3rd Quarter Results

British American Tobacco PLC 01 November 2007 QUARTERLY REPORT TO 30 SEPTEMBER 2007 1 November 2007 SUMMARY NINE MONTHS RESULTS - unaudited 2007 2006 Change Revenue Â£7,312m Â£7,251m +1% Profit from operations Â£2,304m Â£1,944m +19% Adjusted diluted earnings per share 82.00p 75.00p +9% The reported profit from operations was 19per cent higher at Â£2,304million, or 8per cent higher if exceptional items are excluded. However, profit from operations, at comparable rates of exchange and excluding exceptional items, would have been 14 per cent higher, with all regions contributing to this strong result. Group volumes from subsidiaries were 504 billion, a decrease of 1per cent, mainly as a result of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany. In the third quarter, volumes rose slightly over the comparable period last year. The four global drive brands achieved an overall volume growth for the nine months of 10per cent, which led to share improvements in many markets. The reported Group revenue increased by 1per cent to Â£7,312million but, at comparable rates of exchange, would have increased by 6per cent as a result of more favourable pricing and an improving product mix. Adjusted diluted earnings per share rose by 9 per cent, principally as a result of the strong operating profit performance, partly offset by the adverse impact from foreign exchange movements. Basic earnings per share were higher at 82.67p (2006:70.11p). The Chairman, Jan du Plessis, commented "The Group's spread of developed and developing markets has continued to serve shareholders well, with all regions contributing to the strong results at comparable rates of exchange. There were improvements in both product mix and share in a broad range of key markets. Although the momentum of the first six months has been maintained in the third quarter, we do still expect the growth in profit from operations at comparable rates of exchange to slow in the fourth quarter, as a result of generally higher marketing spend and the timing of price increases in Brazil." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson/ 020 7845 1180 David Betteridge/Kate Matrunola/ 020 7845 2888 Sharon Woodcock 020 7845 1519 Catherine Armstrong BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 30 SEPTEMBER 2007 INDEX PAGE Chairman's comments 2 Business review 3 Group income statement 7 Group statement of changes in total equity 8 Segmental analyses of revenue and profit 9 Accounting policies and basis of preparation 11 Foreign currencies 11 Exceptional items 11 Other changes in the Group 12 Net finance costs 13 Associates 13 Taxation 14 Earnings per share 14 Dividends 15 Contingent liabilities 15 Share buy-back programme 15 CHAIRMAN'S COMMENTS British American Tobacco's adjusted diluted earnings per share rose by 9 per cent in the first nine months of 2007. Profit from operations increased by 8 per cent if exceptional items are excluded, while, at comparable rates of exchange, profit from operations excluding exceptional items would have grown by 14 per cent. The adverse impact from foreign exchange movements was Â£130 million. The Group's spread of developed and developing markets has continued to serve shareholders well, with all regions contributing to the strong results at comparable rates of exchange. There were improvements in both product mix and share in a broad range of key markets. Revenue increased by 1 per cent at current rates but it would have increased by 6 per cent at comparable rates of exchange, despite volumes being down 1 per cent. The reasons for this slight volume decline are the same as in previous quarters, namely some supply chain disruptions and short term trading patterns. Volumes were up slightly in the third quarter. The growth in revenue at comparable rates illustrates the continuing improvement in the quality of our business. Indeed, our premium volume rose by over 1 per cent and accounted for 32 per cent of our total volume from subsidiaries. The global drive brands, which are mostly premium, achieved overall volume growth of 10 per cent, with exceptionally strong growth in the third quarter, up 18 per cent. Kent was up 18 per cent for the nine months, benefiting from growth in both new and existing markets, and Dunhill rose by 7 per cent. Lucky Strike grew slightly, despite lower industry volumes in Germany and Japan. Pall Mall continued to perform well, growing by 9 per cent. The Group's associate companies had slightly higher volumes of 173 billion and our share of their post-tax results was down 4 per cent at Â£335 million. Our share of their results at comparable rates of exchange and excluding exceptional items would have been Â£356 million, up 8 per cent. Adjusted diluted earnings per share rose 9 per cent to 82.00 pence, principally as a result of the strong operating profit performance, partly offset by the adverse impact from foreign exchange movements. Some 38 million shares were repurchased in the nine months at a cost of Â£612 million and at an average of 1630 pence per share. Although the momentum of the first six months has been maintained in the third quarter, we do still expect the growth in profit from operations at comparable rates of exchange to slow in the fourth quarter, as a result of generally higher marketing spend and the timing of price increases in Brazil. Jan du Plessis 1 November 2007 Page 2 BUSINESS REVIEW The reported Group profit from operations was 19 per cent higher at Â£2,304 million or 8 per cent higher if exceptional items, as explained on pages 11 and 12, are excluded. However, profit from operations, at comparable rates of exchange and excluding exceptional items, would have been 14 per cent higher, with all regions contributing to this strong result. Group volumes from subsidiaries were 504 billion, a decrease of 1 per cent, mainly as a result of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany. In the third quarter, volumes rose slightly over the comparable period last year. The good performance of the global drive brands led to share improvements in many markets. Group revenue increased by 1 per cent to Â£7,312 million but, at comparable rates of exchange, would have increased by 6 per cent as a result of favourable pricing and an improving product mix. The four global drive brands continued their good performance and achieved an overall volume growth of 10 per cent, with a particularly strong performance in the third quarter, up 18 per cent. Kent grew by 18 per cent with good growth in Russia, Romania, Ukraine and Chile. It also benefited from significant volume increases from the brand migrations in Western Europe and new markets in Azerbaijan and Kazakhstan. Dunhill rose by 7 per cent, driven by strong performances in South Korea, Russia, France, Italy, South Africa and Saudi Arabia, although volumes were lower in Malaysia and Taiwan. Lucky Strike volumes were slightly up as the growth in Spain, Italy, France, Argentina and the Czech Republic was almost offset by declines as a result of lower industry volumes in Germany and Japan. Despite the absence of Pall Mall StiX in Germany during 2007, Pall Mall continued its growth with an increase of 9 per cent, driven by Italy, Hungary, Russia, Uzbekistan and Turkey, partly offset by lower volumes in Romania, Spain and Greece. In Europe, profit at Â£650 million was up Â£56 million mainly as a result of higher margins in Russia, Romania, Hungary and Spain, partly offset by the impact of reduced volumes in a number of markets and weaker exchange rates. At comparable rates of exchange, profit would have increased by Â£67 million or 11 per cent. Regional volumes were down 2 per cent at 180 billion, with reductions in Germany, Russia, Switzerland, France and Ukraine partly offset by an increase in Romania. In Italy, volumes and market share were lower although Lucky Strike and Pall Mall grew share. While margins improved following industry price increases, profit was lower due to reduced volumes, higher marketing expenses and the disposal of the Toscano cigar business as explained on page 12. Although market share rose in Germany, cigarette volumes declined as industry volumes were affected by the growth of illicit trade, the end of StiX sales, changes in vending regulations and consumer down trading to other tobacco products. This volume decline, together with lower margins of other tobacco products, led to lower profits. Sales volumes in France were lower in line with the overall industry decline, although Lucky Strike, Pall Mall and Vogue grew market share. Profit was slightly down as an improved product mix and lower costs were more than offset by the lower volumes. Following the excise increase in Switzerland at the beginning of the year, weaker volumes and down-trading led to lower profits. In the Netherlands, market share was higher as a result of the strong performances by Lucky Strike and Pall Mall, although volumes were marginally down. Profit was lower as a result of down-trading. Volume and profit in Belgium were lower, impacted by a significant excise driven price increase across all tobacco categories. Results in Spain improved significantly, benefiting from price increases at the beginning of the year, and volume and market share grew driven by Lucky Strike. Page 3 Business review cont... Sales volumes in Russia were influenced by trade buying at the end of last year in anticipation of the new excise system and price increases in December. However, most of the first quarter's shortfall has since been recovered with strong performances by Kent and Vogue, leading to an increased market share. Profit grew significantly, benefiting from higher margins, an improved product mix and productivity savings. In Romania, the excellent performance of Kent, supported by the growth of Dunhill and Vogue, resulted in a higher market share. Profit increased impressively with volume growth, higher prices and an improved product mix. Profit in Ukraine was higher as better pricing, effective cost control and an improved mix was partly offset by the impact of reduced local brand volumes. In Hungary, profit grew substantially, benefiting from improved margins and efficiency programmes. Overall volumes were stable with Viceroy and Pall Mall growing strongly. Results in Poland improved with a price increase earlier this year and, although volumes were slightly down, market share grew. In Asia-Pacific, profit rose by Â£32 million to Â£498 million, mainly attributable to strong performances from Australasia, South Korea, Vietnam, Pakistan and Bangladesh, despite the adverse impact of exchange. At comparable rates of exchange, profit would have increased by Â£47 million or 10 per cent. Volumes at 109 billion were 3 per cent higher as a result of strong growth in Pakistan, South Korea and Vietnam, which were partially offset by declines in Malaysia and Bangladesh. In Australia, there was good profit growth as a result of improved margins from a combination of cost reductions and price increases. Profit growth was achieved despite intensified competitor discounting and industry volume declines, while market share grew with good performances from Dunhill, Pall Mall and Winfield. In New Zealand, strong competition in the low price segment continued to affect volumes and market share adversely, although Pall Mall and Dunhill showed good growth. As a result, profit was lower despite the benefit of price increases. In Malaysia, the large rise in excise in July 2007 impacted volumes, which were already declining due to high levels of illicit trade and growth of the low price segment, but market share remained resilient, with strong performances from Dunhill and Pall Mall. Although there was higher pricing and an improved product mix, the decline in volumes resulted in lower profit. In Vietnam, profit increased significantly benefiting from better pricing, productivity initiatives and volume growth from expanded distribution. Volumes and market share rose in South Korea, with Dunhill continuing to grow. However, the impact of higher volumes and supply chain savings on profit was offset by a weaker local currency. In Taiwan, volume was higher as a result of a strong performance from Pall Mall. This, together with increased prices and cost reductions, resulted in higher profit. Pakistan continued its strong volume growth with Gold Flake the major contributor, resulting in an increase in overall market share. Higher volumes, coupled with price increases and effective cost management, led to an impressive profit performance. In Bangladesh, despite lower volumes due to the growth of the low price segment, profit increased as a result of improved pricing and product mix. In Sri Lanka, profit benefited from higher margins, better product mix and lower expenses, but this was more than offset by the impact of a weaker exchange rate. Page 4 Business review cont... Profit in Latin America increased by Â£103 million to Â£550 million due to exceptionally strong performances in Brazil and Venezuela, partly offset by lower profit in Mexico and the adverse impact of weaker local currencies. At comparable rates of exchange, profit would have grown by Â£127 million or 28 per cent. Volumes were 2 per cent down at 111 billion as the increase in Venezuela was more than offset by declines in Mexico, Argentina and Central America. In Brazil, profit grew significantly, benefiting in the first half of the year from the impact of price increases in anticipation of the excise increase in July and an improved product mix. Although cigarette volumes were slightly down, market share was higher. Industry volume in Mexico suffered following a large excise driven price increase early in 2007 and this, together with lower market share and a weaker currency, resulted in lower profit. In Argentina, although profit in local currency grew as prices increased after the severe price competition of last year, profit reported in sterling and volumes were both lower. In Chile, volumes were in line with last year. Profit grew, despite an unfavourable exchange rate, due to higher margins and strong up-trading to Kent and Lucky Strike. In Venezuela, profit increased strongly, despite the impact of exchange, due to price rises and higher volumes. Market share grew through good performances by Consul and Belmont. The Central America and Caribbean area benefited from higher margins and more efficient product sourcing, but this was more than offset by the impact of exchange and lower industry volumes, as a result of excise driven price increases. Profit in the Africa and Middle East region fell by Â£8 million to Â£354 million due to exchange rate movements. However, at comparable rates of exchange, profit would have increased by Â£45 million or 12 per cent with strong performances from South Africa and Nigeria. Volumes were 3 per cent lower at 73 billion, due to disruption of supply to the Middle East and the change in distribution model in Turkey. In South Africa, despite the sharply weaker average exchange rate, profit growth was achieved as a result of market share gains and an improved product mix. The two key brands, Peter Stuyvesant and Dunhill, continued their good performances and grew volume and share. Strong profit growth in Nigeria was the result of higher margins, productivity initiatives and an improved product mix. Share performance was particularly strong for Benson & Hedges, although overall volumes were marginally lower. In Sub-Saharan Africa, supply difficulties in West Africa early in the year impacted volume and profit, while a number of markets in East Africa grew volumes, reflecting good progress in reducing illicit trade. In the Middle East, the product mix improved across the area through the growth of premium brands, although profit was adversely affected by distribution problems and weaker currencies. Dunhill continued its expansion in Saudi Arabia and the Gulf and grew market share. North Africa showed improved volume and profit performance, with market share in Egypt growing as a result of strong performances by Kent and Rothmans. Strong sales in the Caucasus resulted in volume growth with market share and profit higher than last year. In Turkey, operating losses increased due to the one-off costs associated with the change in the distribution model in January and higher brand support with the launch of new brands. The profit from the America-Pacific region decreased by Â£12 million to Â£320 million as a result of lower profit in Canada and the impact of weaker exchange rates. At comparable rates of exchange, profit would have increased by Â£15 million or 5 per cent. Volumes decreased by 4 per cent to 31 billion, mainly as a result of the decline in industry volumes in Canada, partly offset by the growth in Japan. Page 5 Business review cont... In Canada, profit was down Â£19 million at Â£196 million. This was due to the greater prevalence of illicit product, the increased cost of direct distribution, the continued down-trading to lower priced products and the weaker exchange rate. These were partly offset by higher margins and cost savings resulting from the transfer of manufacturing to Mexico. At comparable rates of exchange, profit was down 3 per cent, although profit in the third quarter was up 14 per cent partly due to the one-off costs related to direct distribution in the comparable period. The continued growth of Peter Jackson resulted in share growth in the low price segment but, as this was more than offset by the decline of the premium segment, overall market share declined. In Japan, volumes grew despite a significant decline in industry volumes, with strong performances of Kent and Kool resulting in good market share growth. Profit grew through higher volumes, increased margins and effective cost management, largely offset by the impact of unfavourable exchange rates. Unallocated costs, which are net corporate costs not directly attributable to individual segments, were Â£3 million lower at Â£74 million, mainly as a result of timing of expenses. The above regional profits were achieved before accounting for restructuring costs and gains/losses on disposal of businesses and brands, as explained on pages 11 and 12. Results of associates The Group's share of the post-tax results of associates decreased by Â£13 million to Â£335 million. Excluding the exceptional item in 2006 explained on page 13, the Group's share of the post-tax results of associates was slightly up at Â£335 million but would have been 8 per cent higher at comparable rates of exchange. The contribution from Reynolds American, excluding the benefit from the favourable resolution of tax matters in 2006, was Â£10 million lower due to the impact of the weaker US dollar. At comparable rates of exchange, the contribution from Reynolds American would have been 4 per cent higher at Â£240 million, with pricing and productivity gains at R J Reynolds and the inclusion of Conwood's strong results. As explained on page 13, Reynolds American acquired Conwood on 31 May 2006 and reported that on a pro-forma US GAAP basis, as if it had been owned since the beginning of 2006, Conwood increased volumes, market share and profit. The Group's associate in India, ITC, continued its strong growth and its contribution to the Group rose by Â£12 million to Â£77 million. At comparable rates of exchange, the contribution would have been Â£78 million, or 20 per cent higher than last year, with the growth helped by one-off costs in 2006. Cigarette volumes The segmental analysis of the volumes of subsidiaries is as follows: 3 months to 9 months to Year to 30.9.07 30.9.06 30.9.07 30.9.06 31.12.06 bns bns bns bns bns 65.7 64.4 Europe 180.3 183.5 247.7 34.4 34.7 Asia-Pacific 108.8 106.1 141.9 36.6 37.5 Latin America 110.6 113.0 152.6 26.5 26.9 Africa and Middle East 73.1 75.1 104.8 11.3 10.3 America-Pacific 31.4 32.8 43.8 ------- ------- -------- -------- -------- 174.5 173.8 504.2 510.5 690.8 ======= ======= ======== ======== ======== In addition, associates' volumes for the nine months were 173.2 billion (2006: 171.6 billion) and, with the inclusion of these, the Group volumes would have been 677.4 billion (2006: 682.1 billion). Page 6 GROUP INCOME STATEMENT - unaudited 3 months to 9 months to Year to 30.9.07 30.9.06 30.9.07 30.9.06 31.12.06 Â£m Â£m Â£m Â£m Â£m ======== ======== ======== ========= ======== 6,683 6,220 Gross turnover (including duty, 19,017 18,669 25,189 excise and other taxes of Â£11,705million (30.9.06: Â£11,418million - 31.12.06: Â£15,427 million)) ======== ======== ======== ========= ======== 2,587 2,443 Revenue 7,312 7,251 9,762 Raw materials and consumables (683) (733) used (2,069) (2,208) (2,861) Changes in inventories of (33) 22 finished goods and work in progress 45 61 (11) (385) (423) Employee benefit costs (1,096) (1,182) (1,554) Depreciation and amortisation (76) (108) costs (232) (299) (401) 68 14 Other operating income 138 62 181 (666) (596) Other operating expenses (1,794) (1,741) (2,494) -------- -------- -------- --------- -------- 812 619 Profit from operations 2,304 1,944 2,622 ---------------------- --------------------------------------- after (charging)/crediting exceptional items (10) (116) - restructuring costs (50) (164) (216) - gains/(losses) on disposal 45 of businesses and brands 56 (16) 41 ---------------------- --------------------------------------- ---------------------- --------------------------------------- 31 25 Finance income 86 83 110 (109) (110) Finance costs (290) (292) (399) ---------------------- --------------------------------------- (78) (85) Net finance costs (204) (209) (289) Share of post-tax results of 113 105 associates and joint ventures 335 348 431 ---------------------- --------------------------------------- after (charging)/crediting exceptional items - brand impairments (13) - exceptional tax credits 17 17 ---------------------- --------------------------------------- ---------------------- --------------------------------------- 847 639 Profit before taxation 2,435 2,083 2,764 (209) (152) Taxation on ordinary activities (629) (518) (716) -------- -------- -------- --------- -------- 638 487 Profit for the period 1,806 1,565 2,048 ======== ======== ======== ========= ======== Attributable to: 600 446 Shareholders' equity 1,679 1,447 1,896 ======== ======== ======== ========= ======== 38 41 Minority interests 127 118 152 ======== ======== ======== ========= ======== Earnings per share 29.73p 21.73p Basic 82.67p 70.11p 92.08p ======== ======== ======== ========= ======== 29.52p 21.56p Diluted 82.10p 69.57p 91.33p ======== ======== ======== ========= ======== See notes on pages 11 to 15. Page 7 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 9 months to Year to 30.9.07 30.9.06 31.12.06 Â£m Â£m Â£m Differences on exchange 152 (500) (685) Cash flow hedges - net fair value gains 3 12 13 - reclassified and reported in net profit (20) (8) (15) Available-for-sale investments - net fair value losses (1) (2) (2) - reclassified and reported in net profit 1 1 Net investment hedges - net fair value gains 15 73 117 Tax on items recognised directly in equity (13) (5) (12) -------- -------- -------- Net gains/(losses) recognised directly in equity 137 (429) (584) Profit for the period page 7 1,806 1,565 2,048 -------- -------- -------- Total recognised income for the period 1,943 1,136 1,464 ------------------------------------- - shareholders' equity 1,809 1,029 1,334 - minority interests 134 107 130 ------------------------------------- Employee share options - value of employee services 27 31 41 - proceeds from shares issued 24 26 28 Dividends - ordinary shares (1,198) (1,008) (1,008) - to minority interests (140) (131) (137) Purchase of own shares - held in employee share ownership trusts (29) (77) (77) - share buy-back programme (612) (399) (500) Acquisition of minority interests (5) (11) (13) Other movements (6) 11 13 -------- -------- -------- 4 (422) (189) Balance at 1 January 6,688 6,877 6,877 -------- -------- -------- Balance at period end 6,692 6,455 6,688 ======== ======== ======== See notes on pages 11 to 15. Page 8 SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited Revenue The analyses for the nine months are as follows: 30.9.07 30.9.06 Inter Inter External segment Revenue External segment Revenue restated restated restated Â£m Â£m Â£m Â£m Â£m Â£m Europe 2,642 179 2,821 2,602 380 2,982 Asia-Pacific 1,386 16 1,402 1,313 23 1,336 Latin America 1,440 416 1,856 1,312 205 1,517 Africa and Middle East 876 10 886 793 15 808 America-Pacific 347 347 608 608 -------- -------- -------- ------- ------- -------- Revenue 6,691 621 7,312 6,628 623 7,251 ======== ======== ======== ======= ======= ======== The analyses for the year ended 31 December 2006 are as follows: Inter External segment Revenue restated restated restated Â£m Â£m Â£m Europe 3,495 526 4,021 Asia-Pacific 1,755 27 1,782 Latin America 1,780 332 2,112 Africa and Middle East 1,063 24 1,087 America-Pacific 760 760 ------- ------- -------- Revenue 8,853 909 9,762 ======= ======= ======== The segmental analysis of revenue above is based on location of manufacture and the 2006 analysis has been restated to reflect changes in manufacturing operations. Figures based on location of sales would be as follows: 30.9.07 30.9.06 31.12.06 Â£m Â£m Â£m Europe 2,667 2,637 3,545 Asia-Pacific 1,386 1,376 1,839 Latin America 1,444 1,321 1,791 Africa and Middle East 1,051 1,098 1,489 America-Pacific 764 819 1,098 -------- -------- ----------- Revenue 7,312 7,251 9,762 ========= ======== ========= Page 9 Segmental analyses of revenue and profit cont... - unaudited Profit from operations 30.9.07 30.9.06 31.12.06 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* Â£m Â£m Â£m Â£m Â£m Â£m Europe 666 650 462 594 676 781 Asia-Pacific 502 498 463 466 609 616 Latin America 550 550 447 447 611 611 Africa and Middle East 349 354 359 362 444 468 America-Pacific 311 320 290 332 385 424 ------- ------- ------- ------ ------ ------- Segmental results 2,378 2,372 2,021 2,201 2,725 2,900 Unallocated costs (74) (74) (77) (77) (103) (103) ------- ------- ------- ------ ------ ------- Profit from operations 2,304 2,298 1,944 2,124 2,622 2,797 ======= ======= ======= ======= ======= ======= *Excluding restructuring costs and gains/losses on disposal of businesses and brands as explained on pages 11 and 12. The segmental analysis of the Group's share of the post-tax results of associates and joint ventures for the nine months is as follows: 30.9.07 30.9.06 31.12.06 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* Â£m Â£m Â£m Â£m Â£m Â£m Europe 34 34 32 32 46 46 Asia-Pacific 79 79 67 67 92 92 Latin America 1 1 Africa and Middle East 1 1 2 2 4 4 America-Pacific 220 220 247 230 289 285 ------- ------- ------ ------ ------ ------- 335 335 348 331 431 427 ======= ======= ====== ====== ====== ======= *Excluding brand impairments and exceptional tax credits as explained on page 13. Page 10 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited interim results for the nine months to 30 September 2007 and 30 September 2006, together with the audited results for the year ended 31 December 2006. The annual consolidated financial statements for 2006, which represent the statutory accounts for that year, have been filed with the Registrar of Companies. The auditors' report on those statements was unqualified and did not contain any statement concerning accounting records or failure to obtain necessary information and explanations. From 1 January 2005, the Group has prepared its annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and implemented in the UK. These unaudited Group interim results have been prepared on a basis consistent with the IFRS accounting policies as set out in the Annual Report and Accounts for the year ended 31 December 2006. These interim financial statements have been prepared under the historical cost convention, except in respect of certain financial instruments. 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 30.9.07 30.9.06 31.12.06 30.9.07 30.9.06 31.12.06 US dollar 1.988 1.820 1.844 2.037 1.868 1.957 Canadian dollar 2.194 2.060 2.091 2.025 2.084 2.278 Euro 1.478 1.461 1.467 1.433 1.475 1.484 South African rand 14.200 12.021 12.520 14.051 14.511 13.799 Brazilian real 3.977 3.970 4.009 3.749 4.055 4.179 EXCEPTIONAL ITEMS (a) Restructuring costs During 2003, the Group commenced a detailed review of its manufacturing operations and organisational structure, including the initiative to reduce overheads and indirect costs. The restructuring continued, with major announcements during 2005 and 2006 which covered the cessation of production in the UK, Ireland, Canada and Zevenaar in the Netherlands with production to be transferred elsewhere. The profit from operations for the year ended 31 December 2006 included a charge for restructuring of Â£216 million. The nine months to 30 September 2007 includes a charge for restructuring of Â£50 million (2006: Â£164 million), principally in respect of costs associated with restructuring the operations in Italy and 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. Page 11 Exceptional items cont... (b) Gains/losses on disposal of businesses and brands On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell its cigar business, Toscano, to Maccaferri for euro 95 million. The sale was subject to regulatory and governmental approval and was completed on 19 July 2006. The sale resulted in a loss of Â£19 million for the year ended 31 December 2006, reflecting a Â£15 million impairment charge included in depreciation and amortisation costs in the profit from operations and Â£4 million of other costs included in other operating expenses in the profit from operations. A charge of Â£16 million was reflected in the nine months to 30 September 2006. On 29 November 2006, the Group completed a trademark transfer agreement with Philip Morris International. Under the arrangement the Group sold its Muratti Ambassador brand in certain markets, as well as the L&M and Chesterfield trademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademark in certain African countries. These transactions resulted in a gain of Â£60 million included in other operating income in the profit from operations. 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 euro 24 million. The sale was completed during the second quarter and resulted in a gain of Â£11 million included in other operating income in the profit from operations. However, the Group has 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 Skandinavisk Tobakskompagni AS. The sale includes a factory in Leuven as well as trademarks including Corps Diplomatique, Schimmelpennick, Don Pablo and Mercator. The transaction was completed on 3 September 2007 and a gain on disposal of Â£45 million is included in other operating income for the nine months to 30 September 2007. OTHER CHANGES IN THE GROUP From August 2006, the Group purchased minority interests in its subsidiary in Chile for a cost of Â£91 million, raising the Group shareholding from 70.4 per cent to 96.6 per cent. In the year ended 31 December 2006, the goodwill arising on this transaction was Â£80 million and the minority interests in Group equity were reduced by Â£11 million. Page 12 NET FINANCE COSTS Net finance costs comprise: 9 months to 30.9.07 30.9.06 Â£m Â£m Interest payable (277) (308) Interest and dividend income 71 90 Fair value changes - derivatives (76) 154 Exchange differences 78 (145) ------- -------- 2 9 ------- -------- (204) (209) ======= ======== Net finance costs at Â£204 million were Â£5 million lower. The Â£2 million gain (2006: Â£9 million) of fair value changes and exchange differences reflects a gain of Â£10 million (2006: Â£3 million) from the net impact of exchange rate movements and a charge of Â£8 million (2006: Â£6 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. ASSOCIATES The Group's share of post-tax results of associates was Â£335 million (2006: Â£348 million) after tax of Â£190 million (2006: Â£175 million). For the year to 31 December 2006, the share of post-tax results was Â£431 million after tax of Â£216 million. The share is after exceptional charges and credits. In the nine months to 30 September 2006 and the year ended 31 December 2006, Reynolds American benefited from the favourable resolution of tax matters of which the Group's share was Â£17 million. In the year ended 31 December 2006, Reynolds American also modified the previously anticipated level of support between certain brands and the projected net sales of certain brands, resulting in a brand impairment charge of which the Group's share amounted to Â£13 million (net of tax). On 25 April 2006, Reynolds American announced an agreement to acquire Conwood, the second largest manufacturer of smokeless tobacco products in the US, for US$3.5 billion, and the acquisition was completed on 31 May 2006. Page 13 TAXATION The tax rate in the income statement of 25.8 per cent for the nine months to 30 September 2007 (30 September 2006: 24.9 per cent) is 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 29.8 per cent and 29.7 per cent in 2006. 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 shares held by the Group's employee share ownership trusts). For the calculation of 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: 30.9.07 30.9.06 31.12.06 Earnings Shares Earnings Shares Earnings Shares Â£m m Â£m m Â£m m Basic 1,679 2,031 1,447 2,064 1,896 2,059 Diluted 1,679 2,045 1,447 2,080 1,896 2,076 The earnings have been affected by exceptional items and to illustrate the impact of these the adjusted diluted earnings per share are shown below: Diluted earnings per share 9 months to Year to 30.9.07 30.9.06 31.12.06 pence pence pence Unadjusted diluted earnings per share 82.10 69.57 91.33 Effect of restructuring costs 1.66 5.72 8.09 Effect of disposal of businesses and brands (1.76) 0.53 (1.11) Effect of associates' brand impairments and exceptional tax credits (0.82) (0.19) ------- ------- ------- Adjusted diluted earnings per share 82.00 75.00 98.12 ======= ======= ======= Adjusted diluted earnings per share are based on: - adjusted earnings (Â£m) 1,677 1,560 2,037 - shares (m) 2,045 2,080 2,076 Similar types of adjustments would apply to basic earnings per share. For the nine months to 30 September 2007, basic earnings per share on an adjusted basis would be 82.57p (2006: 75.59p) compared to unadjusted amounts of 82.67p (2006: 70.11p). Page 14 DIVIDENDS The Directors declared an interim dividend out of the profit for the six months to 30 June 2007, which was paid on 12 September 2007, at the rate of 18.6p per share. The interim dividend amounted to Â£377 million. The comparative dividend for the six months to 30 June 2006 of 15.7p per share amounted to Â£323 million. In accordance with IFRS, the interim dividend is charged in the Group results for the third quarter. The results for the nine months to 30 September 2007 include the final dividend paid in respect of the year ended 31 December 2006 of 40.2p per share amounting to Â£821 million (2006: 33.0p amounting to Â£685 million), as well as the above interim dividend. CONTINGENT LIABILITIES As noted in the Report and Accounts for the year ended 31 December 2006, there are contingent liabilities in respect of litigation, overseas taxes and guarantees in various countries. Group companies, as well as other leading cigarette manufacturers, are defendants in a number of product liability cases. In a number of these cases, the amounts of compensatory and punitive damages sought are significant. At least in the aggregate and despite the quality of defences available to the Group, it is not impossible that the results of operations or cash flows of the Group in particular quarterly or annual periods could be materially affected by this. Having regard to these matters, the Directors (i) do not consider it appropriate to make any provision in respect of any pending litigation and (ii) do not believe that the ultimate outcome of this litigation will significantly impair the financial condition of the Group. SHARE BUY-BACK PROGRAMME The Group initiated an on-market share buy-back programme at the end of February 2003. During the nine months to 30 September 2007, 38 million shares were bought at a cost of Â£612 million (30 September 2006: 28 million shares at a cost of Â£399 million). On 1 October 2007, the Company announced that it had commenced an irrevocable non-discretionary programme to purchase shares on its own behalf during its close period from that date up to and including 31 October 2007. During this period, the Company purchased 4.4 million shares at a cost of Â£79 million. ----------------------------------------------------------- Copies of this Report will be posted to shareholders and may also be obtained during normal business hours from the Company's Registered Office at Globe House, 4 Temple Place, London WC2R 2PG and from our website www.bat.com Nicola Snook Secretary 1 November 2007 Page 15 This information is provided by RNS The company news service from the London Stock Exchange

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