Final Results
British American Tobacco PLC
26 February 2002
26 February 2002
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2001
SUMMARY
2001 2000 Change
Restated
Operating profit pre-exceptionals £2,771m £2,575m +8%
Pre-tax profit £2,065m £1,522m +36%
Adjusted earnings per share 61.82p 56.93p +9%
Dividends per share 32.00p 29.00p +10%
• Operating profit, before goodwill amortisation and
exceptional items, was 8 per cent higher at £2,771
million, with good performances across the Group.
• International brand volumes grew by almost 3 per cent
but Group volumes at 807 billion were the same as last
year. The Group's four global drive brands achieved a
growth of more than 10 per cent.
• Pre-tax profit was up 36 per cent at £2,065 million
benefiting from the lower level of exceptional charges
and net interest paid.
• Adjusted earnings per share (on a fully diluted basis)
rose 9 per cent to 61.82p.
• The Board is recommending a final dividend of 22.3p, up
11.5 per cent, which will be paid on 19 April 2002.
This will take the growth in dividends for the year to
10 per cent.
• The Chairman, Martin Broughton, commented "The Group's
results since the demerger in 1998 prove that our
global strategy for creating shareholder value is
working. Whether measured by operating profit, pre-tax
profit, earnings per share, dividends or total
shareholder return, the record speaks for itself."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph Edmondson 020 7845 1180 David Betteridge 020 7845 2888
Scott Hailstone
Ann Tradigo
Video, audio and text interviews with Martin Broughton
and Paul Adams are available at www.bat.com/ir and
www.cantos.com
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2001
INDEX
PAGE
Chairman's comments 2
Business review 5
Dividends 11
Group profit and loss account 12
Statement of total recognised gains and losses 13
Interest of British American Tobacco's shareholders 13
Segmental analyses 14
Quarterly analyses of profit 15
Group balance sheet 17
Group cash flow statement 18
Accounting policies and basis of preparation 19
BAT Australasia 20
Imperial Tobacco Canada/Imasco 20
Convertible redeemable preference shares 21
Exchange rate effects 21
Exceptional items 21
Goodwill amortisation 22
Sale of business 22
Interest and interest cover 22
Taxation 23
Earnings per share 23
Group reserves 24
Cash flow 25
Contingent liabilities 25
Annual report and accounts 28
CHAIRMAN'S COMMENTS 2.
Operating profit before exceptional items rose by 8 per cent to
£2,771 million in 2001, maintaining British American Tobacco's
record of steady growth in varying economic conditions since the
demerger in 1998. Pre-tax profit increased 36 per cent, while
adjusted earnings per share were ahead by 9 per cent at 61.82p.
As a result, the Board is recommending a final Dividend of
22.3p per share, taking the total growth for the year to 10 per
cent, in line with the Group's policy of paying out at least
50 per cent of sustainable earnings.
We have continued to shift our brand mix to the growing, more
profitable segments of the tobacco market, towards International
Brands, Premium Brands, Lights and the Adult Smokers Under 30
category. The resulting improvement has a real impact on both
operating profit and margins, as we have seen over the past few
years, with average Group margins up almost 60 per cent over the
period since the demerger in 1998.
Overall, our global drive brands had an excellent year, with
growth above 10 per cent. Total International Brands rose three
per cent and Lights were up 11 per cent. All our global drive
brands posted record years in terms of volumes with the highest
ever market share in the majority of their key markets. Total
Group volume was stable in 2001.
Lucky Strike is our best selling international brand and our
premier global brand for the key Adult Smoker Under 30 segment
of the market. 2001 was another record year for Lucky Strike
with volumes four per cent higher, driven particularly by growth
in key markets, such as France, Germany and Spain, as well as a
number of other markets where the brand gained share.
Kent is our premier free-standing lights brand and its role is
to strengthen the portfolio in the critical Premium, Lights and
Adult Smokers Under 30 segments. The original four markets that
re-launched Kent in 1999 (Russia, Chile, Romania and Hong Kong)
continued to generate impressive volume growth in 2001, over
50 per cent ahead of the previous year. Russia was the most
notable success and, on the basis of our retail audit at the end
of December, Kent became the leading Premium International Brand
in Moscow, the key market for influencing the rest of the
country.
Dunhill's role is to establish a strong global position in the
premium/super premium segment by providing consumers with a
product seen as the finest cigarette in the world. In 2001,
fuelled by outstanding performance in South Korea, Malaysia and
Taiwan, Dunhill achieved the highest ever volume in the history
of the brand, with 14 per cent growth over 2000. The Dunhill
cigar range was also re-launched, to position it at the premium
end of the cigar market.
Chairman's comments cont... 3.
Our leading global mid-price brand, Pall Mall, which is also
positioned to strengthen the Group amongst the Adult Smokers
Under 30 and Lights segments, has experienced significant growth
in 2001, with volumes up 21 per cent. The growth was driven by
strong performances in Germany, Russia, Hungary, Italy, Ukraine
and Romania and the launch of Pall Mall filter proved to be one
of the most successful cigarette brand launches in the US during
the last ten years.
With a new top management team in place, I hope it will be
helpful to shareholders if I outline the three areas of the
business on which we will be focusing over the medium term to
sustain our performance.
The first is organic volume growth. As the world market is
basically flat at about 5.3 trillion cigarettes, declining an
estimated 0.2 per cent in 2001, volume growth can only come from
gaining share. However, the quality of that share growth is
equally important to us. An improved brand mix, as a result of
our move towards higher margin brands, has been a fundamental
part of our approach for a number of years.
Our marketing and brand strategies are working well, as can be
seen from the performance of our global drive brands and our key
regional and national brands. We also have strong positions in
those parts of the world where there is both population growth
and GDP growth, both of which should benefit Group volumes and
brand mix in the future.
Entries into new markets are a very important source of further
organic volume growth. The success of the Group's moves into
Eastern Europe in the 1990s gives us real confidence in our
ability to grow share by entering new markets and every reason
to believe that the current investments in South Korea, Turkey,
Vietnam, Nigeria and Egypt will be just as successful in the
medium term.
As announced in December, we do anticipate that Group volumes
will decline about 2-3 per cent in 2002. This is a result of
economic conditions and the decision to apply even more
stringent criteria for the supply of products to trade
customers, especially in the area of duty-free sales. However,
we expect to see volume growth in 2003 and beyond.
Chairman's comments cont... 4.
Secondly, the Group will continue to play an active role in the
consolidation of the tobacco industry, enabling us to add growth
from acquisitions to organic growth. Although there is no
opening of the size and scale of Rothmans, there are
opportunities to strengthen our position in key markets and to
improve our margins. Any acquisitions would need to be both
strategically important and financially attractive.
Thirdly, we will be focusing relentlessly on improving
productivity across all our business activities, without
undermining the Group's effectiveness, especially in the market
place. Indeed, our capabilities and scale in research and
development, leaf, purchasing, manufacturing and marketing,
which are already world-class, can be further strengthened,
giving us significant scope to improve our performance.
In December, we confirmed our confidence in delivering high
single figure earnings growth in line with market estimates for
2002, subject to exchange rates. In terms of further
information about current trading, I will, as usual, be giving
shareholders an indication of how the Board views 2002 at the
Annual General Meeting in April.
However, recognising that Argentina and Venezuela may be causing
some concern, it seems sensible to make a brief comment. The
economic conditions are clearly very challenging but they are
the same problems that we have experienced in other markets over
the years, such as Russia in 1998. Despite the volatility of
exchange rates since December, we remain confident of meeting
the forecast.
The Group's results since the demerger in 1998 prove that our
global strategy for creating shareholder value is working.
Whether measured by operating profit, pre-tax profit, earnings
per share, dividends or total shareholder return, the record
speaks for itself.
MARTIN BROUGHTON
BUSINESS REVIEW 5.
British American Tobacco is the world's second largest quoted
tobacco group with annual shipments of more than 800 billion
cigarettes, which represents a world market share of over 15 per
cent.
British American Tobacco is the world's most international
tobacco company with an impressive market position in Latin
America and a robust position in all the other regions. A
strong broad based portfolio of international, regional and
local brands provides the platform for achieving global
leadership of the tobacco business. This will be achieved by
increasing share in the key growth consumer segments.
Group operating profit, before goodwill amortisation and the
exceptional items set out on page 21, was 8 per cent higher at
£2,771 million, with good performances across the Group. Profit
in the fourth quarter rose 6 per cent to £689 million. The
strengthening of the average exchange rate of a number of
currencies against sterling, primarily the US dollar and euro,
was largely offset by the weakness of the Brazilian real and
South African rand. At comparable rates of exchange, the growth
in profit for the year would have been 7 per cent.
International brand volumes grew by almost 3 per cent but
overall Group volumes at 807 billion were the same as last year.
Lucky Strike, Kent, Dunhill and Pall Mall, the four global drive
brands of the Group, achieved an overall growth of more than
10 per cent.
America-Pacific
Profit of £1,019 million from the region rose by £141 million,
reflecting higher contributions in all the main markets and the
benefits from stronger US dollar exchange rates during the year
There were market share gains in Japan and excellent volume
growth and increased market share in South Korea, although
regional volumes at 106 billion were 3 per cent lower as a
result of the lower US market share and total market size
declines.
Imperial Tobacco Canada contributed £431 million of profit, up
11 per cent, compared to the £389 million for the same period
last year. On a comparable basis (see page 20), profit for the
tobacco operations increased by 9 per cent as a result of higher
margins, partially offset by lower volumes as a result of the
reduced total market. Imperial Tobacco's impressive market
share was held, with share increases for Matinee and du Maurier
and a slight decline for Player's.
Business review cont... 6.
In the US, Brown & Williamson, contributed £356 million, an
increase of 10 per cent in local currency. This increase was
the result of higher pricing and lower costs following last
year's restructuring, partly offset by lower volumes and higher
ongoing expenses under the 1998 Master Settlement Agreement.
The market share for 2001 was slightly lower at 10.9 per cent,
but showed signs of stabilising during the year. Pall Mall grew
volumes and share of retail off-take continued to increase,
while Viceroy also increased market share. Advance, a
potentially reduced exposure product, was launched in a test
market in November.
In Japan, profit grew strongly due to the impact of the SCAT
acquisition and the favourable effect of foreign exchange,
partially offset by lower volumes in a reduced total market.
Overall market share rose to 8 per cent due to the success of
Kent and Kool, which both increased share.
With volumes trebling, Dunhill drove the substantial increase in
profits in South Korea, and overall market share was almost
5 per cent. The project to replace the Group imports with local
production remains on schedule.
Asia-Pacific
Profit of £414 million was £53 million ahead, with strong
results in Australia and Malaysia due to rationalisation
changes, and higher volumes in Vietnam. This strong performance
was achieved despite poor economic conditions in Asia, which
were exacerbated by the global slowdown. Regional volumes
declined by 6 per cent to 82 billion as a result of tax driven
price increases in Malaysia, Indonesia, Australia and New
Zealand, which were partially offset by growth in Vietnam.
Australia delivered strong profit growth, as a result of more
favourable margins and a lower cost base. Overall market share
increased, with strong performances by Winfield and Benson &
Hedges, although total volumes were down due to retail price
increases caused by excise increases.
Malaysia's profit growth reflected higher margins and the
strength of the Dunhill brand, which increased market share.
This was bolstered by lower costs, partially offset by the need
to pay import duties on additional leaf to meet the shortfall in
the local crop and provide additional financial support to local
tobacco farmers.
Business review cont... 7.
Profit grew significantly in Vietnam, due to higher sales
volumes with improved distribution coverage and the strength of
the State Express 555 and Craven 'A' brands. The joint venture
agreement with Vinataba, will further contribute to the profit
from this market. In Indonesia, profit increased substantially
after the restructuring early in the year, coupled with higher
margins driven by price increases but volumes declined as excise
increases adversely affected the Group, whereas Kretek and small
manufacturers benefited.
Both profit and volumes declined in Singapore due to a
significant excise increase and rapid development of the value-
for-money segment, which eroded higher priced volumes. The
Group grew its share of the value-for-money segment and had
stabilised overall market share by year end.
In Taiwan, the rapid growth of Dunhill fuelled an increase in
overall market share and significant increases in premium and
lights segment shares although the profit was lower due to
higher marketing investments.
Latin America
Profit at £428 million was slightly ahead of last year. Despite
good performances in local currency by a number of operations,
the results in sterling were affected by exchange movements.
Higher volumes in Brazil almost offset reductions in some other
countries where the total markets contracted. As a result, the
regional volumes showed a slight decline to 163 billion.
In Brazil, while there were higher sales volumes, higher leaf
export volumes, lower expenses and the benefit of a price
increase, the market was affected by a poorer brand mix. The
6 per cent increase in volumes and higher market share was
driven by the strong performance of Derby, following its price
repositioning to recover volume from the illegal competition.
However, reported profit was affected by the devaluation of the
local currency against the US dollar.
With increased margins, a better brand mix and lower costs,
profit rose in Mexico despite lower volumes and market share.
In Chile, profit increased due to higher margins and the high
market share was maintained although the total market was flat.
In Venezuela, Belmont led the growth in volumes and market share
which, together with higher prices, a reduction in variable cost
and lower expenses, resulted in higher profit.
Business review cont... 8.
In Argentina, market share was in line with last year, despite
the significant down sizing of the total market during the
latter part of the year as a result of the very difficult
economic conditions. Profitability benefited as industry
margins were restored, following the reduction of the social
assistance fund tax rate during the year. The excellent
performances of Delta and Belmont in Central America drove the
higher market share and profit, notwithstanding lower overall
volumes and the costs of entry in the Dominican Republic.
Europe
Profit for the region was £512 million, down by £29 million.
Excluding the non-recurring excise gain in the UK market in
2000, profit was in line with last year, despite fiercely
competitive market conditions in Poland and market size
reductions in other markets. Volume grew well, predominantly in
the central and eastern markets, resulting in an increase in
regional volumes of 7 per cent to 223 billion.
Profit more than doubled in Russia, mainly due to improved brand
mix. Vogue and Kent growth was supplemented by another
excellent performance of the Yava portfolio and encouraging
results from Pall Mall and Lucky Strike, with volumes increasing
15 per cent. Prilucky Osoblivy, only two years after its
launch, has become the leading brand in Ukraine where volumes
increased dramatically. Market share growth of Kent, Pall Mall
and Derby, coupled with a reduction in overhead costs
contributed to significantly higher profit in Romania.
In Germany, Lucky Strike, Gauloises Blondes and Pall Mall all
grew market share and the Group's position was consolidated,
despite the growth in trade brands reflecting the economic
downturn. Coupled with a reduction in overhead costs this led to
slightly higher profits. In Switzerland, excellent performances
by Parisienne and Barclay combined with overhead savings
contributed to outstanding profit growth. Higher margins and
lower costs enhanced profitability in the Netherlands. An
exceptional performance by Lucky Strike combined with additional
competitive inroads made by Winfield were driving forces behind
a significant profit growth in France. During the year Philip
Morris withdrew from the UK Partnership which now gives us the
freedom to build the business on our own terms, although this
will come at some cost. As a result 555 Smooth was launched in
the UK in October 2001 and is performing in line with
expectations.
Business review cont... 9.
Profits from the smoking tobacco and cigars operations were
slightly higher with good trading results in the UK and Germany.
Fine cut volumes were up in the Netherlands, UK and Germany
despite total market declines and increased price pressure in
several core markets, notably in France. The leading position
in the Belgian Cigar market was further strengthened and sector
share of tobacco-rolls and cigars in Germany was maintained.
Amesca
The region increased profit by £28 million to £398 million,
benefiting from higher contributions by South Africa, the Middle
East, Pakistan and Bangladesh, as well as the associated
companies in India. The results were adversely affected by the
trading environment in Uzbekistan and the costs of setting up
our new market entries in Egypt and Turkey. Although volumes
increased in Pakistan and Bangladesh, regional volume at
233 billion was down by 2 per cent as a result of a sharp
reduction in India.
In South Africa, profit reported in sterling was lower due to
the depreciation of the rand. However, profit in local
currency, excluding the profit of £33 million on the sale of the
pipe tobacco business (see page 22), was higher as a result of
the price increases, lower costs and the good performances of
Peter Stuyvesant, Benson & Hedges and Dunhill. This improvement
was achieved despite the domestic market decline of 3 per cent
and the loss of the contribution from the disposed pipe tobacco
business.
Mixed performances were reported elsewhere in Africa but profits
were higher in total, overcoming difficult economic conditions
and political instability. The North Africa results were
affected by the investment in the Egyptian operations. The
manufacturing plant currently under construction in Nigeria, as
well as the development of leaf growing and a national
distribution network, will secure future growth in the country.
The Group's associated companies in India produced excellent
results, which were significantly ahead of last year. This
improvement reflected price benefits and a higher overall market
share, despite lower volumes in a declining market. Although
sales volumes in Sri Lanka fell, market share was maintained and
profit increased.
The results in the Middle East, where market share was
maintained, showed significant improvement as a result of volume
gains and improved margins. An operating loss in Uzbekistan
reflected the very difficult trading conditions, the lack of
dollar conversion and an almost 100 per cent currency
devaluation in July.
Business review cont... 10.
In Pakistan, there was a significant turnaround in the business
following a price repositioning. Total volume and market share
increased strongly, mainly driven by the growth in Gold Flake
and Capstan. Operating profit was well ahead, reflecting the
volume increase and the benefit of the restructuring programme
last year. In Bangladesh, volume increased in a growing
market, with strong growth in John Player Gold Leaf. Market
share fell slightly while the profit growth reflected the
volume gains, coupled with mix benefits.
Non-trading items
The above results were achieved before accounting for any
goodwill amortisation and exceptional items which are described
on pages 21 and 22.
DIVIDENDS 11.
The Directors will be recommending to the shareholders at the
Annual General Meeting to be held on 16 April 2002 the payment
on 19 April 2002 of a final dividend for the year of 22.3p per
ordinary share of 25p and convertible redeemable preference
shares of 25p.
Valid transfers received by the Registrar of the Company up to
8 March 2002 will be in time to rank for payment of this
dividend. Ordinary shares go ex-dividend on 6 March 2002.
The following is a summary of the dividends declared for the
years ended 31 December 2001 and 2000.
2001 2000
pence per pence per
share £m share £m
(a) On ordinary shares:
Interim 2001 paid 17 September 2001 9.7 208
2000 paid 18 September 2000 9.0 193
Final 2001 payable 19 April 2002 22.3 478
2000 paid 8 May 2001 20.0 430
----- --- ----- ---
32.0 686 29.0 623
===== === ===== ===
(b) On convertible redeemable
preference shares:
Interim 2001 paid 17 September 2001 9.7 12
2000 paid 18 September 2000 9.0 11
Final 2001 payable 19 April 2002 22.3 27
2000 paid 8 May 2001 20.0 24
Amortisation of discount 18 22
----- --- ----- ---
32.0 57 29.0 57
===== === ===== ===
The amortisation of discount on preference shares reflects the
difference between the share price at the date of the Rothmans
transaction and the redemption price in 2004, which is being
amortised over the period to the redemption date.
GROUP PROFIT AND LOSS ACCOUNT 12.
For the year ended 31 December
2001 2000
Restated
£m £m
REVENUE
Subsidiary undertakings 24,466 23,578
Share of associates and joint ventures 1,228 1,253
------ ------
25,694 24,831
====== ======
PROFIT
Subsidiary undertakings 2,176 1,739
after charging: integration costs (82) (126)
US restructuring costs (119)
acquired stock (83)
goodwill amortisation (392) (376)
Share of associates and joint ventures 121 61
after charging: Imasco restructuring costs (71)
------ ------
Total operating profit 2,297 1,800
Sale of business 33
------ ------
Profit on ordinary activities
before interest 2,330 1,800
Net interest (263) (269)
Share of associates' and joint ventures'
net interest (2) (9)
------ ------
Profit before taxation 2,065 1,522
Taxation (886) (660)
------ ------
Profit after taxation 1,179 862
Minority interests (169) (170)
------ ------
Profit for the year 1,010 692
Dividends and other appropriations (743) (680)
------ ------
Retained earnings 267 12
====== ======
Earnings per share: Basic 44.43p 29.53p
====== ======
Adjusted diluted 61.82p 56.93p
====== ======
See notes on pages 19 to 28.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 13.
for the year ended 31 December
2001 2000
Restated
£m £m
Profit for the year 1,010 692
Differences on exchange (631) (221)
Revaluation of associated company 1,248
----- -----
Total recognised gains related to the year (below) 379 1,719
===== =====
INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS
for the year ended 31 December
2001 2000
£m £m
Balance 1 January 5,178 4,821
Accounting policy change (81) (95)
----- -----
Balance 1 January restated 5,097 4,726
Total recognised gains related to the year (above) 379 1,719
Issue of shares - share options 3 3
Redemption of convertible redeemable preference shares
(695)
Dividends and other appropriations:
Ordinary shares (686) (623)
Convertible redeemable preference shares (39) (35)
Amortisation of discount on preference shares (18) (22)
Other 18 24
----- -----
Balance 31 December 4,754 5,097
===== =====
See notes on pages 19 to 28.
14.
SEGMENTAL ANALYSES
The analyses below for the year ended 31 December include the
Group's share of associates and joint ventures.
Cigarette volumes Net revenue
2001 2000 2001 2000
bns bns £m £m
America-Pacific 106 109 4,128 4,092
Asia-Pacific 82 87 1,472 1,405
Latin America 163 165 1,619 1,615
Europe 223 208 3,165 2,904
Amesca 233 238 1,655 1,599
------ ------ ------ ------
807 807 12,039 11,615
====== ====== ====== ======
OPERATING PROFIT
America-Pacific 1,019 878
Asia-Pacific 414 361
Latin America 428 425
Europe 512 541
Amesca 398 370
------ ------
2,771 2,575
US restructuring costs (119)
Acquired stock (83)
Integration costs (82) (126)
Goodwill amortisation (392) (376)
Imasco restructuring costs (71)
------ ------
2,297 1,800
====== ======
The net revenue analysis is based on the external sales in each
region less duty, excise and other taxes. The operations of
subsidiaries are almost entirely related to tobacco. The Group's
share of the operations of associates and joint ventures comprise
the following businesses:
NET REVENUE
Tobacco 668 588
Financial services 69
Other trading activities 43
------ ------
668 700
====== ======
OPERATING PROFIT (after Imasco
restructuring cost in 2000)
Tobacco 121 45
Financial services 12
Other trading activities 4
------ ------
121 61
====== ======
Following the acquisition of Imperial Tobacco Canada, the above
results for associates and joint ventures only include the
results of Imasco to 31 January 2000 (see page 20).
QUARTERLY ANALYSES OF PROFIT 15.
The figures shown below have been produced using average rates
of exchange for the years ended 31 December 2001 and 2000
respectively, with the previously reported quarterly figures for
2001 restated using average rates for the full year.
3 months to
31.3.01 30.6.01 30.9.01 31.12.01
£m £m £m £m
America-Pacific 201 268 269 281
Asia-Pacific 96 95 110 113
Latin America 100 124 111 93
Europe 116 135 142 119
Amesca 89 91 135 83
---- ---- ---- ----
602 713 767 689
Integration costs (73) (6) (3)
Goodwill amortisation (96) (98) (99) (99)
---- ---- ---- ----
Total operating profit 506 542 662 587
Sale of business 33
---- ---- ---- ----
Profit on ordinary activities before interest
539 542 662 587
Net interest - subsidiary undertakings
(70) (74) (71) (48)
Share of associates' and joint ventures' net
interest
(2) (1) (1) 2
---- ---- ---- ----
Profit before taxation 467 467 590 541
==== ==== ==== ====
Quarterly analyses of profit continued 16.
3 months to
31.3.00 30.6.00 30.9.00 31.12.00
£m £m £m £m
America-Pacific 181 211 245 241
Asia-Pacific 78 95 98 90
Latin America 88 115 116 106
Europe 116 125 177 123
Amesca 82 99 100 89
---- ---- ---- ----
545 645 736 649
US restructuring costs (119)
Acquired stock (83)
Integration costs (18) (26) (31) (51)
Imasco restructuring costs (69) (2)
Goodwill amortisation (86) (96) (96) (98)
---- ---- ---- ----
Profit on ordinary activities before interest
289 523 609 379
Net interest - subsidiary undertakings
(63) (39) (97) (70)
Share of associates' and joint ventures' net
interest
(3) (1) (1) (4)
---- ---- ---- ----
Profit before taxation 223 483 511 305
==== ==== ==== ====
The above table includes the results from Canada, comprising of
the Group's share of the results of its associate for January
2000 and the consolidated results of Imperial Tobacco for the
11 months to 31 December 2000 (see page 20).
GROUP BALANCE SHEET 17.
31 December
2001 2000
Restated
£m £m
Fixed assets
Intangible assets 6,546 7,158
Tangible assets 2,678 2,600
Investments in associates and joint ventures 274 201
Other investments and long term loans 512 527
------ ------
10,010 10,486
------ ------
Current assets
Stocks 2,748 3,053
Debtors 2,173 2,253
Acquired businesses awaiting disposal 57
Current investments 331 221
Short term deposits and cash 1,968 1,667
------ ------
7,220 7,251
------ ------
TOTAL ASSETS 17,230 17,737
====== ======
Capital and reserves
Share capital 575 575
Share premium account 10 7
Merger reserves 4,231 4,475
Capital redemption reserve 30 30
Other reserves 529 511
Profit and loss account (621) (501)
------ ------
Shareholders' funds (including non-equity
interests) 4,754 5,097
Minority shareholders' equity interest 329 419
------ ------
5,083 5,516
------ ------
Other liabilities
Provisions for liabilities and charges 1,467 1,456
Borrowings 6,150 6,151
Creditors 4,530 4,614
------ ------
12,147 12,221
------ ------
TOTAL FUNDS EMPLOYED 17,230 17,737
====== ======
See notes on pages 19 to 28.
GROUP CASH FLOW STATEMENT 18.
For the year ended 31 December
2001 2000
£m £m
Net operating cash flow from subsidiary
undertakings 3,279 2,758
Dividends from associates 38 30
------ ------
Net cash inflow from operating activities 3,317 2,788
Returns on investments and servicing of finance (586) (530)
Taxation paid (858) (598)
Capital expenditure and financial investment (455) (346)
------ ------
Net cash generation 1,418 1,314
Acquisitions less disposals (342) 88
Equity dividends paid (638) (580)
------ ------
Cash flow 438 822
====== ======
NOTES 19.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial statements comprise the audited results for the
years ended 31 December 2001 and 31 December 2000.
The audited Group results have been prepared under the
historical cost convention and in accordance with applicable
accounting standards.
During the year, two new accounting standards were implemented
being FRS18 on Accounting Policies and FRS19 on Deferred Tax.
FRS18 had no significant impact on the Group accounts.
Accounting standard FRS19 on Deferred Tax requires full
provision to be made for deferred tax arising from timing
differences between the recognition of gains and losses in the
financial statements and their recognition in the tax
computation. In adopting FRS19, the Group has chosen not to
discount deferred tax assets and liabilities.
The comparative figures for 2000 have been restated to reflect
the impact of FRS19. Consequently the interest of British
American Tobacco's shareholders at 1 January 2000 and
31 December 2000, as published last year, have been reduced by
£95 million and £81 million respectively to reflect recognition
of the additional net provision in respect of deferred tax. The
impact of FRS19 is to decrease the tax charge as follows:
Year to
31.12.01 31.12.00
£m £m
Decrease in tax charge 24 23
The reduction in the tax charge in 2001 principally arises from
movements in the deferred tax asset set up under FRS19 in
respect of payments for US tobacco settlement costs. The
reduction in 2000 principally arises from the setting up of a
deferred tax asset for the exceptional charge in respect of the
cigarette stocks reacquired from S.C.A. Tobacco Corporation
(SCAT) on 31 March 2000 (see page 22).
In addition to the above accounting standard FRS17 on Retirement
Benefits was issued and represents a radical change in
accounting for pension costs and other post retirement benefits.
Full application of FRS17 requirements is not mandatory until
accounting periods ending on or after 22 June 2003.
Consequently, as the Group has made use of the transitional
provisions of the standard, the Group's reported income and
shareholders' equity does not reflect the impact of FRS17
requirements. The impact of applying FRS17 at 31 December 2001
would be to reduce our reported shareholders' funds by
£106 million.
Accounting policies and basis of preparation cont... 20.
However, the Group balance sheet also includes at cost
investments pledged in respect of pension liabilities in
Germany. If these pledged investments were included at fair
value, consistent with the treatment of the pension liabilities
under FRS17, then the effect of FRS17 on shareholders' funds
would be reduced from £106 million to £14 million.
BAT AUSTRALASIA
On 30 January 2001, it was announced that the Group's Australian
subsidiary had entered into an agreement under which the Group
proposed to acquire the remaining 40.5 per cent shareholding of
that company that it did not already own. This transaction was
completed on 11 May 2001 at a cost of Aus$1.1 billion
(£393 million), resulting in goodwill of £311 million which will
be amortised over 20 years. Following the transaction, the
company was delisted from the Australian Stock Exchange.
IMPERIAL TOBACCO CANADA/IMASCO
As reported last year, on 1 February 2000 a transaction was
completed whereby the holding in Imasco, an associated company
in Canada, was effectively replaced by shares in Imperial
Tobacco Canada, a wholly-owned subsidiary comprising only the
tobacco interests of Imasco.
Consequently, the comparative results from Canada for the year
ended 31 December 2000 comprise the Group's share of the results
of its associate for January and the consolidated results of
Imperial Tobacco Canada for the eleven months to 31 December
2000. In January 2000, Imasco's discontinued non-tobacco
operations contributed £112 million of turnover and £16 million
of profit. For the period the tobacco operations were an
associate they contributed £23 million of turnover and
£9 million of profit, while for the period they were a wholly-
owned subsidiary they contributed £757 million of turnover and
£364 million of profit before goodwill amortisation.
Having sold most of the non-tobacco businesses of Imasco in
2000, the Group disposed of the remaining operations of Genstar,
Imasco's land development company in Canada, for
Can$128 million in 2001. As the intention at the time of the
Imasco acquisition was to dispose of all these non-tobacco
businesses, the revaluation of £1,248 million included in the
year to 31 December 2000 is principally in respect of the
surplus on revaluing the businesses prior to their disposal. As
a result of this revaluation, the profit and loss account does
not include any gain on these disposals.
CONVERTIBLE REDEEMABLE PREFERENCE SHARES 21.
British American Tobacco p.l.c. issued ordinary shares and
convertible redeemable preference shares in consideration for
the acquisition of Rothmans International in 1999. In
accordance with the terms of the convertible redeemable
preference shares, the holders of such shares gave notice in
2000 of the redemption of 50 per cent of the preference shares,
at a price of 575p per share. An amount of £695 million was
paid on 7 June 2000 to redeem these preference shares. The
remaining preference shares are redeemable in June 2004 at a
price of 675p each, unless previously redeemed or converted.
EXCHANGE RATE EFFECTS
The results of overseas subsidiaries and associates have been
translated to sterling for the purpose of this report at average
rates of exchange. The strengthening of average rates of a
number of currencies against sterling, primarily the US dollar
and euro, was largely offset by the weakness of the South
African rand and Brazilian real and operating profit before
exceptional items benefited by approximately £18 million.
EXCEPTIONAL ITEMS
Integration costs are the costs incurred in integrating Rothmans
into the British American Tobacco Group and the consequential
restructuring of the enlarged Group. The charge of £82 million
for the current year, mainly in respect of rationalisation costs
in Europe, comprises the last items which will be disclosed as
integration costs.
At the time of the merger we reported that we expected to
achieve annual synergy benefits of some £250 million at a cost
of £400 million. Although the final costs of £565 million are
above our initial estimates, the annual savings are now
proportionately higher at over £350 million, some of which is
being reinvested in the business.
During 2000 Brown & Williamson announced a major cost cutting
programme in order to improve its financial position and enable
it to remain competitive. The cost of £119 million for early
retirement and redundancies and the write down of fixed assets
were charged in 2000 as an exceptional item.
Exceptional items cont... 22.
The purchase of SCAT on 31 March 2000, which distributed the
Group's products in Japan, resulted in the Group reacquiring
cigarette stocks which had previously been sold to that
business. A one-off accounting adjustment of £83 million was
charged against Group operating profit in 2000, to remove the
gross contribution previously recognised by the Group on those
cigarette sales.
The Imasco restructuring costs of £71 million in 2000 relate to
the Group's share of the pre-tax cost to Imasco of buying out
share options, together with other employee deferred
compensation and severance arrangements consequent upon a
fundamental change of control.
GOODWILL AMORTISATION
The amortisation charge of £392 million (2000 £376 million) is
in respect of goodwill which principally arose from the Rothmans
transaction during 1999 and the Imasco transaction during 2000.
SALE OF BUSINESS
The sale of the Group's pipe tobacco business in South Africa to
Swedish Match was completed on 1 February 2001, resulting in a
non-taxable profit on disposal of £33 million.
INTEREST AND INTEREST COVER
Net interest paid was £13 million lower at £265 million as the
impact in 2001 of the acquisition of the minority shares in
Australia, together with the financing of the June 2000
redemption of convertible redeemable preference shares and a
gain on the cancellation of swap contracts in 2000, was more
than offset by the benefits from the Group's cash flow and lower
interest rates.
The Group's interest cover was distorted in 2000 and 2001 by
goodwill amortisation and exceptional items in operating profit,
as well as the profit on sale of a business in 2001. On an
adjusted basis, interest cover, based on profit before interest
paid over interest paid, remains strong at 7.2x (2000 5.8x). On
a similar adjusted basis, interest cover based on profit before
net interest over net interest, was 10.5x (2000 9.5x).
TAXATION 23.
Year to
31.12.01 31.12.00
Restated
£m £m
UK (4) 20
Overseas 859 751
---- ----
Current taxation 855 771
Deferred taxation (13) (136)
---- ----
British American Tobacco p.l.c.
and subsidiary undertakings 842 635
Share of associates 44 25
---- ----
886 660
==== ====
Tax rate 42.9% 43.4%
==== ====
The tax rates in both 2001 and 2000 were adversely affected by
goodwill amortisation. The underlying tax rate reflected in the
adjusted earnings per share shown below was 36.6 per cent
(2000 34.1 per cent). The increase in the rate was due to
significant growth in profit before tax in relatively high taxed
countries.
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 two Employee Share Ownership Trusts).
For the calculation of diluted earnings per share the average
number of shares reflects the potential dilution effect of
employee share schemes and the convertible redeemable preference
shares. The earnings are correspondingly adjusted to the amount
of earnings prior to charging dividends and the amortisation of
discount on the convertible redeemable preference shares.
Earnings per share cont... 24.
The earnings have been affected by a number of exceptional
items. To illustrate the impact of the principal distortions,
as well as the effect of goodwill amortisation, adjusted diluted
earnings per share are shown below:
Diluted earnings per share
Year to
31.12.01 31.12.00
Restated
(pence) (pence)
Unadjusted earnings per share 43.97 29.57
Effect of US restructuring costs 3.08
Effect of acquired stock 2.14
Effect of goodwill amortisation 17.07 16.07
Effect of integration costs 2.22 4.02
Effect of Imasco restructuring costs 2.05
Effect of sale of business (1.44)
------ ------
Adjusted earnings per share 61.82 56.93
====== ======
Similar types of adjustments would apply to basic earnings per
share which, on an adjusted basis, would be 63.55p
(2000 59.30p) compared to unadjusted amounts of 44.43p
(2000 29.53p).
GROUP RESERVES
The Group reserve movements are summarised on page 13. As
explained on page 19 Group reserves have been restated for a
change in accounting for deferred tax.
During 2001 there was a decrease in reserves of £631 million due
to exchange, notably affected by the weakness of the South
African, Canadian and Argentinian currencies. The prior year
reflects the £1,248 million gain on disposal of the non-tobacco
businesses of Imasco (see page 20) and the charge of
£695 million for the redemption of 50 per cent of the
convertible redeemable preference shares (see page 21).
Shareholders' funds comprise £3,980 million
(2000 £4,341 million) of equity interests and £774 million
(2000 £756 million) of non-equity interests.
CASH FLOW 25.
The Group's cash flow is summarised on page 18 but the
comparison of 2001 with 2000 is distorted by a number of events.
The increase in net operating cash flow by £529 million to
£3,317 million reflects the growth in underlying operating
profit, while the 2000 flows were more adversely affected by
exceptional items for integration and restructuring costs. The
operating cash flow in both years reflected continuing
improvements in the efficient use of working capital.
Investment returns and finance costs (which include preference
and minorities' dividends, as well as interest), were up by
£56 million at £586 million, while taxation rose by
£260 million to £858 million. Both net interest and taxation
were affected by the settlement of tax audits, with taxation
also impacted by timing and other one-off effects. Capital
expenditure and financial investment is £109 million higher at
£455 million, principally as investment for future growth was
made in new and expanding operations, as well as systems
development.
Acquisitions less disposals resulted in a net outflow of
£342 million, due to the buy out of the Australian minorities
partly offset by the proceeds on the disposal of the Canadian
operations of Genstar and the South African pipe tobacco
business. The cash inflow of £88 million in 2000 included the
sale of Rothmans Canada and the net cash impact of the Imperial
Tobacco acquisition, less the cost of acquiring SCAT.
After equity dividends of £638 million, the net cash inflow was
£438 million. With only a small net impact of exchange on
foreign currency borrowings and cash, the Group's net debt
position improved by £412 million.
With total borrowings remaining similar to last year at
£6,150 million, the net debt movement was reflected in cash and
short term investments increasing by £411 million to
£2,299 million.
CONTINGENT LIABILITIES
There are contingent liabilities in respect of litigation,
overseas taxes and guarantees in various countries. Group
companies, notably Brown & Williamson Tobacco Corporation
('B&W'), as well as other leading cigarette manufacturers are
defendants, principally in the United States, in a number of
product liability cases. In a number of these cases, the
amounts of compensatory and punitive damages sought are
significant.
26.
Contingent liabilities cont...
Legal matters outside the United States
At year end, active claims against Group companies existed in
17 countries but the only countries with more than five active
claims are Argentina, Brazil, Canada, the Netherlands and the
Republic of Ireland.
The total number of US product liability cases pending at year
end involving Group companies was approximately 4,419
(31 December 2000, 4,740 cases). UK based Group companies were
named as co-defendants in some 1,387 of those cases
(2000, 1,345 cases). Since many of these pending cases seek
unspecified damages, it is not possible to quantify the total
amounts being claimed, but the aggregate amounts involved in
such litigation are significant. The cases fall into four broad
categories:
(1) Medical reimbursement cases. These civil actions seek to
recover amounts spent by government entities and other third
party providers on health care and welfare costs claimed to
result from illnesses associated with smoking. Despite the
almost uniform success of the industry's defence to these
actions to date, the US Department of Justice has filed a suit
seeking reimbursement for Medicare and other health expenses
incurred by the US Federal Government as well as various
equitable remedies, including paying over of proceeds from
alleged unlawful acts. The court has dismissed the
reimbursement claims (and has dismissed B.A.T Industries on
jurisdictional grounds) but is allowing the government to
proceed with its claim for equitable relief which is tentatively
scheduled for trial in July 2003.
(2) Class actions. As at 31 December 2001, B&W was named as a
defendant in some 28 (31 December 2000, 35) separate actions
attempting to assert claims on behalf of classes of persons
allegedly injured by smoking. The Engle case (Florida) is
currently on appeal. At the end of the second phase of a three
phase trial, the jury awarded compensatory damages totalling
US$12.7 million to three class representatives (US$5.8 million
of which was found to be time barred) and assessed
US$17.6 billion in punitive damages against B&W and
US$127 billion in total punitive damages against the other major
companies in the US tobacco industry. For numerous reasons, B&W
remains confident that Engle will eventually be reversed on
appeal. Immediate payment of punitive damages pursuant to the
verdict is unlikely for a number of reasons, including, among
others, that the punitive damages cannot be final until
completion of a series of further individual trials for every
27.
Contingent liabilities cont...
member of the class (the so-called phase three of the Engle
trial plan, which will take many years); that the jury's
determination of punitive damages violates several provisions of
Florida law; and that, pursuant to recently adopted legislation,
in Florida any enforcement of punitive damages must be stayed
upon the posting of a bond in an amount equal to the lower of
10 per cent of the defendant's net worth or US$100 million.
(3) Individual cases. Approximately 4,318 cases were pending
against B&W at 31 December 2001 (31 December 2000, 4,637), filed
by or on behalf of individuals in which it is contended that
diseases or deaths have been caused by cigarette smoking or by
exposure to environmental tobacco smoke (ETS). Of these cases:
(a) approximately two thirds are ETS cases brought by flight
attendants who were members of a class action (Broin) that was
settled on terms that allow compensatory but not punitive damage
claims by class members; (b) approximately one quarter are
cases brought in consolidated proceedings in West Virginia; and
(c) less than 7 per cent are cases filed by other individuals.
In 2001, the Supreme Court refused to review a jury verdict
against B&W for US$750,000 (Carter) that had been reinstated by
the Florida Supreme Court. B&W paid this amount with interest
(a total of just over US$1 million) in June 2001.
4) Other claims. As at 31 December 2001, 15 cases were pending
on behalf of asbestos companies, seeking reimbursement for costs
and judgements paid in litigation brought by third parties
against them. One case (Falise), brought by a trust established
to pay asbestos litigation claims, ended in a mistrial in
January 2001. The plaintiffs subsequently dismissed this case
as well as one other similar case.
As at 31 December 2001, B&W was named as defendant in 29 US
cases brought by foreign government entities seeking
reimbursement of medical costs which they incurred for treatment
for persons in their own countries who are alleged to have
smoked imported cigarettes, including those manufactured by B&W.
Seven foreign government cases were dismissed in 2001.
Conclusion
While it is impossible to be certain of the outcome of any
particular case or of the amount of any possible adverse
verdict, the Company believes that the defences of the Group
companies to all these various claims are meritorious both on
the law and the facts, and a vigorous defence is being made
everywhere. If an adverse judgement were entered against any of
the Group companies in any case, an appeal would be made. Such
appeals could require the posting of appeal bonds or substitute
security by the appellants in amounts which could in some cases
equal or exceed the amount of the judgement.
28.
Contingent liabilities cont...
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 and by the
final outcome of any particular litigation.
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 all this litigation will significantly impair the
financial condition of the Group.
ANNUAL REPORT AND ACCOUNTS
The above figures have been extracted from the Group's full
financial statements which, for the year ended 31 December 2000
have been delivered and for the year ended 31 December 2001,
will be delivered to the Registrar of Companies. Both carry an
unqualified audit report. The Annual General Meeting will be
held on 16 April 2002 at 11.30 a.m. at The Brewery, Chiswell
Street. London.
The report and accounts will be posted to shareholders in March
2002.
Aileen E McDonald
Secretary
26 February 2002
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