9 Months Results - Part 1

British American Tobacco PLC 31 October 2000 Part 1 QUARTERLY REPORT TO 30 SEPTEMBER 2000 SUMMARY NINE MONTHS RESULTS 2000 1999 Change Operating profit pre-exceptionals £1,921m £1,437m +34% Pre-tax profit £1,215m £1,211m 0% Adjusted earnings per share 42.57p 39.40p +8% * Operating profit before goodwill amortisation and exceptional items rose 34 per cent to £1,921 million, as a result of excellent performances in a wide range of markets. Although the comparison is obviously flattered by last year's merger with Rothmans, the enlarged British American Tobacco made good underlying progress as well. * The integration of the Rothmans business into British American Tobacco is well advanced and synergy benefits continue to be delivered well ahead of schedule. * Group volumes were 9 per cent higher at 599 billion cigarettes. The improvement in the quality of the mix continued, with both international and lights brands increasing volumes, which resulted in higher margins. On a comparable basis, overall volumes were 3 per cent lower. * After goodwill amortisation and exceptional items, operating profit rose 6 per cent. However, with higher interest costs, profit before tax was similar to last year. Adjusted earnings per share (on a fully diluted basis) rose by 8 per cent. * The Chairman, Martin Broughton, commented 'Although the public policy arena remains challenging, the confidence I have expressed about our ability to make sustainable progress in a more stable world market is fully borne out by these results. The integration of Rothmans is nearing completion and we are achieving a good increase in adjusted earnings per share'. ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson 020 7845 1180 David Betteridge/Scott Hailstone 020 7845 2888 www.bat.com BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 30 SEPTEMBER 2000 INDEX PAGE Chairman's comments 2-4 Business review 5-9 Group results 10 Segmental analyses of turnover and profit 11 Statement of total recognised gains and losses 12 Interest of British American Tobacco's shareholders 12 Accounting policies and basis of preparation 13 Changes in the Group 14 Foreign currencies 15 Exceptional items 16 Goodwill amortisation 16 Sale of brands 16 Net interest 16 Taxation 17 Earnings per share 17 Segmental analyses: Associated companies and joint venture 19 Shareholders' funds 19 CHAIRMAN'S COMMENTS 2. Operating profit before exceptional items rose 34 per cent to £1,921 million as a result of excellent performances in a wide range of markets, including Australia, Brazil, Canada, Germany, India, Japan, Malaysia, Russia, South Africa and Venezuela. Although the comparison is obviously flattered by last year's merger with Rothmans, the enlarged British American Tobacco made good underlying progress as well. After goodwill and exceptional items, operating profit rose 6 per cent. However, with higher interest costs, profit before tax was similar to last year. Adjusted diluted earnings per share, the best measure of the Group's performance since the merger, increased by 8 per cent to 42.57p. Trading conditions continue to be very difficult in the US domestic business. Brown & Williamson has commenced a major cost cutting programme in order to improve its financial position and enable it to remain competitive. We are wholeheartedly committed to the market, one of the most profitable in the world. The business is benefiting from the list price reductions of GPC and Viceroy in April. In addition, the initial results from a test market for Pall Mall are encouraging. In the tobacco policy arena, we were pleased to be given the opportunity to make two brief presentations at the recent World Health Organisation (WHO) hearings in Geneva. Although it remains to be seen how influential our views will be, we hope to be able to build on the discussions so far. The WHO has a natural role to play in supporting national governments, through providing funds, through policy advice and through the sharing of best practice but, in our view, attempts to impose supra-national legislation and universal levels of taxation are invariably unworkable. We would also like to be able to establish more of a dialogue with the European Union (EU), especially in the light of the European Court of Justice's (ECJ) decision to annul the EU Draft Directive on Tobacco Advertising. The Court has clearly told the European legislature that it should only make laws in accordance with its own constitutional rules. Following the ECJ's decision, it is very much to be hoped that legislators in the EU will take the opportunity to reconsider the Draft Directive on Tobacco Control. Chairman's comments... 3. The Directive and WHO's proposals are both based on a supra- national approach to tobacco policy, whereas we believe that public policy in relation to alcohol and tobacco should be nationally based. Under good regulatory practice, as recommended by the OECD guidelines, national governments must be the entities that set policies and laws in the best interest of all their citizens, while the industries being regulated must be involved as well. This is even more important for proposals that extend well beyond public policy and incorporate a plethora of prescriptive detail. British American Tobacco can help national governments to keep the public appropriately informed about the risks that accompany the pleasure of smoking and can agree standards for the development of reduced risk products acceptable to consumers. We can also work jointly on programmes to prevent people under the age of 18 from smoking. More rapid progress could be made if regulators who are seriously interested in practical tobacco policy could come to see the tobacco industry as part of the solution, rather than as part of the problem. In the US, the Federal lawsuit against the tobacco industry is a good example of a flawed approach to tobacco policy. It is therefore encouraging that the key parts of the case have been thrown out. The increase in counterfeit goods around the world illustrates the consequences of harassing the major tobacco companies who actually represent the responsible part of the business. Companies like ours support sensible regulation and offer governments and regulators a partnership in maintaining orderly markets for tobacco products. The stark choice facing regulators is whether to continue with their battle against the industry leaders, cheered on by a chorus of single issue pressure groups, or to engage in more constructive debate and together win the war against disorderly markets. We are naturally disappointed that the UK Secretary of State for Trade and Industry has announced the commencement of a confidential investigation under Section 447 of the Companies Act 1985. We will, of course, co-operate fully with the investigators but will be making no further comments during the course of their work. Chairman's comments... 4. Although the public policy arena remains challenging, the confidence I have expressed about our ability to make sustainable progress in a more stable world market is fully borne out by these results. The integration of Rothmans is nearing completion and we are achieving a good increase in adjusted earnings per share. The enlarged British American Tobacco is a higher quality business, with an improved balance between the regions and much better margins. It is encouraging that these successes are being more readily reflected in the value of the Group. MARTIN BROUGHTON BUSINESS REVIEW 5. OPERATING PROFIT AT £1,921 MILLION WAS 34 PER CENT HIGHER, EXCLUDING GOODWILL AMORTISATION AND THE EXCEPTIONAL ITEMS SET OUT ON PAGE 16. EXCELLENT RESULTS WERE ACHIEVED IN A WIDE RANGE OF MARKETS. VOLUMES WERE 9 PER CENT HIGHER AT 599 BILLION. THE CURRENT PERIOD ALSO BENEFITS FROM THE INCLUSION OF NINE MONTHS OF ROTHMANS RESULTS COMPARED TO FOUR MONTHS IN THE COMPARABLE PERIOD. THE INTEGRATION OF THE ROTHMANS BUSINESS INTO BRITISH AMERICAN TOBACCO IS WELL ADVANCED AND SYNERGY BENEFITS CONTINUE TO BE DELIVERED WELL AHEAD OF SCHEDULE. The significant increase in the total volumes resulted from the inclusion of Rothmans volumes and, on a comparable basis, volumes were 3 per cent lower. The improvement in the quality of the mix continued, with both international and lights brands increasing volumes, which resulted in higher margins. Strong performances were recorded by Lucky Strike, Viceroy, Kent, John Player Gold Leaf and Dunhill, although there were lower volumes for Peter Stuyvesant, State Express 555 and Rothmans. Global procurement initiatives continued to have a positive impact on manufacturing costs. There was also further rationalisation of production facilities with the factory in Costa Rica closed in August, and the cost reduction programme in Pakistan and the closure of one factory in Zimbabwe announced during the quarter. Profits from the America-Pacific region for the nine months were £21 million higher at £630 million, mainly due to the inclusion of Imperial Tobacco in Canada as a wholly-owned subsidiary and an improved contribution from Japan, partly offset by a lower profit contribution from the US domestic market. Volumes for the region were down 7 per cent, with lower total volumes in the US and Canada and a reduced market share in the US outweighing the impact of market share gains in Canada, Japan and Korea. The operating profit contribution from Canada was £271 million, compared to a profit of £217 million for the same period last year. These results are not comparable due to the restructuring of the Canadian business (see page 14). The profit of the tobacco operations, on a comparable basis for the nine months, was 5 per cent higher, mainly as a result of higher prices and operating efficiencies. Although Imperial's volumes were down by 2 per cent, market share increased in a smaller total market. This increase was led by du Maurier and Matinee, while Players' market share was stable. Business review continued 6. The contribution from the US domestic market, before common overheads of £173 million, decreased by £62 million to £363 million. This reduction was due to lower volumes, higher federal excise taxes, and ongoing settlement and legal expenses, partially offset by higher pricing and lower discounting. Brown & Williamson's market share declined by 1.8 share points while industry shipments were in line with last year. The company lost share, primarily in the discount segment where both GPC and Misty's shares were lower as a result of competitive discounting, the rise in grey market activity and the preferential treatment allowed to certain small manufacturers under the MSA agreement. Lucky Strike, Viceroy and Capri showed small market share increases, while both Kool and Carlton lost share. The rate of decline in overall market share has slowed significantly after the list price reduction in April mainly affecting GPC and Viceroy. On 20 September, Brown & Williamson commenced a major cost cutting programme in order to improve its financial position and enable it to remain competitive. Work is proceeding to finalise the detailed plans and the consequent restructuring costs will be charged in the fourth quarter. In Japan, there were increases in both volume and market share, with Kent, Lucky Strike and Kool driving the growth. Following the acquisition of S.C.A. Tobacco Corporation, the integration is proceeding well and contributing to the success of the business. These factors, combined with favourable exchange rates, led to an increase in profit contribution of 8 per cent which was, however, limited by higher marketing investment. In Asia-Pacific, profits surged ahead 58 per cent to £270 million and volumes rose by 8 per cent to 66 billion. Following the merger the geographic balance of profit in the region has improved. The region benefited from the addition of Rothmans businesses in Malaysia, Australia, New Zealand and Singapore, and synergies from the integration of markets, partially offset by the effect of the brand divestments in Australia and New Zealand. The Group demonstrated a strong performance in Australasia, with profits significantly higher largely due to improved margins, merger benefits in Australia and the South Pacific and growing market share in the key brands. In Australia, Winfield, Benson & Hedges and Dunhill gained market share. This improved performance is despite a significant fall in the total market as a consequence of the November 1999 excise change, further excise increases in 2000 and a general sales tax introduced in July 2000. Business review continued 7. In Malaysia, volume continued the upward trend as the economy recovered with Dunhill improving market share. These volume gains, coupled with merger benefits and cost reduction initiatives, saw performance well ahead of last year. In Indonesia, volumes were lower due to the excise changes and mandatory price increases earlier this year but this was offset by higher margins. In Taiwan, market share and profits improved, with Dunhill demonstrating strong growth. The profit in Latin America at £315 million increased by £72 million, mainly due to the strong performance in Brazil partly offset by Argentina. The inclusion of the Rothmans business in Jamaica also contributed to the increase. Regional volumes at 122 billion were in line with last year. Souza Cruz in Brazil maintained its high market share, with volumes slightly higher as Hollywood continued to increase market share. Higher volumes and reductions in operating costs contributed to the increase in profits. Although the Group's volume and market share in Mexico declined, operating profit was in line with last year benefiting from higher prices and cost reductions. In both Venezuela and Chile, volumes and profits increased. Nobleza- Piccardo in Argentina gained market share in a market where volumes declined. However, profit was lower as a result of the delay between the introduction earlier this year of a social assistance fund tax and price increases sufficient to maintain margins. Profits in the European region have risen impressively, mainly due to the inclusion of the former Rothmans business and strong underlying performances in many markets. Operating profit increased by £181 million to £420 million, while volumes increased by 27 billion to 154 billion. The excellent results for the region were achieved despite the abolition of intra-EU duty free business since July 1999. Higher profits were achieved in Germany despite lower total volumes, following price increases in October 1999 and gains in market share for Lucky Strike and Pall Mall. Elsewhere in Western Europe, there were generally good performances with higher profits in most markets. In Russia, increased volumes, particularly Yava Gold, and improved mix led to improved profits. Both Ukraine and Romania showed strong volume growth from Prilucky Osoblivy and Viceroy respectively, leading to improved financial performance. Business review continued 8. Both sales and profits from the Smoking Tobacco and Cigar operations were up on a comparable basis. The Amesca region benefited significantly from the Rothmans merger with profit up £111 million to £286 million and volumes 14 per cent higher at 176 billion. In South Africa, good progress with the merger and a cost reduction programme, together with higher prices, resulted in improved profits. The rate of total market decline continued to slow with Peter Stuyvesant achieving excellent growth in volume and market share. Elsewhere in Africa, results were affected by the floods in Mozambique, local currency devaluations resulting in reduced purchasing power, economic decline and civil unrest. In some markets the Group launched selective brands or repositioned pricing in response to consumer downtrading. In India, improving economic conditions have helped in producing excellent growth in profits from our associated companies, with volumes and market share higher than last year. John Player Gold Leaf showed strong growth in Bangladesh , generating volume and profit growth and an increased market share. Volumes were significantly higher in Pakistan, but profits were affected by restructuring costs. The shortage of foreign currency in Uzbekistan continued to limit production and sales volumes. Profit growth in the Middle East was driven by a combination of merger benefits and improved margins. With the changing structure of the Group, the currency exposure is more evenly spread. The impact of the strengthening of the US and Canadian dollar on the translation of profit has been partly offset by the weaker euro. Consequently the percentage growth in operating profit would be only 3 per cent lower if profits were translated at prior period rates of exchange. Business review continued 9. Group Cigarette Volumes 3 months to 9 months to Year to 30.9.00 30.9.99* 30.9.00 30.9.99* 31.12.99** bns bns bns bns bns 27.9 31.9 America-Pacific 81.7 88.2 116.1 20.9 30.2 Asia-Pacific 65.6 61.0 85.1 40.1 41.1 Latin America 122.1 121.3 167.0 54.2 63.3 Europe 153.6 126.5 170.4 59.0 62.3 Amesca 175.5 153.7 213.9 ----- ----- ----- ----- ----- 202.1 228.8 598.5 550.7 752.5 ===== ===== ===== ===== ===== * Volumes include four months in respect of Rothmans brands. ** Volumes include seven months in respect of Rothmans brands. GROUP RESULTS - UNAUDITED 10. 3 months to 9 months to Year to 30.9.00 30.9.99 30.9.00 30.9.99 31.12.99 £m £m £m £m £m REVENUE 6,754 5,829 Subsidiary undertakings 17,973 12,805 18,798 371 904 Share of associates 1,057 2,255 2,873 ----- ----- ------ ------ ------ 7,125 6,733 19,030 15,060 21,671 ===== ===== ====== ====== ====== PROFIT 578 400 Subsidiary undertakings 1,388 966 1,099 ------- ------- --------------------------- ------- ------- -------- after charging: acquired stock (81) 5 US tobacco settlements (17) (24) (31) (81) integration costs (75) (81) (357) (96) (91) goodwill amortisation (278) (91) (162) ------- ------- --------------------------- ------- ------- -------- Share of associates and 30 113 joint venture 30 282 380 ------- ------- --------------------------- ------- ------- -------- after charging: Imasco restructuring costs (69) ------- ------- --------------------------- ------- ------- -------- ----- ----- ------ ------ ------ 608 513 Total operating profit 1,418 1,248 1,479 88 Sale of brands 88 88 ----- ----- ------ ------ ------ Profit on ordinary 608 601 activities before interest 1,418 1,336 1,567 (96) (45) Net interest (198) (109) (170) Share of associates' (1) (4) net interest (5) (16) (26) ----- ----- ------ ------ ------ 511 552 Profit before taxation 1,215 1,211 1,371 Taxation on ordinary (232) (266) activities (557) (596) (673) ----- ----- ------ ------ ------ 279 286 Profit after taxation 658 615 698 (41) (93) Minority interests (129) (142) (142) ----- ----- ------ ------ ------ 238 193 Profit for the period 529 473 556 ===== ===== ====== ====== ====== Earnings per share 11.09p 7.91p - basic 23.25p 24.70p 25.25p ===== ===== ====== ====== ===== 16.33p 15.49p - adjusted diluted 42.57p 39.40p 52.33p ===== ===== ====== ====== ===== See notes on pages 13 to 19. SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - UNAUDITED 11. 3 months to 9 months to Year to 30.9.00 30.9.99 30.9.00 30.9.99 31.12.99 £m £m £m £m £m Turnover excluding duty, excise and other taxes 991 1,260 America-Pacific 3,062 3,506 4,804 379 398 Asia-Pacific 1,063 822 1,208 379 381 Latin America 1,188 1,047 1,461 764 882 Europe 2,151 1,646 2,359 441 424 Amesca 1,165 875 1,350 ----- ----- ------ ------ ------ 2,954 3,345 8,629 7,896 11,182 ===== ===== ====== ====== ====== Operating profit 242 237 America-Pacific 630 609 848 97 83 Asia-Pacific 270 171 231 115 104 Latin America 315 243 333 178 138 Europe 420 239 342 103 118 Amesca 286 175 268 ----- ----- ------ ------ ------ 735 680 1,921 1,437 2,022 Acquired stock (81) 5 US tobacco settlements (17) (24) (31) (81) Integration costs (75) (81) (357) (96) (91) Goodwill amortisation (278) (91) (162) Imasco restructuring (69) costs ----- ----- ------ ------ ------ 608 513 1,418 1,248 1,479 ===== ===== ====== ====== ====== Operating profit restated at comparable rates of 585 513 exchange 1,383 1,248 1,479 ===== ===== ====== ====== ====== The net turnover analysis is based on external sales in each region. The figures for the nine months ended 30 September 2000 and 30 September 1999 based on regional location of manufacture would not be materially different except for sales from Europe to Amesca and Asia-Pacific which amounted to £440 million and £240 million respectively, 1999 £301 million and £296 million. The operations of subsidiaries are entirely related to tobacco. The Group's share of the operations of associates and joint venture, analysed by business, is set out on page 19. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - UNAUDITED 12. 9 months to Year to 30.9.00 30.9.99 31.12.99 £m £m £m Profit for the period 529 473 556 Differences on exchange (178) (134) (268) Revaluation of associated company 1,269 ------ ------ ------ Total recognised gains related to the period (below) 1,620 339 288 ====== ====== ====== INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - UNAUDITED 9 months to Year to 30.9.00 30.9.99 31.12.99 £m £m £m Balance 1 January 4,821 64 64 Total recognised gains related to the period (above) 1,620 339 288 Issue of shares: share options 2 1 3 Rothmans merger 5,089 5,089 Redemption of convertible redeemable preference shares (695) Dividends and other appropriations: ordinary shares (196) (156) (546) convertible redeemable preference shares (11) (10) (54) amortisation of discount on preference shares (18) (12) (20) Other movements 23 (18) (3) ------ ------ ------ Balance at period end 5,546 5,297 4,821 ====== ====== ====== See notes on pages 13 to 19. 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