Final Results - Year Ended 31 December 1999 - Pt 1

British American Tobacco PLC 7 March 2000 PART ONE PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 1999 SUMMARY 1999 1998 Change Operating profit pre- exceptionals £2,022m £1,550m +30% Pre-tax profit £1,371m £ 738m +86% Adjusted earnings per 52.33p 46.12p +13% share Dividends per share 26.20p 24.00p + 9% * Adjusted earnings per share (on a fully diluted basis), probably the best indicator of true improvement, were 13 per cent higher at 52.33p. * Operating profit was 30 per cent higher at £2,022 million, excluding goodwill amortisation and exceptional items, and benefited from the inclusion of seven months results for Rothmans combined with a good underlying performance. * Group volumes increased by 5 per cent to 753 billion. Excluding the impact of the merger, volumes declined by 9 per cent, a similar position to our major international competitors. * Progress on the integration of the Rothmans operations has been excellent. The merger has improved the geographical balance of the Group and resulted in the Group having a 15.4 per cent share of the world market. * The Board is recommending a final dividend of 17.9p, up 12 per cent, which will be paid on 3 May 2000. This will take the growth in dividends for the year to 9 per cent, which is in line with our policy of paying out at least 50 per cent of sustainable earnings. * The Chairman, Martin Broughton, commented that 'As a result of the Rothmans merger, we made a major advance in 1999. We also succeeded in managing the business on strategy in a difficult environment, a task made more complex by the merger. We are disappointed that the real progress we have made has not been reflected in our share price.' ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson 020 7845 1180 Fran Morrison/David Betteridge/ Denise Hart 020 7845 1191 Jody Humble 020 7845 2888 BRITISH AMERICAN TOBACCO plc PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 1999 INDEX PAGE Chairman's statement 2-4 Business review 5-7 Dividends 8 Group profit and loss account 9 Statement of total recognised gains and losses 10 Interest of British American Tobacco's shareholders 10 Segmental analyses 11 Quarterly analyses of profit 12-13 Group balance sheet 14 Group cash flow statement 15 Accounting policies and basis of preparation 16 Rothmans International 16 Exchange rate effects 17 Exceptional items 17 Sale of brands 17 Demerger and restructuring costs 18 Interest and interest cover 18 Taxation 18 Earnings per share 19 Group reserves 19 Cash flow 20 Contingent Liabilities 20 Post balance sheet event - Imasco 22 Annual report and accounts 22 CHAIRMAN'S STATEMENT 2. As a result of the Rothmans merger, we made a major advance in 1999. We also succeeded in managing the business on strategy in a difficult environment, a task made more complex by the merger. We are disappointed that the real progress we have made has not been reflected in our share price. The Group's operating profit before exceptional items grew by 30 per cent to £2,022 million, reflecting seven months' benefit from the merger with Rothmans, combined with a good underlying performance. Pre-tax profit rose 86 per cent to £1,371 million, while adjusted fully diluted earnings per share, probably the best indication of the true improvement, advanced by 13 per cent to 52.3p. Your Board is recommending a final dividend of 17.9p per share, payable on 3 May. This will take the total dividend growth for the year to 9 per cent, in line with our policy of paying out at least 50 per cent of sustainable earnings. The major strategic achievements were plainly the Rothmans merger and the highly complex acquisition of our Canadian associate company, Imasco, including the subsequent sale of its non tobacco businesses on a tax efficient basis. The transaction, which will enable us to integrate Imperial Tobacco of Canada into our operations, was completed in February 2000 and it will materially improve our cash flow this year. Complexity was also a feature of the Rothmans merger, especially when it came to securing regulatory approval with limited disposals and undertaking corporate restructurings in a number of key markets. The outcome was better than we expected when we announced the merger, except in Canada where the forced sale of the Rothmans business reflected the exceedingly depressed level of tobacco assets. The anticipated £250 million of synergies per annum will be achieved ahead of schedule. I should like to take this opportunity to welcome Bill Ryan, as Deputy Managing Director, and Johann Rupert and Jan du Plessis, as non executives, to the Main Board, where their experience is proving invaluable. We also welcome Tony Jones and Chris Bischoff to the Management Board. For the tobacco industry, a difficult environment does not, of course, confine itself to the trading conditions covered in the Business Review. Our two principal legal and regulatory concerns at the moment are the three phase Engle class action in Florida and the World Health Organization's Framework Convention on Tobacco Control (FCTC). Chairman's statement.... 3. The latter is a potential threat, despite the fact that it represents a developed world obsession being foisted on to the developing world. There are, however, encouraging signs that some significant countries are in favour of a broad convention, allowing governments to take account of their own circumstances, rather than a binding treaty. We have been analysing the potential impact of the FCTC and believe that it has fundamental flaws. In particular, the proposals conflict with the established principles of good public policy formation and risk undermining governments' sovereignty over tobacco regulations and excise. Because of the way the Engle class action is being run by the Judge, who is himself a member of the class, investors expect a headline-grabbing punitive damages award in the next month or so and this has affected the share price. We are confident that, in the event of a loss, the companies involved will be able to appeal successfully, without having to post a bond. Despite the blatant pressure applied by the Judge, Brown & Williamson has no intention of settling. It is also worth stressing that Engle is really something of an exception as, elsewhere on the litigation front, class actions and medical reimbursement cases are consistently being dismissed, despite increasingly novel claims being filed, not least by the US Federal Government. In terms of creativity, pride of place in a crowded field probably goes to the US plaintiffs' lawyers who have been able to persuade various Latin American countries and states, as well as Thailand, to sue the tobacco industry in the US, rather than in their own courts. The Guatemala and Thailand cases have already been dismissed and we expect the others to follow suit. The pressure from regulators and governments who, it must be remembered, make over 10 times as much from the sale of cigarettes as we do, seems set to continue. As this new century begins, we are determined to find a constructive way forward, instead of remaining trapped with them in the sterile arguments of the past. We have, for example, recently presented the UK Government with a coherent set of proposals called 'partnership for change'. Chairman's statement.... 4. In a further initiative to improve our ability to communicate directly with all our stakeholders, our Annual Review's publication will coincide with the launch of our website. On behalf of the Board, I would like to thank our management teams and employees, around the world and at our headquarters here in the UK, for their unstinting efforts during a momentous year in the Company's development. The way that so many people have risen to additional challenges is an impressive tribute to their commitment. While we recognise that traditional businesses are currently out of favour with the stock market, our task for 2000 is to work on ensuring that the value we are building for shareholders is actually reflected in the value of our shares. Apart from market share and financial growth targets, our broader objectives include continuing to build on the success of the Rothmans merger, starting to capitalise on the benefits that e-commerce can offer and making progress in becoming recognised as a responsible company in an industry seen as controversial. MARTIN BROUGHTON BUSINESS REVIEW 5. The improved geographical balance of our businesses is reflected by the fact that the Group has the leadership position in over 50 countries around the world. Throughout the integration of Rothmans into the business, we have remained focused on achieving global leadership of the tobacco business by developing brands and growing strong positions in the premium and lights segments. Operating profit, before goodwill amortisation and exceptional items, was 31 per cent higher in local currency as a result of the inclusion of Rothmans since June 1999. On a pre-merger basis, profit is estimated to be around 4 per cent higher than last year. Profit in the fourth quarter, before exceptional items, was 101 per cent higher than the comparable period last year. This increase reflects the contribution from Rothmans, cost reduction initiatives and last year being affected by the one-off cost of factory closures. Group volumes increased by 5 per cent. Excluding Rothmans, Group volumes declined by 9 per cent, in line with our major international competitors. Operating Profit from the America-Pacific Region was £544 million, an increase of £9 million from 1998. These figures exclude the initial payments and liquidated legal fees on the US tobacco settlements. Total volume for 1999 was 11 per cent lower than 1998, due to conditions in the US market. US domestic market contribution, before reduced common overheads of £259 million, was £601 million, a fall of 7 per cent compared to 1998. This decrease is attributable to lower volumes, partially offset by higher pricing net of settlement costs. Total industry shipments for the year declined 9 per cent due to trade inventory adjustment, the emergence of grey market product and list price increases in excess of 60 per cent. Brown & Williamson's volume fell 13 billion units to 56 billion and overall market share slipped to 13.4 per cent. This was principally due to GPC, which was affected by the rise in grey market brands, preferential treatment allowed to certain small manufacturers under the MSA agreement and aggressive competitive discounting. Although Kool's market share was slightly down, image building programmes did register sizeable share gains in specific segments, while Lucky Strike Filters and Lights distribution was expanded. In the premium sector, Capri slightly increased its share of the market and Carlton's repositioning has helped slow its share decline. The Group's operations in Japan show higher sales volumes in a reduced total market. The Group's market share rose to 7.4 per cent, with further growth from Kent and Kool. Despite the 23 per cent increased contribution in local currency, the contribution in US dollars decreased slightly due to the unfavourable US$/Yen exchange rates. Business review..... 6. In Asia-Pacific, profits rose to £257 million, reflecting the merger with Rothmans as a result of which the Group now has a much stronger balance of businesses. The merger has also created significant opportunities for synergy benefits in the region. Actions to secure these savings, through factory rationalisation and distribution changes, are now well underway following corporate restructurings in Malaysia, Singapore, Australasia, and Indonesia. The Australasian markets showed strong profit growth (excluding the divested brands as described on page 17), driven by cost control and improved margins. Following the excise change in November, market share in Australia increased as a result of the strength of Benson & Hedges, Winfield, and Dunhill. In Malaysia, improvements in financial performance were constrained by lower total market volume, market penetration by kreteks and excise increases in 1998. Indonesia continued the good performance in difficult market conditions, despite excise tax changes that reduced margins, with volumes and profits well up. Profits in Singapore increased following the closure of the factory in 1998. Vietnam has seen strong growth in Craven 'A' volume. On a comparable basis, regional volumes were 9 per cent lower at 85 billion, principally due to weak export volumes impacted by macro- economic conditions and a significant increase in counterfeit products. In Latin America, profit was slightly higher at £333 million, if the benefit from the recovery of sales tax of £74 million in Brazil is excluded from the comparative figures. Despite the difficult economic situation in Latin America, there were good performances in Mexico, Venezuela, Central America and the Caribbean. The regional volumes decreased by 15 per cent to 167 billion, due mainly to the lower exports from Brazil following the introduction of a cigarette export tax. Souza Cruz maintained their share of the duty paid market in Brazil, with Free increasing its share, although smuggling and tax evasion posed a growing threat. However, despite good performances from the leaf business and cost reduction initiatives, profit for the year was lower as export volumes fell significantly. In Venezuela and Central America, profits rose as a result of price increases and cost savings, with volume growth in Venezuela. Despite the slight decrease in our market share in Mexico due to aggressive competitor activities, profits were helped by price rises, cost savings and firmer exchange rates. In Chile, profits were severely impacted by swingeing excise increases that resulted in downtrading, as well as lower leaf export volumes, while profits in Argentina were affected by the strong recession. Business review..... 7. In Europe, the regional profit for the enlarged group almost doubled from £164 million to £316 million. The growth in profit is due to the merger (including the smoking tobacco and cigars operations) and higher contributions from Russia, Germany and Romania. These were partly offset by the discontinuation of intra- EU Duty Free and the adverse affects of the change in the local excise structure in Hungary and difficult trading conditions in Ukraine and Poland. A step change was achieved in our competitive position in Europe where the reported volume grew 30 per cent to 171 billion. We increased volumes in both the largest market in Eastern Europe, Russia, and the largest market in Western Europe, Germany. In Russia, this was driven by significantly higher sales of Yava Gold and Pall Mall and in Germany, Lucky Strike and Pall Mall. There were also improved volumes in Romania. However, these successes were offset by small declines in a number of other markets. In Amesca, total regional profit was £268 million, up £158 million, benefiting from the merger and improved profits in India and South Africa. Group volumes grew to 214 billion cigarettes. On a comparable basis, volumes were 6 per cent lower than last year largely due to civil war in the Congo and some depressed economies in Africa and South Asia. In South Africa, profit grew despite a declining market, benefiting from price increases and a reduction in costs. Benson & Hedges, Rothmans Special Mild and Peter Stuyvesant grew market share. In Uzbekistan, volumes were well ahead resulting in higher market share and profitability. In India, good profit growth was achieved from tobacco principally through a combination of improved mix and price increases, although there was a loss on disposal of certain non-tobacco interests. The Middle East achieved profit growth with rising sales in the premium sector of the market. In particular, results in Arabia were strong, as the sales mix improved with John Player Gold Leaf showing steady growth in share. In Sri Lanka, excellent results were generated through a combination of cost reductions, improved margins and the sale of the CTC Eagle insurance operations. Imasco in Canada, which was equity accounted in 1999, contributed £304 million to the Group profits, up 18 per cent in local currency. In the tobacco business, profits rose 8 per cent to £149 million as a result of higher prices and cost efficiencies. In a slightly reduced total market, a higher market share was again achieved. The total profits from financial services increased by 25 per cent to £103 million. This is the result of the growth in revenues together with strong cost control and higher productivity. Profit from other trading activities was substantially higher at £52 million. Non-trading items These comprise goodwill amortisation and exceptional items which are described on pages 16 and 17. DIVIDENDS 8. The Directors will be recommending to the shareholders at the Annual General Meeting to be held on 27 April 2000 the payment on 3 May 2000 of a final dividend for the year of 17.9p per ordinary share of 25p. Valid transfers received by the Registrar of the Company up to 17 March 2000 will be in time to rank for payment of this dividend. Ordinary shares go ex-dividend on 13 March 2000. The following is a summary of the dividends declared for the years ended 31 December 1999 and 1998, which also illustrates the acceleration in the dividend payment dates. 1999 1998 pence per pence per share £m share £m (a) On ordinary shares: Interim - special 1999 paid 1 July 1999 4.0 62 - ordinary - 1999 paid 27 September 1999 4.3 94 - FID - 1998 paid 5 January 1999 8.0 125 Final 1999 payable 3 May 2000 17.9 390 1998 paid 1 July 1999 16.0 252 ----- --- ----- --- 26.2 546 24.0 377 ===== === ===== === (b) On convertible redeemable preference shares: Interim 1999 paid 27 September 1999 4.3 10 Final 1999 payable 3 May 2000 17.9 44 Amortisation of discount 20 ----- --- 22.2 74 ===== === 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 9. For the year ended 31 December 1999 1998 £m £m REVENUE Subsidiary undertakings 18,798 14,584 Share of associates 2,873 2,792 ------ ------ 21,671 17,376 ====== ====== PROFIT Subsidiary undertakings 1,099 676 -------------------------------------------- --------- ------- after charging: US tobacco settlements* (24) (613) integration costs* (357) goodwill amortisation* (162) after crediting:sales tax recovery* 74 -------------------------------------------- --------- ------- Share of associates and joint venture 380 335 ------ ------ Total operating profit 1,479 1,011 Sale of brands 88 Demerger and restructuring costs (46) ------ ------ Profit on ordinary activities before interest 1,567 965 Net interest (170) (204) Share of associates net interest (26) (23) ------ ------ Profit before taxation 1,371 738 Taxation (673) (277) ------ ------ Profit after taxation 698 461 Minority interests (142) (115) ------ ------ Profit for the year 556 346 Dividends from demerged businesses 123 Dividends and other appropriations (620) (377) ------ ------ Retained profit (64) 92 ====== ====== Earnings per share: Basic 25.25p 22.17p ====== ====== Adjusted fully diluted 52.33p 46.12p ====== ====== * see notes on pages 16 and 17. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 10. for the year ended 31 December 1999 1998 £m £m Profit for the year 556 346 Differences on exchange (268) (69) ----- ----- Total recognised gains related to the year (below) 288 277 ===== ===== INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS for the year ended 31 December 1999 1998 £m £m Balance 1 January 64 (97) Total recognised gains related to the year (above) 288 277 Issue of shares: Share options 3 42 Rothmans merger 5,089 Dividends from demerged businesses 123 Dividends and other appropriations: Ordinary shares (546) (377) Convertible redeemable preference shares (54) Amortisation of discount on preference shares (20) Utilisation of ACT 96 Other (3) ----- ----- Balance 31 December 4,821 64 ===== ===== SEGMENTAL ANALYSES 11. The analyses below include the Group's share of associates for the year ended 31 December Cigarette volumes Net revenue 1999 1998 1999 1998 bns bns £m £m America-Pacific 84 93 3,204 2,491 Asia-Pacific 85 71 1,208 959 Latin America 167 196 1,461 1,671 Europe 171 132 2,359 1,552 Amesca 214 190 1,350 913 Imasco 32 32 1,600 1,662 ------ ------ ------ ------ 753 714 11,182 9,248 ====== ====== ====== ====== OPERATING PROFIT America-Pacific 544 535 Asia-Pacific 257 179 Latin America 333 309 Europe 316 164 Amesca 268 110 Imasco 304 253 ------ ------ 2,022 1,550 US tobacco settlements (24) (613) Integration costs (357) Goodwill amortisation (162) Sales tax recovery 74 ------ ------ 1,479 1,011 ====== ====== 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 operations of associates comprise the following businesses: NET REVENUE Tobacco 824 721 Financial services 761 693 Other trading activities 525 714 ------ ------ 2,110 2,128 ====== ====== OPERATING PROFIT Tobacco 224 217 Financial services 103 81 Other trading activities 53 37 ------ ------ 380 335 ====== ====== QUARTERLY ANALYSES OF PROFIT 12. The figures shown below have been produced using average rates of exchange for the years ended 31 December 1999 and 1998 respectively, with the previously reported quarterly figures for 1999 restated using average rates for the full year. 3 months to 31.3.99 30.6.99 30.9.99 31.12.99 £m £m £m £m America-Pacific 106 132 154 152 Asia-Pacific 48 57 88 64 Latin America 71 68 104 90 Europe 39 45 133 99 Amesca 26 31 118 93 Imasco 63 71 83 87 ---- ---- ---- ---- 353 404 680 585 US tobacco settlements (13) (9) 5 (7) Integration costs (81) (276) Goodwill amortisation (91) (71) ---- ---- ---- ---- Operating profit 340 395 513 231 Sale of brands 88 ---- ---- ---- ---- Profit on ordinary activities before interest 340 395 601 231 Net interest - subsidiary undertakings (27) (37) (45) (61) Share of associates' net interest (5) (7) (4) (10) ---- ---- ---- ---- Profit before taxation 308 351 552 160 ==== ==== ==== ==== As explained in the interim report for the six months to 30 June 1999, the results of Rothmans International were excluded from that period's results. Consequently, the above table includes the results of Rothmans and the goodwill for the period from 7 June 1999 to 30 September 1999 as part of the three months to 30 September. Quarterly analyses of profit continued 13. 3 months to 31.3.98 30.6.98 30.9.98 31.12.98 £m £m £m £m America-Pacific 114 126 164 131 Asia-Pacific 56 77 66 (20) Latin America 78 77 81 73 Europe 51 43 64 6 Amesca 26 35 17 32 Imasco 53 63 68 69 ---- ---- ---- ---- 378 421 460 291 US tobacco settlements (150) (463) Sales tax recovery 74 ---- ---- ---- ---- Operating profit 378 345 460 (172) Demerger and restructuring costs (7) (19) (17) (3) ---- ---- ---- ---- Profit on ordinary activities before interest 371 326 443 (175) Net interest - subsidiary undertakings (56) (49) (54) (45) Share of associates' net interest (4) (6) (5) (8) ---- ---- ---- ---- Profit before taxation 311 271 384 (228) ==== ==== ==== ==== GROUP BALANCE SHEET 14. 31 December 1999 1998 £m £m Fixed assets Intangible assets 5,338 Tangible assets 2,456 2,048 Investments in associates and joint venture 636 472 Other investments and long term loans 210 119 ------ ------ 8,640 2,639 ------ ------ Current assets Stocks 2,850 2,165 Debtors 2,000 1,493 Acquired business awaiting disposal 123 Current investments 768 185 Short term deposits and cash 1,853 970 ------ ------ 7,594 4,813 ------ ------ TOTAL ASSETS 16,234 7,452 ====== ====== Capital and reserves Share capital 605 393 Share premium account 4 1 Merger reserves 4,726 Other reserves 503 483 Profit and loss account (1,017) (813) ------ ------ Shareholders' equity (including non-equity interests) 4,821 64 Minority shareholders' interest 455 323 ------ ------ 5,276 387 ------ ------ Other liabilities Provisions for liabilities and charges 1,251 741 Borrowings 5,676 3,730 Creditors 4,031 2,594 ------ ------ 10,958 7,065 ------ ------ TOTAL FUNDS EMPLOYED 16,234 7,452 ====== ====== GROUP CASH FLOW STATEMENT 15. For the year ended 31 December 1999 1998 £m £m Net operating cash flow from subsidiary undertakings 1,995 1,096 Dividends from associates 90 86 ------ ------ Net cash inflow from operating activities 2,085 1,182 Returns on investments and servicing of finance (206) (282) Taxation paid (334) (281) Capital expenditure and financial investment (281) (351) ------ ------ Net cash generation 1,264 268 Acquisitions less disposals (216) (16) Dividends paid (530) (696) Dividends from demerged businesses 242 Cash flow with demerged businesses 668 ------ ------ Cash flow 518 466 ====== ====== MORE TO FOLLOW FR UNSARRWRORUR

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