Final Results
British American Tobacco PLC
24 February 2004
24 February 2004
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2003
SUMMARY
2003 2002 Change
Operating profit before
goodwill amortisation and
exceptionals £2,781m £2,681m +4%
Pre-tax profit £1,567m £2,113m -26%
Adjusted earnings per share 69.21p 66.54p +4%
Dividends per share 38.80p 35.20p +10%
• Group operating profit, excluding goodwill and exceptional
items, was 3 per cent higher at comparable rates of
exchange, as the significant exchange movements during
2003 only had a small net effect. Group operating profit,
after goodwill and exceptional items, was 20 per cent
lower at £1,852 million.
• Group volumes grew by 2 per cent to 792 billion. The four
global drive brands, Kent, Dunhill, Lucky Strike and Pall
Mall achieved an overall growth of 13 per cent.
• Pre-tax profit was 26 per cent lower at £1,567 million and
basic earnings per share fell to 26.93p (2002 50.91p),
reflecting the exceptional items and loss on disposal of
subsidiaries.
• Adjusted diluted earnings per share at 69.21p were up
4 per cent, benefiting from higher operating profit and
the impact of the share buy-back programme.
• Net cash generation rose £344 million to £1,515 million.
• The Board is recommending a final dividend of 27.0p up
10 per cent, which will be paid on 27 April 2004. This
will also take the growth in dividends for the year as a
whole to 10 per cent. Total shareholder return for the
year was 32 per cent, relative to 18 per cent for the
FTSE 100.
• The Chairman, Martin Broughton, commented "2003 has been a
highly significant year for the Group. We have achieved
organic growth and taken important steps to position
ourselves for the future with a higher quality and more
sustainable business. We expect the real momentum in our
business to continue during 2004, although at current
exchange rates the growth in our profit would be adversely
affected when translated into sterling."
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BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2003
INDEX
PAGE
Chairman's comments 2
Business review 5
Dividends 10
Group profit and loss account 11
Statement of total recognised gains and losses 12
Interest of British American Tobacco's shareholders 12
Segmental analyses 13
Quarterly analyses of profit 14
Group balance sheet 16
Group cash flow statement 17
Accounting policies and basis of preparation 18
Changes in the Group 18
Convertible redeemable preference shares 19
Exchange rate effects 19
Restructuring costs 20
Goodwill amortisation 20
Write down of loan to joint venture 20
Loss on disposal of subsidiaries 20
Interest and interest cover 21
Taxation 22
Earnings per share 22
Share buy-back programme 23
Group reserves 23
Cash flow 24
Contingent liabilities 24
Annual report and accounts 27
CHAIRMAN'S COMMENTS 2.
British American Tobacco's operating profit before goodwill
amortisation and exceptional items rose by 4 per cent to
£2,781 million, as volumes grew by 2 per cent to 792 billion
cigarettes. At the pre-tax level, profit was 26 per cent
lower at £1,567 million, reflecting the exceptional items and
losses on the disposal of subsidiaries. Basic earnings per
share were 26.9p compared to 50.9p in 2002.
However, adjusted diluted earnings per share improved by 4 per
cent to 69.2p, as the growth in operating profit and the
benefit from the share buy-back programme more than offset the
increases in the effective tax rate and minorities. Net cash
generation was 29 per cent higher at £1,515 million, due to
the rise in underlying operating profit, reductions in working
capital and lower tax payments.
We bought back over 106 million shares, nearly 5 per cent of
the issued share capital, at an average price of £6.56 per
share, enhancing earnings per share and we plan to continue
the programme this year.
The Board is proposing a 10 per cent rise in the final
dividend to 27.00p, making the increase for the year 10 per
cent as well.
In 2003, we have maintained our strategy for sustainable
profit growth through focusing on a balanced approach to
growth, productivity and responsibility.
In terms of organic growth, our local brands grew slightly and
the real stars shone brightly. Our four global drive brands,
Kent, Dunhill, Lucky Strike and Pall Mall, grew by 13 per cent
between them. Kent's volume reached almost 30 billion,
improving 14 per cent, while Dunhill, already over the
30 billion mark, was up 8 per cent. Lucky Strike had a
difficult time but performed more strongly as the year
progressed. Pall Mall broke the 30 billion barrier for the
first time, powering ahead by 32 per cent, largely due to an
impressive performance in Italy.
Italy also demonstrates our ability to achieve growth through
acquisition. Buying Ente Tabacchi Italiani (ETI) has given
us a much higher quality business in Italy, taking us to the
number two position in the second largest tobacco market in
the European Union.
Chairman's comments cont... 3.
The proposed Reynolds American transaction, combining
R.J. Reynolds and Brown & Williamson's US businesses, will
also create a stronger and more sustainable entity, in which
the Group will have a 42 per cent share. The process of
achieving the various regulatory approvals is progressing and
we expect the transaction to be completed around the middle of
the year.
In Peru, we acquired control of Tabacalera Nacional and in
Serbia we won the bid for the Serbian tobacco company Duvanska
Industrija Vranje that has around 8 per cent of the Serbian
market. These deals, although less eye-catching than those in
Italy or the US, are, nevertheless, examples of the
opportunities for enhancing our business.
Turning to productivity, the key developments in the year have
been the major restructuring in Canada and the UK, as we
continue our drive for an effective and efficient integrated
supply chain. We believe that we can improve our service to
customers, as well as releasing funds that can then be
invested in our brands to increase the momentum behind our
organic growth. We are also committed to saving some
£200 million a year in overheads and indirects by 2007 and we
made a good start in 2003, saving some £64 million.
As well as focusing on growth and productivity, we have
continued to embed our approach to responsibility in the
Group. We developed and disseminated our Statement of
Business Principles, being the basis on which we expect our
businesses to be run in terms of responsibility, and produced
a Framework for Corporate Social Responsibility which, we
believe, could form a blueprint for a responsible tobacco
company in the 21st century. There have also been a number of
instances of external recognition for our efforts in the field
of Corporate Social Responsibility and they are all most
encouraging.
For example, we won the Stakeholder Communication Award in the
new PricewaterhouseCoopers Building Public Trust Awards and,
once again, were the only tobacco company other than our
Malaysian subsidiary selected for the 2004 Dow Jones
Sustainability World Index. In addition, the annual Business
in the Environment Index of Corporate Environmental Engagement
ranked us in the 'Premier' league of 18 British companies out
of over 200 assessed. Our website, bat.com, was again the
highest ranked of FTSE 100 companies in a survey published in
the Financial Times.
Chairman's comments cont... 4.
2003 has been a highly significant year for the Group. We
have achieved organic growth and taken important steps to
position ourselves for the future with a higher quality and
more sustainable business. We expect the real momentum in our
business to continue during 2004, although at current exchange
rates the growth in our profit would be adversely affected
when translated into sterling.
The year has also been rewarding for our shareholders, with a
total return of 32 per cent, relative to 18 per cent from the
FTSE 100. This is not an isolated performance; over the past
five years our total shareholder return has been even more
impressive, at 15 per cent per annum, compared to a negative
3 per cent for the FTSE 100.
MARTIN BROUGHTON
BUSINESS REVIEW 5.
Group operating profit, excluding goodwill amortisation and
exceptional items as set out on page 20, was 4 per cent higher
at £2,781 million, with higher contributions from
Asia-Pacific, Latin America and Africa and Middle East
regions. The growth in profit at comparable rates of exchange
would have been 3 per cent as the impact of a stronger euro
and South African rand more than offset the continued weakness
of the US dollar and currency devaluations in Latin America.
Group volumes grew by almost 2 per cent, from 777 billion to
792 billion, with net turnover at £11,427 million increasing
by over 2 per cent at comparable rates of exchange. The
volume growth was boosted by the good performance of the four
global drive brands Kent, Dunhill, Lucky Strike and Pall Mall,
which achieved an overall growth of 13 per cent. This was the
result of an outstanding performance by Pall Mall, strong
growth from Kent and Dunhill and a stable position for Lucky
Strike.
These results exclude any contribution from Ente Tabacchi
Italiani S.p.A. (ETI) which was acquired just before the year
end. The acquisitions in Peru and Serbia contributed
2 billion to Group volumes and £5 million to operating profit
before charging restructuring costs of £2 million. These
acquisitions are described on page 18.
Profit from the America-Pacific region was £995 million, down
£23 million from last year, as US dollar exchange rate
movements and the very difficult trading conditions in the US
cigarette business were only partly offset by a strong profit
increase from the rest of the region. Volumes were down 4 per
cent to 103 billion, as the increases from South Korea and
Japan were more than offset by the impact of lower industry
volumes in the US and Canada. Net turnover was 8 per cent
lower at comparable rates of exchange, principally reflecting
the position in the US market.
Imperial Tobacco Canada delivered a good performance in
difficult circumstances. There was a steep decline in
industry volumes as a result of significant increases in
tobacco taxes, which promoted the growth of the lower-priced
segment and a resurgence of illicit trade. The company
contributed £464 million of profit before restructuring and
other exceptional costs, up 6 per cent from last year due to
the stronger Canadian dollar, price increases and reduced
costs. The market leader, du Maurier, grew market share,
while overall market share in the premium segment, where
volume and margins are the highest, was in line with last
year. However, the strong growth in the lower-priced segment
eroded total market share and volumes.
Business review cont... 6.
In the US, industry profitability for the year was severely
affected by continued competitive pricing and promotional
activities, as well as by industry volumes down 5 per cent due
to state excise tax increases and lower wholesale inventory
levels. Brown & Williamson's contribution from its US
cigarette business was £256 million, 27 per cent lower than
last year, as a result of lower volumes, a weaker US dollar
and lower net pricing, partly offset by lower ongoing
settlement expenses.
Good performances in the strategic brands, Kool, Pall Mall and
Misty, were more than offset by the declines in non-strategic
brands, mainly GPC, which resulted in the shipment share down
from 11.2 to 10.5 per cent.
The contribution from the US cigarette business would have
been 35 per cent lower than last year without the inclusion of
a benefit of £27 million in respect of the settlement of
certain disputed MSA payments.
As described on page 19, the Group announced in October 2003
that agreement had been reached to combine the US domestic
business with R. J. Reynolds in a new holding company,
Reynolds American, and to sell Lane to this new company.
In Japan, the good performance continued with a higher overall
market share as Kent and Kool increased volumes, while other
brands maintained share. Profit benefited from the increased
margins following a business restructuring.
After the smooth transition to local manufacturing in South
Korea, the very strong growth of Dunhill Lights continued.
The improved volumes and record market share, which increased
2 share points to 13 per cent, resulted in a substantially
higher profit.
In Asia-Pacific, regional profit of £473 million was £10 million
above last year with outstanding performances in Australia,
Malaysia, Vietnam and India, partially offset by reduced profit
from Cambodia, Indonesia and duty-free. Regional volumes at
192 billion were in line with last year, as strong increases in
Vietnam, Malaysia, Bangladesh and India were offset by declines
from Indonesia, Cambodia and duty-free sales.
Australia delivered impressive profit growth through higher
margins, supply chain efficiencies and overhead reductions. Both
volumes and market share rose, reflecting the growth of Dunhill and
Winfield, together with a stable performance from Benson & Hedges.
Profit in New Zealand was higher than last year despite lower
volumes.
Business review cont... 7.
Profitability in Malaysia was enhanced by significant operational
efficiencies and volume growth. The increased volumes were driven
by higher Dunhill volumes, reflecting the success of the new pack
range and the continuing strong growth of Pall Mall.
In Vietnam, an outstanding performance was achieved as both profit
and volumes grew strongly, led by State Express 555 and Craven 'A',
with a much higher market share. Indonesia witnessed a downturn in
profitability and volume, as a result of punitive excise increases,
while lower volumes seriously affected profit in Cambodia.
In Pakistan, volumes were higher with John Player Gold Leaf
continuing its growth but the pressure from illicit products led to
lower pricing and profit was down on last year. In Bangladesh,
volumes grew with an excellent contribution by Benson & Hedges,
although profit was lower as the company was unable to pass on the
full extent of the additional 2002 excise increase.
In Sri Lanka, despite the presence of counterfeit product which
affected the growth of John Player Gold Leaf, total volumes were in
line with last year while profit was well up. The Group's
associated companies in India reported strong increases in profit.
ITC grew volumes by the successful launch of new brands and
extending distribution for some existing brands.
In Latin America, profit of £440 million was £47 million higher
with increases from many markets in the region and a first time
contribution from the acquisition in Peru. The excellent regional
results were achieved despite the impact of currency devaluations
compared to last year and the difficult economic conditions in many
of the countries. Volumes in the region declined by 2 per cent to
150 billion, mainly due to lower volumes in Brazil, but net
turnover at comparable rates of exchange rose by 8 per cent.
Profit in Brazil increased following price increases in 2002 and
late 2003, partially offset by lower sales volumes with continued
high levels of illicit trade. Volumes were lower, mainly in the
low priced segment, as a consequence of the difficult economic
environment, price increases which reduced the size of the market
and competitor pricing activities.
In Mexico, profit was higher due to price increases at the end of
2002 and during 2003, coupled with lower expenses. Market share
grew slightly despite lower volumes reflecting the higher prices
and the economic slowdown. In Chile, both profit and volumes were
up, mainly driven by Belmont. Profit increased in Central America
as margins improved, while volumes were stable.
Business review cont... 8.
Volumes in Argentina were higher, with good performances from
Viceroy and Pall Mall. Profit benefited from higher volumes but
price increases in July were not sufficient to cover inflationary
pressures on the cost base and fully restore margins. Volumes in
Venezuela remained in line with last year but Belmont and Consul
helped to grow overall market share. However, three price
increases did not compensate for the severe impact of the
devaluation of the currency and higher VAT, resulting in a
significant reduction in profit.
Total profit in Europe was down £11 million to £536 million,
despite the strengthening of the euro. While there were good
performances in Eastern and Central Europe, led by Russia and
Romania, they were insufficient to cover the lower profit from
Western Europe, especially in the fourth quarter. Volumes for the
region increased by 7 per cent to 249 billion, with strong growth
from Russia, Romania and Italy, which was partly offset by
decreases in France and Germany.
In Germany, the total market share was broadly in line with last
year as the three key brands Lucky Strike, Pall Mall and Gauloises
Blondes continued to grow their share. Profit, however, declined
as a result of lower margins and volumes, reflecting the reduction
in total industry volumes following the excise related price
increases at the beginning of the year. The French market suffered
as a result of a significant reduction in the overall market size
and intense competitive pricing, resulting in both volumes and
profit sharply down.
In Italy, both volume and market share showed strong growth
following the very successful repositioning of Pall Mall, with
profit in line with last year after the one-off investment to
support the brand. The three main brands in Switzerland, Barclay,
Lucky Strike and Parisienne continued to perform well and drove the
overall market share growth. Profit grew strongly in both Belgium
and the Netherlands on account of higher margins, despite a small
decline in volumes.
In Russia, excellent results were achieved with the continuation of
volume and profit growth, driven mainly by Kent. The 30 key city
volume share grew to a record level of 25 per cent and the market
leadership position in Moscow further improved to a share of almost
34 per cent. The sustained volume growth in Ukraine resulted in
record volumes but profit was lower due to intense competitive
pricing. In Romania, share gains made by Kent, Pall Mall and
Viceroy, combined with higher margins, led to a significant
improvement in profitability and volume.
In Hungary, a record market share was achieved despite a marginal
decline in volumes, while profit was similar to last year. Lower
volumes and depressed pricing due to very competitive market
conditions, led to a profit decline in Poland.
Business review cont... 9.
Smoking Tobacco and Cigars continued its profit growth, with all
product groups showing a good performance. A well balanced
portfolio of fine cut products allowed the operations to
successfully cope with changing consumer preferences towards lower
priced products, while increased cigar sales in the Far East and
Russia compensated for declines in Germany.
In the Africa and Middle East region, profit at £337 million
was up by £77 million. This good performance was achieved
despite the costs of continuing investments in this region and
reflected generally good performances, as well as the
favourable impact of the stronger South African rand. Volumes
increased by 7 per cent to 98 billion with strong growth in
Nigeria, good performances in the Middle East and from the
launch of our business in Turkey. Net turnover at comparable
rates of exchange was 14 per cent higher.
The contribution from South Africa showed strong growth, with
price and mix driven margin gains partly offset by cost
increases and lower volumes as the total market shrunk. Peter
Stuyvesant, Rothmans and Dunhill increased market share,
contributing to the higher margins.
In the rest of the Southern Africa area, cigarette volumes
were in line with last year, while profit was higher as a
result of margin gains in Mozambique and Zimbabwe, partly
offset by a lower contribution from leaf sales following the
dramatic crop size reduction.
Profit in East Africa improved, with volumes in Uganda and
Kenya, margins in Kenya and the Congo and leaf sales in Uganda
all higher than last year. Profit in West Africa decreased as
adverse trading conditions in the Ivory Coast and Cameroon
resulted in lower volumes. In Nigeria, where the newly built
factory was commissioned during 2003, volumes increased
strongly and market share was higher, mainly driven by Benson
& Hedges. However, higher marketing and infrastructure costs
led to a small decline in profit.
The performances in the Middle East were particularly
noteworthy in the light of the difficult environment. Volume
and profit rose as a result of the solid performance of Kent
in Iran, which improved the sales mix, as well as good results
from Israel and Yemen. The increasing investment in Turkey
contributed strongly to the growth in volumes but adversely
affected the regional results.
Non-trading items
The above results were achieved before accounting for goodwill
amortisation and exceptional items.
DIVIDENDS 10.
The Directors will be recommending to the shareholders at the
Annual General Meeting to be held on 21 April 2004 the payment
on 27 April 2004 of a final dividend for the year of 27.0p per
ordinary share of 25p and convertible redeemable preference
share of 25p.
Valid transfers received by the Registrar of the Company up to
5 March 2004 will be in time to rank for payment of this
dividend. Ordinary shares go ex-dividend on 3 March 2004.
The following is a summary of the dividends declared for the
years ended 31 December 2003 and 2002.
2003 2002
pence per pence per
share £m share £m
(a) On ordinary shares:
Interim 2003 paid 15 September 2003 11.8 247
2002 paid 16 September 2002 10.7 229
Final 2003 payable 27 April 2004 27.0 552
2002 paid 22 April 2003 24.5 526
----- --- ----- ---
38.8 799 35.2 755
===== === ===== ===
(b) On convertible redeemable
preference shares:
Interim 2003 paid 15 September 2003 11.8 14
2002 paid 16 September 2002 10.7 13
Final 2003 payable 27 April 2004 27.0 33
2002 paid 22 April 2003 24.5 29
Amortisation of discount 18 18
----- --- ----- ---
38.8 65 35.2 60
===== === ===== ===
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 11.
For the year ended 31 December
2003 2002
£m £m
REVENUE
Subsidiary undertakings 24,151 23,330
Share of associates and joint ventures 1,471 1,352
------ ------
25,622 24,682
====== ======
PROFIT
Subsidiary undertakings 1,777 2,180
after charging: restructuring costs (437)
goodwill amortisation (405) (378)
Share of associates and joint ventures 75 123
after charging: write down of loan to
joint venture (87)
------ ------
Total operating profit 1,852 2,303
Loss on disposal of subsidiaries (72)
------ ------
Profit on ordinary activities
before interest 1,780 2,303
Net interest - subsidiary undertakings (209) (184)
Share of associates' and joint ventures'
net interest (4) (6)
------ ------
Profit before taxation 1,567 2,113
Taxation (779) (818)
------ ------
Profit after taxation 788 1,295
Minority interests (157) (143)
------ ------
Profit for the year 631 1,152
Dividends and other appropriations (864) (815)
------ ------
Retained (loss)/profit (233) 337
====== ======
Earnings per share: Basic 26.93p 50.91p
====== ======
Diluted - unadjusted 26.69p 50.10p
====== ======
Diluted - adjusted 69.21p 66.54p
====== ======
See notes on pages 18 to 27.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 12.
For the year ended 31 December
2003 2002
£m £m
Profit for the year 631 1,152
Differences on exchange 206 70
----- -----
Total recognised gains related to the year (below) 837 1,222
===== =====
INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS
For the year ended 31 December
2003 2002
£m £m
Balance 1 January 5,185 4,754
Total recognised gains related to the year (above) 837 1,222
Issue of shares - share options 5 6
Dividends and other appropriations:
Ordinary shares (799) (755)
Convertible redeemable preference shares (47) (42)
Amortisation of discount on preference shares (18) (18)
Purchase of own shares (698)
Other movements 18 18
----- -----
Balance 31 December 4,483 5,185
===== =====
See notes on pages 18 to 27.
13.
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
2003 2002 2003 2002
bns bns £m £m
America-Pacific 102.9 107.0 3,562 4,026
Asia-Pacific 192.2 192.5 1,765 1,792
Latin America 149.6 153.0 1,309 1,410
Europe 249.0 232.6 3,502 3,064
Africa and Middle East 98.2 92.2 1,289 1,087
------ ------ ------ ------
791.9 777.3 11,427 11,379
====== ====== ====== ======
OPERATING PROFIT
America-Pacific 995 1,018
Asia-Pacific 473 463
Latin America 440 393
Europe 536 547
Africa and Middle East 337 260
------ ------
2,781 2,681
Restructuring costs (437)
Goodwill amortisation (405) (378)
Write down of loan to
joint venture (87)
------ ------
1,852 2,303
====== ======
Operating profit, before exceptional items
and goodwill amortisation, restated at comparable
rates of exchange
2,759 2,681
====== ======
The net revenue analysis is based on the external sales in each
region less duty, excise and other taxes.
Acquisitions during 2003 in Peru and Serbia contributed £29 million
to Group net revenue and £5 million to operating profit before
charging restructuring costs of £2 million.
QUARTERLY ANALYSES OF PROFIT 14.
The figures shown below have been produced using average rates
of exchange for the years ended 31 December 2003 and 2002
respectively, with the previously reported quarterly figures
for 2003 restated using average rates for the full year.
3 months to
31.3.03 30.6.03 30.9.03 31.12.03
£m £m £m £m
America-Pacific 190 284 251 270
Asia-Pacific 119 109 130 115
Latin America 91 125 115 109
Europe 136 126 182 92
Africa and Middle East 84 74 95 84
---- ---- ---- ----
620 718 773 670
Restructuring costs (281) (22) (134)
Goodwill amortisation (100) (102) (101) (102)
Write down of loan to
joint venture (87)
---- ---- ---- ----
Total operating profit 520 335 650 347
Loss on disposal of subsidiaries (62) (10)
---- ---- ---- ----
Profit on ordinary activities
before interest 520 335 588 337
Net interest - subsidiary undertakings (51) (47) (55) (56)
Share of associates' and joint
ventures' net interest (1) (1) (1) (1)
---- ---- ---- ----
Profit before taxation 468 287 532 280
==== ==== ==== ====
Quarterly analyses of profit continued 15.
3 months to
31.3.02 30.6.02 30.9.02 31.12.02
£m £m £m £m
America-Pacific 223 265 270 260
Asia-Pacific 113 104 132 114
Latin America 100 118 98 77
Europe 116 143 156 132
Africa and Middle East 65 67 75 53
---- ---- ---- ----
617 697 731 636
Goodwill amortisation (94) (94) (95) (95)
---- ---- ---- ----
Profit on ordinary activities before interest 523 603 636 541
Net interest - subsidiary undertakings (59) (47) (31) (47)
Share of associates' and
joint ventures' net interest (1) (1) (3) (1)
---- ---- ---- ----
Profit before taxation 463 555 602 493
==== ==== ==== ====
GROUP BALANCE SHEET 16.
31 December
2003 2002
£m £m
Fixed assets
Intangible assets 8,012 6,248
Tangible assets 2,578 2,602
Investments in associates and joint ventures 327 347
Other investments 518 473
------ ------
11,435 9,670
------ ------
Current assets
Stocks 2,582 2,599
Debtors 2,571 2,082
Current investments 108 163
Short term deposits and cash 2,283 1,772
------ ------
7,544 6,616
------ ------
TOTAL ASSETS 18,979 16,286
====== ======
Capital and reserves
Share capital 550 576
Share premium account 33 27
Merger reserves 3,748 3,999
Capital redemption reserves 57 30
Other reserves 565 547
Profit and loss account (470) 6
------ ------
Shareholders' funds (including non-equity
interests) 4,483 5,185
Minority shareholders' equity interest 225 267
------ ------
4,708 5,452
------ ------
Other liabilities
Provisions for liabilities and charges 1,541 1,350
Borrowings 7,610 5,314
Creditors 5,120 4,170
------ ------
14,271 10,834
------ ------
TOTAL FUNDS EMPLOYED 18,979 16,286
====== ======
See notes on pages 18 to 27.
GROUP CASH FLOW STATEMENT 17.
For the year ended 31 December
2003 2002
£m £m
Net operating cash flow from subsidiary
undertakings 3,067 2,946
Dividends from associates 46 40
------ ------
Net cash inflow from operating activities 3,113 2,986
Returns on investments and servicing of finance (424) (405)
Taxation (709) (907)
Capital expenditure and financial investment (465) (503)
------ ------
Net cash generation 1,515 1,171
Acquisitions less disposals (1,820) 25
Equity dividends paid (773) (707)
------ ------
Cash flow (1,078) 489
Proceeds from issue of shares 5 6
Purchase of own shares (698)
Net debt acquired on purchase of subsidiaries (35)
Net funds disposed of on sale of subsidiaries (126)
Other changes 12
Differences on exchange (34) 91
------ ------
Movement in net debt in the year (1,840) 472
Net debt at 1 January (3,379) (3,851)
------ ------
Net debt at 31 December (5,219) (3,379)
====== ======
NOTES 18.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial statements comprise the audited results for the
years ended 31 December 2003 and 31 December 2002.
The audited Group results have been prepared under the
historical cost convention and in accordance with the
Companies Act 1985 and applicable UK accounting standards.
Accounting Standard FRS17 on Retirement Benefits was issued in
2001 and represented a radical change in accounting for
pension costs and other post-retirement benefits. During
2002, the Accounting Standards Board decided to allow deferral
of full implementation of FRS17 until 2005, while the
International Accounting Standards Board considers revisions
to its standard on employee benefits.
Consequently, as the Group still reports under SSAP24 and is
continuing to make use of the transitional arrangement
permitted under FRS17, the reported income and shareholders'
equity are not affected by the standard. However, additional
disclosures are being made as required by the standard. The
impact of FRS17 would be to increase Group pre-tax profit for
2003 by £34 million (2002 £4 million) and reduce reported
shareholders' funds at 31 December 2003 by £486 million
(2002 £561 million). During 2003, the impact of the
improvement in equity markets on shareholders' funds under
FRS17 was offset by changes in actuarial assumptions,
especially the impact of lower interest rates used to discount
the value of the liabilities.
CHANGES IN THE GROUP
On 4 April 2003, the Group announced that it had acquired
controlling interests in a number of companies in Peru,
including Peru's leading tobacco company Tabacalera
Nacional S.A.A. With the aggregate consideration to the
vendors of all the various shareholdings acquired of
£146 million, the goodwill arising on these transactions is
provisionally estimated at £123 million.
On 16 July 2003, the Group announced a successful bid to
acquire Ente Tabacchi Italiani S.p.A., Italy's state
tobacco company, for E2.32 billion subject to regulatory
approval. The transaction was completed on 23 December
2003 and the goodwill arising is provisionally estimated at
£1.6 billion. As the profit for the period in 2003 after
acquisition is not material for the Group results, the
effective date of acquisition has been deemed to be
31 December 2003.
Changes in the Group cont... 19.
It was announced on 4 August 2003 that the Group had
successfully bid for a 67.8 per cent holding in the Serbian
tobacco company Duvanska Industrija Vranje. The Group's
shareholding was subsequently increased to 78.8 per cent,
which brought the total consideration to £43 million. The
acquisition resulted in goodwill of £40 million. In
addition, the Group has committed to invest £17 million in
factory modernisation over two years and further amounts
over five years on social programmes.
The Group announced on 27 October 2003 the agreement to
combine Brown & Williamson's (B&W) US domestic business
with R.J. Reynolds (RJR) under Reynolds American, a new
holding company 58 per cent owned by RJR shareholders and
42 per cent by the Group, through B&W. The Group will also
sell Lane to Reynolds American for US$400 million in cash.
Following the restructuring of its Malaysian businesses in
1999, the Group had an operational subsidiary and a 54.7
per cent holding in a separate non-trading company whose
assets were primarily short term deposits. In May 2002,
the holding in this separate company was sold for book
value.
CONVERTIBLE REDEEMABLE PREFERENCE SHARES
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 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 at average rates of exchange. The
operating profit before exceptional items benefited by
£22 million as the impact of a stronger euro and South African
rand more than offset the weaker average rate for the US
dollar and currency devaluations in Latin America.
The principal exchange rates used were as follows:
Average Closing
------------- ------------------
2003 2002 2003 2002
US dollar 1.635 1.504 1.790 1.610
Canadian dollar 2.288 2.361 2.313 2.543
Euro 1.445 1.581 1.419 1.534
South African rand 12.331 15.739 11.949 13.814
RESTRUCTURING COSTS 20.
During 2003, the Group commenced a detailed review of its
manufacturing operations and organisational structure,
including the initiative to reduce overheads and indirect
costs.
As a result, in the second quarter of 2003, the Group
announced proposals to restructure the businesses in the UK
and Canada. These proposals include the closure of the
Darlington factory in the UK, with manufacturing consolidation
in the larger Southampton plant, and a major restructuring of
the business in Canada. This includes the closure of the
Montreal factory with production transferred to other Canadian
facilities, as well as the closure of the leaf threshing
operations at Aylmer, Ontario.
Manufacturing rationalisation continued in the second half of
2003, notably with the agreed closure plan for the Merksem
factory in Belgium. In addition, there have been a number of
changes to the organisational structure at all levels of the
Group and a review of the supply chain is underway.
The results for the year include a charge for restructurings
of £437 million.
GOODWILL AMORTISATION
The amortisation charge of £405 million (2002 £378 million) is
in respect of goodwill which principally arose from the
Rothmans transaction during 1999 and the Imasco transaction
during 2000. The increase in the charge mainly reflects the
impact of exchange rate movements shown above.
WRITE DOWN OF LOAN TO JOINT VENTURE
The write down relates to the reduction in value of the
convertible loan stock of British American Racing (Holdings)
(BAR), as part of taking a controlling interest in that
company. On 12 December 2003, the Group converted
US$136 million of its convertible loan stock in BAR, raising
its shareholding in BAR from 50 per cent to 89.7 per cent and
changing the status of BAR from a joint venture to a
subsidiary. No goodwill was created by this transaction.
LOSS ON DISPOSAL OF SUBSIDIARIES
On 29 September 2003, a subsidiary of the Group absolutely and
irrevocably transferred to a newly created trust (the Trust)
all of its rights, title and interest in and to 100 per cent
of the issued and outstanding shares of The Flintkote Company
(Flintkote) together with US$3 million in cash and did not
receive any consideration in return. The Trust, administered
by an independent trustee, has been created for the
management, conservation and eventual disposition of the
assets transferred to the Trust and names a medical facility
Loss on disposal of subsidiaries cont... 21.
active in the research and treatment of asbestos-related
diseases as ultimate beneficiary. The Group will have no
continuing involvement in the Trust. Since by virtue of this
arrangement Flintkote is no longer a Group subsidiary, the
Group has ceased to consolidate Flintkote effective
29 September 2003. The transfer resulted in a loss on
disposal of £62 million before tax. Flintkote, a US company,
was part of the acquisition of Genstar Corporation by Imasco
Limited in 1986 and became a Group subsidiary following the
restructuring of Imasco in 2000. Flintkote has been named,
along with a large number of defendants, in numerous actions
by individuals who seek damages based upon alleged exposure to
asbestos products, or alleged damage to their buildings due to
the presence in the buildings of certain materials containing
asbestos, allegedly manufactured and/or sold by such
defendants. Certain of these claims and suits allege
significant damage. All claims relate to businesses which
ceased active operations in the early 1970s. To date
substantially all of the claim costs and legal expenses
incurred in connection with these suits have been covered by
insurance proceeds and this continues. However, there remain
a number of factors, beyond the control of Flintkote, that
could impact its future costs. Regardless of the outcome of
current and potential future claims against Flintkote, in the
Directors' view no future costs should accrue to the Group
beyond what has already been presented in these financial
statements.
The loss on disposal of subsidiaries also includes a provision
for losses on the announced sale of the Group's shareholding
in a company in Myanmar.
INTEREST AND INTEREST COVER
Net interest paid was £23 million higher at £213 million,
despite improved interest rates. This reflected the impact of
the Group's share buy-back programme, the interest costs of
acquisitions and new market entries and one-off items in both
2002 and 2003.
The Group's interest cover was distorted by goodwill
amortisation and exceptional items. On an adjusted basis,
interest cover based on profit before interest paid over
interest paid, is strong at 8.8x (2002 8.6x).
TAXATION 22.
Year to
31.12.03 31.12.02
£m £m
British American Tobacco p.l.c. and
subsidiary undertakings
- overseas 821 822
Adjustments in respect of prior periods (49) (44)
---- ----
Current taxation 772 778
Deferred taxation (48) (5)
---- ----
British American Tobacco p.l.c.
and subsidiary undertakings 724 773
Share of associates and joint ventures 55 45
---- ----
779 818
==== ====
Tax rate 49.7% 38.7%
==== ====
The tax rates in both 2003 and 2002 were adversely affected by
goodwill amortisation, and 2003 was also adversely affected by
the impact of the exceptional items described on pages 20 and
21. The underlying tax rate reflected in the adjusted
earnings per share shown below was 33.5 per cent
(2002 32.8 per cent). Both years benefited from the
resolution of various outstanding tax issues. The increase in
the underlying tax rate reflects changes in the mix of
profits.
EARNINGS PER SHARE
Basic earnings per share are based on the profit for the year
attributable to ordinary shareholders and the average number
of ordinary shares in issue during the year (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. For 2003 the convertible redeemable
preference shares were not dilutive for the unadjusted
earnings per share calculation.
Earnings per share cont... 23.
The earnings have been distorted by exceptional items and
goodwill amortisation. To illustrate the impact of these
distortions, the adjusted diluted earnings per share are shown
below:
Diluted earnings per share
Year to
31.12.03 31.12.02
(pence) (pence)
Unadjusted earnings per share 26.69 50.10
Convertible redeemable preference
shares 1.47
Effect of restructuring costs 15.71
Effect of goodwill amortisation 18.07 16.44
Effect of write down of loan to
joint venture 3.88
Effect of disposal of subsidiaries 3.39
------ ------
Adjusted earnings per share 69.21 66.54
====== ======
Similar types of adjustments would apply to basic earnings per
share which, on an adjusted basis, would be 70.70p
(2002 68.53p) compared to unadjusted amounts of 26.93p
(2002 50.91p).
SHARE BUY-BACK PROGRAMME
The Group initiated an on-market share buy-back programme at
the end of February 2003. During the year, 106.3 million
shares were bought at a cost of £697.6 million.
GROUP RESERVES
The Group reserve movements are summarised on page 12.
There was an increase in reserves of £206 million due to
exchange, notably affected by the strength of the year end
euro, South African rand and Canadian dollar rates which more
than offset the weakness of the US dollar. However,
shareholders' funds were £702 million lower at £4,483 million,
mainly reflecting the impact of a £698 million reduction in
respect of the share buy-back programme.
Shareholders' funds comprise £3,673 million
(2002 £4,393 million) of equity interests and £810 million
(2002 £792 million) of non-equity interests.
CASH FLOW 24.
The Group's cash flow is summarised on page 17.
Net operating cash flow was £127 million higher at
£3,113 million due to higher underlying operating profit and
reductions in working capital.
Investment returns and finance costs (which include preference
and minorities' dividends, as well as interest) were
£19 million higher at £424 million, reflecting increases in
dividends to minorities. Tax outflows at £709 million were
£198 million lower than last year, mainly due to the timing of
payments which led to abnormally high outflows in 2002. The
outflow for capital expenditure and financial investments was
down £38 million at £465 million reflecting lower capital
expenditure.
The above cash flows resulted in net cash generation of
£1,515 million, up £344 million over last year.
Acquisitions less disposals resulted in a net outflow of
£1,820 million in 2003. This principally reflects the net cash
movements on the acquisition of Ente Tabacchi Italiani S.p.A.
of £1,599 million, together with the acquisitions in Peru and
Serbia. The net inflow of £25 million in 2002 was mainly due
to the sale of a non-trading Malaysian company.
After equity dividends of £773 million, the net cash outflow
was £1,078 million. This, together with a £698 million
outflow for the Group's share buy-back programme in 2003 and
the small negative exchange rate impact, led to the Group's
net debt rising by £1,840 million to £5,219 million.
The net debt movement was reflected in total borrowings up by
£2,296 million to £7,610 million and cash, short term deposits
and current investments increasing by £456 million to £2,391
million.
CONTINGENT LIABILITIES
There are contingent liabilities in respect of litigation,
overseas taxes and guarantees in various countries.
Product liability litigation
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.
Contingent liabilities cont... 25.
The total number of US product liability cases pending at year
end involving Group companies was approximately 4,302
(31 December 2002, 4,219 cases). UK based Group companies
were named as co-defendants in some 1,128 of those cases
(2002, 1,272 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 suit against the leading US
cigarette manufacturers, certain affiliated companies
(including parent companies), and others 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 p.l.c. on jurisdictional grounds)
but is allowing the government to proceed with its claims for
equitable relief which includes a claim for disgorgement of
profit up to US$289 billion against the industry. The court
has scheduled trial for September 2004.
2. Class actions
As at 31 December 2003, B&W was named as a defendant in some
36(2002, 47) separate actions attempting to assert claims on
behalf of classes of persons allegedly injured by smoking. At
the end of the second phase of a three phase trial in the
Engle case (Florida), 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. On 21 May 2003,
the intermediate appellate court reversed the trial court's
judgement and remanded the case to the trial court with
instructions to decertify the class. Plaintiffs are seeking
further review by the Florida Supreme Court. B&W continues to
26.
Contingent liabilities cont...
believe confidently that the Florida Supreme Court will uphold
the reversal of the trial court's judgement against B&W. In a
Louisiana medical monitoring case brought on behalf of
Louisiana smokers (Scott), phase one of the trial began in
January 2003. On 28 July 2003, the jury returned a verdict in
favour of defendants on the medical monitoring claim.
However, the jury made findings against the defendants on
claims relating to fraud, conspiracy, marketing to minors and
smoking cessation. The court has scheduled a phase two trial
to begin on 29 March 2004 to address the scope and cost of
smoking cessation programmes.
3. Individual cases
Approximately 4,245 cases were pending against B&W at
31 December 2003 (2002, 4,123), 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
damages claims by class members; (b) approximately one quarter
are cases brought in consolidated proceedings in West
Virginia; and (c) only about 10 per cent are cases filed by
other individuals. Four of the ten cases tried during 2003
resulted in verdicts against B&W at the trial court level. In
April 2003, a Florida jury (Eastman) awarded $650,000 damages
against B&W. In May 2003, an Arkansas jury (Boerner) awarded
$4 million in compensatory damages and $15 million in punitive
damages against B&W. In November 2003, a Missouri jury
(Thompson) awarded $210,000 damages against B&W. In December
2003, a New York jury (Frankson) awarded $350,000 compensatory
damages against B&W and two industry organizations. In
January 2004, the same jury awarded $20 million punitive
damages. B&W is appealing all these verdicts.
4. Other claims
As at 31 December 2003, seven (2002, eight) cases were pending
on behalf of asbestos companies, seeking reimbursement for
costs and judgements paid in litigation brought by third
parties against them. As at 31 December 2003, B&W was named
as defendant in four (2002, 28) 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. 34 foreign government
cases have been dismissed.
At year end, active claims against Group companies existed in
18 other countries but the only countries with more than five
active claims were Argentina, Australia, Brazil, Canada,
Italy, the Netherlands and the Republic of Ireland.
27.
Contingent liabilities cont...
Conduct-based claims
Claims seeking damages for conduct unrelated to smoking and
health have also been filed in the US. None of these claims
are considered to be meritorious.
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 appellants to post appeal bonds
or substitute security in amounts which could in some cases
equal or exceed the amount of the judgement. 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
2002 have been delivered and for the year ended 31 December
2003, will be delivered to the Registrar of Companies. Both
carry an unqualified audit report. The Annual General Meeting
will be held on 21 April 2004 at 11.30 a.m. at The Brewery,
Chiswell Street, London.
The report and accounts will be posted to shareholders in
March 2004.
Alan F Porter
Secretary
24 February 2004
This information is provided by RNS
The company news service from the London Stock Exchange
Friday, 22nd November 2024
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