Interim Results

British American Tobacco PLC 26 July 2007 INTERIM REPORT TO 30 JUNE 2007 26 July 2007 SUMMARY SIX MONTHS RESULTS - unaudited 2007 2006 Change Revenue £4,725m £4,808m -2% Profit from operations £1,492m £1,325m +13% Adjusted diluted earnings per share 53.51p 49.11p +9% Interim dividend per share 18.6p 15.7p +18% • The reported profit from operations was 13 per cent higher at £1,492 million, or 10 per cent higher if exceptional items are excluded. However, profit from operations, excluding exceptional items, would have been 18 per cent higher at comparable rates of exchange, with all regions except for America-Pacific contributing to this strong result. • Group volumes from subsidiaries were 330 billion, a decrease of 2 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. The four global drive brands achieved an overall volume growth of 6 per cent, which led to share improvements in many markets. The reported Group revenue declined by 2 per cent to £4,725 million but, at comparable rates of exchange, would have increased by 4 per cent as a result of more favourable pricing and better product mix. • Adjusted diluted earnings per share rose by 9 per cent, principally benefiting from the increase in profit from operations. Basic earnings per share were higher at 52.94p (2006 48.38p). • The Board has declared an interim dividend of 18.6p, an 18 per cent increase on last year, to be paid on 12 September 2007. • The Chairman, Jan du Plessis, commented "As a result of global drive brand growth and improved pricing, British American Tobacco has had a strong six months, despite the substantial impact of foreign exchange. However, there have recently been significant excise increases in a number of key markets, while the level of our investment in expanding distribution and rolling out our global drive brands is set to rise over the next few months. We therefore expect our growth in profit from operations at comparable rates of exchange to slow in the second half of the year." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson/ 020 7845 1180 David Betteridge/Kate Matrunola/ 020 7845 2888 Rachael Brierley 020 7845 1519 Catherine Armstrong BRITISH AMERICAN TOBACCO p.l.c. INTERIM REPORT TO 30 JUNE 2007 INDEX PAGE Chairman's comments 2 Business review 3 Independent review report to British American Tobacco p.l.c. 7 Group income statement 8 Group statement of changes in total equity 9 Group balance sheet 10 Group cash flow statement 12 Segmental analyses of revenue and profit 13 Accounting policies and basis of preparation 15 Foreign currencies 15 Exceptional items 15 Other changes in the Group 16 Net finance costs 17 Associates 17 Taxation 18 Earnings per share 18 Cash flow 19 Dividends 21 Shareholders' funds 22 Contingent liabilities 22 Share buy-back programme 22 CHAIRMAN'S COMMENTS British American Tobacco increased its adjusted diluted earnings per share by 9 per cent in the first six months of 2007. Excluding exceptional items, profit from operations improved by 10 per cent. These results were affected by a £115 million impact from adverse foreign exchange movements; at comparable rates of exchange, profit from operations excluding exceptional items would have grown by 18 per cent. The strength derived from the Group's unique geographic diversity is amply illustrated by the growth in profit from operations at comparable rates of exchange of 35 per cent in Latin America, 25 per cent in Africa and the Middle East and 14 per cent in Asia Pacific. Revenue declined by 2 per cent at current rates but would have increased by 4 per cent at comparable rates of exchange, despite volumes being 2 per cent lower. This downturn reflects some supply chain disruptions, particularly in the Middle East, and some short-term trading patterns, with Russia being the most significant. We continue to achieve price increases and the progress of our global drive brand portfolio, driven by successful product and packaging innovations such as the launch of Kent Nanotek in Russia, is enriching our product mix. Our global drive brands grew by 6 per cent. Kent was up 11 per cent, while Dunhill improved by 8 per cent and Lucky Strike was down 3 per cent, primarily as a result of lower industry volumes in its key markets of Germany and Japan. Pall Mall rose by 4 per cent, despite the loss of StiX in Germany but, if its roll-your-own business in Germany is included, was up 9 per cent. Our associate companies, Reynolds American in the US, ITC in India and STK in Denmark, had volumes of 118 billion and our share of their post-tax results was £222 million. Excluding exceptional items, our share of their results at comparable rates of exchange would have been 6 per cent higher. Adjusted diluted earnings per share rose 9 per cent to 53.5p, principally benefiting from the growth in profit from operations. The Board has declared a significantly increased interim dividend of 18.6p per share, up 18 per cent. It will be paid on 12 September to shareholders on the Register at 3 August. This is consistent with our policy that the interim will normally represent one-third of the previous year's total dividend. In addition, some 22 million shares were repurchased in the six months to 30 June at a cost of £358 million and at an average price of 1621p per share. The programme will restart shortly. As a result of global drive brand growth and improved pricing, British American Tobacco has had a strong six months, despite the substantial impact of foreign exchange. However, there have recently been significant excise increases in a number of key markets, while the level of our investment in expanding distribution and rolling out our global drive brands is set to rise over the next few months. We therefore expect our growth in profit from operations at comparable rates of exchange to slow in the second half of the year. Jan du Plessis 26 July 2007 Page 2 BUSINESS REVIEW The reported Group profit from operations was 13 per cent higher at £1,492 million or 10 per cent higher if exceptional items, as explained on pages 15 and 16, are excluded. However, profit from operations, excluding exceptional items, would have been 18 per cent higher at comparable rates of exchange, with all regions except for America-Pacific, contributing to this strong result. Group volumes from subsidiaries were 330 billion, a decrease of 2 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. The performance of the global drive brands led to share improvements in many markets. Group revenue declined by 2 per cent to £4,725 million but, at comparable rates of exchange, would have increased by 4 per cent as a result of favourable pricing and a better product mix. The four global drive brands continued to perform well and achieved an overall volume growth of 6 per cent. Kent grew by 11 per cent with solid growth in Russia, Romania, Ukraine, Chile and Switzerland, helped by additional volume from the new markets in Azerbaijan and Kazakhstan. Dunhill rose by 8 per cent, driven by strong performances in South Korea, South Africa, Russia and Saudi Arabia, although volumes were lower in Taiwan and Australia. Lucky Strike volumes were down 3 per cent as the growth in Spain, France, Argentina and Italy was more than 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 4 per cent, driven by Italy, Russia, Uzbekistan and Hungary, partly offset by lower volumes in Germany, Romania and Spain. Growth would have been 9 per cent if sales of the roll-your-own business in Germany were included. In Europe, profit at £404 million was up £24 million mainly as a result of higher margins in Russia, Romania, Hungary and Spain, partly offset by the impact of reduced volumes in a number of markets and weaker exchange rates. At comparable rates of exchange, profit would have increased by £34 million or 9 per cent. Regional volumes were down 4 per cent at 115 billion, with reductions in Germany, Russia, Spain and Ukraine partly offset by increases in Romania, Poland and Italy. In Italy, volumes were up with increased market share for Lucky Strike, Pall Mall and Dunhill, although overall share was down. Profit was in line with last year as improved margins from industry price increases and the benefit of the productivity programme were offset by the absence of the profit from the Toscano cigar business disposed of in July 2006. Total tobacco volumes in Germany declined as industry volumes were affected by the growth of illicit trade and the end of StiX sales, although both Pall Mall and overall market share grew. Profit was lower as the benefit from higher prices was more than offset by the reduction in volumes. Sales volumes in France were lower although Lucky Strike and Pall Mall grew market share. Profit rose as a result of an improved product mix, lower overheads and reduced variable costs. In Switzerland, weaker volumes and downtrading following the excise increase at the beginning of the year led to lower profits. In the Netherlands, Lucky Strike and Pall Mall both grew market share but profit was lower, impacted by downtrading following an excise increase. Profit and volumes in Belgium were down, affected by a significant excise driven price increase. Results in Spain improved significantly, benefiting from higher prices. Overall market share grew, driven by Lucky Strike, although total volumes were lower. Page 3 Business review cont... Sales volumes in Russia were influenced by trade buying at the end of last year in anticipation of the new excise system and price increases in December. However, some of the first quarter's volume shortfall has been recovered with strong performances by Kent and Vogue, leading to an increased market share. Profit grew strongly, benefiting from higher margins, and an improved product mix. In Romania, market leadership was strengthened with the growth of Kent, Dunhill and Vogue. This, together with higher prices and an improved product mix, resulted in a significant increase in profit. In Ukraine, results improved and Kent grew strongly, although overall volumes were lower due to reduced sales of local brands. In Hungary, profit grew impressively, benefiting from improved margins and efficiency programmes, with Viceroy and Pall Mall volumes growing well. In Poland, volumes and market share were up and results improved after a price increase earlier this year. In Asia-Pacific, profit rose by £30 million to £335 million, mainly attributable to strong performances from Australasia, South Korea, Vietnam and Pakistan, despite the adverse impact of exchange. At comparable rates of exchange, profit would have increased by £44 million or 14 per cent. Volumes at 74 billion were 4 per cent higher as a result of strong growth in Pakistan, South Korea and Vietnam which was partially offset by declines in Bangladesh and Indonesia. Profit grew in Australia, mainly as a result of improved margins from a combination of product cost reductions and price increases, partly offset by the impact of industry volume declines and intensified competitor discounting. Market share rose with good performances from Dunhill, Pall Mall and Winfield. In New Zealand, strong competition in the low price segment continued to affect market share adversely. Profit was lower as the consequent reduction in volume more than offset the benefit from price increases. In Malaysia, despite volumes being impacted by higher levels of illicit trade and the rapid growth of the low price segment, the strong performance of Dunhill meant that market share was only slightly lower. Profit declined due to lower volumes, competitor discounting and the impact of exchange, partly offset by higher pricing and an improved product mix. In Vietnam, profit increased significantly benefiting from a favourable product mix, productivity initiatives and volume growth with expanded distribution. In South Korea, volumes and market share rose with Dunhill and Vogue continuing to make good progress and this, together with supply chain savings, resulted in strong profit growth. In Taiwan, profit improved due to higher prices, cost reductions and increased volumes with a good performance from Pall Mall. Pakistan continued its strong volume growth with Gold Flake the major contributor, resulting in a rise in overall market share. Increased volumes, coupled with price increases and effective cost management, led to an impressive profit performance. In Bangladesh, despite lower volumes, profit was higher with improved margins. In Sri Lanka, profit benefited from higher margins, better product mix and lower expenses but this was more than offset by the impact of a weaker exchange rate. Profit in Latin America increased by £83 million to £386 million due to good performances in Brazil, Venezuela and Chile, partly offset by the adverse impact of weaker local currencies. At comparable rates of exchange, profit would have increased by £107 million or 35 per cent. Volumes were 2 per cent down at 74 billion with declines in Mexico, Argentina and Central America and Caribbean, only partly offset by the increase in Venezuela. In Brazil, excellent profit growth resulted from higher prices in anticipation of an excise increase and an improved product mix, partly offset by the weaker local currency. Cigarette volumes were stable and market share was higher. Page 4 Business review cont... Industry volume in Mexico suffered following excise driven price increases early in 2007 and this, together with lower market share and the impact of exchange, resulted in lower profit. In Argentina, profit was up as prices increased after the severe price competition of last year, although volumes were lower. In Chile, profit grew despite an unfavourable exchange rate, due to higher margins and up-trading to Kent and Lucky Strike, both of which increased market share. Profit in Peru rose with a lower cost base and a slight growth in volumes. In Venezuela, profit increased strongly despite the impact of exchange, due to price increases and higher volumes, with good performances by Consul and Belmont. The Central America and Caribbean area benefited from more efficient product sourcing, but this was more than offset by the impact of exchange and lower industry volumes as a result of excise and price increases. Profit in the Africa and Middle East region grew by £13 million to £249 million, mainly driven by South Africa and Nigeria. At comparable rates of exchange, profit would have increased by £59 million or 25 per cent. Volumes were 3 per cent lower at 47 billion, resulting from disruption of supply to the Middle East and the change in distribution model in Turkey. In South Africa, despite the sharply weaker average exchange rate, profit growth was achieved as a result of price increases, market share gains and an improved product mix. The two main brands, Peter Stuyvesant and Dunhill, continued their impressive performance. Profit growth in Nigeria was the result of higher margins, an improved product mix and productivity initiatives. Share performance was particularly strong for Benson & Hedges, although overall volumes were lower. In sub-Saharan Africa, supply difficulties in West Africa early in the year impacted volume and profit, while a number of markets in East Africa grew volumes, reflecting good progress in reducing illicit trade. In the Middle East, product mix improved across the area through the growth of premium brands, although profit was adversely affected by supply chain problems and a weaker US dollar. Dunhill continued its expansion into Saudi Arabia and grew market share while overall volumes were up. North Africa continued to show volume and profit growth, mostly in Egypt where market share grew through Kent and Rothmans. In Turkey, operating losses increased due to the one-off costs associated with the change in the distribution model in January. The profit from the America-Pacific region decreased by £33 million to £192 million as a result of lower profit in Canada and the impact of weaker exchange rates. At comparable rates of exchange, profit would have decreased by £12 million or 5 per cent. Volumes decreased by 11 per cent to 20 billion, lower in both Japan and in Canada, mainly as a result of declines in industry volumes. The profit contribution from Canada was down £29 million to £107 million. This was due to the greater prevalence of illicit product, the higher initial cost of direct distribution, the continued down-trading to lower priced products and the weaker exchange rate. These were partly offset by higher prices and cost savings resulting from the transfer of manufacturing to Mexico. At comparable rates of exchange, profit was down by 13 per cent. The continued growth of Peter Jackson and the benefits from a more robust and effective direct sales and distribution network, resulted in slight share growth for the second consecutive quarter. Page 5 Business review cont... In Japan, industry volumes were materially lower due to trade buying in June 2006 in anticipation of an excise increase. However, due to the performances of Kent and Kool, there was good market share growth. Profit was adversely impacted by the lower volumes and the weaker exchange rate, partly offset by higher pricing, a better product mix and effective cost management. Unallocated costs, which are net corporate costs not directly attributable to individual segments, were £15 million lower at £45 million, mainly as a result of timing of expenses. The above regional profits were achieved before accounting for restructuring costs and gains/losses on disposal of businesses and brands, as explained on pages 15 and 16. Results of associates The Group's share of the post-tax results of associates decreased by £21 million to £222 million. Excluding the exceptional item in 2006 explained on page 17, the Group's share of the post-tax results of associates decreased by £4 million to £222 million but it would have been 6 per cent higher at comparable rates of exchange. The contribution from Reynolds American, excluding the benefit from the favourable resolution of tax matters in 2006, was £13 million lower due to the impact of the weaker US dollar. At comparable rates of exchange, the contribution from Reynolds American would have been slightly higher at £158 million. The impact of margin improvements from pricing, product mix and costs was offset by lower volumes as the first half of 2006 benefited from timing of shipments. As explained on page 17, Reynolds American acquired Conwood on 31 May 2006 and reported that on a proforma US GAAP basis, as if it had been owned since the beginning of 2006, Conwood increased both its profits and margins. The Group's associate in India, ITC, continued its strong performance and its contribution to the Group rose by £7 million to £54 million. At comparable rates of exchange, the contribution would have been £57 million, or 21 per cent higher than last year, with the growth assisted by one-off costs in 2006. Cash flow The IFRS cash flow on page 12 includes all transactions affecting cash and cash equivalents, including financing. The alternative cash flow on page 19 is presented to illustrate the cash flows before transactions relating to borrowings. This shows Group free cash flow of £752 million, £359 million higher than 2006, with the growth in underlying operating profit, as well as working capital movements reflecting timing and one-off differences in 2006 and 2007. Cigarette volumes The segmental analysis of the volumes of subsidiaries is as follows: 3 months to 6 months to Year to 30.6.07 30.6.06 30.6.07 30.6.06 31.12.06 bns bns bns bns bns 63.1 63.7 Europe 114.6 119.1 247.7 39.1 36.6 Asia-Pacific 74.4 71.4 141.9 36.3 37.4 Latin America 74.0 75.5 152.6 24.0 24.8 Africa and Middle East 46.6 48.2 104.8 10.9 13.2 America-Pacific 20.1 22.5 43.8 ______ ______ ______ ______ ______ 173.4 175.7 329.7 336.7 690.8 ====== ====== ====== ====== ====== In addition, associates' volumes for the six months were 118.3 billion (2006: 115.6 billion) and, with the inclusion of these, the Group volumes would be 448.0 billion (2006: 452.3 billion). Page 6 INDEPENDENT REVIEW REPORT TO BRITISH AMERICAN TOBACCO p.l.c. Introduction We have been instructed by the Company to review the consolidated financial information for the six months ended 30 June 2007, which comprises the Group income statement, the Group statement of changes in total equity, the Group balance sheet, the Group cash flow statement, the segmental analyses of revenue and profit, the accounting policies and basis of preparation 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 Listing Rules of the Financial Services Authority 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. The Interim Report has been prepared in accordance with the basis set out in the Accounting Policies and Basis of Preparation in the Interim Report for the six months to 30 June 2007. 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 disclosed accounting policies have been applied. 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 and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the consolidated 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 consolidated financial information as presented for the six months ended 30 June 2007. PricewaterhouseCoopers LLP Chartered Accountants London 26 July 2007 Page 7 GROUP INCOME STATEMENT - unaudited 3 months to 6 months to Year to 30.6.07 30.6.06 30.6.07 30.6.06 31.12.06 £m £m £m £m £m Gross turnover (including duty, excise and other taxes of £7,609 million (30.6.06: £7,641 million - 31.12.06: 6,515 6,413 £15,427 million)) 12,334 12,449 25,189 ======= ======= ======= ======= ======= 2,493 2,511 Revenue 4,725 4,808 9,762 (771) (799) Raw materials and consumables used (1,386) (1,475) (2,861) Changes in inventories of finished 53 8 goods and work in progress 78 39 (11) (367) (398) Employee benefit costs (711) (759) (1,554) (82) (85) Depreciation and amortisation costs (156) (191) (401) 40 24 Other operating income 70 48 181 (558) (552) Other operating expenses (1,128) (1,145) (2,494) ------- ------- ------- ------- ------- 808 709 Profit from operations 1,492 1,325 2,622 after (charging)/crediting exceptional items -------------------- --------------------------------- (32) (27) - restructuring costs (40) (48) (216) - gains/(losses) on disposal of businesses and 11 (1) brands 11 (16) 41 -------------------- --------------------------------- -------------------- --------------------------------- 25 20 Finance income 55 58 110 (93) (76) Finance costs (181) (182) (399) -------------------- --------------------------------- (68) (56) Net finance costs (126) (124) (289) Share of post-tax results of 111 123 associates and joint ventures 222 243 431 -------------------- --------------------------------- after (charging)/crediting exceptional items - brand impairments (13) 1 - exceptional tax credits 17 17 -------------------- --------------------------------- ------- ------- ------- ------- ------- 851 776 Profit before taxation 1,588 1,444 2,764 (221) (188) Taxation on ordinary activities (420) (366) (716) ------- ------- ------- ------- ------- 630 588 Profit for the period 1,168 1,078 2,048 ======= ======= ======= ======= ======= Attributable to: 584 549 Shareholders' equity 1,079 1,001 1,896 ======= ======= ======= ======= ======= 46 39 Minority interests 89 77 152 ======= ======= ======= ======= ======= Earnings per share 28.70p 26.57p Basic 52.94p 48.38p 92.08p ======= ======= ======= ======= ======= 28.52p 26.39p Diluted 52.58p 48.01p 91.33p ======= ======= ======= ======= ======= See notes on pages 15 to 22. Page 8 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 6 months to Year to 30.6.07 30.6.06 31.12.06 £m £m £m Differences on exchange 88 (377) (685) Cash flow hedges - net fair value gains 5 11 13 - reclassified and reported in net profit (6) (11) (15) Available-for-sale investments - net fair value losses (1) (3) (2) - reclassified and reported in net profit (2) 1 Net investment hedges - net fair value gains 15 63 117 Tax on items recognised directly in equity (13) 3 (12) -------- -------- -------- Net gains/(losses) recognised directly in equity 86 (313) (584) Profit for the period page 8 1,168 1,078 2,048 -------- -------- -------- Total recognised income for the period 1,254 765 1,464 -------------------------------------- - shareholders' equity 1,159 694 1,334 - minority interests 95 71 130 -------------------------------------- Employee share options - value of employee services 17 21 41 - proceeds from shares issued 19 20 28 Dividends (821) (685) (1,008) - ordinary shares - to minority interests (84) (85) (137) Purchase of own shares - held in employee share ownership trusts (29) (77) (77) - share buy-back programme (358) (239) (500) Acquisition of minority interests (2) (13) Other movements (8) 9 13 -------- -------- -------- (12) (271) (189) Balance at 1 January 6,688 6,877 6,877 -------- -------- -------- Balance at period end 6,676 6,606 6,688 ======== ======== ======== See notes on pages 15 to 22. Page 9 GROUP BALANCE SHEET - unaudited 30.6.07 30.6.06 31.12.06 £m £m £m ASSETS Non-current assets Intangible assets 7,561 7,704 7,476 Property, plant and equipment 2,192 2,195 2,207 Investments in associates and joint ventures 2,212 2,198 2,108 Retirement benefit assets 37 37 29 Deferred tax assets 265 258 273 Trade and other receivables 143 125 192 Available-for-sale investments 19 26 24 Derivative financial instruments 79 63 76 -------- -------- -------- Total non-current assets 12,508 12,606 12,385 -------- -------- -------- Current assets Inventories 2,208 2,362 2,056 Income tax receivable 50 26 59 Trade and other receivables 1,503 1,635 1,568 Available-for-sale investments 95 127 128 Derivative financial instruments 93 134 124 Cash and cash equivalents 1,141 1,926 1,456 -------- -------- -------- 5,090 6,210 5,391 Assets classified as held for sale 53 69 -------- -------- -------- Total current assets 5,143 6,279 5,391 -------- -------- -------- -------- -------- -------- TOTAL ASSETS 17,651 18,885 17,776 ======== ======== ======== See notes on pages 15 to 22. Page 10 GROUP BALANCE SHEET - unaudited 30.6.07 30.6.06 31.12.06 £m £m £m EQUITY Capital and reserves Shareholders' funds after deducting 6,440 6,373 6,461 ---------------------------------------- - cost of own shares held in employee share ownership trusts (174) (212) (197) ---------------------------------------- Minority interests 236 233 227 -------- -------- -------- Total equity 6,676 6,606 6,688 -------- -------- -------- LIABILITIES Non-current liabilities Borrowings 5,440 5,988 5,568 Retirement benefit liabilities 395 482 435 Deferred tax liabilities 304 257 296 Other provisions for liabilities and charges 145 165 161 Trade and other payables 152 165 146 Derivative financial instruments 82 29 29 -------- -------- -------- Total non-current liabilities 6,518 7,086 6,635 -------- -------- -------- Current liabilities Borrowings 1,194 1,895 1,058 Income tax payable 281 269 292 Other provisions for liabilities and charges 230 267 253 Trade and other payables 2,665 2,695 2,766 Derivative financial instruments 82 63 84 -------- -------- -------- 4,452 5,189 4,453 Liabilities directly associated with assets classified as held for sale 5 4 -------- -------- -------- Total current liabilities 4,457 5,193 4,453 -------- -------- -------- -------- -------- -------- TOTAL EQUITY AND LIABILITIES 17,651 18,885 17,776 ======== ======== ======== See notes on pages 15 to 22. Page 11 GROUP CASH FLOW STATEMENT - unaudited 6 months to Year to 30.6.07 30.6.06 31.12.06 £m £m £m Cash generated from operations 1,434 1,078 2,816 Dividends received from associates 94 86 259 Tax paid (410) (378) (713) -------- -------- -------- Net cash from operating activities 1,118 786 2,362 -------- -------- -------- Interest and dividends received 50 62 121 Purchases of property, plant and equipment (157) (166) (425) Proceeds on disposal of property, plant and equipment 27 13 64 Purchases and disposals of intangible assets (2) (14) 2 Purchases and disposals of investments 37 (25) (37) Purchases and disposals of subsidiaries (6) (1) (39) -------- -------- -------- Purchases of associates (1) Net cash from investing activities (51) (131) (315) Interest paid (173) (176) (389) Finance lease rental payments (11) (11) (22) Proceeds from issue of shares and exercise of options 19 20 28 Proceeds from increases in and new borrowings 445 1,642 1,365 Movements relating to derivative financial instruments (13) 51 142 Purchases of own shares (387) (316) (577) Reductions in and repayments of borrowings (300) (862) (1,739) Dividends paid (904) (771) (1,147) -------- -------- -------- Net cash from financing activities (1,324) (423) (2,339) -------- -------- -------- Net cash flows from operating, investing and financing activities (257) 232 (292) Differences on exchange 10 (74) (96) -------- -------- -------- (Decrease)/increase in net cash and cash equivalents in the period (247) 158 (388) Net cash and cash equivalents at 1 January 1,276 1,664 1,664 -------- -------- -------- Net cash and cash equivalents at period end 1,029 1,822 1,276 ======== ======== ======== See notes on pages 15 to 22. Page 12 SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited The analyses for the six months are as follows: Revenue 30.6.07 30.6.06 Inter Inter External segment Revenue External segment Revenue restated restated restated £m £m £m £m £m £m Europe 1,683 125 1,808 1,712 262 1,974 Asia-Pacific 932 17 949 854 13 867 Latin America 939 253 1,192 862 101 963 Africa and Middle East 546 9 555 527 21 548 America-Pacific 221 221 456 456 ------- ------- ------- ------- ------- ------- Revenue 4,321 404 4,725 4,411 397 4,808 ======= ======= ======= ======= ======= ======= 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 would be as follows: 30.6.07 30.6.06 £m £m Europe 1,708 1,743 Asia-Pacific 932 907 Latin America 944 869 Africa and Middle East 664 728 America-Pacific 477 561 ------- ------- Revenue 4,725 4,808 ======= ======= Profit from operations 30.6.07 30.6.06 Adjusted Adjusted Segment segment Segment segment result result* result result* £m £m £m £m Europe 376 404 344 380 Asia-Pacific 339 335 305 305 Latin America 386 386 303 303 Africa and Middle East 247 249 234 236 America-Pacific 189 192 199 225 ------- ------- ------- ------- Segmental results 1,537 1,566 1,385 1,449 Unallocated costs (45) (45) (60) (60) ------- ------- ------- ------- Profit from operations 1,492 1,521 1,325 1,389 ======= ======= ======= ======= *Excluding restructuring costs and gains/losses on disposal of businesses and brands as explained on pages 15 and 16. Page 13 Segmental analyses of revenue and profit cont... - unaudited The analyses for the year ended 31 December 2006 are as follows: Revenue Location of manufacture Location of sales Inter External segment Revenue Revenue restated restated restated £m £m £m £m Europe 3,495 526 4,021 3,545 Asia-Pacific 1,755 27 1,782 1,839 Latin America 1,780 332 2,112 1,791 Africa and Middle East 1,063 24 1,087 1,489 America-Pacific 760 760 1,098 ------- ------- ------- ------- Revenue 8,853 909 9,762 9,762 ======= ======= ======= ======= The above analysis has been restated to reflect changes in manufacturing operations. Profit from operations Adjusted Segment result segment result* £m £m Europe 676 781 Asia-Pacific 609 616 Latin America 611 611 Africa and Middle East 444 468 America-Pacific 385 424 -------- -------- Segmental results 2,725 2,900 Unallocated costs (103) (103) -------- -------- Profit from operations 2,622 2,797 ======== ======== *Excluding restructuring costs and gains/losses on disposal of businesses and brands as explained on pages 15 and 16. The segmental analysis of the Group's share of the post-tax results of associates and joint ventures for the six months is as follows: 30.6.07 30.6.06 31.12.06 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* £m £m £m £m £m £m Europe 21 21 20 20 46 46 Asia-Pacific 55 55 48 48 92 92 Latin America 1 1 Africa and Middle East 1 1 1 1 4 4 America-Pacific 144 144 174 157 289 285 ------ ------ ------ ------ ------ ------ 222 222 243 226 431 427 ====== ====== ====== ====== ====== ====== *Excluding brand impairments and exceptional tax credits as explained on page 17. Page 14 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited interim results for the six months to 30 June 2007 and 30 June 2006, together with the audited results for the year ended 31 December 2006. The annual consolidated financial statements for 2006, which represent the statutory accounts for that year, have been filed with the Registrar of Companies. The auditors' report on those statements was unqualified and did not contain any statement concerning accounting records or failure to obtain necessary information and explanations. 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 (EU) and implemented in the UK. These unaudited Group interim results have been prepared on a basis consistent with the IFRS accounting policies as set out in the Annual Report and Accounts for the year ended 31 December 2006. These interim financial statements 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 statement has been translated at the average rates for the respective periods. The total equity has 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 30.6.07 30.6.06 31.12.06 30.6.07 30.6.06 31.12.06 US dollar 1.971 1.791 1.844 2.006 1.850 1.957 Canadian dollar 2.235 2.038 2.091 2.134 2.057 2.278 Euro 1.482 1.455 1.467 1.486 1.447 1.484 South African rand 14.120 11.317 12.520 14.149 13.191 13.799 Brazilian real 4.028 3.919 4.009 3.864 4.003 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 £216 million. The six months to 30 June 2007 includes a charge for restructuring of £40 million (2006: £48 million), principally in respect of costs associated with restructuring the operations in Italy and 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 is expected to be completed by the end of the third quarter. In the second quarter, this has resulted in the separate classification of the assets and liabilities as held for sale in the Group balance sheet. Page 15 Exceptional items cont... (b) 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 £20 million, reflecting a £16 million impairment charge included in depreciation and amortisation costs in the profit from operations and £4 million of other costs included in other operating expenses in the profit from operations. The impairment charge was reflected in the six months to 30 June 2006. 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 £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 £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 is expected to be completed later this year and the assets and liabilities are classified as held for sale in the Group balance sheet. OTHER CHANGES IN THE GROUP From August 2006, the Group purchased minority interests in its subsidiary in Chile for a cost of £91 million, raising the Group shareholding from 70.4 per cent to 96.6 per cent. The goodwill arising on this transaction was £80 million and the minority interests in Group equity were reduced by £11 million. Page 16 NET FINANCE COSTS Net finance costs comprise: 6 months to 30.6.07 30.6.06 £m £m Interest payable (185) (203) Interest and dividend income 53 63 Fair value changes - derivatives (36) 141 Exchange differences 42 (125) -------- -------- 6 16 -------- -------- (126) (124) ======== ======== Net finance costs at £126 million were similar to last year. The £6 million gain (2006: £16 million) of fair value changes and exchange differences reflects a gain of £6 million (2006: £7 million) from the net impact of exchange rate movements and a gain of £nil million (2006: £9 million) 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. These amounts do not always reflect an economic gain or loss for the Group. In calculating the adjusted earnings per share for the six months to 30 June 2006, a £4 million gain was excluded as it related to exchange where there was a compensating exchange loss taken directly to total equity. ASSOCIATES The share of post-tax results of associates was £222 million (2006: £243 million) after tax of £120 million (2006: £108 million). For the year to 31 December 2006, the share of post-tax results was £431 million after tax of £216 million. The share is after exceptional charges and credits. In the six months to 30 June 2006 and the year ended 31 December 2006, Reynolds American benefited from the favourable resolution of tax matters of which the Group's share was £17 million. In the year ended 31 December 2006, Reynolds American also 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 £13 million (net of tax). 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. Page 17 TAXATION The tax rate in the income statement of 26.4 per cent for the six months to 30 June 2007 (30 June 2006: 25.3 per cent) is affected by the inclusion of the share of associates' post-tax profits in the Group's pre-tax results. The underlying rate for subsidiaries reflected in the adjusted earnings per share below was 30.8 per cent and 30.6 per cent in 2006. The charge relates to taxes payable overseas. 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 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. The earnings per share are based on: 30.6.07 30.6.06 31.12.06 Earnings Shares Earnings Shares Earnings Shares £m m £m m £m m Basic 1,079 2,038 1,001 2,069 1,896 2,059 Diluted 1,079 2,052 1,001 2,085 1,896 2,076 The earnings have been affected by exceptional items, together with certain distortions to net finance costs under IFRS in 2006, and to illustrate the impact of these the adjusted diluted earnings per share are shown below: Diluted earnings per share 6 months to Year to 30.6.07 30.6.06 31.12.06 pence pence pence Unadjusted earnings per share 52.58 48.01 91.33 Effect of restructuring costs 1.32 1.61 8.09 Effect of disposal of businesses and brands (0.39) 0.50 (1.11) Effect of associates' brand impairments and exceptional tax credits (0.82) (0.19) Net finance costs adjustments (0.19) ------- ------- ------- Adjusted diluted earnings per share 53.51 49.11 98.12 ======= ======= ======= Adjusted diluted earnings per share are based on: - adjusted earnings (£m) 1,098 1,024 2,037 - shares (m) 2,052 2,085 2,076 Similar types of adjustments would apply to basic earnings per share. For the six months to 30 June 2007, basic earnings per share on an adjusted basis would be 53.88p (2006: 49.49p) compared to unadjusted amounts of 52.94p (2006: 48.38p). Page 18 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. 6 months to Year to 30.6.07 30.6.06 31.12.06 £m £m £m Net cash from operating activities before restructuring costs and taxation 1,604 1,236 3,295 Restructuring costs (76) (72) (220) Taxation (410) (378) (713) ------ ------ ------ Net cash from operating activities (page 12) 1,118 786 2,362 Net interest (135) (140) (263) Net capital expenditure (148) (167) (419) Dividends to minority interests (83) (86) (139) ------ ------ ------ Free cash flow 752 393 1,541 Dividends paid to shareholders (821) (685) (1,008) Share buy-back (358) (239) (500) Other net flows 25 (51) (5) ------ ------ ------ Net cash flows (402) (582) 28 ====== ====== ====== The Group's net cash flow from operating activities at £1,118 million was £332 million higher, with the growth in underlying operating performance, as well as working capital movements reflecting timing and one-off differences in 2006 and 2007. With relatively small changes in net interest and dividends paid to minorities, as well as lower net capital expenditure, the free cash flow was £752 million, £359 million higher than 2006. Below free cash flow, the cash flows for the first six months of the year include the payment of the prior year final dividend (2007: £821 million - 2006: £685 million). The share buy-back also results in an outflow of £358 million (2006: £239 million). The change in other net outflows from a £51 million outflow in 2006 to a £25 million inflow in 2007 principally reflects the reduced purchase of own shares to be held in employee share ownership trusts and the disposal of trade marks in 2007. The above flows resulted in net cash outflows of £402 million (30 June 2006: £582 million outflow - 31 December 2006: £28 million inflow). After taking account of transactions related to borrowings, especially net new borrowings, the above flows resulted in a net decrease of cash and cash equivalents of £257 million, (30 June 2006: £232 million increase - 31 December 2006: £292 million decrease) as shown in the IFRS cash flow on page 12. These cash flows, after a positive exchange impact of £10 million, resulted in cash and cash equivalents, net of overdrafts, decreasing by £247 million in 2007 (30 June 2006: £158 million increase - 31 December 2006: £388 million decrease). Page 19 Cash flow cont... In addition, the cash outflows were also the principal reason why borrowings, excluding overdrafts but taking into account derivatives relating to borrowings, were £6,544 million compared to £6,401 million at 31 December 2006. Current available-for-sale investments at 30 June 2007 were £95 million (30 June 2006: £127 million and 31 December 2006: £128 million). As a result of the above, total borrowings including related derivatives, net of cash, cash equivalents and current available-for-sale investments, were £5,419 million (31 December 2006: £4,996 million). b) IFRS cash generated from operations (page 12) 6 months to Year to 30.6.07 30.6.06 31.12.06 £m £m £m Profit before taxation 1,588 1,444 2,764 Share of post-tax results of associates (222) (243) (431) Net finance costs 126 124 289 Gains on disposal of brands and joint ventures (11) (60) Depreciation and impairment of property, plant and equipment 141 174 367 Amortisation and impairment of intangible assets 15 17 34 (Increase)/decrease in inventories (146) (202) 21 Decrease/(increase) in trade and other receivables 134 (66) (105) (Decrease)/increase in trade and other payables (94) (100) 57 (Decrease) in net retirement benefit liabilities (55) (49) (69) (Decrease) in other provisions for liabilities and charges (43) (49) (68) Other 1 28 17 ------ ------ ------ 1,434 1,078 2,816 ====== ====== ====== c) IFRS investing and financing activities The investing and financing activities in the IFRS cash flows on page 12 include the following items: Interest and dividends received include dividends received of £1 million (30 June 2006: £1 million - 31 December 2006: £2 million). Purchases and disposals of intangible assets include £16 million of sales proceeds for the six months to 30 June 2007 and £60 million for the year to 31 December 2006, mainly from the brands sale explained on page 16. Purchases and disposals of investments (which comprise available-for-sale investments and loans and receivables) include an inflow in respect of current investments of £33 million for the six months to 30 June 2007 (30 June 2006: £27 million outflow - 31 December 2006: £41 million outflow) and £4 million sales proceeds of non-current investments for the six months to 30 June 2007 (30 June 2006: £2 million - 31 December 2006: £4 million). Purchase and disposals of subsidiaries for the year ended 31 December 2006, principally reflected the cost of acquiring minority interests in the Group's Chilean subsidiary, less the proceeds from the sale of Toscano as explained on page 16. Page 20 Cash flow cont... In the six months to 30 June 2007, euro 800 million of notes with a maturity of 2009 were replaced by a euro 1,000 million bond with a maturity of 2017. In the six months to 30 June 2006, euro 1,000 million floating note rates were repaid, while euro 600 million Notes with a maturity of 2014, £325 million Notes with a maturity of 2016 and euro 525 million Notes with a maturity of 2010 were issued. In addition, there was a net draw down on the Revolving Credit Facility of £400 million during the six months to 30 June 2006. 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 22, together with purchases of shares held in employee share schemes (30 June 2007: £29 million - 30 June 2006: £77 million - 31 December 2006: £77 million). Dividends paid for the six months to 30 June 2007 include £821 million of dividends to Group shareholders and £83 million to minority shareholders (30 June 2006: £685 million and £86 million respectively - 31 December 2006: £1,008 million and £139 million respectively). d) Net cash and cash equivalents in the Group cash flow statement comprise: 30.6.07 30.6.06 31.12.06 £m £m £m Cash and cash equivalents per balance sheet 1,141 1,926 1,456 Less accrued interest (1) (2) (1) Overdrafts (111) (102) (179) ------- ------- ------- 1,029 1,822 1,276 ======= ======= ======= DIVIDENDS The Directors have declared an interim dividend for the six months to 30 June 2007, for payment on 12 September 2007, at the rate of 18.6p per share. This interim dividend amounts to £377 million. The comparative dividend for the six months to 30 June 2006 of 15.7p per share amounted to £322 million. Valid transfers received by the Registrar of the Company up to 3 August 2007 will be in time to rank for payment of the interim dividend. In accordance with IFRS, the interim dividend will be charged in the Group results for the third quarter. The results for the six months to 30 June 2007 include the final dividend paid in respect of the year ended 31 December 2006 of 40.2p per share amounting to £821 million (30 June 2006: 33.0p amounting to £685 million). Page 21 SHAREHOLDERS' FUNDS 30.6.07 30.6.06 31.12.06 £m £m £m Share capital 509 520 517 Share premium account 52 47 48 Capital redemption reserves 98 87 90 Merger reserves 3,748 3,748 3,748 Translation reserve (94) 74 (177) Hedging reserve 9 13 10 Available-for-sale reserve 11 14 13 Other reserves 573 573 573 Retained earnings 1,534 1,297 1,639 after deducting ------------------------------ - cost of own shares held in employee share ownership trusts (174) (212) (197) ------------------------------ ------- ------- ------- Shareholders' funds 6,440 6,373 6,461 ======= ======= ======= CONTINGENT LIABILITIES As noted in the Report and Accounts for the year ended 31 December 2006, there are contingent liabilities in respect of litigation, overseas taxes and guarantees in various countries. Group companies, as well as other leading cigarette manufacturers, are defendants in a number of product liability cases. In a number of these cases, the amounts of compensatory and punitive damages sought are significant. 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. Having regard to these matters, the Directors (i) do not consider it appropriate to make any provision in respect of any pending litigation and (ii) do not believe that the ultimate outcome of this litigation will significantly impair the financial condition of the Group. 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 2007, 22 million shares were bought at a cost of £358 million (30 June 2006: 17 million shares at a cost of £239 million). 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 and from our website www.bat.com Nicola Snook Secretary 26 July 2007 Page 22 This information is provided by RNS The company news service from the London Stock Exchange

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