Interim Results
British American Tobacco PLC
27 July 2004
INTERIM REPORT TO 30 JUNE 2004 27 July 2004
SUMMARY
SIX MONTHS RESULTS 2004 2003 Change
Operating profit pre-goodwill amortisation and
exceptionals £1,346m £1,338m +1%
Pre-tax profit £941m £755m +25%
Adjusted earnings per share 33.91p 31.60p +7%
Interim dividend per share 12.70p 11.80p +8%
• Operating profit, excluding goodwill amortisation and
exceptional items, was 1 per cent higher at
£1,346 million, affected by the translation of results
to sterling which strengthened against almost all
currencies. At comparable rates of exchange, operating
profit would have risen by 7 per cent.
• Group volumes grew by 3 per cent to 396 billion, with
overall volumes from the Group's global drive brands
Kent, Pall Mall, Lucky Strike and Dunhill down 1 per
cent.
• Operating profit, after goodwill and exceptional items,
was 25 per cent higher at £1,070 million, pre-tax
profit was 25 per cent higher at £941 million and basic
earnings per share were 22.56p (2003 11.92p) reflecting
the higher exceptional costs of restructuring charged
in 2003.
• Adjusted diluted earnings per share at 33.91p were up
7 per cent, benefiting from the impact of the share
buy-back programme and a lower effective tax rate.
• The Board have declared an interim dividend of 12.70p
to be paid on 15 September 2004, which represents an
8 per cent increase on last year.
• The Chairman, Jan du Plessis, commented "For the year
as a whole, the downtrading in Canada will
significantly affect our results, while sterling has
strengthened further against the US dollar since the
end of June. We expect that these factors will
negatively impact earnings in the second half.
Shareholders should also note that there were some one-
off tax benefits in 2003.
However, the 8 per cent increase in the interim
dividend signals the Board's confidence in the
underlying strength of the business, while the expected
completion of the Reynolds American transaction and our
progress in China represent important steps in
improving our long term prospects."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph Edmondson/ 020 7845 1180 David Betteridge/ 020 7845 2888
Rachael Cummins 020 7845 1519 Teresa La Thangue/
Ann Tradigo
BRITISH AMERICAN TOBACCO p.l.c.
INTERIM REPORT TO 30 JUNE 2004
INDEX
PAGE
Chairman's comments 2
Business review 5
Independent review report to British American
Tobacco p.l.c. 11
Group results 12
Segmental analyses of turnover and profit 13
Statement of total recognised gains and losses 14
Interest of British American Tobacco's shareholders 14
Group balance sheet 15
Group cash flow statement 16
Notes to the Group cash flow statement 17
Accounting policies and basis of preparation 18
Convertible redeemable preference shares 18
Foreign currencies 18
Changes in the Group 19
Goodwill amortisation 20
Restructuring costs 20
Write down of loan to joint venture 20
Loss on disposal of subsidiaries 20
Net interest 21
Taxation 21
Earnings per share 21
Dividends 22
Share buy-back programme 22
Shareholders' funds 23
CHAIRMAN'S COMMENTS 2.
British American Tobacco's operating profit, before
exceptional items and goodwill amortisation, improved
marginally to £1,346 million in the first six months. The
results were adversely affected by the strength of sterling,
particularly against the US dollar. At comparable rates of
exchange, operating profit would have increased by 7 per cent
reflecting the benefit of the ETI acquisition and good
performances in Asia-Pacific and Africa and Middle East.
Adjusted diluted earnings per share rose by 7 per cent to
33.91p, as a result of a lower effective tax rate and the
share buy-back programme. We repurchased 34 million shares in
the first half of the year at a cost of £280 million and at an
average price of £8.23 per share.
This brings the number of shares bought back since March 2003
to 140 million at a cost of almost £980 million. We remain
committed to the share buy-back programme and intend to
restart it following the announcement of these results,
although we are aware of the importance of our credit rating.
In addition, we may need to scale back the programme from time
to time in the light of investment opportunities as and when
they may arise.
The Board has declared an interim dividend, to be paid on
15 September, of 12.7p per share, an increase of 8 per cent.
Total Group volumes were ahead by 3 per cent to 396 billion,
largely as a result of acquisitions, although organic growth
more than made up for market declines in a number of important
countries, such as France, Germany and Japan. These declines
affected the performance of our global drive brands, Dunhill,
Kent, Lucky Strike and Pall Mall, and their total sales were
marginally lower. This is clearly disappointing but we still
expect to achieve overall growth from the global drive brands
for the year as a whole.
For shareholders, the most significant development has been
the receipt of the key regulatory approvals, especially from
the Federal Trade Commission, for the proposed Reynolds
American transaction. All that now remains is for
R.J. Reynolds' shareholders to approve the proposal at their
meeting on 28 July. The merger should then close on 31 July
and, as a result, the Group will own a 42 per cent share in a
much stronger and more sustainable business. Not only will
our shareholding in the new company be valued transparently
but Brown & Williamson will be indemnified for all existing
and future litigation.
Chairman's comments cont... 3.
In Canada, the British Columbia Court of Appeal's decision to
uphold a new statute that was enacted in order to enable the
Province to bring an action for recoupment of healthcare
costs, allegedly associated with the use of tobacco, is
clearly a cause for concern. We expect to hear later this
year whether the Supreme Court of Canada will take the appeal.
More positively, we have recently published our third Social
Report and, as was the case last year, we will be circulating
an overview to shareholders along with these results. Our
social reporting now covers 34 markets, representing two-
thirds of our global sales volume. As a result, with UK
listed companies starting to think about the Operating and
Financial Reviews that they must publish from next year, we
are, to some extent, well ahead of the new requirements.
In terms of regulation, one of the issues currently receiving
considerable attention is public smoking, largely as a result
of the bans introduced in New York and in Ireland. It
continues to be our view that claims of exposure to
environmental tobacco smoke being shown to be a cause of
chronic disease are simply not supported by the weight of
epidemiological research over the last 20 years or so.
Nevertheless, we entirely accept that many people dislike
tobacco smoke accumulating in the air and, in our view,
exposure to environmental tobacco smoke in public places
should be reduced.
This does not mean, however, that total bans are either
proportionate or necessary because there are good solutions
that banish the smoke but not the smoker. The provision of
smoking and non-smoking areas or the installation of good
ventilation systems should be more than capable of
accommodating both non-smokers and smokers.
Finally, this month, we have announced that the Central
Government of China has approved a major strategic investment
by the Group in China, which is the largest market in the
world, with annual sales of around 1.8 trillion cigarettes.
We have approval to build a new factory, with an eventual
manufacturing capacity of 100 billion cigarettes, in a joint
venture with our partners, China Eastern Investments, and to
distribute and sell brands such as State Express 555 and Kent
nationally.
We are naturally aware of the questions being asked about the
nature of the approval we have received and we would like to
assure shareholders that we have, indeed, received approval
from the highest levels of Government in China. While there
are still some sizable hurdles to overcome, including agreeing
the final location of the factory and our sales and
distribution strategy, this is a significant milestone.
Chairman's comments cont... 4.
Although our progress is the result of a tremendous team
effort over several years, I should like to pay particular
tribute to the role of our previous Chairman, Martin
Broughton, in enabling us to reach this point.
The Group's results have been adversely affected by the
strength of sterling and overall market declines in a number
of key countries. For the year as a whole, the downtrading in
Canada will significantly affect our results, while sterling
has strengthened further against the US dollar since the end
of June. We expect that these factors will negatively impact
earnings in the second half. Shareholders should also note
that there were some one-off tax benefits in 2003.
However, the 8 per cent increase in the interim dividend
signals the Board's confidence in the underlying strength of
the business, while the expected completion of the Reynolds
American transaction and our progress in China represent
important steps in improving our long term prospects.
Jan du Plessis
27 July 2004
BUSINESS REVIEW 5.
Group operating profit, excluding goodwill amortisation and
exceptional items set out on page 20, was 1 per cent higher at
£1,346 million, despite some good underlying performances, as
reported profits were affected by the translation of results
to sterling which strengthened against almost all currencies.
The growth in profit at comparable rates of exchange would
have been 7 per cent.
Group volumes grew by 3 per cent to 396 billion mainly due to
the volumes from acquisitions, while there was some organic
growth despite market declines in a number of important
countries, such as France, Germany and Japan. Although there
were good market share performances, the overall volumes from
the four global drive brands Kent, Dunhill, Lucky Strike and
Pall Mall, were disappointing with a decline of 1 per cent.
Kent grew by 1 per cent as the outstanding performance in
Russia and growth in Romania were almost offset by declines in
Japan and Iran. In South Korea, Dunhill recovered from the
first quarter competitor activities and resumed its good
performance but, with lower volumes in Malaysia and a number
of smaller markets, overall volumes declined by 3 per cent.
Lucky Strike gained market share in its main markets of Japan
and Germany but was affected by market size reductions and
consequently volume was down by 4 per cent. Pall Mall
maintained its growth with volumes up 3 per cent as Italy, the
US, Russia and Germany reported good progress.
Profit from the America-Pacific region was £388 million, down
£86 million from the same period last year. Lower volumes in
all the markets except South Korea, growth of the value-for-
money segment in Canada, the absence of a £27 million one-off
benefit in 2003 for the US and the adverse exchange impact on
translation to sterling were the reasons for the reduced
profits. Volumes in the region were down 6 per cent to
48 billion, mainly as a result of lower volumes in Canada and
Japan.
Imperial Tobacco Canada contributed £169 million of profit
before restructuring costs, down £44 million from last year,
due to lower volumes, the continued shift in sales mix and
exchange rate movements partly offset by reduced operating
costs. Although total industry volumes declined slightly, the
value-for-money segment continued to grow strongly with much
industry activity. In May, Imperial repositioned Matinee to
compete more vigorously in this segment with encouraging
initial signs. Imperial's market share was lower at 59 per
cent with du Maurier and Player's, both premium brands,
remaining the number one and two brand families in Canada.
Business review cont... 6.
Brown & Williamson's contribution from its US cigarette
business was 13 per cent lower at £110 million reflecting
adverse exchange rate movements and the non-recurrence of a
gain on the settlement of certain disputed MSA payments.
Excluding this gain, the increase at comparable rates of
exchange would have been 23 per cent as a result of lower
supply chain and marketing costs, partly reflecting one-off
trade costs last year, which more than offset lower volumes
and lower net pricing. Intense competition continued, but the
strategic brands performed well with increased market shares
for Pall Mall and Misty. These increases were offset by
declines in non-strategic brands, mainly GPC, and Brown &
Williamson's overall market share remained steady at 9.7 per
cent compared to 9.8 per cent in 2003.
The Group's overall market share in Japan was slightly higher
as Lucky Strike and Kool continued to grow share. Volumes
were, however, down as the overall market size continued to
decline, leading to a lower profit contribution. In South
Korea, Dunhill increased volumes despite competitor
activities, although profit was similar to last year due to
higher marketing investment.
In Asia-Pacific, regional profit of £254 million was
£26 million above last year with strong results in Australia,
New Zealand, Malaysia, Pakistan, India and generally higher
duty free sales. This performance was achieved despite the
currency weaknesses in Malaysia and India. Regional volumes
at 101 billion were 5 per cent up with increases in Pakistan,
Bangladesh, India and Vietnam partially offset by lower sales
in Indonesia and Malaysia.
Australia and New Zealand continued to deliver strong profit
growth through higher margins, volumes and market share. In
Australia, the higher margins reflected lower costs and an
improved sales mix, with Dunhill and Winfield increasing
volumes and market share.
Local currency profit in Malaysia was ahead of last year due
to improved margins but volumes were lower as a result of
reduced market share and timing of shipments in a very
competitive environment.
In South East Asia, Vietnam continued to deliver strong profit
and volume growth. Profit and volumes in Indonesia were still
under pressure due to the expansion of the low-price segment
but Lucky Strike continued its strong growth.
Business review cont... 7.
Pakistan delivered strong profit and volume growth with
continued good performances from Gold Flake and John Player
Gold Leaf. In Bangladesh, volumes were higher but local
currency profit was slightly lower due to higher marketing
expenses.
In Latin America, profit of £190 million declined by
£26 million as the lower results from Brazil, Mexico, Chile and
Central America more than offset the increases from Venezuela
and Argentina. The contribution from the region was depressed
by the general weakening of exchange rates against sterling.
Volumes of 72 billion for the region were similar to last year
as the increases in Venezuela, Chile and Central America and
the impact of the acquisition in Peru were offset by declines
in Brazil, Mexico and Argentina.
Profit in Brazil was affected by lower cigarette and leaf
volumes, as well as the depreciation of the real against
sterling and higher marketing and other costs. The lower
cigarette volumes were the result of excise driven price
increases.
In Mexico, profit was down mainly as a result of lower volumes,
driven by the contraction of the market, and the devaluation of
the currency. Competitor activities at the end of the quarter
resulted in a decline in market share despite a strong
performance from the Group's premium brands. Profit increased
in Argentina with higher margins driven by both price increases
and lower costs. However, the price increases resulted in a
decline in volumes as a result of the growth of local
manufacturers and the illegal market.
In Chile, profit was slightly lower, affected by the timing of
expenses. However, overall volumes were up, mainly driven by
Belmont, reflecting the success in reducing illicit trade.
Profit in Venezuela rose due to price increases, coupled with
higher volumes, partly offset by the devaluation of the
currency and the timing of expenses. Volume growth and higher
market share were achieved mainly by the performance of Consul.
In Central America, volumes were higher but profit was lower
due to reduced margins and exchange rate movements.
Total profit in Europe increased by £77 million to
£339 million, mainly attributable to the acquisition of Ente
Tabacchi Italiani S.p.A. (ETI) in Italy at the end of 2003.
The region also benefited from cost savings following the
closure and reorganisation of factories in the United Kingdom
and Benelux, as well as strong growth from a number of
businesses, although these benefits were offset by lower
profits in France, Germany and Hungary. Total volume grew by
9 per cent, reaching 128 billion, primarily due to additional
volume from newly acquired businesses in Italy and Serbia, and
continued growth in Russia, which more than offset the market
related declines in Germany, France, Hungary and the
Netherlands.
Business review cont... 8.
In Italy, following the acquisition of ETI, the integration of
the new business is going well. The total business in Italy
contributed profit of around £86 million which is ahead of
expectations. While there was an overall reduction in size of
the Italian market, the Group's market share was 31.3 per cent
with Pall Mall increasing its share from 6.1 per cent to
6.6 per cent.
In Germany, Lucky Strike and Pall Mall continued to grow share,
with total market share similar to last year. A 13 per cent
decline of industry cigarette volumes, following the excise
related price increases, led to a reduction of both volumes and
profit. However, in this market the Group benefited from its
strong presence in other tobacco products through its Smoking
Tobacco and Cigars operations, so that total tobacco volumes in
Germany were only down 7 per cent.
Market share in France slightly increased with Lucky Strike
growing share but profit and volumes were both down. These
declines are mainly attributable to total market shipments
contracting significantly after consecutive large excise
increases in October 2003 and January 2004.
In Switzerland, profit and volumes showed a small decline
following the October excise increase. Higher market share was
driven by Parisienne while Lucky Strike maintained its share.
Lower overheads led to improved results in the Netherlands
despite lower volumes, following a large excise increase in
February, while higher margins contributed to profit growth in
Belgium.
Continued strong volume growth, higher market share and
improved mix, led by a significant increase of Kent volumes,
resulted in an excellent profit from Russia. Higher market
share in Romania was driven by the growth of Kent, Pall Mall
and Viceroy, and, coupled with improved margins, this led to a
much better result. In Poland, profit growth was primarily a
result of higher volumes and improved market share led by
Golden American and Pall Mall, whereas lower volumes were
behind a profit decline in Ukraine. In Hungary, despite an
increase in market share, profit was significantly lower due to
successive excise increases which led to a 22 per cent
reduction in the total market size and a 15 per cent decline in
Group volumes.
The Smoking Tobacco and Cigars operations showed strong profit
growth, led by the growth of volumes in all major product
groups.
Business review cont... 9.
In the Africa and Middle East region, despite the continued
investment in new markets, notably Turkey, and the
difficulties in Zimbabwe, profit at £175 million was
£17 million higher with a strong performance from South
Africa. Volumes increased by 2 per cent to 47 billion
mainly as a result of the strong growth in Nigeria, partly
offset by declines in South Africa and Zimbabwe.
Profit in South Africa improved strongly with higher margins
and currency stability. Volumes were lower as the total
market declined but Peter Stuyvesant, Rothmans and Dunhill
made share gains, although overall market share was slightly
down.
In Equatorial Africa, volumes were lower than last year,
principally reflecting the economic conditions in Kenya and
Zimbabwe. Profit improved slightly as a result of cost
savings in Kenya and improved leaf margins in Uganda.
Volumes were higher in the West Africa area, attributable to
the Nigerian market where improved distribution led to a
7 share point increase over last year to 72 per cent.
Profit for the area was also ahead.
In the Middle East & North Africa area, profit was slightly
lower as a result of market entry costs in North Africa and
higher brand support expenditure in the Middle East, largely
offset by margin gains in Saudi Arabia. Volumes increased
with good performances by Viceroy and Craven 'A' in Iraq,
partly offset by volume declines in the Gulf and Iran.
Non-trading items
The above results were achieved before accounting for goodwill
amortisation and exceptional items described on page 20.
Cash flow
The Group's net cash inflow from operating activities was
£99 million higher at £1,328 million despite the impact of
the strengthening of sterling against most currencies.
This principally reflected more favourable working capital
movements, partly as a result of the timing of cash flows.
Capital expenditure and financial investment was
£75 million lower at £93 million partly due to the
expenditure in 2003 on the local manufacturing facilities
in Nigeria and South Korea.
With little change in the outflow for taxation and returns
on investments and servicing of finance, this resulted in
net cash generation up £158 million at £591 million.
10.
Business review cont...
While cash flows in respect of acquisitions less disposals
were relatively small in 2004, the comparative period
showed an outflow of £154 million principally due to the
acquisition of the companies in Peru (see page 19).
With equity dividends paid of £552 million
(2003 £526 million), the Group's net cash inflow after
dividends paid was £36 million compared to a net outflow in
2003 of £247 million.
The cost of shares purchased for the buy-back programme was
£280 million (2003 £316 million) and the net outflow for
employee share schemes was £48 million (2003 £50 million).
These, partly offset by the beneficial impact of exchange on
net debt, resulted in the Group's net debt rising by
£99 million for the six months to £5,318 million.
The increase in net debt was reflected in cash, short term
deposits and current investments £652 million lower at
£1,739 million and debt decreasing by £553 million to
£7,057 million.
Group Cigarette Volumes
3 months to 6 months to Year to
30.6.04 30.6.03 30.6.04 30.6.03 31.12.03
bns bns bns bns bns
25.4 27.3 America-Pacific 47.7 51.0 102.9
51.1 47.6 Asia-Pacific 100.6 95.8 192.2
35.5 36.1 Latin America 72.2 72.4 149.6
66.7 64.7 Europe 127.7 116.7 249.0
24.7 23.1 Africa and Middle East 47.4 46.6 98.2
----- ----- ----- ----- -----
203.4 198.8 395.6 382.5 791.9
===== ===== ===== ===== =====
INDEPENDENT REVIEW REPORT TO BRITISH AMERICAN TOBACCO p.l.c. 11.
Introduction
We have been instructed by the Company to review the financial
information which comprises the Group results, the segmental
analyses of turnover and profit, the statement of total
recognised gains and losses, the interest of British American
Tobacco's shareholders, the Group balance sheet, the Group
cash flow statement and the related notes. We have read the
other information contained in the interim report and
considered whether it contains any apparent misstatements or
material inconsistencies with the financial information.
Directors' responsibilities
The interim report, including the financial information
contained therein, is the responsibility of, and has been
approved by, the Directors. The Directors are responsible for
preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that
the accounting policies and presentation applied to the
interim figures should be consistent with those applied in
preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained
in Bulletin 1999/4 issued by the Auditing Practices Board for
use in the United Kingdom. A review consists principally of
making enquiries of Group management and applying analytical
procedures to the financial information and underlying
financial data and, based thereon, assessing whether the
accounting policies and presentation have been consistently
applied unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of
assets, liabilities and transactions. It is substantially
less in scope than an audit performed in accordance with
United Kingdom Auditing Standards and therefore provides a
lower level of assurance than an audit. Accordingly we do not
express an audit opinion on the financial information. This
report, including the conclusion, has been prepared for and
only for the Company for the purpose of the Listing Rules of
the Financial Services Authority and for no other purpose. We
do not, in producing this report, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Review conclusion
On the basis of our review we are not aware of any material
modifications that should be made to the financial information
as presented for the six months ended 30 June 2004.
PricewaterhouseCoopers LLP
Chartered Accountants
1 Embankment Place
London
WC2N 6RH
27 July 2004
GROUP RESULTS - unaudited 12.
3 months to 6 months to Year to
30.6.04 30.6.03 30.6.04 30.6.03 31.12.03
£m £m £m £m £m
REVENUE
8,151 6,164 Subsidiary undertakings 15,625 11,663 24,151
Share of associates and
384 382 joint ventures 732 753 1,471
----- ----- ------ ------ ------
8,535 6,546 16,357 12,416 25,622
===== ===== ====== ====== ======
PROFIT
516 301 Subsidiary undertakings 992 785 1,777
after charging:
(118) (102) goodwill amortisation (235) (202) (405)
(36) (281) restructuring costs (41) (281) (437)
Share of associates and
40 34 joint ventures 78 70 75
after charging:
write down of loan to joint
venture (87)
----- ----- ------ ------ ------
556 335 Total operating profit 1,070 855 1,852
Loss on disposal of
subsidiaries (72)
----- ----- ------ ------ ------
Profit on ordinary
556 335 activities before interest 1,070 855 1,780
(66) (47) Net interest (129) (98) (209)
Share of associates' and
(1) joint ventures' net interest (2) (4)
----- ----- ------ ------ ------
490 287 Profit before taxation 941 755 1,567
Taxation on ordinary
(201) (205) activities (404) (400) (779)
----- ----- ------ ------ ------
289 82 Profit after taxation 537 355 788
(34) (41) Minority interests (67) (78) (157)
----- ----- ------ ------ ------
255 41 Profit for the period 470 277 631
===== ===== ====== ====== ======
Earnings per share
12.22p 1.04p basic 22.56p 11.92p 26.93p
===== ===== ====== ====== ======
11.85p 1.03p diluted - unadjusted 21.69p 11.82p 26.69p
===== ===== ====== ====== ======
18.58p 16.92p diluted - adjusted 33.91p 31.60p 69.21p
===== ===== ====== ====== ======
12.70p 11.80p Dividends per share 12.70p 11.80p 38.80p
===== ===== ====== ====== ======
See notes on pages 18 to 23.
SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - unaudited 13.
3 months to 6 months to Year to
30.6.04 30.6.03 30.6.04 30.6.03 31.12.03
£m £m £m £m £m
Turnover excluding duty,
excise and other taxes
769 903 America-Pacific 1,469 1,783 3,562
456 448 Asia-Pacific 870 868 1,765
307 339 Latin America 593 610 1,309
1,276 930 Europe 2,422 1,722 3,502
327 301 Africa and Middle East 626 603 1,289
----- ----- ------ ------ ------
3,135 2,921 5,980 5,586 11,427
===== ===== ====== ====== ======
Operating profit
202 284 America-Pacific 388 474 995
131 109 Asia-Pacific 254 228 473
101 125 Latin America 190 216 440
188 126 Europe 339 262 536
88 74 Africa and Middle East 175 158 337
----- ----- ------ ------ ------
710 718 1,346 1,338 2,781
(118) (102) Goodwill amortisation (235) (202) (405)
(36) (281) Restructuring costs (41) (281) (437)
Write down of loan to
joint venture (87)
----- ----- ------ ------ ------
556 335 1,070 855 1,852
===== ===== ====== ====== ======
Operating profit, before exceptional items
and goodwill amortisation,
restated at comparable
rates of exchange
754 718 1,428 1,338 2,781
===== ===== ====== ====== ======
Net turnover for the six months includes £438 million (2003 £439 million)
in respect of associates and joint ventures. The net turnover analysis is
based on external sales in each region. The figures for the six months
ended 30 June 2004 and 30 June 2003 based on regional location of
manufacture would not be materially different except for sales from Europe
to Africa and Middle East and Asia-Pacific which amounted to £228 million
and £67 million respectively (2003 £228 million and £56 million).
In December 2003 the Group acquired ETI as described on page 19, which is
being integrated with the Group's other Italian operations. In the first
half of 2004, it is estimated that ETI contributed £701 million of
turnover (of which £551 million is attributable to the distribution business
of Etinera) and £71 million of operating profit to the Group results above.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - unaudited 14.
6 months to Year to
30.6.04 30.6.03 31.12.03
£m £m £m
Profit for the period 470 277 631
Differences on exchange (113) 256 206
------ ------ ------
Total recognised gains related
to the period (below) 357 533 837
====== ====== ======
INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - unaudited
6 months to Year to
30.6.04 30.6.03 31.12.03
Restated Restated
£m £m £m
Balance 1 January 4,483 5,185 5,185
Accounting policy changes (122) (107) (107)
------ ------ ------
4,361 5,078 5,078
Total recognised gains related
to the period (above) 357 533 837
Issue of shares - share options 3 4 5
Dividends and other appropriations:
ordinary shares (271) (247) (799)
convertible redeemable
preference shares (14) (47)
amortisation of discount on
preference shares (8) (9) (18)
Purchase of own shares (280) (316) (698)
Consideration paid for purchase of
own shares held in Employee Share
Ownership Trusts (64) (58) (58)
Consideration received on the
exercise of options over own
shares held in Employee Share
Ownership Trusts 16 8 15
Credit in respect of employee
share schemes 16 14 28
Other movements 8 9 18
------ ------ ------
Balance at period end 4,138 5,002 4,361
====== ====== ======
See notes on pages 18 to 23.
GROUP BALANCE SHEET - unaudited 15.
30.6.04 30.6.03 31.12.03
Restated Restated
£m £m £m
Fixed assets
Intangible assets 7,538 6,610 8,012
Tangible assets 2,439 2,396 2,578
Investments in associates and joint
ventures 367 402 327
Other investments 380 397 396
------ ------ ------
10,724 9,805 11,313
------ ------ ------
Current assets
Stocks 2,606 2,674 2,582
Debtors 2,408 2,213 2,571
Current investments 73 177 108
Short term deposits and cash 1,666 1,191 2,283
------ ------ ------
6,753 6,255 7,544
------ ------ ------
TOTAL ASSETS 17,477 16,060 18,857
====== ====== ======
Capital and reserves
Shareholders' funds:
equity 4,138 4,201 3,551
non-equity 801 810
------ ------ ------
4,138 5,002 4,361
Minority shareholders' equity interest 213 223 225
------ ------ ------
4,351 5,225 4,586
------ ------ ------
Other liabilities
Provisions for liabilities and charges 1,409 1,524 1,541
Borrowings 7,057 5,464 7,610
Creditors 4,660 3,847 5,120
------ ------ ------
13,126 10,835 14,271
------ ------ ------
TOTAL FUNDS EMPLOYED 17,477 16,060 18,857
====== ====== ======
See notes on pages 18 to 23.
GROUP CASH FLOW STATEMENT - unaudited 16.
6 months to Year to
30.6.04 30.6.03 31.12.03
Restated Restated
£m £m £m
Net operating cash flow from
subsidiary undertakings (note 1) 1,328 1,228 3,067
Dividends from associates 1 46
------ ------ ------
Net cash inflow from operating
activities 1,328 1,229 3,113
Returns on investments and
servicing of finance (249) (237) (424)
Taxation (395) (391) (709)
Capital expenditure and financial
investment (93) (168) (422)
------ ------ ------
Net cash generation 591 433 1,558
Acquisitions less disposals (3) (154) (1,820)
Equity dividends paid (552) (526) (773)
------ ------ ------
Cash flow before use of liquid
resources and financing 36 (247) (1,035)
Management of liquid resources 532 639 (303)
Financing (note 2) (566) (376) 1,464
------ ------ ------
Increase in cash in the period 2 16 126
====== ====== ======
Reconciliation of net cash flow to
movement in net debt (note 3)
Increase in cash in the period 2 16 126
Decrease/(increase) in debt 241 14 (2,200)
(Decrease)/increase in liquid resources (532) (639) 303
------ ------ ------
Change in net debt resulting from
cash flow (289) (609) (1,771)
Net debt acquired on purchase of
subsidiaries (35)
Other changes 15 2
Differences on exchange 175 (110) (34)
------ ------ ------
Movement in net debt in the period (99) (717) (1,840)
Net debt at 1 January (5,219) (3,379) (3,379)
------ ------ ------
Net debt at period end (5,318) (4,096) (5,219)
====== ====== ======
NOTES TO THE GROUP CASH FLOW STATEMENT 17.
6 months to Year to
30.6.04 30.6.03 31.12.03
Restated Restated
1) Net operating cash flow from £m £m £m
subsidiary undertakings
Operating profit 992 785 1,777
Depreciation 162 289 477
Goodwill amortisation 235 202 405
(Increase)/decrease in stocks (110) (15) 179
Decrease/(increase) in debtors 105 (104) (52)
(Decrease)/increase in creditors (4) (61) 97
(Decrease)/increase in provisions (65) 113 157
Other 13 19 27
------ ------ ------
Net operating cash flow from
subsidiary undertakings 1,328 1,228 3,067
====== ====== ======
2) Financing
Proceeds from issue of shares 3 4 5
Purchase of own shares (280) (316) (698)
Employee share ownership trusts
- purchase of own shares (64) (58) (58)
- proceeds on exercise of options 16 8 15
(Decrease)/increase in debt (241) (14) 2,200
------ ------ ------
(566) (376) 1,464
====== ====== ======
Differences
Cash Other on
1.1.04 flow changes exchange 30.6.04
3) Analysis of £m £m £m £m £m
net debt
Cash and bank
balances 517 411
Overdrafts (172) (92)
------ ------
345 2 (28) 319
Term borrowings (7,366) 229 (7) 245 (6,899)
Finance lease
obligations (72) 12 (9) 3 (66)
Short term
deposits 1,766 (498) 31 (44) 1,255
Current
investments 108 (34) (1) 73
------ ------ ------ ------ ------
(5,219) (289) 15 175 (5,318)
====== ====== ====== ====== ======
ACCOUNTING POLICIES AND BASIS OF PREPARATION 18.
The financial statements comprise the unaudited results for
the six months ended 30 June 2004 and 30 June 2003 and the
audited results for the twelve months ended 31 December 2003.
The unaudited Group results have been prepared under the
historical cost convention and in accordance with applicable
UK accounting standards using the accounting policies set out
in the Report and Accounts for the year ended 31 December
2003, with the exception as described below.
From 1 January 2004, the Group has amended its accounting for
employee share schemes and Employee Share Ownership Trusts
(ESOTs) in accordance with UITF abstracts 17 (as revised) and
38. As a result the cost of awards made under the share
schemes is now calculated with reference to the fair value of
the shares at the date of the award rather than the cost of
the shares purchased by the Group. In addition, the net
carrying value of shares held by the Group's ESOTs, previously
shown as an asset in other investments in the balance sheet,
is now deducted from shareholders' funds.
The comparative figures for 2003 have been restated to reflect
the impact of these changes. Consequently the interest of
British American Tobacco's shareholders at 1 January 2003,
30 June 2003 and 31 December 2003, as published last year, has
been reduced by £107 million, £143 million and £122 million
respectively to reflect the deduction of the net carrying
value of the shares from shareholders' funds. The Group cash
flow statement has been restated to show the relevant cash
flows in financing activities rather than capital expenditure
and financial investment. The impact of the revision to
UITF 17 on the charges in respect of the share scheme awards
is not material.
CONVERTIBLE REDEEMABLE PREFERENCE SHARES
On 7 June 1999, the Company issued 241,734,651 convertible
redeemable preference shares (CRPS) of 25p each to
R&R Holdings SA as part consideration for the acquisition of
the issued share capital of Rothmans International BV.
Subsequently, in accordance with the terms of the CRPS, 50 per
cent of the CRPS was redeemed for cash on 7 June 2000 and the
remaining 50 per cent was converted into the same number of
ordinary shares on 3 June 2004.
FOREIGN CURRENCIES
The results of overseas subsidiaries and associated
undertakings have been translated to sterling as follows:
Profit and loss and cash flow for the six months to 30 June
2004 at the average rates for that period. The
comparatives for the six months to 30 June 2003 and the
year to 31 December 2003 at the average rates for the year
to 31 December 2003. Assets and liabilities have been
translated at the relevant period end rates.
Foreign currencies cont... 19.
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
-------------- ---------------------------------------
2004 2003 30.6.04 30.6.03 31.12.03
US dollar 1.822 1.635 1.814 1.650 1.790
Canadian dollar 2.439 2.288 2.431 2.242 2.313
Euro 1.485 1.445 1.491 1.437 1.419
South African
rand 12.169 12.331 11.266 12.393 11.949
CHANGES IN THE GROUP
On 4 April 2003, the Group announced that it had acquired
controlling interests in a number of companies in Peru,
including Peru's leading tobacco company Tabacalera
Nacional S.A.A. With the aggregate consideration to the
vendors of all the various shareholdings acquired of
£146 million, the goodwill arising on these transactions is
provisionally estimated at £123 million.
It was announced on 4 August 2003 that the Group
successfully bid for a 67.8 per cent holding in the Serbian
tobacco company Duvanska Industrija Vranje. The Group's
shareholding was subsequently increased to 78.8 per cent,
which brought the total consideration to £43 million. The
acquisition resulted in goodwill of £40 million. In
addition, the Group has committed to invest £17 million in
factory modernisation over two years and further amounts
over five years on social programmes.
On 23 December 2003, the Group completed the acquisition of
Ente Tabacchi Italiani S.p.A. (ETI), Italy's state tobacco
company, for €2.32 billion and the goodwill arising on this
transaction is provisionally estimated at £1.6 billion.
The Group announced on 27 October 2003 the agreement to
combine Brown & Williamson's (B&W) US domestic businesses
with R.J. Reynolds (RJR) under Reynolds American, a new
holding company 58 per cent owned by RJR shareholders and
42 per cent by the Group, through B&W. The Group will also
sell Lane to Reynolds American for US$400 million in cash.
The proposed transaction has now received clearance from
the US Federal Trade Commission and the US Internal Revenue
Service. Completion of the deal is subject to approval by
RJR shareholders at the end of July 2004.
GOODWILL AMORTISATION 20.
The amortisation charge of £235 million is in respect of
goodwill which principally arose from the Rothmans transaction
during 1999, the Imasco transaction during 2000 and the ETI
transaction during 2003. The increase in the charge mainly
reflects the impact of the acquisition of ETI at the end of
December 2003.
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.
As a result, in the second quarter of 2003 the Group announced
proposals to restructure the businesses in the UK and Canada.
These proposals included the closure of the Darlington factory
in the UK, with manufacturing consolidated in the larger
Southampton plant, and a major restructuring of the business in
Canada, including the closure of the Montreal factory with
production transferred to other Canadian facilities, as well as
the closure of the leaf threshing operations at Aylmer, Ontario.
Manufacturing rationalisation continued in the second half of
2003, notably with the agreed closure plan for the Merksem
factory in Belgium. In addition, there have been a number of
changes to the organisational structure at all levels of the
Group and a review of the supply chain is underway.
The results for the six months to 30 June 2004 include a charge
of £41 million in respect of the above and further
restructurings in Europe, including a reorganisation of the
Group's business in Germany.
WRITE DOWN OF LOAN TO JOINT VENTURE
The write down relates to the reduction in value of the
convertible loan stock of British American Racing (Holdings) Ltd
(BAR), as part of taking a controlling interest in that company.
On 12 December 2003, the Group converted US$136 million of its
convertible loan stock in BAR, raising its shareholding in BAR
from 50 per cent to 89.7 per cent and changing the status of BAR
from a joint venture to a subsidiary. No goodwill was created
by this transaction.
LOSS ON DISPOSAL OF SUBSIDIARIES
On 29 September 2003, a subsidiary of the Group absolutely and
irrevocably transferred to a newly created trust (the Trust) all
of its rights, title and interest in and to 100 per cent of the
issued and outstanding shares of The Flintkote Company
(Flintkote) together with US$3 million in cash and did not
receive any consideration in return. The Trust, administered by
an independent trustee, was created for the management,
conservation and eventual disposition of the assets transferred
to the Trust and named a medical facility active in the research
and treatment of asbestos-related diseases as ultimate
beneficiary. The Group will have no continuing involvement in
the Trust. Since by virtue of this arrangement Flintkote is no
longer a Group subsidiary, the Group ceased to consolidate
Flintkote effective 29 September 2003. The transfer resulted in
a loss on disposal of £62 million before tax.
Loss on disposal of subsidiary cont... 21.
The loss on disposal of subsidiaries during 2003 also included
a provision for losses on the announced sale of the Group's
shareholding in a company in Myanmar.
NET INTEREST
Net interest rose by £29 million to £129 million due to the
impact of the share buy-back programme and the cost of
acquisitions, partly offset by the benefit from the Group's
cash flow since 30 June 2003.
TAXATION
6 months to
30.6.04 30.6.03
£m £m
British American Tobacco p.l.c.
and subsidiary undertakings
- overseas 377 374
Share of associates and joint
ventures 27 26
---- ----
404 400
==== ====
Tax rate 42.9% 53.0%
==== ====
The tax rates for each period are adversely affected by
goodwill amortisation and 2003 is also adversely affected
by the impact of the restructuring costs. The underlying
tax rate reflected in the adjusted earnings per share shown
below was 34.1 per cent (2003 35.8 per cent) and the
decrease reflects changes in the mix of profits.
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 the diluted earnings per share the
average number of shares reflects the potential dilutive
effect of employee share schemes and, for the comparative
numbers, the convertible redeemable preference shares. The
earnings are correspondingly adjusted to the amount of
earnings prior to charging dividends and the amortisation
of discount on the convertible redeemable preference
shares. For the six months to 30 June 2003 and the year to
31 December 2003, the convertible redeemable preference
shares were not dilutive for the unadjusted earnings per
share calculation and therefore the weighted average number
of shares in issue is also adjusted.
Earnings per share cont.... 22.
The earnings have been distorted by exceptional items and
goodwill amortisation. To illustrate the impact of these
distortions, the adjusted diluted earnings per share are
shown below:
Diluted earnings per share
6 months to Year to
30.6.04 30.6.03 31.12.03
pence pence pence
Unadjusted earnings per share 21.69 11.82 26.69
Convertible redeemable
preference shares 0.39 1.47
Effect of goodwill amortisation 10.84 8.90 18.07
Effect of restructuring costs 1.38 10.49 15.71
Effect of write down of loan to
joint venture 3.88
Effect of disposal of
subsidiaries 3.39
------ ------ ------
Adjusted earnings per share 33.91 31.60 69.21
====== ====== ======
Similar types of adjustments would apply to basic earnings
per share. For the six months to 30 June 2004 basic
earnings per share on an adjusted basis would be 35.49p
(2003 32.57p) compared to unadjusted amounts of 22.56p
(2003 11.92p).
DIVIDENDS
The Directors have declared an interim dividend out of the
profit for the six months to 30 June 2004, for payment on
15 September 2004, at the rate of 12.7p per share. This
interim dividend amounts to £271 million. The comparative
dividend for the six months to 30 June 2003 of 11.8p per
share amounted to £261 million.
Valid transfers received by the Registrar of the Company up
to 6 August 2004 will be in time to rank for payment of the
interim dividend.
The amortisation of discount on preference shares referred
to on page 14 reflects the difference between the share
price at the date of the Rothmans transaction and the
redemption price, which was being amortised over the period
to the redemption date.
SHARE BUY-BACK PROGRAMME
The Group initiated an on-market share buy-back programme at
the end of February 2003. During the six months to 30 June
2004, 34.0 million shares were bought at a cost of
£279.8 million.
During the year to 31 December 2003, 106.3 million shares
were bought at a cost of £697.6 million.
SHAREHOLDERS' FUNDS 23.
30.6.04 30.6.03 31.12.03
Restated Restated
£m £m £m
Share capital 541 564 550
Share premium account 36 33 33
Merger reserves 3,626 3,874 3,748
Capital redemption reserves 66 43 57
Other reserves 573 556 565
Profit and loss account (704) (68) (592)
after deducting:
cost of own shares held in
Employee Share Ownership
Trusts (204) (198) (187)
------ ------ ------
Total shareholders' funds 4,138 5,002 4,361
====== ====== ======
******
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.
Alan F Porter
Secretary
27 July 2004
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