3rd Quarter Results
British American Tobacco PLC
26 October 2004
QUARTERLY REPORT TO 30 SEPTEMBER 2004 26 October 2004
SUMMARY
NINE MONTHS RESULTS 2004 2003 Change
Operating profit pre-goodwill amortisation and
exceptionals
£2,138m £2,111m +1%
Pre-tax profit £1,543m £1,287m +20%
Adjusted earnings per share 54.97p 51.42p +7%
• Operating profit, before charging goodwill amortisation and
exceptional items, was 1 per cent higher at £2,138 million. The
results continued to be adversely affected by the translation to
sterling, which strengthened against almost all currencies. At
comparable rates of exchange, operating profit would have risen by 7
per cent benefiting from the ETI acquisition and good performances
in all regions apart from America-Pacific.
• Group volumes grew by 6 per cent to 618 billion, mainly due to
additional volumes from acquisitions and the Reynolds American
transaction. The four global drive brands Kent, Dunhill, Pall Mall
and Lucky Strike improved in the third quarter, up 3 per cent, and
for the nine months grew slightly. With the inclusion of cigarette
stix, which have grown substantially in Germany, global drive brands
were 2 per cent ahead of last year.
• Operating profit, after charging goodwill amortisation and
exceptional items, was 8 per cent higher at £1,619 million
reflecting the lower level of exceptional costs in 2004. This,
together with a gain on the disposal of subsidiaries compared to a
loss in 2003, resulted in pre-tax profit 20 per cent higher at
£1,543 million. Basic earnings per share were 42.51p (2003 24.34p).
• Adjusted diluted earnings per share at 54.97p were up 7 per cent,
benefiting from the impact of the share buy-back programme and a
lower effective tax rate.
• The Chairman, Jan du Plessis, commented "While the results for the
first nine months continue to be adversely affected by the strength
of sterling, they do also demonstrate the real benefit that we
derive from our balanced brand portfolio and the geographic spread
of our businesses. These are two of the Group's defining
characteristics and they represent a sustainable competitive
advantage."
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BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 30 SEPTEMBER 2004
INDEX
PAGE
Chairman's comments 2
Business review 5
Group results 9
Segmental analyses of turnover and profit 10
Statement of total recognised gains and losses 11
Interest of British American Tobacco's shareholders 11
Accounting policies and basis of preparation 12
Convertible redeemable preference shares 12
Foreign currencies 12
Changes in the Group 13
Goodwill amortisation 14
Restructuring costs 14
Write-down of loan to joint venture 15
Gain/(loss) on disposal of subsidiaries 15
Net interest 16
Taxation 16
Earnings per share 16
Share buy-back programme 17
CHAIRMAN'S COMMENTS 2.
British American Tobacco's operating profit, before exceptional items
and goodwill amortisation, at £2,138 million, was 1 per cent ahead
compared to last year. The results continued to be adversely
affected by the strength of sterling, not only against the US dollar
but also against the Canadian dollar and the Euro. At comparable
rates of exchange, operating profit would have grown by 7 per cent,
benefiting from the ETI acquisition and good performances in all
regions apart from America-Pacific.
Adjusted diluted earnings per share increased by 7 per cent to 55.0p,
reflecting a lower underlying tax rate and the benefit of the share
buy-back programme. In the year so far, 46 million shares have been
bought back at a cost of £379 million and at an average price of
£8.24 per share.
As expected, the merger between the US businesses of Brown &
Williamson and R. J. Reynolds, announced almost exactly a year ago,
closed at the end of July. The Group now has a 42 per cent share in
a much stronger and more competitive business. The integration
process is proceeding very smoothly indeed and we have every
confidence in Reynolds American's prospects for the years ahead.
Total Group volumes were 6 per cent higher at 618 billion, driven
largely by acquisitions and the impact of the Reynolds American
transaction. The performance of our four global drive brands,
Dunhill, Kent, Lucky Strike and Pall Mall, has improved as expected
and they achieved overall growth in the first nine months, having
been slightly lower than last year in the first six months. In the
third quarter, the global drive brands grew by 3 per cent. This is
an encouraging trend, especially in the light of the difficulties in
major markets such as France, Germany and Japan. Kent was the star
performer, with continued strong growth in Russia and Romania.
As mentioned earlier, there were good performances from all regions
except America-Pacific, where the decline in the Canadian market has
had a significant impact on the results. Our management team in
Canada is reviewing every aspect of their business in order to be as
competitive in the growing value-for-money segment as they are in
premium.
The most impressive regional profit increases were in Asia-Pacific,
notably from Australia, and in Europe. It is too early to quantify
the negative impact of the recently announced excise increase and
tobacco control regulations in Malaysia but the picture should be
clearer in the first quarter of 2005.
Chairman's comments cont... 3.
Although the results in Europe are boosted by the acquisition of ETI,
there was also continued success in Russia, which helped to offset
the declines in France and Germany resulting from excise increases.
We were also able to draw on our expertise in other tobacco products
to launch Pall Mall Stix in Germany earlier in the year.
In Italy, we announced the sale of Etinera, BAT Italia's distribution
business, to Logista, a specialist tobacco distributor in Spain and
Portugal, for €590 million in cash. The sale, which is still subject
to regulatory approval, represents a sensible solution to a potential
problem in that it avoids some restructuring costs that BAT Italia
could have incurred. We expect the sale to be completed in the
fourth quarter.
The Latin American region achieved good results in difficult
conditions, with Venezuela performing particularly well. In Africa
and Middle East, South Africa continued to increase its profit, while
there was good volume growth in Turkey.
Shareholders will probably be aware that the US Department of
Justice's case against the US tobacco industry, seeking
US$280 billion in "ill-gotten gains" has now reached the trial stage.
It is worth noting that the Group's exposure to US litigation has
been significantly reduced as a result of the Reynolds American
transaction. Moreover, while the trial may well provide some
negative publicity, your Board has full confidence in the strength of
the industry's defences to the case.
British American Tobacco has been included for the third year running
as the only tobacco company in the 2005 Dow Jones Sustainability
World Index (DJSI). The DJSI includes over 300 companies in 24
countries judged to lead their industries in corporate
sustainability. We maintained our 100 per cent score in four
categories: Social Reporting; Environmental Reporting; Management of
Genetically Modified Organisms; and Fuels for Tobacco Curing. In the
tobacco sector, we achieved the best scores in 18 of the 25 criteria,
including all the environmental ones.
The Group has also won a further PricewaterhouseCoopers Building
Public Trust Award for what the judges called our "bold and
innovative" report on Corporate Governance and Executive Remuneration
in the 2003 Annual Report. They added that "It gives you the feeling
that British American Tobacco has nothing to hide". Both the award
and our inclusion in the DJSI are encouraging objective signs of the
steady progress we are making in improving our reputation.
Chairman's comments cont... 4.
While the results for the first nine months continue to be adversely
affected by the strength of sterling, they do also demonstrate the
real benefit that we derive from our balanced brand portfolio and the
geographic spread of our businesses. These are two of the Group's
defining characteristics and they represent a sustainable competitive
advantage.
Jan du Plessis
26 October 2004
BUSINESS REVIEW 5.
Group operating profit, excluding goodwill amortisation and
exceptional items set out on pages 14 and 15, was 1 per cent higher
at £2,138 million. Good underlying performances were adversely
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 6 per cent to 618 billion, mainly due to
additional volumes from acquisitions and the Reynolds American
transaction. Volumes include the whole of the Reynolds American
volume, as is the case with our other associated companies in India
and Denmark. The US volumes therefore include seven months from
Brown & Williamson and two months from Reynolds American.
The four global drive brands improved in the third quarter, growing
by 3 per cent, and for the nine months grew slightly with increased
volumes by Kent partly offset by declines in Dunhill, Pall Mall and
Lucky Strike. With the inclusion of cigarette stix, which have grown
substantially in Germany, Pall Mall is ahead of last year and the
global drive brands grew by 2 per cent in the nine months.
Profit from the America-Pacific region was £600 million, down
£125 million from the same period last year, with decreases in Japan
and Canada, further accentuated by the translation of US and Canadian
results to sterling. Volumes in the region were up 13 per cent to
87 billion, mainly as a result of Reynolds American, with higher
volumes from South Korea but declines in Canada and Japan.
Imperial Tobacco Canada's profit was down £88 million at £252 million
due to lower volumes, changing sales mix and a weakening of the
currency against sterling, partly offset by lower operating costs.
Industry volumes declined despite continued growth in the low-priced
segment where, since May, Imperial has competed more vigorously
following the repositioning of Matinee. Imperial's share of this
segment has increased from 12 to 33 per cent. Overall market share
was down as the share of the premium segment declined slightly,
although du Maurier and Player's remain the market leaders.
The total contribution from the US domestic businesses was
£222 million (2003: £242 million). Following the Reynolds American
transaction described on page 13, the results for 2004 include the
contribution from Group subsidiaries for seven months (£149 million)
and the Group's share in the profit of Reynolds American for two
months (£73 million). Brown & Williamson's cigarette business profit
for the seven months was lower than the comparative period as a
result of adverse exchange rate movements, lower volumes and the non-
recurrence of a gain on the settlement of certain disputed MSA
payments. Excluding this one-off item, profit at comparable rates of
exchange increased as lower supply chain and marketing costs were
partly offset by lower volumes and net pricing. The merger of the
businesses in Reynolds American is progressing well with a combined
third quarter US market share of 30.75 per cent.
Business review cont... 6.
Profit in Japan was lower due to unfavourable exchange and reduced
volumes as the overall market declined. The market shares of the key
brands remained broadly stable. In South Korea, volumes increased
with the growth in Dunhill, which contributed to higher profit.
In Asia-Pacific, regional profit rose by £37 million to £395 million,
with strong performances in Australia, Pakistan, Malaysia, India and
the duty-free business. Regional volumes at 151 billion were 5 per
cent higher than last year, with increases in India, Vietnam,
Pakistan and Bangladesh partially offset by declines in Indonesia and
Malaysia.
Australia delivered strong profit growth through higher margins, with
volumes and market share both up, reflecting the strong performance
of Dunhill and Winfield. Profit in New Zealand was higher as a result
of improved margins, reduced costs, and a slight increase in volumes.
In Malaysia, profit growth was achieved in local currency through
higher margins, despite lower volumes and market share following an
excise increase last year. Vietnam continued to deliver strong
profit and volume growth, increasing overall market share. The
volume decline in Indonesia reflected further excise increases and
led to lower profit.
Pakistan delivered an excellent increase in profit from price
increases, improved sales mix, lower costs and strong volume growth,
with good performances from Gold Flake and John Player Gold Leaf. In
Bangladesh, volumes and market share increased but profit was lower
due to consumer down-trading. The Group's associated companies in
India continued their good performance with strong volume growth and
increased profit in local currency.
In Latin America, profit of £311 million was £20 million lower as
favourable results in local currency were affected by the general
weakening of exchange rates against sterling. Regional volumes of
109 billion were slightly lower than last year as increases in
Venezuela and Central America and the impact of the acquisition in
Peru, were offset by declines in Brazil, Mexico and Argentina.
Profit in Brazil was lower as the impact of price increases was
offset by reduced cigarette volumes, lower leaf export margins and
the depreciation of the real against sterling.
In Mexico, profit was affected as lower volumes, higher marketing
expenditure and the devaluation of the currency more than offset the
benefit of price increases and a larger share of the premium segment.
In Argentina, profit recovered as a result of two price increases.
However, the price increases resulted in a strong growth of low-
priced brands from local manufacturers and in illegal market
activity, with the total legal market down by 9 per cent.
Business review cont... 7.
In Chile, profit was affected by the timing of expenses while volumes
were slightly up due to good results by Belmont. Despite the impact
of exchange, profit grew in Venezuela due to price increases, the
timing of expenses and much higher volumes, as disposable income
levels improved and imported illegal product reduced. In Central
America, profit benefited from higher prices and volumes, as well as
lower trade costs, but was negatively affected by exchange rate
movements.
In Europe, profit increased by £120 million, to £564 million,
principally driven by the acquisition of Ente Tabacchi Italiani
S.p.A. (ETI). The benefits from cost savings following the closure
of factories in the United Kingdom and Benelux, as well as good
results in a number of markets, were largely offset by markets where
excise increases resulted in lower volumes. Total volume grew by
8 per cent to 197 billion, primarily due to incremental volume from
newly acquired businesses and continued regional expansion in Russia,
partly offset by market related declines in Germany, France, Hungary
and the Netherlands.
In Italy, the business is going well, with profit from the combined
business ahead of expectations at £136 million and market share of
over 30 per cent. The sale of the Italian tobacco distributor
Etinera, as described on page 13, is proceeding.
In Germany, overall cigarette market share remained in line with last
year and Lucky Strike and Pall Mall continued to grow share.
However, volume and profit suffered due to a 15 per cent decline of
industry cigarette volumes following the excise related price
increases. As the Group is well positioned to benefit from the
growth in consumer demand for other tobacco products, including
cigarette stix, total tobacco volumes fell by only 7 per cent.
Market share in France was stable but both profit and volumes
declined as two large excise increases led to a significant reduction
in the total market.
In Switzerland, volumes fell slightly following an excise increase,
but profit was marginally up and market share was higher driven by
continued growth of Parisienne.
In Russia, profit was significantly up with continued strong volume
increases, a better mix and higher market share, driven by the
impressive growth of premium priced Kent. In Romania, profit
increased strongly as improved margins and higher market share were
achieved through the growth of Kent, Pall Mall and Viceroy. In
Poland, with a lower total market, volume and share increases of Pall
Mall and Viceroy resulted in market share and profit growth.
Business review cont... 8.
The Smoking Tobacco and Cigars operations showed very strong profit
growth, led by price increases and the growth of volumes in all
product groups, especially in Germany.
Profit in the Africa and Middle East region grew by £15 million to
£268 million with strong performances from South Africa and Nigeria,
partly offset by the continued investment in new markets and the
difficulties in Zimbabwe. Volumes rose by 5 per cent to 74 billion,
with good growth in Nigeria and Turkey, partly offset by declines in
South Africa and Zimbabwe.
In South Africa, good profit growth was achieved with higher margins
and the benefit of a stronger rand exchange rate.
Volumes and profit were higher in the Middle East and North Africa.
In Turkey there were good performances by Viceroy and Pall Mall and
total volume more than doubled, but losses continued reflecting
further investment in this market.
Elsewhere in Africa, there were generally improved results, notably
from improved distribution and strong growth by Benson & Hedges in
Nigeria. The impact of these improvements was partly offset by the
effects of difficult economic conditions in Zimbabwe.
Non-trading items
The above results were achieved before accounting for goodwill
amortisation and exceptional items described on pages 14 and 15.
Group Cigarette Volumes
3 months to 9 months to Year to
30.9.04 30.9.03 30.9.04 30.9.03 31.12.03
bns bns bns bns bns
38.8 25.8 America-Pacific 86.5 76.8 102.9
50.5 47.7 Asia-Pacific 151.1 143.5 192.2
36.7 37.3 Latin America 108.9 109.7 149.6
69.2 66.3 Europe 196.9 183.0 249.0
26.9 24.4 Africa and Middle East 74.3 71.0 98.2
----- ----- ----- ----- -----
222.1 201.5 617.7 584.0 791.9
===== ===== ===== ===== =====
GROUP RESULTS - unaudited 9.
3 months to 9 months to Year to
30.9.04 30.9.03 30.9.04 30.9.03 31.12.03
£m £m £m £m £m
REVENUE
8,136 6,246 Subsidiary undertakings 23,778 17,910 24,151
Share of associates and
756 342 joint ventures 1,486 1,094 1,471
----- ----- ------ ------ ------
8,892 6,588 25,264 19,004 25,622
===== ===== ====== ====== ======
PROFIT
554 604 Subsidiary undertakings 1,544 1,389 1,777
after charging:
(118) (101) goodwill amortisation (354) (303) (405)
(9) (22) restructuring costs (50) (303) (437)
Share of associates and
(3) 46 joint ventures 75 116 75
after charging:
(14) goodwill amortisation (14)
(101) restructuring costs (101)
write down of loan to joint
venture (87)
----- ----- ------ ------ ------
551 650 Total operating profit 1,619 1,505 1,852
Gain/(loss) on disposal
127 (62) of subsidiaries 127 (62) (72)
----- ----- ------ ------ ------
Profit on ordinary
678 588 activities before interest 1,746 1,443 1,780
(72) (55) Net interest (201) (153) (209)
Share of associates' and
(2) (1) joint ventures' net interest (2) (3) (4)
----- ----- ------ ------ ------
604 532 Profit before taxation 1,543 1,287 1,567
(144) (227) Taxation (549) (627) (779)
----- ----- ------ ------ ------
460 305 Profit after taxation 994 660 788
(36) (40) Minority interests (103) (118) (157)
----- ----- ------ ------ ------
424 265 Profit for the period 891 542 631
===== ===== ====== ====== ======
Earnings per share
19.89p 12.51p basic 42.51p 24.34p 26.93p
===== ===== ====== ====== ======
19.76p 11.93p diluted - unadjusted 41.23p 24.05p 26.69p
===== ===== ====== ====== ======
21.16p 19.89p diluted - adjusted 54.97p 51.42p 69.21p
===== ===== ====== ====== ======
See notes on pages 12 to 17.
SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - unaudited 10.
3 months to 9 months to Year to
30.9.04 30.9.03 30.9.04 30.9.03 31.12.03
£m £m £m £m £m
Turnover excluding duty,
excise and other taxes
806 897 America-Pacific 2,278 2,680 3,562
415 445 Asia-Pacific 1,281 1,313 1,765
334 342 Latin America 928 952 1,309
1,283 922 Europe 3,708 2,644 3,502
341 318 Africa and Middle East 971 920 1,289
----- ----- ------ ------ ------
3,179 2,924 9,166 8,509 11,427
===== ===== ====== ====== ======
Operating profit
211 251 America-Pacific 600 725 995
143 130 Asia-Pacific 395 358 473
121 115 Latin America 311 331 440
226 182 Europe 564 444 536
92 95 Africa and Middle East 268 253 337
----- ----- ------ ------ ------
793 773 2,138 2,111 2,781
(132) (101) Goodwill amortisation (368) (303) (405)
(110) (22) Restructuring costs (151) (303) (437)
Write down of loan to
joint venture (87)
----- ----- ------ ------ ------
551 650 1,619 1,505 1,852
===== ===== ====== ====== ======
Operating profit, before exceptional items
and goodwill amortisation, restated at
829 773 comparable rates of exchange 2,257 2,111 2,781
===== ===== ====== ====== ======
Net turnover for the nine months includes £965 million (2003 £637 million)
in respect of associates and joint ventures. The net turnover analysis is
based on external sales in each region. The figures for the nine months
ended 30 September 2004 based on regional location of manufacture would not
be materially different except that the turnover for Europe would have been
£446 million (2003 £438 million) higher. Consequently, Africa and Middle East
would have been £342 million (2003 £353 million) lower and Asia-Pacific
£104 million (2003 £85 million) lower.
The impact of the acquisition of ETI and Reynolds American transaction on the
above results are described on page 13.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - unaudited 11.
9 months to Year to
30.9.04 30.9.03 31.12.03
£m £m £m
Profit for the period 891 542 631
Differences on exchange (17) 345 206
Gain on disposal of subsidiaries 921
------ ------ ------
Total recognised gains related
to the period (below) 1,795 887 837
====== ====== ======
INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - unaudited
9 months to Year to
30.9.04 30.9.03 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) 1,795 887 837
Issue of shares - share options 4 4 5
Dividends and other appropriations:
ordinary shares (271) (247) (799)
convertible redeemable preference
shares (14) (47)
amortisation of discount on
preference shares (8) (13) (18)
Purchase of own shares (368) (518) (698)
Consideration paid for purchase of
own shares held in Employee Share
Ownership Trusts (70) (58) (58)
Consideration received on the exercise
of options over own shares held in
Employee Share Ownership Trusts 28 9 15
Credit in respect of employee share
schemes 25 21 28
Goodwill reinstated on disposal of
subsidiaries 216
Other movements 8 13 18
------ ------ ------
Balance at period end 5,720 5,162 4,361
====== ====== ======
See notes on pages 12 to 17.
ACCOUNTING POLICIES AND BASIS OF PREPARATION 12.
The financial statements comprise the unaudited results for the nine
months ended 30 September 2004 and 30 September 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 September 2003
and 31 December 2003, as published last year, has been reduced by
£107 million, £135 million and £122 million respectively to reflect
the deduction of the net carrying value of the shares from
shareholders' funds. 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 were redeemed
for cash on 7 June 2000 and the remaining 50 per cent were 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 for the nine months to 30 September 2004 at the
average rates for that period. The comparatives for the nine months
to 30 September 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... 13.
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 30.9.04 30.9.03 31.12.03
US dollar 1.820 1.635 1.810 1.661 1.790
Canadian dollar 2.418 2.288 2.290 2.242 2.313
Euro 1.486 1.445 1.457 1.427 1.419
South African
rand 11.979 12.331 11.717 11.572 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. Recently the EU has given
approval to proceed with the sale of Etinera S.p.A., the distribution
business of its Italian subsidiary, for €590 million. The sale now
awaits approval from the Italian Government and satisfactory tax
clearances. In the nine months to 30 September 2004, it is estimated
that the acquisition contributed £1,082 million of net turnover and
£111 million of operating profit to the Group results (of which
£827 million and £29 million respectively is attributable to the
distribution business of Etinera).
The Group announced on 27 October 2003 and completed on 30 July
2004 the agreement to combine Brown & Williamson's (B&W) US
domestic businesses with R.J. Reynolds (RJR) under Reynolds
American Inc., a new holding company 58 per cent owned by RJR
shareholders and 42 per cent by the Group, through B&W. The Group
also sold Lane to Reynolds American for US$400 million in cash.
Changes in the Group cont... 14.
This transaction has been accounted for in accordance with UITF
abstract 31, which gives rise to goodwill relating to the Group's
investment in Reynolds American Inc. and a gain on the partial
disposal of the US domestic businesses. The goodwill on the
transaction is provisionally estimated at £1,670 million, with a gain
on the partial disposal of £1,048 million. Of this amount
£127 million is included in the Group profit and loss account as a
realised gain, reflecting the cash element of the transaction. In
addition £921 million is included in the statement of total
recognised gains and losses as an unrealised gain.
The Group has consolidated the results of B&W and Lane for the seven
months to the end of July 2004, while for the two months of August
and September 2004, Reynolds American Inc. is accounted for as an
associated undertaking. In the nine months to 30 September 2004,
Reynolds American contributed £331 million of net turnover and
£73 million of operating profit before exceptional items, while B&W
and Lane contributed £965 million of net turnover and £149 million
of operating profit. In the comparative nine months B&W and Lane
contributed £1,503 million in net turnover and £242 million in
operating profit.
In October 2004 the Group sold its 20 per cent stake in Lakson
Tobacco Company in Pakistan resulting in a profit on disposal of
£27 million which will be included as an exceptional item in the
results for the fourth quarter.
GOODWILL AMORTISATION
The amortisation charge of £354 million for subsidiaries 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. The £14 million charge for associates reflects 2 months in
respect of Reynolds American.
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.
Restructuring costs cont... 15.
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 of subsidiary undertakings for the nine months to
30 September 2004 include a charge of £50 million in respect of the
above and further restructurings in Europe, including a
reorganisation of the Group's business in Germany.
Following the combination of Brown & Williamson with R. J. Reynolds
as described on page 13, the new company Reynolds American incurred
restructuring costs in integrating the two businesses. For the
period to 30 September 2004 the Group's share of these amounted to
£101 million, mainly in relation to asset write-downs and staff
costs, and further costs are expected in the fourth quarter.
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.
GAIN/(LOSS) ON DISPOSAL OF SUBSIDIARIES
The realised gain on disposal of £127 million in 2004 arises from the
agreement to combine Brown & Williamson with R. J. Reynolds as
described on page 13.
In 2003 there was a 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 in 2003 of £62 million before tax.
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 16.
Net interest rose by £47 million to £203 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 September
2003.
TAXATION
9 months to
30.9.04 30.9.03
£m £m
British American Tobacco p.l.c.
and subsidiary undertakings
- overseas 561 588
Share of associates and joint ventures 29 39
---- ----
590 627
Share of associate's exceptional credits (41)
---- ----
549 627
==== ====
Tax rate 35.6% 48.7%
==== ====
The tax rate for 2003 was adversely affected by the loss on disposal
of subsidiaries and the impact of the restructuring costs, whilst the
tax rate for 2004 has benefited from the profit on disposal of
subsidiaries and exceptional credits arising from tax recoveries in
Reynolds American Inc. The tax rates for each period are also
adversely affected by goodwill amortisation.
The underlying tax rate reflected in the adjusted earnings per share
shown below was 33.3 per cent (2003 34.7 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 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.... 17.
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
9 months to Year to
30.9.04 30.9.03 31.12.03
pence pence pence
Unadjusted earnings per share 41.23 24.05 26.69
Convertible redeemable preference
shares 1.47
Effect of goodwill amortisation 17.03 13.44 18.07
Effect of restructuring costs 4.49 11.18 15.71
Effect of tax recoveries in
associated company (1.90)
Effect of write-down of loan to
joint venture 3.88
Effect of disposal of subsidiaries (5.88) 2.75 3.39
------ ------ ------
Adjusted earnings per share 54.97 51.42 69.21
====== ====== ======
Similar types of adjustments would apply to basic earnings per share.
For the nine months to 30 September 2004 basic earnings per share on
an adjusted basis would be 56.82p (2003 53.50p) compared to unadjusted
amounts of 42.51p (2003 24.34p).
SHARE BUY-BACK PROGRAMME
The Group initiated an on-market share buy-back programme at the end of
February 2003. During the nine months to 30 September 2004,
44.6 million shares were bought at a cost of £367.9 million.
During the year to 31 December 2003, 106.3 million shares were bought at
a cost of £697.6 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.
Alan F Porter
Secretary
26 October 2004
This information is provided by RNS
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