Final Results

British American Tobacco PLC 28 February 2008 28 February 2008 PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2007 SUMMARY 2007 2006 Change Revenue Â£10,018m Â£9,762m +3% Profit from operations Â£2,905m Â£2,622m +11% Adjusted diluted earnings per share 108.53p 98.12p +11% Dividends per share 66.20p 55.90p +18% The reported profit from operations was 11 per cent higher at Â£2,905million, or 7 per cent higher if exceptional items are excluded. However, profit from operations, at comparable rates of exchange and excluding exceptional items, would have been 11 per cent higher, with all regions contributing to this strong result. Group volumes from subsidiaries were 684 billion, a decrease of 1per cent, mainly as a result of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany. The four Global Drive Brands achieved an overall volume growth of 10 per cent, which led to share improvements in many markets. The reported Group revenue increased by 3 per cent to Â£10,018 million but, at comparable rates of exchange, would have increased by 5 per cent as a result of more favourable pricing and an improving product mix. Adjusted diluted earnings per share rose by 11 per cent, principally as a result of the strong growth in profit from operations, partly offset by the adverse impact from foreign exchange movements. Basic earnings per share were higher at 105.19p (2006:92.08p). The Board is recommending a final dividend of 47.60p, which will be paid on 7 May 2008. This, together with the interim dividend, will take dividends declared in respect of 2007 as a whole to 66.20p, an increase of 18 per cent. The Chairman, Jan du Plessis, commented "British American Tobacco has had another very good year, with increased profit and share growth in many markets. At a time of considerable economic and financial uncertainty around the world, the Group is in good shape. Over the past five years, we have delivered significant shareholder value with a total return of 294 per cent compared to 89 per cent for the FTSE 100 as a whole." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson/ 020 7845 1180 David Betteridge/Kate Matrunola/ 020 7845 2888 Sharon Woodcock 020 7845 1519 Catherine Armstrong BRITISH AMERICAN TOBACCO p.l.c. PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2007 INDEX PAGE Chairman's statement 2 Business review 4 Dividends 9 Group income statement 10 Group statement of changes in total equity 11 Group balance sheet 12 Group cash flow statement 14 Segmental analyses of volume, revenue and profit 15 Quarterly analyses of profit 17 Accounting policies and basis of preparation 19 Foreign currencies 19 Exceptional items 19 Other changes in the Group 20 Net finance costs 21 Associates 22 Taxation 22 Earnings per share 23 Cash flow 24 Total equity 27 Contingent liabilities 27 Share buy-back programme 37 Post balance sheet events 37 Annual Report and Accounts 37 Financial calendar 2008 38 Disclaimers 38 CHAIRMAN'S STATEMENT British American Tobacco has had another very good year, with increased profit and share growth in many markets. At current rates of exchange, revenue was ahead by 3 per cent and profit from operations, excluding exceptionals, by 7 per cent, despite the Â£106 million adverse impact of exchange rates. At comparable rates of exchange, revenue was up 5 per cent and profit from operations, excluding exceptionals, up 11 per cent. Adjusted diluted earnings per share increased by 11 per cent to 108.53p. Over the past five years, our earnings per share have grown by 10 per cent compound, clearly demonstrating our ability to meet our goal of delivering high single-figure growth in earnings, on average, over the medium to long term. Sales of the Group's Global Drive Brands improved by 10 per cent, as both Kent and Pall Mall broke through the 50 billion sticks volume level for the first time. Kent grew by 19 per cent, driven by the innovative Kent Nanotek in Russia, as well as by growth in Chile, Romania and Ukraine. Dunhill was up 6 per cent, benefiting from new products and packaging, while Lucky Strike grew slightly. Our premium volume grew by 3 per cent, in contrast to the 1 per cent decline in overall volumes, demonstrating the benefit of our continuing investment in innovation. 2007 saw the completion of our initial five year programmes of cost savings from the supply chain and from overheads and indirects. Over the period, we have saved over Â£1 billion in annual costs. The annualised supply chain savings in 2007 reached Â£177 million, bringing the total to Â£551 million and the overheads and indirects annualised savings were Â£100 million, making the total for that programme Â£455 million. Over the next five years, our target is to achieve further annualised savings of Â£800 million by 2012, in areas such as supply chain efficiencies, back-office integration and management structures. Some of the savings will be reinvested in the business, so that we can maintain our investment in innovation, distribution and research and development, driving sustainable revenue growth and improving the quality of our business. Our share of our associate companies' post-tax results rose by 3 per cent to Â£442 million, reflecting higher profits from Reynolds American and ITC, partly offset by adverse exchange movements. We have announced an agreement to acquire 100 per cent of Skandinavisk Tobakskompagni's (ST) cigarette and snus business in exchange for our 32.35 per cent holding in ST and the payment of DKK11,384 million (Â£1,151 million) in cash. ST accounts for more than 60 per cent of cigarette sales in Scandinavia. By turning our minority stake in a diversified group into full control of a very profitable cigarette business, we will strengthen our market positions in Denmark, Norway, Sweden and Poland and achieve significant synergy benefits. The transaction, which is subject to competition approvals, will be funded from a committed bank facility and, excluding one-off costs, is expected to be immediately earnings enhancing. We are also delighted to have won the public tender for the cigarette assets of Tekel, the Turkish state owned tobacco company, with a bid of US$1,720 million (Â£860 million). On completion, which is expected later this year and is subject to regulatory approvals, the acquisition will raise our market share in Turkey, the eighth largest cigarette market in the world, to some 36 per cent from just over 7 per cent today. Page 2 Chairman's statement cont... The addition of Tekel's portfolio will provide a stronger platform for the growth of our international brands such as Kent, Pall Mall and Vogue in the Turkish market. We expect to achieve significant one-off benefits in addition to the expected cost savings and the transaction, which will also be financed with a committed bank facility, should be earnings enhancing from 2009. During the year, we repurchased some 45 million shares at a cost of Â£750 million and at an average price of Â£16.57. Over the past five years, we have returned almost Â£3 billion to shareholders in share buy-backs. However, in view of our refinancing plans following the Tekel and ST transactions, we have decided to scale-back the 2008 share buy-back to some Â£400 million with a view to maintaining our credit rating. We will keep the level under review, as we intend to return to the higher level of Â£750 million announced last year in due course. Once again, following discussions with the Takeover Panel, the Company will be asking independent shareholders at the Annual General Meeting to waive the requirement for R&R to make a bid for the remaining shares in British American Tobacco, should their combined interest, which currently stands at 29.95 per cent, reach or exceed 30 per cent as a result of our share buy-back programme. In November 2007, Richemont and Remgro made preliminary announcements that they were considering restructurings that might entail providing their respective shareholders with the option of becoming direct shareholders in British American Tobacco. We have agreed, if requested, to obtain a secondary listing for our ordinary shares on the Johannesburg Stock Exchange with a view to facilitating any such restructurings. Shareholders may remember that last year the Board announced a phased increase in the dividend payout ratio, which is planned to reach 65 per cent of long term sustainable earnings in 2008. The Board is therefore proposing a final dividend for 2007 of 47.60p, taking the total for the year to 66.20p, an increase of 18 per cent, representing a payout ratio of 61 per cent. Over the past five years, we have achieved compound dividend growth of 13 per cent. There have been a number of changes to the Board during 2007. Antonio Monteiro de Castro retired following an outstandingly successful period as Chief Operating Officer and was replaced by Nicandro Durante. We have also announced that Paul Rayner will be retiring as Finance Director at the AGM, as he needs to return to Australia for family reasons. Our thoughts are very much with Paul and his family at this difficult time. I would like to thank him for his tremendous contribution to the Group over many years. Paul will be succeeded by Ben Stevens, currently Regional Director, Europe. Amongst the Non-Executive Directors, Piet Beyers retired in June and Karen de Segundo and Christine Morin-Postel were appointed in October. Ken Clarke will be retiring from the Board at the AGM, having served since 1998. We will miss his wise counsel very much indeed. Ken will be succeeded as Senior Independent Director by Sir Nick Scheele. At a time of considerable economic and financial uncertainty around the world, British American Tobacco is in good shape. Over the past five years, we have delivered significant shareholder value with a total return of 294 per cent, compared to 89 per cent for the FTSE 100 as a whole. Jan du Plessis Page 3 BUSINESS REVIEW The reported Group profit from operations was 11 per cent higher at Â£2,905 million or 7 per cent higher if exceptional items, as explained on pages 19 and 20 are excluded. However, profit from operations at comparable rates of exchange and excluding exceptional items, would have been 11 per cent higher, with all regions contributing to this strong result. Group volumes from subsidiaries were 684 billion, a decrease of 1 per cent, mainly as a result of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany. Group revenue increased by 3 per cent to Â£10,018 million but, at comparable rates of exchange, would have increased by 5 per cent as a result of favourable pricing and improved product mix. The four Global Drive Brands continued their good performance and achieved an overall volume growth of 10 per cent, with a particularly strong performance in the second half of the year. The good performance of the Global Drive Brands led to share improvements in many markets. Kent grew by 19 per cent, with excellent growth in Russia, Romania, Ukraine and Chile, while volumes were maintained in a reduced Japan market. It also benefited from significant volume increases from the brand migrations in Western Europe and new markets in Azerbaijan and Kazakhstan. Dunhill rose by 6 per cent, driven by strong performances in South Korea, Russia, Italy, South Africa and Saudi Arabia, although volumes were in line with last year in Malaysia and lower in Taiwan and Australia. Lucky Strike volumes were slightly up as the growth in Spain, Italy, France, Argentina and Brazil was almost offset by declines as a result of lower industry volumes in Germany and Japan. Despite the absence of Pall Mall StiX in Germany during 2007, Pall Mall continued its growth with an increase of 10 per cent, driven by Italy, Hungary, Russia, Uzbekistan, Turkey and Taiwan, partly offset by lower volumes in Germany, Romania, Spain, Greece and Malaysia. In Europe, profit at Â£842 million was up Â£61 million or 8 per cent, at both current and comparable rates of exchange, mainly as a result of higher margins in Russia, Romania, Hungary and Spain, which more than offset the impact of reduced volumes in a number of markets. Volumes were down 1 per cent at 245 billion, with reductions in Russia, Ukraine, Germany, Italy and Spain partly offset by increases in Romania. In Italy, volumes and market share were lower although Lucky Strike, Dunhill and Pall Mall grew share. While margins improved following industry price increases, profit was lower due to the reduced volumes, higher marketing expenses and the disposal of the Toscano cigar business in 2006. In addition, the Group incurred a penalty of euro20 million in the 'cartel case' related to cigarette prices in Italy, where the infringement had been committed prior to the Group's acquisition of ETI. The productivity programme was completed through the consolidation of production into one factory and a further reduction in the cost base. Although cigarette market share rose in Germany, driven by Pall Mall, volumes declined as industry sales were affected by the growth of illicit trade, the end of StiX sales, changes in vending regulations and consumer down-trading to other tobacco products. This, together with the lower margins of other tobacco products, led to lower profit. Page 4 Business review cont... Sales volumes in France were lower, mainly as a result of the overall industry decline after public place smoking restrictions and a price increase. Lucky Strike and Pall Mall showed strong growth in market share, with Dunhill and Vogue performing well in the premium segment. Profit was up as margins improved through the price increase and cost reductions. The excise increase in Switzerland at the beginning of the year stimulated down-trading and growth in the trade brand sector, resulting in weaker volumes and lower profits. However, Parisienne and Pall Mall grew market share. Volumes and profit in the Netherlands increased, benefiting from the growth of Lucky Strike, Kent and Pall Mall and the May 2007 price increase, partially offset by consumer down-trading. In Belgium, a significant excise driven price increase led to lower volumes and market down-trading. Profit was lower as the impact of these more than offset higher margins and overhead savings. Results in Spain improved, benefiting from price increases at the beginning of 2007 and, although volumes were lower, Lucky Strike showed impressive market share growth. Sales volumes in Russia were influenced by trade buying at the end of 2006 in anticipation of the new excise system and price increases in December. However, most of the shortfall was recovered with strong performances by Kent, Vogue and Viceroy, leading to an increased market share. Profit grew significantly, benefiting from higher margins, an improved product mix and productivity savings. In Romania, the excellent performance of Kent, the leading brand in this market, supported by the growth of Dunhill, Vogue and Pall Mall, resulted in a higher market share. Profit increased impressively with volume growth, higher prices and an improved product mix. Results in Ukraine improved as better pricing, effective cost control and an improved mix, following a good performance by Kent, was partly offset by the impact of reduced local brand volumes. In Hungary, profit grew substantially, benefiting from improved margins and efficiency programmes. Overall volumes were stable with Viceroy and Pall Mall growing strongly and Vogue strengthening its position in the premium segment. Results in Poland improved significantly as prices increased and volume and market share grew with good performances from Viceroy, Pall Mall and Vogue. In Asia-Pacific, profit rose by Â£56 million to Â£672 million, mainly attributable to strong performances from Australasia, Vietnam, Pakistan and Bangladesh, despite the adverse impact of exchange. At comparable rates of exchange, profit would have increased by Â£66 million or 11 per cent. Volumes at 145 billion were 2 per cent higher as a result of strong growth in Pakistan, South Korea and Vietnam, partially offset by declines in Malaysia and Bangladesh. In Australia, profit growth was achieved with improved margins from product cost reductions and price increases. Market share grew with good performances from Dunhill, Pall Mall and Winfield. In New Zealand, strong competition affected market share and profit but Pall Mall and Dunhill showed good growth. In Malaysia, the strong performance of Dunhill and, more recently, Pall Mall, resulted in growth in their respective price segments with Dunhill increasing overall share. However, the large excise increase in July 2007 impacted industry volumes which were already declining due to high levels of illicit trade and total market share was lower. Profit was slightly lower as a result of increased marketing expenditure and lower volumes which more than offset the benefits of higher pricing and an improved product mix. In Vietnam, profit increased significantly benefiting from better pricing, productivity initiatives and volume growth. Market share was higher, driven by a good performance from Craven 'A'. Page 5 Business review cont... Volumes and market share rose in South Korea, with Dunhill continuing to grow strongly. However, the positive impact of higher volumes, margins and supply chain savings were offset by increased marketing investment and a weaker local currency. In Taiwan, volume and profit rose due to a strong performance from Pall Mall, increased prices and cost reductions. Pakistan continued its strong volume growth with Gold Flake the major contributor. Overall market share increased confirming our market leadership. Higher volumes, price increases and effective cost management, led to an impressive profit performance. In Bangladesh, despite lower volumes due to the growth of the value-for-money segment, profit increased as a result of improved pricing and product mix. In Sri Lanka, profit and market share continued to grow although overall volumes declined due to the security situation and price increases. Profit in Latin America increased by Â£69 million to Â£680 million due to good performances in key markets such as Brazil and Venezuela, partly offset by lower profit in Mexico and the adverse impact of some weaker local currencies. At comparable rates of exchange, profit would have increased by Â£86 million or 14 per cent. Volumes were 1 per cent down at 151 billion as the increases in Brazil, Venezuela and Chile were more than offset by declines in Mexico, Argentina and Central America. In Brazil, profit grew strongly, benefiting from higher volumes, price rises in anticipation of the excise increase in July, some improvement in product mix and a stronger local currency. Market share was higher as volumes increased due to strong brand and trade marketing efforts and the effective anti-illicit trade enforcement actions by the government. Industry volume in Mexico suffered following a large excise driven price increase at the beginning of 2007 and this, together with a lower market share and a weaker currency, resulted in lower profit. In Argentina, profit grew as prices increased after the severe price competition of the prior year, as well as a better product mix and cost saving initiatives. Volumes and market share, however, were both down. In Chile, volumes were higher than last year and, despite an unfavourable exchange rate, profit grew due to higher margins and strong up-trading to Kent and Lucky Strike. Volumes in Peru were stable although profit declined due to competitive pricing. In Venezuela, profit increased strongly, despite the impact of exchange, due to price rises and higher volumes, partially offset by increased costs. Market share grew through good performances by Consul and Belmont. The Central America and Caribbean area benefited from higher margins and more efficient product sourcing, but this was more than offset by the impact of exchange and lower industry volumes, as a result of excise driven price increases. Profit in the Africa and Middle East region was Â£2 million higher at Â£470 million due to exchange rate movements. However, at comparable rates of exchange, profit would have increased by Â£53 million or 11 per cent with strong performances from South Africa and Nigeria. Volumes were 4 per cent lower at 101 billion, resulting from supply chain disruption in the Middle East and a change in distribution model in Turkey. Page 6 Business review cont... In South Africa, despite the weaker average exchange rate, good profit growth was achieved as a result of reductions in illicit trade, an improved product mix and higher margins. The margin improvements were the result of pricing and productivity improvements across the business. Dunhill recorded its highest ever market share and Peter Stuyvesant continued its growth. Strong profit growth in Nigeria was the result of higher margins, the benefits of productivity initiatives and an improved product mix. Share performance was particularly strong for Benson & Hedges and was supported by Dunhill and Pall Mall. Volumes were marginally lower as a result of trade de-stocking following the country's elections. In Sub-Saharan Africa, supply difficulties in West Africa at the beginning of the year impacted volume and profit, while a number of markets in East Africa delivered productivity savings and grew volumes reflecting lower levels of illicit trade. In the Middle East, the brand portfolio mix improved across the area through the growth of premium brands, although profit was adversely affected by lower volumes as a result of supply chain disruptions and weaker currencies. Dunhill continued its growth in Saudi Arabia and the Arabian Gulf and grew market share. North Africa showed improved volume and profit performance, with market share in Egypt growing as a result of strong performances by Kent and Rothmans. Volumes, market share and profit in the Caucasus were all well ahead of last year. The higher volumes reflected significant increases in Dunhill and Vogue, while Kent remained the leading brand. In Turkey, volumes and market share were higher but operating losses increased due to the one-off costs associated with the change in the distribution model in January and higher brand support with the launch of new brands. The profit from the America-Pacific region increased by Â£22 million to Â£446 million as a result of higher profit in local currency in Japan and Canada, partly offset by the impact of weaker exchange rates. At comparable rates of exchange, profit would have increased by Â£45 million or 11 per cent. Volumes decreased by 3 per cent to 42 billion, mainly as a result of the decline in industry volumes in Canada, partly offset by the increase in Japan. In Canada, profit of Â£276 million was down Â£4 million from last year. However, profit would have been Â£4 million higher at comparable rates of exchange, due to higher margins and lower production costs following the transfer of manufacturing to Mexico. The impact of these more than offset the reduction in volumes driven by the increased prevalence of illicit product and loss of market share. The continued growth of Peter Jackson resulted in share growth in the value-for-money segment, but, as this was more than offset by the decline in the premium segment, the overall market share was lower. In Japan, where there was a significant decline in industry volumes, the growth of market share, profit and volumes continued, driven by the strong performances of Kent and Kool. Profit grew through higher volumes, increased margins, improved product mix and effective cost management, partly offset by the impact of unfavourable exchange rates. Page7 Business review cont... Unallocated costs, which are net corporate costs not directly attributable to individual regions, were Â£107 million (2006: Â£103 million). The above regional results were achieved before accounting for restructuring costs and gains/losses on disposal of businesses and brands, as explained on pages 19 and 20. Results of associates Associates principally comprise Reynolds American, ITC and Skandinavisk Tobakskompagni (ST). The Group's share of the post-tax results of associates increased by Â£11 million, or 3 per cent to Â£442 million, after taxation of Â£246 million (2006: Â£216 million). Excluding the exceptional items explained on page 22, the Group's share of the post-tax results of associates at Â£449 million, rose by 5 per cent. However, the Group's share of these results was particularly affected by the weakening of the average US dollar rate against sterling from 1.844 to 2.001 and, at comparable rates of exchange, the increase would have been 11 per cent. The contribution from Reynolds American, excluding exceptional items, was only Â£4 million higher due to the impact of the weaker US dollar. At comparable rates of exchange, the contribution from Reynolds American would have been Â£28 million higher at Â£313 million. The impact of increased pricing, moist-snuff volumes and productivity more than offset lower cigarette volume and higher settlement expenses. The results of Reynolds American also reflect the inclusion of the first full year of Conwood's results and that company's continued growth. As explained on page 22, Reynolds American acquired Conwood on 31 May 2006 and reported that on a pro forma US GAAP basis, as if it had been owned since the beginning of 2006, Conwood increased volume, margins and profit. The Group's associate in India, ITC, continued its strong revenue growth and its contribution to the Group rose by Â£17 million to Â£108 million, with the growth helped by one-off costs in 2006. The contribution from the Group's associate in Denmark, ST, rose by 4 per cent to Â£48 million. Associates' volumes decreased by 4 per cent to 230 billion and, with the inclusion of these, total Group volumes were 914 billion (2006: 930 billion). Page 8 DIVIDENDS The Directors will be recommending to the shareholders at the Annual General Meeting to be held on 30 April 2008, the payment on 7 May 2008 of a final dividend for the year of 47.6p per ordinary share of 25p. Valid transfers received by the Registrar of the Company up to 7 March 2008, will be in time to rank for payment of this dividend. Ordinary shares go ex-dividend on 5 March 2008. The following is a summary of the dividends declared for the years ended 31 December 2007 and 2006. 2007 2006 Pence per Pence per share Â£m share Â£m Ordinary shares Interim - 2007 paid 12 September 2007 18.6 377 - 2006 paid 13 September 2006 15.7 323 Final - payable 7 May 2008 47.6 954 - 2006 paid 3 May 2007 40.2 821 ----- ------ ------ ------ 66.2 1,331 55.9 1,144 ===== ====== ====== ====== In accordance with IFRS, the proposed final dividend amounting to Â£954 million (2006: Â£821 million), payable on 7 May 2008, will be recognised in the Group accounts for the year ending 31 December 2008. For the year ended 31 December 2007, the accounts include the final dividend paid in respect of the year ended 31 December 2006, amounting to Â£821 million and the interim dividend amounting to Â£377 million, paid on 13 September 2006. For the year ended 31 December 2006, the accounts include the final dividend paid in respect of the year ended 31 December 2005, amounting to Â£685 million and the 2006 interim dividend, amounting to Â£323 million. Page 9 GROUP INCOME STATEMENT For the year ended 31 December 2007 2006 Â£m Â£m Gross turnover (including duty, excise and other taxes of Â£16,216 million (2006: Â£15,427 million)) 26,234 25,189 ======= ======= Revenue 10,018 9,762 Raw materials and consumables used (2,802) (2,861) Changes in inventories of finished goods and work in progress 30 (11) Employee benefit costs (1,586) (1,554) Depreciation and amortisation costs (336) (401) Other operating income 205 181 Other operating expenses (2,624) (2,494) ------- ------- Profit from operations 2,905 2,622 after (charging)/crediting ---------------- - restructuring costs (173) (216) - net gains/(losses) on disposal of businesses and brands 75 41 ---------------- ---------------- Finance income 136 110 Finance costs (405) (399) ---------------- Net finance costs (269) (289) Share of post-tax results of associates and joint ventures 442 431 after (charging)/crediting --------------- - brand impairments (7) (13) - exceptional tax credits 17 ---------------- ------- ------- Profit before taxation 3,078 2,764 Taxation on ordinary activities (791) (716) ------- ------- Profit for the year 2,287 2,048 ======= ======= Attributable to Shareholders' equity 2,130 1,896 ======= ======= Minority interests 157 152 ======= ======= Earnings per share Basic 105.19p 92.08p ======= ======= Diluted 104.46p 91.33p ======= ======= See notes on pages 19 to 38. Page 10 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY For the year ended 31 December 2007 2006 Â£m Â£m Differences on exchange 312 (685) Cash flow hedges - net fair value gains 15 13 - reclassified and reported in profit for the year (42) (15) Available-for-sale investments - net fair value gains/(losses) 1 (2) - reclassified and reported in profit for the year 1 Net investment hedges - net fair value (losses)/gains (35) 117 Tax on items recognised directly in equity (19) (12) ------ ------ Net gains/(losses) recognised directly in equity 233 (584) Profit for the year page 10 2,287 2,048 ------ ------ Total recognised income for the year 2,520 1,464 -------------------- - shareholders' equity 2,348 1,334 - minority interests 172 130 -------------------- Employee share options - value of employee services 37 41 - proceeds from shares issued 27 28 Dividends - ordinary shares (1,198) (1,008) - to minority interests (173) (137) Purchase of own shares - held in employee share ownership trusts (41) (77) - share buy-back programme (750) (500) Acquisition of minority interests (9) (13) Other movements (3) 13 ------ ------ 410 (189) Balance 1 January 6,688 6,877 ------ ------ Balance 31 December 7,098 6,688 ====== ====== See notes on pages 19 to 38. Page 11 GROUP BALANCE SHEET At 31 December 2007 2006 Â£m Â£m Assets Non-current assets Intangible assets 8,105 7,476 Property, plant and equipment 2,378 2,207 Investments in associates and joint ventures 2,269 2,108 Retirement benefit assets 50 29 Deferred tax assets 262 273 Trade and other receivables 123 192 Available-for-sale investments 22 24 Derivative financial instruments 153 76 ------- ------- Total non-current assets 13,362 12,385 ======= ======= Current assets Inventories 1,985 2,056 Income tax receivable 85 59 Trade and other receivables 1,845 1,568 Available-for-sale investments 75 128 Derivative financial instruments 82 124 Cash and cash equivalents 1,258 1,456 ------- ------- 5,330 5,391 Assets classified as held for sale 36 ------- ------- Total current assets 5,366 5,391 ======= ======= ------- ------- Total assets 18,728 17,776 ======= ======= See notes on pages 19 to 38. Page 12 GROUP BALANCE SHEET At 31 December 2007 2006 Equity Â£m Â£m Capital and reserves Shareholders' funds 6,880 6,461 ----------------------- after deducting cost of treasury shares (296) (197) ----------------------- Minority interests 218 227 ------- ------- Total equity 7,098 6,688 ======= ======= Liabilities Non-current liabilities Borrowings 6,062 5,568 Retirement benefit liabilities 357 435 Deferred tax liabilities 294 296 Other provisions for liabilities and charges 165 161 Trade and other payables 149 146 Derivative financial instruments 49 29 ------- ------- Total non-current liabilities 7,076 6,635 ======= ======= Current liabilities Borrowings 861 1,058 Income tax payable 227 292 Other provisions for liabilities and charges 263 253 Trade and other payables 2,976 2,766 Derivative financial instruments 225 84 ------- ------- 4,552 4,453 ------- ------- Liabilities directly associated with assets classified as held for sale 2 ------- ------- Total current liabilities 4,554 4,453 ======= ======= ------- ------- Total equity and liabilities 18,728 17,776 ======= ======= See notes on pages 19 to 38. Page 13 GROUP CASH FLOW STATEMENT For the year ended 31 December 2007 2006 Â£m Â£m Cash generated from operations 3,181 2,816 Dividends received from associates 285 259 Tax paid (866) (713) ------- ------- Net cash from operating activities 2,600 2,362 ======= ======= Interest and dividends received 116 121 Purchases of property, plant and equipment (416) (425) Proceeds on disposal of property, plant and equipment 46 64 Purchases and disposals of intangible assets (50) 2 Purchases and disposals of investments 71 (37) Purchases and disposals of minorities and subsidiaries 111 (39) Purchases of associates (1) ------- ------- Net cash from investing activities (122) (315) ======= ======= Interest paid (384) (389) Finance lease rental payments (24) (22) Proceeds from issue of shares and exercise of options 27 28 Proceeds from increases in and new borrowings 438 1,365 Movements relating to derivative financial instruments (89) 142 Purchases of own shares (791) (577) Reductions in and repayments of borrowings (427) (1,739) Dividends paid (1,371) (1,147) ------- ------- Net cash from financing activities (2,621) (2,339) ======= ======= Net cash flows from operating, investing and financing activities (143) (292) Differences on exchange 47 (96) ------- ------- Decrease in net cash and cash equivalents in the year (96) (388) Net cash and cash equivalents at 1 January 1,276 1,664 ------- ------- Net cash and cash equivalents at 31 December 1,180 1,276 ======= ======= See notes on pages 19 to 38. Page 14 SEGMENTAL ANALYSES OF VOLUME, REVENUE AND PROFIT For the year ended Volume 31.12.07 31.12.06 bns bns Europe 245.0 247.7 Asia-Pacific 145.2 141.9 Latin America 150.5 152.6 Africa and Middle East 101.0 104.8 America-Pacific 42.3 43.8 ------- ------- 684.0 690.8 ======= ======= Revenue 31.12.07 31.12.06 Inter Inter External segment Revenue External segment Revenue restated restated restated Â£m Â£m Â£m Â£m Â£m Â£m Europe 3,621 225 3,846 3,495 526 4,021 Asia-Pacific 1,874 22 1,896 1,755 27 1,782 Latin America 1,979 585 2,564 1,780 332 2,112 Africa and Middle East 1,224 15 1,239 1,063 24 1,087 America-Pacific 473 473 760 760 ------- ------- ------- ------ ------ ------- Revenue 9,171 847 10,018 8,853 909 9,762 ======= ======= ======= ====== ====== ======= The segmental analysis of revenue is based on location of manufacture and the 2006 analysis has been restated to reflect changes in manufacturing operations. Figures based on location of sales are as follows: 31.12.07 31.12.06 Â£m Â£m Europe 3,655 3,545 Asia-Pacific 1,876 1,839 Latin America 1,983 1,791 Africa and Middle East 1,445 1,489 America-Pacific 1,059 1,098 ------- ------- Revenue 10,018 9,762 ======= ======== Page 15 Segmental analyses of volume, revenue and profit cont... Profit from operations 31.12.07 31.12.06 Adjusted Adjusted Segment segment Segment segment result result* result result* Â£m Â£m Â£m Â£m Europe 782 842 676 781 Asia-Pacific 667 672 609 616 Latin America 680 680 611 611 Africa and Middle East 447 470 444 468 America-Pacific 436 446 385 424 ------- ------- ------- ------ 3,012 3,110 2,725 2,900 Unallocated costs (107) (107) (103) (103) ------- ------- ------- ------ Profit from operations 2,905 3,003 2,622 2,797 ======= ======= ======= ====== *Excluding restructuring costs and net gains/losses on disposal of businesses and brands as explained on pages 19 and 20. The segmental analysis of the Group's share of the post-tax results of associates and joint ventures is as follows: 31.12.07 31.12.06 Adjusted Adjusted Segment segment Segment segment result result* result result* Â£m Â£m Â£m Â£m Europe 48 48 46 46 Asia-Pacific 110 110 92 92 Latin America 1 1 Africa and Middle East 1 1 4 4 America-Pacific 282 289 289 285 ------- ------- ------- ------ 442 449 431 427 ======= ======= ======= ====== *Excluding brand impairments and exceptional tax credits as explained on page 22. Page 16 QUARTERLY ANALYSES OF PROFIT 3 months to Year to 31.3.07 30.6.07 30.9.07 31.12.07 31.12.07 Â£m Â£m Â£m Â£m Â£m Europe 182 222 246 192 842 Asia-Pacific 167 168 163 174 672 Latin America 180 206 164 130 680 Africa and Middle East 124 125 105 116 470 America-Pacific 80 112 128 126 446 ------- ------ ------ ------ ------- 733 833 806 738 3,110 Unallocated costs (41) (4) (29) (33) (107) ------- ------ ------ ------ ------- 692 829 777 705 3,003 Restructuring costs (8) (32) (10) (123) (173) Gains on disposal of businesses and brands 11 45 19 75 ------- ------ ------ ------ ------- Profit from operations 684 808 812 601 2,905 Net finance costs (58) (68) (78) (65) (269) ------- ------ ------- ------ ------- Share of post-tax results of associates and joint ventures 111 111 113 107 442 ------- ------ ------- ------ ------- Profit before taxation 737 851 847 643 3,078 Taxation on ordinary activities (199) (221) (209) (162) (791) ------- ------ ------- ------ ------- Profit for the period 538 630 638 481 2,287 ======= ====== ======= ====== ======= Earnings per share Basic 24.24p 28.70p 29.73p 22.52p 105.19p ======= ====== ======= ====== ======= Adjusted diluted 24.31p 29.20p 28.49p 26.53p 108.53p ======= ====== ======= ====== ======= Page 17 Quarterly analyses of profit cont... 3 months to Year to 31.3.06 30.6.06 30.9.06 31.12.06 31.12.06 Â£m Â£m Â£m Â£m Â£m Europe 168 212 214 187 781 Asia-Pacific 155 150 161 150 616 Latin America 155 148 144 164 611 Africa and Middle East 114 122 126 106 468 America-Pacific 93 132 107 92 424 ------- ------ ------- ------- ------- 685 764 752 699 2,900 Unallocated costs (33) (27) (17) (26) (103) ------- ------ ------- ------- ------- 652 737 735 673 2,797 Restructuring costs (21) (27) (116) (52) (216) ------- ------ ------- ------- ------- Net (losses)/gains on disposal of businesses and brands (15) (1) 57 41 ------- ------ ------- ------- ------- Profit from operations 616 709 619 678 2,622 Net finance costs (68) (56) (85) (80) (289) ------- ------ ------- ------- ------- Share of post-tax results of associates and joint ventures 120 123 105 83 431 ------- ------ ------- ------- ------- Profit before taxation 668 776 639 681 2,764 Taxation on ordinary acivities (178) (188) (152) (198) (716) ------- ------ ------- ------- ------- Profit for the period 490 588 487 483 2,048 ======= ====== ======= ======= ======= Earnings per share 21.81p 26.57p 21.73p 21.97p 92.08p Basic ======= ====== ======= ======= ======= Adjusted diluted 22.05p 27.06p 25.89p 23.12p 98.12p ======= ====== ======= ======= ======= Page 18 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information has been extracted from the Annual Report and Accounts, including the audited financial statements for the year ended 31 December 2007. From 1 January 2005, the Group has prepared its annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and implemented in the UK. The Group's financial statements for the year ended 31 December 2007 have been prepared under the historical cost convention, except in respect of certain financial instruments. FOREIGN CURRENCIES The results of overseas subsidiaries and associates have been translated to sterling as follows: The income and cash flow statements have been translated at the average rates for the respective periods. Assets and liabilities have been translated at the relevant period end rates. For high inflation countries, the local currency results are adjusted for the impact of inflation prior to translation to sterling at closing exchange rates. The principal exchange rates used were as follows: Average Closing --------------- --------------- 2007 2006 2007 2006 US dollar 2.001 1.844 1.991 1.957 Canadian dollar 2.147 2.091 1.965 2.278 Euro 1.462 1.467 1.362 1.484 South African rand 14.110 12.520 13.605 13.799 Brazilian real 3.894 4.009 3.543 4.179 EXCEPTIONAL ITEMS (a) Restructuring costs During 2003, the Group commenced a detailed review of its manufacturing operations and organisational structure, including the initiative to reduce overheads and indirect costs. The restructuring continued, with major announcements during 2005 and 2006 which covered the cessation of production in the UK, Ireland, Canada and Zevenaar in the Netherlands with production to be transferred elsewhere. The profit from operations for the year ended 31 December 2006 included a charge for restructuring of Â£216 million. The twelve months to 31 December 2007 includes a charge for restructuring of Â£173 million, principally in respect of costs associated with restructuring the operations in Italy and with the reorganisation of the business across the Europe and Africa and Middle East regions, as well as further costs related to restructurings announced in prior years. On 18 May 2007, the Group's Italian subsidiary announced the results of a review of its manufacturing infrastructure, including an intention to consolidate its operations at the plant in Lecce, close its operations at Rovereto and sell its facilities at Chiaravalle together with three national brands. The disposal of Chiaravalle was completed on 12 September 2007. Page 19 Exceptional items cont... (b) Net gains/losses on disposal of businesses and brands On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell its cigar business, Toscano, to Maccaferri for euro 95 million. The sale was subject to regulatory and governmental approval and was completed on 19 July 2006. The sale resulted in a loss of Â£19 million for the year ended 31 December 2006, reflecting a Â£15 million impairment charge included in depreciation and amortisation costs in the profit from operations and Â£4 million of other costs included in other operating expenses in the profit from operations. On 29 November 2006, the Group completed a trademark transfer agreement with Philip Morris International. Under the arrangement the Group sold its Muratti Ambassador brand in certain markets, as well as the L&M and Chesterfield trademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademark in certain African countries. These transactions resulted in a gain of Â£60 million included in other operating income in the profit from operations. On 20 February 2007, the Group announced that it had agreed to sell its pipe tobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for euro 24 million. The sale was completed during the second quarter and resulted in a gain of Â£11 million included in other operating income in the profit from operations. However, the Group has retained the Dunhill and Captain Black pipe tobacco brands. On 23 May 2007, the Group announced that it had agreed to sell its Belgian cigar factory and associated brands to the cigars division of Skandinavisk Tobakskompagni AS. The sale includes a factory in Leuven as well as trademarks including Corps Diplomatique, Schimmelpennick, Don Pablo and Mercator. The transaction was completed on 3 September 2007 and a gain on disposal of Â£45 million is included in other operating income for the twelve months to 31 December 2007. On 1 October 2007, the Group agreed the termination of its license agreement with Philip Morris for the rights to the Chesterfield trademark in a number of countries in Southern Africa. This transaction resulted in a gain of Â£19 million included in other operating income in the profit from operations. OTHER CHANGES IN THE GROUP From August 2006, the Group purchased minority interests in its subsidiary in Chile for a cost of Â£91 million, raising the Group shareholding from 70.4 per cent to 96.6 per cent. In the year ended 31 December 2006, the goodwill arising on this transaction was Â£80 million and the minority interests in Group equity were reduced by Â£11 million. In addition, a number of smaller acquisitions of minority interests were made during 2007 in Africa and Middle East, Europe and Asia-Pacific. Page 20 NET FINANCE COSTS Net finance costs comprise: Year to 31.12.07 31.12.06 Â£m Â£m Finance costs (405) (399) Finance income 136 110 ------ ------ (269) (289) ====== ====== Comprising: Interest payable (382) (410) Interest and dividend income 111 122 Fair value changes - derivatives (143) 212 Exchange differences 145 (213) ------ ------ 2 (1) ------ ------ (269) (289) ====== ====== Net finance costs at Â£269 million were Â£20 million lower than last year, principally reflecting the impact of lower average net debt, as well as one-off items. The Â£2 million gain (2006: Â£1 million loss) of fair value changes and exchange differences reflects a gain of Â£12 million (2006: Â£7 million loss) from the net impact of exchange rate movements and a loss of Â£10 million (2006: Â£6 million gain) principally due to interest related changes in the fair value of derivatives. IFRS requires fair value changes for derivatives, which do not meet the tests for hedge accounting under IAS39, to be included in the income statement. In addition, certain exchange differences are required to be included in the income statement under IFRS and, as they are subject to exchange rate movements in a period, they can be a volatile element of net finance costs. The Group's interest cover was distorted by the impact of the exceptional items, shown in the adjusted earnings per share calculations (page 23), on the profit before taxation. On an adjusted basis, interest cover based on profit before interest payable over interest payable remains strong at 9.4x (2006: 8.1x), with the higher cover reflecting both higher profit and lower interest costs. Net interest cover, on the basis of profit before net finance costs over net finance costs, was 12.8x (2006: 11.2x). Page 21 ASSOCIATES The share of post-tax results of associates and joint ventures was Â£442 million (2006: Â£431 million) after tax of Â£246 million (2006: Â£216 million). The share of associates is after exceptional charges and credits: - In the year ended 31 December 2007, Reynolds American modified the previously anticipated level of support between certain brands and the projected net sales of certain brands, resulting in a brand impairment charge of which the Group's share amounted to Â£7 million (net of tax) (2006: Â£13 million). - In the year ended 31 December 2006, Reynolds American also benefited from the favourable resolution of tax matters of which the Group's share was Â£17 million. On 25 April 2006, Reynolds American announced an agreement to acquire Conwood, the second largest manufacturer of smokeless tobacco products in the US, for US$3.5 billion, and the acquisition was completed on 31 May 2006. The acquisition was funded principally with debt and the fair value of assets acquired and liabilities assumed was US$4.1 billion and US$0.6 billion respectively. Included in the assets were US$2.5 billion in respect of goodwill and US$1.4 billion in respect of brands. TAXATION Year to 31.12.07 31.12.06 Â£m Â£m UK corporation tax 14 Overseas tax 816 743 Adjustment in respect of prior periods (51) (62) ------- ------- Current tax 765 695 Deferred tax 26 21 ------- ------- 791 716 ======= ======= The tax rates in the income statement of 25.7 per cent in 2007 and 25.9 per cent in 2006 are affected by the inclusion of the share of associates' post-tax profit in the Group's pre-tax results. The underlying tax rate for subsidiaries reflected in the adjusted earnings per share below was 29.6 per cent in 2007 and 29.6 per cent in 2006. In 2006 the UK corporation tax charge of Â£14 million is reduced to Â£nil million by an equal and opposite deferred tax credit of Â£14 million and did not result in the payment of any UK tax. Page 22 EARNINGS PER SHARE Basic earnings per share are based on the profit for the year attributable to ordinary shareholders and the weighted average number of ordinary shares in issue during the year (excluding treasury shares). For the calculation of the diluted earnings per share, the weighted average number of shares reflects the potential dilutive effect of employee share schemes. The earnings per share are based on: 31.12.07 31.12.06 Earnings Shares Earnings Shares Â£m m Â£m m Basic 2,130 2,025 1,896 2,059 Diluted 2,130 2,039 1,896 2,076 The earnings have been distorted by exceptional items and to illustrate the impact of these, the adjusted diluted earnings per share are shown below: Diluted earnings per share Year to 31.12.07 31.12.06 pence pence Unadjusted earnings per share 104.46 91.33 Effect of restructuring costs 6.48 8.09 Effect of disposal of businesses and brands (2.75) (1.11) Effect of associates' brand impairments and exceptional tax credits 0.34 (0.19) ------- ------- 108.53 98.12 ======= ======= Adjusted earnings per share are based on: - adjusted earnings (Â£m) 2,213 2,037 - shares (m) 2,039 2,076 Similar types of adjustments would apply to basic earnings per share. For the year to 31 December 2007, basic earnings per share on an adjusted basis would be 109.29p (2006: 98.93p) compared to unadjusted amounts of 105.19p (2006: 92.08p). Page 23 CASH FLOW a) The IFRS cash flow includes all transactions affecting cash and cash equivalents, including financing. The alternative cash flow below is presented to illustrate the cash flows before transactions relating to borrowings. Year to 31.12.07 31.12.06 Â£m Â£m Net cash from operating activities before restructuring costs and taxation 3,656 3,295 Restructuring costs (190) (220) Taxation (866) (713) ------ ------ Net cash from operating activities page 14 2,600 2,362 Net interest (280) (263) Net capital expenditure (436) (419) Dividends to minority interests (173) (139) ------ ------ Free cash flow 1,711 1,541 Dividends paid to shareholders (1,198) (1,008) Share buy-back (750) (500) Other net flows 152 (5) ------ ------ Net cash flows (85) 28 ====== ====== The growth in underlying operating performance, as well as the timing of working capital movements and higher dividends from associates, resulted in a Â£361 million increase in cash flow before restructuring costs and taxation to Â£3,656 million. Although there was a Â£153 million increase in tax outflows reflecting higher profits and the timing of payments, with the above operating cash flows and lower restructuring costs, the Group's net cash flow from operating activities was Â£238 million higher at Â£2,600 million. With higher net interest flows, net capital expenditure and dividends to minority interests, the free cash flow was Â£170 million higher than 2006 at Â£1,711 million. However, with the step up in dividends and share buy-back in 2007, the total cash outlay on dividends to shareholders and share buy-back exceeds the free cash flow by Â£237 million. Free cash flow is the Group's cash flow before dividends, share buy-back and investing activities. The ratio of free cash flow per share to adjusted diluted earnings per share was 77 per cent (2006: 76 per cent), with free cash flow per share increasing by 13 per cent. The other net flows in 2007 principally reflect the sale of the Belgium cigar factory and associated brands, as well as the disposal of the pipe tobacco business, as described on page 20. The comparative figure for 2006 primarily relates to the purchase of minority interests in Chile and shares for the Group's share based compensation plans, partly offset by the sale of Toscano in Italy and the disposal of brands. The above flows resulted in net cash outflow of Â£85 million compared to an inflow of Â£28 million in 2006. After taking account of transactions related to borrowings, the above flows resulted in a net decrease of cash and cash equivalents of Â£143 million compared to a net decrease of Â£292 million in 2006, as shown in the IFRS cash flow on page 14. Page 24 Cash flow cont... These cash flows, after a positive exchange impact of Â£47 million, resulted in cash and cash equivalents, net of overdrafts, decreasing by Â£96 million to Â£1,180 million in 2007 (2006: Â£388 million decrease). Borrowings, excluding overdrafts but taking into account derivatives relating to borrowings, were Â£6,836 million compared to Â£6,401 million as at 31 December 2006. The increase principally reflected the impact of exchange movements. Current available-for-sale investments at 31 December 2007 were Â£75 million (31 December 2006: Â£128 million). As a result of the above net debt, comprising borrowings, cash, cash equivalents and current available for sale investments, was Â£5,581 million (31 December 2006: Â£4,996 million). b) Cash generated from operations (page 14) Year to 31.12.07 31.12.06 Â£m Â£m Profit before taxation 3,078 2,764 Share of post-tax results of associates and joint ventures (442) (431) Net finance costs 269 289 Gains on disposal of businesses and brands (75) (60) Depreciation and impairment of property, plant and equipment 293 367 Amortisation and write off of intangible assets 43 34 Decrease in inventories 170 21 (Increase) in trade and other receivables (83) (105) Increase in trade and other payables 61 57 (Decrease) in net retirement benefit liabilities (120) (69) (Decrease) in provisions for liabilities and charges (16) (68) Other 3 17 ------ ------ Cash generated from operations 3,181 2,816 ====== ====== c) IFRS Investing and financing activities The investing and financing activities in the IFRS cash flows on page 14 include the following items: Interest and dividends received include dividends received of Â£2 million (2006: Â£2 million). Purchases and disposals of intangible assets include Â£16 million of sales proceeds for the year to 31 December 2007 (2006: Â£60 million), mainly from the trademark sales explained on page 20. Purchases and disposals of investments (which comprise available-for-sale investments and loans and receivables) include an inflow in respect of current investments of Â£65 million for the year to 31 December 2007 (31 December 2006: Â£41 million outflow) and Â£6 million sales proceeds from non-current investments for the year to 31 December 2007 (31 December 2006: Â£4 million). Page 25 Cash flow cont... Purchases and disposals of subsidiaries for the year ended 31 December 2007, principally reflect the proceeds from the sale of the Belgian cigar factory and associated brands. Purchases and disposals of subsidiaries for the year ended 31 December 2006, principally reflect the cost of acquiring minority interests in the Group's Chilean subsidiary less the proceeds from the sale of Toscano in Italy. These transactions are described on page 20. During the year to 31 December 2007, euro800 million of euro1.7 billion bonds with a maturity of 2009 were replaced by euro1,000 million bonds with a maturity of 2017. During the year to 31 December 2006, euro600 million Eurobonds with a maturity of 2014, Â£325 million Eurobonds with a maturity of 2016 and euro525 million floating rate notes with a maturity of 2010 were issued. The proceeds, together with cash resources, were used to repay bonds including euro1 billion floating rate notes, a DM1 billion Eurobond and a euro 500 million Eurobond. The movement relating to derivative financial instruments is in respect of derivatives taken out to hedge cash and cash equivalents and external borrowings, derivatives taken out to hedge inter company loans and derivatives treated as net investment hedges. Derivatives taken out as cash flow hedges in respect of financing activities are also included in the movement relating to derivative financial instruments, while other such derivatives in respect of operating and investing activities are reflected along with the underlying transactions. Purchases of own shares include the buy-back programme as described on page 37, together with purchases of shares held in employee share schemes of Â£41 million in 2007 (2006: Â£77 million). Dividends paid for the year to 31 December 2007 include Â£1,198 million of dividends to Group shareholders and Â£173 million to minority shareholders (2006: Â£1,008 million and Â£139 million respectively). d) Net cash and cash equivalents in the cash flow statement comprise: 31.12.07 31.12.06 Â£m Â£m Cash and cash equivalents per balance sheet 1,258 1,456 Accrued interest (1) Overdrafts (78) (179) ------- ------- 1,180 1,276 ======= ======= Page 26 TOTAL EQUITY 31.12.07 31.12.06 Â£m Â£m Share capital 506 517 Share premium account 53 48 Capital redemption reserves 101 90 Merger reserves 3,748 3,748 Translation reserve 59 (177) Hedging reserve (11) 10 Available-for-sale reserve 16 13 Other reserves 573 573 Retained earnings 1,835 1,639 ------------------ after deducting cost of treasury shares (296) (197) ------------------- ------- ------- Total shareholders' funds 6,880 6,461 ------- ------- Minority interests 218 227 ------- ------- 7,098 6,688 ======= ======= Total equity was Â£410 million higher at Â£7,098 million. The profit retained after payment of dividends exceeded the level of the share buy-back by Â£182 million. In addition, exchange movements had a Â£312 million positive impact on shareholder's funds, reflecting the general weakness of sterling at the end of 2007 compared to 2006. CONTINGENT LIABILITIES The Group is subject to contingencies pursuant to requirements that it complies with relevant laws, regulations and standards. Failure to comply could result in restrictions in operations, damages, fines, increased tax, increased cost of compliance, reputational damage, or other sanctions. These matters are inherently difficult to quantify. In cases where the Group has an obligation as a result of a past event existing at the balance sheet date, it is probable that an outflow of economic resources will be required to settle the obligation and the amount of the obligation can be reliably estimated, a provision would be recognised based on best estimates and management judgement. There are, however, contingent liabilities in respect of litigation, taxes in some countries and guarantees for which no provisions were made. The Group has exposures in respect of the payment or recovery of a number of taxes. The Group is and has been subject to a number of tax audits covering amongst others, excise tax, value added taxes, sales taxes, corporate taxes, withholding taxes and payroll taxes. The estimated costs of known tax obligations have been provided in these accounts in accordance with the Group's accounting policies. In some countries, tax law requires that full or part payment of disputed tax assessments be made pending resolution of the dispute. To the extent that such payments exceed the estimated obligation, they would not be recognised as an expense. In some cases disputes are proceeding to litigation. While the amounts that may be payable or receivable could be material to the results or cash flows of the Group in the period in which they are recognised, the Board does not expect these amounts to have a material effect on the Group's financial condition. Page 27 Contingent liabilities cont... Product liability litigation Group companies, notably Brown & Williamson Holdings, Inc. (formerly Brown & Williamson Tobacco Corporation) (B&W), as well as other leading cigarette manufacturers, are defendants, principally in the US, in a number of product liability cases. In a number of these cases, the amounts of compensatory and punitive damages sought are significant. Indemnity On 30 July 2004, B&W completed transactions combining its US tobacco business assets, liabilities and operations with R.J. Reynolds Tobacco Company. A new company called R.J. Reynolds Tobacco Company (RJRT) was created as a result of the combination transactions. These transactions (the Business Combination) were accomplished through Reynolds American Inc. (RAI), which is a publicly traded holding company and the indirect parent corporation of RJRT. As a result of the Business Combination: (a) B&W discontinued the active conduct of any tobacco business in the US; (b) B&W contributed to RJRT all of its assets other than the capital stock of certain subsidiaries engaged in non-US businesses and other limited categories of assets; (c) RJRT assumed all liabilities of B&W (except liabilities to the extent relating to businesses and assets not contributed by B &W to RJRT and other limited categories of liabilities) and contributed subsidiaries or otherwise to the extent related to B&W's tobacco business as conducted in the US on or prior to 30 July 2004; and, (d) RJRT agreed to indemnify B&W and each of its affiliates (other than RAI and its subsidiaries) against, among other matters, all losses, liabilities, damages, expenses, judgments, attorneys' fees, etc, to the extent relating to or arising from such assumed liabilities or the assets contributed by B&W to RJRT (the RJRT Indemnification). The scope of the RJRT Indemnification includes all expenses and contingent liabilities in connection with litigation to the extent relating to or arising from B&W's US tobacco business as conducted on or prior to 30 July 2004, including smoking and health tobacco litigation, whether the litigation is commenced before or after 30 July 2004 (the tobacco litigation). Pursuant to the terms of the RJRT Indemnification, RJRT is liable for any possible judgments, the posting of appeal bonds or security, and all other expenses of and responsibility for managing the defence of the tobacco litigation. RJRT has assumed control of the defence of the tobacco litigation involving B&W and RJRT is also a party in most (but not all) of the same cases. Accordingly, RJRT uses or plans to use the same law firm or firms to represent both B&W and RJRT in any single or similar case (except in certain limited circumstances) as RJRT's interests are typically aligned with B&W's interests, and RJRT has substantial experience in managing recognised external legal counsel in defending the tobacco litigation, and external counsel have independent professional responsibilities to represent the interests of B&W. In addition, in accordance with the terms of the RJRT Indemnification, affiliates of B&W have retained control of the defence in certain tobacco litigation cases with respect to which such affiliates are entitled to indemnification. US litigation The total number of US product liability cases pending at 31 December 2007 involving B&W and/or other Group companies was approximately 3,323 (2006: 3,492). At 31 December 2007, UK-based Group companies have been named as co-defendants in six of those cases (2006: seven). In 2007, only one case was tried against B&W, and it resulted in a defence verdict. That case, Menchinini, was an individual case brought by a flight attendant who was a member of the Broin class action (see below). No US cases involving the UK-based Group companies were tried in 2007. Approximately six cases where B&W is a defendant are currently scheduled for trial in 2008, some involving amounts ranging possibly into the hundreds of millions and even billions of dollars. No case in which a UK-based Group company is a defendant is currently scheduled for trial in 2008. Page 28 Contingent liabilities cont... 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: (a) Medical reimbursement cases These civil actions seek to recover amounts spent by government entities and other third party providers on healthcare and welfare costs claimed to result from illnesses associated with smoking. Although B&W continues to be a defendant in healthcare cost recovery cases involving plaintiffs such as hospitals and Native American tribes, the vast majority of such cases have been dismissed on legal grounds. At 31 December 2007, one reimbursement suit was pending against B &W by an Indian tribe in Indian tribal court in South Dakota, and no suits were pending against B&W by county or other political subdivisions of the states. The Master Settlement Agreement (MSA) with the 46 states includes a credit for any amounts paid in suits brought by the states' political subdivisions; nevertheless, RJRT intends to defend and is defending these cases vigorously. Based on somewhat different theories of claim are two non-governmental medical reimbursement cases and health insurers' claims. One third party reimbursement case (City of St. Louis), consists of more than 60 public and non-profit hospitals in Missouri seeking reimbursement of past and future alleged smoking related healthcare costs. A trial date for this case has been set for 11 January 2010. B&W was named as a defendant in two cases brought by foreign government entities in a single US court (Republic of Panama and State of Sao Paulo) 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. These two cases, originally filed in state court in Louisiana, were consolidated and then dismissed by the trial court on the basis that Louisiana was the inappropriate forum. These plaintiffs filed new cases in the Superior Court for the State of Delaware on 19 July 2005. On 13 July 2006, the Delaware Superior Court granted defendants' motion to dismiss. Plaintiffs filed notices of appeal to the Supreme Court of Delaware on 19 July 2006, and that Court affirmed the dismissal of plaintiffs' claims on 23 February 2007. (b) Class actions At 31 December 2007, B&W was named as a defendant in some 12 (2006: 15) separate actions attempting to assert claims on behalf of classes of persons allegedly injured or financially impacted through smoking or where classes of tobacco claimants have been certified. Even if the classes remain certified and the possibility of class-based liability is eventually established, it is likely that individual trials will still be necessary to resolve any actual claims. Class-action suits have been filed in a number of states against individual cigarette manufacturers and their parent corporations, alleging that the use of the terms 'lights' and 'ultralights' constitutes unfair and deceptive trade practices. A class action complaint (Schwab) was filed in the US District Court for the Eastern District of New York on 11 May 2004 against several defendants, including B&W and certain UK-based Group companies. The complaint challenges the defendants' practices with respect to the marketing, advertising, promotion and sale of 'light' cigarettes. The court granted plaintiffs' motion for class certification on 25 September 2006. By order dated 17 November 2006, the Second Circuit Court of Appeals granted defendants' motion to stay the district court proceedings in this case, and further granted defendants' petition for leave to appeal the district court's class certification order. Briefing on the appeal was completed on 31 January 2007, and oral argument was heard on 10 July 2007. A decision on the appeal remains pending. Other types of class-action suits assert claims on behalf of classes of individuals who claim to be addicted, injured, or at greater risk of injury by the use of tobacco or exposure to environmental tobacco smoke, or the legal survivors of such persons. Page 29 Contingent liabilities cont... In Engle (Florida), one jury awarded a total of US$12.7 million to three class representatives, and in a later stage of this three phase trial process, a jury assessed US$17.6 billion in punitive damages against B&W. In November 2000, B&W posted a surety bond in the amount of US$100 million (the amount required by Florida law) to stay execution of this punitive damages award. On 21 May 2003, the intermediate appellate court reversed the trial court's judgment and remanded the case to the trial court with instructions to decertify the class. On 16 July 2003, plaintiffs filed a motion for rehearing which was denied on 22 September 2003. On 12 May 2004, the Florida Supreme Court agreed to review this case and, on 6 July 2006, it upheld the intermediate appellate court's decision to decertify the class, and vacated the jury's punitive damages award. By an order dated 17 April 2007, the surety bond for the punitive damages was released and the US$100 million collateral securing that bond was returned to B&W. Further, the Florida Supreme Court permitted the judgments entered for two of the three Engle class representatives to stand, but dismissed the judgment entered in favour of the third Engle class representative. Finally, the Court has permitted putative Engle class members to file individual lawsuits against the Engle defendants within one year of the Court's decision (subsequently extended to 11 January 2008). The Court's order precludes defendants from litigating certain issues of liability against the putative Engle class members in these individual actions. On 7 August 2006, defendants filed a motion for rehearing before the Florida Supreme Court, which was granted in part, and denied in part, on 21 December 2006. The Florida Supreme Court's 21 December 2006 ruling did not amend any of the earlier decisions' major holdings, which included decertifying the class, vacating the punitive damages judgment, and permitting individual members of the former class to file separate suits. Instead, the ruling addressed the claims on which the Engle jury's phase one verdict will be applicable to the individual lawsuits that were permitted to stand. On 1 October 2007, the United States Supreme Court denied defendants' request for certiorari review of the Florida Supreme Court's decision. At 31 December 2007, more than 1,700 plaintiffs had filed lawsuits as purported Engle class members, and 43 of these suits name B&W as a defendant. All 43 suits against B&W, however, are individual smoker lawsuits that were pending in Florida before the Florida Supreme Court's 6 July 2006 decision, which have been re-classified as individual Engle lawsuits. No lawsuits by purported Engle class members have been filed against B&W after the Florida Supreme Court's 6 July 2006 decision. However, at 31 December 2007, approximately 360 suits named RJRT individually and as successor in interest to B&W, four suits named RJRT only as successor in interest to B&W, and approximately 197 suits named RJRT only in its individual capacity. In the first 'phase three' trial of an individual Engle class member (Lukacs), the jury awarded the plaintiff US$37.5 million in compensatory damages (B&W's share: US$8.4 million). On 1 April 2003, the jury award was reduced to US$25.125 million (B&W's share: US$5.65 million) but no final judgment has been entered to date because the Court postponed the entry of final judgment until the Engle appeal was fully resolved. On 12 October 2007, plaintiff filed notice of completion of all appellate review to the trial court. Once final judgment is entered, defendants intend to pursue an appeal. In a Louisiana medical monitoring case brought on behalf of Louisiana smokers (Scott), on 28 July 2003, the jury returned a verdict in defendants' favour on the medical monitoring claim but made findings against defendants with respect to claims relating to fraud, conspiracy, marketing to minors and smoking cessation. On 21 May 2004, the jury returned a verdict in the amount of US$591 million on the class's claim for a smoking cessation programme. On 1 July 2004, the court upheld the jury's verdict and entered final judgment. On 29 September 2004, defendants posted a US$50 million bond Page 30 Contingent liabilities cont... (legislation in Louisiana limits the amount of a bond to prevent execution upon such a judgment to US$50 million collectively for signatories to the MSA). RJRT posted US$25 million (i.e. the portions for RJRT and B&W) towards the bond. On 12 April 2006, the Louisiana Fourth Circuit Court of Appeal heard argument on defendants' appeal. The appellate court issued a decision on 7 February 2007 that affirmed class certification and upheld the smoking cessation programme for certain smokers who began smoking before 1988, but reduced the US$591 million jury award by US$312 million and rejected any award of prejudgement interest. The decision also remanded the case to re-determine damages in light of its holding that no class members who started smoking before 1988 were entitled to any monetary damages. All further proceedings in the trial court have been stayed, however, pending further appellate review. Defendants (on 2 April 2007) and plaintiffs (on 13 April 2007) both filed petitions for review by the Louisiana Supreme Court, which the Court denied on 7 January 2008. (c) Individual cases Approximately 3,307 cases were pending against B&W at 31 December 2007 (2006: 3,471) 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 75 per cent 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 20 per cent of the individual cases against B&W are cases brought in consolidated proceedings in West Virginia, where the first phase of trial is scheduled to begin on 17 March 2008; and (c) only about 5 per cent are cases filed by other individuals. Of the individual cases that were decided or remained on appeal during 2007, 3 resulted in verdicts against B&W: In December 2003, a New York jury (Frankson) awarded US$350,000 compensatory damages against B&W and two industry organisations. In January 2004, the same jury awarded US$20 million punitive damages. On 22 June 2004, the trial judge granted a new trial unless the parties agreed to an increase in compensatory damages to US$500,000 and a decrease in punitive damages to US$5 million, of which US$4 million would be assigned to B&W. Plaintiffs agreed to a decrease in punitive damages, but B&W has not agreed to an increase in compensatory damages. On 25 January 2005, B&W appealed to an intermediate New York State appellate court. Oral argument was heard on 8 May 2006. The appellate court affirmed the judgment on 5 July 2006. B&W filed a motion for leave to reargue, or in the alternative, for leave to appeal to the New York Court of Appeals, on 3 August 2006. The intermediate appellate court denied this motion on 5 October 2006. On 8 December 2006, the trial judge granted plaintiff's application for entry of judgment, and granted plaintiff's motion to vacate that part of the 2004 order granting a new trial unless the parties agreed to an increase in compensatory damages to US$500,000. RJRT posted a bond in the approximate amount of US$8,018,000 on 3 July 2007. B&W appealed from final judgment on 3 July 2007 to an intermediate New York State appellate court, and its initial appellate brief was submitted on 3 January 2008. On 1 February 2005, a Missouri jury (Smith) awarded US$500,000 in compensatory damages against B&W and then, on 2 February 2005, awarded US$20 million in punitive damages, also against B&W. On 1 June 2005, B&W filed its notice of appeal. B&W filed its opening appellate brief on 28 April 2006. Oral argument was heard on 31 August 2006. On 31 July 2007, an intermediate Missouri appellate court affirmed the compensatory damages award, but it reversed the punitive damages award, reasoning that plaintiff failed to produce sufficient evidence to justify the verdict. The court remanded the case for a second trial, limited to punitive damages. Page 31 Contingent liabilities cont... On 18 March 2005, a New York jury (Rose) awarded US$1.7 million in compensatory damages against B&W. On 18 August 2005, B&W filed its notice of appeal. RJRT posted a bond in the approximate amount of US$2.058 million on 7 February 2006. Oral argument on this appeal was heard on 12 December 2006 by an intermediate New York appellate court, which has not yet rendered a decision. (d) Other claims The Flintkote Company (Flintkote), a US asbestos production and sales company, was included in the acquisition of Genstar Corporation by Imasco in 1986 and became a Group subsidiary following the restructuring of Imasco Limited (now Imperial Tobacco Canada Limited (Imperial)) in 2000. Soon after this acquisition, and as part of the acquisition plan, Genstar began to sell most of its assets, including the non-asbestos related operations and subsidiaries of Flintkote. The liquidation of Flintkote assets produced cash proceeds and, having obtained advice that sufficient assets would remain to satisfy liabilities, Flintkote and Imasco authorised the payment of two dividends. In 2003, Imperial divested Flintkote and then, in 2004, Flintkote filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware. In 2006, Flintkote, certain representatives of both the present and future asbestos claimants as well as certain individual asbestos claimants were permitted by the bankruptcy court to file a complaint against Imperial and numerous other defendants for the recovery of the dividends and other compensation under various legal theories. The parties are presently engaged in case management discussions to establish the scope and manner of discovery in this case. This litigation is at a preliminary stage and is expected to take a number of years to proceed to trial. In Wisconsin, the authorities have identified potentially responsible parties to fund the clean up of the Fox River, Wisconsin. The pollution was caused by discharges of toxic material from paper mills operating close to the river. The cost of the clean up work has been estimated to be in the order of US$600 million. Among the potentially responsible parties are NCR Corporation (NCR) and Appleton Papers Inc. (Appleton) who may be liable for a proportion of the clean up costs. B.A.T Industries p.l.c. (Industries) purchased what was then NCR's Appleton Papers Division from NCR in 1978 and spun off this business in 1990, obtaining full indemnities from Appleton for past and future environmental claims. Disputes between NCR, Appleton and Industries as to the indemnities given and received under the purchase agreement in 1978 have been the subject of arbitration in 1998 and 2006. Under the terms of the arbitration awards, Industries and Appleton have an obligation to share the costs of environmental claims with NCR, but Industries has never been required to pay any sums in this regard because Appleton has paid any sums demanded to date. It is believed that all future environmental liabilities will continue to be met directly by Appleton by self-funding or insurance cover and no demand will be made upon Industries. Settlement of State Health Care Reimbursement Cases During 2003, agreement was reached on certain disputed MSA payments relating to MSA calculations based on 1999 and 2000 sales. This agreement resulted in a benefit of Â£27 million which is excluded from the 2003 costs shown in the consolidated audited annual accounts of the Company for the financial year ended 31 December 2004. In other developments, after an Independent Auditor found that the terms of the MSA were a 'significant factor' in market share losses experienced by signatories to the MSA in 2003, several US tobacco companies, including B&W, asserted their rights under the NPM (or Non-Participating Manufacturer) Adjustment provision of the MSA to recover a payment credit or offset - against their April 2006 payment obligations - for MSA payments made in April 2004 in respect of cigarettes shipped or sold in the US in 2003. The amount at stake exceeds Page 32 Contingent liabilities cont... US$1 billion. The settling states oppose these MSA payment reduction claims and, in late April 2006, began filing motions in MSA courts across the country seeking enforcement of certain MSA provisions and a declaration of the parties' rights under the NPM Adjustment provision of the MSA. Defendants have opposed these motions, arguing that their NPM Adjustment claims must go instead to arbitration. To date, the overwhelming majority of MSA courts to decide these motions have ruled in defendants' favour. UK-based Group companies At 31 December 2007, Industries was a defendant in the US in one class action, the Schwab case mentioned previously. In that case, Industries was substituted for the Company as a defendant. British American Tobacco (Investments) Limited (Investments) had been served in one reimbursement case (City of St. Louis), the Department of Justice case (see below), one anti-trust case (Smith, see below), two class actions (Cleary and Schwab) and two individual actions (Eiser and Perry). Conduct-based claims On 22 September 1999, the US Department of Justice brought an action in the US District Court for the District of Columbia against various industry members, including RJRT, B&W, Industries and Investments. Industries was dismissed for lack of personal jurisdiction on 28 September 2000. The government sought to recover federal funds expended in providing healthcare to smokers who have developed diseases and injuries alleged to be smoking-related, and, in addition, sought, pursuant to the federal Racketeer Influenced and Corrupt Organizations Act (RICO), disgorgement of profits the government contends were earned as a consequence of a RICO 'enterprise'. On 28 September 2000, the portion of the claim which sought recovery of federal funds expended in providing healthcare to smokers who have developed diseases and injuries alleged to be smoking-related was dismissed. The bench (non-jury) trial of the RICO portion of the claim began on 21 September 2004, and ended on 9 June 2005. On 17 November 2004, the Washington DC Circuit Court of Appeals heard an appeal by the defendants against an earlier district court decision that disgorgement of profits is an appropriate remedy to the RICO violations alleged by the government. On 4 February 2005, the Court of Appeals allowed the appeal, ruling that the government could not claim disgorgement of profits. On 17 October 2005, the US Supreme Court declined to hear the government's appeal in respect of the claim for disgorgement of US$280 billion of past profits from the US tobacco industry. The disgorgement claim was a centrepiece of the government's claim. On 17 August 2006, the district court issued its final judgment, consisting of some 1,600 pages of factual findings and legal conclusions. The court found in favour of the government, and against certain defendants, including B&W and Investments. The court also ordered a wide array of injunctive relief, including a ban on the use of 'lights' and other similar descriptors beginning 1 January 2007. Compliance with the court-ordered remedies may cost RJRT and Investments millions of dollars. In addition, the government is seeking the recovery of roughly US$1.9 million in litigation costs. Defendants filed a motion to stay enforcement of the judgment shortly after the judgment was issued. The court denied defendants' stay motion on 28 September 2006. Defendants, including B&W and Investments, filed their notices of appeal to the Washington DC Circuit Court of Appeals on 11 September 2006, and filed an emergency motion to stay the judgment before the same court on 29 September 2006. On 31 October 2006, the Court of Appeals granted defendants' motion to stay enforcement of the judgment pending the outcome of the appeal. On 10 August 2007, defendants filed their initial appellate briefs to the Court of Appeals. All defendants filed a joint appellate brief, and Investments also filed its own brief which raised the issue of whether Congress intended for RICO to apply to extraterritorial conduct by a foreign defendant. On 19 November 2007, the government filed its opposition/ cross-appeal brief. Appellate briefing will be completed in May 2008, but a date for oral argument has not yet been scheduled. Page 33 Contingent liabilities cont... In the Daric Smith case, purchasers of cigarettes in the State of Kansas brought a class action in the Kansas State Court against B&W, Investments and certain other tobacco companies seeking injunctive relief, treble damages, interest and costs. The allegations are that the defendants participated in a conspiracy to fix or maintain the price of cigarettes sold in the US, including the State of Kansas, in violation of the Kansas Restraint of Trade Act. The matter will be defended vigorously. Product liability outside the United States At 31 December 2007, active claims against Group companies existed in 18 (2006: 18) countries outside the US but the only countries with more than five active claims were Argentina, Australia, Brazil, Canada, Chile, Italy, and the Republic of Ireland. Recoupment actions are being brought in Argentina, Brazil, Israel, Nigeria, Spain and Saudi Arabia, and there are also three class actions being brought in Brazil. At 31 December 2007, there were some 3,478 (2006: 1,113) filed individual 'lights' cases in Italy. This is a significant increase from last year due to the filing of 2,230 cases by a single plaintiffs' counsel in one jurisdiction (Pescopagano). Of the 2,230 Pescopagano cases, plaintiffs' lawyer has withdrawn 472 claims currently before the Court, although the Court has not yet confirmed the withdrawal of those cases. Plaintiffs' lawyer has also stated his intention to withdraw the remaining 1,758 cases not yet formally registered. Almost all of the individual 'lights' cases filed in Italy, including Pescopagano, are pending before Justices of the Peace courts. Because of the type of court involved, the most that any individual plaintiff can recover is â‚¬1,033. To date, more than 950 (2006: 678) of these cases (not including Pescopagano cases) have been suspended or resulted in decisions given in favour of British American Tobacco Italia S.p.A. There are around 33 (2006: 27) smoking and health cases pending before Italian Civil Courts, filed by or on behalf of individuals in which it is contended that diseases or deaths have been caused by cigarette smoking. There are two (2006: two) labour cases for alleged occupational exposure pending in Italy. In Canada, the government of the Province of British Columbia brought a claim pursuant to the provisions of the Tobacco Damages and Health Care Costs Recovery Act 2000 against domestic and foreign 'manufacturers' seeking to recover the plaintiff's costs of health care benefits. The constitutionality of the 2000 Act was challenged by certain defendants and, on 5 June 2003, the British Columbia Supreme Court found the Act to be beyond the competence of the British Columbia legislature and, accordingly, dismissed the government's claim. The government appealed that decision to the British Columbia Court of Appeal which, on 20 May 2004, overturned the lower court's decision and declared the Act to be constitutionally valid. Defendants appealed to the Supreme Court of Canada in June 2004 and that court gave its judgment in September 2005 dismissing the appeals and declaring the Act to be constitutionally valid. The action is now set down for trial in September 2010. The federal government has been enjoined by a Third Party Notice, and has presented a Motion to Strike the claim. The hearing will take place during the week of 3 March 2008. Non-Canadian defendants challenged the personal jurisdiction of the British Columbia Court and those motions were heard in the Supreme Court of British Columbia. On 23 June 2006, the court dismissed all defendants' motions, finding that there is a 'real and substantial connection' between British Columbia and the foreign defendants. Subsequently, defendants were granted leave to appeal. The appeal was dismissed on 15 September 2006. Defendants have filed leave to appeal to the Supreme Court on 10 November 2006. Similar legislation has been enacted, but not yet brought into force, in some other Canadian provinces, and is also being considered by other Canadian provinces. In June 2006, the government of New Brunswick passed the Tobacco Damages and Health Care Costs Recovery Act. It has recently announced that it has hired a consortium of law firms from Canada and the US to represent the Province and file suit. Page 34 Contingent liabilities cont... In addition, there are five class actions and four individual cases in Canada. In the Knight class action, the Supreme Court of British Columbia certified a class of all consumers of cigarettes bearing 'light' or 'mild' descriptors since 1974 manufactured in British Columbia by Imperial. Imperial filed an appeal against the certification which was heard in February 2006. The Appeal Court confirmed the certification of the class but has limited any financial liability, if proved, to the period from 1997. This is a 'lights' class action in which plaintiff alleges that the marketing of light and mild cigarettes is deceptive because it conveys a false and misleading message that those cigarettes are less harmful than regular cigarettes. Although the claim arises from health concerns, it does not seek compensation for personal injury. Instead it seeks compensation for amounts spent on 'light and mild' products and a disgorgement of profits from Imperial. The motion of the federal government to strike out the third party notice issued against them by Imperial was heard in February 2006 and was granted but is currently under appeal by Imperial. A similar 'lights' and 'mild' class action claim has been filed in Newfoundland. Imperial has filed a third party notice against the federal government. The certification hearing took place in September 2007 and is now under advisement. There are currently two class actions in Quebec. On 21 February 2005, the Quebec Superior Court granted certification. The court certified two classes, which include residents of Quebec who suffered from lung, throat and laryngeal cancer or emphysema, and residents who were addicted to nicotine at the time the proceedings were filed and who have since remained addicted. In Quebec, there is no right of appeal for a defendant upon certification. Plaintiffs have served a Statement of Claim. This litigation is expected to take several years to proceed to trial. The other class action is an attempt to establish a class claiming for personal injury or damage to property from fires caused by cigarettes that did not automatically extinguish on being dropped or left unattended. Certification of such a class was denied in October 2005. Plaintiffs' appeal was heard on 28/ 29 January 2008 and judgment is awaited. In 2007, four Nigerian states (Lagos, Kano, Gombe, and Oyo) and the federal government of Nigeria filed separate health care recoupment actions, each seeking the equivalent of billions of US dollars for costs allegedly incurred by the state and federal governments in treating smoking-related illnesses. The actions are still in the preliminary stages. British American Tobacco (Nigeria) Limited, the Company, and Investments have all been named as defendants in these suits. At 31 December 2007, the British American Tobacco defendants had filed preliminary objections in each of the state cases. British American Tobacco (Nigeria) Limited raised preliminary objections based on, inter alia, lack of standing by plaintiffs, lack of jurisdiction of the courts over plaintiffs' claims, a failure by plaintiffs to prove that defendants' purported misconduct was the proximate cause of plaintiffs' damages and constitutional arguments relating to separation of powers and federalism. Both the Company and Investments raised preliminary objections to personal jurisdiction and service. The courts in Kano and Gombe are scheduled to hear oral argument on defendants' jurisdiction and service objections in early 2008. It is possible that other Nigerian states will file similar lawsuits in the near future. In Saudi Arabia, there are reports that the Ministry of Health is pursuing a health-care recoupment action in the Riyadh General Court against Saudi tobacco distributors, seeking damages of billions of Saudi Riyals. The identity of the defendants is unclear at this time. At 31 December 2007, no Group company had been served with process. In addition, a separate recoupment action was reportedly filed by the King Faisal Hospital on 30 September 2007 in the Riyadh General Court, naming 'BAT Company Limited' as a defendant. At 31 December 2007, no Group company had been served with process in the action. Page 35 Contingent liabilities cont... Other Litigation outside the United States In November 2004, the Royal Canadian Mounted Police (the RCMP) obtained a warrant to search and seize business records and documents at the head office of Imperial in Montreal. The affidavit filed by the RCMP to obtain the search warrant made allegations in relation to the smuggling of cigarettes in Canada between 1989 and 1994, naming Imperial, the Company, Industries and certain former directors and employees. No charges have yet been laid. Imperial believes that it has conducted itself appropriately at all times, but cannot predict the outcome of any such investigation, or whether additional investigations will occur. Two actions were started in Russia by a minority shareholder in OJSC Company British American Tobacco-Yava (BAT-Yava), a Russian incorporated subsidiary of British American Tobacco Holdings (Russia) B.V. The minority shareholder, Branston Holdings (Branston), issued a claim in Moscow seeking to have a contract between BAT-Yava and its sister company invalidated, and issued another claim in the Stavropol region alleging that certain of the directors of BAT-Yava, and other parties, took various unlawful steps. At first instance, the Moscow Court dismissed the claim and the Stavropol Court ordered the transfer of the case filed there to Moscow. The Stavropol case was duly transferred and after a hearing on the merits on 3 October 2007, the Court dismissed all Branston's claims in full. Branston has now appealed the first instance judgment and there is a hearing scheduled before the Moscow Court of Appeal on 9 April 2008. The Group considers the claim to be without merit and will continue to defend it strenuously. 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 judgment is entered against any of the Group companies in any case, an appeal will 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 judgment. In any event, with regard to US litigation, the Group has the benefit of the RJRT Indemnification. 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 all these matters, the Directors (i) do not consider it appropriate to make any provision in respect of any pending litigation and (ii) do not believe that the ultimate outcome of this litigation will significantly impair the financial condition of the Group. Page 36 SHARE BUY-BACK PROGRAMME The Group initiated an on market buy-back programme at the end of February 2003. During the year to 31 December 2007, 45 million shares were bought at a cost of Â£750 million (31 December 2006: 35 million shares at a cost of Â£500 million), bringing the total of the share buy-back programme to 291 million shares, at a cost of Â£2,942 million. POST BALANCE SHEET EVENTS (a) On 22 February 2008, the Group announced that it had won the public tender for Tekel, the Turkish state owned tobacco company, with a bid of US$1,720 million. The transaction, financed with a committed bank facility, is subject to regulatory approvals and is expected to be completed later this year. The privatisation only relates to the cigarette assets of Tekel, which principally comprise brands, six factories and tobacco leaf stocks. The privatisation does not include employees and an announcement on employment by the Group is planned nearer to the completion of the transaction, after dialogue with employees and unions. (b) On 27 February 2008, the Group agreed to acquire 100 per cent of Skandinavisk Tobakskompagni (ST) cigarette and snus business in exchange for its 32.35 per cent holding in ST and payment of DKK11,384 million in cash. This transaction, which is subject to approval by he European Commission, is being financed through a committed bank facility and completion is anticipated later this year. (c) On 21 February 2008, the Group's associated company Reynolds American, announced that it would receive a payment from Gallaher Limited resulting from the termination of a joint venture agreement. While the payments will be received over a number of years, in the first quarter of 2008 Reynolds American will recognise a pre-tax gain of US$300 million. ANNUAL REPORT AND ACCOUNTS The financial information in this preliminary announcement does not constitute statutory accounts within the meaning of section 240 of the Companies Act (as amended). The figures contained herein have been extracted from the Group's Annual Report and Accounts, including the audited financial statements for the year ended 31 December 2007, which will be delivered to the Registrar of Companies. The Annual Report and Accounts for the year ended 31 December 2006 have been delivered to the Registrar of Companies. The auditors' report on both these sets of financial statements were unqualified and did not contain a statement under section 237(2) or section 237(3) of the Companies Act. The Annual Report and Accounts will be published on bat.com at the beginning of April 2008. At that time it will be mailed only to those shareholders who have elected to receive it. Otherwise, shareholders will be notified that the Annual Report and Accounts is available on the website and will, at the time of that notification, receive a Performance Summary (which sets out an overview of the Group's performance, headline facts and figures and key dates in the Company's financial calendar) together with a Proxy Form and Notice of Annual General Meeting and Circular to Shareholders. Page 37 Annual Report and Accounts cont... FINANCIAL CALENDAR 2008 5 March Ex-dividend date 2007 final dividend 7 March Record date 2007 final dividend 30 April Annual General Meeting The Mermaid Conference & Events Centre London EC4V 3DB 7 May Payment date 2007 final dividend 7 May First quarter results announced 31 July Interim results announced 6 August Ex-dividend date for 2008 interim dividend 8 August Record date 2008 interim dividend 17 September Payment date 2008 interim dividend 30 October Third quarter results announced DISCLAIMERS This announcement does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any British American Tobacco p.l.c. shares or other securities. This announcement contains certain forward looking statements which are subject to risk factors associated with, among other things, the economic and business circumstances occurring from time to time in the countries and markets in which the Group operates. It is believed that the expectations reflected in this announcement are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. ----------------------------------------------- Nicola Snook Secretary 28 February 2008 Page 38 This information is provided by RNS The company news service from the London Stock Exchange

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