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 £7,312m £7,251m +1%
Profit from operations £2,304m £1,944m +19%
Adjusted diluted earnings per share 82.00p 75.00p +9%
The reported profit from operations was 19per cent higher at £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 £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 £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 £335 million. Our
share of their results at comparable rates of exchange and excluding exceptional
items would have been £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 £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
£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
£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 £650 million was up £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 £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 £32 million to £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 £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 £103 million to £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 £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 £8 million to £354 million
due to exchange rate movements. However, at comparable rates of exchange, profit
would have increased by £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 £12 million to
£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
£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 £19 million at £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 £3 million lower at £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 £13 million
to £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 £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 £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
£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 £12 million to £77 million. At comparable
rates of exchange, the contribution would have been £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
£m £m £m £m £m
======== ======== ======== ========= ========
6,683 6,220 Gross turnover (including duty, 19,017 18,669 25,189
excise and other taxes of
£11,705million
(30.9.06: £11,418million -
31.12.06: £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
£m £m £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
£m £m £m £m £m £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
£m £m £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
£m £m £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*
£m £m £m £m £m £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*
£m £m £m £m £m £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 £216 million.
The nine months to 30 September 2007 includes a charge for restructuring of
£50 million (2006: £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 £19 million for the year ended 31 December 2006,
reflecting a £15 million impairment charge included in depreciation and
amortisation costs in the profit from operations and £4 million of other costs
included in other operating expenses in the profit from operations. A charge of
£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 £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 £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
£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 £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 £80 million and the minority interests in Group equity
were reduced by £11 million.
Page 12
NET FINANCE COSTS
Net finance costs comprise:
9 months to
30.9.07 30.9.06
£m £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 £204 million were £5 million lower.
The £2 million gain (2006: £9 million) of fair value changes and exchange
differences reflects a gain of £10 million (2006: £3 million) from the net
impact of exchange rate movements and a charge of £8 million (2006: £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 £335 million (2006:
£348 million) after tax of £190 million (2006: £175 million). For the year to 31
December 2006, the share of post-tax results was £431 million after tax of
£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 £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 £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
£m m £m m £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 (£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 £377 million. The comparative dividend
for the six months to 30 June 2006 of 15.7p per share amounted to £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 £821 million (2006: 33.0p amounting to £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 £612 million (30 September 2006: 28 million shares at a cost of
£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 £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
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