| Thu 26 Feb 2009, 9:00 | | BTI - British American Tobacco P.L.C - Preliminary Announcement - Year Ended 31 |
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BTI
BTI
BTI - British American Tobacco P.L.C - Preliminary Announcement - Year Ended 31
December 2008 and dividend declaration
British American Tobacco p.l.c.
Incorporated in England and Wales
(Registration number: 03407696)
Short name: BATS
Share code: BTI
ISIN number: GB0002875804
("British American Tobacco p.l.c." or "the Company")
26 February 2009
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2008
SUMMARY
2008 2007 Change
restated
Revenue GBP12,122m GBP10,018m +21%
Profit from operations GBP3,572m GBP2,904m +23%
Basic earnings per share 123.28p 105.19p +17%
Adjusted diluted earnings per share 128.78p 108.53p +19%
Dividends per share 83.70p 66.20p +26%
The reported Group revenue increased by 21 per cent to GBP12,122 million as a
result of improved pricing, a better product mix, the acquisitions of Tekel and
Skandinavisk Tobakskompagni (ST) mid-year and favourable exchange rate
movements. Revenue would have increased by 11 per cent at constant rates of
exchange.
The reported Group profit from operations was 23 per cent higher at GBP3,572
million, or 24 per cent higher if adjusting items are excluded. Profit from
operations, at constant rates of exchange and excluding adjusting items, would
have been 14 per cent higher, with all regions contributing to this strong
result.
Group volumes from subsidiaries were 715 billion, up 4 per cent, a
combination of organic volume growth of 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 16 per cent with around a
quarter of the rise coming from brand migrations.
Adjusted diluted earnings per share rose by 19 per cent to 128.78p,
principally as a result of the strong growth in profit from operations and
favourable exchange movements. Basic earnings per share were 17 per cent higher
at 123.28p (2007: 105.19p).
The Board is recommending a final dividend of 61.6p, which will be paid on 6
May 2009. This, together with the interim dividend, will take dividends in
respect of 2008 as a whole to 83.70p, an increase of 26 per cent.
The Chairman, Jan du Plessis, commented "Looking ahead, we remain alert to the
possibilities of downtrading. However, our well balanced portfolio of brands
covers all major price points, while our geographic diversity further mitigates
the risks for shareholders. We are very much aware of the potential challenges
but the inherent strength of our businesses, our brands and our people should
make us more resilient than most."
ENQUIRIES:
INVESTOR RELATIONS:
Ralph Edmondson/ 020 7845 1180
Rachael Brierley 020 7845 1519
PRESS OFFICE:
David Betteridge/Catherine Armstrong/ 020 7845 2888
Elif Boutlu
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2008
INDEX
PAGE
Chairman`s statement 2
Business review 4
Dividends 9
Risk and uncertainties 10
Going concern 10
Group income statement 11
Group statement of recognised income and expense 12
Group balance sheet 13
Group cash flow statement 15
Accounting policies and basis of preparation 16
Segmental analyses of volume, revenue and profit 17
Quarterly analyses of profit 19
Rebased regional analysis 21
Non-GAAP measures 22
Foreign currencies 22
Adjusting items 22
Other changes in the Group 24
Net finance costs 27
Associates and joint ventures 28
Taxation 29
Earnings per share 29
Cash flow 31
Retirement benefit schemes 35
Movements in total equity 35
Litigation: FRANKED INVESTMENT INCOME GROUP LITIGATION ORDER 36
Contingent liabilities 36
Share buy-back programme 48
Related party disclosures 48
Annual Report 48
Financial calendar 2009 49
Calendar for the final dividend 2008 49
Listings and shareholder services 49
Disclaimers 50
CHAIRMAN`S STATEMENT
2008 was an extraordinary year, with financial markets in unprecedented
turmoil, economies slowing and confidence badly shaken. Despite these
conditions, British American Tobacco continued to deliver excellent results and
completed two important acquisitions.
Revenue rose by 11 per cent at constant rates of exchange and by 21 per cent to
GBP12,122 million at current rates. Profit from operations, excluding adjusting
items, increased by 14 per cent at constant rates of exchange and by 24 per
cent to GBP3,717 million at current rates. The benefit from the translation of
our results into Sterling was GBP295 million.
Adjusted diluted earnings per share grew by 19 per cent to 128.8p and the Board
has recommended a final dividend of 61.6p, an increase of 29 per cent. This
brings our total dividend for the year to 83.7p, an increase of 26 per cent.
For us, 2008 was an outstanding year.
It rounds off a decade of value creation for shareholders. It is just over 10
years since we demerged our financial services businesses and announced the
merger with Rothmans. Over the past 10 years, British American Tobacco has
achieved compound growth of 11 per cent in earnings per share and 13 per cent
in dividends per share. Our total shareholder return has been 486 per cent,
compared to 3 per cent for the FTSE 100 as a whole.
Our continued focus on our four Global Drive Brands (GDBs) has played a major
part in these achievements. Last year, our GDBs grew by 16 per cent, with about
a quarter of the increase attributable to successful brand migrations. Kent
rose by 18 per cent and Pall Mall by 22 per cent and they each achieved sales
of over 60 billion cigarettes for the first time. Kent, which is premium
priced, is now the Group`s biggest brand. Completing a very strong all round
performance, Lucky Strike increased by 9 per cent and Dunhill by 7 per cent.
GDB volume now represents over 26 per cent of our total volume, providing us
with a significant opportunity to add scale to our key competitive innovations.
Moreover, as the GDBs are predominantly premium, our premium volume grew by 5
per cent organically, compared to the 1 per cent level of overall organic
growth. Total volumes were up 4 per cent as a result of the combination of this
organic growth and the benefit from the acquisitions of Tekel and Skandinavisk
Tobakskompagni (ST) in the middle of the year.
As a result of these acquisitions, we now have much stronger market positions
in Turkey, Denmark, Sweden, Norway and Poland and both acquisitions are
performing in line with expectations, each contributing positively to earnings
in 2008.
We have also made further progress with our productivity savings and we are
very much on track towards our target of reducing our costs by GBP800 million
by 2012, in addition to the GBP1 billion saved between 2003 and 2007. The
principal areas of focus continue to be the supply chain, through initiatives
such as our Global Leaf Pool, overheads and indirect costs. As a result of this
focus, our operating margins increased to 31 per cent in 2008.
Moving to associates, ST ceased to be an associate company during the year,
following our acquisition of its cigarette and snus businesses. Our share of
associates` post-tax profit rose by 5 per cent at constant rates of exchange,
if adjusting items are excluded. Their volume amounted to 205 billion
cigarettes.
At Reynolds American, cigarette volumes were lower and expenses under the
Master Settlement Agreement were higher. However, these adverse factors were
more than offset by improved pricing for both cigarettes and moist-snuff, as
well as double-digit volume growth in moist-snuff and increased productivity in
cigarette manufacturing. ITC, in India, continued the strong profit growth seen
in recent years.
British American Tobacco`s adjusted diluted earnings per share grew by 19 per
cent to 128.8p. The substantial improvement in profit from operations, the
significant uplift from foreign exchange and the benefit from the share
buy-back programme were offset by higher net finance costs, a higher tax rate
and an increase in minority interests.
The Board has recommended a final dividend of 61.6 p per share, which will be
paid on 6 May 2009 to shareholders on the register at 13 March 2009. This takes
the total dividend for the year to 83.7p, an increase of 26 per cent, as we
reach our previously stated target of paying out 65 per cent of sustainable
earnings in dividends.
In addition, some 22 million shares were bought back at a cost of GBP400
million and at an average price of 1812p per share. In order to preserve the
Group`s financial flexibility during a period of economic uncertainty, the
Board has decided to suspend the share buy-back programme for the time being.
However, we continue to appreciate the merit of having the share buy-back
programme in place, together with the financial flexibility it provides, and we
will therefore be seeking the necessary authority to resume the buy-back at the
Annual General Meeting (AGM) on 30 April.
Arguably the most satisfying feature of our results last year was the high
level of cash generation. Free cash flow rose 52 per cent to GBP2,604 million,
exceeding the cost of the share buy-back and the increased level of dividends
by more than GBP800million.
We continue to maintain investment grade credit ratings. The strength of our
ratings has underpinned the debt issued during 2007 and 2008 and, despite the
impact of the turbulence in financial markets, we are confident of our ability
to access the debt capital markets successfully. The Group`s central banking
facility of GBP1.75 billion was undrawn as at 31 December 2008.
Thys Visser, who has been a non-executive director since 2001, will be retiring
from the Board following the AGM, at the expiry of his current term in office.
With his in-depth knowledge of the tobacco industry and his down to earth, no
nonsense style, I should like to thank him very much for his contribution to
our business over the years.
Looking ahead, we remain alert to the possibilities of downtrading. However,
our well balanced portfolio of brands covers all major price points, while our
geographic diversity further mitigates the risks for shareholders. We are very
much aware of the potential challenges but the inherent strength of our
businesses, our brands and our people should make us more resilient than most.
Jan du Plessis
25 February 2009
BUSINESS REVIEW
The reported Group revenue was 21 per cent higher at GBP12,122 million as a
result of improved pricing, a better product mix, the acquisitions of Tekel and
Skandinavisk Tobakskompagni (ST) made at the half year and favourable exchange
rate movements. At constant rates of exchange, revenue would have increased by
11 per cent.
The reported Group profit from operations was 23 per cent higher at GBP3,572
million, up 24 per cent if adjusting items, as explained on pages 22 and 23,
are excluded. All regions contributed to this strong result at current rates of
exchange. Profit from operations, excluding adjusting items, would have been 14
per cent higher at constant rates of exchange, with all regions up.
Group volumes from subsidiaries were 715 billion, up 4 per cent, a combination
of organic volume growth of 1 per cent and the benefit of additional volumes
from the two acquisitions, made earlier this year.
The four Global Drive Brands continued their strong performance and achieved
overall volume growth of 16 per cent. Around a quarter of the growth was
contributed by brand migrations.
Kent volume grew by 18 per cent with excellent growth in Russia, Romania,
Kazakhstan, Ukraine and Chile and from new markets like 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 7 per cent, with growth in South Korea, Taiwan, Australia,
South Africa, Russia, Romania, France, Italy and Saudi Arabia, while volumes
were maintained in Malaysia, leading to an increase in market share.
Lucky Strike volumes were up 9 per cent with good growth in Spain, Italy,
France, Chile, Brazil and Argentina, partly offset by declines in Japan and
Germany as a result of lower industry volumes.
Pall Mall increased volumes by 22 per cent with the geographic roll-out to more
markets, such as Pakistan, Malawi, Mexico and Belarus, and the continued growth
in Turkey, Romania, Uzbekistan, Hungary, the Netherlands and Malaysia. This was
partly offset by lower volumes in Poland, Russia, Spain, Greece and Italy.
In the fourth quarter, revenue grew by 26 per cent to GBP3,418 million and
profit from operations, excluding adjusting items, was up 36 per cent to GBP962
million, mainly as a result of the inclusion of ST and Tekel in 2008, as well
as the benefits from exchange rate movements. This information is shown on the
quarterly analysis of profits.
In Europe, profit at GBP1,213 million was up GBP371 million, as a result of the
ST acquisition and excellent performances in Russia, Uzbekistan, Romania and
Spain, with growth in Germany, France, Switzerland and Italy, partially offset
by decreases in Hungary, the 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 GBP235 million or 28 per cent.
Excluding the benefit from the acquisition of ST, profit increased by GBP279
million, up 33 per cent, or GBP144 million, up 17 per cent at constant rates of
exchange.
Regional volumes were up 4 per cent at 254 billion, benefiting from the
acquisition of ST. Volume increases in Poland, Romania, Uzbekistan, Switzerland
and Spain were more than offset by decreases in Russia, Italy, Germany, Ukraine
and the Czech Republic.
The acquisition of ST in the middle of the year resulted in significant
additional profit for the region.
In Italy, Lucky Strike performed very well although overall volumes were
adversely impacted by the decline of local brands and the disposal of some
brands in 2007. Profit increased as a result of lower product costs due to
continuing productivity programmes and reduced overheads, partly offset by
reduced volumes.
Volumes in Germany declined as industry volumes shrank while market share was
slightly lower. However, Pall Mall, performed well by growing volume and market
share. Profit increased as a result of higher margins from a combination of
price increases, reduced product costs and overhead savings.
While industry volumes in France were lower, volume and market share grew, led
by Dunhill, Lucky Strike and Pall Mall. Profit increased as a result of higher
prices and overhead savings.
In Switzerland, Parisienne, Lucky Strike and Pall Mall continued to grow market
share and profit increased due to higher volumes and improved margins.
In the Netherlands, profits were down as a result of slightly lower volumes,
despite an increase in market share. Industry volumes in Belgium were severely
impacted by last year`s excise-driven price increase and, together with the
sale of the pipe and cigar business in 2007, resulted in lower profit.
Market share improved, assisted by the successful migration of Winfield to Pall
Mall.
In Spain, strong profit growth and higher volumes were achieved due to the
excellent volume and share growth of Lucky Strike, coupled with a more
favourable pricing environment.
In Russia, a strong performance by the premium brands, Kent, Dunhill and Vogue,
continued to improve the product mix and, with higher prices, profit increased
significantly. Volumes were lower as a result of the decline in low price and
local brands following price increases that were not immediately followed by
competitors.
Profit in Romania increased significantly, benefiting from higher volumes,
price increases and the improved product mix, partially offset by higher
marketing investment. The strong growth of volumes, driven by the continued
success of the Global Drive Brands led to increased market share.
The tobacco market in the Czech Republic was heavily impacted during 2008 by
the effect of the trade buying at the end of 2007 in anticipation of an excise
increase, resulting in lower profit and volumes.
The accelerated decline of industry shipments in Poland was the result of
significant excise-driven price increases during the last two years.
Competitive market conditions continued and with the increase in illicit trade,
profitability was adversely impacted. Volumes increased as a result of the
inclusion of the ST businesses.
In Hungary, volumes were slightly down although Dunhill and Pall Mall performed
well despite price competition. This, coupled with higher marketing investment,
led to lower profit.
In Ukraine, volume and market share decreased slightly due to the decline of
low priced local brands, largely offset by the excellent performance of Kent.
Results improved significantly with the improved mix, price increases and cost
control, despite the volume decline and higher marketing spend.
The impressive performance of Kent in Kazakhstan and Pall Mall in Uzbekistan
led to increased volumes and, with higher prices and better cost control,
resulted in higher profit.
In Asia-Pacific, profit rose by GBP132 million to GBP804 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 increased by GBP79 million or 12 per cent.
Volumes at 153 billion were 5 per cent higher as good increases in Pakistan,
Bangladesh and South Korea were partially offset by lower volumes in Vietnam,
Malaysia and Sri Lanka.
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. In New Zealand, profit improved, benefiting from price rises, cost
efficiencies and exchange movements. Volumes in Australia and New Zealand were
similar to last year, but both Dunhill and Pall Mall increased market share.
In Malaysia, strong profit growth was achieved as a result of price increases,
a better product mix and continued productivity savings. Dunhill and Pall Mall
grew market share, with good results from Kent after its relaunch in August
2008. Volumes were lower due to the overall industry decline, the high levels
of illicit trade and another significant excise increase during the third
quarter of 2008.
In Vietnam, strong profit growth was achieved through higher prices, a solid
performance in the premium segment and cost saving initiatives. Volumes were
down due to lower industry volumes, although market share increased strongly
with outstanding 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. Good profit growth was achieved
through higher margins, increased volumes and an improved product mix, partly
offset by the weakening of the currency.
In Taiwan, volumes were slightly down despite the significant growth of
Dunhill. Profit was lower, adversely impacted by the marketing investment
behind Dunhill.
In Pakistan, volume and market share continued to grow strongly. The volume
growth, coupled with higher prices, resulted in a profit increase, however,
this was more than offset by the weakening of the currency.
In Bangladesh, strong growth in volumes, price increases and a better product
mix resulted in an impressive increase in profit.
Profit in Sri Lanka was well ahead, benefiting from price rises, a better
product mix and continued productivity improvements. Volumes were lower,
although overall market share grew with the good performances of Dunhill and
Pall Mall.
Profit in Latin America increased by GBP78 million to GBP759 million, mainly as
a result of an excellent performance in Brazil and exchange rate movements. At
constant rates of exchange, profit would have increased by GBP25 million or 4
per cent. Volumes were down 2 per cent at 147 billion after declines in Mexico
and Venezuela.
In Brazil, profit grew strongly, benefiting from higher margins, an improved
product mix and a stronger local currency. Market share increased on volumes in
line with last year. Leaf export results improved substantially benefiting from
higher volumes, higher pricing and the appreciation of the US dollar.
Volumes in Mexico were lower, resulting in a reduced market share. A price
increase in January was not sufficient to fully recover the earlier excise
increase and, combined with higher marketing investment behind the GDBs,
resulted in a reduced profit.
In Argentina, profit rose mainly as a result of a stronger local currency.
Higher margins and an improved product mix, due to the good performance of
Lucky Strike, were offset by higher variable costs and higher salaries due to
inflationary pressures.
In Chile, volumes were slightly up with the strong growth of Kent and Lucky
Strike, while profit was higher due to price increases and product mix
benefits, partially offset by higher marketing investment.
In Venezuela, volumes were lower following high excise-driven price increases
in the last quarter of 2007 and price rises in 2008. Increased illicit trade
resulted in a lower market share, adversely affecting 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 and the local currencies strengthened.
Profit in the Africa and Middle East region grew by GBP69 million to GBP536
million mainly as a result of the acquisition of Tekel and the good performance
of Nigeria. At constant rates of exchange, profit would have increased by GBP76
million or 16 per cent. Volumes were 19 per cent higher at 120 billion,
following increases in Nigeria, Egypt and Saudi Arabia, coupled with the
additional volumes from the acquisition of Tekel during the year. These
increases were partially offset by the disposal of the Chesterfield trademark
in South Africa.
In South Africa, profit was only slightly higher than last year, adversely
impacted by the weaker exchange rate. In local currency, profit growth was
achieved as a result of higher prices and an improved product mix, partially
offset by the decline in volumes. 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 good volume growth, a favourable
exchange rate, an improved product mix, productivity benefits and higher
margins.
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 as Kent performed well.
In Turkey, the acquisition of the cigarette assets of Tekel was completed in
June 2008 (see page 26) and was successfully integrated with the existing
business, which reached break even in 2008 following good organic volume
growth. GDBs grew strongly with good performances by Kent and Pall Mall.
Profit from the America-Pacific region increased by GBP69 million to GBP515
million. This was principally due to the improved contribution from both Canada
and Japan and stronger currencies. At constant rates of exchange, profit would
have increased by GBP13 million or 3 per cent. Volumes at 41 billion were 4 per
cent lower than last year.
Profit in Canada increased with the contribution to the Group at GBP297
million. This was the result of higher pricing, lower distribution costs and a
stronger exchange rate, partly offset by lower volumes and a weaker product
mix. At constant rates of exchange, profit was GBP272 million, down 2 per cent.
Overall market share at 52 per cent was slightly lower than last year as the
decline in the premium segment was not offset by the growth in the
value-for-money and low-price segments.
In Japan, market share was up due to the strong performance of Kool and stable
market shares of Kent and Lucky Strike, although volumes were lower as a result
of the continued decline in total industry volumes. Profit was up as a result
of a favourable exchange rate, higher pricing and an improved mix.
Unallocated costs, which are net corporate costs not directly attributable to
individual regions, were GBP110 million (2007 restated: GBP106 million).
The above regional profits were achieved before accounting for restructuring
and integration costs, the Canadian settlement, amortisation of trademarks and
gains on disposal of businesses and trademarks, as explained on pages 22 and
23.
Results of associates
Associates principally comprise Reynolds American and ITC. ST was an associate
until 2 July 2008 when the cigarette and snus businesses of ST were acquired
and from that date it was consolidated into the Group results.
The Group`s share of the post-tax results of associates increased by GBP61
million, or 14 per cent, to GBP503 million. Excluding adjusting items,
explained on page 28, the Group`s share of the post-tax results of associates
increased by GBP28 million to GBP477 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 24).
The contribution from Reynolds American to the post-tax results was up 20 per
cent at GBP339 million, or 12 per cent at constant rates of exchange. Excluding
the impairment of trademarks, the benefit from the termination of the joint
venture agreement and costs of the organisational restructuring in 2008, it was
13 per cent higher at GBP326 million (2007: post tax results of GBP289 million
excluding trademark impairments of GBP7 million). At constant rates of
exchange, the contribution would have been GBP302 million, or 5 per cent higher
than last year. Earnings were up as lower cigarette volumes and higher
settlement obligations were more than offset by higher cigarette and
moist-snuff pricing, increased productivity at R J Reynolds and double-digit
moist-snuff volume growth at Conwood.
The Group`s main associate in India, ITC, continued its strong profit growth
and its contribution to the Group rose by GBP9 million, or 8 per cent, to
GBP117 million. At constant rates of exchange, the contribution would have been
GBP113 million, or 5 per cent higher than last year.
Associates` volumes decreased by 11 per cent to 205 billion largely as a result
of the ST transaction. With the inclusion of associates` volumes, total Group
volumes were 919 billion (2007: 914 billion).
DIVIDENDS
The Board recommends to shareholders a final dividend of 61.6 pence per
ordinary share of 25p for the year ended 31 December 2008. If approved by
shareholders at the Annual General Meeting to be held on 30 April 2009, the
dividend will be payable on 6 May 2009 to shareholders registered on either the
UK main register or the new South African branch register on 13 March 2009 (the
record date).
In compliance with the requirements of STRATE, the electronic settlement and
custody system used by the JSE Limited (JSE), the following salient dates for
the payment of the dividend are applicable:
Last day to trade cum dividend (JSE): Friday 6 March 2009
Shares commence trading ex dividend (JSE): Monday 9 March 2009
Shares commence trading ex dividend (LSE): Wednesday 11 March 2009
Record date (JSE and LSE): Friday 13 March 2009
Payment date: Wednesday 6 May 2009
As the Group reports in sterling, dividends are declared and payable in
sterling except for shareholders on the branch register in South Africa whose
dividends are payable in rand. A rate of exchange of GBP:R = 14.32310 as at 24
February 2009 (the closing rate on that date as quoted by Bloomberg), results
in an equivalent final dividend of 882.30296 SA cents per ordinary share. From
the close of business on 6 March 2009 until the close of business on 13 March
2009, no transfers between the UK main register and the South African branch
register will be permitted and no shares may be dematerialised or
rematerialised between 9 March 2009 and 13 March 2009, both days inclusive.
The following is a summary of the dividends declared for the years ended 31
December 2008 and 2007:
2008 2007
Pence per Pence per
share GBPm share GBPm
Ordinary shares
Interim
- 2008 paid 17 September 2008 22.1 440
- 2007 paid 12 September 2007 18.6 377
Final
- 2008 payable 6 May 2009 61.6 1,221
- 2007 paid 7 May 2008 47.6 953
83.7 1,661 66.2 1,330
In accordance with IFRS, the proposed final dividend amounting to GBP1,221
million (2007: GBP953 million), payable on 6 May 2009, will be recognised in
the Group accounts for the year ending 31 December 2009. For the year ended 31
December 2008, the accounts include the final dividend paid in respect of the
year ended 31 December 2007, amounting to GBP953 million and the interim
dividend amounting to GBP440 million, paid on 17 September 2008. For the year
ended 31 December 2007, the accounts include the final dividend paid in respect
of the year ended 31 December 2006, amounting to GBP821 million and the 2007
interim dividend, amounting to GBP377 million.
RISKS AND UNCERTAINTIES
The principal risks and uncertainties affecting the business activities of the
Group were identified under the `Key Group risk factors` section of the Annual
Report and Accounts for the year ended 31 December 2007, a copy of which is
available on the Group`s website www.bat.com. The key Group risks have been
reviewed and updated and are summarised in a table that will be included in the
Annual Report for the year ended 31 December 2008 that will be available on the
Group`s website at the end of March 2009. The table provides a brief
description of the key risks to which the Group`s operations are exposed and it
identifies, in each case, their potential impact on the Group and the principal
processes in place to manage the risk.
The key Group risks are summarised under the headings of:
- Illicit trade
- Excise and tax
- Financial
- Marketplace
- Regulation
- Litigation
- Information technology
GOING CONCERN
The Annual Report has been prepared on the going concern basis. After reviewing
the Group`s annual budgets, plans and financing arrangements, the Directors
consider that the Group has adequate resources to continue operating for the
foreseeable future. A full description of the business activities, its
financial position, cash flows, liquidity position, facilities and borrowing
position, together with the factors likely to affect its future development,
performance and position, are set out in the Business Review and Financial
Review and in the notes to the accounts, all of which will be included in the
Annual Report that will be available on the Group`s website, www.bat.com at the
end of March 2009.
The Group has, at the date of this report, sufficient financing available for
its estimated existing requirements for the next twelve months. This, together
with the proven ability to generate cash from trading activities, the
performance of the Group`s Global Drive Brands, its leading market positions in
a number of markets and its geographical spread, as well as numerous contracts
with established customers and suppliers across different geographical areas
and industries, provides the Directors with the confidence that the Group is
well placed to manage its business risks successfully despite the current
financial conditions and uncertain outlook in the general global economy and
financial climate.
GROUP INCOME STATEMENT
For the year ended 31 December
2008 2007
GBPm GBPm
restated
Gross turnover (including duty, excise and other taxes
of GBP21,799 million 33,921 27,104
(2007: GBP17,086 million))
Revenue 12,122 10,018
Raw materials and consumables used (3,335) (2,802)
Changes in inventories of finished goods and work in
progress 19 30
Employee benefit costs (1,907) (1,587)
Depreciation and amortisation costs (430) (336)
Other operating income 281 205
Other operating expenses (3,178) (2,624)
Profit from operations 3,572 2,904
after (charging)/crediting
- restructuring and integration costs (160) (173)
- Canadian settlement (102)
- amortisation of trademarks (24)
- gains on disposal of businesses and trademarks 141 75
Finance income 267 136
Finance costs (658) (405)
Net finance costs (391) (269)
Share of post-tax results of associates and joint
ventures 503 442
after (charging)/crediting:
- trademark impairments (20) (7)
- additional ST income 13
- termination of joint venture 45
- restructuring costs (12)
Profit before taxation 3,684 3,077
Taxation on ordinary activities (1,025) (790)
Profit for the year 2,659 2,287
Attributable to
Shareholders` equity 2,457 2,130
Minority interests 202 157
Earnings per share
Basic 123.28p 105.19p
Diluted 122.54p 104.46p
The restatement of the 2007 results reflects the change in the Group`s
accounting policy for recognition of actuarial gains and losses, together with
the early adoption of IFRIC14, as explained on page 16.
See notes on pages 16 to 48.
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
For the year ended 31 December
2008 2007
GBPm GBPm
restated
Differences on exchange 937 320
Difference on exchange reclassified and reported in
profit for the year (22)
Cash flow hedges
- net fair value gains 180 15
- reclassified and reported in profit for the year (173) (42)
- reclassified and reported in net assets 1
Available-for-sale investments
- net fair value gains 1 1
- reclassified and reported in profit for the year (6) 1
Net investment hedges
- net fair value losses (672) (35)
- differences on exchange on borrowings (178)
Revaluation of existing business page 25 179
Retirement benefit schemes
- actuarial (losses)/gains in respect of subsidiaries (547) 95
- surplus recognition in respect of subsidiaries 9
- actuarial (losses)/gains in respect of associate
companies (396) 17
Tax on items recognised directly in SORIE 184 (53)
Net (losses)/gains (512) 328
Profit for the year page 11 2,659 2,287
Total recognised income for the year 2,147 2,615
- shareholders` equity 1,913 2,443
- minority interests 234 172
Effect of changes in accounting policy at 1 January 2007:
- shareholders` equity (104)
- minority interest -
The Group has prepared a Statement of Recognised Income and Expense (SORIE),
rather than a Statement of Changes in Total Equity as previously presented,
following the accounting policy change for recognition of actuarial gains and
losses, together with the early adoption of IFRIC14, as explained further on
page 16.
See notes on pages 16 to 48.
GROUP BALANCE SHEET
At 31 December
2008 2007
GBPm GBPm
restated
Assets
Non-current assets
Intangible assets 12,318 8,105
Property, plant and equipment 3,076 2,378
Investments in associates and joint ventures 2,552 2,316
Retirement benefit assets 75 37
Deferred tax assets 392 264
Trade and other receivables 193 123
Available-for-sale investments 27 22
Derivative financial instruments 176 153
Total non-current assets 18,809 13,398
Current assets
Inventories 3,177 1,985
Income tax receivable 137 85
Trade and other receivables 2,395 1,845
Available-for-sale investments 79 75
Derivative financial instruments 420 82
Cash and cash equivalents 2,309 1,258
8,517 5,330
Assets classified as held for sale 225 36
Total current assets 8,742 5,366
Total assets 27,551 18,764
The restatement of the 2007 balance sheet reflects the change in Group
accounting policy for recognition of actuarial gains and losses, together with
the early adoption of IFRIC14, as explained on page 16.
See notes on pages 16 to 48.
GROUP BALANCE SHEET
At 31 December
2008 2007
GBPm GBPm
restated
Equity
Capital and reserves
Share capital 506 506
Share premium, capital redemption and merger reserves 3,905 3,902
Other reserves 955 658
Retained earnings 1,578 1,805
Shareholders` funds 6,944 6,871
after deducting
- cost of treasury shares (745) (296)
Minority interests 271 218
Total equity 7,215 7,089
Liabilities
Non-current liabilities
Borrowings 9,437 6,062
Retirement benefit liabilities 848 360
Deferred tax liabilities 599 336
Other provisions for liabilities and charges 186 165
Trade and other payables 166 149
Derivative financial instruments 199 49
Total non-current liabilities 11,435 7,121
Current liabilities
Borrowings 2,724 861
Income tax payable 300 227
Other provisions for liabilities and charges 295 263
Trade and other payables 4,718 2,976
Derivative financial instruments 864 225
8,901 4,552
Liabilities directly associated with assets classified
as held for sale 2
Total current liabilities 8,901 4,554
Total equity and liabilities 27,551 18,764
The restatement of the 2007 balance sheet reflects the change in Group
accounting policy for recognition of actuarial gains and losses, together with
the early adoption of IFRIC14, as explained on page 16.
See notes on pages 16 to 48.
GROUP CASH FLOW STATEMENT
For the year ended 31 December
2008 2007
GBPm GBPm
Cash flows from operating activities
Cash generated from operations page 33 4,156 3,181
Dividends received from associates 326 285
Tax paid (943) (866)
Net cash from operating activities 3,539 2,600
Cash flows from investing activities
Interest received 125 114
Dividends received from investments 2 2
Purchases of property, plant and equipment (448) (416)
Proceeds on disposal of property, plant and equipment 62 46
Purchases of intangibles (96) (66)
Proceeds on disposal of intangibles 17 16
Purchases and disposals of investments 9 71
Proceeds from associates` share buy-backs 42
Purchase of Tekel cigarette assets (873)
Purchase of ST cigarette and snus businesses (1,243)
Purchases of other subsidiaries and minority interests (9) (15)
Proceeds on disposals of subsidiaries 26 126
Net cash from investing activities (2,386) (122)
Cash flows from financing activities
Interest paid (400) (384)
Interest element of finance lease rental payments (3) (3)
Capital element of finance lease rental payments (30) (21)
Proceeds from issue of shares to Group shareholders 3 5
Proceeds from exercise of options over own shares
held in employee share ownership trusts 7 22
Proceeds from increases in and new borrowings 3,518 438
Movements relating to derivative financial instruments (656) (89)
Purchases of own shares (400) (750)
Purchase of own shares held in employee share ownership
trusts (116) (41)
Reductions in and repayments of borrowings (731) (427)
Dividends paid to shareholders (1,393) (1,198)
Dividends paid to minority interests (173) (173)
Net cash from financing activities (374) (2,621)
Net cash flows from operating, investing and financing
activities 779 (143)
Differences on exchange 261 47
Increase/(decrease) in net cash and cash equivalents
in the year 1,040 (96)
Net cash and cash equivalents at 1 January 1,180 1,276
Net cash and cash equivalents at 31 December 2,220 1,180
See notes on pages 16 to 48.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information has been extracted from the Annual Report and
Accounts, including the audited financial statements for the year ended 31
December 2008. This financial information does not constitute statutory
accounts within the meaning of Section 240 of the UK Companies Act 1985/2006.
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 and implemented in the UK.
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 the changes
explained below.
In 2008, the Group has amended its treatment with regard to the recognition of
actuarial gains and losses of retirement benefit schemes under IAS19. Following
the change in accounting policy, the Group now recognises actuarial gains and
losses in the period in which they occur, in the Statement of Recognised Income
and Expense (SORIE), rather than using partial deferral of such gains and
losses through the "corridor" method as also permitted by IAS19. The Group
believes that fully recognising actuarial gains and losses where they occur
results in a better presentation of the financial statements which is more in
line with current market practice and expected financial reporting
developments, thus providing more comparable market information. In addition,
the Group also adopted early IFRIC14 (IAS19 - The Limit on a Deferred Benefit
Asset, Minimum Funding Requirements and their Interaction) which 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.
The comparative period has been restated to reflect these changes, including
the presentation of a SORIE which has not been required under the previous
accounting policy. The impact of the changes was to reduce the Group`s total
equity at 31 December 2008 by GBP817 million (2007: GBP9 million) and increase
the profit for 2008 by GBP4 million. In the year ended 31 December 2007 the
profit from operations and taxation were both reduced by GBP1 million and
therefore the profit for the year was unchanged.
In 2008, the Group also updated its accounting policy on `intangible assets
other than goodwill` to address trademarks acquired by the Group`s subsidiary
undertakings. As with other recognised intangible assets, 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 remaining useful lives, which do not exceed twenty years. Consistent with
the existing policy for associated companies` trademarks, impairments are
recognised in the income statement but increases in values are not recognised.
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 VOLUME, REVENUE AND PROFIT
For the year ended
Volume 31.12.08 31.12.07
bns bns
Europe 253.6 245.0
Asia-Pacific 152.5 145.2
Latin America 147.2 150.5
Africa and Middle East 120.5 101.0
America-Pacific 40.8 42.3
714.6 684.0
Revenue 31.12.08
Inter
External segment Revenue
GBPm GBPm GBPm
Europe 4,720 258 4,978
Asia-Pacific 2,146 19 2,165
Latin America 2,232 615 2,847
Africa and Middle East 1,572 1,572
America-Pacific 560 560
Revenue 11,230 892 12,122
31.12.07
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 East 1,224 15 1,239
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 are as follows:
31.12.08 31.12.07
GBPm GBPm
Europe 4,745 3,655
Asia-Pacific 2,151 1,876
Latin America 2,246 1,983
Africa and Middle East 1,797 1,445
America-Pacific 1,183 1,059
Revenue 12,122 10,018
Profit from operations
31.12.08
Adjusted
Segment segment
result result*
GBPm GBPm
Europe 1,218 1,213
Asia-Pacific 802 804
Latin America 759 759
Africa and Middle East 485 536
America-Pacific 418 515
3,682 3,827
Unallocated costs (110) (110)
Profit from operations 3,572 3,717
31.12.07
Adjusted
Segment segment
result result*
restated restated
GBPm GBPm
Europe 782 842
Asia-Pacific 667 672
Latin America 681 681
Africa and Middle East 444 467
America-Pacific 436 446
3,010 3,108
Unallocated costs (106) (106)
Profit from operations 2,904 3,002
*Excluding adjusting items: restructuring and integration costs, the Canadian
settlement, amortisation of trademarks and gains on disposal of businesses and
trademarks as explained on pages 22 and 23.
The segmental analysis of the Group`s share of the post-tax results of
associates and joint ventures is as follows:
31.12.08 31.12.07
Adjusted Adjusted
Segment segment Segment segment
result result* result result*
GBPm GBPm GBPm GBPm
Europe 39 26 48 48
Asia-Pacific 121 121 110 110
Latin America 2 2 1 1
Africa and Middle East 2 2 1 1
America-Pacific 339 326 282 289
503 477 442 449
*Excluding adjusting items: charges for trademark impairments, additional ST
income, gain on termination of joint venture and restructuring costs as
explained on page 28.
The restatement of the 2007 results reflects the change in the Group`s
accounting policy for recognition of actuarial gains and losses, together with
the early adoption of IFRIC14, as explained on page 16.
QUARTERLY ANALYSES OF PROFIT
3 months to
31.3.08 30.6.08 30.9.08
GBPm GBPm GBPm
Revenue 2,541 2,916 3,247
Europe 230 300 366
Asia-Pacific 193 210 199
Latin America 193 188 203
Africa and Middle East 131 128 128
America-Pacific 110 125 140
857 951 1,036
Unallocated costs (40) (11) (38)
817 940 998
Restructuring and integration
costs (10) (23) (34)
Canadian settlement (101)
Amortisation of trademarks (12)
Gains on disposal of businesses
and trademarks 139
Profit from operations 807 917 990
Net finance costs (95) (84) (91)
Share of post-tax results of
associates and joint ventures 159 134 93
Profit before taxation 871 967 992
Taxation on ordinary activities (224) (270) (281)
Profit for the period 647 697 711
Earnings per share
Basic 29.92p 32.56p 33.01p
Adjusted diluted 28.44p 33.58p 33.95p
3 months to Year to
31.12.08 31.12.08
GBPm GBPm
Revenue 3,418 12,122
Europe 317 1,213
Asia-Pacific 202 804
Latin America 175 759
Africa and Middle East 149 536
America-Pacific 140 515
983 3,827
Unallocated costs (21) (110)
962 3,717
Restructuring and integration
costs (93) (160)
Canadian settlement (1) (102)
Amortisation of trademarks (12) (24)
Gains on disposal of businesses
and trademarks 2 141
Profit from operations 858 3,572
Net finance costs (121) (391)
Share of post-tax results of
associates and joint ventures 117 503
Profit before taxation 854 3,684
Taxation on ordinary activities (250) (1,025)
Profit for the period 604 2,659
Earnings per share
Basic 27.79p 123.28p
Adjusted diluted 32.81p 128.78p
3 months to
31.3.07 30.6.07
GBPm GBPm
Revenue 2,232 2,493
Europe 182 222
Asia-Pacific 167 168
Latin America 180 206
Africa and Middle East 124 125
America-Pacific 80 112
733 833
Unallocated costs (41) (4)
692 829
Restructuring costs (8) (32)
Gains on disposal of businesses
and trademarks 11
Profit from operations 684 808
Net finance costs (58) (68)
Share of post-tax results of
associates and joint ventures 111 111
Profit before taxation 737 851
Taxation on ordinary activities (199) (221)
Profit for the period 538 630
Earnings per share
Basic 24.24p 28.70p
Adjusted diluted 24.31p 29.20p
3 months to
30.9.07 31.12.07
restated
GBPm GBPm
Revenue 2,587 2,706
Europe 246 192
Asia-Pacific 163 174
Latin America 164 131
Africa and Middle East 105 113
America-Pacific 128 126
806 736
Unallocated costs (29) (32)
777 704
Restructuring costs (10) (123)
Gains on disposal of businesses
and trademarks 45 19
Profit from operations 812 600
Net finance costs (78) (65)
Share of post-tax results of
associates and joint ventures 113 107
Profit before taxation 847 642
Taxation on ordinary activities (209) (161)
Profit for the period 638 481
Earnings per share
Basic 29.73p 22.52p
Adjusted diluted 28.49p 26.53p
Year to
31.12.07
restated
GBPm
Revenue 10,018
Europe 842
Asia-Pacific 672
Latin America 681
Africa and Middle East 467
America-Pacific 446
3,108
Unallocated costs (106)
3,002
Restructuring costs (173)
Gains on disposal of businesses
and trademarks 75
Profit from operations 2,904
Net finance costs (269)
Share of post-tax results of
associates and joint ventures 442
Profit before taxation 3,077
Taxation on ordinary activities (790)
Profit for the period 2,287
Earnings per share
Basic 105.19p
Adjusted diluted 108.53p
The restatement of the 2007 balance sheet reflects the change in Group
accounting policy for recognition of actuarial gains and losses, together with
the early adoption of IFRIC14, as explained on page 16.
REBASED REGIONAL ANALYSIS
During 2008, the Group conducted a review of the composition of its regions
and, given the acquisitions of ST and Tekel, it was announced in 2008 that the
regional structure would be realigned from 1 January 2009 to the following:
- Europe region splits into Eastern Europe and Western Europe
- Americas region includes the markets of Latin America, the Caribbean and
Canada
- Asia-Pacific includes Japan
Although the new regional structure is only applicable from 1 January 2009, the
2008 information has been presented on the new regional basis and is shown
below:
For the year ended 31 December 2008
Volume and revenue Volume Revenue
bns GBPm
Eastern Europe 137.3 1,594
Western Europe 122.6 3,218
Asia-Pacific 179.5 2,717
Americas 161.0 2,863
Africa and Middle East 114.2 1,730
714.6 12,122
Based on location of sales.
Adjusted
Profit from operations profit from operations*
Profit from operations GBPm GBPm
Eastern Europe 468 468
Western Europe 765 760
Asia-Pacific 922 924
Americas 956 1,052
Africa and Middle East 461 513
3,572 3,717
*Excluding adjusting items: restructuring and integration costs, Canadian
settlement, amortisation of trademarks and gains on disposal of businesses and
trademarks as explained on pages 22 and 23.
All centre costs are allocated to regions in the new regional structure.
The segmental analysis of the Group`s share of the post-tax results of
associates and joint ventures is as follows:
For the year ended 31 December 2008
Adjusted
Post-tax profit post-tax profit*
GBPm GBPm
Eastern Europe
Western Europe 39 26
Asia-Pacific 121 121
Americas 341 328
Africa and Middle East 2 2
503 477
*Excluding adjusting items: charges for trademark impairments, additional ST
income, the gain on termination of joint venture and restructuring costs as
explained on page 28.
NON-GAAP MEASURES
In the reporting of financial information, the Group uses certain measures that
are not required under IFRS, the generally accepted accounting principles
(GAAP) under which the Group reports. This is done because the Group believes
that these additional measures, which are used internally, are useful to users
of the financial statements in helping them understand underlying business
performance.
The principal non-GAAP measure which the Group uses is adjusted diluted
earnings per share, which is reconciled to diluted earnings per share. The
adjusting items that mainly drive the adjustments made, are separately
disclosed as memorandum information on the face of the Income Statement and the
segmental analysis.
The Group also prepares an alternative cash flow, which includes a measure of
`free cash flow`, to illustrate the cash flows before transactions relating to
borrowings, and provides gross turnover as an additional disclosure to indicate
the impact of duty, excise and other taxes. Certain reclassifications have been
made in respect of gross turnover in 2008 and as a result historical
information has been represented.
Following the secondary listing of the ordinary shares of British American
Tobacco p.l.c. on the main board of the JSE Limited ("JSE") in South Africa,
the Group is required to present headline earnings per share and diluted
headline earnings per share which are additional alternative measures of
earnings per share, calculated in accordance with Circular 8/2007, `Headline
Earnings` issued by the South African Institute of Chartered Accountants. These
are shown on pages 30 and 31.
FOREIGN CURRENCIES
The income and cash flow statements of overseas subsidiaries and associates
have been translated at the average rates for the respective periods. Assets
and liabilities have 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
2008 2007 2008 2007
US dollar 1.852 2.001 1.438 1.991
Canadian dollar 1.961 2.147 1.775 1.965
Euro 1.257 1.462 1.034 1.362
South African rand 15.132 14.110 13.292 13.605
Brazilian real 3.355 3.894 3.353 3.543
Australian dollar 2.187 2.390 2.062 2.267
Russian rouble 45.810 51.161 43.902 48.847
ADJUSTING ITEMS
Adjusting items include what we previously described as exceptional items, as
well as trademark amortisation and other one-off items that distort reported
results. They are excluded from earnings in calculating the adjusted diluted
earnings per share.
(a) Restructuring and integration costs
The review of the Group`s manufacturing operations and organisational structure
including the initiative to reduce overheads and indirect costs, continued. The
year ended 31 December 2008 includes a charge for restructuring and integration
of GBP160 million (2007: GBP173 million), principally in respect of further
costs related to restructurings announced in prior years, the reorganisation of
the business in the Netherlands and costs in respect of the integration of the
Tekel and ST businesses into existing operations.
(b) Canadian settlement
On 31 July 2008, the Group`s subsidiary in Canada (Imperial Tobacco Canada)
announced that it had 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 subsidiary 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 GBP102 million which was included in other operating expenses in the profit
from operations for the year ended 31 December 2008.
Imperial Tobacco Canada 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 trademarks
The acquisitions of Tekel and ST resulted in the capitalisation of trademarks
which are amortised over their expected useful lives, which do not exceed 20
years. The amortisation charge of GBP24 million was included in depreciation
and amortisation costs in the profit from operations for the year ended
December 2008.
(d) Gains on disposal of businesses and trademarks
The gain on disposal of businesses and trademarks for the year ended 31
December 2008 was GBP141 million, of which GBP139 million arose on 2 July 2008
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 on page 24).
This gain was included in other operating income in the profit from operations
for the year to 31 December 2008.
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
EUR24 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 trademarks.
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 year
ended 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 year ended 31 December 2007.
OTHER CHANGES IN THE GROUP
(a) Skandinavisk Tobakskompagni (ST)
On 27 February 2008, the Group agreed to acquire 100 per cent of ST`s cigarette
and snus businesses in exchange for its existing 32.35 per cent holding in ST
and payment of DKK11,582 million (GBP1,237 million) in cash, following
finalisation of completion accounts. Completion of this transaction was subject
to regulatory approval which was subsequently received on the condition that
the Group agreed to divest a small number of local trademarks, primarily in
Norway. The transaction was completed on 2 July 2008.
Until the date of the transaction, the results of ST were equity accounted as
an associate undertaking and following the transaction, the results of the
acquired businesses have been consolidated.
The estimated fair value of the ST Group at 2 July 2008 was GBP2,754 million,
comprising GBP2,128 million for the cigarette and snus businesses and GBP626
million for the other operations. The Group has exchanged its 32.35 per cent
existing interest in ST (estimated fair value of GBP891 million) and cash of
GBP1,237 million for a 100 per cent interest in the cigarette and snus
businesses (estimated fair value of GBP2,128 million). The transaction has been
accounted for as an acquisition of 67.65 per cent of the cigarette and snus
businesses` net assets of ST and a disposal of the Group`s existing
32.35 per cent interest in the non-cigarette and snus businesses of ST.
The goodwill of GBP923 million on acquisition of the cigarette and snus
businesses at 2 July 2008, stated at the exchange rate ruling at the date of
the transaction, arises as follows:
Book Fair value
Value adjustments Fair value
GBPm GBPm GBPm
Goodwill 45 (45)
Other intangible assets 8 471 479
Property, plant and equipment 83 88 171
Inventories 211 6 217
Trade and other receivables 237 237
Available for sale investments 5 (5)
Cash and cash equivalents 78 78
Overdrafts (82) (82)
Retirement benefit liabilities (3) (3)
Deferred tax liabilities (139) (139)
Other provisions for liabilities and
charges (7) (7)
Trade and other payables (364) (364)
Assets classified as held for sale 182 182
Net assets of cigarette and snus
businesses 211 558 769
Less: fair value of 32.35% existing
interest in
cigarette and snus businesses (248)
Fair value of net assets acquired 521
Goodwill 923
Total consideration 1,444
GBPm
The total consideration comprises:
- Cash 1,237
- Fair value of existing 32.35% interest in ST not retained by the
Group
203
- Acquisition costs 4
Total consideration 1,444
The transaction also results in a revaluation of the Group`s 32.25
per cent previous interest in the
cigarette and snus businesses retained by the Group:
GBPm
- Fair value of the existing interest in ST as retained by the Group 248
- Carrying value under equity accounting prior to the transaction (69)
Revaluation 179
The disposal of the Group`s 32.35 per cent interest in the
non-cigarette and snus businesses of ST
gave rise to a non-taxable gain of GBP139 million, after costs of
GBP3 million as follows:
GBPm
- Cash (1,237)
- Book value, including goodwill, of existing 32.35%
interest in ST not retained by the Group (80)
- Costs allocated to disposal (3)
- Fair value of cigarette and snus businesses acquired 1,440
- Exchange differences recycled from equity 19
Gain on disposal of non-cigarette and snus
businesses 139
Included within the cigarette and snus businesses acquired from ST are GBP182
million of local trademarks, primarily in Norway, that are being actively
marketed for sale as a condition of the regulatory approval being granted.
These assets are expected to be sold within a period of one year from the
balance sheet date and have been included as assets classified as
held-for-sale.
The book values of the acquired assets have been revalued to fair value as at
the acquisition date. The main adjustments relate to the revaluations of land
and buildings, recognition of cigarette trademarks and the related impact on
deferred tax.
In addition to the fair value adjustments above, goodwill carried in the local
books has been reversed.
The goodwill of GBP923 million arising on the acquisition of the cigarette and
snus businesses of ST represents a strategic premium to acquire cigarette
market leadership in Denmark and Norway and significant cigarette market
positions in Sweden and Poland, together with a stronger snus business as a
result of acquiring additional expertise and in-house manufacturing, with
anticipated synergies that will arise post-acquisition. The goodwill in respect
of ST on the balance sheet comprises the GBP923 million as a result of this
transaction, together with GBP64 million from earlier transactions which
relates to the cigarette and snus businesses.
(b) Tekel
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. The acquisition only relates to the cigarette
assets of Tekel, which principally comprised trademarks, factories and tobacco
leaf stocks. The acquisition did not include employees and the Group had
directly employed the required workforce by the effective date of the
transaction. Completion of this transaction was subject to regulatory approval
which was subsequently received and on 24 June 2008 the Group completed the
transaction, subject to finalisation of completion accounts.
The goodwill of GBP566 million on the cigarette assets of Tekel, stated at the
exchange rates ruling at the date of the transaction, arises as follows:
Book Fair value
Provisional values value adjustments Fair value
GBPm GBPm GBPm
Intangible assets 127 127
Property, plant and equipment 77 (40) 37
Deferred tax asset 1 1
Inventories 154 (24) 130
Trade and other receivables 1 1
Other provisions for liabilities and
charges (4) (4)
Assets classified as held for sale 6 9 15
Net assets acquired 237 70 307
Goodwill 566
Total consideration 873
Consideration comprises:
- Cash 866
- Acquisition costs 7
Total consideration 873
Included within the cigarette assets acquired from Tekel are certain items of
property, plant and equipment that are being actively marketed for sale. These
assets, amounting to GBP15 million are expected to be sold within a period of
one year from the balance sheet date and have been included as `Assets
classified as held-for-sale`.
The book values of the acquired assets have been revalued to fair value as at
the acquisition date. The main adjustments relate to the downwards revaluation
of land and buildings, reduction in inventory to net realisable value and the
recognition of cigarette trademarks.
The goodwill of GBP566 million arising on the acquisition of the cigarette
assets of Tekel represents a strategic premium to acquire Tekel`s significant
market position in the Turkish cigarette market and significant anticipated
synergies that will arise post acquisition.
Finalisation of part of the transaction is still continuing and, in addition,
work in respect of identifying the appropriate fair value to be assigned to the
acquired cigarette assets, has been continued since the published results for
the six months to 30 June 2008. This further work has lead to the goodwill
increasing by GBP90 million compared to the provisional amount included in the
six months` results. This has arisen due to more detailed on-site inspections
and a review by the external valuers in determining the most appropriate fair
value for property, plant and equipment and the assets disclosed as
held-for-sale.
The transaction was financed from new facilities and bond issues, as described
on page 34.
NET FINANCE COSTS
Net finance costs comprise:
Year to
31.12.08 31.12.07
GBPm GBPm
Finance costs (658) (405)
Finance income 267 136
(391) (269)
Comprising:
Interest payable (535) (382)
Interest and dividend income 131 111
Fair value changes - derivatives (521) (143)
Exchange differences 534 13 145 2
(391) (269)
Net finance costs at GBP391 million were GBP122 million higher than last year,
principally reflecting the impact of the higher interest cost as a result of
increased borrowings as well as the impact of exchange rate movements.
The net GBP13 million gain (2007: GBP2 million gain) of fair value changes and
exchange differences reflects a gain of GBP16 million (2007: GBP12 million
gain) from the net impact of exchange rate movements and a loss of GBP3 million
(2007: GBP10 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 such amounts.
The adjusted diluted earnings per share for the year ended 31 December 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 the
Statement of Recognised Income and Expense.
The Group`s interest cover was also distorted by the impact of the adjusting
items, shown in the adjusted diluted earnings per share calculations (page 30).
It was also impacted by the acquisitions and exchange rate movements, partially
offset by higher profit from operations. On an adjusted basis, based on profit
before interest payable over interest payable, interest cover remains strong at
8.5x (2007: 9.4x) with the lower cover reflecting higher interest cost. Net
interest cover, on the basis of profit before net finance costs over net
finance costs, was 11.1x (2007: 12.8x).
ASSOCIATES AND JOINT VENTURES
The Group`s share of post-tax results of associates and joint ventures was
GBP503 million (2007: GBP442 million) after tax of GBP284 million (2007: GBP246
million). The share is after the following adjusting items which are excluded
from the calculation of adjusted diluted earnings per share (page 30).
In the year ended 31 December 2008, Reynolds American modified the previously
anticipated level of support between certain trademarks and the projected net
sales of certain trademarks, resulting in a trademark impairment charge of
which the Group`s share amounted to GBP20 million (2007: 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 24, 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 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.
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
year ended 31 December 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
year amounted to GBP45 million (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 year`s results amounted to
US$90 million. The Group`s share of this charge included in the results for the
year amounted to GBP12 million (net of tax).
Following the change in the Group accounting policy for retirement benefits,
noted on page 16, the Investment in Associates and Joint Ventures on the Group
balance sheet at 31 December 2007 has been increased by GBP47 million, with a
corresponding entry to equity. The change in the Group`s accounting policy did
not have any impact on the results from Associates for 2008 and 2007.
TAXATION
Year to
31.12.08 31.12.07
GBPm GBPm
restated
UK corporation tax
Overseas tax 959 816
Adjustment in respect of prior periods (14) (51)
Current tax 945 765
Deferred tax 80 25
1,025 790
The tax rates in the income statement of 27.8 per cent in 2008 and 25.7 per
cent in 2007 are affected by the inclusion of the share of associates` post-tax
profit in the Group`s pre-tax results and by adjusting items. The underlying
tax rate for subsidiaries reflected in the adjusted earnings per share below
was 30.8 per cent in 2008 and 29.6 per cent in 2007. The increase arose
primarily from a change in the mix of profits and as a result of one-off prior
year adjustments included in 2007. The charge related to taxes payable
overseas. The tax charge for 2008 also included a one-off deferred tax charge
of GBP26 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. The restatement of 2007
reflects the change in the Group`s accounting policy as explained on page 16.
EARNINGS PER SHARE
Year to
31.12.08 31.12.07
restated
pence pence
Earnings per share:
- basic 123.28 105.19
- diluted 122.54 104.46
Adjusted earnings per share
- basic 129.55 109.29
- diluted 128.78 108.53
Headline earnings per share
- basic 114.80 103.46
- diluted 114.11 102.75
Basic earnings per share are based on the profit for the year attributable to
ordinary shareholders and the weighted average number of ordinary shares in
issue during the year (excluding treasury shares).
For the calculation of the diluted earnings per share, the weighted average
number of shares reflects the potential dilutive effect of employee share
schemes.
The presentation of headline earnings per share is mandated under the JSE
Listing Requirements. It is calculated in accordance with Circular 8/2007
`Headline Earnings`, as issued by the South African Institute of Chartered
Accountants.
Earnings have been affected by a number of adjusting items, together with
certain distortions to net finance costs under IFRS (see page 27) and to
deferred tax (see page 29) in 2008, and to illustrate the impact of these items
the adjusted diluted earnings per share are shown below:
Diluted earnings per share
Year to
31.12.08 31.12.07
pence pence
Unadjusted earnings per share 122.54 104.46
Effect of restructuring and integration costs 6.08 6.48
Effect of Canadian settlement 5.09
Effect of amortisation of trademarks 0.90
Effect of disposals of businesses and trademarks (6.38) (2.75)
Effect of net finance cost adjustment 0.55
Effect of associates` trademark impairments,
restructuring costs and
termination of joint venture (0.65) 0.34
Effect of additional ST income (0.65)
Effect of deferred tax adjustment 1.30
Adjusted diluted earnings per share 128.78 108.53
Similar types of adjustments would apply to basic earnings per share.
The earnings per share are based on:
31.12.08 31.12.07
Earnings Shares Earnings Shares
GBPm m GBPm m
Earnings per share
- basic 2,457 1,993 2,130 2,025
- diluted 2,457 2,005 2,130 2,039
Adjusted earnings per share
- basic 2,582 1,993 2,213 2,025
- diluted 2,582 2,005 2,213 2,039
Headline earnings per share
- basic 2,288 1,993 2,095 2,025
- diluted 2,288 2,005 2,095 2,039
Headline earnings per share are calculated by taking the following adjustments
into account:
Diluted headline earnings per share
Year to
31.12.08 31.12.07
pence pence
Unadjusted earnings per share 122.54 104.46
Effect of impairment of goodwill and property, plant
and equipment 0.25 0.84
Effect of gains on disposal of property, plant and
equipment (0.45) (0.19)
Effect of gains on disposal of businesses and
trademarks (6.68) (2.75)
Effect of (gains)/losses reclassified from the
available-for-sale reserve (0.30) 0.05
Effect of share of associates` trademark impairments
and termination
of joint ventures (1.25) 0.34
Headline earnings per share 114.11 102.75
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.
Year to
31.12.08 31.12.07
GBPm GBPm
Net cash from operating activities before
restructuring costs and
taxation 4,692 3,656
Restructuring costs (210) (190)
Taxation (943) (866)
Net cash from operating activities page 15 3,539 2,600
Net interest (280) (280)
Net capital expenditure (482) (436)
Dividends to minority interests (173) (173)
Free cash flow 2,604 1,711
Dividends paid to shareholders (1,393) (1,198)
Share buy-back (400) (750)
Purchase of Tekel cigarette assets (873)
Purchase of ST cigarette and snus businesses (1,243)
Other net flows (227) 152
Net cash outflows (1,532) (85)
The growth in underlying operating performance, as well as the timing of
working capital movements and higher dividends from associates, partly offset
by the adverse impact of the GBP102 million cash outflow from the Canadian
settlement, explained on page 23, resulted in a GBP1,036 million increase in
cash flow before restructuring costs and taxation to GBP4,692 million. Although
there was a GBP77 million increase in tax outflows reflecting higher profits
and the timing of payments, with the above operating cash flows and higher
restructuring costs, the Group`s net cash flow from operating activities was
GBP939 million higher at GBP3,539 million.
Free cash flow is the Group`s cash flow before dividends, share buy-back and
investing activities. With higher capital expenditure, the free cash flow was
GBP893 million higher than 2007 at GBP2,604 million. The free cash flow
exceeded the total cash outlay on dividends to shareholders and share buy-back
by GBP811 million.
The ratio of free cash flow per share to adjusted diluted earnings per share
was 101 per cent (2007: 77 per cent), with free cash flow per share increasing
by 55 per cent.
During 2008, the cash outflows of GBP873 million and GBP1,243 million
respectively on the purchase of Tekel assets and ST businesses comprised the
purchase price, part of the acquisition costs less acquired net cash and cash
equivalents and overdrafts.
The other net flows in 2008 principally reflect the impact of the level of
shares purchased by the employee share ownership trusts, together with the
impact of outflows in respect of certain derivative financial instruments. The
comparative figure for 2007 largely relates to the sale of the Belgium cigar
factory and associated brands, as well as the disposal of the pipe tobacco
business.
The above flows resulted in net cash outflows of GBP1,532 million (2007: GBP85
million outflow). After taking account of transactions related to borrowings,
especially net new borrowings, the above flows resulted in a net increase of
cash and cash equivalents of GBP779 million (2007: GBP143 million decrease) as
shown in the IFRS cash flow on page 15.
b) The movements in net debt (borrowings including related derivatives, less
cash and cash equivalents and current available-for-sale investments) and the
maturity analyses of net debt are as follows:
31.12.08 31.12.07
GBPm GBPm
Reconciliation of movements in net debt
Net debt 1 January (5,581) (4,994)
Exchange* (2,622) (466)
Free cash flow 2,604 1,711
Dividends (1,393) (1,198)
Share buy-back (400) (750)
Tekel acquisition (873)
ST acquisition (1,243)
Other net flows (227) 152
Other non cash items (156) (36)
Net debt 31 December (9,891) (5,581)
*Including movements in respect of debt related derivatives
Maturity analysis of net debt
31.12.08 31.12.07
GBPm GBPm
Net debt due within one year:
Borrowings (2,724) (861)
Related derivatives (91) (90)
Cash and cash equivalents 2,309 1,258
Current available for sale investments 79 75
(427) 382
Net debt due beyond one year:
Borrowings (9,437) (6,062)
Related derivatives (27) 99
(9,464) (5,963)
Total net debt (9,891) (5,581)
The Group remains confident about its ability to successfully access the debt
capital markets and reviews its options on an ongoing basis.
c) Cash generated from operations (page 15)
Year to
31.12.08 31.12.07
restated
GBPm GBPm
Profit from operations 3,572 2,904
Adjustments for:
Amortisation of trademarks 24
Gains on disposal of businesses and trademarks (141) (75)
Depreciation and impairment of property, plant and
equipment 350 293
Amortisation and write off of intangible assets 56 43
(Increase)/decrease in inventories (367) 170
Decrease/(increase) in trade and other receivables 19 (83)
Increase in trade and other payables 746 61
Decrease in net retirement benefit liabilities (99) (119)
Decrease in provisions for liabilities and charges (31) (16)
Other non cash items 27 3
Cash generated from operations 4,156 3,181
The restatement of the 2007 results reflects the change in the Group`s
accounting policy for recognition of actuarial gains and losses, together with
the adoption of IFRIC14, as explained on page 16.
Cash generated from operations includes an outflow of GBP102 million (2007:
GBPnil) relating to the Canada Settlement as explained on page 23.
d) IFRS Investing and financing activities
The investing and financing activities in the IFRS cash flows on page 15
include the following items:
In 2008, the GBP17 million cash inflow on disposal of intangibles comprises the
cash received on the termination of the license agreement described on page 23,
while in 2007, the GBP16 million cash inflow reflects the pipe tobacco
trademarks, explained on page 23.
Purchases and disposals of investments (which comprise available-for-sale
investments and loans and receivables) include an inflow in respect of current
investments of GBP8 million (2007: GBP65 million inflow) and GBP1 million sales
proceeds of non-current investments (2007: GBP6 million).
In 2008, the cash proceeds on associates` share buy-back of GBP42 million
principally reflects the cash received in respect of the Group`s participation
in the share buy-back programme conducted by Reynolds American Inc.
In 2008, the cash outflow of GBP873 million on the purchase of Tekel assets
comprises the purchase price and the acquisition costs as shown on page 26. The
cash outflow of GBP1,243 million on the purchase of ST cigarette and snus
businesses comprises the purchase price less acquired net cash and cash
equivalents of GBP78 million and overdrafts of GBP82 million as shown on page
24.
In 2008, the purchase of other subsidiaries and minority interests arises from
the acquisition of minority interests in the Group`s subsidiaries in Africa and
Middle East and Europe, while in 2007 it arises from the acquisition of
minority interests in the Group`s subsidiaries in Africa and Middle East,
Europe and Asia Pacific.
In 2008, the cash inflow on disposal of subsidiaries reflects the net proceeds
on the sale of a non-core business in the Asia Pacific region, while for the
year ended 31 December 2007 the cash inflows principally reflected the proceeds
from sale of the Belgian Cigar factory and associated trademarks.
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.
Dividends paid for the year to 31 December 2008 include GBP1,393 million (2007:
GBP1,198 million) of dividends to Group shareholders and GBP173 million (2007:
GBP173 million) to minority shareholders.
e) Net cash and cash equivalents in the cash flow statement comprise:
31.12.08 31.12.07
GBPm GBPm
Cash and cash equivalents per balance sheet 2,309 1,258
Accrued interest (3)
Overdrafts (86) (78)
Net cash and cash equivalents 2,220 1,180
f) Liquidity
In the year ended 31 December 2008, the 1.8 billion revolving credit facility
arranged in December 2007 was cancelled and replaced with the issue of EUR1.25
billion and GBP500 million bonds maturing in 2015 and 2024 respectively. In
addition to this, the Group increased its EUR1 billion (5.375 per cent, maturity
2017) bond by an additional EUR250 million, bringing the total size of the bond
to EUR1.25 billion.
During the year the Group also issued US$300 million and US$700 million bonds,
maturing in 2013 and 2018 respectively, pursuant to Rule 144A and RegS under
the US Securities Act. The Group also repaid US$330 million and GBP217 million
bonds upon maturity in May and November respectively. In addition, on 22
September 2008, the Group repurchased its maturing Mexican 2011 MXN1,055
million UDI bond and refinanced it with a floating rate borrowing of MXN1,444
million.
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 EUR420 million and one of EUR860 million. These
facilities expire on 31 October 2009. There was a net draw down on these credit
facilities of EUR1.15 billion during the year ended 31 December 2008 (2007
EURnil).
In March 2007, EUR800 million of EUR1.7 billion bonds with a maturity of
February 2009 were replaced by EUR1 billion bonds with a maturity of 2017. In
March 2007, the Group`s central banking facility at GBP1.75 billion was extended
on
existing terms under a one year extension option with final maturity dates
between March 2011 and March 2012, and was undrawn as at 31 December 2008.
RETIREMENT BENEFIT SCHEMES
The Group`s subsidiaries operate around 150 retirement benefit arrangements
globally. The majority of the scheme members belong to defined benefit schemes,
most of which are funded externally and are closed to new entrants. The Group
also operates a number of defined contribution schemes.
The overall net liability for all pension schemes and healthcare schemes
amounted to GBP773 million at the end of 2008, up from GBP323 million at the
end of 2007. The present total value of funded scheme liabilities was GBP4,647
million (2007: GBP4,265 million), while unfunded scheme liabilities amounted to
GBP248 million (2007: GBP232 million).
The increase in the scheme liabilities and deficit in the schemes, were largely
due to an increase in life expectancy and the fall in asset values on world
markets, partly offset by higher discount rates for liabilities.
Contributions to the defined benefit schemes are determined after consultation
with the respective trustees and actuaries of the individual externally funded
schemes, taking into account the regulatory environment.
MOVEMENTS IN TOTAL EQUITY
31.12.08 31.12.07
restated
GBPm GBPm
Total recognised income and expense for the year page
12 2,147 2,615
Employee share options
- value of employee services 51 37
- proceeds from shares issued 10 27
Dividends and other appropriations
- ordinary shares (1,393) (1,198)
- to minority interests (176) (173)
Purchase of own shares
- held in employee share ownership trusts (116) (41)
- share buy-back programme (400) (750)
Acquisition of minority interests (5) (9)
Other movements 8 (3)
126 505
Balance 1 January 7,089 6,584
Balance 31 December 7,215 7,089
Total equity was GBP126 million higher at GBP7,215 million. The profit retained
after payment of dividends exceeded the level of the share buy-back by GBP664
million. In addition, exchange movements had a GBP937 million positive impact
on shareholders` funds, reflecting the general weakness of sterling at the end
of 2008 compared to 2007.
The restatement of the 2007 results reflects the change in the Group`s
accounting policy for recognition of actuarial gains and losses, together with
the adoption of IFRIC14, as explained on page 16.
LITIGATION: FRANKED INVESTMENT INCOME GROUP LITIGATION ORDER
British American Tobacco is the principal test claimant in an action in the
United Kingdom against HM Revenue and Customs in the Franked Investment Income
Group Litigation Order ("FII GLO"). There are over 20 companies in the FII GLO.
The case concerns the treatment for UK corporate tax purposes of profits earned
overseas and distributed to the UK. The claim was filed in 2003 and the case
was heard in the European Court of Justice in 2005 and a decision of the ECJ
received in December 2006. In July 2008, the case reverted to a trial in the UK
High Court for the UK Court to determine how the principles of the ECJ decision
should be applied in a UK context.
The High Court judgment in November 2008 concluded, amongst many other things,
that dividends received from EU subsidiaries should be, and should have been,
exempt from UK taxation. It also concluded that certain dividends received
before 5 April 1999 from the EU and, in some limited circumstances after 1993
from outside the EU, should have been treated as franked investment income with
the consequence that advance corporation tax need not have been paid. Claims
for the repayment of UK tax incurred where the dividends were from the EU can
be made back to 1973. The case will now proceed to the Court of Appeal.
The tentative conclusion reached in the judgment would, if upheld, produce an
estimated receivable of about GBP1.2 billion for British American Tobacco.
The potential receipt of some or all of the amount referred to above has not
been recognised in the results of the Group due to the uncertainty of the
amounts and eventual outcome.
CONTINGENT LIABILITIES
The Group is subject to contingencies pursuant to requirements that it complies
with relevant laws, regulations and standards. Failure to comply could result
in restrictions in operations, damages, fines, increased tax, increased cost of
compliance, reputational damage, or other sanctions. These matters are
inherently difficult to quantify.
In cases where the Group has an obligation as a result of a past event existing
at the balance sheet date, it is probable that an outflow of economic resources
will be required to settle the obligation and the amount of the obligation can
be reliably estimated, a provision would be recognised based on best estimates
and management judgment.
There are, however, contingent liabilities in respect of litigation, taxes in
some countries and guarantees for which no provisions were made.
The Group has exposures in respect of the payment or recovery of a number of
taxes. The Group is and has been subject to a number of tax audits covering
amongst others, excise tax, value added taxes, sales taxes, corporate taxes,
withholding taxes and payroll taxes.
The estimated costs of known tax obligations have been provided in these
accounts in accordance with the Group`s accounting policies. In some countries,
tax law requires that full or part payment of disputed tax assessments be made
pending resolution of the dispute. To the extent that such payments exceed the
estimated obligation, they would not be recognised as an expense. In some cases
disputes are proceeding to litigation.
While the amounts that may be payable or receivable could be material to the
results or cash flows of the Group in the period in which they are recognised,
the Board does not expect these amounts to have a material effect on the
Group`s financial condition.
Product liability litigation
Group companies, notably Brown & Williamson Holdings, Inc. (formerly Brown &
Williamson Tobacco Corporation) (B&W) as well as other leading cigarette
manufacturers, are defendants, principally in the United States, in a number of
product liability cases. In a number of these cases, the amounts of
compensatory and punitive damages sought are significant.
Indemnity
In 2004, B&W completed the combination of the assets, liabilities and
operations of its US tobacco business with R.J. Reynolds Tobacco Company
(RJRT), a wholly-owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc.,
pursuant to which Reynolds American Inc. was formed (the Business Combination).
As part of the Business Combination, B&W contributed to RJRT all of the assets
and liabilities of its US cigarette and tobacco business, subject to specified
exceptions, in exchange for a 42 per cent. equity ownership interest in
Reynolds American. As a result of the Business Combination:
B&W discontinued the active conduct of any tobacco business in the United
States;
B&W contributed to RJRT all of its assets other than the capital stock of
certain subsidiaries engaged in non-US businesses and other limited categories
of assets;
RJRT assumed all liabilities of B&W (except liabilities to the extent relating
to businesses and assets not contributed by B&W to RJRT and other limited
categories of liabilities) and contributed subsidiaries or otherwise to the
extent related to B&W`s tobacco business as conducted in the US on or prior to
30 July 2004; and
RJRT agreed to indemnify B&W and each of its associates (other than Reynolds
American and its subsidiaries) against, among other matters, all losses,
liabilities, damages, expenses, judgments, attorneys` fees, etc., to the extent
relating to or arising from such assumed liabilities or the assets contributed
by B&W to RJRT (the RJRT Indemnification).
The scope of the RJRT Indemnification includes all expenses and contingent
liabilities in connection with litigation to the extent relating to or arising
from B&W`s US tobacco business as conducted on or prior to 30 July 2004,
including smoking and health tobacco litigation, whether the litigation is
commenced before or after 30 July 2004 (the Tobacco Litigation).
Pursuant to the terms of the RJRT Indemnification, RJRT is liable for any
possible judgments, the posting of appeal bonds or security, and all other
expenses of and responsibility for managing the defence of the Tobacco
Litigation. RJRT has assumed control of the defence of the Tobacco Litigation
involving B&W, to which RJRT is also a party in most (but not all) of the same
cases. Accordingly, RJRT uses or plans to use the same law firm or firms to
represent both B&W and RJRT in any single or similar case (except in certain
limited circumstances) as RJRT`s interests are typically aligned with B&W`s
interests, as RJRT has substantial experience in managing recognised external
legal counsel in defending the Tobacco Litigation, and external counsel have
independent professional responsibilities to represent the interests of B&W. In
addition, in accordance with the terms of the RJRT Indemnification, associates
of B&W have retained control of the defence in certain Tobacco Litigation cases
with respect to which such associates are entitled to indemnification.
US litigation
The total number of US product liability cases pending at 31 December 2008
involving B&W and/or other Group companies was approximately 3,251 (2007:
approximately 3,323). At 31 December 2008, UK-based Group companies have been
named as co-defendants in six of those cases (2007: six). In 2008, no US cases
were tried against B&W. No US cases involving the UK-based Group companies were
tried in 2008. No product liability case in which a UK-based Group company is a
defendant is currently scheduled for trial in 2009.
Since many of these pending cases seek unspecified damages, it is not possible
to quantify the total amounts being claimed, but the aggregate amounts involved
in such litigation are significant. The cases fall into four broad categories:
(a) Medical reimbursement cases
These civil actions seek to recover amounts spent by government entities and
other third party providers on healthcare and welfare costs claimed to result
from illnesses associated with smoking. Although B&W continues to be a
defendant in healthcare cost recovery cases involving plaintiffs such as
hospitals and Native American tribes (see below), the vast majority of such
cases have been dismissed on legal grounds.
Further, on 23 November 1998, the major US cigarette manufacturers (including
B&W and RJRT) and the attorneys general of 46 US states and five US territories
executed the Master Settlement Agreement (MSA), which settled recoupment
lawsuits that had been brought by these states and territories. Under the terms
of the MSA, the settling cigarette manufacturers agreed, among other things, to
pay approximately US$246 billion to the settling states and territories (and to
four states that had reached separate settlements of their recoupment actions)
over 25 years, and agreed to various restrictions on US tobacco advertising and
marketing. The MSA includes a credit for any amounts paid by participating
tobacco manufacturers in subsequent suits brought by the states` political
subdivisions.
At 31 December 2008, a reimbursement suit was pending against B&W by an Indian
tribe in Indian tribal court in South Dakota, and another reimbursement case
(City of St. Louis) was pending against B&W and a UK-based company. In City of
St. Louis, plaintiffs consist of more than 60 public and non-profit hospitals
in Missouri seeking reimbursement of past and future alleged smoking related
healthcare costs. Summary judgment motions are pending and discovery remains
ongoing. A trial date for this case has been set for 11 January 2010.
(b) Class actions
At 31 December 2008, B&W was named as a defendant in some 10 (2007: 12)
separate actions attempting to assert claims on behalf of classes of persons
allegedly injured or financially impacted through smoking or where classes of
tobacco claimants have been certified. Even if the classes are or remain
certified and the possibility of class-based liability is eventually
established, it is likely that individual trials will still be necessary to
resolve any actual claims. Class-action suits have been filed in a number of US
state and federal courts against individual cigarette manufacturers and their
parent corporations, alleging that the use of terms such as "lights" and
"ultralights" constitutes unfair and deceptive trade practices.
A class action complaint (Schwab) was filed in the US District Court for the
Eastern District of New York on 11 May 2004 against several defendants,
including B&W and certain UK-based Group companies. The complaint challenges
defendants` practices with respect to the marketing, advertising, promotion and
sale of "light" cigarettes, and seeks billions of dollars in economic damages.
The district court granted plaintiffs` motion for class certification on 25
September 2006. On 3 April 2008, the Schwab class was decertified by the Second
Circuit Court of Appeals. The mandate returning the case to the district court
was issued on 29 May 2008.
Other types of class-action suits assert claims on behalf of classes of
individuals who claim to be addicted, injured, or at greater risk of injury by
the use of tobacco or exposure to environmental tobacco smoke, or the legal
survivors of such persons.
In Engle (Florida), filed on 5 May 1994, a jury rendered a punitive damages
verdict in favour of the Florida class against all defendants, with US$17.6
billion in punitive damages assessed against B&W. After various post-trial and
appellate proceedings, the Florida Supreme Court, among other things, affirmed
an intermediate appellate court`s decision to decertify the class, vacated the
jury`s punitive damages award and permitted putative Engle class members to
file individual lawsuits against the Engle defendants within one year of the
Court`s decision (subsequently extended to 11 January 2008). As of 31 December
2008, B&W has been served individually in approximately 54 Engle progeny cases
pending in Florida courts. These cases include approximately 110 plaintiffs.
In the first trial of an individual Engle class member (Lukacs), the jury, on
11 June 2002, awarded plaintiff US$37.5 million in compensatory damages (B&W`s
share: US$8.4 million). After post-trial proceedings, on 12 November 2008, the
trial court entered judgment for plaintiff in the amount of US$24,835,000 (plus
interest), for which defendants were jointly and severally liable. Defendants
filed an appeal from the judgment on 1 December 2008.
In a case filed on 24 May 1996 by a class of Louisiana smokers (Scott) in
Louisiana state court against several US cigarette manufacturers (including
B&W), the jury, on 28 July 2003, returned a verdict in defendants` favour on a
medical monitoring claim, but made findings against defendants with respect to
claims relating to fraud, conspiracy, marketing to minors and smoking
cessation. On 21 May 2004, the jury returned a verdict in the amount of US$591
million on the class`s claim for a smoking cessation programme. On 7 February
2007, an intermediate appellate court, among other things, affirmed class
certification and upheld the smoking cessation programme for certain smokers
who began smoking before 1988, but reduced the US$591 million jury award by
US$312 million and rejected any award of prejudgment interest. On 21 July 2008,
the trial court entered judgment in the case, finding that defendants were
jointly and severally liable for funding the cost of a court-supervised
smoking cessation programme, and ordering defendants to deposit approximately
US$264 million together with interest from 30 June 2004 into a trust for the
funding of the programme. On 15 December 2008, the trial court entered an order
permitting defendants to take a suspensive appeal, thereby staying enforcement
of the judgment pending the resolution of defendants` appeal.
A class action complaint (Cleary) was filed in state court in Chicago, Illinois
on 3 June 1998 against several defendants, including B&W, B.A.T Industries
p.l.c. (Industries) and British American Tobacco (Investments) Limited
(Investments). Industries was dismissed on jurisdictional grounds by an
intermediate appellate court on 17 March 2000. The second amended complaint,
filed on 8 April 2005, alleges, among other things, that defendants
fraudulently concealed facts regarding the addictive nature of nicotine and
that certain US defendants marketed tobacco products to underage consumers, and
seeks, among other remedies, disgorgement of profits. On 11 July 2006,
plaintiffs filed a renewed motion for class certification, which remains
pending. The case is currently in class certification discovery.
(c) Individual cases
Approximately 3,238 cases were pending against B&W at 31 December 2008 (2007:
approximately 3,307) filed by or on behalf of individuals in which it is
contended that diseases or deaths have been caused by cigarette smoking or by
exposure to environmental tobacco smoke (ETS). Of these cases, approximately:
(a) 2,620 are ETS cases brought by flight attendants who were members of a
class action (Broin) that was settled on terms that allow compensatory but not
punitive damages claims by class members; (b) 490 of the individual cases
against B&W are cases brought in consolidated proceedings in West Virginia; (c)
54 are Engle progeny cases that have been served upon B&W, and (d) 74 are cases
filed by other individuals.
There are three verdicts against B&W that remained subject to appeal in 2008:
In December 2003 and January 2004, a New York state court jury (Frankson)
awarded an individual plaintiff compensatory and punative damages against B&W
and two industry organisations. After post-trial and appellate proceedings, the
trial court entered judgment on 26 June 2007 in the amounts of US$175,000 in
compensatory damages and US$5 million in punitive damages. Defendants
subsequently appealed from the judgment to an intermediate appellate court.
Appellate oral argument was heard on 26 January 2009. A decision remains
pending.
In February 2005, a Missouri state court jury (Smith) awarded an individual
plaintiff US$500,000 in compensatory damages and US$20 million in punitive
damages against B&W. On 16 December 2008, an intermediate Missouri appellate
court affirmed the compensatory damages award, but remanded the case for a new
trial on issues relating to punitive damages. B&W filed a motion for rehearing
on 31 December 2008, which was denied on 27 January 2009.
On 18 March 2005, a New York state court jury (Rose) awarded an individual
plaintiff US$1.7 million in compensatory damages against B&W. On 10 April 2008,
an intermediate state appellate court reversed the judgment and ordered that
the case be dismissed. On 16 December 2008, the New York Court of Appeals
affirmed the intermediate appellate court`s ruling. Plaintiff filed a motion to
reargue to the Court of Appeals on 14 January 2009, and defendants filed a
response on 9 February 2009. A decision on this motion remains pending.
(d) Other claims
The Flintkote Company (Flintkote), a US asbestos production and sales company,
was included in the acquisition of Genstar Corporation by Imasco Limited in
1986 and became a Group subsidiary following the restructuring of Imasco
Limited (now Imperial Tobacco Canada Limited (Imperial), the Group`s operating
company in Canada) in 2000. Soon after this acquisition, and as part of the
acquisition plan, Genstar began to sell most of its assets, including the
non-asbestos related operations and subsidiaries of Flintkote. The liquidation
of Flintkote assets produced cash proceeds and, having obtained advice from the
law firm of Sullivan & Cromwell LLP and other advice that sufficient assets
would remain to satisfy liabilities, Flintkote and Imasco authorised the
payment of a dividend of US$170.2 million in 1986 and a further dividend of
US$355 million in 1987. In 2003, Imperial divested Flintkote and then, in 2004,
Flintkote filed for bankruptcy in the United States Bankruptcy Court for the
District of Delaware. In 2006, Flintkote, representatives of both the present
and future asbestos claimants, and individual asbestos claimants were permitted
by the bankruptcy court to file a complaint against Imperial and numerous other
defendants including Sullivan & Cromwell LLP, for the recovery of the dividends
and other compensation under various legal and equitable theories. Sullivan &
Cromwell LLP and Imperial have since filed cross complaints against each other.
The parties are presently engaged in case management discussions to establish
the scope and manner of discovery in this case.
In Wisconsin, the authorities have identified potentially responsible parties
(PRPs) to fund the clean up of the Fox River, Wisconsin. The pollution was
caused by the alleged discharges of toxic material from paper mills operating
close to the river. The cost of the clean up work has been estimated to be in
the order of US$600 million. Among the PRPs are NCR Corporation (NCR) and
Appleton Papers Inc. (Appleton) who may be liable for a proportion of the clean
up costs. In 1978, Industries purchased what was then NCR`s Appleton Papers
Division from NCR. In 1978, Industries also incorporated a US entity by the
name of BATUS, Inc. (BATUS), which in 1980 became the holding company for all
of Industries` US subsidiaries, including Appleton. As the holding company,
BATUS obtained insurance policies for itself and its subsidiaries that included
coverage for certain environmental liabilities. Industries/BATUS spun off the
Appleton business in 1990 to Wiggins Teape
Appleton p.l.c. and Wiggins Teape Appleton (Holdings) p.l.c., now known as Arjo
Wiggins Appleton Ltd. and Arjo Wiggins US Holdings Ltd. (collectively, the AWA
Entities), obtaining full indemnities from AWA Entities for past and future
environmental claims. Disputes between NCR, Appleton, the AWA Entities, and
Industries as to the indemnities given and received under the purchase
agreement in 1978 have been the subject of arbitrations in 1998 and 2006. Under
the terms of the arbitration awards, Industries and Appleton/the AWA Entities
have an obligation to share the costs of environmental claims with NCR, but
Industries has never been required to pay any sums in this regard because
Appleton and the AWA Entities have paid any sums demanded to date, and the
authorities have not identified Industries or BATUS as PRPs. It is believed
that all future environmental liabilities will continue to be met directly by
Appleton and the AWA Entities by self-funding or insurance cover and no demand
will be made upon Industries. However, the risk for Industries in respect of
the Fox River clean up is that Appleton and the AWA Entities will exhaust
insurance policies beyond that which Industries believes Appleton and the AWA
Entities are entitled to under the demerger agreement, potentially leaving
Industries with no insurance to call on should it be called on to contribute.
There is currently a tolling agreement in place with regard to the differing
interpretations of the provisions of the demerger agreement in this regard,
which preserves the parties` rights to litigate the issue even though the
limitation period has expired. Given the likelihood that the case will not be
resolved for some time, Appleton, the AWA Entities, Industries and BATUS have
agreed to extend the tolling agreement until 31 December 2009.
UK-based Group companies
At 31 December 2008, Industries was a defendant in the US in one class action,
the Schwab case mentioned previously. In that case, Industries was substituted
for British American Tobacco p.l.c. as a defendant. Investments had been served
in one reimbursement case (City of St. Louis), the Department of Justice case
(see below), one anti-trust case (Daric Smith, see below), two class actions
(Cleary and Schwab) and two individual actions (Eiser and Perry).
Conduct-based claims
On 22 September 1999, the US Department of Justice brought an action in the US
District Court for the District of Columbia against various industry members,
including B&W, Industries and Investments. Industries was dismissed for lack of
personal jurisdiction on 28 September 2000. The Government sought, among other
relief, the disgorgement of US$280 billion in past profits pursuant to the
federal Racketeer Influenced and Corrupt Organisations Act (RICO) statute. On 4
February 2005, the DC Circuit Court of Appeals ruled that the Government could
not claim disgorgement of profits under RICO. On 17 August 2006, the district
court issued its final judgment in favour of the Government, and against
certain defendants, including B&W and Investments. The court also ordered a
wide array of injunctive relief, including a ban on the use of "lights" and
other similar descriptors. Investments` compliance with the court-ordered
remedies may result in potentially significant financial exposure. Defendants,
including B&W and Investments, filed notices of appeal to the DC Circuit Court
of Appeals on 11 September 2006, and thereafter obtained a stay of the district
court`s judgment. Appellate briefing has been completed and oral argument took
place on 14 October 2008. A decision remains pending.
In the Daric Smith case, purchasers of cigarettes in the State of Kansas
brought a class action in the Kansas State Court against B&W, Investments and
certain other tobacco companies seeking injunctive relief, treble damages,
interest and costs. The allegations are that defendants participated in a
conspiracy to fix or maintain the price of cigarettes sold in the US, including
the State of Kansas, in violation of the Kansas Restraint of Trade Act.
Discovery is continuing.
Product liability outside the United States
At 31 December 2008, active claims against the Group`s companies existed in 18
(2007: 18) markets outside the US but the only markets with more than five
active claims were Argentina, Brazil, Canada, Chile, Italy, Nigeria, and the
Republic of Ireland. There has been new litigation in Bulgaria and Israel,
where class actions have been filed, and in Russia where the Ministry of Health
commenced a consumer protection claim. In 2008, judgments in favour of the
defence were rendered in individual smoking and health cases in Finland, the
Netherlands and Chile. The following is a description of the major developments
since the last report in cases pending outside the United States that fall into
four broad categories:
(a) Medical reimbursement cases
Argentina
ATLA (Argentine Tort Law Association) in June 2007 instigated a lawsuit stating
damages and medical recoupment claims as against Nobleza-Piccardo S.A.I.C.y F.
(Nobleza Piccardo). ATLA sought to have certain public entities joined as
plaintiffs. On 23 December 2008, the court allowed intervention by the national
government and declined to accept in full certain defences asserting legal
invalidity of the claims. Nobleza Piccardo will appeal this ruling.
Brazil
The Sao Paulo State Public Prosecutor instigated a lawsuit in July 2007
comprising product liability, ETS and medical recoupment claims. On 7 October
2008, Souza Cruz S.A. (Souza Cruz) filed an objection to a motion to intervene
as an additional plaintiff by ACTbr, a private anti-tobacco group.
On 17 October 2008, the court issued an order to plaintiffs to respond to
certain of defendants` procedural requests, as well as certain defences and
objections.
Canada
The government of the Province of British Columbia brought a claim pursuant to
the provisions of the Tobacco Damages and Health Care Costs Recovery Act 2000
(the Recovery Act) against domestic and foreign manufacturers seeking to
recover plaintiff`s costs of health care benefits. Investments, Industries,
Imperial and certain former Rothmans Group companies are named as defendants.
The constitutionality of the Recovery Act was challenged by certain defendants.
Ultimately, in September 2005, the Supreme Court of Canada declared the
Recovery Act to be constitutionally valid. The defendants joined the federal
Government of Canada as a defendant and the federal Government, in turn, filed
a motion to strike the claim. The Supreme Court of British Columbia found in
favour of the federal Government, dismissing it from the action. Defendants`
subsequent appeal of that order has been consolidated with a similar appeal in
the Knight case (see below). The appeals are scheduled to be heard in the week
of 1 June 2009. Non-Canadian defendants, including Investments and Industries,
sought to dismiss the action on the ground that the British Columbia court
lacked personal jurisdiction over them. These motions were subsequently denied,
and defendants` appeal of these decisions was ultimately unsuccessful. The
claim is now set down for trial in September 2011.
In another Canadian recoupment case, the government of the Province of New
Brunswick has brought a health care recoupment claim against domestic and
foreign tobacco manufacturers, pursuant to the provisions of the Recovery Act
passed in that Province in June 2006. The Company, Investments, Industries,
Imperial and certain former Rothmans Group companies have all been named as
defendants. The government filed a statement of claim on 13 March 2008. The
Group defendants were served with the Notice of Action and Statement of Claim
on 2 June 2008.
Colombia
British American Tobacco (South America) Limited was served on 18 July 2008 in
a public interest action that has a recoupment component. The case was brought
by two Colombian citizens alleging that the defendant violated numerous
"collective" interests and rights of the Colombian population. In addition to
equitable and injunctive relief, plaintiffs are seeking 25 per cent. of
smoking-related health-care costs since the time that the Group has been
operating in Colombia.
Israel
Clalit, one of the main healthcare providers in Israel, filed a recoupment
claim on 28 September 1998 in the Tel Aviv District Court against several local
and international tobacco companies. Clalit seeks NIS 7.6 billion
(approximately US$1.9 billion) in damages and injunctive relief. Following a
series of procedural negotiations between the parties, the Group companies
currently named as defendants in the action are Industries, B&W, B.A.T (U.K.
and Export) Limited (BATUKE) and Investments. In 2003, the Group company
defendants except for Industries, and others, filed motions to strike the
Statement of Claim on the ground that Clalit`s claims are remote and
derivative, and therefore cannot be brought as direct claims. On 16 February
2004, the District Court judge issued a consolidated decision denying
defendants` motions. Defendants have appealed this decision to the Supreme
Court. The outcome of the Supreme Court ruling on defendants` appeals is still
awaited. Additionally, in 2002, Industries filed a motion to set aside service
as improper due to its lack of contacts with the jurisdiction. That motion was
denied in or about November 2005, and Industries subsequently filed a motion
seeking leave to appeal that decision to the Supreme Court. A decision on
Industries` motion is stayed pending a ruling on the other defendants` motions
to strike.
Nigeria
In 2007, four Nigerian states (Lagos, Kano, Gombe, and Oyo) and the federal
government of Nigeria filed separate health care recoupment actions, each
seeking the equivalent of billions of US Dollars for costs allegedly incurred
by the state and federal governments in treating smoking-related illnesses.
British American Tobacco (Nigeria) Limited, the Company and Investments have
all been named as defendants, and have filed preliminary objections in each of
the pending cases. In 2008, a healthcare recoupment claim was also filed in
Akwa Ibom state. The Company and British American Tobacco (Nigeria) Limited
have been served with notices in that action. A healthcare recoupment claim has
reportedly also been filed in Ogun state. No Group companies have been served
with that claim.
On 21 February 2008, the initial Lagos action was voluntarily discontinued by
plaintiffs and replaced on 13 March 2008 with a substantially similar action.
British American Tobacco (Nigeria) Limited, the Company and Investments have
all been served in the new action and have filed preliminary objections. On 8
July 2008, the High Court of Gombe State ruled on the preliminary objections
filed by the Company, Investments and other defendants in the case, setting
aside service on all defendants and striking out the claim. Plaintiff has since
filed a renewed action and the court has granted plaintiff`s application for
leave to issue and serve a writ of summons outside the jurisdiction.
In Kano and Oyo States, proceedings are currently concerned with determining
the parties` preliminary objections to jurisdiction. Matters in the Akwa Ibom
and Federal claims stand adjourned for reports on service.
Saudi Arabia
There are reports that the Saudi Ministry of Health is pursuing a health-care
recoupment action in the Riyadh General Court against a number of tobacco
distributors and agents. At 31 December 2008, no Group company had been served
with process. The Ministry of Health is reportedly seeking damages of at least
127 billion Saudi Riyals. In addition, a separate recoupment action has
reportedly been filed by the King Faisal Specialist Hospital in the Riyadh
General Court, naming `BAT Company Limited` as a defendant. At 31 December
2008, no Group company had been served with process.
Spain
The Junta de Andalucia, together with the Health Service of Andalucia
(hereinafter "Junta") filed, on 20 September 2007, a recoupment action against
the Spanish State and six tobacco companies, including British American Tobacco
Espana, S.A. (BAT Espana). The Junta seeks the reimbursement of EUR1,769,964
allegedly spent in healthcare costs for treating patients with smoking-related
diseases. The Court upheld the State`s preliminary objections to the claim and
dismissed the claim on 14 November 2007. On 4 March 2008, the Junta filed a
notice of its intention to appeal that decision. The Junta`s appeal remains
pending. On 23 July 2008, BAT Espana was served with notice of a new claim by
the Junta asserting essentially the same claims as in the prior action.
(b) Class actions
Brazil
In 1995, a class action was filed by the Association for the Defence of the
Health of Smokers (ADESF) against Souza Cruz and other tobacco manufacturers in
the Sao Paulo Lower Civil Court alleging that defendants are liable to a class
of smokers and former smokers for failing to warn of cigarette addiction.
Plaintiffs seek monetary damages and injunctive relief. The case was stayed in
2004 pending defendants` appeal from a decision issued by the lower civil court
on 7 April 2004. On 12 November 2008, the Sao Paulo Court of Appeals overturned
the lower court`s unfavourable decision of 2004, finding that the lower court
had failed to provide defendants with an opportunity to produce evidence. The
case now returns to the lower court for production of evidence and a new
judgment.
The Brazilian Association for the Defence of Consumers` Health (Saudecon) filed
a class action against Souza Cruz in the City of Porto Alegre, Brazil on 3
November 2008. Plaintiff purports to represent all Brazilian smokers whom, it
alleges, are unable to quit smoking and lack access to cessation treatments.
Plaintiff is seeking an order requiring the named defendants to fund, according
to their market share, the purchase of cessation treatments for these smokers
over a minimum period of two years. Souza Cruz filed its Statement of Defence
on 26 January 2009.
A consumer association known as ACODE (Association of Exploited Consumers of
the Federal District) instigated an action in essence seeking a court order to
stop Souza Cruz from marketing cigarettes in Brazil. In December 2006, the 4th
Chamber of the Federal District Court of Appeals confirmed a lower court
decision that ruled the claim groundless and unlawful. Plaintiff filed an
appeal before the Superior Court of Justice which has been pending final review
since May 2007.
The State of Sergipe instigated in 2004 a class action seeking compensation for
smokers in Sergipe State who purportedly sought to quit smoking. The lower
court denied plaintiffs` request for early relief and determined that all
Brazilian tobacco companies and ANVISA be ordered to join the case as
co-defendants. Since then all the parties involved have yet to be served
process.
Bulgaria
In March 2008, a collective claim was filed in the Sofia City Court of Bulgaria
against 21 defendants, including British-American Tobacco Polska S.A.,
British-American Tobacco (Romania) Trading SRL, and House of Prince A/S.
Plaintiff seeks recovery of roughly 17,000 Leva (approximately US$12,000) in
damages per class member and injunctive relief. The claim was dismissed twice
on procedural deficiencies, but re-instated both times on appeal. On 2 December
2008, the Sofia City Court dismissed the youth advertising claim and required
plaintiff to meet various evidentiary and procedural conditions in order to
proceed with the claim.
Canada
In the Knight class action in Canada, the Supreme Court of British Columbia
certified a class of all consumers of cigarettes bearing "light" or "mild"
descriptors since 1974 manufactured in British Columbia by Imperial. The
British Columbia Court of Appeal affirmed the certification of the class but
has limited any potential financial liability to the period from 1997. This is
a "lights" class action in which plaintiff alleges that the marketing of light
and mild cigarettes is deceptive because it conveys a false and misleading
message that those cigarettes are less harmful than regular cigarettes.
Plaintiff seeks compensation for amounts spent on "light and mild" products and
a disgorgement of profits from Imperial. Imperial joined the federal Government
of Canada as a defendant and the federal Government, in turn, filed a motion to
strike the claim. The court subsequently dismissed the federal Government from
the action. Imperial appealed that order, and its appeal has been consolidated
with a similar appeal in the British Columbia recoupment litigation (see
above). Hearings are scheduled for the week of 1 June 2009.
A similar "lights" and "mild" class action claim has been filed in
Newfoundland. Imperial has filed a third party notice against the Federal
Government. The certification hearing took place in September 2007.
Certification was denied on 29 December 2008 and Imperial subsequently received
plaintiffs` notice for leave to appeal.
There are currently two class actions in Quebec. On 21 February 2005, the
Quebec Superior Court granted certification. The court certified two classes,
which include residents of Quebec who suffered from lung, throat and laryngeal
cancer or emphysema, and residents who were addicted to nicotine at the time
the proceedings were filed and who have since remained addicted. Plaintiffs
have served a Statement of Claim.
On 12 May 2008, the Ontario Court of Appeal dismissed plaintiffs` appeal in the
Ragoonanan class action. The proposed class action sought to certify as a class
"all persons who suffered bodily damage or property damage as a result of fires
commenced by cigarettes that did not automatically extinguish upon being
dropped or left unattended". Certification was denied in first instance and
leave to appeal was denied in the 12 May 2008 decision. In summary, the court
decided that there was no rational relationship between the class definition
and the proposed common issues and that a class action was not a preferable
procedure.
Israel
In May 2008, nine smokers of low yield cigarettes filed a class action in
Israel, known as Numberg, before the Tel Aviv District Court against various
defendants including the Group`s Israeli distributor, Globrands Agencies 2007
Limited. Plaintiffs allege that since December 2004, defendants have
fraudulently marketed and sold low yield cigarettes in Israel, in contravention
of what they interpret to be an express ban on the sale of such products
following the prohibition on the use of "lights" descriptors, by using methods
such as marking cigarette packages in a special colour, using descriptors such
as "slim" or "super slim", and displaying text that describes the amount of tar
and nicotine yields. In addition to injunctive and declaratory relief,
plaintiffs seek 78.5 billion NIS (approximately US$20.3 billion) in monetary
damages.
Venezuela
FEVACU (Venezuelan Federation of Associations of Users and Consumers)
instigated a purported class action that was admitted by the court on 22
October 2008 seeking, among other relief, that defendant be required to fund a
trust for the treatment of alleged smoking-related diseases. On 19 January
2009, C.A. Cigarrera Bigott Sucs. appeared as a third party whose rights may be
affected by the proceedings, as provided under the procedural law.
(c) Individual cases
Brazil
As of 31 December 2008. there were approximately 310 individual cases that
remain pending in Brazil against Souza Cruz in which it is contended that the
smokers` diseases or deaths were caused by cigarette smoking. Since 1995,
approximately 530 individual cases have been filed in Brazil against Souza
Cruz. Approximately ten of these cases have resulted in court decisions
favourable to plaintiffs in either the civil court or court of appeal, all of
which remain on appeal.
Canada
Three individual smoking and health cases have been filed in Canada. Of these,
two (Battaglia and Landry) have been in abeyance since 2004 and 2003
respectively. The third (Spasic) is active and currently at a preliminary
stage. One smoking and health case (Stright) has been filed in Nova Scotia but
has been in abeyance since 2005.
Chile
On 16 December 2008, the Civil Court of Santiago dismissed an individual
smoking and health action filed by Mr Andres Javier Rada Meza against Compania
Chilena de Tabacos S.A. (Chiletabacos) and other tobacco manufacturers in 2006.
Plaintiff can challenge this decision before the Court of Appeal with ten days
of being notified of the decision. In addition to Rada, there are eight smoking
and health claims pending against Chiletabacos that have not been decided yet.
Finland
On 10 October 2008, following a consolidated trial, the Helsinki District Court
dismissed three individual smoking and health actions that were brought against
British American Tobacco Nordic Oy (BAT Nordic), amongst others, and ordered
each plaintiff to pay BAT Nordic costs of EUR125,000. In December 2008,
plaintiffs appealed the District Court`s decisions in their entirety but one
plaintiff, Lindroos, has subsequently withdrawn her appeal. Briefing of the
substantive appeals is ongoing.
Ireland
Fifteen individual smoking and health cases are ongoing in the Republic of
Ireland, in which plaintiffs seek compensation for various alleged
tobacco-related injuries. The Group defendants involved in these claims are PJ
Carroll & Co. Ltd and Rothmans of Pall Mall (Ireland) Ltd, although both Group
companies are not named in every action. One case, McCormack, was dismissed by
judgment perfected on 17 July 2008 but plaintiff has filed a notice of appeal.
Dismissal motions in 13 other cases are pending the decision of the Supreme
Court in McCormack. The fifteenth case is currently dormant.
Italy
As of 31 December 2008, there were approximately 1,672 (2007: 3,478) individual
"lights" cases in Italy pending against British American Tobacco Italia S.p.A.
Almost all of the individual "lights" cases filed in Italy are pending before
lower level (Justices of the Peace) courts. Because of the type of court
involved, the maximum possible recovery in damages is EUR1,033. In 2007, 2,230
"lights" cases were filed by a single plaintiffs` counsel in the jurisdiction
of Pescopagano. In 2008, all of these claims were withdrawn. As of 31 December
2008, 1,026 (2007: 950) cases (not including the Pescopagano cases) have been
suspended or dismissed. There are 38 (2007: 33) individual smoking and health
cases pending before Italian Civil Courts, in which it is contended that the
smokers` diseases or deaths were caused by cigarette smoking. There are three
(2007: two) labour cases for alleged occupational exposure.
Netherlands
On 17 December 2008, the District Court of Amsterdam dismissed an individual
smoking and health action filed in June 2005 by Peter Josef Romer against
British American Tobacco The Netherlands B.V. and British American Tobacco
Manufacturing B.V. Plaintiff has until 18 March 2009 to appeal the dismissal.
(d) Consumer protection litigation
Russia
On 8 September 2008, a consumer fraud action was filed in the Savelovsky
District Court of Moscow by the Ministry of Health and Social Development in
Russia against OJSC British American Tobacco - Yava (Yava) and its retail
distributor, CJSC International Tobacco Marketing Services. The claim seeks a
declaration from the court that the use of the words "light, superlight, and
1mg light" on cigarette packets of Yava`s low tar cigarettes are misleading and
unlawful, and further seeks the removal of these descriptors. In November 2008,
the action was dismissed for lack of jurisdiction, but the dismissal was
reversed on appeal. Grounds are awaited to determine whether a further appeal
can be launched. In the meantime, the case file has been returned to the court
of first instance where a hearing on the merits will be scheduled.
Other litigation outside the US
In July 2008, Imperial entered into a plea of guilty to a violation of a single
count of section 240(1)(a) of the Canadian Excise Act and paid a fine of C$200
million. Imperial thereafter obtained full immunity from further prosecution
and civil proceedings from the federal and all 10 provincial governments in
Canada. Imperial also entered into a 15-year civil agreement with the federal
and provincial governments of Canada, under which Imperial, the federal
government, the provinces and others will work together on initiatives to fight
the growth of illegal tobacco products. The agreement further requires a
payment of C$50 million in 2008 and a percentage of Imperial`s annual net sales
revenue going forward for fifteen years up to a maximum of C$350 million.
Conclusion
While it is impossible to be certain of the outcome of any particular case or
of the amount of any possible adverse verdict, the Group believes that the
defences of the Group`s companies to all these various claims are meritorious
on both the law and the facts, and a vigorous defence is being made everywhere.
If an adverse judgment is entered against any of the Group`s companies, an
appeal will be made. Such appeals could require the appellants to post appeal
bonds or substitute security in amounts which could in some cases equal or
exceed the amount of the judgment. In any event, with regard to US litigation,
the Group has the benefit of the RJRT Indemnification. At least in the
aggregate, and despite the quality of defences available to the Group, it is
not impossible that the Group`s results of operations or cash flows in
particular quarterly or annual periods could be materially affected by the
final outcome of any particular litigation.
Having regard to all these matters, the Group (i) does not consider it
appropriate to make any provision in respect of any pending litigation and (ii)
does not believe that the ultimate outcome of this litigation will
significantly impair the Group`s financial condition.
Guarantees
Performance guarantees given to third parties in respect of Group companies
were GBP1 million (2007: GBP1 million).
SHARE BUY-BACK PROGRAMME
The Group initiated an on-market share buy-back programme at the end of
February 2003. During the year to 31 December 2008, 22 million shares were
bought at a cost of GBP400 million (31 December 2007: 45 million shares at a
cost of GBP750 million), bringing the total of the above buy-back programme to
313 million shares, at a cost of GBP3,342 million.
RELATED PARTY DISCLOSURES
The Group`s related party transactions and relationships for 2007 were
disclosed in the British American Tobacco Annual Report and Accounts for the
year ended 31 December 2007. During 2008, there were no material changes in
related parties or related party transactions, other than in relation to the ST
Group (see page 24), Reynolds American Inc. (see page 33) and in respect of the
shareholding by R&R Holdings S.A. in the ordinary shares of the Group. In
November 2008, the controlling companies of R&R Holdings S.A., Compagnie
Financiere Richemont SA and Remgro Limited, distributed the 30 per cent
interest in the shares of British American Tobacco that they indirectly held,
to their shareholders. A new subsidiary company of Richemont, Reinet
Investments S.C.A., now owns around 4 per cent of the Company`s shares, while
the rest are owned by non-related individuals and institutions.
ANNUAL REPORT
The financial information in this preliminary announcement does not constitute
statutory accounts within the meaning of section 240 of the Companies Act 1985
(as amended).
The figures contained herein have been extracted from the Group`s Annual
Report, including the audited financial statements for the year ended 31
December 2008, which will be delivered to the Registrar of Companies. The
Annual Report and Accounts for the year ended 31 December 2007 have been
delivered to the Registrar of Companies. The auditors` report on both these
sets of financial statements were unqualified and did not contain a statement
under section 237(2) or section 237(3) of the Companies Act 1985.
The Annual Report will be published on bat.com at the end of March 2009. At
that time, a printed copy will be mailed to shareholders on the UK main
register who have elected to receive it. Otherwise, such shareholders will be
notified that the Annual Report is available on the website and will, at the
time of that notification, receive a Performance Summary (which sets out an
overview of the Group`s performance, headline facts and figures and key dates
in the Company`s financial calendar) together with a Proxy Form and Notice of
Annual General Meeting. Specific local mailing and/or notification requirements
will apply to shareholders on the South African branch register.
FINANCIAL CALENDAR 2009
30 April Annual General Meeting
The Mermaid Conference & Events Centre
London
EC4V 3DB
6 May Interim Management Statement
30 July Interim Results
28 October Interim Management Statement
CALENDAR FOR THE FINAL DIVIDEND 2008
2009
26 February Dividend announced (including amount of dividend per share in
both sterling and rand; applicable exchange rate and
conversion date)
6 March Last Day to Trade (JSE)
9 March to
13 March No transfers between UK main register and South African
branch register; no shares may be dematerialised or
rematerialised.
9 March Ex-dividend date (JSE)
11 March Ex-dividend date (LSE)
13 March Record date (LSE and JSE)
6 May Payment date (sterling and rand)
LISTINGS AND SHAREHOLDER SERVICES
Primary listing
London Stock Exchange (Share Code: BATS; ISIN:
GB0002875804)
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ, UK
tel: 0800 408 0094 (UK); +44 870 889 3159 (overseas)
e mail: web.queries@computershare.co.uk
Secondary listing
(since 28 October 2008) - JSE (Share Code: BTI)
Shares are traded in electronic form only and transactions
settled electronically through Strate
Computershare Investor Services (Pty) Ltd
PO Box 61051, Marshalltown 2107, South Africa
tel: 0861 100 925 (SA); +27 11 870 8222 (overseas)
email: web.queries@computershare.co.za
DISCLAIMERS
This announcement 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 announcement 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.
Past performance is no guide to future performance and persons needing advice
should consult an independent financial adviser.
Copies of this announcement 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
25 February 2009
Sponsor:
UBS South Africa (Pty) Ltd
Date: 26/02/2009 09:00:07 Produced by the JSE SENS Department.
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