Interim Results

British American Tobacco PLC 31 July 2001 INTERIM REPORT TO 30 JUNE 2001 31 July 2001 SUMMARY SIX MONTHS RESULTS 2001 2000 Change Operating profit pre-exceptionals £1,317m £1,190m +11% Pre-tax profit £936m £706m +33% Adjusted earnings per share 28.39p 26.30p +8% Interim dividend per share 9.70p 9.00p +8% * Operating profit at £1,317 million, was 11 per cent higher, excluding goodwill amortisation and exceptional items, with all regions contributing to this growth. Profit benefited from exchange rate movements and was 9 per cent up at comparable rates of exchange. * Volumes were slightly higher at 399 billion. The four global drive brands, Lucky Strike, Kent, Dunhill and Pall Mall, performed well with growth of 9 per cent. * Pre-tax profit was up 33 per cent at £936 million benefiting from the lower level of exceptional charges. * Adjusted earnings per share (on a fully diluted basis) rose 8 per cent to 28.39p. * The Board is declaring an interim dividend of 9.7p, to be paid on 17 September, which represents an 8 per cent increase on last year. * The Chairman, Martin Broughton, commented 'These results illustrate British American Tobacco's ability to improve profits and increase dividends. Although we have to face the fact that economic conditions are deteriorating around the world, we confidently expect to continue building sustainable shareholder value.' ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson 020 7845 1180 David Betteridge/ 020 7845 2888 Scott Hailstone BRITISH AMERICAN TOBACCO p.l.c. INTERIM REPORT TO 30 JUNE 2001 INDEX PAGE Chairman's comments 2 Business review 5 Group results 10 Segmental analyses of turnover and profit 11 Statement of total recognised gains and losses 12 Interest of British American Tobacco's shareholders 12 Group balance sheet 13 Group cash flow statement 14 Notes to the Group cash flow statement 15 Accounting policies and basis of preparation 16 Changes in the Group 17 Foreign currencies 17 Exceptional items 18 Goodwill amortisation 18 Sale of business 19 Net interest 19 Taxation 19 Earnings per share 19 Dividends 20 Segmental analyses: associated companies and joint ventures 21 Shareholders' funds 21 CHAIRMAN'S COMMENTS 2. British American Tobacco's operating profit before exceptional items rose 11 per cent to £1,317 million in the first six months, demonstrating very good progress. With higher net interest payments and an increase in the underlying tax rate, adjusted earnings per share were ahead by 8 per cent at 28.39p. The Board has declared an interim dividend of 9.7p, up 8 per cent, which will be payable on 17 September. The performance of our international drive brands has been encouraging, with Pall Mall being the star performer following the launch of Pall Mall Filter in the USA and strong growth in a number of key European markets. The success of Kent continues and it has recently been rolled out in Egypt, Central America, Colombia and the Middle East. Dunhill is progressing well, especially in South Korea, where volumes have more than doubled since last year. Lucky Strike's growth in Europe has been sustained, the highlights being the performances in France, Germany and Spain. It is now possible to report on the final restructuring costs following the Rothmans merger. Shareholders may remember that we expected to achieve annual synergy benefits of some £250 million at a cost of £400 million and that, by the end of 2000, about £480 million had been charged. The total costs amount to £550 million, with savings in excess of £350 million, some of which is being reinvested in the business. In addition to these synergies, the merger has delivered a number of other key benefits to our business in terms of market opportunities, brand portfolio, margins, trade marketing coverage, capital expenditure avoidance and management talent. Indeed, the enlarged group is now so completely integrated that the terms 'former BAT' and 'former Rothmans' are hardly heard. Altogether, the merger has been a great success. On the litigation front, the broad trend in favour of the US tobacco industry has continued, although Brown & Williamson did not succeed in appealing the verdict in the Carter case to the US Supreme Court. Losing an individual case from time to time is simply a cost of doing business in the US and a cost, moreover, that is by no means unique to tobacco companies. The number of individual smoking and health cases being filed is not increasing, while class actions continue to be rejected by the courts. Shareholders may well have read about the result of the court case relating to the future of the partnership between ourselves and Philip Morris in the UK. Although we lost the case, the practical outcome is not yet clear but we expect it to become clearer in a matter of weeks. In any event, we will continue to be a player in the UK market. Chairman's comments cont... 3. Turning to the European Union, the text of the Tobacco Control Directive has now been published. We are still considering our position but bad law doesn't become good law just because it's tobacco law. We would, of course, prefer to have a constructive relationship with the EU institutions, as well as with all governments, especially since they are such significant stakeholders in our business and the contribution we can make to the issues surrounding tobacco should be self-evident. In the field of youth smoking prevention our aim is to have prevention programmes in the countries where we operate, supported by the major tobacco companies operating there. Two aspects of our current campaigns, one involving television and the other based on retail access control, illustrate what can be achieved. First, the results of the initial research carried out on the MTV campaign have now been received. Asked what the campaign was about, the great majority gave an unprompted response relating to encouraging people not to smoke, while approval of the key message that you can be 'cool' and not smoke is high across all countries, the lowest being the 71 per cent achieved in Germany. Secondly, the Group's investment has led to CitizenCard becoming the fastest growing proof-of-age card in Europe, with the number of holders up from 35,000 to over 200,000 in just over six months. Moving to key developments in our business, we recently announced our plan to enter the Turkish market, the seventh largest in the world, with some 110 billion cigarettes. The Group plans to invest US$150-200 million over 10 years and will build a factory in the Izmir district. Two Turkish partners, Sunel Tobacco and Duzey Pazarlama, will have minority shareholdings and Duzey, a member of one of the leading groups of companies in Turkey, will establish a distribution network for our products. It will inevitably take some time for our commitment to this important market to pay off but it undoubtedly represents a significant opportunity for us. Chairman's comments cont... 4. We announced in June that Paul Rayner would become Finance Director on the retirement of Keith Dunt from the Board on 31 December 2001. I know I can speak for my colleagues when I say that Keith has made a tremendous contribution to the Board and to the financial efficiency with which we operate. I am convinced that Paul, who was previously with our Australian subsidiary, itself a quoted company until earlier this year, will be a worthy successor. These results illustrate British American Tobacco's ability to improve profits and increase dividends. Although we have to face the fact that economic conditions are deteriorating around the world, we confidently expect to continue building sustainable shareholder value. MARTIN BROUGHTON BUSINESS REVIEW 5. Operating profit at £1,317 million, was 11 per cent higher, excluding goodwill amortisation and exceptional items set out on page 18, with all regions contributing to this growth. Profit benefited from exchange rate movements and was 9 per cent up at comparable rates of exchange. Volumes were slightly higher at 399 billion. The four global drive brands, Lucky Strike, Kent, Dunhill and Pall Mall, performed well with growth of 9 per cent. Lucky Strike maintained its growth momentum in many of its key markets, with increased volumes in Germany, France and Spain. The growth of Kent continued in all of its key markets, notably Japan, Romania, Russia, Israel and Chile. Volumes for the Dunhill brand have increased strongly due to the impressive growth in the South Korean market and the good performances in Malaysia and Taiwan. Pall Mall has continued to perform very well in its major markets of Germany, Russia, Italy, Romania and Hungary, with promising progress in the US. Profit from the America-Pacific region for the six months was up £77 million at £469 million due to higher contributions from almost all the markets in the region. However, shipment volumes at 51 billion were down 6 per cent mainly because of conditions in the US market, while South Korea showed strong volume growth. The profit included for Imperial Tobacco Canada was £193 million compared to £ 174 million for the same period last year. On a comparable basis (see page 17), profit increased by 6 per cent as a result of higher margins, partly offset by lower volumes in a reduced total market. The market share of both Player's and du Maurier declined slightly, with Matinee increasing share. In the US, Brown & Williamson contributed £173 million, which represents an increase of 19 per cent on last year. This is the result of higher pricing and lower costs following the restructuring last year, which were partly offset by lower volumes and higher ongoing settlement expenses. Business review cont... 6. Compared to the same period last year, market share fell by 1.1 share points driven by a higher level of competitor promotional activity. Market share was stable quarter on quarter at around 10.7 per cent. Pall Mall Filter showed promising results and both Pall Mall and Viceroy grew market share. Overall market share was adversely affected by restrictive contracts with retailers imposed by competitors, as well as cheaper brands from some of the small manufacturers who receive preferential treatment under the MSA. In Japan, overall market share rose with Kent and Kool achieving increased volumes in a market where total industry volumes fell. This, together with the favourable impact of the SCAT acquisition and foreign exchange, led to a substantial rise in profit. In South Korea, volumes more than doubled, with a corresponding improvement in profits, driven by the success of Dunhill Lights. The Asia-Pacific profit of £191 million was £18 million ahead. The region benefited from significant synergy benefits in Australasia and Malaysia following the major rationalisation and distribution changes completed last year. Volumes at 40 billion were 11 per cent lower, mainly due to the decline in volumes in Indonesia following various excise changes partially offset by increased volumes in Vietnam. The Australasian businesses continued to deliver strong profit growth despite volume decline for the total market, following last year's introduction of a general sales tax in Australia and frequent excise increases. The profit growth was attributable to growing market share for Winfield and Benson & Hedges in Australia, better margins and significant other merger benefits. In Malaysia, profit was well ahead of last year despite slower than expected economic growth, increasing competitor activity and downtrading after the November 2000 excise increase. The higher profit was mainly attributable to improved margins, merger benefits and the growth in market share by Dunhill. In Vietnam, volumes rose as Craven 'A' maintained its good performance, while in Taiwan, Dunhill continued its growth momentum and is gaining market share. A large excise increase in Singapore during February 2001 led to lower volumes. Business review cont... 7. The change in the excise system in Indonesia during 2000 and the cumulative effect of excise increases adversely affected the Group, whereas Kretek and small manufacturers benefited. Results were lower due to the significant reduction in the Group's volumes and market share, although there are signs of stabilisation. The profit in Latin America increased by £19 million to £222 million, with almost all markets contributing strongly. Market shares were generally higher, although regional volumes were 2 per cent lower despite increases in Brazil, Venezuela and Chile. Souza Cruz's market share in Brazil increased due to the strong performance of Derby, with an overall rise in volumes of 5 per cent. This was, however, not sufficient to offset the negative impact on profit of the devaluation of the local currency against the US dollar. Higher prices, a better mix and lower costs, led to increased profits in Mexico despite a decline in volumes and market share. In Chile, the high market share has been maintained and, with increased volumes, profit rose. In Venezuela, volumes and market share grew which, together with cost reductions, led to increased profits. In Argentina, the slight decline in volumes resulted from more difficult economic conditions. Profits recovered significantly as a result of the restoration of industry profit margins following the reduction of the social assistance fund tax rate agreed with the government in June 2000. In Central America, although volumes were lower than last year, the good performance of Delta and Belmont led to increased market share and profits. Total profits in Europe were £249 million, which is £8 million higher than last year. This growth was driven by higher volumes, which have increased by 9 per cent to 108 billion. Regional profit growth was achieved in spite of the continued fierce price competition in Poland and the overall market decline in the UK, Netherlands and Belgium. Business review cont... 8. The combination of volume increases for Yava and a better mix as Vogue and Kent continued to grow, led to another strong performance in Russia. Market share gains for Kent and Pall Mall Lights were the principal reasons for profit growth in Romania. In Ukraine, Prilucky Osoblivy managed to solidify its position as the largest brand in that market, while profits rose in Hungary due to higher prices and an improved product mix. Growth in market share by Lucky Strike and Pall Mall, coupled with reduced overheads, led to higher profits in Germany, where our company consolidated its number two position in the market. Synergy related savings led to better results in Switzerland, while strong performances for Winfield and Lucky Strike contributed to improved results in France. Pall Mall in Italy and Lucky Strike in Spain continued to make good progress. Fine cut volumes for the smoking tobacco and cigar operations were slightly down compared to last year, mainly due to increased price pressure in some of the core markets. Market segment shares for the mainstream brands were maintained which enabled the operation to increase profits despite declines in pipe tobacco and cigar sales. In the Amesca region, profits at £186 million, were £5 million higher, with increases from South Africa, the Middle East, Pakistan, Bangladesh and the associated companies in India. However, lower results in Uzbekistan and a number of markets in Africa, as well as the cost of setting up the Egyptian operating company, partly offset these positive results. Volumes for the region grew 2 per cent to 119 billion, mainly as a result of excellent performances in Pakistan and Bangladesh. Profit in South Africa was higher as a result of price increases, synergy benefits and good performances from Peter Stuyvesant and Benson & Hedges. This was achieved despite a decline in the total market and the loss of the contribution from the pipe tobacco business, which was sold for a profit of £ 35 million, shown separately (see page 19). In India, the Group's associated companies produced excellent results. Sales volume in Sri Lanka fell but the company maintained its strong market share. The results in the Middle East improved, reflecting volume gains and market share improvements. In Uzbekistan, difficult trading conditions and a lack of foreign currency affected the performance for the period. Business review cont... 9. In Pakistan, total volume, market share and profit increased as a result of the growth in Gold Flake and Capstan, following a price repositioning, and last year's restructuring programme. In Bangladesh, profit rose with higher volumes and market share driven by strong growth in John Player Gold Leaf. The above results were achieved before accounting for any exceptional items and goodwill amortisation which are described on page 18. The Group's net cash flow from operating activities was £747 million higher at £1,630 million. This increase over the first half of 2000 reflected the benefit of higher profits and favourable working capital movements, notably from the timing of stock purchases and other payments. Net cash inflow before acquisitions and dividends rose by £348 million to £607 million. Compared to the first half of 2000 there were increased tax and interest outflows, mainly due to increased profits, higher net interest (see page 19), the settlement of tax audits and timing of payments, together with higher capital expenditure. Acquisitions less disposals resulted in a net outflow of £320 million, due to the buy out of the Australian minorities partly offset by the proceeds on the disposal of the Canadian operations of Genstar and the South African pipe tobacco business. After equity dividends paid of £430 million, the Group's net cash outflow was £143 million. This, together with the strengthening of the US dollar, contributed to the Group's net debt rising by £291 million to £4,554 million. Group Cigarette Volumes 3 months to 6 months to Year to 30.6.01 30.6.00 30.6.01 30.6.00 31.12.00 bns bns bns bns bns 26.7 27.7 America-Pacific 50.7 53.8 109.4 20.4 21.3 Asia-Pacific 40.0 44.7 86.5 40.2 40.5 Latin America 80.7 82.0 164.5 56.7 54.2 Europe 108.4 99.4 208.1 59.3 60.0 Amesca 118.7 116.5 238.0 ----- ----- ----- ----- ----- 203.3 203.7 398.5 396.4 806.5 ===== ===== ===== ===== ===== GROUP RESULTS - UNAUDITED 10. 3 months to 6 months to Year to 30.6.01 30.6.00 30.6.01 30.6.00 31.12.00 Restated Restated Restated £m £m £m £m £m REVENUE 6,553 5,905 Subsidiary undertakings 12,710 11,261 23,578 Share of associates and 316 141 joint ventures 607 686 1,253 ----- ----- ------ ------ ------ 6,869 6,046 13,317 11,947 24,831 ===== ===== ====== ====== ====== PROFIT 514 508 Subsidiary undertakings 990 812 1,739 after charging: US restructuring costs (119) acquired stock (83) (83) (74) (26) integration costs (74) (44) (126) (99) (96) goodwill amortisation (196) (182) (376) Share of associates and 31 15 joint ventures 57 61 after charging: Imasco restructuring costs (69) (71) ----- ----- ------ ------ ------ 545 523 Total operating profit 1,047 812 1,800 Sale of business 35 ----- ----- ------ ------ ------ Profit on ordinary 545 523 activities before interest 1,082 812 1,800 (74) (39) Net interest (144) (102) (269) Share of associates' and (1) (1) joint ventures' net interest (2) (4) (9) ----- ----- ------ ------ ------ 470 483 Profit before taxation 936 706 1,522 Taxation on ordinary (213) (196) activities (407) (300) (660) ----- ----- ------ ------ ------ 257 287 Profit after taxation 529 406 862 (44) (47) Minority interests (89) (89) (170) ----- ----- ------ ------ ------ 213 240 Profit for the period 440 317 692 ===== ===== ====== ====== ====== Earnings per share 9.16p 10.53p - basic 19.55p 13.61p 29.53p ===== ===== ====== ====== ====== 15.80p 14.88p - adjusted diluted 28.39p 26.30p 56.93p ===== ===== ====== ====== ====== See notes on pages 16 to 21. SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - UNAUDITED 11. 3 months to 6 months to Year to 30.6.01 30.6.00 30.6.01 30.6.00 31.12.00 £m £m £m £m £m Turnover excluding duty, excise and other taxes 1,050 1,033 America-Pacific 2,010 2,098 4,092 365 328 Asia-Pacific 722 685 1,405 423 438 Latin America 812 821 1,615 796 671 Europe 1,529 1,386 2,904 394 364 Amesca 810 718 1,599 ----- ----- ------ ------ ------ 3,028 2,834 5,883 5,708 11,615 ===== ===== ====== ====== ====== Operating profit 269 211 America-Pacific 469 392 878 95 95 Asia-Pacific 191 173 361 124 115 Latin America 222 203 425 135 125 Europe 249 241 541 95 99 Amesca 186 181 370 ----- ----- ------ ------ ------ 718 645 1,317 1,190 2,575 US restructuring costs (119) Acquired stock (83) (83) (74) (26) Integration costs (74) (44) (126) (99) (96) Goodwill amortisation (196) (182) (376) Imasco restructuring costs (69) (71) ----- ----- ------ ------ ------ 545 523 1,047 812 1,800 ===== ===== ====== ====== ====== Operating profit restated at comparable rates of 527 523 exchange 1,022 812 1,800 ===== ===== ====== ====== ====== The net turnover analysis is based on external sales in each region. The figures for the six months ended 30 June 2001 and 30 June 2000 based on regional location of manufacture would not be materially different except for sales from Europe to Amesca and Asia-Pacific which amounted to £290 million and £179 million respectively, 2000 £246 million and £152 million. The operations of subsidiaries are entirely related to tobacco. The Group's share of the operations of associates and joint ventures, analysed by business, is set out on page 21. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - UNAUDITED 12. 6 months to Year to 30.6.01 30.6.00 31.12.00 Restated Restated £m £m £m Profit for the period 440 317 692 Differences on exchange (33) 34 (221) Revaluation of associated company 1,269 1,248 ------ ------ ------ Total recognised gains related to the period (below) 407 1,620 1,719 ====== ====== ====== As shown below the cumulative effect of the accounting policy change was £81 million at 1 January 2001. INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - UNAUDITED 6 months to Year to 30.6.01 30.6.00 31.12.00 Restated Restated £m £m £m Balance 1 January 5,178 4,821 4,821 Accounting policy change (81) (95) (95) ------ ------ ------ Balance 1 January restated 5,097 4,726 4,726 Total recognised gains related to the period (above) 407 1,620 1,719 Issue of shares - share options 3 2 3 Redemption of convertible redeemable preference shares (695) (695) Dividends and other appropriations: ordinary shares (208) (196) (623) convertible redeemable preference shares (12) (11) (35) amortisation of discount on preference shares (9) (13) (22) Other movements 9 16 24 ------ ------ ------ Balance at period end 5,287 5,449 5,097 ====== ====== ====== See notes on pages 16 to 21. GROUP BALANCE SHEET - UNAUDITED 13. 30.6.01 30.6.00 31.12.00 Restated Restated £m £m £m Fixed assets Intangible assets 7,332 7,466 7,158 Tangible assets 2,704 2,645 2,600 Investments in associates and joint ventures 241 177 201 Other investments and long term loans 531 305 527 ------ ------ ------ 10,808 10,593 10,486 ------ ------ ------ Current assets Stocks 3,004 3,351 3,053 Debtors 2,224 2,237 2,253 Acquired businesses awaiting disposal 86 57 Current investments 318 341 221 Short term deposits and cash 1,461 2,020 1,667 ------ ------ ------ 7,007 8,035 7,251 ------ ------ ------ TOTAL ASSETS 17,815 18,628 17,737 ====== ====== ====== Capital and reserves Shareholders' funds: equity 4,522 4,702 4,341 non-equity 765 747 756 ------ ------ ------ 5,287 5,449 5,097 Minority shareholders' equity interest 382 466 419 ------ ------ ------ 5,669 5,915 5,516 ------ ------ ------ Other liabilities Provisions for liabilities and charges 1,413 1,512 1,456 Borrowings 6,333 7,110 6,151 Creditors 4,400 4,091 4,614 ------ ------ ------ 12,146 12,713 12,221 ------ ------ ------ TOTAL FUNDS EMPLOYED 17,815 18,628 17,737 ====== ====== ====== See notes on pages 16 to 21. GROUP CASH FLOW STATEMENT - UNAUDITED 14. 6 months to Year to 30.6.01 30.6.00 31.12.00 £m £m £m Net operating cash flow from subsidiary undertakings (note 1) 1,630 883 2,758 Dividends from associates 30 ------ ------ ------ Net cash inflow from operating activities 1,630 883 2,788 Returns on investments and servicing of finance (366) (239) (530) Taxation (473) (288) (598) Capital expenditure and financial investment (184) (97) (346) ------ ------ ------ Net cash generation 607 259 1,314 Acquisitions less disposals (320) 104 88 Equity dividends paid (430) (387) (580) ------ ------ ------ Cash flow before use of liquid resources and external financing (143) (24) 822 Management of liquid resources 137 427 761 Financing - proceeds from issue of shares 3 2 3 - redemption of preference shares (695) (695) - increase/(decrease) in debt 30 327 (915) 33 (366) (1,607) ------ ------ ------ Increase/(decrease) in cash in the period 27 37 (24) ====== ====== ====== Reconciliation of net cash flow to movement in net debt (note 2) Increase/(decrease) in cash in the period 27 37 (24) (Increase)/decrease in debt (30) (327) 915 Decrease in liquid resources (137) (427) (761) ------ ------ ------ Change in net debt resulting from cash flow (140) (717) 130 Net debt acquired on purchase of subsidiaries (798) (798) Other changes (20) 12 (203) Differences on exchange (131) (191) (337) ------ ------ ------ Movement in net debt in the period (291) (1,694) (1,208) Net debt at 1 January (4,263) (3,055) (3,055) ------ ------ ------ Net debt at period end (4,554) (4,749) (4,263) ====== ====== ====== NOTES TO THE GROUP CASH FLOW STATEMENT 15. 6 months to Year to 30.6.01 30.6.00 31.12.00 1) Net operating cash flow from £m £m £m subsidiary undertakings Operating profit 990 812 1,739 Depreciation 168 177 401 Goodwill amortisation 196 182 376 Decrease/(increase) in stocks 92 (115) 122 Decrease/(increase) in debtors 8 (7) 27 Increase/(decrease) in creditors 204 (147) 206 Decrease in provisions (26) (7) (114) Other (2) (12) 1 ------ ------ ------ Net operating cash flow from subsidiary undertakings 1,630 883 2,758 ====== ====== ====== Differences Cash Other on 1.1.01 flow changes exchange 30.6.01 2) Analysis of £m £m £m £m £m net debt Cash and bank balances 471 451 Overdrafts (142) (118) ------ ------ ------ ------ ------ 329 27 (23) 333 Term borrowings (5,895) (49) (11) (145) (6,100) Finance lease obligations (114) 19 (13) (7) (115) Short term deposits 1,196 (228) 1 41 1,010 Current investments 221 91 3 3 318 ------ ------ ------ ------ ------ (4,263) (140) (20) (131) (4,554) ====== ====== ====== ====== ====== ACCOUNTING POLICIES AND BASIS OF PREPARATION 16. The financial statements comprise the unaudited results for the six months ended 30 June 2001 and 30 June 2000 and the audited results for the twelve months ended 31 December 2000. The unaudited Group results have been prepared under the historical cost convention and in accordance with applicable accounting standards using the accounting policies set out in the Report and Accounts for the year ended 31 December 2000, with the exception of deferred tax as described below. From 1 January 2001 the Group is adopting the new accounting standard FRS19: Deferred Tax which requires full provision to be made for deferred tax arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in the tax computation. In adopting FRS19, the Group has chosen not to discount deferred tax assets and liabilities. The comparative figures for 2000 have been restated to reflect the impact of FRS19. Consequently the interest of British American Tobacco's shareholders at 1 January 2000 and 31 December 2000, as published last year, have been reduced by £95 million and £81 million respectively to reflect recognition of the additional net provision in respect of deferred tax. The impact of FRS19 is to decrease the tax charge as shown below: 6 months to Year to 30.6.01 30.6.00 31.12.00 £m £m £m 15 25 23 The reduction in the tax charge in 2000 principally arises from the setting up of a deferred tax asset under FRS19 for the exceptional charge in respect of the cigarette stocks reacquired from S.C.A. Tobacco Corporation (SCAT) on 31 March 2000 (see page 18). CHANGES IN THE GROUP 17. On 1 February 2000, a transaction was completed whereby the holding in Imasco, an associated company in Canada, was effectively replaced by shares in Imperial Tobacco Canada, a wholly-owned subsidiary comprising only the tobacco interests of Imasco. Consequently, the comparative results from Canada for the six months ended 30 June 2000 comprise the Group's share of the results of its associate for January and the consolidated results of Imperial Tobacco Canada for the five months to 30 June 2000. During that period, Imasco's discontinued non-tobacco operations contributed £112 million of turnover and £16 million of profit. For the period the tobacco operations were an associate they contributed £23 million of turnover and £9 million of profit, while for the period they were a wholly-owned subsidiary they contributed £336 million of turnover and £149 million of profit before goodwill amortisation. Having sold most of the non-tobacco businesses of Imasco last year, on 15 January 2001 the Group disposed of the remaining operations of Genstar, Imasco's land development company in Canada, for Can$128 million. As the intention at the time of the Imasco acquisition was to dispose of all these non-tobacco businesses, the revaluation of £1,248 million included in the year to 31 December 2000 is principally in respect of the surplus on revaluing the businesses prior to their disposal. As a result of this revaluation, the profit and loss account does not include any gain on these disposals. On 30 January 2001, it was announced that the Group's Australian subsidiary had entered into an agreement under which the Group proposed to acquire the remaining 40.5 per cent shareholding of that company that it did not already own. This transaction was completed on 11 May 2001 at a cost of Aus$1.1 billion (£391 million), resulting in a provisional goodwill amount of £309 million which will be amortised over 20 years. Consequent upon the transaction, the company was delisted from the Australian Stock Exchange. FOREIGN CURRENCIES The results of overseas subsidiaries and associated undertakings have been translated to sterling as follows: Profit and loss for the six months to 30 June 2001 at the average rates for that period. The comparatives for the six months to 30 June 2000 and the year to 31 December 2000 at the average rates for the year to 31 December 2000. The interest of British American Tobacco's shareholders has been translated at the relevant period end rate. Foreign currencies cont... 18. For high inflation countries, the translation from local currencies to sterling makes allowance for the impact of inflation on the local currency results. The principal exchange rates used were as follows: Average Closing 2001 2000 30.6.01 30.6.00 31.12.00 US dollar 1.440 1.516 1.406 1.514 1.494 Canadian dollar 2.209 2.249 2.134 2.243 2.244 Euro 1.604 1.642 1.661 1.580 1.591 EXCEPTIONAL ITEMS On 20 September 2000, Brown & Williamson announced a major cost cutting programme in order to improve its financial position and enable it to remain competitive. The costs of £119 million for early retirement and redundancies and the write-down of fixed assets were charged in 2000 as an exceptional item. On 31 March 2000, the Group completed the purchase of SCAT, which distributes the Group's products in Japan. As part of the acquisition, the Group reacquired cigarette stocks which had previously been sold to that business. A one-off accounting adjustment of £83 million was charged against Group operating profit in 2000 to remove the gross contribution previously recognised by the Group on those cigarette sales. Integration costs are the costs incurred in integrating Rothmans into the British American Tobacco Group and the consequential restructuring of the enlarged Group. The charge of £74 million in the first half of 2001, mainly in respect of rationalisation costs in Europe, comprises the last items which will be disclosed as integration costs. The Imasco restructuring costs relate to the Group's share of the pre-tax cost to Imasco of buying out share options together with other employee deferred compensation and severance arrangements consequent upon a fundamental change of control. GOODWILL AMORTISATION The amortisation charge is in respect of goodwill which principally arose from the Rothmans transaction during 1999 and the Imasco transaction during 2000. SALE OF BUSINESS 19. The sale of the Group's pipe tobacco business in South Africa to Swedish Match was completed on 1 February 2001, resulting in a non-taxable profit on disposal of £35 million. NET INTEREST The increase in net interest mainly reflects the impact in 2001 of financing the June 2000 redemption of convertible redeemable preference shares, together with a £25 million gain on the cancellation of swap contracts in the first half of 2000. TAXATION 6 months to 30.6.01 30.6.00 Restated £m £m UK 6 4 Overseas 380 293 ---- ---- British American Tobacco p.l.c. and subsidiary undertakings 386 297 Share of associates and joint ventures 21 3 ---- ---- 407 300 ==== ==== Tax rate 43.5% 42.5% ==== ==== The tax rates for the first half of both 2001 and 2000 are adversely affected by goodwill amortisation. The underlying tax rate reflected in the adjusted earnings per share shown below was 36.7 per cent (2000 34.0 per cent). The increase in the rate was due to significant profit growth in the relatively high taxed countries. EARNINGS PER SHARE Basic earnings per share are based on the profit for the period attributable to ordinary shareholders and the average number of ordinary shares in issue during the period (excluding shares held by the Group's two Employee Share Ownership Trusts). For the calculation of diluted earnings per share the average number of shares reflects the potential dilutive effect of employee share schemes and the convertible redeemable preference shares. The earnings are correspondingly adjusted to the amount of earnings prior to charging dividends and the amortisation of discount on the convertible redeemable preference shares. Earnings per share cont... 20. The earnings have been affected by a number of exceptional items. To illustrate the impact of the principal distortions, as well as the effect of goodwill amortisation, adjusted diluted earnings per share are shown below: Diluted earnings per share 6 months to Year to 30.6.01 30.6.00 31.12.00 Restated Restated pence pence pence Unadjusted earnings per share 19.16 13.57 29.57 Effect of US restructuring costs 3.08 Effect of acquired stock 2.09 2.14 Effect of goodwill amortisation 8.53 7.62 16.07 Effect of integration costs 2.22 1.05 4.02 Effect of Imasco restructuring costs 1.97 2.05 Sale of business (1.52) ------ ------ ------ Adjusted earnings per share 28.39 26.30 56.93 ====== ====== ====== Similar types of adjustments would apply to basic earnings per share. For the six months to 30 June 2001 basic earnings per share on an adjusted basis would be 29.44p (2000 27.72p) compared to unadjusted amounts of 19.55p (2000 13.61p). DIVIDENDS The Directors have declared an interim dividend out of the profit for the six months to 30 June 2001, for payment on 17 September 2001, at the rate of 9.7p per share on both the ordinary and preference shares. This interim dividend amounts to £220 million. The comparative dividend for the six months to 30 June 2000 of 9p per share amounted to £207 million. Valid transfers received by the Registrar of the Company up to 10 August 2001 will be in time to rank for payment of the interim dividend. The amortisation of discount on preference shares referred to on page 12 reflects the difference between the share price at the date of the Rothmans transaction and the redemption price, which is being amortised over the period to the redemption date. SEGMENTAL ANALYSES: ASSOCIATED COMPANIES AND JOINT VENTURES 21. 6 months to Year to 30.6.01 30.6.00 31.12.00 £m £m £m Turnover excluding duty, excise and other taxes Tobacco 317 288 588 Financial services 69 69 Other trading activities 43 43 ------ ------ ------ 317 400 700 ====== ====== ====== Operating profit Tobacco 57 53 116 Financial services 12 12 Other trading activities 4 4 ------ ------ ------ 57 69 132 Imasco restructuring costs (69) (71) ------ ------ ------- 57 - 61 ====== ====== ======= The comparisons between the periods above are distorted by the Imasco transaction (see page 17). SHAREHOLDERS' FUNDS 30.6.01 30.6.00 31.12.00 Restated Restated £m £m £m Share capital 576 575 575 Share premium account 9 6 7 Merger reserves 4,350 4,600 4,475 Capital redemption reserve 30 30 30 Other reserves 520 502 511 Profit and loss account (198) (264) (501) ------ ------ ------ Total shareholders' funds 5,287 5,449 5,097 ====== ====== ====== ****** Copies of this Report will be posted to shareholders and may also be obtained during normal business hours from the Company's Registered Office at Globe House, 4 Temple Place, London WC2R 2PG. Aileen E McDonald Secretary 31 July 2001

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