2nd Quarter & Interims-Part 1
British American Tobacco PLC
1 August 2000
Part 1
INTERIM REPORT TO 30 JUNE 2000
SUMMARY
SIX MONTHS RESULTS 2000 1999 Change
Operating profit pre-exceptionals £1,175m £757m +55%
Pre-tax profit £698m £659m + 6%
Adjusted earnings per share 26.38p 24.84p + 6%
Interim dividend per share 9.00p 8.30p + 8%
* Operating profit 55 per cent higher at £1,175 million,
excluding goodwill amortisation and exceptional items,
demonstrating the continuing success of last year's
merger with Rothmans. There were some excellent results,
notably in Europe and Latin America, but trading
conditions remained difficult in the US.
* Group volumes 23 per cent higher at 396 billion.
International brands showed good progress, especially in
the lights segment. On a comparable basis, overall
volumes were 2 per cent lower with the second quarter
showing an improvement on the same quarter last year.
* After goodwill and exceptional items, operating profit
was 9 per cent up and, after higher net interest, pre-tax
profit was 6 per cent ahead. Adjusted earnings per share
(on a fully diluted basis) rose by 6 per cent.
* The Board is declaring an interim dividend of 9p, to be
paid on 18 September, which represents an 8 per cent
increase over the comparable payments last year.
* The Chairman, Martin Broughton, commented 'Shareholders
may well feel that litigation and regulation are
obscuring the value that has been created by the merger
with Rothmans over the past 18 months. The progress
achieved by most of our key international brands in many
of the major markets affected by the merger is very
encouraging, clearly illustrating the benefits of our
additional size and scale. Moreover, the results as a
whole demonstrate the increased strength and the improved
quality of our business, particularly its much better
balance between mature and emerging markets.'
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph Edmondson 020 7845 1180 David Betteridge/Scott
Hailstone/Jody Humble
020 7845 2888
www.bat.com
BRITISH AMERICAN TOBACCO p.l.c.
INTERIM REPORT TO 30 JUNE 2000
INDEX
PAGE
Chairman's comments 2-4
Business review 5-9
Group results 10
Segmental analyses of turnover and profit 11
Statement of total recognised gains and losses 12
Interest of British American Tobacco's shareholders 12
Group balance sheet 13
Group cash flow statement 14
Notes to the Group cash flow statement 15
Accounting policies and basis of preparation 16
Changes in the Group 17
Foreign currencies 18
Exceptional items 19
Goodwill amortisation 19
Sale of brands 19
Net interest 19
Taxation 20
Earnings per share 20
Dividends 21
Segmental analyses: Associated companies and joint
venture 22
Shareholders' funds 22
CHAIRMAN'S COMMENTS 2.
British American Tobacco's operating profit before exceptional
items rose by 55 per cent to £1,175 million, demonstrating the
continuing success of last year's merger with Rothmans. After
goodwill and exceptionals, operating profit was 9 per cent up and,
after higher net interest, pre-tax profit was 6 per cent ahead.
Adjusted diluted earnings per share rose 6 per cent to 26.38p
and the Board has declared an interim dividend of 9p, payable
on 18 September. This represents an 8 per cent increase.
In terms of business headlines, the main changes compared to
last year are significantly higher profits from Europe and
Amesca, as well as substantial improvements from Asia-Pacific
and Latin America. Profits from America-Pacific are
marginally ahead, reflecting the change in Canada and the
continuing difficulties in the Brown & Williamson (B&W) US
domestic business.
Large corporate mergers are currently attracting some
criticism for their failure to deliver the benefits originally
envisaged. It is therefore reassuring to be able to report to
shareholders that the smooth integration of the Rothmans
businesses is continuing and that the synergy targets are not
only being met but are also being achieved more quickly than
we forecast.
There have been a number of developments concerning tobacco
issues around the world, notably the Engle jury verdict, the
UK Health Select Committee Report, two European Union
Directives and the announcement of the public hearings that
the World Health Organisation (WHO) intends to hold about its
proposed Tobacco Free Initiative.
Although there have been some important verdicts in favour of
the US tobacco industry, they are plainly overshadowed by
Engle. The jury's award of US$145 billion against the
industry, US$17.6 billion of which is against B&W, is dramatic
by any standard.
B&W is absolutely confident that the Engle verdict will be
reversed eventually during the appeal process, given the
inappropriateness of class certification, the significant
constitutional issues involved in the case and the numerous
errors committed during the trial. The industry has now
petitioned to have the case removed to the Federal District
Court in Florida.
Chairman's comments... 3.
If the manifest absurdities of the Engle trial raise the need
for tort reform further up Congress's agenda, the saga may
ultimately serve some purpose. It would certainly be a
fitting tribute to a case that has so clearly demonstrated the
extent to which the US legal system has become a business
opportunity for lawyers rather than an orderly process for
civil redress.
The UK Health Select Committee's Report was published in June,
including some constructive proposals, despite its predictably
hostile tone. Many of the proposals, such as further work to
develop lower risk products, reflect our own suggestions.
We support sensible regulation of tobacco. We do not,
however, accept that either the EU advertising ban or the
proposed EU Directive on the Manufacture and Sale of Tobacco
Products are sensible in their present form. In addition,
they spuriously purport to be measures intended to promote the
Single Market. It is encouraging that the Advocate-General of
the European Court of Justice has condemned the advertising
ban on the grounds that the Single Market cannot be promoted
by the elimination of advertising.
The tobacco products draft directive, whose legal base is also
questionable, would, amongst other things, ban the export of
cigarettes yielding over 10mg of tar, seriously threatening
jobs in our EU factories.
The top prize for verbal gymnastics must go to the WHO's claim
that 'tobacco is a communicable disease' on the grounds that
'it is communicated through advertising'. The WHO is now to
hold public hearings in October but since participants will be
restricted to five minutes of presentation and five pages of
written submission, this cannot represent either serious
consultation or genuine dialogue.
The difficulties British American Tobacco is facing with supra
national bodies such as the EU and the WHO are fortunately
much less pronounced with national governments around the
world. Indeed, we seek to operate in partnership with
governments, who are significant economic stakeholders in our
business, based on our open acknowledgement that we make a
risky product and therefore support sensible regulation.
Chairman's comments... 4.
Shareholders may well feel that litigation and regulation are
obscuring the value that has been created by the merger with
Rothmans over the past 18 months. The progress achieved by
most of our key international brands in many of the major
markets affected by the merger is very encouraging, clearly
illustrating the benefits of our additional size and scale.
Moreover, the results as a whole demonstrate the increased
strength and the improved quality of our business,
particularly its much better balance between mature and
emerging markets.
MARTIN BROUGHTON
BUSINESS REVIEW 5.
Following the merger with Rothmans, operating profit was up
55 per cent at £1,175 million, excluding goodwill amortisation
and the exceptional items set out on page 19. There were some
excellent results, notably in Europe and Latin America, but
trading conditions remained difficult in the US.
The integration of the Rothmans business into British American
Tobacco is well advanced and synergy benefits continue to be
delivered well ahead of schedule.
Volumes were 23 per cent higher at 396 billion. International
brands showed good progress, especially in the lights segment,
despite volume declines in certain markets. On a comparable
basis, overall volumes were 2 per cent lower with the second
quarter showing an improvement on the same quarter last year.
Lucky Strike continued its return to growth, with volumes
around 20 per cent higher as a result of strong performances
in Japan, France, Spain and Germany.
There was a good performance by the Dunhill brand with
excellent results in Malaysia and Taiwan and continued growth
in the South Korean market. The good performance was achieved
in spite of the abolition of intra-EU duty free. This change
also had a negative impact on sales of Benson & Hedges,
although the brand is progressing well in its other markets.
The trading environment in Asia-Pacific had a detrimental
effect on State Express 555 volumes. However, Kent showed
strong progress in all its key markets, notably Japan,
Romania, Russia and Chile.
Peter Stuyvesant generally performed well in its major markets
although total volumes were slightly down compared to last
year. Lower volumes in Africa and Yemen resulted in the
Rothmans brand showing a volume decline.
Pall Mall has continued to perform well in Germany, Russia,
Italy and Hungary while Viceroy maintained its volume growth
in the US, Romania and Jordan.
Manufacturing operations continued to deliver savings in
material costs through global procurement initiatives. The
rationalisation of production facilities resulted in the
closure of factories in Geneva, Spennymoor and Granville in
Sydney.
Business review continued 6.
Profit from the America-Pacific region for the six months was
£9 million higher at £381 million. This is primarily due to
the inclusion of Imperial Tobacco in Canada as a subsidiary,
offset by the lower profit contribution from the US domestic
market. Volumes were down as a result of lower sales in the
US market, not fully covered by the increases elsewhere in the
region.
The operating profit included for Canada was £167 million in
the current half year and £134 million for the same period
last year, although these numbers are not comparable (see
page 17). However, the profit for the tobacco operations, on
a comparable basis for the six months, increased by 10 per
cent, mainly as a result of higher prices.
Although the Canadian industry's volumes were down by 3 per
cent, Imperial's volumes were stable. This led to a market
share of over 70 per cent with a growth in share for
Du Maurier and Matinee, while Players maintained share.
Before common overheads of £116 million, the contribution from
the US domestic market decreased by £42 million to
£221 million. Brown & Williamson lost market share, primarily
in the discount segment where both GPC and Misty's shares were
lower as a result of heavy competitive discounting, the rise
in grey market activity and the preferential treatment allowed
to certain small manufacturers under the MSA agreement.
Although Lucky Strike, Viceroy and Capri showed small market
share increases, both Kool and Carlton lost share.
Encouragingly, the price reduction on GPC implemented in April
seems to have stopped the decline in its market share.
In Japan, Kent, Lucky Strike and Kool drove further increases
in both volume and market share, but the profit contribution
was slightly lower due to the timing of marketing expenditure.
Dunhill Lights' performance helped the merged businesses in
Korea to progress strongly.
In Asia-Pacific, the region benefited from the addition of
Rothmans' businesses to the Group, despite the brand
divestments in Australia and New Zealand, as well as from
significant synergy benefits. Volumes rose by almost
14 billion or 45 per cent versus the same period last year
with profits £83 million ahead at £171 million.
Business review continued 7.
In Australia, where the total industry volume was down
following tax changes, there were market share gains for
Benson & Hedges, Winfield and Dunhill at the top end of the
market. These gains, together with the merger, led to higher
profits compared to last year. The results in New Zealand
reflected the merger as well as a one-off benefit following
the May excise tax increase.
In Indonesia, profits rose despite lower volumes which were
heavily impacted by the change in the excise system. In
Malaysia, volumes increased as the economic recovery continued
and this, together with synergy benefits, led to significantly
higher profits.
Exports to the region were lower than last year but, following
the merger, the region is much less dependent on profit from
this business.
The profit in Latin America, at £197 million, increased by
£58 million. This was mainly due to strong performances in
Brazil and Chile, together with the inclusion of the Rothmans
business in Jamaica, partly offset by a deterioration in
Argentina. Regional volumes were up 2 billion to 82 billion.
In Brazil, Souza Cruz increased volumes and maintained its
high market share. Free is the leader in the lights segment,
while Hollywood increased market share. The growth in volume
and cost reductions contributed to the increase in profit.
An excise increase and aggressive competitor activities in
Mexico led to a decline in the Group's volumes and market
share but, with higher prices, profit was in line with last
year. In Chile, both profit and volumes rose. Nobleza-
Piccardo gained market share in Argentina and volumes
increased. However, results were adversely affected as a
consequence of an increase in the social assistance fund tax.
The rate of tax was reduced after the period end and margins
are now recovering. During the period, the Group increased
its shareholding in Nobleza-Piccardo from 70 to over 95 per
cent.
In Europe, results benefited from the wider market presence
following the Rothmans merger. This, coupled with some
excellent underlying performances, contributed to the higher
profits which advanced by £142 million to £243 million and
higher volumes up 36 billion to 99 billion.
Business review continued 8.
In Germany, profits were well ahead and both Lucky Strike and
Pall Mall achieved good volume and market share growth. In
Russia, there was excellent progress by Yava and international
brands, with results improving despite the continuing
programme of marketing investment. Although trading
conditions remained difficult, there was an encouraging
performance in Ukraine as Prilucky Osoblivy led the recovery
in market share. Viceroy and Kent performed very well in
Romania, resulting in higher profits and market share. There
was a good performance from the smoking tobacco and cigar
operations.
The excellent results for the region were achieved in spite of
volume losses in some markets on a comparable basis, as well
as the abolition of intra-EU duty free business since July
1999.
The Rothmans merger had a material impact on the Amesca
region, with volumes up 27 per cent to over 116 billion and
profit £126 million higher at £183 million.
The total market in South Africa continued to decline,
although at a slower rate, with Peter Stuyvesant increasing
both volume and market share. Profits also rose mainly due to
cost reductions as a result of the integration of the
operations. Elsewhere in Africa results have been adversely
impacted by local currency devaluations resulting in reduced
purchasing power. Despite the unsettled situation in Zimbabwe
leaf sales and processing are proceeding, although behind
schedule. While the land occupations threaten the size of
next year's crop, appropriate contingency plans are in place.
Improving economic conditions have helped in producing
excellent growth in profits from our associated companies in
India. Volumes are slightly up on last year. In Bangladesh,
profit and volumes rose, with John Player Gold Leaf performing
strongly.
The shortage of foreign currency in Uzbekistan continued to
limit production and sales volume. Profit growth in the
Middle East benefited from a combination of merger benefits
and shipments in advance of duty increases.
Business review continued 9.
Comparisons of the Group's cash flow for the half year are
distorted by a number of factors. Net cash inflow from
operating activities, up £20 million at £862 million,
reflected the changed working capital position at June of the
enlarged Group, as well as integration and Imasco
restructuring costs. Net cash generation pre-dividends, at
£246 million, was below last year principally due to the above
distortions on operating cash flows, as well as the payment of
dividends on the preference shares and the timing of interest
payments. Dividend payments on the ordinary share capital
were higher as a result of the acceleration of payment dates.
With a £695 million outflow for the redemption of one half of
the preference shares, £841 million of net debt acquired with
Imperial Tobacco and a £147 million exchange impact, the
Group's net debt rose during the half year by £1,694 million
to £4,749 million.
Group Cigarette Volumes
3 months to 6 months to Year to
30.6.00 30.6.99 30.6.00 30.6.99 31.12.99
bns bns bns bns bns
27.7 29.3 America-Pacific 53.8 56.3 116.1
21.3 14.8 Asia-Pacific 44.7 30.8 85.1
40.5 38.3 Latin America 82.0 80.2 167.0
54.2 33.1 Europe 99.4 63.2 170.4
60.0 47.1 Amesca 116.5 91.4 213.9
----- ----- ----- ----- -----
203.7 162.6 396.4 321.9 752.5
===== ===== ===== ===== =====
GROUP RESULTS - UNAUDITED 10.
3 months to 6 months to Year to
30.6.00 30.6.99 30.6.00 30.6.99 31.12.99
£m £m £m £m £m
REVENUE
5,826 3,589 Subsidiary undertakings 11,114 6,976 18,798
140 557 Share of associates 682 1,351 2,873
----- ----- ------ ------ ------
5,966 4,146 11,796 8,327 21,671
===== ===== ====== ====== ======
PROFIT
501 322 Subsidiary undertakings 802 566 1,099
------- ------- --------------------------- ------- ------- --------
after charging:
acquired stock (80)
(9) US tobacco settlements (22) (24)
(26) integration costs (44) (357)
(94) goodwill amortisation (181) (162)
------- ------- --------------------------- ------- ------- --------
Share of associates and
15 73 joint venture 1 169 380
------- ------- --------------------------- ------- ------- --------
after charging:
Imasco restructuring costs (67)
------- ------- --------------------------- ------- ------- --------
----- ----- ------ ------ ------
516 395 Total operating profit 803 735 1,479
Sale of brands 88
----- ----- ------ ------ ------
Profit on ordinary
516 395 activities before interest 803 735 1,567
(38) (37) Net interest (101) (64) (170)
Share of associates'
(1) (7) net interest (4) (12) (26)
----- ----- ------ ------ ------
477 351 Profit before taxation 698 659 1,371
Taxation on ordinary
(197) (193) activities (321) (330) (673)
----- ----- ------ ------ ------
280 158 Profit after taxation 377 329 698
(45) (20) Minority interests (87) (49) (142)
----- ----- ------ ------ ------
235 138 Profit for the period 290 280 556
===== ===== ====== ====== ======
Earnings per share
10.44p 8.85p - basic 12.36p 17.96p 25.25p
===== ===== ====== ====== =====
15.27p 13.98p - adjusted diluted 26.38p 24.84p 52.33p
===== ===== ====== ====== =====
See notes on pages 16 to 22.
SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - UNAUDITED 11.
3 months to 6 months to Year to
30.6.00 30.6.99 30.6.00 30.6.99 31.12.99
£m £m £m £m £m
Turnover excluding duty,
excise and other taxes
1,000 1,168 America-Pacific 2,032 2,246 4,804
326 209 Asia-Pacific 679 424 1,208
424 339 Latin America 793 666 1,461
672 333 Europe 1,383 764 2,359
362 229 Amesca 723 451 1,350
----- ----- ------ ------ ------
2,784 2,278 5,610 4,551 11,182
===== ===== ====== ====== ======
Operating profit
204 203 America-Pacific 381 372 848
95 48 Asia-Pacific 171 88 231
112 68 Latin America 197 139 333
126 54 Europe 243 101 342
99 31 Amesca 183 57 268
----- ----- ------ ------ ------
636 404 1,175 757 2,022
Acquired stock (80)
(9) US tobacco settlements (22) (24)
(26) Integration costs (44) (357)
(94) Goodwill amortisation (181) (162)
Imasco restructuring (67)
costs
----- ----- ------ ------ ------
516 395 803 735 1,479
===== ===== ====== ====== ======
Operating profit restated
at comparable rates of
506 395 exchange 798 735 1,479
===== ===== ====== ====== ======
The net turnover analysis is based on external sales in each region.
The figures for the six months ended 30 June 2000 and 30 June 1999 based
on regional location of manufacture would not be materially different
except for sales from Europe to Amesca and Asia-Pacific which amounted
to £245 million and £152 million respectively, 1999 £164 million
and £175 million.
The operations of subsidiaries are entirely related to tobacco.
The Group's share of the operations of associates and joint venture,
analysed by business, is set out on page 22.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - UNAUDITED 12.
6 months to Year to
30.6.00 30.6.99 31.12.99
£m £m £m
Profit for the period 290 280 556
Differences on exchange 43 (138) (268)
Revaluation of associated company 1,269
------ ------ ------
Total recognised gains related
to the period (below) 1,602 142 288
====== ====== ======
INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - UNAUDITED
6 months to Year to
30.6.00 30.6.99 31.12.99
£m £m £m
Balance 1 January 4,821 64 64
Total recognised gains related
to the period (above) 1,602 142 288
Issue of shares:
share options 2 1 3
Rothmans merger 5,089 5,089
Redemption of convertible redeemable
preference shares (695)
Dividends and other appropriations:
ordinary shares (196) (156) (546)
convertible redeemable preference
shares (11) (10) (54)
amortisation of discount on
preference shares (13) (20)
Other movements 16 (31) (3)
------ ------ ------
Balance at period end 5,526 5,099 4,821
====== ====== ======
See notes on pages 16 to 22.
GROUP BALANCE SHEET - UNAUDITED 13.
30.6.00 30.6.99 31.12.99
£m £m £m
Fixed assets
Intangible assets 7,466 5,338
Tangible assets 2,645 2,041 2,456
Investments in associates and joint
venture 177 532 636
Other investments and long term loans 305 138 210
------ ------ ------
10,593 2,711 8,640
------ ------ ------
Current assets
Stocks 3,351 2,194 2,850
Debtors 2,150 1,456 2,000
Acquired businesses awaiting disposal 86 123
Current investments 341 549 768
Short term deposits and cash 2,020 2,165 1,853
------ ------ ------
7,948 6,364 7,594
------ ------ ------
Rothmans International 5,114
------ ------ ------
TOTAL ASSETS 18,541 14,189 16,234
====== ====== ======
Capital and reserves
Shareholders' funds:
Equity 4,779 3,643 3,347
Non-equity 747 1,456 1,474
------ ------ ------
Total shareholders' funds 5,526 5,099 4,821
Minority shareholders' equity interest 467 347 455
------ ------ ------
5,993 5,446 5,276
------ ------ ------
Other liabilities
Provisions for liabilities and charges 1,347 668 1,251
Borrowings 7,110 5,205 5,676
Creditors 4,091 2,870 4,031
------ ------ ------
12,548 8,743 10,958
------ ------ ------
TOTAL FUNDS EMPLOYED 18,541 14,189 16,234
====== ====== ======
See notes on pages 16 to 22.
GROUP CASH FLOW STATEMENT - UNAUDITED 14.
6 months to Year to
30.6.00 30.6.99 31.12.99
£m £m £m
Net operating cash flow from
subsidiary undertakings (note 1) 862 811 1,995
Dividends from associates 31 90
------ ------ ------
Net cash inflow from operating
activities 862 842 2,085
Returns on investments and
servicing of finance (236) (72) (206)
Taxation (282) (176) (334)
Capital expenditure and financial
investment (98) (100) (281)
------ ------ ------
Net cash generation 246 494 1,264
Disposals less acquisitions 116 (22) (216)
Equity dividends paid (387) (125) (530)
------ ------ ------
Cash flow before use of liquid
resources and external financing (25) 347 518
Management of liquid resources 421 (1,442) (1,340)
--------------------------------------- ------- ------- ---------
Financing - proceeds from issue
of shares 2 1 3
- redemption of shares (695)
- increase in debt 325 1,308 853
--------------------------------------- ------- ------- ---------
(368) 1,309 856
------ ------ ------
Increase in cash in the period 28 214 34
====== ====== ======
Reconciliation of net cash flow to
movement in net debt (note 2)
Increase in cash in the period 28 214 34
Increase in debt (325) (1,308) (853)
(Decrease)/increase in liquid resources (421) 1,442 1,340
------ ------ ------
Change in net debt resulting from
cash flow (718) 348 521
Net debt acquired on purchase of
subsidiaries (841) (754)
Net funds disposed of on sale
of subsidiaries (23) (23)
Other changes 12 (29) (33)
Differences on exchange (147) (212) (191)
------ ------ ------
Movement in net debt in the period (1,694) 84 (480)
Net debt at 1 January (3,055) (2,575) (2,575)
------ ------ ------
Net debt at period end (4,749) (2,491) (3,055)
====== ====== ======
NOTES TO THE GROUP CASH FLOW STATEMENT 15.
6 months to Year to
30.6.00 30.6.99 31.12.99
1) Net operating cash flow from £m £m £m
subsidiary undertakings
Operating profit 802 566 1,099
Depreciation 174 131 350
Goodwill amortisation 181 162
(Increase)/decrease in stocks (124) (43) 31
(Increase)/decrease in debtors (9) 10 82
(Decrease)/increase in creditors (143) 172 180
(Decrease)/increase in provisions (7) (24) 83
Other (12) (1) 8
------ ------ ------
Net operating cash flow from subsidiary
undertakings 862 811 1,995
====== ====== ======
Differences
Cash Other on
1.1.00 flow changes exchange 30.6.00
2) Analysis of £m £m £m £m £m
net debt
Cash and bank
balances 450 448
Overdrafts (110) (113)
------ ------ ------ ------ ------
340 28 (33) 335
Term borrowings (5,492) (340) (949) (138) (6,919)
Finance lease
obligations (74) 15 (15) (4) (78)
Short term
deposits 1,403 5 99 65 1,572
Current
investments 768 (426) 36 (37) 341
------ ------ ------ ------ ------
(3,055) (718) (829) (147) (4,749)
====== ====== ====== ====== ======
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