3rd Quarter Results

RNS Number : 0002H

British American Tobacco PLC

30 October 2008

 



30 October 2008

QUARTERLY REPORT TO 30 SEPTEMBER 2008

SUMMARY

NINE MONTHS RESULTS - unaudited	2008	2007	Change
Revenue	£8,704m	£7,312m	19%
Profit from operations	£2,714m	£2,304m	18%
Basic earnings per share	95.49p	82.67p	16%
Adjusted diluted earnings per share	95.97p	82.00p	17%

	The reported Group revenue increased by 19 per cent to £8,704m as a result of favourable exchange  rate movements, improved pricing, better product mix and the acquisitions of Tekel and Skandinavisk  Tobakskompagni (ST) mid year.  Revenue would have increased by 9 per cent at constant rates of  exchange.
	The reported Group profit from operations was 18 per cent higher at £2,714 million, up 20 per cent if exceptional items are excluded, with all regions contributing to this strong result.  Profit from operations, excluding exceptional items, would have been 10 per cent higher at constant rates of exchange, with Latin America the only region lower.
	Group volumes from subsidiaries were 524 billion, up 4 per cent, a combination of organic volume growth of over 1 per cent and the benefits from the two acquisitions. The four Global Drive Brands continued their strong performance and achieved overall volume growth of 17 per cent with around a quarter of the rise coming from brand migrations.
	Adjusted diluted earnings per share rose by 17 per cent, principally as a result of the strong growth in profit from operations and favourable exchange movements.  Basic earnings per share was 16 per cent higher at 95.49p (2007: 82.67p).
	The Chairman, Jan du Plessis, commented "Although there is general concern about the prospects for the world economy and consumer behaviour over the next couple of years, these results demonstrate that there has been no discernable effect on British American Tobacco. Moreover, the impact of any consumer downturn on our business should be mitigated by our balanced and innovative brand portfolio covering all consumer price points. In addition, we continue to benefit from the extent of our geographic diversity, which will also help to protect shareholders from the impact of volatility in the foreign exchange markets."

ENQUIRIES:
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Ralph Edmondson/ Rachael Brierley	020 7845 1180 020 7845 1519	David Betteridge/Kate Matrunola/ Catherine Armstrong	020 7845 2888

BRITISH AMERICAN TOBACCO p.l.c.

QUARTERLY REPORT TO 30 SEPTEMBER 2008 INDEX

	PAGE
Chairman's comments	2
Business review	4
Group income statement	9
Group statement of changes in total equity	10
Accounting policies and basis of preparation	11
Segmental analyses of revenue and profit	12
Foreign currencies	14
Exceptional items	14
Other changes in the group	15
Net finance costs	16
Associates	16
Taxation	17
Earnings per share	17
Net debt/financing	18
Dividends	19
Share buy-back programme	19
Contingent liabilities	19
Financial Calendar	19
Disclaimers	20

CHAIRMAN'S COMMENTS

British American Tobacco's adjusted diluted earnings per share rose by 17 per cent as the Group's very

good performance continued.

Revenue was 9 per cent ahead at constant rates of exchange and 19 per cent ahead at current rates.

Profit from operations, excluding exceptional items, grew by 10 per cent at constant rates and by 20 per 

cent to £2,755 million at current rates. This reflects the benefit of the £236 million from foreign exchange 

and the inclusion, for the first time, of the businesses acquired mid year, Tekel and Skandinavisk 

Tobakskompagni (ST).

Excluding the acquisitions, the underlying business grew well, with the trends in revenue, volumes and 

profit from operations being consistent with those described at the half year.

Our volume from subsidiaries was up 1 per cent on an organic basis and by 4 per cent to 524 billion 

cigarettes including Tekel and ST. The four Global Drive Brands continued their strong performance, 

achieving overall volume growth of 17 per cent. Sales of our premium brands grew by 7 per cent.

Our associate companies' volumes were 159 billion and our share of their post-tax profits, excluding 

exceptional items, was slightly higher, at £339 million, as a result of improved contributions from 

Reynolds American and ITC. ST ceased to be an associate at the half year.

Adjusted diluted earnings per share grew by 17 per cent to 95.97p. The substantial improvement in profit 

from operations, the uplift from foreign exchange and the benefit of the share buyback programme were 

marginally offset by higher net finance costs, a higher tax rate and an increase in minority interests.  

Some 17 million shares were bought back during the period at an average cost of £18.59 per share and 

at a total cost of £312 million.

The inclusion of Tekel and ST into their respective regions is proceeding smoothly. The two businesses 

are performing in line with expectations and we are confident that they will be earnings enhancing in 

2009.

The acquisition of ST has prompted a review of our regional structure because of its impact on Europe, 

which was already our largest region. We have decided, from 1 January 2009, to separate Europe into 

two regions, Eastern and Western. In addition, Canada will form part of a new Americas region, which 

will include the markets of Latin America and the Caribbean, while Japan will become part of the Asia-

Pacific region. The new regional structure will represent a more balanced distribution of revenue and 

profit.

From 1 January 2009, to streamline our reporting and in line with other companies, we will be publishing 

Interim Management Statements (IMS) for the first and third quarters, instead of full quarterly reports.  

Our IMS will contain information about the performance of the Global Drive Brands, as well as regional 

volumes and trends in market share. They will also cover the Group's financing activities and report on 

any mergers and acquisitions. We will continue to publish income, balance sheet and cash flow 

information at the full year and interim stages.

Page 2

  Chairman's comments cont…

The restructuring announced by Compagnie Financière Richemont S.A. and Remgro Limited is 

progressing and the interest in British American Tobacco previously held by Richemont is now held by 

Reinet Investments SCA, a Luxembourg investment company. As announced on 28 October, British 

American Tobacco's shares are now listed on the JSE in South Africa in preparation for the next stage of 

the restructuring being carried out by Reinet and Remgro.

This involves the distribution of British American Tobacco shares to investors in Reinet on or around 

3 November 2008. Separately, on or around the same date, Remgro will also distribute British American 

Tobacco shares to its shareholders. Following the distributions, a holding of approximately 3 per cent of 

British American Tobacco shares will be retained by Reinet. The distributions will be followed by a rights 

issue by Reinet, which can be subscribed to by using British American Tobacco shares.

Based on information provided by Richemont, Remgro and Reinet in their announcements, we believe 

that, following the distributions, and the completion of the rights issue in mid December, the residual 

Reinet shareholding in British American Tobacco is likely to be less than 10 per cent. The dispersal of 

these major blocks of shares should result in the Group having a more widely distributed range of 

institutional and private shareholders, as well as an increased FTSE 100 Index weighting from 75 per 

cent to 100 per cent.

Although there is general concern about the prospects for the world economy and consumer behaviour 

over the next couple of years, these results demonstrate that there has been no discernable effect on 

British American Tobacco. Moreover, the impact of any consumer downturn on our business should be 

mitigated by our balanced and innovative brand portfolio covering all consumer price points. In addition, 

we continue to benefit from the extent of our geographic diversity, which will also help to protect 

shareholders from the impact of volatility in the foreign exchange markets.

Jan du Plessis

30 October 2008

Page 3

BUSINESS REVIEW

The reported Group revenue was 19 per cent higher at £8,704 million as a result of favourable exchange 

rate movements, improved pricing, a better product mix and the acquisitions of Tekel and ST mid year.  

At constant rates of exchange, revenue would have increased by 9 per cent.

The reported Group profit from operations was 18 per cent higher at £2,714 million, up 20 per cent if 

exceptional items, as explained on pages 14 and 15, are excluded, with all regions contributing to this 

strong result.  Profit from operations, excluding exceptional items, would have been 10 per cent higher at 

constant rates of exchange, with Latin America the only region lower. 

Group volumes from subsidiaries were 524 billion, up 4 per cent, a combination of organic volume growth 

of over 1 per cent and the benefit of additional volumes from the two acquisitions made earlier this year. 

Good volume growth in Romania, Pakistan, Bangladesh, Uzbekistan, Poland, Saudi Arabia and Egypt, 

with additional volumes in Turkey and Denmark, was partly offset by declines in Italy, Germany, Russia, 

Czech Republic, Canada, South Africa, Vietnam, Mexico and Venezuela. 

The four Global Drive Brands continued their strong performance and achieved overall volume growth of 

17 per cent. Around a quarter of the growth was contributed by brand migrations. 

Kent grew by 21 per cent with excellent volume growth in Russia, Romania, Kazakhstan, Ukraine and 

Chile and from new markets such as Egypt, Kyrgyzstan, Mongolia and Serbia, while it also benefited 

from a brand migration in South Africa.  Volumes were lower in Japan, although market share increased. 

Dunhill rose by 5 per cent, with growth in all its important markets, namely South Korea, Malaysia, 

Taiwan, Australia, South Africa, Russia, Romania, Italy and Saudi Arabia.

Lucky Strike volumes were up 9 per cent with good growth in Spain, Italy, France and Argentina, partly 

offset by declines in Japan and Germany, as a result of lower industry volumes.  Pall Mall increased 

volumes by 25 per cent with the geographic roll-out to more markets, such as Pakistan, Australia, 

Malawi, Zambia, Mexico and Belarus, and the continued growth in Turkey, Romania, Uzbekistan and 

Malaysia, partly offset by lower volumes in Poland, Russia, Spain and Italy.

In Europe, profit at £896 million was up £246 million, as a result of the ST acquisition and excellent 

performances in Russia, Romania and Spain.  Profit also grew in Germany, France, Switzerland, Italy, 

the Netherlands, Uzbekistan and Ukraine, but these were partly offset by decreases in Hungary, Czech 

Republic and Belgium.  These results benefited from the more favourable pricing environment, an 

improved product mix and exchange rates.  At constant rates of exchange, profit would have increased 

by £154 million or 24 per cent.  Regional volumes were up 3 per cent at 186 billion, benefiting from the 

acquisition of ST.  Volume increases in Romania, Uzbekistan and Spain, were offset by decreases in 

Russia, Italy, Germany and Czech Republic. 

In Italy, Dunhill and Lucky Strike performed very well but overall volumes were adversely impacted by the 

decline of local brands and the disposal of some brands in 2007.  Profit was higher as a result of the 

lower overheads and a favourable exchange rate, partly offset by reduced volumes.

Volumes in Germany were down in line with industry volumes. Pall Mall performed well, growing volume 

and market share.  Profit rose as a result of exchange movements, as well as improved margins from a 

combination of price increases and cost reductions.  While industry volumes in France were lower after 

significant price rises in August 2007, total market share grew, led by Lucky Strike and Pall Mall. Profit 

increased as a result of the higher prices.  In Switzerland, Parisienne and Pall Mall continued to grow 

market share and profit increased with higher volumes and improved margins.

Page 4

  Business review cont...

In the Netherlands, volumes were slightly higher and profit was up as a result of improved margins after a 

price increase in July 2008.  Industry volumes in Belgium were severely impacted by last year's excise-

driven price rise, resulting in lower profit. Market share improved, assisted by the successful migration of 

Winfield to Pall Mall.  In Spain, strong profit growth was achieved due to the excellent volume and share 

growth of Lucky Strike, coupled with a price increase at the beginning of the year.

In Russia, a strong performance by our premium brands, Kent, Dunhill and Vogue, continued to improve 

the product mix and, with higher prices and a favourable exchange rate, profit increased significantly.  

Volumes were slightly lower as a result of the decline in local brands. 

In Romania, both volume and market share continued to grow, driven by the continued success of our 

Global Drive Brands.  Profit increased significantly, benefiting from higher volumes, price rises and the 

improved product mix, partly offset by higher marketing investment.  Both profit and volumes in the 

Czech Republic were lower due to the effect of the trade buying at the end of 2007, ahead of an excise 

increase. 

Competitive market conditions in Poland continued and total industry shipment volumes were down as a 

result of a significant excise driven price increase during 2007.  Lower volumes and the weakening of the 

currency impacted profitability.  In Hungary, volumes were slightly down although Dunhill and Pall Mall 

performed well despite low price competition.  This, coupled with higher marketing investment behind the 

brands, led to lower profit.  In Ukraine, Kazakhstan and Uzbekistan, volumes increased due to the 

continued impressive performance of Kent, as well as Pall Mall in Uzbekistan.  The improved volumes 

and product mix, higher prices and better cost control contributed to improved profit performances in all 

these markets, although marketing investment has increased.

In Asia-Pacific, profit rose by £104 million to £602 million, mainly attributable to strong performances in 

Pakistan, Vietnam, Bangladesh, Australia and Malaysia and also benefiting from favourable exchange 

rates.  At constant rates of exchange, profit would have grown by £65 million or 13 per cent.  Volumes at 

114 billion were 5 per cent higher as good increases in Pakistan and Bangladesh were partly offset by 

lower volumes in Vietnam.

Profit in Australia was up as a result of higher margins and exchange rate movements, partially offset by 

the impact of increased competitor discounting activities.  Market share was in line with last year, with 

Dunhill and Pall Mall growing market share.  In New Zealand, volumes were similar to last year but profit 

improved, benefiting from price rises, cost efficiencies and exchange movements.

In Malaysia, market share grew with good performances from Dunhill and Pall Mall and as a result of the 

successful relaunch of Kent in August 2008.  Profit rose due to price increases, a better product mix and 

continued productivity savings, despite slightly lower volumes due to the overall industry decline and the 

significant excise rises announced recently.

In Vietnam, strong profit growth was achieved through higher prices and cost savings initiatives.  

Volumes were down due to lower industry volumes, although market share increased strongly with good 

performances from Craven 'A', Dunhill and State Express 555. 

Volumes in South Korea were higher than last year and market share was up as a result of the good 

performance from Dunhill.  Profit was slightly down as the benefits of higher volumes and an improved 

product mix were more than offset by the weakening in the currency.  In Taiwan, volumes and profit were 

in line with last year and Dunhill grew market share.

Page 5

  Business review cont...

In Pakistan, the volume and market share growth continued and, coupled with higher prices, resulted in a 

profit increase, however, this was more than offset by the weakening of the currency.  In Bangladesh, 

good growth in volumes, price rises and a better product mix resulted in an impressive increase in profit.  

Market share, however, was slightly lower due to the increase in the low-priced segment.  Profit in Sri 

Lanka was well ahead, benefiting from price rises, a better product mix and continued productivity 

improvements.  Volumes were marginally lower, although market shares for Dunhill and Pall Mall grew.

Profit in Latin America increased by £34 million to £584 million, mainly as a result of exchange rate 

movements. At comparable rates of exchange, profit would have decreased by £39 million or 7 per cent 

as profit declined in local currency in Brazil, Mexico and Venezuela.  Volumes were down 2 per cent at 

108 billion with declines in Mexico and Venezuela.  

In Brazil, reported profit increased, benefiting from a stronger local currency and higher volumes which 

resulted in an improved market share.  However, at constant rates of exchange, profit was down as 

margins in the comparative period were higher due to price rises in anticipation of excise increases.  

Further price rises were not sufficient to offset the impact of increased excise and higher marketing 

investment.

Volumes in Mexico were lower, resulting in a reduced market share.  A price increase in February was 

not sufficient to fully recover an earlier excise increase and higher marketing investment, resulting in a 

reduced profit.  In Argentina, volumes were slightly up and profit flat as the benefit of an improved 

product mix, due to the good performance of Lucky Strike, was offset by higher costs.

In Chile, volumes were up with the strong growth of Kent and Lucky Strike, while profit was higher due to 

price rises and lower costs.  Market share in Venezuela grew but volumes declined following high excise 

driven price increases in the last quarter of 2007 and price rises earlier this year, coupled with higher 

costs, resulting in a lower profit.  Volumes in the Central America and Caribbean area were down as a 

result of lower industry volumes and the resurgence in illicit trade. However, profit increased as margins 

improved.

Profit in the Africa and Middle East region grew by £33 million to £387 million as a result of the 

acquisition of Tekel and a good performance of the Middle East, negatively impacted by the weakening 

of the South African rand.  At comparable rates of exchange, profit would have grown by £39 million or 

11 per cent.  Volumes were 16 per cent higher at 85 billion, following increases in Nigeria, Egypt and 

GCC, coupled with the volumes gained with the acquisition of Tekel.

In South Africa, profit was lower as a result of a decline in volumes and the impact of the weaker 

exchange rate. Profit in local currency was higher with an improved product mix and higher pricing.  

Volumes and market share were lower following the termination of the Chesterfield trademark license 

agreement at the end of 2007.  Dunhill and Peter Stuyvesant continued to deliver strong share 

performances, while Kent performed well after its migration from Benson & Hedges.

Profit in Nigeria increased as a result of a good growth in volumes, a favourable exchange rate and an 

improved product mix and price rises.

In the Middle East, profit and volumes were higher due to the impressive growth of Dunhill in Saudi 

Arabia.  Strong sales across the Caucasus led to volume, market share and profit increases with Kent's 

performance being outstanding.

Page 6

  Business review cont...

In Turkey, the acquisition of the cigarette assets of Tekel was completed on 24 June 2008 (see page 15) 

and the integration of the two businesses is progressing well.  Global Drive Brands grew strongly with 

good performances by Kent and Pall Mall. Results improved with the growth in volumes and the stronger 

currency, partly offset by marketing investment.

Profit from the America-Pacific region increased by £55 million to £375 million.  This was principally 

due to the improved contribution from Canada and stronger currencies.  At comparable rates of 

exchange, profit would have increased by £21 million or 7 per cent.  Volumes at 31 billion were 3 per 

cent lower than last year.

Profit in Canada rose to £223 million as a result of higher pricing, lower distribution costs and a stronger 

exchange rate, partly offset by lower volumes and an adverse product mix.  At constant rates of 

exchange, profit was £202 million, up 3 per cent.  Overall market share at 52 per cent was down 1.1 per 

cent as the decline in the Premium segment was not offset by the growth in the value-for-money and the 

budget segments.

In Japan, volumes were slightly down as a result of the continued decline in total industry volumes and 

the unfavourable comparison with last year, which was impacted by trade buying ahead of a price 

increase.  Market share was up due to the strong performance of Kool and market share growth of Lucky 

Strike.  Profit was up as a result of a favourable exchange rate, higher pricing and an improved mix, 

partially offset by increased marketing expenditure and vending machine age verification costs.

Unallocated costs, which are net corporate costs not directly attributable to individual segments, were 

£89 million compared to £74 million in 2007. 

The above regional profits were achieved before accounting for restructuring and integration costs, 

Canadian settlement, amortisation of brands and gains on disposal of businesses and brands, as 

explained on pages 14 and 15.

Results of Associates

Associates principally comprise Reynolds American and ITC. ST was an associate until 2 July 2008 

when the cigarette and snus business of ST was acquired and from that date it is consolidated into the 

Group results.

The Group's share of the post-tax results of associates increased by £51 million, or 15 per cent, to 

£386 million. Excluding the exceptional items, explained on page 16, the Group's share of the post-tax 

results of associates increased by £4 million to £339 million, reflecting the impact of the increase in profit 

from Reynolds American and ITC, partly offset by the impact of the ST transaction (see page 17).

The contribution from Reynolds American to post-tax results was up 18 per cent at £259 million. 

Excluding the benefit from the termination of a joint venture agreement and costs in respect of the 

restructuring of organisational structures, both in 2008, the contribution was 2 per cent higher at 

£225 million and the same as last year at constant rates of exchange.  Earnings for the nine month 

period were up as pricing and productivity improvements more than offset cigarette volume declines and 

higher settlement expense.

The Group's associate in India, ITC, continued its strong profit growth and its contribution to the Group 

rose by £6 million, or 8 per cent, to £83 million. At comparable rates of exchange, the contribution would 

have been £81 million, or 5 per cent higher than last year. 

Page 7

  Business review cont...

Cigarette volumes

The segmental analysis of the volumes of subsidiaries is as follows:

3 months to					9 months to				Year to
30.9.08		30.9.07			30.9.08		30.9.07		31.12.07
bns		bns			bns		bns		bns
70.0		65.7		Europe	186.5		180.3		245.0
37.2		34.4		Asia-Pacific	113.7		108.8		145.2
36.8		36.6		Latin America	108.2		110.6		150.5
35.9		26.5		Africa and Middle East	85.0		73.1		101.0
10.3		11.3		America-Pacific	30.5		31.4		42.3
190.2		174.5			523.9		504.2		684.0

In addition, associates' volumes for the nine months were 158.6 billion (2007: 173.2 billion) and, with the 

inclusion of these, the Group volumes would have been 682.5 billion (2007: 677.4 billion).

Page 8

GROUP INCOME STATEMENT - unaudited

3 months to				9 months to			Year to
30.9.08		30.9.07		30.9.08		30.9.07		31.12.07
£m		£m		£m		£m		£m
9,293		6,683	Gross turnover (including duty, excise and other taxes of £15,128 million (30.9.07: £11,705 million -      31.12.07: £16,216 million))	23,832		19,017		26,234
3,247		2,587	Revenue	8,704		7,312		10,018
(865)		(683)	Raw materials and consumables used	(2,402)		(2,069)		(2,802)
4		(33)	Changes in inventories of finished  goods and work in progress	56		45		30
(541)		(385)	Employee benefit costs	(1,347)		(1,096)		(1,586)
(103)		(76)	Depreciation and amortisation costs	(277)		(232)		(336)
158		68	Other operating income	212		138		205
(910)		(666)	Other operating expenses	(2,232)		(1,794)		(2,624)
990		812	Profit from operations	2,714		2,304		2,905
			after (charging)/crediting:
(34)		(10)	- restructuring and integration costs	(67)		(50)		(173)
(101)			- Canadian settlement	(101)
(12)			- amortisation of brands	(12)
139		45	- gains on disposal of businesses and brands	139		56		75
26		31	Finance income	147		86		136
(117)		(109)	Finance costs	(417)		(290)		(405)
(91)		(78)	Net finance costs	(270)		(204)		(269)
93		113	Share of post-tax results of  associates and joint ventures	386		335		442
			after (charging)/crediting:
			- brand impairments					(7)
			- additional ST income	13
1			- termination of joint venture	46
(12)			- restructuring costs	(12)
992		847	Profit before taxation	2,830		2,435		3,078
(281)		(209)	Taxation on ordinary activities	(775)		(629)		(791)
711		638	Profit for the period	2,055		1,806		2,287
			Attributable to:
657		600	Shareholders' equity	1,906		1,679		2,130
54		38	Minority interests	149		127		157
			Earnings per share
33.01p		29.73p	Basic	95.49p		82.67p		105.19p
32.79p		29.52p	Diluted	94.87p		82.10p		104.46p

See notes on pages 11 to 20.

Page 9

GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited

	9 months to				Year to
	30.9.08		30.9.07		31.12.07
	£m		£m		£m
Differences on exchange	133		152		312
Cash flow hedges
- net fair value gains	44		3		15
- reclassified and reported in profit for the period	(8)		(20)		(42)
Available-for-sale investments
- net fair value gains/(losses)	2		(1)		1
- reclassified and reported in profit for the period	(2)		1		1
Net investment hedges
- net fair value (losses)/gains	(141)		15		(35)
Revaluation of existing business	183
Tax on items recognised directly in equity	(5)		(13)		(19)
Net gains recognised directly in equity	206		137		233
Profit for the period page 9	2,055		1,806		2,287
Total recognised income for the period	2,261		1,943		2,520
- shareholders' equity	2,101		1,809		2,348
- minority interests	160		134		172
Employee share options
- value of employee services	38		27		37
- proceeds from shares issued	9		24		27
Dividends and other appropriations  - ordinary shares	(1,394)		(1,198)		(1,198)
- to minority interests	(147)		(140)		(173)
Purchase of own shares
- held in employee share ownership trusts	(116)		(29)		(41)
- share buy-back programme	(362)		(612)		(750)
Acquisition of minority interests	(4)		(5)		(9)
Other movements	3		(6)		(3)
	288		4		410
Balance at 1 January	7,098		6,688		6,688
Balance at period end	7,386		6,692		7,098

  See notes on pages 11 to 20.

Page 10

ACCOUNTING POLICIES AND BASIS OF PREPARATION

The financial information comprises the unaudited interim results for the nine months to 30 September 

2008 and 30 September 2007, together with the audited results for the year ended 31 December 2007.  

The annual consolidated financial statements for 2007, 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.

These financial statements have been prepared under the historical cost convention, except in respect of 

certain financial instruments, and on a basis consistent with the IFRS accounting policies as set out in the 

Annual Report and Accounts for the year ended 31 December 2007, except for an update which extends 

the Group's accounting policy on 'intangible assets other than goodwill' to cover trademarks acquired by 

the Group's subsidiary undertakings.  As with other recognised intangible assets, acquired trademarks 

are carried at cost less accumulated amortisation and impairment.  Trademarks with indefinite lives are 

not amortised but are reviewed annually for impairment.  Other trademarks are amortised on a straight-

line basis over their useful lives, which do not exceed twenty years.  Consistent with the existing policy for 

associated companies' acquired brands, impairments are recognised in the income statement but 

increases in values are not recognised.

As indicated in the 2007 Annual Report and Accounts, IFRIC14 (IAS19 - The Limit on a Defined Benefit 

Asset, Minimum Funding Requirements and their Interaction) will be effective from 1 January 2008, once 

it has been endorsed by the EU. The interpretation clarifies the conditions under which a surplus in a 

post-retirement benefit scheme can be recognised in the financial statements, as well as setting out the 

accounting implications where minimum funding requirements exist. Currently, it is not expected that this 

change would materially alter the Group's reported equity and profit at 1 January 2008 or 31 December 

2008.

The preparation of these financial statements requires management to make estimates and assumptions 

that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of 

contingent liabilities at the date of these financial statements. Such estimates and assumptions are 

based on historical experience and various other factors that are believed to be reasonable in the 

circumstances and constitute management's best judgement at the date of the financial statements. In 

the future, actual experience may deviate from these estimates and assumptions, which could affect 

these financial statements as the original estimates and assumptions are modified, as appropriate, in the 

period in which the circumstances change.

Page 11

SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited

Revenue

The analyses for the nine months are as follows:

	30.9.08						30.9.07
			Inter						Inter
	External		segment		Revenue		External		segment		Revenue
	£m		£m		£m		£m		£m		£m
Europe	3,363		190		3,553		2,642		179		2,821
Asia-Pacific	1,561		27		1,588		1,386		16		1,402
Latin America	1,664		453		2,117		1,440		416		1,856
Africa and Middle East	1,065				1,065		876		10		886
America-Pacific	381				381		347				347
Revenue	8,034		670		8,704		6,691		621		7,312

The analyses for the year ended 31 December 2007 are as follows:

					Inter
			External		segment		Revenue
			£m		£m		£m
		Europe	3,621		225		3,846
		Asia-Pacific	1,874		22		1,896
		Latin America	1,979		585		2,564
		Africa and Middle East	1,224		15		1,239
		America-Pacific	473				473
		Revenue	9,171		847		10,018

The segmental analysis of revenue above is based on location of manufacture and figures based on location 

of sales would be as follows:

	30.9.08		30.9.07		31.12.07
	£m		£m		£m
Europe	3,381		2,667		3,655
Asia-Pacific	1,567		1,386		1,876
Latin America	1,672		1,444		1,983
Africa and Middle East	1,231		1,051		1,445
America-Pacific	853		764		1,059
Revenue	8,704		7,312		10,018

Page 12

  Segmental analyses of revenue and profit cont... - unaudited

Profit from operations

	30.9.08				30.9.07				31.12.07
			Adjusted				Adjusted				Adjusted
	Segment		Segment		Segment		segment		Segment		segment
	result		result*		result		result*		result		result*
	£m		£m		£m		£m		£m		£m
Europe	976		896		666		650		782		842
Asia-Pacific	599		602		502		498		667		672
Latin America	584		584		550		550		680		680
Africa and Middle East	368		387		349		354		447		470
America-Pacific	276		375		311		320		436		446
Segmental results	2,803		2,844		2,378		2,372		3,012		3,110
Unallocated costs	(89)		(89)		(74)		(74)		(107)		(107)
Profit from operations	2,714		2,755		2,304		2,298		2,905		3,003

*Excluding restructuring and integration costs, Canadian settlement, amortisation of brands and gains 

on disposal of businesses and brands as explained on pages 14 and 15.

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:

	30.9.08				30.9.07				31.12.07
			Adjusted				Adjusted				Adjusted
	Segment		Segment		Segment		segment		Segment		segment
	result		result*		result		result*		result		result*
	£m		£m		£m		£m		£m		£m
Europe	38		25		34		34		48		48
Asia-Pacific	86		86		79		79		110		110
Latin America	2		2		1		1		1		1
Africa and Middle East	1		1		1		1		1		1
America-Pacific	259		225		220		220		282		289
	386		339		335		335		442		449

*Excluding gain on termination of joint venture, restructuring costs, additional ST income and charges for 

brand impairments as explained on pages 16 and 17.

Page 13

  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
	30.9.08		30.9.07		31.12.07		30.9.08		30.9.07		31.12.07
US dollar	1.947		1.988		2.001		1.783		2.037		1.991
Canadian dollar	1.982		2.194		2.147		1.895		2.025		1.965
Euro	1.280		1.478		1.462		1.269		1.433		1.362
South African rand	14.984		14.200		14.110		14.760		14.051		13.605
Brazilian real	3.282		3.977		3.894		3.438		3.749		3.543
Australian dollar	2.136		2.421		2.390		2.260		2.302		2.267
Russian rouble	46.797		51.430		51.161		45.778		50.709		48.847

EXCEPTIONAL ITEMS

(a) Restructuring and integration 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 which covered the cessation of production in the 

UK, Ireland, Canada and Zevenaar in the Netherlands, with production to be transferred elsewhere.

The results for the twelve months to 31 December 2007 included a charge for restructuring of 

£173 million, principally in respect of costs associated with restructuring the operations in Italy and with 

the reorganisation of the business across the Europe and Africa and Middle East regions, as well as 

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.

The nine months to 30 September 2008 include a charge for restructuring and integration of £67 million 

(2007: £50 million), principally in respect of further costs related to restructurings announced in prior 

years, the closure of the Bologna factory in Italy and costs in respect of the integration of the Tekel and 

ST businesses into existing operations.

(b) Canadian settlement

On 31 July 2008, Imperial Tobacco Canada announced that it reached a resolution with the federal and 

provincial governments with regard to the investigation related to the export to the United States of 

Imperial Tobacco Canada tobacco products in the late 1980s and early 1990s. The Company entered a 

plea of guilty to a regulatory violation of a single count of Section 240(i) (a) of the Excise Act and has paid 

a fine of £101 million which was included in other operating expenses in the profit from operations for the 

nine months to 30 September 2008.

Page 14

  Exceptional items cont…

The Company has also entered into a 15 year civil agreement with the federal and provincial 

governments. In order, amongst other things, to assist the governments in their future efforts against illicit 

trade, Imperial Tobacco Canada has agreed to pay a percentage of annual net sales revenue going 

forward for 15 years, up to a maximum of Can$350 million, which will be expensed as it is incurred.

(c) Amortisation of brands

The acquisitions of Tekel and ST resulted in the capitalisation of brands which are amortised over their 

expected useful lives, which do not exceed 20 years.  Brands with indefinite lives are not amortised.  The 

amortisation charge was included in depreciation and amortisation costs in the profit from operations for 

the nine months to September 2008.

(d) Gains on disposal of businesses and brands

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 €24 million. The sale was completed during the 

second quarter in 2007 and resulted in a gain of £11 million included in other operating income in the 

profit from operations. However, the Group 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 ST. The sale included 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 was included in other operating income in the 

profit from operations for the twelve months to 31 December 2007.

On 1 October 2007, the Group agreed the termination of its license agreement with Philip Morris for the 

rights to the Chesterfield trademark in a number of countries in Southern Africa. This transaction resulted 

in a gain of £19 million included in other operating income in the profit from operations for the twelve 

months to 31 December 2007.

On 2 July 2008, the Group realised an estimated gain of £139 million with the disposal of its 32.35 per 

cent holding in the non-cigarette and snus business of ST (see other changes in the Group below).  This 

gain, which is subject to finalisation of the purchase price adjustments, was included in other operating 

income in the profit from operations for the nine months to 30 September 2008.

OTHER CHANGES IN THE GROUP

On 22 February 2008, the Group announced that it had won the public tender to acquire the cigarette 

assets of Tekel, the Turkish state-owned tobacco company, with a bid of US$1,720 million.  Completion 

of this transaction was subject to regulatory approval which was subsequently received and on 24 June 

2008 the Group completed the transaction.

On 27 February 2008, the Group agreed to acquire 100 per cent of ST's cigarette and snus business in 

exchange for its existing 32.35 per cent holding in ST and payment of DKK11,598 million in cash, subject 

to finalisation of completion accounts.  Completion of this transaction was subject to regulatory approval 

which was subsequently received and on 2 July 2008 the Group completed the transaction.  The Group 

agreed to divest a small number of local brands, primarily in Norway. The transaction has been 

accounted for as an acquisition of 67.65 per cent of the cigarette and snus business' net assets and a 

disposal of the Group's existing 32.35 per cent interest in the non-cigarette and snus businesses of ST.  

Consequently, the Group's results for the nine months to 30 September 2008 reflect a gain on disposal of 

£139 million, noted above, and a revaluation of £183 million on the existing 32.35 per cent holding in the 

cigarette and snus business which is shown in the statement of changes in total equity on page 10.

Both the Tekel and ST transactions were financed from new facilities and bond issues, as described on 

page 18.

Page 15

  NET FINANCE COSTS

Net finance costs comprise:

			9 months to
			30.9.08				30.9.07
			£m				£m
Interest payable			(359)				(277)
Interest and dividend income			94				71
Fair value changes - derivatives	(202)				(76)
Exchange differences	197				78
			(5)				2
			(270)				(204)

Net finance costs at £270 million were £66 million higher than last year, principally reflecting the impact of 

the higher interest cost as a result of increased borrowings.

The net £5 million loss (2007: £2 million gain) of fair value changes and exchange differences reflects a 

gain of £3 million (2007: £10 million gain) from the net impact of exchange rate movements and a loss of 

£8 million (2007: £8 million loss) 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, accordingly, the Group has decided that, in calculating the 

adjusted diluted earnings per share, it is appropriate to exclude certain amounts.

The adjusted diluted earnings per share for the period ended 30 September 2008 exclude, in line with 

previous practice, an £11 million loss (2007: £nil) relating to exchange losses in net finance costs where 

there is a compensating exchange gain reflected in differences in exchange taken directly to changes in 

total equity.

ASSOCIATES

The Group's share of post-tax results of associates was £386 million (2007: £335 million) after tax of 

£218 million (2007: £190 million). For the year to 31 December 2007, the share of post-tax results was 

£442 million after tax of £246 million. The share is after exceptional charges and credits.

On 21 February 2008, Reynolds American announced that it would receive a payment from Gallaher 

Limited resulting from the termination of a joint venture agreement. While the payment will be received 

over a number of years, in the nine months to 30 September 2008 Reynolds American recognised a pre-

tax gain of US$328 million. The Group's share of this gain included in the results for the nine months, 

amounts to £46 million and is treated as an exceptional item (net of tax).

On 9 September 2008, Reynolds American further announced planned changes in the organisational 

structure at Reynolds American Inc. and its largest subsidiary, R. J. Reynolds Tobacco Company. The 

charge to the third quarter's results amounts to US$91 million. The Group's share of this charge included 

in the results for the nine months, amounts to £12 million and is treated as an exceptional item (net of 

tax).

Page 16

  Associates cont…

In the year ended 31 December 2007, Reynolds American 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 £7 million (net of tax).

The year end of ST, an associate of the Group to 2 July 2008, was 30 June, and, for practical reasons, 

the Group had previously equity accounted for its interest based on the information available from ST 

which was 3 months in arrears to that of the Group.  As explained on page 15, the Group acquired 100 

per cent of ST's cigarette and snus business on 2 July 2008.  Consequently, in order to account for the 

Group's share of the net assets of ST at the date of the acquisition, the estimated results of ST for the 

period up to 2 July 2008 have been included in the results from associates for 2008, resulting in one 

additional quarter's income in 2008.  This contributed an additional £13 million to the share of post-tax 

results of associates and joint ventures, but this has been treated as an exceptional item and excluded 

from the calculation of the adjusted diluted earnings per share. 

TAXATION

The tax rate in the income statement of 27.4 per cent for the nine months to 30 September 2008 

(30 September 2007: 25.8 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 30.4 per cent and 29.8 per cent in 2007.  The increase arises primarily from 

a change in the mix of profits.  The charge relates to taxes payable overseas.

The tax charge for 2008 includes a one-off deferred tax charge of £25 million as a result of the acquisition 

of the cigarette assets of Tekel. This has been excluded from the adjusted diluted earnings per share 

and consequently from the underlying tax rate above.

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 treasury shares).

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:

	30.9.08				30.9.07				31.12.07
	Earnings		Shares		Earnings		Shares		Earnings		Shares
	£m		m		£m		m		£m		m
Basic	1,906		1,996		1,679		2,031		2,130		2,025
Diluted	1,906		2,009		1,679		2,045		2,130		2,039

Page 17

  Earnings per share cont…

The earnings have been affected by exceptional items, together with certain distortions to net finance 

costs under IFRS (see page 16) and to deferred tax (see page 17) in 2008, 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
	30.9.08		30.9.07		31.12.07
	pence		pence		Pence
Unadjusted earnings per share	94.87		82.10		104.46
Effect of restructuring and integration costs	2.58		1.66		6.48
Effect of disposals of businesses and brands	(6.42)		(1.76)		(2.75)
Amortisation of brands	0.45
Effect of Canadian settlement	5.03
Net finance cost adjustment	0.55
Effect of associates' brand impairments, restructuring costs and termination of joint ventures	(1.68)				0.34
Effect of additional ST income	(0.65)
Effect of deferred tax adjustment	1.24
Adjusted diluted earnings per share	95.97		82.00		108.53
Adjusted diluted earnings per share are based on:
- adjusted earnings (£m)	1,928		1,677		2,213
- shares (m)	2,009		2,045		2,039

Similar types of adjustments would apply to basic earnings per share. For the nine months to 

30 September 2008, basic earnings per share on an adjusted basis would be 96.59p (2007: 82.57p) 

compared to unadjusted amounts of 95.49p (2007: 82.67p).

NET DEBT/FINANCING

The Group remains confident in its ability to access successfully the debt capital markets and reviews its 

options on an ongoing basis. The main financing agreements entered into since the beginning of the 

financial year, with issue proceeds used to finance certain acquisitions as well as repay maturing debt, 

were as follows:

In the nine months to 30 September 2008, the €1.8 billion revolving credit facility arranged in December 

last year was cancelled and replaced with the issue of €1.25 billion and £500 million bonds maturing in 

2015 and 2024 respectively.  In addition to this, the Group increased its €1 billion 5.375 per cent bond by 

an additional €250 million, bringing the total size of the bond to €1.25 billion.

On 13 February 2008, the Group entered into an acquisition credit facility whereby lenders agreed to 

make available an amount of US$2 billion.  On 1 May 2008, this facility was syndicated in the market and 

was redenominated into two euro facilities, one of €420 million and one of €860 million. These facilities 

expire on 31 October 2009.  There was a net draw down on these credit facilities of €1,154 million during 

the nine months to 30 September 2008 (2007 €nil).

During the nine months to 30 September 2008, the Group also repaid the US$330 million fixed rate bond 

upon maturity in May 2008.

On 22 September 2008, the Group refinanced its maturing Mexican bond with a floating rate borrowing of 

MXN1,444 million.

Page 18

  DIVIDENDS

The Directors declared an interim dividend out of the profit for the six months to 30 June 2008, which was 

paid on 17 September 2008, at the rate of 22.1p per share.  The interim dividend amounted to 

£440 million.  The comparative dividend for the six months to 30 June 2007 of 18.6p per share amounted 

to £377 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 2008 include the final dividend paid in respect of the year 

ended 31 December 2007 of 47.6p per share amounting to £954 million (2007: 40.2p amounting to 

£821 million), as well as the above interim dividend.

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 2008, 17 million shares were bought at a cost of £312 million

(30 September 2007: 38 million shares at a cost of £612 million).

'Purchase of own shares' in the Group statement of changes in total equity, includes an amount of 

£50 million provided for the potential buy-back of shares during October 2008 under an irrevocable non-

discretionary contract.

CONTINGENT LIABILITIES

As noted in the Report and Accounts for the year ended 31 December 2007, 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.

FINANCIAL CALENDAR 2009

26 February 2009   Preliminary Announcement of results for the year ended 31 December 2008

Page 19

  DISCLAIMERS

This Report does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose 

of any British American Tobacco p.l.c. shares or other securities.

This Report contains certain forward looking statements which are subject to risk factors associated with, 

among other things, the economic and business circumstances occurring from time to time in the 

countries and markets in which the Group operates. It is believed that the expectations reflected in this 

announcement are reasonable but they may be affected by a wide range of variables which could cause 

actual results to differ materially from those currently anticipated.

Neither the Company nor the Directors accept any liability to any person in relation to this Report except 

to the extent that such liability could arise under English law. Accordingly, any liability to a person who 

has demonstrated reliance on any untrue or misleading statement or omission shall be determined in 

accordance with section 90A of the Financial Services and Markets Act 2000.

Past performance is no guide to future performance and persons needing advice should consult an 

independent financial advisor.

Copies of this Report may 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

30 October 2008

Page 20

 

END

 

 

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