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BTI
BTI
BTI - British American Tobacco Plc - Quarterly report to 30 September 2008
British American Tobacco Plc
Incorporated in the United Kingdom and Wales
(Registration number: 03407696)
Short name: BATS
Share code: BTI
ISIN number: GB0002875804
("British American Tobacco plc" or "the company")
QUARTERLY REPORT TO 30 SEPTEMBER 2008
SUMMARY
NINE MONTHS RESULTS - unaudited 2008 2007 Change
Revenue GBP8,704m GBP7,312m 19%
Profit from operations GBP2,714m GBP2,304m 18%
Basic earnings per share 95.49p 82.67p 16%
Adjusted diluted earnings per share 95.97p 82.00p 17%
The reported Group revenue increased by 19 per cent to GBP8,704m as a result
of favourable exchange rate movements, improved pricing, better product mix and
the acquisitions of Tekel and Skandinavisk Tobakskompagni (ST) mid year.
Revenue would have increased by 9 per cent at constant rates of exchange.
The reported Group profit from operations was 18 per cent higher at GBP2,714
million, up 20 per cent if exceptional items are excluded, with all regions
contributing to this strong result. Profit from operations, excluding
exceptional items, would have been 10 per cent higher at constant rates of
exchange, with Latin America the only region lower.
Group volumes from subsidiaries were 524 billion, up 4 per cent, a
combination of organic volume growth of over 1 per cent and the benefits from
the two acquisitions. The four Global Drive Brands continued their strong
performance and achieved overall volume growth of 17 per cent with around a
quarter of the rise coming from brand migrations.
Adjusted diluted earnings per share rose by 17 per cent, principally as a
result of the strong growth in profit from operations and favourable exchange
movements. Basic earnings per share was 16 per cent higher at 95.49p (2007:
82.67p).
The Chairman, Jan du Plessis, commented "Although there is general concern
about the prospects for the world economy and consumer behaviour over the next
couple of years, these results demonstrate that there has been no discernable
effect on British American Tobacco. Moreover, the impact of any consumer
downturn on our business should be mitigated by our balanced and innovative
brand portfolio covering all consumer price points. In addition, we continue to
benefit from the extent of our geographic diversity, which will also help to
protect shareholders from the impact of volatility in the foreign exchange
markets."
ENQUIRIES:
INVESTOR RELATIONS:
Ralph Edmondson/ 020 7845 1180
Rachael Brierley 020 7845 1519
PRESS OFFICE:
David Betteridge/Kate Matrunola/ 020 7845 2888
Catherine Armstrong
BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 30 SEPTEMBER 2008
INDEX
PAGE
Chairman`s comments 2
Business review 4
Group income statement 9
Group statement of changes in total equity 10
Accounting policies and basis of preparation 11
Segmental analyses of revenue and profit 12
Foreign currencies 14
Exceptional items 14
Other changes in the group 15
Net finance costs 16
Associates 16
Taxation 17
Earnings per share 17
Net debt/financing 18
Dividends 19
Share buy-back programme 19
Contingent liabilities 19
Financial Calendar 19
Disclaimers 20
CHAIRMAN`S COMMENTS
British American Tobacco`s adjusted diluted earnings per share rose by 17 per
cent as the Group`s very good performance continued.
Revenue was 9 per cent ahead at constant rates of exchange and 19 per cent
ahead at current rates. Profit from operations, excluding exceptional items,
grew by 10 per cent at constant rates and by 20 per cent to GBP2,755 million at
current rates. This reflects the benefit of the GBP236 million from foreign
exchange and the inclusion, for the first time, of the businesses acquired mid
year, Tekel and Skandinavisk Tobakskompagni (ST).
Excluding the acquisitions, the underlying business grew well, with the trends
in revenue, volumes and profit from operations being consistent with those
described at the half year.
Our volume from subsidiaries was up 1 per cent on an organic basis and by 4 per
cent to 524 billion cigarettes including Tekel and ST. The four Global Drive
Brands continued their strong performance, achieving overall volume growth of
17 per cent. Sales of our premium brands grew by 7 per cent.
Our associate companies` volumes were 159 billion and our share of their
post-tax profits, excluding exceptional items, was slightly higher, at GBP339
million, as a result of improved contributions from Reynolds American and ITC.
ST ceased to be an associate at the half year.
Adjusted diluted earnings per share grew by 17 per cent to 95.97p. The
substantial improvement in profit from operations, the uplift from foreign
exchange and the benefit of the share buyback programme were marginally offset
by higher net finance costs, a higher tax rate and an increase in minority
interests. Some 17 million shares were bought back during the period at an
average cost of GBP18.59 per share and at a total cost of GBP312 million.
The inclusion of Tekel and ST into their respective regions is proceeding
smoothly. The two businesses are performing in line with expectations and we
are confident that they will be earnings enhancing in 2009.
The acquisition of ST has prompted a review of our regional structure because
of its impact on Europe, which was already our largest region. We have decided,
from 1 January 2009, to separate Europe into two regions, Eastern and Western.
In addition, Canada will form part of a new Americas region, which will include
the markets of Latin America and the Caribbean, while Japan will become part of
the Asia-Pacific region. The new regional structure will represent a more
balanced distribution of revenue and profit.
From 1 January 2009, to streamline our reporting and in line with other
companies, we will be publishing Interim Management Statements (IMS) for the
first and third quarters, instead of full quarterly reports. Our IMS will
contain information about the performance of the Global Drive Brands, as well
as regional volumes and trends in market share. They will also cover the
Group`s financing activities and report on any mergers and acquisitions. We
will continue to publish income, balance sheet and cash flow information at the
full year and interim stages.
The restructuring announced by Compagnie Financiere Richemont S.A. and Remgro
Limited is progressing and the interest in British American Tobacco previously
held by Richemont is now held by Reinet Investments SCA, a Luxembourg
investment company. As announced on 28 October, British American Tobacco`s
shares are now listed on the JSE in South Africa in preparation for the next
stage of the restructuring being carried out by Reinet and Remgro.
This involves the distribution of British American Tobacco shares to investors
in Reinet on or around 3 November 2008. Separately, on or around the same date,
Remgro will also distribute British American Tobacco shares to its
shareholders. Following the distributions, a holding of approximately 3 per
cent of British American Tobacco shares will be retained by Reinet. The
distributions will be followed by a rights issue by Reinet, which can be
subscribed to by using British American Tobacco shares.
Based on information provided by Richemont, Remgro and Reinet in their
announcements, we believe that, following the distributions, and the completion
of the rights issue in mid December, the residual Reinet shareholding in
British American Tobacco is likely to be less than 10 per cent. The dispersal
of these major blocks of shares should result in the Group having a more widely
distributed range of institutional and private shareholders, as well as an
increased FTSE 100 Index weighting from 75 per cent to 100 per cent.
Although there is general concern about the prospects for the world economy and
consumer behaviour over the next couple of years, these results demonstrate
that there has been no discernable effect on British American Tobacco.
Moreover, the impact of any consumer downturn on our business should be
mitigated by our balanced and innovative brand portfolio covering all consumer
price points. In addition, we continue to benefit from the extent of our
geographic diversity, which will also help to protect shareholders from the
impact of volatility in the foreign exchange markets.
Jan du Plessis
30 October 2008
BUSINESS REVIEW
The reported Group revenue was 19 per cent higher at GBP8,704 million as a
result of favourable exchange rate movements, improved pricing, a better
product mix and the acquisitions of Tekel and ST mid year. At constant rates of
exchange, revenue would have increased by 9 per cent.
The reported Group profit from operations was 18 per cent higher at GBP2,714
million, up 20 per cent if exceptional items, as explained on pages 14 and 15,
are excluded, with all regions contributing to this strong result. Profit from
operations, excluding exceptional items, would have been 10 per cent higher at
constant rates of exchange, with Latin America the only region lower.
Group volumes from subsidiaries were 524 billion, up 4 per cent, a combination
of organic volume growth of over 1 per cent and the benefit of additional
volumes from the two acquisitions made earlier this year. Good volume growth in
Romania, Pakistan, Bangladesh, Uzbekistan, Poland, Saudi Arabia and Egypt, with
additional volumes in Turkey and Denmark, was partly offset by declines in
Italy, Germany, Russia, Czech Republic, Canada, South Africa, Vietnam, Mexico
and Venezuela.
The four Global Drive Brands continued their strong performance and achieved
overall volume growth of 17 per cent. Around a quarter of the growth was
contributed by brand migrations.
Kent grew by 21 per cent with excellent volume growth in Russia, Romania,
Kazakhstan, Ukraine and Chile and from new markets such as Egypt, Kyrgyzstan,
Mongolia and Serbia, while it also benefited from a brand migration in South
Africa. Volumes were lower in Japan, although market share increased.
Dunhill rose by 5 per cent, with growth in all its important markets, namely
South Korea, Malaysia, Taiwan, Australia, South Africa, Russia, Romania, Italy
and Saudi Arabia.
Lucky Strike volumes were up 9 per cent with good growth in Spain, Italy,
France and Argentina, partly offset by declines in Japan and Germany, as a
result of lower industry volumes. Pall Mall increased volumes by 25 per cent
with the geographic roll-out to more markets, such as Pakistan, Australia,
Malawi, Zambia, Mexico and Belarus, and the continued growth in Turkey,
Romania, Uzbekistan and Malaysia, partly offset by lower volumes in Poland,
Russia, Spain and Italy.
In Europe, profit at GBP896 million was up GBP246 million, as a result of the
ST acquisition and excellent performances in Russia, Romania and Spain. Profit
also grew in Germany, France, Switzerland, Italy, the Netherlands, Uzbekistan
and Ukraine, but these were partly offset by decreases in Hungary, Czech
Republic and Belgium. These results benefited from the more favourable pricing
environment, an improved product mix and exchange rates. At constant rates of
exchange, profit would have increased by GBP154 million or 24 per cent.
Regional volumes were up 3 per cent at 186 billion, benefiting from the
acquisition of ST. Volume increases in Romania, Uzbekistan and Spain, were
offset by decreases in Russia, Italy, Germany and Czech Republic.
In Italy, Dunhill and Lucky Strike performed very well but overall volumes were
adversely impacted by the decline of local brands and the disposal of some
brands in 2007. Profit was higher as a result of the lower overheads and a
favourable exchange rate, partly offset by reduced volumes.
Volumes in Germany were down in line with industry volumes. Pall Mall performed
well, growing volume and market share. Profit rose as a result of exchange
movements, as well as improved margins from a combination of price increases
and cost reductions. While industry volumes in France were lower after
significant price rises in August 2007, total market share grew, led by Lucky
Strike and Pall Mall. Profit increased as a result of the higher prices. In
Switzerland, Parisienne and Pall Mall continued to grow market share and profit
increased with higher volumes and improved margins.
In the Netherlands, volumes were slightly higher and profit was up as a result
of improved margins after a price increase in July 2008. Industry volumes in
Belgium were severely impacted by last year`s excise-driven price rise,
resulting in lower profit. Market share improved, assisted by the successful
migration of Winfield to Pall Mall. In Spain, strong profit growth was achieved
due to the excellent volume and share growth of Lucky Strike, coupled with a
price increase at the beginning of the year.
In Russia, a strong performance by our premium brands, Kent, Dunhill and Vogue,
continued to improve the product mix and, with higher prices and a favourable
exchange rate, profit increased significantly. Volumes were slightly lower as a
result of the decline in local brands.
In Romania, both volume and market share continued to grow, driven by the
continued success of our Global Drive Brands. Profit increased significantly,
benefiting from higher volumes, price rises and the improved product mix,
partly offset by higher marketing investment. Both profit and volumes in the
Czech Republic were lower due to the effect of the trade buying at the end of
2007, ahead of an excise increase.
Competitive market conditions in Poland continued and total industry shipment
volumes were down as a result of a significant excise driven price increase
during 2007. Lower volumes and the weakening of the currency impacted
profitability. In Hungary, volumes were slightly down although Dunhill and Pall
Mall performed well despite low price competition. This, coupled with higher
marketing investment behind the brands, led to lower profit. In Ukraine,
Kazakhstan and Uzbekistan, volumes increased due to the continued impressive
performance of Kent, as well as Pall Mall in Uzbekistan. The improved volumes
and product mix, higher prices and better cost control contributed to improved
profit performances in all these markets, although marketing investment has
increased.
In Asia-Pacific, profit rose by GBP104 million to GBP602 million, mainly
attributable to strong performances in Pakistan, Vietnam, Bangladesh, Australia
and Malaysia and also benefiting from favourable exchange rates. At constant
rates of exchange, profit would have grown by GBP65 million or 13 per cent.
Volumes at 114 billion were 5 per cent higher as good increases in Pakistan and
Bangladesh were partly offset by lower volumes in Vietnam.
Profit in Australia was up as a result of higher margins and exchange rate
movements, partially offset by the impact of increased competitor discounting
activities. Market share was in line with last year, with Dunhill and Pall Mall
growing market share. In New Zealand, volumes were similar to last year but
profit improved, benefiting from price rises, cost efficiencies and exchange
movements.
In Malaysia, market share grew with good performances from Dunhill and Pall
Mall and as a result of the successful relaunch of Kent in August 2008. Profit
rose due to price increases, a better product mix and continued productivity
savings, despite slightly lower volumes due to the overall industry decline and
the significant excise rises announced recently.
In Vietnam, strong profit growth was achieved through higher prices and cost
savings initiatives. Volumes were down due to lower industry volumes, although
market share increased strongly with good performances from Craven `A`, Dunhill
and State Express 555.
Volumes in South Korea were higher than last year and market share was up as a
result of the good performance from Dunhill. Profit was slightly down as the
benefits of higher volumes and an improved product mix were more than offset by
the weakening in the currency. In Taiwan, volumes and profit were in line with
last year and Dunhill grew market share.
In Pakistan, the volume and market share growth continued and, coupled with
higher prices, resulted in a profit increase, however, this was more than
offset by the weakening of the currency. In Bangladesh, good growth in volumes,
price rises and a better product mix resulted in an impressive increase in
profit. Market share, however, was slightly lower due to the increase in the
low-priced segment. Profit in Sri Lanka was well ahead, benefiting from price
rises, a better product mix and continued productivity improvements. Volumes
were marginally lower, although market shares for Dunhill and Pall Mall grew.
Profit in Latin America increased by GBP34 million to GBP584 million, mainly as
a result of exchange rate movements. At comparable rates of exchange, profit
would have decreased by GBP39 million or 7 per cent as profit declined in local
currency in Brazil, Mexico and Venezuela. Volumes were down 2 per cent at 108
billion with declines in Mexico and Venezuela.
In Brazil, reported profit increased, benefiting from a stronger local currency
and higher volumes which resulted in an improved market share. However, at
constant rates of exchange, profit was down as margins in the comparative
period were higher due to price rises in anticipation of excise increases.
Further price rises were not sufficient to offset the impact of increased
excise and higher marketing investment.
Volumes in Mexico were lower, resulting in a reduced market share. A price
increase in February was not sufficient to fully recover an earlier excise
increase and higher marketing investment, resulting in a reduced profit. In
Argentina, volumes were slightly up and profit flat as the benefit of an
improved product mix, due to the good performance of Lucky Strike, was offset
by higher costs.
In Chile, volumes were up with the strong growth of Kent and Lucky Strike,
while profit was higher due to price rises and lower costs. Market share in
Venezuela grew but volumes declined following high excise driven price
increases in the last quarter of 2007 and price rises earlier this year,
coupled with higher costs, resulting in a lower profit. Volumes in the Central
America and Caribbean area were down as a result of lower industry volumes and
the resurgence in illicit trade. However, profit increased as margins improved.
Profit in the Africa and Middle East region grew by GBP33 million to GBP387
million as a result of the acquisition of Tekel and a good performance of the
Middle East, negatively impacted by the weakening of the South African rand. At
comparable rates of exchange, profit would have grown by GBP39 million or 11
per cent. Volumes were 16 per cent higher at 85 billion, following increases in
Nigeria, Egypt and GCC, coupled with the volumes gained with the acquisition of
Tekel.
In South Africa, profit was lower as a result of a decline in volumes and the
impact of the weaker exchange rate. Profit in local currency was higher with an
improved product mix and higher pricing. Volumes and market share were lower
following the termination of the Chesterfield trademark license agreement at
the end of 2007. Dunhill and Peter Stuyvesant continued to deliver strong share
performances, while Kent performed well after its migration from Benson &
Hedges.
Profit in Nigeria increased as a result of a good growth in volumes, a
favourable exchange rate and an improved product mix and price rises.
In the Middle East, profit and volumes were higher due to the impressive growth
of Dunhill in Saudi Arabia. Strong sales across the Caucasus led to volume,
market share and profit increases with Kent`s performance being outstanding.
In Turkey, the acquisition of the cigarette assets of Tekel was completed on 24
June 2008 (see page 15) and the integration of the two businesses is
progressing well. Global Drive Brands grew strongly with good performances by
Kent and Pall Mall. Results improved with the growth in volumes and the
stronger currency, partly offset by marketing investment.
Profit from the America-Pacific region increased by GBP55 million to GBP375
million. This was principally due to the improved contribution from Canada and
stronger currencies. At comparable rates of exchange, profit would have
increased by GBP21 million or 7 per cent. Volumes at 31 billion were 3 per cent
lower than last year.
Profit in Canada rose to GBP223 million as a result of higher pricing, lower
distribution costs and a stronger exchange rate, partly offset by lower volumes
and an adverse product mix. At constant rates of exchange, profit was GBP202
million, up 3 per cent. Overall market share at 52 per cent was down 1.1 per
cent as the decline in the Premium segment was not offset by the growth in the
value-for-money and the budget segments.
In Japan, volumes were slightly down as a result of the continued decline in
total industry volumes and the unfavourable comparison with last year, which
was impacted by trade buying ahead of a price increase. Market share was up due
to the strong performance of Kool and market share growth of Lucky Strike.
Profit was up as a result of a favourable exchange rate, higher pricing and an
improved mix, partially offset by increased marketing expenditure and vending
machine age verification costs.
Unallocated costs, which are net corporate costs not directly attributable to
individual segments, were GBP89 million compared to GBP74 million in 2007.
The above regional profits were achieved before accounting for restructuring
and integration costs, Canadian settlement, amortisation of brands and gains on
disposal of businesses and brands, as explained on pages 14 and 15.
Results of Associates
Associates principally comprise Reynolds American and ITC. ST was an associate
until 2 July 2008 when the cigarette and snus business of ST was acquired and
from that date it is consolidated into the Group results.
The Group`s share of the post-tax results of associates increased by GBP51
million, or 15 per cent, to GBP386 million. Excluding the exceptional items,
explained on page 16, the Group`s share of the post-tax results of associates
increased by GBP4 million to GBP339 million, reflecting the impact of the
increase in profit from Reynolds American and ITC, partly offset by the impact
of the ST transaction (see page 17).
The contribution from Reynolds American to post-tax results was up 18 per cent
at GBP259 million. Excluding the benefit from the termination of a joint
venture agreement and costs in respect of the restructuring of organisational
structures, both in 2008, the contribution was 2 per cent higher at GBP225
million and the same as last year at constant rates of exchange. Earnings for
the nine month period were up as pricing and productivity improvements more
than offset cigarette volume declines and higher settlement expense.
The Group`s associate in India, ITC, continued its strong profit growth and its
contribution to the Group rose by GBP6 million, or 8 per cent, to GBP83
million. At comparable rates of exchange, the contribution would have been
GBP81 million, or 5 per cent higher than last year.
Cigarette volumes
The segmental analysis of the volumes of subsidiaries is as follows:
3 months to
30.9.08 30.9.07
bns bns
Europe 70.0 65.7
Asia-Pacific 37.2 34.4
Latin America 36.8 36.6
Africa and Middle East 35.9 26.5
America-Pacific 10.3 11.3
190.2 174.5
9 months to
30.9.08 30.9.07
bns bns
Europe 186.5 180.3
Asia-Pacific 113.7 108.8
Latin America 108.2 110.6
Africa and Middle East 85.0 73.1
America-Pacific 30.5 31.4
523.9 504.2
Year to
31.12.07
bns
Europe 245.0
Asia-Pacific 145.2
Latin America 150.5
Africa and Middle East 101.0
America-Pacific 42.3
684.0
In addition, associates` volumes for the nine months were 158.6 billion (2007:
173.2 billion) and, with the inclusion of these, the Group volumes would have
been 682.5 billion (2007: 677.4 billion).
GROUP INCOME STATEMENT - unaudited
3 months to
30.9.08 30.9.07
GBPm GBPm
Gross turnover (including duty, excise
and other taxes of GBP15,128 million
(30.9.07: GBP11,705 million -
31.12.07: GBP16,216 million)) 9,293 6,683
Revenue 3,247 2,587
Raw materials and consumables used (865) (683)
Changes in inventories of finished
goods and work in progress 4 (33)
Employee benefit costs (541) (385)
Depreciation and amortisation costs (103) (76)
Other operating income 158 68
Other operating expenses (910) (666)
Profit from operations 990 812
after (charging)/crediting:
- restructuring and integration costs (34) (10)
- Canadian settlement (101)
- amortisation of brands (12)
- gains on disposal of businesses and brands 139 45
Finance income 26 31
Finance costs (117) (109)
Net finance costs (91) (78)
Share of post-tax results of
associates and joint ventures 93 113
after (charging)/crediting:
- brand impairments
- additional ST income
- termination of joint venture 1
- restructuring costs (12)
Profit before taxation 992 847
Taxation on ordinary activities (281) (209)
Profit for the period 711 638
Attributable to:
Shareholders` equity 657 600
Minority interests 54 38
Earnings per share
Basic 33.01p 29.73p
Diluted 32.79p 29.52p
9 months to Year to
30.9.08 30.9.07 31.12.07
GBPm GBPm GBPm
Gross turnover (including duty, excise
and other taxes of GBP15,128 million
(30.9.07: GBP11,705 million -
31.12.07: GBP16,216 million)) 23,832 19,017 26,234
Revenue 8,704 7,312 10,018
Raw materials and consumables used (2,402) (2,069) (2,802)
Changes in inventories of finished
goods and work in progress 56 45 30
Employee benefit costs (1,347) (1,096) (1,586)
Depreciation and amortisation costs (277) (232) (336)
Other operating income 212 138 205
Other operating expenses (2,232) (1,794) (2,624)
Profit from operations 2,714 2,304 2,905
after (charging)/crediting:
- restructuring and integration costs (67) (50) (173)
- Canadian settlement (101)
- amortisation of brands (12)
- gains on disposal of businesses and brands 139 56 75
Finance income 147 86 136
Finance costs (417) (290) (405)
Net finance costs (270) (204) (269)
Share of post-tax results of
associates and joint ventures 386 335 442
after (charging)/crediting:
- brand impairments (7)
- additional ST income 13
- termination of joint venture 46
- restructuring costs (12)
Profit before taxation 2,830 2,435 3,078
Taxation on ordinary activities (775) (629) (791)
Profit for the period 2,055 1,806 2,287
Attributable to:
Shareholders` equity 1,906 1,679 2,130
Minority interests 149 127 157
Earnings per share
Basic 95.49p 82.67p 105.19p
Diluted 94.87p 82.10p 104.46p
See notes on pages 11 to 20.
GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited
9 months to Year to
30.9.08 30.9.07 31.12.07
GBPm GBPm GBPm
Differences on exchange 133 152 312
Cash flow hedges
- net fair value gains 44 3 15
- reclassified and reported in profit for
the period (8) (20) (42)
Available-for-sale investments
- net fair value gains/(losses) 2 (1) 1
- reclassified and reported in profit for
the period (2) 1 1
Net investment hedges
- net fair value (losses)/gains (141) 15 (35)
Revaluation of existing business 183
Tax on items recognised directly in equity (5) (13) (19)
Net gains recognised directly in equity 206 137 233
Profit for the period page 9 2,055 1,806 2,287
Total recognised income for the period 2,261 1,943 2,520
- shareholders` equity 2,101 1,809 2,348
- minority interests 160 134 172
Employee share options
- value of employee services 38 27 37
- proceeds from shares issued 9 24 27
Dividends and other appropriations
- ordinary shares (1,394) (1,198) (1,198)
- to minority interests (147) (140) (173)
Purchase of own shares
- held in employee share ownership trusts (116) (29) (41)
- share buy-back programme (362) (612) (750)
Acquisition of minority interests (4) (5) (9)
Other movements 3 (6) (3)
288 4 410
Balance at 1 January 7,098 6,688 6,688
Balance at period end 7,386 6,692 7,098
See notes on pages 11 to 20.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information comprises the unaudited interim results for the nine
months to 30 September 2008 and 30 September 2007, together with the audited
results for the year ended 31 December 2007. The annual consolidated financial
statements for 2007, 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.
These financial statements have been prepared under the historical cost
convention, except in respect of certain financial instruments, and on a basis
consistent with the IFRS accounting policies as set out in the Annual Report
and Accounts for the year ended 31 December 2007, except for an update which
extends the Group`s accounting policy on `intangible assets other than
goodwill` to cover trademarks acquired by the Group`s subsidiary undertakings.
As with other recognised intangible assets, acquired trademarks are carried at
cost less accumulated amortisation and impairment. Trademarks with indefinite
lives are not amortised but are reviewed annually for impairment. Other
trademarks are amortised on a straight-line basis over their useful lives,
which do not exceed twenty years. Consistent with the existing policy for
associated companies` acquired brands, impairments are recognised in the income
statement but increases in values are not recognised.
As indicated in the 2007 Annual Report and Accounts, IFRIC14 (IAS19 - The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction)
will be effective from 1 January 2008, once it has been endorsed by the EU. The
interpretation clarifies the conditions under which a surplus in a
post-retirement benefit scheme can be recognised in the financial statements,
as well as setting out the accounting implications where minimum funding
requirements exist. Currently, it is not expected that this change would
materially alter the Group`s reported equity and profit at 1 January 2008 or 31
December 2008.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities, and the disclosure of contingent liabilities
at the date of these financial statements. Such estimates and assumptions are
based on historical experience and various other factors that are believed to
be reasonable in the circumstances and constitute management`s best judgement
at the date of the financial statements. In the future, actual experience may
deviate from these estimates and assumptions, which could affect these
financial statements as the original estimates and assumptions are modified, as
appropriate, in the period in which the circumstances change.
SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited
Revenue
The analyses for the nine months are as follows:
30.9.08
Inter
External segment Revenue
GBPm GBPm GBPm
Europe 3,363 190 3,553
Asia-Pacific 1,561 27 1,588
Latin America 1,664 453 2,117
Africa and Middle East 1,065 1,065
America-Pacific 381 381
Revenue 8,034 670 8,704
30.9.07
Inter
External segment Revenue
GBPm GBPm GBPm
Europe 2,642 179 2,821
Asia-Pacific 1,386 16 1,402
Latin America 1,440 416 1,856
Africa and Middle East 876 10 886
America-Pacific 347 347
Revenue 6,691 621 7,312
The analyses for the year ended 31 December 2007 are as follows:
Inter
External segment Revenue
GBPm GBPm GBPm
Europe 3,621 225 3,846
Asia-Pacific 1,874 22 1,896
Latin America 1,979 585 2,564
Africa and Middle 1,224 15 1,239
East
America-Pacific 473 473
Revenue 9,171 847 10,018
The segmental analysis of revenue above is based on location of manufacture and
figures based on location of sales would be as follows:
30.9.08 30.9.07 31.12.07
GBPm GBPm GBPm
Europe 3,381 2,667 3,655
Asia-Pacific 1,567 1,386 1,876
Latin America 1,672 1,444 1,983
Africa and Middle East 1,231 1,051 1,445
America-Pacific 853 764 1,059
Revenue 8,704 7,312 10,018
Profit from operations
30.9.08 30.9.07
Adjusted Adjusted
Segment Segment Segment Segment
result result* result result*
GBPm GBPm GBPm GBPm
Europe 976 896 666 650
Asia-Pacific 599 602 502 498
Latin America 584 584 550 550
Africa and Middle East 368 387 349 354
America-Pacific 276 375 311 320
Segmental results 2,803 2,844 2,378 2,372
Unallocated costs (89) (89) (74) (74)
Profit from operations 2,714 2,755 2,304 2,298
31.12.07
Adjusted
Segment segment
result result*
GBPm GBPm
Europe 782 842
Asia-Pacific 667 672
Latin America 680 680
Africa and Middle East 447 470
America-Pacific 436 446
Segmental results 3,012 3,110
Unallocated costs (107) (107)
Profit from operations 2,905 3,003
*Excluding restructuring and integration costs, Canadian settlement,
amortisation of brands and gains on disposal of businesses and brands as
explained on pages 14 and 15.
The segmental analysis of the Group`s share of the post-tax results of
associates and joint ventures for the nine months is as follows:
30.9.08 30.9.07
Adjusted Adjusted
Segment Segment Segment segment
result result* result result*
GBPm GBPm GBPm GBPm
Europe 38 25 34 34
Asia-Pacific 86 86 79 79
Latin America 2 2 1 1
Africa and Middle East 1 1 1 1
America-Pacific 259 225 220 220
386 339 335 335
31.12.07
Adjusted
Segment segment
result result*
GBPm GBPm
Europe 48 48
Asia-Pacific 110 110
Latin America 1 1
Africa and Middle East 1 1
America-Pacific 282 289
442 449
*Excluding gain on termination of joint venture, restructuring costs,
additional ST income and charges for brand impairments as explained on pages 16
and 17.
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
30.9.08 30.9.07 31.12.07
US dollar 1.947 1.988 2.001
Canadian dollar 1.982 2.194 2.147
Euro 1.280 1.478 1.462
South African rand 14.984 14.200 14.110
Brazilian real 3.282 3.977 3.894
Australian dollar 2.136 2.421 2.390
Russian rouble 46.797 51.430 51.161
Closing
30.9.08 30.9.07 31.12.07
US dollar 1.783 2.037 1.991
Canadian dollar 1.895 2.025 1.965
Euro 1.269 1.433 1.362
South African rand 14.760 14.051 13.605
Brazilian real 3.438 3.749 3.543
Australian dollar 2.260 2.302 2.267
Russian rouble 45.778 50.709 48.847
EXCEPTIONAL ITEMS
(a) Restructuring and integration 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 which covered the cessation of production in the UK, Ireland,
Canada and Zevenaar in the Netherlands, with production to be transferred
elsewhere.
The results for the twelve months to 31 December 2007 included a charge for
restructuring of GBP173 million, principally in respect of costs associated
with restructuring the operations in Italy and with the reorganisation of the
business across the Europe and Africa and Middle East regions, as well as
further costs related to restructurings announced in prior years. On 18 May
2007, the Group`s Italian subsidiary announced the results of a review of its
manufacturing infrastructure, including an intention to consolidate its
operations at the plant in Lecce, close its operations at Rovereto and sell its
facilities at Chiaravalle together with three national brands. The disposal of
Chiaravalle was completed on 12 September 2007.
The nine months to 30 September 2008 include a charge for restructuring and
integration of GBP67 million (2007: GBP50 million), principally in respect of
further costs related to restructurings announced in prior years, the closure
of the Bologna factory in Italy and costs in respect of the integration of the
Tekel and ST businesses into existing operations.
(b) Canadian settlement
On 31 July 2008, Imperial Tobacco Canada announced that it reached a resolution
with the federal and provincial governments with regard to the investigation
related to the export to the United States of Imperial Tobacco Canada tobacco
products in the late 1980s and early 1990s. The Company entered a plea of
guilty to a regulatory violation of a single count of Section 240(i) (a) of the
Excise Act and has paid a fine of GBP101 million which was included in other
operating expenses in the profit from operations for the nine months to 30
September 2008.
The Company has also entered into a 15 year civil agreement with the federal
and provincial governments. In order, amongst other things, to assist the
governments in their future efforts against illicit trade, Imperial Tobacco
Canada has agreed to pay a percentage of annual net sales revenue going forward
for 15 years, up to a maximum of Can$350 million, which will be expensed as it
is incurred.
(c) Amortisation of brands
The acquisitions of Tekel and ST resulted in the capitalisation of brands which
are amortised over their expected useful lives, which do not exceed 20 years.
Brands with indefinite lives are not amortised. The amortisation charge was
included in depreciation and amortisation costs in the profit from operations
for the nine months to September 2008.
(d) Gains on disposal of businesses and brands
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 24
million. The sale was completed during the second quarter in 2007 and resulted
in a gain of GBP11 million included in other operating income in the profit
from operations. However, the Group 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 ST. The sale
included a factory in Leuven as well as trademarks including Corps
Diplomatique, Schimmelpennick, Don Pablo and Mercator. The transaction was
completed on 3 September 2007 and a gain on disposal of GBP45 million was
included in other operating income in the profit from operations for the twelve
months to 31 December 2007.
On 1 October 2007, the Group agreed the termination of its license agreement
with Philip Morris for the rights to the Chesterfield trademark in a number of
countries in Southern Africa. This transaction resulted in a gain of GBP19
million included in other operating income in the profit from operations for
the twelve months to 31 December 2007.
On 2 July 2008, the Group realised an estimated gain of GBP139 million with the
disposal of its 32.35 per cent holding in the non-cigarette and snus business
of ST (see other changes in the Group below). This gain, which is subject to
finalisation of the purchase price adjustments, was included in other operating
income in the profit from operations for the nine months to 30 September 2008.
OTHER CHANGES IN THE GROUP
On 22 February 2008, the Group announced that it had won the public tender to
acquire the cigarette assets of Tekel, the Turkish state-owned tobacco company,
with a bid of US$1,720 million. Completion of this transaction was subject to
regulatory approval which was subsequently received and on 24 June 2008 the
Group completed the transaction.
On 27 February 2008, the Group agreed to acquire 100 per cent of ST`s cigarette
and snus business in exchange for its existing 32.35 per cent holding in ST and
payment of DKK11,598 million in cash, subject to finalisation of completion
accounts. Completion of this transaction was subject to regulatory approval
which was subsequently received and on 2 July 2008 the Group completed the
transaction. The Group agreed to divest a small number of local brands,
primarily in Norway. The transaction has been accounted for as an acquisition
of 67.65 per cent of the cigarette and snus business` net assets and a disposal
of the Group`s existing 32.35 per cent interest in the non-cigarette and snus
businesses of ST. Consequently, the Group`s results for the nine months to 30
September 2008 reflect a gain on disposal of GBP139 million, noted above, and a
revaluation of GBP183 million on the existing 32.35 per cent holding in the
cigarette and snus business which is shown in the statement of changes in total
equity on page 10.
Both the Tekel and ST transactions were financed from new facilities and bond
issues, as described on page 18.
NET FINANCE COSTS
Net finance costs comprise:
9 months to
30.9.08 30.9.07
GBPm GBPm
Interest payable (359) (277)
Interest and dividend income 94 71
Fair value changes -
derivatives (202) (76)
Exchange differences 197 78
(5) 2
(270) (204)
Net finance costs at GBP270 million were GBP66 million higher than last year,
principally reflecting the impact of the higher interest cost as a result of
increased borrowings.
The net GBP5 million loss (2007: GBP2 million gain) of fair value changes and
exchange differences reflects a gain of GBP3 million (2007: GBP10 million gain)
from the net impact of exchange rate movements and a loss of GBP8 million
(2007: GBP8 million loss) 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 and, accordingly,
the Group has decided that, in calculating the adjusted diluted earnings per
share, it is appropriate to exclude certain amounts.
The adjusted diluted earnings per share for the period ended 30 September 2008
exclude, in line with previous practice, an GBP11 million loss (2007: GBPnil)
relating to exchange losses in net finance costs where there is a compensating
exchange gain reflected in differences in exchange taken directly to changes in
total equity.
ASSOCIATES
The Group`s share of post-tax results of associates was GBP386 million (2007:
GBP335 million) after tax of GBP218 million (2007: GBP190 million). For the
year to 31 December 2007, the share of post-tax results was GBP442 million
after tax of GBP246 million. The share is after exceptional charges and
credits.
On 21 February 2008, Reynolds American announced that it would receive a
payment from Gallaher Limited resulting from the termination of a joint venture
agreement. While the payment will be received over a number of years, in the
nine months to 30 September 2008 Reynolds American recognised a pre-tax gain
of US$328 million. The Group`s share of this gain included in the results for
the nine months, amounts to GBP46 million and is treated as an exceptional item
(net of tax).
On 9 September 2008, Reynolds American further announced planned changes in the
organisational structure at Reynolds American Inc. and its largest subsidiary,
R. J. Reynolds Tobacco Company. The charge to the third quarter`s results
amounts to US$91 million. The Group`s share of this charge included in the
results for the nine months, amounts to GBP12 million and is treated as an
exceptional item (net of tax).
In the year ended 31 December 2007, Reynolds American modified the previously
anticipated level of support between certain brands and the projected net sales
of certain brands, resulting in a brand impairment charge of which the Group`s
share amounted to GBP7 million (net of tax).
The year end of ST, an associate of the Group to 2 July 2008, was 30 June, and,
for practical reasons, the Group had previously equity accounted for its
interest based on the information available from ST which was 3 months in
arrears to that of the Group. As explained on page 15, the Group acquired 100
per cent of ST`s cigarette and snus business on 2 July 2008. Consequently, in
order to account for the Group`s share of the net assets of ST at the date of
the acquisition, the estimated results of ST for the period up to 2 July 2008
have been included in the results from associates for 2008, resulting in one
additional quarter`s income in 2008. This contributed an additional GBP13
million to the share of post-tax results of associates and joint ventures, but
this has been treated as an exceptional item and excluded from the calculation
of the adjusted diluted earnings per share.
TAXATION
The tax rate in the income statement of 27.4 per cent for the nine months to 30
September 2008 (30 September 2007: 25.8 per cent) is affected by the inclusion
of the share of associates` post-tax profit in the Group`s pre-tax results. The
underlying tax rate for subsidiaries reflected in the adjusted earnings per
share shown below, was 30.4 per cent and 29.8 per cent in 2007. The increase
arises primarily from a change in the mix of profits. The charge relates to
taxes payable overseas.
The tax charge for 2008 includes a one-off deferred tax charge of GBP25 million
as a result of the acquisition of the cigarette assets of Tekel. This has been
excluded from the adjusted diluted earnings per share and consequently from the
underlying tax rate above.
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 treasury shares).
For the calculation of 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:
30.9.08 30.9.07 31.12.07
Earnings Shares Earnings Shares Earnings Shares
GBPm m GBPm m GBPm m
Basic 1,906 1,996 1,679 2,031 2,130 2,025
Diluted 1,906 2,009 1,679 2,045 2,130 2,039
The earnings have been affected by exceptional items, together with certain
distortions to net finance costs under IFRS (see page 16) and to deferred tax
(see page 17) in 2008, and 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
30.9.08 30.9.07 31.12.07
pence pence Pence
Unadjusted earnings per share 94.87 82.10 104.46
Effect of restructuring and
integration costs 2.58 1.66 6.48
Effect of disposals of businesses
and brands (6.42) (1.76) (2.75)
Amortisation of brands 0.45
Effect of Canadian settlement 5.03
Net finance cost adjustment 0.55
Effect of associates` brand
impairments, restructuring
costs and termination of joint ventures (1.68) 0.34
Effect of additional ST income (0.65)
Effect of deferred tax adjustment 1.24
Adjusted diluted earnings per share 95.97 82.00 108.53
Adjusted diluted earnings per share
are based on:
- adjusted earnings (GBPm) 1,928 1,677 2,213
- shares (m) 2,009 2,045 2,039
Similar types of adjustments would apply to basic earnings per share. For the
nine months to 30 September 2008, basic earnings per share on an adjusted basis
would be 96.59p (2007: 82.57p) compared to unadjusted amounts of 95.49p (2007:
82.67p).
NET DEBT/FINANCING
The Group remains confident in its ability to access successfully the debt
capital markets and reviews its options on an ongoing basis. The main financing
agreements entered into since the beginning of the financial year, with issue
proceeds used to finance certain acquisitions as well as repay maturing debt,
were as follows:
In the nine months to 30 September 2008, the 1.8 billion revolving credit
facility arranged in December last year was cancelled and replaced with the
issue of 1.25 billion and GBP500 million bonds maturing in 2015 and 2024
respectively. In addition to this, the Group increased its 1 billion 5.375 per
cent bond by an additional 250 million, bringing the total size of the bond to
1.25 billion.
On 13 February 2008, the Group entered into an acquisition credit facility
whereby lenders agreed to make available an amount of US$2 billion. On 1 May
2008, this facility was syndicated in the market and was redenominated into two
euro facilities, one of 420 million and one of 860 million. These facilities
expire on 31 October 2009. There was a net draw down on these credit facilities
of 1,154 million during the nine months to 30 September 2008 (2007 nil).
During the nine months to 30 September 2008, the Group also repaid the US$330
million fixed rate bond upon maturity in May 2008.
On 22 September 2008, the Group refinanced its maturing Mexican bond with a
floating rate borrowing of MXN1,444 million.
DIVIDENDS
The Directors declared an interim dividend out of the profit for the six months
to 30 June 2008, which was paid on 17 September 2008, at the rate of 22.1p per
share. The interim dividend amounted to GBP440 million. The comparative
dividend for the six months to 30 June 2007 of 18.6p per share amounted to
GBP377 million.
In accordance with IFRS, the interim dividend is charged in the Group results
for the third quarter. The results for the nine months to 30 September 2008
include the final dividend paid in respect of the year ended 31 December 2007
of 47.6p per share amounting to GBP954 million (2007: 40.2p amounting to GBP821
million), as well as the above interim dividend.
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 2008, 17 million shares
were bought at a cost of GBP312 million (30 September 2007: 38 million shares
at a cost of GBP612 million).
`Purchase of own shares` in the Group statement of changes in total equity,
includes an amount of GBP50 million provided for the potential buy-back of
shares during October 2008 under an irrevocable non-discretionary contract.
CONTINGENT LIABILITIES
As noted in the Report and Accounts for the year ended 31 December 2007, 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.
FINANCIAL CALENDAR 2009
26 February 2009 Preliminary Announcement of results for the year
ended 31 December 2008
DISCLAIMERS
This Report does not constitute an invitation to underwrite, subscribe for, or
otherwise acquire or dispose of any British American Tobacco p.l.c. shares or
other securities.
This Report contains certain forward looking statements which are subject to
risk factors associated with, among other things, the economic and business
circumstances occurring from time to time in the countries and markets in which
the Group operates. It is believed that the expectations reflected in this
announcement are reasonable but they may be affected by a wide range of
variables which could cause actual results to differ materially from those
currently anticipated.
Neither the Company nor the Directors accept any liability to any person in
relation to this Report except to the extent that such liability could arise
under English law. Accordingly, any liability to a person who has demonstrated
reliance on any untrue or misleading statement or omission shall be determined
in accordance with section 90A of the Financial Services and Markets Act 2000.
Past performance is no guide to future performance and persons needing advice
should consult an independent financial advisor.
Copies of this Report may 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
30 October 2008
Sponsor: UBS South Africa (Pty) Ltd
Date: 30/10/2008 09:00:04 Produced by the JSE SENS Department.
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