3rd Quarter Results
British American Tobacco PLC
26 October 2006
QUARTERLY REPORT TO 30 SEPTEMBER 2006 26 October 2006
SUMMARY
NINE MONTHS RESULTS 2006 2005 Change
Revenue - as reported £7,251m £6,884m +5%
Profit from operations - as reported £1,944m £1,901m +2%
- like-for-like £2,124m £1,961m +8%
Adjusted diluted earnings per share 75.00p 66.64p +13%
• Reported Group profit from operations was 2 per cent higher at £1,944
million. However, profit from operations would have been 8 per cent higher,
or 6 per cent at comparable rates of exchange, if exceptional items and the
impact arising from the change in terms of trade following the sale of
Etinera are excluded, with all regions except Europe contributing to this
good growth. This like-for-like information provides a better understanding
of the subsidiaries' trading results.
• Group volumes from subsidiaries increased by 1 per cent to 509 billion on
both a reported and like-for-like basis, with impressive growth of 16 per
cent from the four global drive brands. The reported Group revenue at £7,251
million rose by 5 per cent or 3 per cent at comparable rates of exchange.
This volume and revenue growth was achieved across a broad spread of
markets.
• Adjusted earnings per share rose by 13 per cent as the higher net finance
costs and minority interests were more than offset by the improvement in
profit from operations, the share of associates' post-tax results, a lower
tax rate and the benefit from the share buy-back programme.
• The Chairman, Jan du Plessis, commented: "Adjusted diluted earnings per
share increased by 13 per cent, which is a very good result, reflecting
strong performances from both our subsidiaries and our associates. Although
exchange gains are expected to deteriorate further in the fourth quarter,
the growth in volume, revenue and profit for the nine months shows that
British American Tobacco is on track for a good year."
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BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 30 SEPTEMBER 2006
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 12
Changes in the Group 12
Restructuring costs 12
Losses/gains on impairment of a business and disposal of brands and joint
venture 13
Like-for-like information 13
Net finance costs 14
Associates 15
Taxation 15
Earnings per share 15
Dividends 16
Contingent liabilities 17
Share buy-back programme 17
CHAIRMAN'S COMMENTS
British American Tobacco's volumes grew by 1 per cent in the first nine months.
At current rates of exchange, revenue was 5 per cent ahead and profit from
operations excluding exceptional items improved by 8 per cent. Adjusted diluted
earnings per share increased by 13 per cent, which is a very good result,
reflecting strong performances from both our subsidiaries and our associates. We
continue to benefit from exchange rates, although to a lesser extent than during
the first six months.
As expected, volumes in the third quarter were adversely affected by the timing
of shipments in some major markets. The Group's global drive brands grew by an
impressive 16 per cent for the nine months. Kent grew by 16 per cent and Dunhill
by 5 per cent, while Lucky Strike was 4 per cent down, despite maintaining share
in most of its major markets. Pall Mall was 37 per cent ahead.
On a like-for-like basis, profit grew by 6 per cent at comparable rates of
exchange, or by 8 per cent at current rates. Profit increases in a wide range of
markets more than compensated for declines in Canada and Germany, underlining
the benefit we derive from our geographic spread of business.
The Group has continued to review its manufacturing operations and, on 22
September, agreement was reached to close the factory at Zevenaar in the
Netherlands. It will close by the end of 2008, with production being transferred
to Bayreuth in Germany and Augustow in Poland.
The Group's associates had volumes of 173 billion and our share of their
post-tax results was £348 million. This represents an increase of 21 per cent if
exceptional items are excluded and reflects good performances from Reynolds
American, ITC and STK.
The growth in profit from operations, our share of the associates' post-tax
profit, a lower tax rate and the benefit of the share buy-back programme more
than made up for higher net finance costs and minority interests. As a result,
adjusted diluted earnings per share increased by 13 per cent to 75.0p.
During the quarter, the offer to purchase the minority shareholders in
Chiletabacos closed, raising the Group's shareholding from 70.4 per cent to 96.4
per cent, at a cost of £95 million. The transaction will enhance our earnings
per share.
At the end of September, a trademark transfer agreement with Philip Morris
International was signed, allowing both companies to consolidate the ownership
of certain brands. The transactions are subject to regulatory approval and will
result in a net payment to the Group of US$115 million.
Although exchange gains are expected to deteriorate further in the fourth
quarter, the growth in volume, revenue and profit for the nine months shows that
British American Tobacco is on track for a good year.
Jan du Plessis
26 October 2006
Page 2
BUSINESS REVIEW
The reported Group profit from operations was 2 per cent higher at
£1,944 million. However, as explained on page 13, on a like-for-like basis,
profit from operations would have been 8 per cent higher or 6 per cent at
comparable rates of exchange, with all regions except Europe, contributing to
this good growth. This like-for-like information provides a better understanding
of the subsidiaries' trading results.
Group volumes from subsidiaries increased by 1 per cent to 509 billion on both a
reported and like-for-like basis. The reported Group revenue rose by 5 per cent
to £7,251 million. On a like-for-like basis, revenue increased by 6 per cent or
4 per cent at comparable rates of exchange. This volume and revenue growth was
achieved across a broad spread of markets.
The four global drive brands achieved impressive overall volume growth of 16 per
cent on a like-for-like basis.
Kent volumes grew by 16 per cent with significant increases in Russia, Romania,
Ukraine and Chile, as well as good growth in its major market of Japan. Dunhill
rose by 5 per cent, driven by strong performances in South Korea, Taiwan and
South Africa, although it was down in Malaysia.
Lucky Strike volumes declined by 4 per cent, mainly as a result of lower
industry volumes in Germany and Japan, but there were good share growth
performances in a number of key markets. Pall Mall continued its exceptional
growth, with an increase of 37 per cent, driven by Germany, Spain, Greece and
Russia, together with good performances in many other markets.
In Europe, profit at £594 million was £22 million lower than last year as a
result of very competitive trading conditions in a number of markets and the
inclusion in the comparative period of a one-off benefit, resulting from the
change in terms of trade following the sale of Etinera. Excluding this benefit,
profit decreased by £8 million, with strong growth from Russia, Italy and
France, more than offset by declines in Germany, Spain, Poland and Ukraine.
Regional volumes on a like-for-like basis were 1 per cent higher at 184 billion,
with growth in Russia, Spain and Hungary partly offset by declines in Italy,
Germany and Ukraine.
In Italy, profit grew strongly driven by improved margins after industry price
increases, lower supply chain costs and overheads savings. Market share was
lower as the growth in global drive brands was offset by the decline in domestic
brands.
Profit in Germany was down due to excise driven volume declines in the overall
market, down-trading and increased competition in the low-price segment after
the end of Stix production. These factors were partly offset by the impact of
cost reductions and the good volume and market share growth of Pall Mall, as
well as the share growth of Lucky Strike, which led to a higher overall
cigarette market share.
Profit in France grew strongly, benefiting from higher margins and reduced
overheads. Profit in Switzerland was slightly lower due to price competition.
Parisienne grew although overall market share was lower with volumes the same as
last year.
In the Netherlands, profit was lower due to higher excise levels and price
competition, partly offset by cost savings. Profit in Belgium increased with
lower costs and stable volumes. In Spain, volumes and market share were up
strongly, driven by Pall Mall, but industry profitability reduced significantly
with intense price competition.
Page 3
Business review cont...
Profit in Russia grew impressively as a result of higher volumes, an improved
product mix, a continued focus on productivity and a stronger exchange rate. A
higher overall market share resulted from significantly increased volumes of
Kent, Dunhill, Vogue and Pall Mall. Romania continued to show good growth in
volumes and profit, consolidating its leadership position. Volume performance
was driven by Kent, which is now the largest selling brand in the market, as
well as Dunhill.
In Ukraine, profitability was reduced due to lower volumes. In Hungary, industry
volumes benefited from improved border controls and Viceroy and Pall Mall
volumes grew significantly. However, profit was slightly lower as price
competition and an excise increase more than offset an improved product mix and
the benefits from efficiency programmes. In Poland, industry profitability was
severely affected by increased excise rates and price competition.
In Asia-Pacific, regional profit rose by £48 million to £466 million, mainly
attributable to strong performances in Australia, Malaysia, South Korea and New
Zealand. Volumes at 106 billion were 3 per cent higher as strong increases in
Pakistan, Bangladesh, South Korea and Vietnam were partially offset by declines
in Malaysia and Indonesia.
Profit grew strongly in Australia, despite the weaker exchange rate, as a result
of higher margins and cost savings following productivity initiatives. Good
performances from Winfield and Dunhill, and the launch of Pall Mall, contributed
to a higher overall market share in a reduced total market. New Zealand also
showed strong profit growth despite a weaker local currency, as margins
increased but market share was slightly down.
In Malaysia, profit increased as higher margins, the favourable product mix, a
reduction in expenses and the benefit of a stronger local currency more than
covered the impact of lower volumes. Dunhill maintained market share, while Pall
Mall grew share, but total volume declined due to reduced industry volumes,
following the growth of illicit trade. In Vietnam, volumes increased but profit
was slightly lower as a result of increased marketing investment.
In South Korea, profit grew impressively with a strong growth in market share,
driven by Dunhill and Vogue, and cost savings. In addition, volumes were
significantly higher, reflecting volume distortions last year as a result of the
excise increase at the end of 2004.
In Pakistan, market leadership was strengthened through good volume and profit
growth and an increased overall market share with excellent performances by Gold
Flake and Capstan. In Bangladesh, volumes were higher but profit fell due to the
impact of the currency devaluation on costs and additional marketing investment.
In Sri Lanka, good profit growth was achieved with higher margins, an improved
product mix and productivity initiatives leading to a lower cost base. Despite
lower volumes, due to overall industry declines, market share grew with a strong
performance by John Player Gold Leaf.
Profit in Latin America increased by £69 million to £447 million due to good
performances across the region coupled with strong local currencies. Volumes
also grew in many of the markets contributing to an overall increase of 3 per
cent to 113 billion.
In Brazil, performance continued to benefit from marketing initiatives and
ongoing anti-illicit trade operations by the government, which led to higher
volumes and market share. Leaf shipments were slightly ahead of last year. The
higher volumes, an improved product mix, higher leaf margins and the
appreciation of the local currency, led to profit growth.
Page 4
Business review cont...
The strong profit growth in Mexico was driven by higher margins, an improved
local currency, benefits from efficiency programmes and synergy benefits from
the contract manufacturing agreement with Canada. Volumes were in line with last
year as the growth in international brands, notably Pall Mall, was offset by the
decline of non-filter and local low-price brands. In Argentina, strong volume
growth was achieved through an excellent performance by Viceroy and a reduction
in illicit trade. However, profit was significantly lower due to price
competition.
Good profit growth in Chile was achieved by higher volumes and margins, together
with the benefits of a stronger currency. There was good market share growth
from Kent. In Venezuela, higher volumes and increased margins, led by Belmont,
resulted in an excellent increase in profit and market share. The Central
America and Caribbean area showed a significant profit growth as a result of
higher margins, an improved product mix, increased volumes and lower costs.
Profit in the Africa and Middle East region grew by £54 million to £362 million,
mainly driven by South Africa, Nigeria and Iran, as well as reduced losses in
Turkey. Volumes declined by 2 per cent to 74 billion, as a result of Turkey,
Levant and supply chain problems in West Africa and the Caucasus, partly offset
by increases in Iran, Egypt and the Gulf.
In South Africa, despite the weaker average rand exchange rate, good profit
growth was achieved as a result of higher margins. There was an improved product
mix, as both Dunhill and Rothmans continued their strong growth, although market
share was slightly down. In Nigeria, despite excise driven price increases,
market share grew. Higher prices, together with mix improvements and
productivity gains, helped to deliver a higher profit.
In Iran, volumes continued to grow and overall market share increased, resulting
in higher profit. Profit in the Arabian Gulf markets rose as volumes increased,
mainly driven by good results from Dunhill in Saudi Arabia.
In Turkey, higher margins, following industry price increases and lower costs,
led to a reduction of losses. However, competitive pressure from new launches
and the price repositioning of some competitor brands impacted Viceroy, which
led to a decrease in volumes and market share.
The profit from the America-Pacific region increased by £5 million to
£332 million, with a strong performance in Japan offsetting the lower profit
contribution from Canada. Volumes were down 1 per cent to 33 billion as higher
volumes from Japan were more than offset by the decline in Canada.
The profit contribution from Canada was down £21 million to £215 million,
largely due to lower volumes following the growth of illicit trade, a lower
market share and the costs incurred in the move to direct distribution. This was
partially offset by the impact of higher prices, productivity savings and the
stronger Canadian dollar. The shift to low-price products continued, with the
premium segment now representing 52 per cent of the total market compared with
57 per cent last year. Imperial Tobacco Canada's total cigarette market share
was down 2 share points to 53 per cent. Direct distribution was introduced from
the beginning of September and the speed and scale of retail sign-up is well
ahead of expectations, which has led to some initial out-of-stocks.
In Japan, the strong growth of Kool generated increased volumes in a declining
total market, leading to a new high in market share. Profit rose significantly
as a result of an improved product mix, higher margins and increased volumes
which more than offset the impact of exchange.
Page 5
Business review cont...
Unallocated costs, which are net corporate costs not directly attributable to
individual segments, were £5 million higher at £77 million, mainly as a result
of increased pension costs.
The above regional profits were achieved before accounting for restructuring
costs, a loss on impairment of a business and a gain on disposal of brands, as
explained on pages 12 and 13.
Results of associates
The Group's share of the post-tax results of associates' increased by £71
million to £348 million. Excluding the exceptional items explained on page 15
the Group's share of the post-tax results of associates increased by £58 million
to £331 million.
The contribution from Reynolds American, excluding the benefit from the
favourable resolution of tax matters in 2006 and restructuring costs in 2005,
was £42 million higher mainly due to improved pricing, cost reductions, the
timing of promotional spending and the impact of the stronger US dollar. As
explained on page 15, Reynolds American acquired Conwood on 31 May 2006.
Reynolds American reported that on a proforma basis, as if it had been owned
since the beginning of 2005, Conwood delivered strong gains in volume, share and
operating income for the nine months to 30 September 2006.
The Group's associate in India, ITC, continued its strong volume growth, and,
excluding the one-off items in 2005, this led to an increased profit.
Cigarette volumes
The segmental analysis of the volumes of subsidiaries is as follows:
3 months to 9 months to Year to
30.9.06 30.9.05 30.9.06 30.9.05 31.12.05
bns bns bns bns bns
64.4 65.6 Europe 183.5 183.9 244.0
34.7 34.8 Asia-Pacific 106.1 102.6 137.1
37.5 37.0 Latin America 113.0 109.7 149.3
26.5 25.9 Africa and Middle East 74.0 75.5 102.6
10.3 12.0 America-Pacific 32.8 33.0 45.0
------- ------- -------- -------- --------
173.4 175.3 509.4 504.7 678.0
======= ======= ======== ======== ========
In addition, associates' volumes for the nine months were 172.7 billion (2005:
171.2 billion) and, with the inclusion of these, the Group volumes would be
682.1 billion (2005: 675.9 billion).
Page 6
GROUP INCOME STATEMENT - unaudited
3 months to 9 months to Year to
30.9.06 30.9.05 30.9.06 30.9.05 31.12.05
restated restated restated
£m £m £m £m £m
Gross turnover (including duty,
excise and other taxes of
£11,418 million (30.9.05:
£10,693 million - 31.12.05:
6,220 6,332 £14,659 million)) 18,669 17,577 23,984
======= ======= ======= ======== =======
2,443 2,485 Revenue 7,251 6,884 9,325
Raw materials and consumables
(733) (819) used (2,208) (2,072) (2,760)
Changes in inventories of
finished goods and work
22 7 in progress 61 19 (2)
(423) (422) Employee benefit costs (1,182) (1,069) (1,557)
(108) (78) Depreciation and amortisation costs (299) (267) (383)
14 27 Other operating income 62 138 179
(596) (552) Other operating expenses (1,741) (1,732) (2,382)
------- ------- ------- -------- -------
619 648 Profit from operations 1,944 1,901 2,420
after (charging)/crediting:
--------------------- ------------------------------------
(116) (100) - restructuring costs (164) (142) (271)
- (losses)/gains on impairment
of a business and disposal
of brands and joint venture (16) 68 72
--------------------- ------------------------------------
--------------------- ------------------------------------
25 39 Finance income 83 80 118
(110) (98) Finance costs (292) (242) (346)
--------------------- ------------------------------------
(85) (59) Net finance costs (209) (162) (228)
Share of post-tax results of
105 81 associates and joint ventures 348 277 392
after (charging)/crediting:
--------------------- ------------------------------------
(5) - restructuring costs (12) (13)
(11) - US Federal tobacco buy-out (11) (12)
- brand impairments (29)
- exceptional tax credits and
1 other impairments 17 27 57
--------------------- ------------------------------------
------- ------- ------- -------- -------
639 670 Profit before taxation 2,083 2,016 2,584
(152) (194) Taxation (518) (547) (690)
------- ------- ------- -------- -------
487 476 Profit for the period 1,565 1,469 1,894
======= ======= ======= ======== =======
Attributable to:
446 442 Shareholders' equity 1,447 1,373 1,767
======= ======= ======= ======== =======
41 34 Minority interests 118 96 127
======= ======= ======= ======== =======
Earnings per share
21.73p 21.21p Basic 70.11p 65.35p 84.34p
======= ======= ======= ======== =======
21.56p 20.98p Diluted 69.57p 64.79p 83.66p
======= ======= ======= ======== =======
See notes on pages 11 to 17.
Page 7
GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited
9 months to Year to
30.9.06 30.9.05 31.12.05
restated restated
£m £m £m
Differences on exchange (500) 317 425
Cash flow hedges
- net fair value gains 12 16 17
- reclassified and reported in net profit (8) 40 38
- reclassified as basis adjustments 3 3
Available-for-sale investments
- net fair value losses (2) (2) (1)
- reclassified and reported in net profit 1 1
Net investment hedges
- net fair value gains/(losses) 73 (34) (52)
Tax on items recognised directly in equity (5) (37) (41)
-------- -------- --------
Net (losses)/gains recognised directly in equity (429) 303 390
Profit for the period page 7 1,565 1,469 1,894
-------- -------- --------
Total recognised income for the period 1,136 1,772 2,284
-------------------------------------
- shareholders' equity 1,029 1,647 2,128
- minority interests 107 125 156
-------------------------------------
Employee share options
- value of employee services 31 31 42
- proceeds from shares issued 26 27 30
Dividends - ordinary shares (1,008) (910) (910)
- to minority interests (131) (99) (112)
Purchase of own shares
- held in Employee Share Ownership Trusts (77) (47) (48)
- share buy-back programme (399) (394) (501)
Acquisition of minority interests (11)
Other movements 11 13 17
-------- -------- --------
(422) 393 802
Balance at 1 January 6,877 6,117 6,117
Change in accounting policy page 11 (42) (42)
-------- -------- --------
Balance at period end 6,455 6,468 6,877
======== ======== ========
See notes on pages 11 to 17.
Page 8
SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited
The analyses for the nine months are as follows:
Revenue 30.9.06 30.9.05
Inter Inter
External segment Revenue External segment Revenue
£m £m £m £m £m £m
Europe 2,602 380 2,982 2,595 410 3,005
Asia-Pacific 1,313 23 1,336 1,216 12 1,228
Latin America 1,312 1 1,313 1,106 1 1,107
Africa and Middle East 793 15 808 708 25 733
America-Pacific 812 812 811 811
-------- -------- -------- ------- ------- --------
Revenue 6,832 419 7,251 6,436 448 6,884
======== ======== ======== ======= ======= ========
The segmental analysis of revenue is based on location of manufacture and
figures based on location of sales would be as follows:
30.9.06 30.9.05
£m £m
Europe 2,637 2,633
Asia-Pacific 1,376 1,299
Latin America 1,321 1,116
Africa and Middle East 1,098 1,024
America-Pacific 819 812
---------- ---------
Revenue 7,251 6,884
========= =========
Profit from operations
30.9.06 30.9.05
Adjusted Adjusted
Segment segment Segment segment
result result* result result*
£m £m £m £m
Europe 462 594 559 616
Asia-Pacific 463 466 410 418
Latin America 447 447 373 378
Africa and Middle East 359 362 307 308
America-Pacific 290 332 324 327
-------- -------- -------- -------
Segmental result 2,021 2,201 1,973 2,047
Unallocated costs (77) (77) (72) (72)
-------- -------- -------- -------
Profit from operations 1,944 2,124 1,901 1,975
======== ======== ======== =======
*Excluding restructuring costs, loss on impairment of a business and gain on
disposal of brands as explained on pages 12 and 13.
Page 9
Segmental analyses of revenue and profit cont... - unaudited
The analyses for the year ended 31 December 2005 are as follows:
Revenue Location of manufacture Location of sales
Inter
External segment Revenue Revenue
£m £m £m £m
Europe 3,456 569 4,025 3,497
Asia-Pacific 1,646 3 1,649 1,758
Latin America 1,541 4 1,545 1,555
Africa and Middle East 964 34 998 1,405
America-Pacific 1,108 1,108 1,110
------- ------- ------- -------
Revenue 8,715 610 9,325 9,325
======= ======= ======= =======
Profit from operations
Adjusted
Segment result segment result*
£m £m
Europe 696 784
Asia-Pacific 517 531
Latin America 524 530
Africa and Middle East 425 434
America-Pacific 354 436
--------- ----------
Segmental result 2,516 2,715
Unallocated costs (96) (96)
--------- ----------
Profit from operations 2,420 2,619
========= ==========
*Excluding restructuring costs and gains on disposal of brands and joint
venture.
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:
30.9.06 30.9.05 31.12.05
Adjusted Adjusted Adjusted
Segment segment Segment segment Segment segment
result result* result result* result result*
restated
£m £m £m £m £m £m
Europe 32 32 27 27 39 39
Asia-Pacific 67 67 84 57 107 81
Africa and Middle East 2 2 1 1 2 2
America-Pacific 247 230 165 188 244 267
------- ------- ------ ------ ------ -------
348 331 277 273 392 389
======= ======= ====== ====== ====== =======
*Excluding restructuring costs, US Federal tobacco buy-out, brand impairments
and exceptional tax credits and other impairments as explained on page 15.
Page 10
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information comprises the unaudited results for the nine months to
30 September 2006 and 30 September 2005, together with the audited results for
the year ended 31 December 2005. The annual financial statements for 2005, 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 Report and Accounts for the year ended
31 December 2005 with the exception of the amendment to IAS21 referred to below.
These interim financial statements have been prepared under the historical cost
convention, except in respect of certain financial instruments.
IAS32 and IAS39 on financial instruments were applied from 1 January 2005 and
the changes to the total equity as at 1 January 2005 principally reflect:
(a) The measurement of available-for-sale investments at fair value.
(b) The measurement of all derivative financial instruments at fair value.
(c) Derecognition of deferred losses on derivatives.
This resulted in a reduction in total equity of £42 million as at 1 January 2005
which is shown as the impact of the change in accounting policy on page 8.
In December 2005, the International Accounting Standards Board issued both a
clarification on and an amendment to IAS21 (the effects of changes in foreign
exchange rates). The clarification was immediately applicable for reported
results. This states that inter company balances between any subsidiary (which
may itself be a foreign subsidiary) and a foreign subsidiary may form part of
the Group's investment in that foreign subsidiary and therefore, subject to
certain other tests, the exchange impact can be taken directly to equity rather
than to net finance costs in the income statement. Previously, only balances
between certain companies qualified for this treatment. The quarterly results
for the three and nine months to 30 September 2005 have been restated
accordingly from those originally published last year. This has resulted in an
increase of £nil million in net finance costs for the three months to 30
September 2005 and an increase of £3 million in net finance costs for the nine
months to 30 September 2005 (page 7), with a compensating adjustment to
differences on exchange in the statement of changes in total equity (page 8).
The amendment to IAS21 allows inter company balances that form part of a
reporting entity's net investment in a foreign operation to be denominated in a
currency other than the functional currency of either the ultimate parent or the
foreign operation itself. This means that certain exchange differences
previously taken to the income statement are instead reflected directly in
changes in total equity. As this amendment was only adopted by the EU in 2006,
the interim report to 30 June 2006 contained the first published results to
reflect this change. The previously published results have been restated
accordingly, which has resulted in an increase in net finance costs of
£4 million for the year ended 31 December 2005 and £1 million and £5 million
respectively for the three months and the nine months to 30 September 2005.
Page 11
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
30.9.06 30.9.05 31.12.05 30.9.06 30.9.05 31.12.05
US dollar 1.820 1.843 1.819 1.868 1.769 1.717
Canadian dollar 2.060 2.256 2.206 2.084 2.053 2.005
Euro 1.461 1.460 1.463 1.475 1.467 1.455
South African rand 12.021 11.626 11.574 14.511 11.247 10.889
CHANGES IN THE GROUP
On 29 December 2004, the Group sold Etinera S.p.A., the distribution business of
its Italian subsidiary. In the first nine months of 2005, following the sale,
volumes and profits in Italy benefited by 2 billion and £14 million respectively
from a change in the terms of trade with Etinera. Around three-fifths of these
benefits are expected to reverse over time.
On 4 October 2005, the Group announced that it had agreed the sale of its 55 per
cent stake in BAR Honda, held through BARH Ltd. (BARH), to Honda and the sale
was completed on 20 December 2005. For the period 7 January 2005 to 20 December
2005, BARH was equity accounted, reflecting shared control with Honda.
On 21 October 2005, the Group announced the exercise of its pre-emption rights
over shares in Skandinavisk Tobakskompagni AS, its Danish associate, and the
transaction was completed on 12 December 2005. This increased the Group's
holding from 26.6 per cent to 32.3 per cent at a cost of £95 million, resulting
in goodwill of £69 million.
On 25 November 2005, the Group acquired Restomat AG, the largest operator of
cigarette vending machines in Switzerland, at a cost of £25 million, resulting
in goodwill of £7 million.
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.
In August 2006, the Group purchased minority interests in its subsidiary in
Chile for a cost of £95 million, raising the Group shareholding from 70.4 per
cent to 96.4 per cent. The goodwill arising on this transaction was £84 million
and the minority interests in Group equity are reduced by £11 million.
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 which covered the cessation of production in the UK,
Ireland and Canada, with production to be transferred elsewhere. The profit from
operations for the year ended 31 December 2005 included a charge for
restructurings of £271 million.
Page 12
Restructuring costs cont...
Further restructurings continued in 2006 and on 22 September agreement was
reached on the closure of the plant at Zevenaar in the Netherlands. The plant
will close by the end of 2008 with the production being transferred to Bayreuth
in Germany and Augustow in Poland. The nine months to 30 September 2006 includes
a charge for restructurings of £164 million (2005: £142 million), mainly in
respect of £84 million for the initial costs for Zevenaar and further costs for
the UK and Canada restructurings.
LOSSES/GAINS ON IMPAIRMENT OF A BUSINESS AND DISPOSAL OF BRANDS AND JOINT
VENTURE
The agreement to sell the Italian cigar business described on page 12 resulted
in the recognition of an impairment charge of £16 million, which is included in
depreciation and amortisation costs in the profit from operations in the nine
months to 30 September 2006.
In April 2005, the Group sold to Gallaher Group plc (Gallaher) its Benson &
Hedges and Silk Cut trademarks in Malta and Cyprus, together with the Silk Cut
trademark in Lithuania, resulting in a gain on disposal of £68 million included
in other operating income in the profit from operations. The transactions are in
accordance with contracts of 1993 and 1994, in which Gallaher agreed to acquire
these trademarks in European Union states and the accession of Malta, Cyprus and
Lithuania necessitated the sale.
The transactions in respect of BARH described on page 12 resulted in a gain of
£5 million which was included in other operating income in the profit from
operations for the year ended 31 December 2005.
On 29 September 2006, the Group signed a trademark transfer agreement with
Philip Morris International. The Group will sell 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, which would result in a net payment to the Group of US$115 million.
As the transactions are subject to regulatory approval, they have not been
recognised in these results to 30 September 2006.
LIKE-FOR-LIKE INFORMATION
The table below shows like-for-like revenue and profit from operations after
excluding restructuring costs, loss on impairment of a business and gains on
disposal of brands, as well as the change in terms of trade in Italy. On this
basis, the revenue for the nine months to 30 September 2006 of £7,251 million
would represent growth of 6 per cent or 4 per cent at comparable rates of
exchange, and the profit from operations of £2,124 million would represent
growth of 8 per cent or 6 per cent at comparable rates of exchange.
Revenue Profit from operations
9 months to 9 months to
30.9.06 30.9.05 30.9.06 30.9.05
£m £m £m £m
As reported (page 7) 7,251 6,884 1,944 1,901
Etinera - change in terms of trade (28) (14)
Restructuring costs (page 7) 164 142
Losses/(gains) on impairment of a
business and disposal of brands (page 7) 16 (68)
------ ----- ------ -------
Like-for-like 7,251 6,856 2,124 1,961
======= ===== ======= =======
Page 13
NET FINANCE COSTS
Net finance costs comprise:
9 months to
30.9.06 30.9.05
restated
£m £m
Interest payable (308) (277)
Interest and dividend income 90 80
Fair value changes - derivatives 154 (151)
Exchange differences (145) 186
------- --------
9 35
------- --------
(209) (162)
======= ========
Net finance costs at £209 million were £47 million higher than last year,
principally reflecting the impact of derivatives and exchange differences, as
well as higher interest rates.
The £9 million gain (2005: £35 million) of fair value changes and exchange
differences reflects a gain of £3 million (2005: £6 million) from the net impact
of exchange rate movements and a gain of £6 million (2005: £29 million)
principally due to interest related changes in the fair value of derivatives.
IFRS requires fair value changes for derivatives, which do not meet the tests
for hedge accounting under IAS39, to be included in the income statement. In
addition, certain exchange differences are required to be included in the income
statement under IFRS and, as they are subject to exchange rate movements in a
period, they can be a volatile element of net finance costs. These amounts do
not always reflect an economic gain or loss for the Group and, in the quarterly
results during 2005, the Group noted that it was reviewing the appropriate
treatment of these in the adjusted earnings per share calculations. At the 2005
year end the Group decided that, in calculating the adjusted earnings per share,
it is appropriate to exclude certain amounts. The adjustments for the nine
months results to 30 September 2006 are as follows:
(a) £nil million (2005: £8 million gain) relating to derivatives for which hedge
accounting was obtained during 2005.
(b) £nil million (2005: £11 million gain) relating to exchange in net finance
costs where there is a compensating exchange amount reflected in differences in
exchange taken directly to changes in total equity.
The adjusted earnings per share for the nine months to 30 September 2005 have
been adjusted accordingly from those originally reported last year.
Excluding the above items, fair value changes and exchange differences are a net
gain of £9 million compared to a net gain of £16 million in 2005.
Page 14
ASSOCIATES
The share of post-tax results of associates and joint ventures is after
exceptional charges and credits.
In the nine months to 30 September 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 2005, Reynolds American incurred restructuring
costs and a one-off charge related to the stabilisation inventory pool losses
associated with the US tobacco quota buy-out programme. The Group's share (net
of tax) of these amounted to £13 million (30 September 2005: £12 million) and
£12 million (30 September 2005: £11 million) respectively. In addition, in the
fourth quarter of 2005, Reynolds American benefited from the favourable
resolution of tax matters of which the Group's share was £31 million, and 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 £29 million (net of tax).
In the nine months to 30 September 2005 and the year to 31 December 2005, the
contribution from ITC in India included a benefit of £27 million (net of tax),
principally related to the write-back of provisions for taxes partly offset by
the impairment of a non-current investment.
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.
TAXATION
The tax rate in the income statement of 24.9 per cent for the nine months to 30
September 2006 (30 September 2005: 27.1 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 29.7 per cent and 31.1 per cent in 2005 and the decrease
reflects the inclusion of a tax credit in Canada in respect of prior years and
changes in the mix of profits. 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 the diluted earnings per share the average number of
shares reflects the potential dilutive effect of employee share schemes.
The earnings per share are based on:
30.9.06 30.9.05 31.12.05
Earnings Shares Earnings Shares Earnings Shares
restated restated
£m m £m m £m m
Basic 1,447 2,064 1,373 2,101 1,767 2,095
Diluted 1,447 2,080 1,373 2,119 1,767 2,112
Page 15
Earnings per share cont...
The earnings have been distorted by exceptional items, together with certain
distortions to net finance costs under IFRS (see page 14), and to illustrate the
impact of these distortions, the adjusted diluted earnings per share are shown
below:
Diluted earnings per share
9 months to Year to
30.9.06 30.9.05 31.12.05
restated restated
pence pence pence
Unadjusted earnings per share 69.57 64.79 83.66
Effect of restructuring costs 5.72 6.13 10.13
Effect of impairment charge on a business and gain
on disposal of brands and joint venture 0.53 (3.21) (3.41)
Effect of associates' restructuring costs, US Federal
tobacco buy-out, brand impairments and exceptional
tax credits and other impairments (0.82) (0.18) (0.14)
Net finance costs adjustments (0.89) (0.90)
------- ------- -------
Adjusted diluted earnings per share 75.00 66.64 89.34
======= ======= =======
Adjusted diluted earnings per share are based on:
- adjusted earnings (£m) 1,560 1,412 1,887
- shares (m) 2,080 2,119 2,112
Similar types of adjustments would apply to basic earnings per share. For the
nine months to 30 September 2006, basic earnings per share on an adjusted basis
would be 75.59p (2005: 67.21p) compared to unadjusted amounts of 70.11p (2005:
65.35p).
DIVIDENDS
The Directors declared an interim dividend out of the profit for the six months
to 30 June 2006, which was paid on 13 September 2006, at the rate of 15.7p per
share. The interim dividend amounted to £323 million. The comparative dividend
for the six months to 30 June 2005 of 14.0p per share amounted to £293 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 2006
include the final dividend paid in respect of the year ended 31 December 2005 of
33.0p per share, amounting to £685 million (2005: 29.2p per share and £617
million), as well as the above interim dividend.
Page 16
CONTINGENT LIABILITIES
As noted in the Report and Accounts for the year ended 31 December 2005, 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 2006, 28 million shares were bought
at a cost of £399 million (30 September 2005: 37 million shares at a cost of
£394 million).
During the year to 31 December 2005, 45 million shares were bought at a cost of
£501 million.
------------------------------------------------
Copies of this Report will be posted to shareholders on 7 November 2006 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
Alan F Porter
Secretary
26 October 2006
Page 17
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