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BTI
BTI
BTI - British American Tobacco P.l.c.- Preliminary announcement - year ended 31
December 2009
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")
25 February 2010
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2009
SUMMARY
2009 2008 Change
Revenue GBP14,208m GBP12,122m +17%
Profit from operations GBP4,101m GBP3,572m +15%
Adjusted profit from operations GBP4,461m GBP3,717m +20%
Basic earnings per share 137.0p 123.3p +11%
Adjusted diluted earnings per share 153.0p 128.8p +19%
Dividends per share 99.5p 83.7p +19%
- The reported Group revenue increased by 17 per cent to GBP14,208 million as a
result of the favourable impact of exchange rate movements, continued good
pricing momentum, volume from acquisitions made in the middle of 2008
(Skandinavisk Tobakskompagni (ST) and Tekel) and the acquisition of Bentoel
Internasional Investama Tbk in June 2009. Revenue increased by 10 per cent at
constant rates of exchange.
- The reported Group profit from operations was 15 per cent higher at GBP4,101
million. Adjusted profit from operations was 20 per cent higher and would have
been up 10 per cent at constant rates of exchange, despite the adverse
transactional impact of exchange rates on costs.
- Group volumes from subsidiaries were 724 billion, an increase of 1 per cent,
as a result of the acquisitions of ST, Tekel and Bentoel. On an organic basis,
volumes were down 3 per cent on last year, mainly driven by deteriorating
economies.
- The four Global Drive Brands achieved good overall volume growth of 4 per
cent. Dunhill was up 9 per cent, Lucky Strike 4 per cent and Pall Mall grew by
10 per cent, while Kent volumes fell 4 per cent.
- Adjusted diluted earnings per share rose by 19 per cent, principally as a
result of the strong growth in profit from operations and favourable exchange
movements.
- The Board is recommending a final dividend of 71.6p, which will be paid on 6
May 2010. This, together with the interim dividend, will take dividends in
respect of 2009 as a whole to 99.5p, an increase of 19 per cent.
- The Chairman, Richard Burrows, commented "There are signs that the global
economy is beginning to improve, although unemployment, which is an important
influence on our business, may continue to rise in developed markets. We have a
very clear strategy and excellent management, with a well balanced portfolio of
brands. Our unrivalled geographic spread mitigates risk for shareholders and
will help us maintain sustainable growth and build shareholder value."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph Edmondson/ 020 7845 1180 David Betteridge/ Kate Matrunola/ 020 7845
Rachael Brierley 020 7845 1519 Catherine Armstrong 2888
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2009
INDEX
PAGE
BUSINESS REVIEW:
Chairman`s statement 2
Business review 3
Dividends 9
Risk and uncertainties 10
Going concern 10
Directors` responsibility statement 10
FINANCIAL STATEMENTS:
Group income statement 11
Group statement of comprehensive income 12
Group statement of changes in equity 13
Group balance sheet 14
Group cash flow statement 16
Accounting policies and basis of preparation 17
Non-GAAP measures 18
Foreign currencies 18
Half-yearly analyses of profit 19
Segmental analyses of revenue and profit 20
Adjusting items included in profit from operations 23
Other changes in the Group 24
Net finance costs 26
Associates and joint ventures 27
Taxation 28
Earnings per share 28
Cash flow and net debt movements 30
Retirement benefit schemes 34
Litigation: Franked Investment Income Group Litigation Order 34
Contingent liabilities 35
Share buy-back programme 51
Related party disclosures 51
Post balance sheet event 51
Annual Report 51
SHAREHOLDER INFORMATION:
Financial calendar 2010 52
Calendar for the final dividend 2009 52
Corporate information 52
Disclaimers 54
Distribution of announcement 54
APPENDICES
Appendix 1 - Key Group risk factors 55
Appendix 2 - Related party disclosures 64
CHAIRMAN`S STATEMENT
2009 was a remarkable year to join British American Tobacco. While many
companies have struggled in the harsh economic climate and international
markets have wavered, I find myself with the great privilege of being Chairman
of a business that continues to deliver excellent results and has a well
established strategy for achieving sustainable growth.
Revenue rose by 10 per cent at constant rates of exchange and by 17 per cent to
GBP14,208 million at current rates. Adjusted profit from operations increased
by 10 per cent at constant rates of exchange and by 20 per cent to GBP4,461
million at current rates. The benefit from the translation of our results into
sterling was GBP355 million.
These fine figures resulted in adjusted diluted earnings per share growing by
19 per cent to 153.0p.
The Board has recommended a final dividend of 71.6p per share, an increase of
16 per cent, which will be paid on 6 May 2010 to shareholders on the register
at 12 March 2010. This takes the total dividend for the year to 99.5p, an
increase of 19 per cent, and maintains our target of paying out 65 per cent of
sustainable earnings in dividends.
It is to the credit of all our people that British American Tobacco has had yet
another successful year and I am delighted with the performance of our
executive team. At the end of 2009, Jimmi Rembiszewski, our outstanding and
long-serving Marketing Director, retired and was succeeded by Jean-Marc Levy.
Jean-Marc, who was previously Regional Director, Western Europe, has been
succeeded by Jack Bowles.
My fellow Non-Executive directors have played an important role in
constructively challenging our strategy and ensuring that the Group is very
well governed. My thanks to them for their help and support in my new role.
May I also extend my warmest thanks on behalf of all shareholders to my
predecessor, Jan du Plessis, who led the Board so skilfully over the past five
years. He set an exemplary standard of Chairmanship and is a tough act to
follow. I know I speak for everyone at British American Tobacco in wishing him
continued success.
Jan`s time here has certainly been a period of impressive value creation for
shareholders. Over the past 5 years, British American Tobacco has achieved
compound growth of 15 per cent in earnings per share and 19 per cent in
dividends per share. Over the same five year period, our total shareholder
return has been 175 per cent, compared to 35 per cent for the FTSE 100.
In summary, I am delighted to be here and optimistic about the future for
British American Tobacco. We have a well established company in one of the more
resilient industries. Indeed, as an outsider, I have been struck by both the
broad stability of the tobacco sector and the opportunities for growth within
it.
There are signs that the global economy is beginning to improve, although
unemployment, which is an important influence on our business, may continue to
rise in developed markets. We have a very clear strategy and excellent
management, with a well balanced portfolio of brands. Our unrivalled geographic
spread mitigates risk for shareholders and will help us maintain sustainable
growth and build shareholder value.
Richard Burrows
24 February 2010
BUSINESS REVIEW
The Group grew revenue by 17 per cent in very difficult times, to GBP14,208
million. This was the result of favourable exchange rate movements, good
pricing momentum, volume from acquisitions made in the middle of 2008 (ST and
Tekel) and the acquisition of Bentoel in June 2009. Revenue increased by 10 per
cent at constant rates of exchange. All the regions contributed to this good
result.
The reported profit from operations was 15 per cent higher at GBP4,101 million.
Adjusted profit from operations was 20 per cent higher and would have been up
10 per cent at constant rates of exchange, despite the adverse transactional
impact of exchange rates on costs.
Group volumes from subsidiaries were 724 billion, an increase of 1 per cent,
mainly as a result of the acquisitions of ST, Tekel and Bentoel. Market shares
increased in a number of markets but, on an organic basis, volumes were down 3
per cent mainly as a result of deteriorating economies which led to declines in
the total size of a number of markets and, in some markets, down-trading and an
increase in illicit trade. Good volume growth in Bangladesh, South Korea,
Vietnam, Uzbekistan, Nigeria, Egypt and the Gulf Cooperation Council (GCC) was
more than offset by declines in Malaysia, Japan, Brazil, Mexico, Argentina,
Venezuela, Italy, Russia, Ukraine, Romania and South Africa.
Despite market size declines in many countries, the four Global Drive Brands
achieved good overall volume growth of 4 per cent and improved share in a
number of markets. Just over half of the growth was contributed by brand
migrations. Although there was pressure on the premium segment, Dunhill grew
market share in all its key markets, except in Taiwan, while Kent increased
market share in its main markets, apart from Japan.
Kent volumes fell by 4 per cent mainly as a result of industry declines in
Russia and Japan, its principal markets and despite a higher market share in
Eastern Europe and an increased premium segment share in Russia. Volumes grew
in Kazakhstan, Ukraine, Uzbekistan and Azerbaijan, while they were slightly
down in Romania. Dunhill rose by 9 per cent, mostly driven by a brand migration
in Brazil, with growth in South Korea, the GCC, South Africa and Russia,
partially offset by declines in Malaysia, Taiwan and Australia.
Lucky Strike volumes were 4 per cent higher with growth in Germany, France,
Italy and Chile, partially offset by declines in Spain, Japan and Argentina,
largely as a result of the industry volume decline. Market share grew well
across all its key markets. Pall Mall volumes increased by 10 per cent with
growth in Germany, Uzbekistan, Spain, Mexico, Chile and Turkey, partially
offset by lower volumes in Pakistan, Russia, Romania and Hungary.
The profit discussed in the business review is based on the adjusted profit
from operations, at current rates of exchange.
Adjusted profit from operations* at constant and current rates of exchange is
as follows:
31.12.09 31.12.08
Adjusted
Profit from
Adjusted profit from operations operations
Constant Current
rates rates
GBPm GBPm GBPm
Asia-Pacific 1,015 1,148 924
Americas 1,120 1,186 1,052
Western Europe 879 994 760
Eastern Europe 433 409 468
Africa and Middle East 659 724 513
4,106 4,461 3,717
*Adjusted profit from operations (page 11) is derived after excluding adjusting
items from profit from operations. Adjusting items include restructuring and
integration costs, the 2008 Canadian Settlement, amortisation of trademarks and
gains on disposal of businesses and trademarks, as explained on pages 23 and
24.
In Asia-Pacific, profit at GBP1,148 million was up GBP224 million, mainly as a
result of favourable exchange rates, backed by strong performances in
Australia, Pakistan, Bangladesh, Taiwan and Vietnam, as well as the
contribution resulting from the acquisition of Bentoel mid-year. Bentoel`s
performance was in line with expectations. At constant rates of exchange,
profit would have increased by GBP91 million or 10 per cent. Volumes at 185
billion were 3 per cent higher as increases in Bangladesh, Vietnam and South
Korea, and the additional volumes from Bentoel, were partially offset by lower
volumes in Japan, Malaysia and Taiwan.
Strong profit growth in Australia was attributable to higher pricing and
continued cost saving initiatives. Volumes were in line with last year while
market share was slightly lower despite the growth experienced by Pall Mall and
Winfield. In New Zealand, volumes and market share were down as competitor
discounting intensified although Pall Mall performed well. Profit was up due to
price increases, lower costs and a stronger exchange rate.
In Malaysia, Kent`s market share grew after its relaunch in 2008 and Dunhill
achieved a record share. However, volumes were down due to steep excise
increases over the last two years and legal industry volume decreases as a
result of the growth of illicit trade. Profit rose as a result of a favourable
exchange rate, higher pricing and cost management, partially offset by the
lower volumes.
In Japan, strong profit growth was achieved predominantly through favourable
exchange rates, productivity savings and a better product mix. Volumes suffered
as a result of significant industry decline. The premium priced brand Kool grew
share although overall market share was slightly lower.
In Vietnam, higher volumes, supported by a combination of price increases,
productivity initiatives and favourable exchange rates, led to strong profit
growth. Whilst market share was down slightly, Dunhill performed well.
Volumes and market share in South Korea grew due to a good performance from
Dunhill. Profit decreased as a weaker exchange rate had an adverse
transactional impact, leading to higher material costs. In Taiwan, profit
improved due to excise-led price increases, cost savings and the favourable
exchange rate. Market share increased in a substantially contracted market.
Market share in Pakistan continued to grow and despite lower volumes, excise
led price increases resulted in a strong growth in profit. In Bangladesh,
profit was significantly higher due to increased volumes, improved sales mix,
lower costs and favourable exchange rates. Market share was slightly lower due
to the substantial growth in the low-price segment of the market. In Sri Lanka,
profit was up strongly benefiting from price increases, a better sales mix and
productivity improvements. Volumes were adversely affected by the excise-led
price increases although Dunhill and Pall Mall increased share.
In Americas, profit rose by GBP134 million to GBP1,186 million, mainly
attributable to a strong performance from Brazil, an improved product mix and
exchange rate benefits. At constant rates of exchange, profit would have risen
by GBP68 million or 6 per cent. Volumes were down 6 per cent at 151 billion,
with decreases experienced in most markets across the region, despite some
market share gains.
In Brazil, strong profit growth was achieved as a result of a substantial
excise led price increase, coupled with a better premium mix performance and
improved margins on the tobacco leaf export business. Higher prices led to
lower industry volumes but share increased in the legal market. Dunhill is
performing well after its migration from Carlton.
Profit in Canada increased, benefiting from a strong currency and some
reduction in illicit trade partially offset by slightly lower volumes,
provincial tobacco tax increases and an adverse product mix. Market share
declined slightly due to downtrading but share grew in the value-for-money and
low price segments.
In Mexico, industry volumes were reduced by the excise-driven price increase at
the end of 2008. Montana performed well and Boots was successfully migrated to
Pall Mall. However, market share was lower. The impact of the reduction in
volumes and increased marketing investment were only partially offset by the
price increase and lower overheads, resulting in a profit decline. Profit in
Argentina was in line with last year as the adverse exchange impacts on
variable costs, other cost pressures and lower volumes, were offset by higher
prices.
In Chile, the contraction of the market led to lower volumes. Although Lucky
Strike and Pall Mall both performed well, market share was in line with last
year. Profit decreased as a result of the lower volumes and higher costs,
including the impact of foreign exchange on imported materials. Profit
increased in Peru as a result of stable volumes and an improved product mix.
Market share improved, driven by distribution expansion and strong growth by
Lucky Strike and Pall Mall.
Market share in Venezuela was up strongly as a result of the growth of Lucky
Strike and the refocusing of the brand portfolio. However, industry volumes
declined sharply, affected by significant price increases to offset excise
increases and high inflation. Profit was significantly lower due to the impact
of foreign exchange and lower volumes. In Colombia, market share was lower than
last year and industry volumes also declined. Profit rose as a result of lower
costs.
Profit grew strongly in the Central America and Caribbean area despite lower
industry volumes. This was due to higher prices and an improved product mix in
key markets, as well as exchange gains. Market share increased, with Pall Mall
and Dunhill being the main drivers for the growth.
Profit in Western Europe increased by GBP234 million to GBP994 million, mainly
as a result of the acquisition of ST in 2008 and stronger exchange rates,
partially offset by continuing losses in Poland. At constant rates of exchange,
profit would have increased by GBP119 million or 16 per cent. Regional volumes
were up 6 per cent to 130 billion, as a result of the additional volumes due to
the acquisition of the ST businesses and growth in Greece, France and Spain,
partially offset by declines in Italy, Switzerland and the Netherlands.
Profit increased in Italy mainly driven by higher prices, a better product mix
and productivity savings. Volumes dropped as the total market contracted and
there was a slight decline in share, mostly due to MS and other local brands,
partly offset by growth in Lucky Strike.
In Germany, volumes were in line with last year, benefiting from higher market
share with strong growth by Pall Mall and higher volumes from Lucky Strike,
compensating for a decline in local brands. This, along with higher margins,
favourable exchange rates and lower overheads, contributed to a significant
rise in profit.
Market share in France was stable with industry volumes up. Lucky Strike and
Pall Mall continued their growth. Profit increased on last year, mainly
attributable to the favourable exchange rate and the price increase in November
2009. In Spain, profit and volume grew despite a sharp decline in the total
market. Higher volumes were driven by Pall Mall and Lucky Strike increasing
their market shares. Increased profit reflected the impact of price rises, as
well as overhead savings.
Profit in Switzerland was lower due to increased price discounting by
competitors and lower volumes, partially offset by favourable exchange rates
and a price increase. Market share was slightly down while the total market
contracted, with Parisienne demonstrating strong share growth.
Profit improved significantly in Belgium with stable volumes and mix benefits
supported by lower costs. There was strong growth in Pall Mall following the
2008 migration from Winfield, supported by an increase in Kent. In the
Netherlands, cigarette volumes decreased following the excise increase in late
2008. Profit rose due to favourable exchange rates, partially offset by the
impact of the overall market decline.
In Poland, reported volume increased significantly due to the incorporation of
the ST Polish business. Organic volumes were down driven by the contraction in
the market as a result of general economic conditions and excise-driven price
rises.
In Hungary, the impact of declining volumes was partially offset by
productivity benefits and improved margins leading to a slight decrease in
profit. Market share remained stable.
The acquisition and the integration of ST transformed our businesses in
Scandinavia. The combined volumes and market share were slightly lower although
Prince remained stable. Profit was in line with expectations at the time of the
acquisition.
Profit in the Eastern Europe region decreased by GBP59 million to GBP409
million. This was principally due to lower volumes and the adverse effect of
exchange rates on transactional costs and on translation to sterling. At
constant rates of exchange, profit would have decreased by GBP35 million.
Volumes at 131 billion were 4 per cent lower than last year, with decreases
seen in Russia, Ukraine and Romania due to industry declines as a result of
lower consumption and an increase in illicit trade, partially offset by a
strong performance in Uzbekistan.
In Russia, volumes were reduced by a decline in market size and competitor
pricing. Profit was down as a result of lower volumes, down-trading and adverse
exchange effects on costs, which more than offset the impact of higher prices.
Market share decreased, although share grew in the premium segment with Dunhill
and Kent performing well.
In Romania, an impressive performance by Kent and strong growth by Dunhill and
Vogue resulted in a record corporate share. Industry volumes declined due to a
number of excise price rises and increased illicit trade. Higher marketing
investment, higher product costs, together with the reduction in volumes, led
to lower profit.
In Ukraine, Kent continued growing volumes and overall share in a market where
industry volumes declined sharply. Profit was higher despite lower volumes and
market share, rapid currency devaluations and excise increases.
Strong volumes and market share performances were achieved in the Caucasus
through the growth of Kent, Pall Mall and Viceroy. In Uzbekistan, profit
increased significantly.
Profit from the Africa and Middle East region grew by GBP211 million to GBP724
million. At constant rates of exchange, profit would have increased by GBP146
million or 28 per cent, mainly driven by South Africa, Nigeria, the GCC and the
benefit of the acquisition of Tekel during 2008. Volumes were 11 per cent
higher at 127 billion, following increases in Turkey, the GCC, Nigeria and
Egypt, which were partly offset by declines in South Africa and Iran.
In South Africa, the overall market contracted and with a reduction in trade
inventories and down- trading to illicit trade, volumes were much lower.
However, market share increased, with Peter Stuyvesant showing strong growth,
whilst Dunhill and Kent performed well, assisted by the migration of Courtleigh
Gold Band to Dunhill. Profit was up, benefiting from price increases and lower
costs.
Profit in Nigeria increased significantly due to higher volumes and lower
costs, partially offset by a weaker local currency. Volumes and market share
grew well. The market benefited from anti-illicit trade initiatives by the
government.
Volumes in the Middle East increased strongly. Dunhill achieved excellent
growth in the GCC whilst sales of Kent and Lucky Strike improved markedly in
the Levant. This led to growth in market share across the area and profit rose
as a result of higher prices and volumes, improved product mix and lower costs
coupled with the favourable exchange rate.
In Egypt there was significant volume and market share growth, supported by an
expansion in distribution.
In Turkey, the Tekel business acquired in 2008 was successfully integrated.
Kent, Pall Mall and Viceroy all performed extremely well although total market
share was lower as a result of a decline in the Tekel local brands. The
financial performance remains in line with our expectations at the time of the
acquisition.
Results of associates
Associates principally comprise Reynolds American and ITC, while they also
included ST for the first six months of 2008.
The Group`s share of the post-tax results of associates decreased by GBP20
million, or 4 per cent, to GBP483 million. Excluding the adjusting items in
2008 and in 2009, explained on page 27, the Group`s share of the post-tax
results of associates increased by 13 per cent to GBP541 million, with a
decline of 1 per cent at constant rates of exchange as a result of accounting
for ST as a subsidiary from July 2008.
The segmental analyses of the Group`s share of the adjusted* post-tax results
of associates and joint ventures at constant and current rates of exchange are
as follows:
31.12.09 31.12.08
Adjusted share of Adjusted share of
post-tax results post-tax results
Constant Current
rates rates
GBPm GBPm GBPm
Asia-Pacific 140 148 121
Americas 332 391 328
Western Europe 26
Eastern Europe
Africa and Middle East 2 2 2
474 541 477
*After adjusting for trademark impairments, health plan credit, additional ST
income, gain on termination of joint venture and restructuring costs as
explained on page 27.
The contribution from Reynolds American excluding adjusting items was 19 per
cent higher at GBP388 million, mainly driven by higher pricing and gains in
productivity, offset by lower volumes and legal expenses. At constant rates of
exchange the increase was 1 per cent.
The Group`s associate in India, ITC, continued its strong profit growth and its
contribution to the Group rose by GBP27 million to GBP144 million. At constant
rates of exchange, the contribution would have been 17 per cent higher than
last year.
Cigarette volumes
The segmental analysis of the volumes of subsidiaries is as follows:
6 months to
30.06.09 30.06.08
bns bns
Asia-Pacific 88 90
Americas 74 78
Western Europe 63 54
Eastern Europe 60 66
Africa and Middle East 64 46
349 334
12 months to
31.12.09 31.12.08
bns bns
Asia-Pacific 185 180
Americas 151 161
Western Europe 130 123
Eastern Europe 131 137
Africa and Middle East 127 114
724 715
Associates` volumes decreased by 10 per cent to 183 billion largely as a result
of ST being consolidated as a subsidiary. With the inclusion of associates`
volumes, total Group volumes were 907 billion (2008: 919 billion).
DIVIDENDS
The Board recommends a final dividend of 71.6 pence per ordinary share of 25p
for the year ended 31 December 2009. If approved by shareholders at the Annual
General Meeting to be held on 28 April 2010, the dividend will be payable on 6
May 2010 to shareholders registered on either the UK main register or the South
African branch register on 12 March 2010 (the record date).
In compliance with the requirements of Strate, the electronic settlement and
custody system used by the JSE Limited (JSE), the following dates for the
payment of the dividend are applicable:
Last day to trade cum dividend (JSE): Friday 5 March 2010
Shares commence trading ex dividend (JSE): Monday 8 March 2010
Shares commence trading ex dividend (LSE): Wednesday 10 March 2010
Record date (JSE and LSE): Friday 12 March 2010
Payment date: Thursday 6 May 2010
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 = 12.03230 as at 23
February 2010 (the closing rate on that date as quoted by Bloomberg), results
in an equivalent final dividend of 861.51268 SA cents per ordinary share. From
the close of business on 5 March 2010 until the close of business on 12 March
2010, 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 8 March 2010 and 12 March 2010, both days inclusive.
The following is a summary of the dividends declared for the years ended 31
December 2009 and 2008:
2009 2008
Pence per Pence
per
share GBPm share GBPm
Ordinary shares
Interim
- 2009 paid 29 September 2009 27.9 557
- 2008 paid 17 September 2008 22.1 440
Final
- 2009 payable 6 May 2010 71.6 1,418
- 2008 paid 6 May 2009 61.6 1,241
99.5 1,975 83.7 1,681
In accordance with IFRS, the proposed final dividend amounting to GBP1,418
million (2008: GBP1,241 million), payable on 6 May 2010, will be recognised in
the Group accounts for the year ending 31 December 2010. For the year ended 31
December 2009, the accounts include the final dividend paid in respect of the
year ended 31 December 2008, amounting to GBP1,241 million and the interim
dividend amounting to GBP557 million, paid on 29 September 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 2008
interim dividend, amounting to GBP440 million.
RISKS AND UNCERTAINTIES
The principal risks and uncertainties affecting the business activities of the
Group were reviewed and updated and are summarised in a table that is attached
as appendix 1 to this announcement. 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
- Data risks
GOING CONCERN
A description of the Group`s business activities, its financial position, cash
flows, liquidity position, facilities and borrowings position, together with
the factors likely to affect its future development, performance and position,
are set out in this announcement. It will also be discussed and disclosed in
the Business Review and Financial Review and in the notes to the financial
statements, all of which will be included in the 2009 Annual Report that will
be available on the Group`s website, www.bat.com on 26 March 2010.
The Group has, at the date of this report, sufficient existing financing
available for its estimated requirements for at least 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 countries and its broad 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 the uncertain outlook
in the general global economy.
After reviewing the Group`s annual budget, plans and financing arrangements,
the Directors consider that the Group has adequate resources to continue
operating for the foreseeable future. The financial statements have therefore
been prepared on a going concern basis.
DIRECTORS` RESPONSIBILITY STATEMENT
The responsibility statement below has been prepared in connection with the
company`s full Annual Report for the year ended 31 December 2009. Certain parts
thereof are not included within this announcement.
We confirm to the best of our knowledge:
the financial statements, prepared in accordance with IFRS as adopted by the
European Union, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company and the Group; and
the Directors` report (which incorporates the business review), includes a
fair review of the development and performance of the business and the position
of the Group and the Company, together with a description of the principal
risks and uncertainties that they face.
This responsibility statement was approved by the Board of Directors on 24
February 2010 and is signed on its behalf by:
Richard Burrows Ben Stevens
Chairman Finance Director
GROUP INCOME STATEMENT
For the year ended 31 December
2009 2008
GBPm GBPm
Gross turnover (including duty, excise and other taxes
of GBP26,505 million 40,713 33,921
(2008: GBP21,799 million))
Revenue 14,208 12,122
Raw materials and consumables used (3,983) (3,335)
Changes in inventories of finished goods and work in
progress 35 19
Employee benefit costs (2,317) (1,907)
Depreciation and amortisation costs (611) (430)
Other operating income 196 281
Other operating expenses (3,427) (3,178)
Profit from operations 4,101 3,572
Analysed as:
- adjusted profit from operations 4,461 3,717
- restructuring and integration costs (304) (160)
- Canadian settlement (102)
- amortisation of trademarks (58) (24)
- gains on disposal of businesses and trademarks 2 141
4,101 3,572
Finance income 77 267
Finance costs (581) (658)
Net finance costs (504) (391)
Share of post-tax results of associates and joint
ventures 483 503
Analysed as:
- adjusted share of post-tax results of
associates and joint ventures 541 477
- trademark impairments (65) (20)
- additional ST income 13
- termination of joint venture 45
- health plan credit 16
- restructuring costs (9) (12)
483 503
Profit before taxation 4,080 3,684
Taxation on ordinary activities (1,124) (1,025)
Profit for the year 2,956 2,659
Attributable to
Shareholders` equity 2,713 2,457
Minority interests 243 202
2,956 2,659
Earnings per share
Basic 137.0p 123.3p
Diluted 136.3p 122.5p
The accompanying notes on pages 17 to 51 form an integral part of this
condensed consolidated financial information.
GROUP STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December
2009 2008
GBPm GBPm
Profit for the year (page 11) 2,956 2,659
Other comprehensive income
Differences on exchange
- subsidiaries 166 213
- associates (258) 724
Difference on exchange reclassified and reported
in profit for the year (22)
Cash flow hedges
- net fair value (losses)/gains (72) 180
- reclassified and reported in profit for the year 67 (173)
- reclassified and reported in net assets (1) 1
Available-for-sale investments
- net fair value gains 3 1
- reclassified and reported in profit for the year (3) (6)
Net investment hedges
- net fair value gains/(losses) 238 (672)
- differences on exchange on borrowings 12 (178)
Revaluation of existing business 179
Retirement benefit schemes
- actuarial losses in respect of subsidiaries (295) (547)
- surplus recognition and minimum funding obligations in
respect
of subsidiaries (76)
- actuarial gains/(losses) in respect of associates net of
tax 61 (396)
Tax on items recognised directly in other comprehensive
income (71) 184
Total other comprehensive income for the year (229) (512)
Total comprehensive income for the year 2,727 2,147
Attributable to
- shareholders` equity 2,476 1,913
- minority interests 251 234
2,727 2,147
The accompanying notes on pages 17 to 51 form an integral part of this
condensed consolidated financial information.
GROUP STATEMENT OF CHANGES IN EQUITY
At 31 December
2009 Share
premium,
capital
redemption
Share and merger Other Retained
capital reserves reserves earnings
GBPm GBPm GBPm GBPm
Total comprehensive income
for the year (page 12) 77 2,399
Employee share options
- value of employee
services 61
- proceeds from shares
issued 2 5
Dividends and other
appropriations
- ordinary shares (1,798)
- to minority interests
Purchase of own shares
- held in employee share
ownership trusts (94)
Minority interests in
Bentoel
(page 24)
Minority interests -
capital injection
Other movements 17
Total changes in equity
for the year 2 77 590
Balance at 1 January 506 3,905 955 1,578
Balance at 31 December 506 3,907 1,032 2,168
2009
Share
holders` Minority Total
funds interests equity
GBPm GBPm GBPm
Total comprehensive income
for the year (page 12) 2,476 251 2,727
Employee share options
- value of employee services 61 61
- proceeds from shares issued 7 7
Dividends and other
appropriations
- ordinary shares (1,798) (1,798)
- to minority interests (240) (240)
Purchase of own shares
- held in employee share
ownership trusts (94) (94)
Minority interests in Bentoel
(page 24) 1 1
Minority interests -
capital injection 16 16
Other movements 17 17
Total changes in equity
for the year 669 28 697
Balance at 1 January 6,944 271 7,215
Balance at 31 December 7,613 299 7,912
2008 Share
premium,
capital
redemption
Share and merger Other Retained
capital reserves reserves earnings
GBPm GBPm GBPm GBPm
Total comprehensive income
for 297 1,616
the year (page 12)
Employee share options
- value of employee
services 51
- proceeds from shares
issued 3 7
Dividends and other
appropriations
- ordinary shares (1,393)
- to minority interests
Purchase of own shares
- held in employee share
ownership trusts (116)
- share buy-back programme (400)
Acquisition of minority
interests
Other movements 8
Total changes in equity
for the year 3 297 (227)
Balance at 1 January 506 3,902 658 1,805
Balance at 31 December 506 3,905 955 1,578
2008
Share
holders` Minority Total
funds interests equity
GBPm GBPm GBPm
Total comprehensive income
for 1,913 234 2,147
the year (page 12)
Employee share options
- value of employee services 51 51
- proceeds from shares issued 10 10
Dividends and other
appropriations
- ordinary shares (1,393) (1,393)
- to minority interests (176) (176)
Purchase of own shares
- held in employee share
ownership trusts (116) (116)
- share buy-back programme (400) (400)
Acquisition of minority interests (5) (5)
Other movements 8 8
Total changes in equity
for the year 73 53 126
Balance at 1 January 6,871 218 7,089
Balance at 31 December 6,944 271 7,215
The accompanying notes on pages 17 to 51 form an integral part of this
condensed consolidated financial information.
GROUP BALANCE SHEET
At 31 December
31.12.09 31.12.08 01.01.08
restated restated
GBPm GBPm GBPm
Assets
Non-current assets
Intangible assets 12,232 12,318 8,105
Property, plant and equipment 3,010 3,076 2,378
Investments in associates and joint
ventures 2,521 2,552 2,316
Retirement benefit assets 105 75 37
Deferred tax assets 350 392 264
Trade and other receivables 171 193 123
Available-for-sale investments 26 27 22
Derivative financial instruments 93 179 154
Total non-current assets 18,508 18,812 13,399
Current assets
Inventories 3,261 3,177 1,985
Income tax receivable 97 137 85
Trade and other receivables 2,344 2,395 1,845
Available-for-sale investments 57 79 75
Derivative financial instruments 156 417 81
Cash and cash equivalents 2,161 2,309 1,258
8,076 8,514 5,329
Assets classified as held-for-sale 30 225 36
Total current assets 8,106 8,739 5,365
Total assets 26,614 27,551 18,764
The balance sheet as at 31 December 2008 has been restated for the
reclassification of certain derivatives, as explained on page 17. In accordance
with IAS 1 Revised, an additional balance sheet comparative has been presented
as at 1 January 2008.
The accompanying notes on pages 17 to 51 form an integral part of this
condensed consolidated financial information.
GROUP BALANCE SHEET
At 31 December
31.12.09 31.12.08 01.01.08
restated restated
GBPm GBPm GBPm
Equity
Capital and reserves
Share capital 506 506 506
Share premium, capital redemption and
merger reserves 3,907 3,905 3,902
Other reserves 1,032 955 658
Retained earnings 2,168 1,578 1,805
Shareholders` funds 7,613 6,944 6,871
after deducting
- cost of treasury shares (772) (745) (296)
Minority interests 299 271 218
Total equity 7,912 7,215 7,089
Liabilities
Non-current liabilities
Borrowings 9,712 9,437 6,062
Retirement benefit liabilities 1,129 848 360
Deferred tax liabilities 527 599 336
Other provisions for liabilities and
charges 144 186 165
Trade and other payables 180 166 149
Derivative financial instruments 94 222 59
Total non-current liabilities 11,786 11,458 7,131
Current liabilities
Borrowings 1,370 2,724 861
Income tax payable 364 300 227
Other provisions for liabilities and
charges 312 295 263
Trade and other payables 4,727 4,718 2,976
Derivative financial instruments 127 841 215
6,900 8,878 4,542
Liabilities directly associated with
assets
classified as held-for-sale 16 2
Total current liabilities 6,916 8,878 4,544
Total equity and liabilities 26,614 27,551 18,764
The balance sheet as at 31 December 2008 has been restated for the
reclassification of certain derivatives, as explained on page 17. In accordance
with IAS 1 Revised, an additional balance sheet comparative has been presented
as at 1 January 2008.
The accompanying notes on pages 17 to 51 form an integral part of this
condensed consolidated financial information.
GROUP CASH FLOW STATEMENT
For the year ended 31 December
2009 2008
GBPm GBPm
Cash flows from operating activities
Cash generated from operations page 32 4,645 4,156
Dividends received from associates 328 326
Tax paid (1,095) (943)
Net cash from operating activities 3,878 3,539
Cash flows from investing activities
Interest received 83 125
Dividends received from investments 2 2
Purchases of property, plant and equipment (450) (448)
Proceeds on disposal of property, plant and equipment 39 62
Purchases of intangibles (104) (96)
Proceeds on disposal of intangibles 17
Purchases and proceeds on disposals of investments 37 9
Proceeds from associates` share buy-backs 42
Purchase of Bentoel (370)
Purchase of Tekel cigarette assets (12) (873)
Proceeds from ST trademark disposals and purchase of ST
businesses 187 (1,243)
Purchases of other subsidiaries, associates and
minority interests (1) (9)
Proceeds on disposal of subsidiaries 26
Net cash from investing activities (589) (2,386)
Cash flows from financing activities
Interest paid (576) (400)
Interest element of finance lease rental payments (2) (3)
Capital element of finance lease rental payments (35) (30)
Proceeds from issue of shares to Group shareholders 2 3
Proceeds from exercise of options over own shares
held in employee share ownership trusts 5 7
Proceeds from increases in and new borrowings 1,447 3,518
Movements relating to derivative financial instruments (267) (656)
Purchases of own shares (400)
Purchase of own shares held in employee share ownership
trusts (94) (116)
Reductions in and repayments of borrowings (1,853) (731)
Dividends paid to shareholders (1,798) (1,393)
Dividends paid to minority interests (234) (173)
Net cash from financing activities (3,405) (374)
Net cash flows from operating, investing and financing
activities (116) 779
Differences on exchange (125) 261
(Decrease)/increase in net cash and cash equivalents
in the year (241) 1,040
Net cash and cash equivalents at 1 January 2,220 1,180
Net cash and cash equivalents at 31 December 1,979 2,220
The accompanying notes on pages 17 to 51 form an integral part of this
condensed consolidated financial information.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information has been extracted from the Annual Report, including
the audited financial statements for the year ended 31 December 2009. This
financial information does not constitute statutory accounts within the meaning
of Section 434 of the Companies Act 2006.
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
for the year ended 31 December 2008, with the following amendments due to
certain changes in IFRS affecting the Group. These changes are effective from 1
January 2009:
IFRS 8 (Operating Segments). This standard requires segmental reporting in
the financial statements to be on the same basis as is used for internal
management reporting to the chief operating decision maker. This has not
required any changes to the segments reported by the Group. However, it has
resulted in certain changes to the disclosures;
Amendment to IFRS 2 (Share-based Payment - Vesting Conditions and
Cancellations). This interpretation clarifies that vesting conditions are
service conditions and performance conditions only, and specifies that all
cancellations, whether by the entity or by other parties, should receive the
same accounting treatment. This change has had no material affect on the
Group`s reported profit or equity;
IAS 1 Revised (Presentation of Financial Statements). This standard requires
certain changes in the format of the financial statements including the
separate disclosure of owner and non-owner changes in equity as primary
statements, and permits some changes in terminology, but does not affect the
measurement of reported profit or equity. The Group has chosen to show other
comprehensive income in a separate statement from the income statement and
hence all owner changes in equity are presented in the consolidated statement
of changes in equity, whereas non-owner changes in equity are shown in the
consolidated statement of comprehensive income;
IAS 23 Revised (Borrowing Costs). This standard requires borrowing costs
directly attributable to the acquisition, construction or production of an
asset that takes a substantial period of time to get ready for its intended use
or sale to be capitalised as part of the cost of the asset. The Group`s
previous policy was to expense such borrowing costs as they were incurred. In
accordance with the transitional provisions of the amended IAS 23, the Group
has adopted the standard on a prospective basis. Therefore, borrowing costs are
capitalised on qualifying assets with a commencement date on or after 1 January
2009. This change has not materially affected the Group`s reported profit or
equity;
Improvements to IFRSs (issued in May 2008). These amendments have varying
application dates commencing on or after 1 January 2009. The main effect has
been a reclassification of derivatives held for trading with a settlement date
greater than one year from current to non- current on the balance sheet. The
balance sheets of prior reporting periods have been amended to reflect this
reclassification and, in accordance with IAS 1 Revised (Presentation of
Financial Statements), an additional balance sheet comparative has been
presented as at 1 January 2008. The effect of the reclassification has been to
increase non-current assets and decrease current assets at 31 December 2008 by
GBP3 million (1 January 2008: GBP1 million) and to increase non-current
liabilities and decrease current liabilities at 31 December 2008 by GBP23
million (1 January 2008: GBP10 million);
IFRIC16 (Hedges of a Net Investment in a Foreign Operation). This
interpretation clarifies the specific hedge accounting requirements for net
investment hedges. This change has not materially affected the Group`s reported
profit or equity; and
Amendment to IFRS 7 (Financial Instruments - Disclosures). The amendment
requires additional disclosures regarding fair value measurements and liquidity
risk, including disclosure of fair value measurements by level of a fair value
measurement hierarchy, and has had no effect on reported profit or equity.
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.
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. The Group believes that these additional
measures, which are used internally, are useful to users of the financial
information 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
are used to calculate the additional non-GAAP measures of adjusted profit from
operations and adjusted share of post-tax results of associates and joint
ventures. All adjustments to profit from operations and diluted earnings per
share are explained in this Announcement.
The chief operating decision maker reviews current and prior year segmental
income statement information of subsidiaries and associates at constant rates
of exchange which provides an approximate guide to performance in the current
year had they been translated at last year`s rate of exchange. The constant
rate comparison provided for reporting segment information is based on a
retranslation, at prior year exchange rates, of the current year results of the
Group`s overseas entities but does not adjust for the normal transactional
gains and losses in operations which are generated by exchange movements.
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.
Due to 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, as 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 28 to 30.
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
2009 2008 2009 2008
US dollar 1.566 1.852 1.615 1.438
Canadian dollar 1.779 1.961 1.693 1.775
Euro 1.123 1.257 1.126 1.034
South African rand 13.091 15.132 11.891 13.292
Brazilian real 3.108 3.355 2.815 3.353
Australian dollar 1.990 2.187 1.796 2.062
Russian rouble 49.535 45.810 48.952 43.902
HALF-YEARLY ANALYSES OF PROFIT
The figures shown below have been produced using average rates of exchange on a
half-yearly basis since the beginning of the year. Thus the discrete half-year
to 30 June has not been restated for subsequent movements in foreign exchange
rates during the year, which are reflected in the results for the subsequent
half-year to 31 December.
6 months to Year to
30.6.09 31.12.09 31.12.09
GBPm GBPm GBPm
Revenue 6,780 7,428 14,208
Adjusted profit from operations
Asia-Pacific 557 591 1,148
Americas 579 607 1,186
Western Europe 509 485 994
Eastern Europe 183 226 409
Africa and Middle East 336 388 724
2,164 2,297 4,461
Restructuring and integration costs (29) (275) (304)
Amortisation of trademarks (26) (32) (58)
Gains on disposal of businesses and
trademarks 2 2
Profit from operations 2,111 1,990 4,101
Net finance costs (219) (285) (504)
Share of post-tax results of
associates and joint ventures 231 252 483
Profit before taxation 2,123 1,957 4,080
Taxation on ordinary activities (534) (590) (1,124)
Profit for the period 1,589 1,367 2,956
Earnings per share
Basic 73.2p 63.8p 137.0p
Diluted 72.8p 63.5p 136.3p
Adjusted diluted 77.3p 75.7p 153.0p
6 months to Year to
30.6.08 31.12.08 31.12.08
GBPm GBPm GBPm
Revenue 5,457 6,665 12,122
Adjusted profit from operations
Asia-Pacific 456 468 924
Americas 516 536 1,052
Western Europe 334 426 760
Eastern Europe 199 269 468
Africa and Middle East 252 261 513
1,757 1,960 3,717
Restructuring and integration costs (33) (127) (160)
Canadian settlement (102) (102)
Amortisation of trademarks (24) (24)
Gains on disposal of businesses and
trademarks 141 141
Profit from operations 1,724 1,848 3,572
Net finance costs (179) (212) (391)
Share of post-tax results of
associates and joint ventures 293 210 503
Profit before taxation 1,838 1,846 3,684
Taxation on ordinary activities (494) (531) (1,025)
Profit for the period 1,344 1,315 2,659
Earnings per share
Basic 62.5p 60.8p 123.3p
Diluted 62.1p 60.4p 122.5p
Adjusted diluted 62.0p 66.8p 128.8p
SEGMENTAL ANALYSES OF REVENUE AND PROFIT
The five geographic regions are the reportable segments for the Group as they
form the focus of the Group`s internal reporting systems and are the basis used
by the chief operating decision maker, identified as the Management Board, for
assessing performance and allocating resources. The Management Board reviews
external revenues and adjusted profit from operations to evaluate segment
performance and allocate resources.
The Management Board reviews current and prior year segmental adjusted profit
from operations of subsidiaries and adjusted post-tax results of associates and
joint ventures at constant ratesof exchange. As a result, the 2009 segmental
results are translated using the 2008 average rates of exchange. The 2008
comparative figures are also stated at the 2008 average rates of exchange for
the relevant period.
The tables below are represented for the new regional structure effective from
1 January 2009, as previously disclosed in the Annual Report for the year ended
31 December 2008.
The analyses of revenue for the year to 31 December 2009 and 31 December 2008,
based on location of sales, are as follows:
31.12.09 31.12.08
Revenue Translation Revenue
Constant exchange Current
rates rates Revenue
GBPm GBPm GBPm GBPm
Asia-Pacific 2,877 393 3,270 2,717
Americas 2,991 165 3,156 2,863
Western Europe 3,523 361 3,884 3,218
Eastern Europe 1,744 (116) 1,628 1,594
Africa and Middle East 2,145 125 2,270 1,730
Total 13,280 928 14,208 12,122
The analyses of profit from operations and the Group`s share of the post-tax
results of associates and joint ventures for the year ended 31 December 2009,
reconciled to profit before tax, are as follows:
31.12.09
Adjusted* Adjusted*
segment segment
result result
Constant Translation Current
rates exchange rates
GBPm GBPm GBPm
Asia-Pacific 1,015 133 1,148
Americas 1,120 66 1,186
Western Europe 879 115 994
Eastern Europe 433 (24) 409
Africa and Middle East 659 65 724
Profit from operations 4,106 355 4,461
Net finance costs
Asia-Pacific 140 8 148
Americas 332 59 391
Western Europe
Eastern Europe
Africa and Middle East 2 2
Share of post-tax results of
associates and joint ventures
474 67 541
Profit before taxation
Segment
result
Adjusting Current
items rates
GBPm GBPm
Asia-Pacific (59) 1,089
Americas (51) 1,135
Western Europe (188) 806
Eastern Europe (16) 393
Africa and Middle East (46) 678
Profit from operations (360) 4,101
Net finance costs (504)
Asia-Pacific 148
Americas (58) 333
Western Europe
Eastern Europe
Africa and Middle East 2
Share of post-tax results of
associates and joint ventures
(58) 483
Profit before taxation 4,080
*The adjustments to profit from operations and the Group`s share of the
post-tax results of associates and joint ventures are explained on pages 23 and
27, respectively.
The analyses of profit from operations and the Group`s share of the post-tax
results of associates and joint ventures for the year ended 31 December 2008,
reconciled to profit before tax, are as follows:
31.12.08
Adjusted*
segment result Adjusting Segment result
Current rates items Current rates
GBPm GBPm GBPm
Asia-Pacific 924 (2) 922
Americas 1,052 (96) 956
Western Europe 760 5 765
Eastern Europe 468 468
Africa and Middle East 513 (52) 461
Profit from operations 3,717 (145) 3,572
Net finance costs (391)
Asia-Pacific 121 121
Americas 328 13 341
Western Europe 26 13 39
Eastern Europe
Africa and Middle East 2 2
Share of post-tax results of
associates and joint
ventures 477 26 503
Profit before taxation 3,684
*The adjustments to profit from operations and the Group`s share of the
post-tax results of associates and joint ventures are explained on pages 23 and
27, respectively.
ADJUSTING ITEMS INCLUDED IN PROFIT FROM OPERATIONS
Adjusting items are significant items in the profit from operations which
individually or, if of a similar type, in aggregate, are relevant to an
understanding of the Group`s underlying financial performance.
These items are separately disclosed either as memorandum information on the
face of the income statement and in the segmental analyses, or in the notes, as
appropriate, and are used to derive the Group`s principal non-GAAP measure
which is adjusted diluted earnings per share.
(a) Restructuring and integration costs
Restructuring costs reflect the costs incurred as a result of initiatives to
improve the effectiveness and the efficiency of the Group as a globally
integrated enterprise. These initiatives include a review of the Group`s
manufacturing operations, overheads and indirect costs, organisational
structure and systems and software used. The costs of these initiatives
together with the costs of integrating acquired businesses into existing
operations were GBP304 million for the year ended 31 December 2009 (2008:
GBP160 million).
Restructuring and integration costs in 2009 principally relate to costs in
respect of the planned closure of the Soeborg factory in Denmark, the planned
downsizing of the manufacturing plant in Australia, the continued integration
of ST and Tekel and the integration of Bentoel into existing operations, as
well as other restructuring initiatives directly related to improving the
efficiency and effectiveness of the Group as a globally integrated enterprise.
The costs for these other initiatives include redundancies, principally in
respect of restructuring activities in the Group`s subsidiary in Canada, and
impairment charges for certain software assets where the development of global
software solutions has resulted in these assets having minimal or limited
future economic benefits.
Restructuring costs in 2008 principally relate to costs in respect of the
integration of ST and Tekel into existing operations, the reorganisation of the
business in the Netherlands, as well as further costs in respect of
restructurings announced in 2007 and earlier years.
Other operating income in 2009 includes a gain on disposal of a property
related to restructuring announced in prior years and the release of deferred
income from a disposal in 2007. In 2008, other operating income includes gains
on property disposals and a gain on disposal of a non-core business in the
Asia-Pacific region arising from the restructuring exercises.
(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 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.
At the same time, 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 agreed to pay, each year, a percentage of annual
net sales revenue for 15 years, up to a maximum of Can$350 million, which is
expensed as it is incurred. These payments are not treated as adjusting items.
(c) Amortisation of trademarks
The acquisitions of Bentoel, 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 GBP58 million was included in
depreciation and amortisation costs in the profit from operations for the year
ended 31 December 2009 (2008: GBP24 million).
(d) Gains on disposal of businesses and trademarks
The acquisition of the cigarette and snus businesses of ST was subject to
regulatory approval which was received on the condition that the Group divest a
small number of local trademarks, primarily in Norway. The disposal of the
trademarks was dealt with in two packages, with the first package sold and
completed in February 2009. In March 2009, contracts were exchanged in respect
of the second package and the sale was completed in May 2009. The total
proceeds from the two packages resulted in a gain of GBP2 million which was
included in other operating income in the profit from operations for the year
ended 31 December 2009.
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 the Group`s 32.35 per cent holding in the non-cigarette
and snus business of ST (see other changes in the Group on page 26). This gain
was included in other operating income in the profit from operations for the
year to 31 December 2008.
OTHER CHANGES IN THE GROUP
(a) PT Bentoel Internasional Investama Tbk
On 17 June 2009, the Group acquired from PT Rajawali Corpora and other
shareholders an 85 per cent stake in Indonesia`s fourth largest cigarette maker
PT Bentoel Internasional Investama Tbk (Bentoel) for US$494 million (GBP303
million). The price is equivalent to IDR873 per share, a premium of 20 per cent
over Bentoel`s closing price of IDR730 per share on 17 June 2009. A public
tender offer for the remaining shares was announced after the acquisition and
was completed on 26 August 2009, resulting in the acquisition of a further 14
per cent share in the company, for IDR855,783 million (GBP52 million), bringing
the total shareholding in the Bentoel Group to 99.7 per cent.
On 20 October, it was announced that Bentoel and BAT Indonesia would enter into
a merger plan whereby BAT Indonesia would merge into Bentoel. The Bentoel name
has been retained and the company remains listed on the Indonesian Stock
Exchange.
The goodwill of GBP188 million on the acquisition of the cigarette business of
Bentoel, stated at the exchange rates ruling at the date of the transactions,
arises as follows:
Book Fair value Estimated
values adjustments fair value
GBPm GBPm GBPm
Intangible assets 4 92 96
Property, plant and equipment 57 21 78
Deferred tax asset 5 (5)
Inventories 152 (13) 139
Trade and other receivables 41 41
Cash and cash equivalents 3 3
Overdrafts (13) (13)
Borrowings (84) (84)
Retirement benefit liabilities (9) (1) (10)
Deferred tax liabilities (29) (29)
Trade and other payables (48) (48)
Net assets acquired 108 65 173
Less: minority share of net assets
acquired (1)
172
Goodwill 188
Total consideration including accrued
acquisition costs of GBP5 million 360
The fair value adjustment principally relates to the value attributable to
trademarks, the revaluation of property, plant and equipment and inventory,
with the relevant tax applicable on these adjustments.
The goodwill of GBP188 million on the acquisition of the business, represents a
strategic premium to enter the very large Indonesian kretek market and the
anticipated synergies that will arise from combining the businesses in
Indonesia.
In the period from 17 June 2009 to 31 December 2009, the acquired business
contributed revenue of GBP105 million and profit from operations of GBP6
million after charging GBP4 million for amortisation of acquired intangibles
and GBP2 million in respect of restructuring and integration costs.
If the acquisition had occurred on 1 January 2009, before accounting for
anticipated synergy, restructuring and pricing benefits, it is currently
estimated that Group revenue would have been GBP14,291 million and Group profit
from operations would have been GBP4,108 million for the 12 months to 31
December 2009, after charging GBP4 million for the amortisation of acquired
intangibles. These amounts have been estimated based on Bentoel`s results for
the 6 months prior to acquisition, adjusted to reflect changes arising from
differences in accounting policies and the anticipated effect of fair value
adjustments.
(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 related 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 the purchase price based on agreed
completion accounts.
As noted in the December 2008 Annual Report, finalisation of part of the
transaction was still continuing. This has now been concluded with an
adjustment of GBP12 million to the provisional purchase price of GBP873 million
and therefore to goodwill. The goodwill of GBP578 million (previously GBP566
million) on the cigarette assets of Tekel, stated at the exchange rates ruling
at the date of the transaction, arose as follows:
Final
fair value
GBPm
Net assets acquired 307
Goodwill 578
Total consideration 885
Consideration comprises:
- cash 878
- acquisition costs 7
Total consideration 885
(c) 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. 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.
The transaction resulted in a revaluation gain of GBP179 million, included in
other comprehensive income for the year ended 31 December 2008, and goodwill of
GBP923 million. The gain on disposal from this transaction and subsequent
trademark disposals, are explained on page 24.
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 business have been consolidated.
NET FINANCE COSTS
Net finance costs comprise:
Year to
31.12.09 31.12.08
GBPm GBPm
Finance costs (581) (658)
Finance income 77 267
(504) (391)
Comprising:
Interest payable (602) (535)
Interest and dividend income 85 131
Fair value changes - derivatives (4) (521)
Exchange differences 17 13 534 13
(504) (391)
Net finance costs at GBP504 million were GBP113 million higher than last year,
principally reflecting the impact of a higher interest cost as a result of
increased borrowings to finance acquisitions, as well as the impact of exchange
rate movements.
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 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
Comprehensive Income. There are no similar gains or losses in the year ended 31
December 2009.
The Group`s interest cover was also distorted by the pre-tax impact of
adjusting items, shown in the adjusted diluted earnings per share calculations
(page 29). On an adjusted basis, based on profit before interest payable over
interest payable, interest cover remains strong at 8.6x (2008: 8.5x) with the
higher cover reflecting increased profit from operations, its cash generation
and the contribution of ST and Tekel since the middle of 2008 and Bentoel since
the middle of 2009, offset by the increase in costs as a result of the
financing arrangements for the acquisitions.
ASSOCIATES AND JOINT VENTURES
The Group`s share of the post-tax results of associates and joint ventures was
GBP483 million (2008: GBP503 million) after tax of GBP291 million (2008: GBP284
million). The share is after the following adjusting items which are excluded
from the calculation of adjusted diluted earnings per share (page 29).
In the year ended 31 December 2009, Reynolds American recognised a trademark
impairment charge of US$394 million, triggered by the increase in federal
excise taxes on tobacco products and changes in pricing. It also had an
amortisation charge of US$5 million in respect of brands. The Group`s share of
these charges amounted to GBP65 million (net of tax).
During 2009, Reynolds American reviewed its post-retirement medical plans,
resulting in a past service credit which is amortised under US GAAP. However,
under IFRS, it must be recognised in full in the income statement. The Group`s
share of this credit amounted to GBP16 million (net of tax).
Reynolds American also recognised a charge of US$56 million in 2009 in
connection with severance and related costs of around 400 employees in order to
better align staffing levels with business requirements and enable Reynolds
American`s manufacturing operations to phase in new productivity programs over
time. The Group`s share of this charge amounted to GBP9 million (net of tax).
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 (net of tax).
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 announced planned changes in the
organisational structure at Reynolds American Inc. and its largest subsidiary,
R.J. Reynolds Tobacco Company. The charge for the year ended 31 December 2008
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).
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 26, the Group acquired 100
per cent of ST`s cigarette and snus business on 2 July 2008. 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.
TAXATION
Year to
31.12.09 31.12.08
GBPm GBPm
UK
- adjustment in respect of prior periods 16
Overseas
- overseas tax 1,104 959
- adjustment in respect of prior periods 43 (14)
Current tax 1,163 945
Deferred tax (39) 80
1,124 1,025
The tax rates in the income statement of 27.5 per cent in 2009 and 27.8 per
cent in 2008 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 30.3 per cent in 2009 and 30.8 per cent in 2008. The decrease arose
primarily from a favourable change in the mix of profits and a reduction in tax
rates in several countries. The benefits were partially offset by a tax charge
following an adverse decision by the Federal Court of Australia in December
2009. This was in respect of a tax case pursued by the Australian Tax Office
concerning the utilisation of capital losses. The judgement has been appealed.
Without this tax case the 2009 underlying tax rate would be 0.7 per cent lower.
The tax charge for 2008 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.
EARNINGS PER SHARE
Year to
31.12.09 31.12.08
pence pence
Earnings per share
- basic 137.0 123.3
- diluted 136.3 122.5
Adjusted earnings per share
- basic 153.8 129.6
- diluted 153.0 128.8
Headline earnings per share
- basic 144.1 114.8
- diluted 143.3 114.1
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, as an alternative measure of
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 which impact profit
from operations (see pages 23 and 24) and share of post-tax results of
associates and joint ventures (see page 27), as well as certain distortions to
net finance costs under IFRS (see page 26) and to deferred tax (see page 28).
In order to illustrate the impact of these items, the adjusted diluted earnings
per share are shown below:
Adjusted diluted earnings per share
Year to
31.12.09 31.12.08
pence pence
Unadjusted earnings per share 136.3 122.5
Effect of restructuring and integration costs 11.7 6.1
Effect of Canadian settlement 5.1
Effect of amortisation of trademarks 2.1 0.9
Effect of disposals of businesses and trademarks (6.4)
Effect of net finance cost adjustment 0.5
Effect of associates` trademark impairments,
restructuring
costs, health plan credit and termination of joint
venture 2.9 (0.6)
Effect of additional ST income (0.6)
Effect of deferred tax adjustment 1.3
Adjusted diluted earnings per share 153.0 128.8
Similar types of adjustments would apply to basic earnings per share.
The earnings per share are based on:
31.12.09 31.12.08
Earnings Shares Earnings Shares
GBPm m GBPm m
Earnings per share
- basic 2,713 1,980 2,457 1,993
- diluted 2,713 1,991 2,457 2,005
Adjusted earnings per share
- basic 3,046 1,980 2,582 1,993
- diluted 3,046 1,991 2,582 2,005
Headline earnings per share
- basic 2,853 1,980 2,288 1,993
- diluted 2,853 1,991 2,288 2,005
Headline earnings per share are calculated by taking the following adjustments
into account:
Diluted headline
earnings per share
Year to
31.12.09 31.12.08
pence pence
Unadjusted earnings per share 136.3 122.5
Effect of impairment of intangibles and property,
plant and equipment 4.3 0.2
Effect of gains on disposal of property, plant and
equipment (0.2) (0.4)
Effect of gains on disposal of businesses and
trademarks (0.2) (6.7)
Effect of gains reclassified from the
available-for-sale reserve (0.2) (0.3)
Effect of share of associates` trademark impairments
and termination
of joint ventures 3.3 (1.2)
Headline earnings per share 143.3 114.1
CASH FLOW AND NET DEBT MOVEMENTS
a) The IFRS cash flow statement on page 16 includes all transactions affecting
cash and cash equivalents, including financing. The alternative cash flow
statement below is presented to illustrate the cash flows before transactions
relating to borrowings.
Year to
31.12.09 31.12.08
GBPm GBPm
Net cash from operating activities before
restructuring costs
and taxation 5,160 4,692
Restructuring costs (187) (210)
Taxation (1,095) (943)
Net cash from operating activities (page 16) 3,878 3,539
Net interest (499) (280)
Net capital expenditure (515) (482)
Dividends paid to minority interests (234) (173)
Free cash flow 2,630 2,604
Dividends paid to shareholders (1,798) (1,393)
Share buy-back (400)
Purchase of Bentoel (page 24) (370)
Purchase of Tekel cigarette assets (page 25) (12) (873)
Proceeds from ST trademark disposals and purchase of
ST businesses (page 26) 187 (1,243)
Purchases of other subsidiaries, associates and
minority interests (1) (9)
Other net flows (203) (218)
Net cash flows 433 (1,532)
Opening net debt (9,891) (5,581)
Exchange rate effects 672 (2,622)
Acquired debt (84)
Accrued interest and other 28 (156)
Closing net debt (8,842) (9,891)
Net cash from operating activities before restructuring costs and taxation
increased by GBP468 million to GBP5,160 million, reflecting growth in
underlying operating performance, partly offset by the impact of adverse
working capital movements reflecting timing differences. Although there was a
GBP152 million increase in tax outflows, reflecting higher profit and the
timing of payments, with the above operating cash flows and the lower
restructuring costs, the Group`s net cash flow from operating activities was
GBP339 million higher at GBP3,878 million.
Free cash flow is the Group`s cash flow before dividends, share buy-backs and
investing activities. Although net interest payments, net capital expenditure
and dividends paid to minorities increased, the Group`s free cash flow was
GBP26 million higher than 2008 at GBP2,630 million. The free cash flow exceeded
the total cash outlay on dividends to shareholders by GBP832 million.
The ratio of free cash flow per share to adjusted diluted earnings per share
was 86 per cent (2008: 101 per cent), with free cash flow per share increasing
by 2 per cent (2008: increasing by 55 per cent).
Below free cash flow, the principal cash outflows for 2009 comprise the payment
of the prior year final dividend, 2009 interim dividend and the acquisition of
PT Bentoel Internasional Investama Tbk in Indonesia. The Bentoel acquisition
resulted in a net cash outflow of GBP370 million, which comprises the purchase
consideration, together with the related acquisition costs and acquired cash
and cash equivalents and overdrafts, as shown on page 24. As explained on page
51, there was no share buy- back in the year ended 31 December 2009 (31
December 2008: GBP400 million).
There were also outflows in respect of the acquisition of the Tekel assets,
GBP12 million in 2009 and GBP873 million in 2008, and for acquiring the ST
businesses in 2008, for GBP1,243 million. The ST transaction resulted in a net
cash inflow of GBP187 million in 2009 (see page 32).
The other net flows principally relate to the impact of the level of shares
purchased by the employee share ownership trusts and outflows in respect of
certain derivative financial instruments.
The above flows resulted in net cash inflows of GBP433 million (2008: GBP1,532
million outflow). After taking account of exchange rate movements of GBP672
million, acquired debt of GBP84 million with the Bentoel acquisition and the
change in accrued interest and other, total net debt was GBP8,842 million at 31
December 2009, down GBP1,049 million from GBP9,891 million on 31 December 2008.
After taking account of transactions related to borrowings, the above flows
resulted in a net decrease of cash and cash equivalents of GBP116 million
(2008: GBP779 million increase) as shown in the IFRS cash flow on page 16.
b) The Group defines net debt as borrowings including related derivatives, less
cash and cash equivalents and current available-for-sale investments. The
maturity profile of net debt is as follows:
31.12.09 31.12.08
GBPm GBPm
Net debt due within one year:
Borrowings (1,370) (2,724)
Related derivatives 33 (91)
Cash and cash equivalents 2,161 2,309
Current available-for-sale investments 57 79
881 (427)
Net debt due beyond one year:
Borrowings (9,712) (9,437)
Related derivatives (11) (27)
(9,723) (9,464)
Total net debt (8,842) (9,891)
The Group remains confident about its ability to successfully access the debt
capital markets and reviews its options on a continuing basis.
c) Cash generated from operations (page 16)
Year to
31.12.09 31.12.08
Restated
GBPm GBPm
Profit from operations 4,101 3,572
Adjustments for:
Amortisation of trademarks 58 24
Gains on disposal of businesses and trademarks (2) (141)
Depreciation and impairment of property, plant and
equipment 433 350
Amortisation and write off of intangible assets 120 56
Increase in inventories (125) (367)
Decrease in trade and other receivables 30 19
Increase in trade and other payables 174 746
Decrease in net retirement benefit liabilities (127) (99)
Decrease in provisions for liabilities and charges (38) (31)
Other non-cash items 21 27
Cash generated from operations 4,645 4,156
In the year ended 31 December 2008, cash generated from operations includes an
outflow of GBP102 million 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 16
include the following items:
The proceeds on disposal of intangibles of GBP17 million in 2008 arose from the
termination of a licence agreement in South Africa in 2007.
The purchases and disposals of investments (which comprise available-for-sale
investments and loans and receivables) included a net cash inflow of GBP37
million (2008: GBP8 million) in respect of current investments and GBPnil
(2008: GBP1 million inflow) from non-current investments.
In 2008, the proceeds from associates` share buy-backs principally reflected
proceeds of GBP41 million in respect of the Group`s participation in the share
buy-back programme conducted by Reynolds American Inc.
In 2009, the net cash outflow of GBP370 million on the purchase of Bentoel
reflects the settlement of the purchase consideration for an initial 85 per
cent stake followed by the acquisition of a further 14 per cent from minority
shareholders, together with related acquisition costs and the acquired cash and
cash equivalents and overdrafts as shown on page 24.
As explained on page 25, the cash outflow of GBP12 million on the Tekel
transaction in 2009 reflects additional cash paid in respect of purchase price
adjustments from the conclusion of the Tekel transaction. In 2008, the cash
outflow of GBP873 million reflected the initial purchase price and related
acquisition costs.
In 2009 the cash inflow on the ST transaction reflects proceeds of GBP188
million from the disposal of a small number of ST trademarks in Norway (see
page 24), together with the payment of the related disposal costs of GBP3
million and a GBP2 million refund of the original purchase price. In 2008, the
net cash outflow of GBP1,243 million comprised the settlement of the purchase
consideration, together with related acquisition costs and the acquired cash
and cash equivalents and overdrafts.
The purchase of other subsidiaries, associates and minority interests in 2009
principally arises from equity investments in associate companies, while in
2008, the cash outflow arose from the acquisition of minority interests in the
Group`s subsidiaries in Africa and Middle East and Western Europe.
In 2008, the proceeds on disposal of subsidiaries principally reflected the net
proceeds on disposal of a non-core business in the Asia-Pacific region.
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.
e) Net cash and cash equivalents in the cash flow statement comprise:
31.12.09 31.12.08
GBPm GBPm
Cash and cash equivalents per balance sheet 2,161 2,309
Accrued interest (1) (3)
Overdrafts (181) (86)
Net cash and cash equivalents 1,979 2,220
f) Liquidity
Central Treasury Department is responsible to manage, within an overall policy
framework, the Group`s exposure to funding and liquidity, interest rate,
foreign exchange and counterparty risk arising from the Group`s underlying
operations.
As at 31 December 2009, the average centrally managed debt maturity was 7 years
(2008: 5 years) and the highest proportion of centrally managed debt maturing
in a single year was 18 per cent (2008: 18 per cent).
In the year ended 31 December 2009, the Group entered into a number of
transactions in the capital markets. The first was the repayment of the EUR900
million maturing debt at the end of February 2009. This was financed from bond
issues during 2008 and from cash generated from operations. In May, there was
the repayment of a MYR100 million bond, which was subsequently replaced in
August by a new MYR250 million bond, due 2014. The additional proceeds were
used for the repayment of a MYR150 million bond which matured in November 2009.
In June, the Group issued a GBP250 million bond with maturity of June 2022. In
November 2009, the terms of EUR481 million of the EUR1.0 billion bond maturing
In 2013 were modified by extending the maturity to 2021. At the same time the
Group issued an additional EUR169 million bond with a maturity of 2021. In
addition, GBP199 million of the GBP350 million bond maturing in 2013 was
purchased and cancelled; at the same time the Group issued a new GBP500 million
bond with a maturity of 2034.
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 of EUR420 million and EUR860 million; EUR395 million and
EUR759 million were outstanding as at 31 December 2008 respectively. The
EUR395 million was repaid in September 2009 and EUR759 million was repaid in
October 2009. The EUR759 million was refinanced by a new EUR700 million term
loan facility with a maturity date of 31 October 2012 with an option to extend
it to October 2013, at the discretion of the banking participants in the
syndicated facility.
In mid-2009, the Group also re-established its euro commercial paper (ECP)
programme of GBP1 billion.
At year end 2009, the GBP1.75 billion revolving credit facility described
below, was undrawn. The revolving credit facility acts as a backstop for the
ECP programme and GBP187 million of ECP was outstanding at year end.
In the year ended 31 December 2008, the EUR1.8 billion revolving acquisition
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 2008, 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.
RETIREMENT BENEFIT SCHEMES
The Group`s subsidiaries operate around 160 retirement benefit arrangements
worldwide. The majority of the scheme members belong to defined benefit
schemes, most of which are funded externally and many 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 GBP1,024 million at the end of 2009, up from GBP773 million at the
end of 2008. The present total value of funded scheme liabilities was GBP5,250
million (2008: GBP4,647 million), while unfunded scheme liabilities amounted to
GBP282 million (2008: GBP248 million).
The increase in the scheme liabilities and deficits in the schemes, were
largely due to changes in assumptions, including lower discount rates for
liabilities and higher expected inflation.
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.
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 27 corporate groups 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 the 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 tentative conclusion reached by the High Court would,
if upheld, produce an estimated receivable of about GBP1.2 billion for British
American Tobacco.
The case was heard by the Court of Appeal in October 2009 and the judgement
handed down on 23 February 2010. The Court of Appeal has determined that
various questions should be referred back to the European Court of Justice for
further clarification. In addition the Court determined that the claim should
be restricted to six years and not cover claims dating back to 1973. This time
restriction would, if upheld, reduce the value of the claim to between zero and
GBP10m. Based on advice received the Company believes it has realistic
prospects of success on further appeal and the Company has resolved to seek
permission to appeal accordingly.
No potential receipt has been recognised in prior years, nor in the current
year, in the results of the Group due to the uncertainty of the amounts and
eventual outcome.
CONTINGENT LIABILITIES AND FINANCIAL COMMITMENTS
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, interest charges, 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 2009
involving B&W and/or other Group companies was approximately 3,203 (2008:
3,251). These case numbers do not include any cases where RJRT is sued as
successor to B&W. At 31 December 2009, UK-based Group companies have been
served as co-defendants in six of those cases (2008: six). In 2009, only one
case (Lincoln Smith, see below) was tried against B&W. No product liability
case in which a UK- based Group company is a defendant was tried in 2009, and
no case in which a UK-based Group company is a defendant is currently scheduled
for trial in 2010. Four cases naming B&W are currently scheduled for trial in
2010. These four cases include the consolidated proceedings in West Virginia
(see below), and three individual smoking and health cases, which are pending
in Maryland state court, Missouri state court, and the US District Court for
the Central District of California.
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, possibly totalling billions of US dollars.
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 health care and welfare costs claimed to result
from illnesses associated with smoking. Although B&W continues to be a
defendant in health care 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.
At 31 December 2009, two US medical reimbursement suits were pending against
B&W. One of these suits was brought by an Indian tribe in an Indian tribal
court in South Dakota. The other reimbursement case (City of St. Louis) is
pending against B&W, British American Tobacco (Investments) Limited
(Investments) and several other defendants in state court in Missouri. In City
of St. Louis, plaintiffs consist of more than 50 public and non-profit
hospitals in Missouri and seek reimbursement of past and future alleged smoking
related health care costs. Plaintiffs have previously filed a motion requesting
the court to give collateral estoppel effect to the factual findings of the US
Department of Justice case to which certain defendants (including B&W and
Investments) filed a memorandum in opposition. This motion remains pending. On
30 June 2009 the court denied defendants` motion for summary judgment based on
the plaintiffs` failure to link alleged wrongful conduct to alleged damages.
Defendants` motion for reconsideration of the court`s 30 June 2009 order
remains pending. A provisional trial date is set for 10 January 2011.
(b) Class actions
At 31 December 2009, B&W has been named as a defendant in eight (2008: 10)
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. If the classes are or remain certified
and the possibility of class-based liability is eventually established, it is
likely that individual trials will be necessary to resolve any claims by
individual plaintiffs. 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 `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
the 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, in a unanimous ruling, the Schwab class
was decertified by the US Court of Appeals for the Second Circuit. The Court of
Appeals issued the mandate officially returning the case to the district court
on 29 May 2008. Defendants have until 5 March 2010 to answer the plaintiffs`
Second Amended Complaint.
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 Investments. Industries was dismissed on jurisdictional
grounds by an intermediate appellate court on 17 March 2000. The Third Amended
Complaint, filed on 3 March 2009, alleges that all defendants fraudulently
concealed facts regarding the addictive nature of nicotine, that certain US
defendants (but not Investments) marketed tobacco products to underage
consumers, and that defendant Philip Morris fraudulently marketed Marlboro
Lights cigarettes. Plaintiffs seek disgorgement of profits. The case was
removed to federal court on 13 March 2009, and plaintiffs` motion to remand the
case back to state court was denied on 1 July 2009. On 15 July 2009, plaintiffs
filed a motion for class certification. On 30 October 2009, Investments, along
with other defendants, filed motions for summary judgment. On 1 February 2010,
the court issued an order that granted summary judgment dismissing plaintiffs`
fraudulent concealment of addiction claim, and permitted plaintiffs 45 days (or
until 18 March 2010) to seek to reinstate that claim if plaintiffs can identify
a new plaintiff to represent the putative class asserting that claim. The court
further granted summary judgment dismissing plaintiffs` youth marketing claims
and permitted the Marlboro Lights claim to proceed against defendant Philip
Morris at this time. To date, the court has not issued any decision on the
class certification motion.
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 (approximately GBP10.9 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). The court`s order precludes defendants from litigating certain
issues of liability against the putative Engle class members in these
individual actions. On 1 October 2007, the United States Supreme Court denied
defendants` request for certiorari review of the Florida Supreme Court`s
decision. As of 31 December 2009, B&W has been named in approximately 53 Engle
progeny cases in both state and federal courts in Florida. These cases include
approximately 109 plaintiffs.
In the first trial of an individual Engle class member (Lukacs), the jury, on
11 June 2002, awarded plaintiff US$37.5 million (approximately GBP23.2 million)
in compensatory damages (B&W`s share: US$8.4 million (approximately GBP5.2
million)). After post-trial proceedings, on 12 November 2008, the trial court
entered judgment for plaintiff in the amount of US$24,835,000 (approximately
GBP15.4 million) (plus interest), for which defendants were jointly and
severally liable. Defendants filed an appeal from the judgment on 1 December
2008 and B&W served their moving brief on 5 June 2009. On 19 March 2009,
pursuant to its indemnification of B&W, RJRT posted a bond (approximately
US$15.2 million (approximately GBP9.4 million)). Oral argument has been
scheduled for 1 March 2010.
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 (approximately GBP366 million) on the class` 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 1 September 1988, but
reduced the US$591 million jury award by US$312 million (approximately GBP193.2
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$263
million (approximately GBP162.9 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. Oral arguments occurred on 1 September 2009 and a decision
remains pending.
(c) Individual cases
Approximately 3,191 cases were pending against B&W at 31 December 2009 (2008:
3,238) 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) 2,595 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) 476 of the individual cases against B&W
are cases brought in consolidated proceedings in West Virginia; (c) 53 are
Engle progeny cases; and (d) 67 are cases filed by other individuals.
There are 3 verdicts against B&W that remained subject to appeal in 2009:
In December 2003 and January 2004, a New York state court jury (Frankson)
awarded an individual plaintiff compensatory and punitive damages against B&W
and 2 industry organisations. After post- trial and appellate proceedings, a
final judgment was entered by the clerk of court on 26 June 2007 in the amounts
of US$175,000 (approximately GBP100,000) in compensatory damages and US$5
million (approximately GBP3.1 million) in punitive damages. RJRT posted a bond
in the approximate amount of $8.018 million (approximately GBP5 million) on 3
July 2007. Defendants subsequently appealed from the judgment to an
intermediate appellate court and appellate oral argument was heard on 26
January 2009. On 29 September 2009, the appellate court issued a decision
modifying the final judgment by deleting the punitive damages award and
remanding the case to the trial court on the issue of punitive damages. On 22
December 2009, plaintiff filed a motion for an extension of time to seek leave
to reargue the appeal, or in the alternative, to take a further appeal to the
New York Court of Appeals. On 15 January 2010, the intermediate appellate court
denied plaintiff`s motion seeking an extension to file a motion for leave to
appeal to the New York Court of Appeals, and granted plaintiff`s motion seeking
an extension to file a motion for leave to reargue the appeal.
Plaintiff filed a motion to reargue on 27 January 2010, which remains pending.
In February 2005, a Missouri state court jury (Smith) awarded the family of a
deceased smoker US$500,000 (approximately GBP300,000) in compensatory damages
and US$20 million (approximately GBP12.4 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. Following a new trial, on 20 August 2009, a
Missouri jury returned a verdict awarding US$1.5 million (approximately
GBP900,000) in punitive damages against B&W. On 24 September 2009, B&W filed a
motion for a new trial and a motion for judgment notwithstanding the verdict
and the plaintiffs filed a motion to increase the punitive damages to US$20
million (approximately GBP12.4 million) and to vacate, modify or set aside
judgment or alternatively for a new trial. These motions were denied on 21
December 2009. On 30 December 2009, B&W filed a notice of appeal to the
intermediate Missouri appellate court. Plaintiffs filed a notice of appeal to
the same court on 31 December 2009. Those appeals have been consolidated and
remain pending.
On 18 March 2005, a New York jury (Rose) awarded an individual plaintiff US$1.7
million (approximately GBP1.1 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, which was denied
on 26 March 2009. In June 2009, plaintiff filed a petition for a writ of
certiorari in the US Supreme Court, which was denied on 5 October 2009.
(d) Other claims
The Flintkote Company (Flintkote), a US asbestos production and sales company,
was included in the acquisition of Genstar Corporation (Genstar) by Imasco
Limited in 1986 and became a Group subsidiary following the restructuring of
Imasco Limited (now Imperial Tobacco Canada Limited (ITCAN), 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 (approximately
GBP105.4 million) in 1986 and a further dividend of US$355 million
(approximately GBP219.8 million) in 1987. In 2003, ITCAN 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 ITCAN 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 ITCAN 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.
Although the litigation is at a preliminary stage, the judge has stated an
intention to consider two discrete issues for potential early resolution either
through evidentiary hearings or trial in an effort to simplify or clarify
determinative issues. The first issue the judge is considering in separate
proceedings is whether Flinkote`s claim for malpractice against Sullivan &
Cromwell LLP is time barred. This will include consideration as to whether
Sullivan & Cromwell LLP`s representation of Flintkote was continuous and the
scope of this enquiry may require findings of fact impacting upon ITCAN`s
involvement in this first issue. The second issue involves an enquiry into the
two dividends and whether they were fraudulently transferred. Until these
preliminary issues have been resolved, it is difficult to estimate when the
remaining issues will be heard.
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 Government`s most recent published estimate of the cost
of the clean up work is US$700 million (approximately GBP433.5 million),
although other reports have suggested that the costs are increasing. 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 2005. 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. In 2005, Appleton
sued those insurance carriers that remained solvent that had issued the
insurance policies to BATUS in the late 1970s and 1980s for a declaratory
judgment that the policies provided coverage for Appleton`s liability for the
Fox River clean up. In 2008, Appleton prevailed in its suit and the court
issued a ruling that the insurance policies provided coverage for the Fox River
clean up. Further, the court held that Appleton was entitled to select from
among the insurance policies an individual policy year and work its way through
the policies in that year collecting coverage. Once that year is exhausted,
Appleton may select additional policy years, one at a time, and proceed through
those years in the same manner. In total, the insurance policies provide
general coverage of US$1,052,300,000. This amount is subject to reduction to
reflect insolvent insurance carriers within the BATUS insurance program. The
insurance carriers have appealed the trial court`s ruling. The ultimate amount
of insurance available will depend on whether the trial court`s rulings
concerning which policies are triggered and how losses may be allocated are
disturbed or modified on appeal. If the ruling stands on appeal, 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. NCR has recently advised Industries that it
believes that it is entitled to call upon Industries for contribution if
necessary, while also reaffirming its intent to look to Appleton and the AWA
entities in the first instance. If, however, Appleton and the AWA entities are
unable to meet their obligations, NCR may look to Industries for contribution.
There is a risk 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. There is a tolling agreement in place between Appleton, the
AWA Entities, Industries and BATUS relating to the demerger agreement, which
runs to 31 December 2011 and preserves the parties` rights to litigate the
issue. In a separate federal action in Wisconsin, Appleton and NCR sought a
contribution towards the contamination clean up costs from various other
companies that also operated along the Fox River. On 17 December 2009, the
judge dismissed the lawsuit on the basis that Appleton and NCR were responsible
for at least 98 per cent of the contamination and that attributing the
remaining 2 per cent amongst other companies was not worthwhile. Appleton and
NCR are therefore liable for the clean up costs in full. This could potentially
increase the amount of insurance sought by Appleton and therefore increases the
risk of Appleton exhausting the insurance policies beyond its entitlement. It
is open for Appleton and NCR to appeal the 17 December 2009 decision.
UK-based Group companies
At 31 December 2009, Industries was a defendant in the US in one class action,
the Schwab case mentioned previously. In that case, Industries was substituted
for the Company 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 (approximately GBP173.4 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. On 31 October 2006, the Court of Appeals granted defendants`
motion to stay enforcement of the judgment pending the outcome of the appeal.
On 22 May 2009, a three-judge appellate panel unanimously affirmed the district
court`s RICO liability judgment against several defendants, including
Investments, and among other things remanded for further factual findings and
clarification as to whether liability should be imposed against B&W. The
Government`s cross-appeal seeking disgorgement of past profits and the funding
of smoking education and cessation programmes was denied. Investments` petition
for panel rehearing and a rehearing to consider the panel`s decision was filed
on 31 July 2009 and was denied on 22 September 2009 by the Court of Appeals.
Following this, the parties are in a position to file petitions for certiorari
with the US Supreme Court. On 11 December 2009, the Court of Appeals entered an
order continuing the effective stay of the district court`s injunctive remedies
pending the US Supreme Court`s final disposition of the case.
In the Daric Smith case, filed on 7 February 2000, 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 of documents continues with Investments challenging the
scope of discovery to which the plaintiff is entitled.
Product liability outside the United States
At 31 December 2009, active claims against the Group`s companies existed in 22
(2008: 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 Brazil (individual
claims), Italy (individual claims) and Canada (Ontario recoupment claim and
class action claims). In 2009, judgments in favour of the defence were rendered
in Russia. Significant developments outside the United States fall into four
broad categories:
(a) Medical reimbursement cases
Argentina
ATLA (Argentine Tort Law Association) in June 2007 instigated a lawsuit seeking
damages and medical recoupment claims 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. On 2 October 2009, Nobleza Piccardo filed a
substantive defence, supplementing its earlier preliminary defences on lack of
jurisdiction, lack of standing to sue and the statute of limitations. On 23
December 2009, the civil court issued an order declining to exercise
jurisdiction over the case as a result of the national Government`s
intervention. The case will now be referred to the contentious administrative
court.
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. The court has determined that issues of third party standing will
be determined at the main hearing. A similar claim was lodged against Philip
Morris and Souza Cruz`s motion to consolidate the two claims was rejected, with
the case removed to a lower court. Souza Cruz filed a motion to reconsider the
refusal for consolidation and an interlocutory appeal against assignment to the
lower court. The Public Prosecutor filed a counter motion and the court has
ordered the assignment issue to proceed to a final review.
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,
Ryesekks Plc, ITCAN 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. Defendants joined the federal
Government of Canada pursuant to a Third Party Notice 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 was consolidated with a
similar appeal in the Knight case (see below). On 8 December 2009, the British
Columbia Court of Appeal handed down its decision in the Medicaid and Knight
cases. In the Medicaid case, the appeal was granted in part, with the court
holding that it was not plain and obvious that the Federal Government did not
owe a duty of care to tobacco manufacturers when it implemented its tobacco
control strategy. On 8 February 2010, the Federal Government sought leave to
appeal this decision. Non-Canadian defendants, including Investments and
Industries, sought to dismiss the underlying Medicaid 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 case is currently scheduled for trial in September
2011 as a target date.
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 Tobacco
Damages and Health Care Costs Recovery Act 2000 passed in that Province in June
2006. The Company, Investments, Industries, ITCAN and certain former Rothmans
Group companies have been named as defendants. The Government filed a statement
of claim on 13 March 2008. The UK-based Group defendants were served with the
Notice of Action and Statement of Claim on 2 June 2008. ITCAN was served on 10
April 2008. In November 2009, the UK-based Group defendants filed notices of
motion challenging jurisdiction. Plaintiff filed its material in response.
These motions are scheduled for hearing in June 2010.
On 29 September 2009, the Government of the Province of Ontario filed a health
care recoupment claim against the Company, Investments, Industries, ITCAN and
certain former Rothmans Group companies, pursuant to the provisions of the
Tobacco Damages and Health Care Costs Recovery Act 2009. The UK-based Group
defendants served their notices of motion and supporting evidence challenging
jurisdiction on 29 January 2010.
Colombia
British American Tobacco (South America) Limited (BAT South America) was served
on 18 July 2008 in Garrido, 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. BAT South America initially filed
preliminary objections to the action with a view to joining the claim to
another public interest action brought by Sandra Florez (see below). However,
the preliminary objections in Garrido are now moot because the Florez case was
decided in BAT South America`s favour in September 2009. BAT South America will
submit a full defence in Garrido in due course.
Israel
Clalit, one of the main health care 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 NIS7.6 billion (approximately
GBP1.2 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 (who is disputing service),
B&W, B.A.T (U.K. and Export) Limited (BATUKE) and Investments. On 29 March
2005, B&W, Investments and BATUKE sought leave to appeal the denial of their
application to strike out the action on the grounds of remoteness and a
decision from the Supreme Court on this issue is still awaited. Plaintiff`s
motion filed on 30 August 2009 to separate consideration of Clalit from another
case (in which no Group company is named) was denied by the
Supreme Court.
Nigeria
In 2007, four Nigerian states (Lagos, Kano, Gombe and Oyo) and the Nigerian
federal Government 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 were all named
as defendants and filed preliminary objections in each of the cases.
On 21 February 2008, the initial Lagos action was voluntarily discontinued by
plaintiffs. On 13 March 2008, the Attorney General of Lagos State filed a
substantially similar action. British American Tobacco (Nigeria) Limited, the
Company and Investments were all served in the new action. On 18 September
2009, the High Court of Lagos State issued a ruling denying the preliminary
objections filed by the Company and Investments. On 2 October 2009, the Company
and Investments filed notices of appeal from the court`s ruling and filed
motions to stay all proceedings pending the resolution of their appeals. The
stay motions remain pending before the High Court of Lagos State and are to be
argued at the next hearing.
On 8 July 2008, the High Court of Gombe State set aside service on all
defendants (including the Company, Investments and British American Tobacco
(Nigeria) Limited) and struck out the claim. The Attorney General of Gombe
State filed and served a renewed action, to which all Group defendants have
filed preliminary objections, which remain pending.
In 2008, a health care recoupment claim was filed in the State of Akwa Ibom.
The Company and Investments were served with process and filed preliminary
objections. British American Tobacco (Nigeria) Limited was not served and on 21
July 2009, was dismissed from the action. On 19 October 2009, following
repeated requests for adjournment by counsel for the Attorney General of the
State of Akwa Ibom, the court struck out the claim for want of diligent
prosecution.
An action was filed by the Attorney General of Ogun State in 2009. In the Ogun
State claim, there has been purported service of the proceedings on the
Company, Investments and British American Tobacco (Nigeria) Limited. The
companies have each filed preliminary objections. The preliminary objections
were heard on 14 December 2009 and a decision is awaited.
In 2009, process was also purportedly served on British American Tobacco
(Nigeria) Limited in two health care recoupment claims brought by the Attorneys
General of the States of Ondo and Ekiti. British American Tobacco (Nigeria)
Limited is the only Group company named as a defendant in these actions. In
Ondo, British American Tobacco (Nigeria) Limited filed an application to strike
out the claim based on defects in the issuance of the writ. While this
application was pending, on 17 June 2009, the Attorney General of Ondo State
filed a notice of discontinuance, and on 18 June 2009, the court accordingly
struck out the action without prejudice and awarded British American Tobacco
(Nigeria) Limited costs. In Ekiti, British American Tobacco (Nigeria) Limited
filed preliminary objections. On 5 October 2009, following the service of a 2
October 2009 notice of discontinuance filed by the Attorney General of Ekiti
State, the court struck out the claim without prejudice.
Saudi Arabia
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, but
no Group company has been served with process. The Ministry of Health is
reportedly seeking damages of at least 127 billion Saudi Riyals (approximately
GBP21 billion).
Spain
The Junta de Andalucia, together with the Health Service of Andalucia
(hereinafter `Junta`) filed, on 20 September 2007, a contentious-administrative
claim against the Spanish State and six tobacco companies, including British
American Tobacco Espana, S.A. (BAT Espana). The Junta seeks the reimbursement
of 1,769,964 (approximately GBP1.6 million) allegedly spent in health care
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, and its appeal was dismissed by a Supreme Court Judgment
of 30 September 2009. In the interim, however, on 6 May 2009, the Junta filed a
new contentious-administrative claim based on the same facts, which proceedings
are still progressing.
(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 was returned to the lower court for production of evidence and a new
judgment. The matter continues on the issue of sufficiency of court-appointed
expert evidence.
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. On 18 May 2009, the case was dismissed with
judgment on the merits. Plaintiffs appealed in August 2009 and Souza Cruz
responded. Parties are now awaiting judgment.
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. On 12 March 2009, the Superior Court affirmed the ruling and
rejected plaintiff`s appeal. Plaintiff issued another appeal which, on 23 March
2009, was unanimously rejected by the Superior Court. An appeal is now pending
before the Federal Supreme Court.
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 ANVISA be
ordered to join the case as co-defendants. ANVISA is a Federal Agency so the
case was removed to the Federal Court where ANVISA successfully argued that it
lacked standing to be sued. The claim against ANVISA was dismissed and the
Federal Court sent the case back to the lower state court for proceedings to
continue, but the action was stayed on 18 December 2009 pending a decision by
the Superior Court on which court has jurisdiction.
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 GBP7,700) 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. Plaintiff`s application to appeal was hindered by an
expired time period and, on 11 December 2009, the Supreme Court of Cassation
held a closed hearing on that issue, and thereafter denied plaintiff`s request
for a restoration of the expired time period. This latest decision remains
subject to appeal.
Canada
In the Knight class action brought against ITCAN 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
ITCAN. 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 ITCAN. ITCAN joined the federal
Government of Canada pursuant to a Third Party Claim and the federal
Government, in turn, filed a motion to strike the claim. The court subsequently
dismissed the federal Government from the action. ITCAN appealed that order,
and its appeal was consolidated with a similar appeal in the British Columbia
recoupment litigation (see above). On 8 December 2009, the British Columbia
Court of Appeal handed down its decision in the Medicaid and Knight cases. In
the Knight case, the court held that it was not plain and obvious that firstly,
the Federal Government did not owe a duty of care to tobacco manufacturers when
it implemented its tobacco control strategy and secondly, that it was not plain
and obvious that the Federal Government did not owe a duty of care to the
members of the class. On 8 February 2010, the Federal Government sought leave
to appeal this decision.
A similar `lights` and `mild` class action claim has been filed in Newfoundland
against ITCAN, who 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 ITCAN subsequently received
plaintiffs` notice for leave to appeal. Plaintiff`s application for leave to
appeal was heard in November 2009 and a decision is now awaited.
There are currently two class actions in Quebec against ITCAN. 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.
ITCAN is currently in discovery and case management.
In August 2009, the Ragoonanan proposed class action against ITCAN in Ontario
was dismissed. It 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. A further appeal
was dismissed on 26 August 2009, thus ending the litigation.
In June 2009, four class actions were filed in Nova Scotia, Manitoba,
Saskatchewan and Alberta naming Investments, Industries, Ryesekks Plc, ITCAN
and certain former Rothmans Group companies. There are service issues in
relation to the UK-based Group companies for Alberta and Manitoba. In
Saskatchewan, the UK-based Group companies have served notices of motion
challenging jurisdiction and these motions are due to be heard on 11 and 12
March 2010. Proceedings in these four class actions have also been served on
ITCAN.
Colombia
On 2 September 2009, a `consumer popular` ("acciACubedn popular") action was
brought
by Sandra Florez against BAT South America. The ruling held that an "acciACubedn
popular" is not an action for damages and that BAT neither threatened nor
violated any "collective right", but instead acted in accordance with the law
without misrepresenting the risks of "light" cigarettes. Plaintiff did not
appeal this ruling and the decision is now final.
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 (Globrands Agencies). 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 NIS78.5 billion (approximately GBP12.8
billion) in monetary damages. In January 2009, the Tel Aviv District Court
denied plaintiffs` motion for a temporary restraining order prohibiting
defendants from marketing and selling low-yield products in Israel. On 3
December 2009, Globrands Agencies sought an order from the court requiring the
three plaintiffs who smoked British American Tobacco brand cigarettes to
deposit NIS 200,000 (approximately GBP33,000) each as a guarantee against trial
costs. On 28 December 2009, the judge granted this motion, requiring the three
plaintiffs to deposit jointly the amount of NIS100,000 (approximately
GBP16,000) by 19 January 2010. As a result of this decision, the remaining
defendants filed similar applications. A pre-trial hearing was scheduled for 20
January 2010, to resolve all outstanding preliminary issues and discuss the
schedule for a hearing on class certification. Since the three plaintiffs did
not deposit the guarantee, the court ordered, during the pre-trial hearing on
20 January 2010, that the action against Globrands Agencies be dismissed
without prejudice. The three plaintiffs that smoked British American Tobacco
brand cigarettes are seeking leave to appeal the deposit decision to the
Israeli Supreme Court, a motion that remains pending.
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. notified the court of its intention to appear
as a third party whose rights may be affected by the proceedings, as provided
under the procedural law. A public hearing to determine its status as a third
party has yet to be scheduled.
(c) Individual cases
Australia
In 2006, proceedings were instituted by Donald Laurie in the Dust Diseases
Tribunal (DDT) against British American Tobacco Australia Services Limited
(BATAS), the Commonwealth of Australia and an asbestos manufacturer, alleging
tobacco and asbestos related illness. In November 2009, BATAS sought an order
in the New South Wales Court of Appeal for the recusal of the judge appointed
to hear the matter, having been unsuccessful at obtaining such relief from the
DDT. On 17 December 2009, the Court of Appeal delivered its judgement against
BATAS, denying its bid to recuse the trial judge. BATAS has now made an
application for special leave to appeal the recusal decision to the High Court
of Australia. While BATAS`s appeals have been pending, plaintiff has chosen not
to prosecute the underlying claims in the DDT.
In January 2009, proceedings were commenced by Terry Gottlieb in the Supreme
Court of Victoria against various BAT Group companies and other tobacco
companies alleging smoking and passive smoking-related illness. These
proceedings were discontinued on 27 October 2009.
In 2001, proceedings were instituted by Rolah Ann McCabe in the Supreme Court
of Victoria against BATAS. Findings were made against BATAS in March, April and
May 2002 by the trial court. These findings were overturned by the Victorian
Court of Appeal in December 2002 and March 2003. An application for special
leave to appeal to the High Court of Australia by the McCabe estate was refused
in October 2003. Since that time, the case has largely been dormant. As of 19
November 2009, BATAS has been awarded AUS$1,102,378.45 (approximately
GBP600,000) in costs (out of AUS$2,098,693 claimed (approximately GBP1.2
million)) arising out of the trial and the appeals before the Victorian Court
of Appeal.
In November 2006, BATAS commenced proceedings against Slater & Gordon (an
Australian plaintiff law firm who represented the plaintiff in the McCabe case
(see above)) in a matter relating to the leaking of legal documents to the
press and public. British American Tobacco Australia Limited commenced parallel
proceedings against Slater & Gordon and Peter Gordon (a partner of the firm)
regarding the same matter. In early 2007, Roxanne Cowell (executrix of the
McCabe estate) was joined as a defendant in each proceeding. The proceedings
are before the Victorian Supreme Court. On 15 December 2009, the respective
proceedings against Slater & Gordon and Peter Gordon were resolved in favour of
BATAS and British American Tobacco Australia Limited, with costs to be
determined after the proceedings against Roxanne Cowell are resolved.
Brazil
As of 31 December 2009, there were approximately 312 (2008: 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 598 individual cases have been filed in Brazil against
Souza Cruz. Approximately 16 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
Four 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. A third (Spasic) is active and currently at a preliminary stage.
One smoking and health case (Stright) has been filed in Nova Scotia but had
previously been in abeyance since 2005. The parties have been summoned to
appear before the court where it is anticipated that the plaintiff will advance
its case to avoid the claim being quashed.
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.
In March 2009, plaintiff`s appeal period lapsed, making the Civil Court of
Santiago`s decision final. There are eight smoking and health claims pending
against Chiletabacos that have not been decided yet. The most recent smoking
and health claim against Chiletabacos was purportedly served on 15 January 2010
and was brought by the estate of a smoker who allegedly died as a result of
lung cancer.
Costa Rica
In February 2006, Mr Jorge Enrique Guerra Ruiz filed a claim against, among
others, British American Tobacco Central America S.A. (Costa Rica branch) (BAT
Costa Rica), alleging improper use of terms in language other than the official
country language (Spanish) on cigarette packs. BAT Costa Rica was cleared of Mr
Ruiz`s allegations in October 2009, except for the Consumer Defence
Commission`s finding that it was liable to a fine for the use of `light`. This
decision has been challenged by BAT Costa Rica.
Denmark
In 2003, a claim was filed against House of Prince A/S and Skandinavisk
Tobakskompagni A/S claiming EUR65,000 (approximately GBP58,000) (plus
damages andcosts) for damages to health including addiction, arising from
allegations of failure to warn, defective design, and product manipulation.
The trial has been postponed until at least late 2010.
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 (approximately GBP100,000).
In December 2008, plaintiffs appealed the District Court`s decisions in their
entirety but one plaintiff (Lindroos) has subsequently withdrawn her appeal.
Trial of the action before the Court of Appeal began on 31 August 2009 and
concluded on 7 December 2009. A decision of the court is expected from the
Court of Appeal in May 2010.
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 2007, but plaintiff has filed a notice of appeal
and no date for the appeal has yet been set. 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 2009, there were approximately 226 individual `lights` cases
in Italy pending against British American Tobacco Italia S.p.A. (2008: 1,672).
Almost 75 per cent of the individual `lights` cases filed in Italy are pending
before lower level (Justices of the Peace) courts, with the remainder on
appeal. Because of the type of court involved, the maximum possible recovery in
damages is EUR1,033 (approximately GBP900) (plus legal fees and costs). 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 2009, approximately 1,128 cases (not including the Pescopagano
cases) have been suspended or dismissed. There are 38 individual smoking and
health cases pending before Italian Civil Courts (including eight cases on
appeal, which includes both the seven cases pending before the Court of Appeal
and the one case pending before the Supreme Court), in which it is contended
that the smokers` diseases or deaths were caused by cigarette smoking.
Kenya
In October 2002, a plaintiff commenced a smoking and health case against
British American Tobacco Kenya Limited. Since November 2007, the parties have
been engaged in a dispute over plaintiff`s failure to produce requested
discovery.
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 Western Europe Area II B. V. and British American
Tobacco Manufacturing B.V. Plaintiff had until 18 March 2009 to appeal the
dismissal but failed to do so. Therefore the decision is now final.
Poland
A claim for PLN 50,000 (approximately GBP11,000) was brought by an incarcerated
plaintiff and served on British American Tobacco Polska S.A. in March 2009,
alleging addiction and unspecified health losses. The plaintiff moved to
voluntarily withdraw the claim in November 2009 and a decision from the court
regarding costs and discontinuation of proceedings is currently pending.
Sri Lanka
In 2003, a plaintiff filed a smoking and health claim against Ceylon Tobacco
Company Limited (CTC). CTC filed preliminary objections which were rejected by
the District Court and Court of Appeal. Leave to appeal to the Supreme Court
was granted and the appeal will be heard on 11 May 2010.
(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 on 13 January 2009 the
dismissal was reversed on appeal. Leave to appeal this decision was refused but
the case was remitted to the district court for a hearing on the merits and on
25 March 2009 was dismissed in full. Plaintiff`s appeal, heard on 16 June 2009,
upheld the first instance decision and plaintiff had until 16 December 2009 to
lodge a further appeal. No appeal was filed.
Other litigation outside the US
Regulatory and Constitutional Challenges
In 2009, there were regulatory and constitutional challenges in Brazil, Canada
(Quebec), South Africa, Paraguay, Turkey and Uruguay. In Brazil, a regulatory
challenge was brought by Souza Cruz against the National Surveillance Health
Agency (ANVISA). This action mainly challenged the legality of the images of
new health warnings and sought an injunction to suspend the effects of the
resolution that established these images until a final decision is issued on
the merit of the case. Although initially granted, the injunction was later
disregarded by the Court of Appeal. A first instance decision is pending. In
Quebec, ITCAN and other Canadian manufacturers filed a constitutional challenge
of the Quebec Medicaid Legislation. The Attorney-General of Quebec has filed a
motion to dismiss the challenge and this motion will be heard on 8 to 9 April
2010. In South Africa, in September 2009, a constitutional challenge was
commenced by British American Tobacco South Africa (Pty) Ltd against the
Ministry of Health. This challenge relates to one to one communications between
tobacco manufacturers (together with importers, wholesalers and retailers) and
consenting adult tobacco consumers. Further regulatory challenges in Turkey,
Paraguay and Uruguay have also been instituted to challenge certain health
warning, and tobacco product packaging and labelling requirements.
Canada
On 9 December 2009, ITCAN was served with a class action filed by Ontario
tobacco farmers and the Provincial Marketing Board, which alleges that between
1989 and 1994 ITCAN improperly paid lower prices for tobacco leaf destined for
duty-free products, as opposed to the higher domestic leaf price.
Russia
In September 2008, a new action was commenced by a minority shareholder of Yava
in relation to approval of interested-party transactions. The claim was filed
by Branston Holdings Ltd. and its value was 4,362,537,236 roubles
(approximately GBP89.1 million). The claim was filed against British American
Tobacco Holdings (Russia) BV, whereas Yava was a third party to the case. We
have been informed that Branston has filed an application with the court to
withdraw its claims in full. The next hearing is currently planned for 22 April
2010, at which the issue of withdrawal of the claim and consequent termination
of the proceedings will be examined by the court.
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 GBPnil (2008: GBP1 million).
SHARE BUY-BACK PROGRAMME
In 2008, the Board decided to suspend the on-market share buy-back programme
that the Group initiated in 2003, in order to preserve the Group`s financial
flexibility during the period of economic uncertainty. No shares were
bought-back during 2009.
RELATED PARTY DISCLOSURES
The Group`s related party transactions and relationships for 2008 and 2009 are
disclosed as Appendix 2 to this announcement.
POST BALANCE SHEET EVENTS
On 22 January 2010, the Group announced the closure of the Tire factory in
Turkey and the consolidation of all manufacturing in Turkey in the Samsun
factory. The estimated costs of the closure are GBP37 million and closure of
the Tire factory is expected to be completed by 31 December 2010.
In respect of the Franked Investment Income Group Litigation Order, the Court
of Appeal handed down its judgment on 23 February 2010 and further details have
been provided on page 34.
ANNUAL REPORT
The financial information set out above does not constitute the Company`s
statutory accounts for the years ended 31 December 2009 or 2008. Statutory
accounts for 2008 have been delivered to the Registrar of Companies and those
for 2009 will be delivered following the Company`s Annual General Meeting. The
auditor`s reports on both the 2008 and 2009 accounts were unqualified, did not
draw attention to any matters by way of emphasis and did not contain statements
under s498(2) or (3) of Companies Act 2006 or equivalent preceding legislation.
The Annual Report will be published on bat.com on 26 March 2010. 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 2010
28 April Interim Management Statement
28 April Annual General Meeting
The Mermaid Conference & Events Centre
London
EC4V 3DB
28 July Half-Yearly Report
27 October Interim Management Statement
CALENDAR FOR THE FINAL DIVIDEND 2009
2010
25 February Dividend announced (including amount of dividend per share
in both sterling and rand; applicable exchange rate and
conversion date)
5 March Last day to trade (JSE)
8 March to
12 March No transfers between UK main register and South African
branch register; no shares may be dematerialised or
rematerialised.
8 March Ex-dividend date (JSE)
10 March Ex-dividend date (LSE)
12 March Record date (LSE and JSE)
6 May Payment date (sterling and rand)
Details of the applicable exchange rate can be found under the heading
`Dividends` above.
For holders of American Depository Receipts (ADRs), the record date is also 12
March 2010 with an ADR payment date of 11 May 2010.
For the Dividend Reinvestment Plan (DRIP), the last date for elections is 14
April 2010.
CORPORATE INFORMATION
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; +44 870 889 3159
share dealing tel: 0870 703 0084 (UK only)
your account: www.computershare.com/uk/investor/bri
share dealing: www.computershare.com/dealing/uk
web-based enquiries: www.investorcentre.co.uk/contactus
Secondary listing
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; +27 11 870 8222
e-mail enquiries: web.queries@computershare.co.za
American Depositary Receipts (ADRs)
NYSE Alternext U.S. (Symbol: BTI; CUSIP No. 110448107)
Sponsored ADR programme; each ADR represents two ordinary shares of British
American Tobacco p.l.c.
Citibank Shareholder Services
PO Box 43077
Providence, Rhode Island 02940-3077, USA
tel: 1 888 985 2055 (toll-free) or +1 781 575 4555
email enquiries: citibank@shareholders-online.com
website: www.citi.com/dr
Publications
British American Tobacco Publications
Unit 80, London Industrial Park, Roding Road, London E6 6LS, UK
tel: +44 (0)20 7511 7797; facsimile: +44 (0)20 7540 4326
email enquiries: bat@team365.co.uk or
Computershare Investor Services (Pty) Ltd in South Africa using the contact
details above.
British American Tobacco p.l.c.
Registered office
Globe House
4 Temple Place
London
WC2R 2PG
UK
tel: +44 (0)20 7845 1000
British American Tobacco p.l.c.
Representative office in South Africa
34 Alexander Street
Stellenbosch 7600
South Africa
(PO Box 631, Cape Town 8000, South Africa)
tel: +27 (0)21 888 3722
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.
DISTRIBUTION OF ANNOUNCEMENT
This announcement is released to the London Stock Exchange and the JSE Limited.
It may be viewed and downloaded from our website www.bat.com
Copies of this announcement may also be obtained during normal business hours
from (1) the Company`s registered office; (2) the Company`s representative
office in South Africa; and (3) British American Tobacco Publications, as
above.
Nicola Snook
Secretary
24 February 2010
APPENDIX 1
KEY GROUP RISK FACTORS
This section identifies the main risk factors that may affect the British
American Tobacco Group`s business. It provides a brief description of the key
risks to which the Group`s operations are exposed and identifies, in each case,
their potential impact on the Group and the principal activities in place to
manage the risk. Each risk is considered in the context of the Group strategy
by identifying the principal strategic element to which it relates, although
other elements may also be relevant.
It is not the intention to provide an extensive analysis of all risks affecting
the Group. Not all of the factors listed are within the control of the Group
and other factors besides those listed may affect the performance of its
businesses. Some risks may be unknown at present and other risks, currently
regarded as immaterial, could turn out to be material in the future.
The risk factors listed in this section and the specific activities in place to
manage them should be considered in the context of the Group`s internal control
framework, which is addressed in detail annually in the internal control
section of the Corporate governance statement in the Annual Report.
This section should also be read in the context of the cautionary statement
regarding forward-looking statements at the end of this section.
Risk registers are used at Group, regional, area and individual market levels.
The Group risk register is reviewed by the Audit Committee at six monthly
intervals and provides the basis for the assessment of the key Group risk
factors identified below.
Illicit trade
Illicit trade in the form of counterfeit products, smuggled genuine products
and locally manufactured products on which applicable taxes are evaded,
represents a significant and growing threat to the legitimate tobacco industry.
Increasing excise rates can encourage more consumers to switch to illegal
cheaper tobacco products and provide greater rewards for smugglers. The risk is
exacerbated by the current economic downturn.
Competition from Illicit trade
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
Sudden and disproportionate excise increases and widening excise
differentials between markets.
Ineffective regulatory environment.
Lack of law enforcement and weak border controls.
Potential impact on Group
Erosion of brand equity.
Investment in trade marketing and distribution is undermined.
Product is commoditised.
Lower volumes and reduced profits.
Principal activities in place to address risk
Dedicated Anti-Illicit Trade (AIT) teams operating at global, regional, area
and key market levels.
Active engagement with key stakeholders.
Global AIT strategy development supported by a research programme to further
the understanding of the size and scope of the problem.
AIT Intelligence Unit (including a dedicated analytical laboratory)
cooperates with law enforcement agencies in pursuit of priority targets and
capacity building.
Strong internal business conduct and customer approval policies.
Excise and tax
Tobacco products are subject to substantial excise and sales taxes in most
countries in which the Group operates. In many of these countries, taxes are
generally increasing but the rate of increase varies between countries and
between different types of tobacco products.
Excise shocks from tax rate increases or structure changes
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
Government initiatives to raise revenues.
Increases advocated within context of national health policies.
Potential impact on Group
Consumers reject the Group`s legitimate tax-paid products for products from
illicit sources.
Lower sales volume or alteration of sales mix.
Principal activities in place to address risk
Requirement for Group companies to have in place formal pricing and excise
strategies and contingency plans to manage significant excise changes.
Annual review of brand portfolio, brand health and equity.
Financial
The Group`s underlying operations give rise to certain financial risks. The
principal risks in this regard, and the controls in place to address them, are
identified below and further details about the Group`s financial management and
treasury operations can be found within the Financial review.
Liquidity risks, including capital structure and leverage
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
Downturn in macroeconomic climate and/or failures in financial systems -
global or in individual markets.
Limited liquidity, access to cash and sources of finance.
Fluctuations in interest rates due to movements in international capital
markets.
Potential impact on Group
Increased funding costs and requirement to raise or issue equity or seek new
sources of capital.
Inability to fund strategic opportunities or respond to threats.
Underperforming share price and erosion of shareholder value.
Damage to corporate reputation.
Principal activities in place to address risk
Established and conservative financing principles, which target a minimum
level of liquidity, a minimum average maturity for the total debt portfolio and
a maximum allowable proportion of total debt maturing in any 1 year, with
regular reporting against those principles.
Targeted investment grade rating.
Retained cash flow spread across a wide banking group.
Maintainance of a substantial committed bank facility which may be drawn at
short notice and lliquidity pooling structures to access operating company cash
balances.
Management of cost base
Principal relevance to Group strategy: Potential impact on Productivity (cost
management)
Principal potential causes
Macroeconomic conditions lead to high inflation of key commodities (leaf,
wood pulp, energy) and/or wage inflation.
Productivity programmes and above market projects do not achieve objectives
due to lack of alignment and/or insufficient resources.
Incomplete, inefficient or misaligned organisational changes.
Potential impact on Group
Higher product costs and/or increased salary costs, with impact on profit and
cash flow.
Inability to manage cost savings leads to lower profits and reduced funds for
investment in long term growth.
Ineffective structural changes restrict future growth potential, increase
short term cost base and result in short term loss of business focus.
Reduced shareholder confidence.
Principal controls in place to address risk
Multiple sources of key commodities and development of new sources in
low-cost countries.
Harmonisation of product specifications and production efficiencies to reduce
variable costs.
Wage inflation is monitored globally via established compensation committee
structures; in areas of high inflation, salary increases are staggered to
mitigate impact.
Programme in place to achieve costs savings of GBP800 million by 2012.
Regular tracking of actual productivity savings and forecast improvements in
operating margin and supply chain, overheads and indirects projects and above
market projects; periodic reviews of long term savings.
For 2009, costs have been one of the performance measures for payments under
the International Executive Incentive Scheme.
Counterparty risks
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
Failure of counterparties with whom the Group has dealings.
Potential impact on Group
Significant financial loss reflected in adverse impact on Group assets,
financial risk profile and liquidity.
Disruption to operations due to failure of a transactional banking
counterparty.
Principal activities in place to address risk
Risk is spread through a wide banking group focused on strong counterparties
across the globe; exposure to each financial counterparty is monitored and risk
is limited according to the counterparty`s credit rating.
Financing principles and treasury policy compliance/monitoring reflect global
counterparty risk strategy.
Foreign exchange rate exposures
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
Translational foreign exchange (FX) rate exposures for earnings/cash flows
from the Group`s global business, from exchange rate movements against
sterling, the Group`s reporting currency.
Transactional FX rate exposures generated from underlying operations across
the Group`s global business due to receipts and payments in non-domestic
currencies.
Potential impact on Group
Fluctuations in translational FX rates of key currencies against sterling
introduce volatility in reported results.
Fluctuations in transactional FX rates introduce volatility in costs of
operations, with a potential adverse impact on financial performance.
Principal activities in place to address risk
While translational FX exposure is not hedged, its impact is identified in
results presentations and financial disclosures and earnings are restated at
constant rates for comparability.
Debt and interest are matched to assets and cash flows to mitigate volatility
where possible.
Transactional FX exposures from the Group`s underlying operations are
monitored and hedged under defined policies, procedures and limits; illiquid
currencies, where hedging is not possible or uneconomic, are regularly
reviewed.
Wrongly valued acquisition opportunities
Principal relevance to Group strategy: Potential impact on Growth (mergers and
acquisitions)
Principal potential causes
Lack of market intelligence.
Overvaluation of assets or understatement of liabilities.
Potential impact on Group
Loss of opportunity.
Loss of volume, market share and profit.
Damage to corporate reputation.
Principal activities in place to address risk
Specialist and properly resourced mergers and acquisitions department.
Contacts at all major investment banks to monitor opportunities.
Transactions must meet defined financial investment criteria.
Oversight by senior management or Board where appropriate.
Retirement benefits
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
The Group operates a number of defined benefit pension schemes.
These create risk through their exposure to the volatility in financial
markets and shifting actuarial assumptions.
Potential impact on Group
Increased deficits force higher contributions and profit & loss charges.
Increased net liabilities impact on the Group`s credit worthiness and put
pressure on its credit rating.
Principal activities in place to address risk
Established limits on the proportion assets that can be held in riskier
investment classes.
Regular actuarial valuations and agreed funding plans.
Defined benefit schemes are now closed to new entrants.
Marketplace
The Group has substantial operations in over 180 countries. Its results are
influenced by the economic, regulatory and political situations in the
countries and regions in which it has operations, as well as by the actions of
competitors.
Inability to obtain adequate supplies of leaf
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
Natural disasters, including major impact of climate change.
Competition for land use from other agricultural products.
Government initiatives to move farmers away from tobacco.
Potential impact on Group
Increased blend costs through lack of supply.
Potential deterioration in smoke quality impacting consumer.
Loss of market share in one or more markets.
Principal activities in place to address risk
Global sourcing and globally integrated management of leaf supply chain.
On average, two thirds of tobacco requirements met from within Group.
3 year planning cycle to identify and manage potential shortages.
Scenario planning and contingency plans.
Economic crisis impact on secondary supply chain
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
Collapse of economic environment in key geographic area.
Trading partners in secondary supply chain fail or suffer lack of capital.
Potential impact on Group
One time loss of revenue led by reduction in inventories within the secondary
supply chain.
Significant increase in bad debts and/or write-offs.
Principal activities in place to address risk
Established route-to-market strategy, involving direct distribution to retail
where appropriate and effective relationships with distributors/wholesalers.
Monitoring of retail stocks, distributors/wholesalers inventories and
reordering patterns, to identify potentially adverse trends.
Strict adherence to established trading terms and conditions
Trading environment
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
Downturn in macroeconomic climate reduces consumers` disposable incomes and
may lead to consumer downtrading.
Competitors seek volume growth by price discounts.
Potential impact on Group
Price increases to cover cost rises are not achieved.
Profit growth in short term falls below shareholders` expectations.
Reduction in funds for investment in long-term growth.
Principal activities in place to address risk
Regular regional and management reviews of budgeted pricing scenarios.
Close monitoring of sales to detect changes in consumer purchasing patterns.
Development of strong brands and brand portfolios.
Price war simulations.
Trading performance in key markets
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
Inability to predict consumers` changing behaviours through lack of market
insights.
Insufficient internal resources committed to develop, launch and maintain
innovative products.
Inability to capture growth opportunities in individual markets and/or
synergistic benefits from strong brand portfolio.
Potential impact on Group
Reduction in market share and volume.
Profit growth in the short term fails to meet shareholders` expectations.
Reduction in funds for investment in long-term growth.
Diminished shareholder confidence in the Group`s growth prospects.
Erosion of consumer base.
Weakened brand portfolio.
Principal activities in place to address risk
Established innovations process and strategy.
Standard methodology to address consumer surveys and brand value segmentation.
Regular reviews of key markets, levels of investment, brand focus, industry
outlook and competitor activity.
Regulation
The Group`s businesses operate under increasingly stringent regulatory regimes
around the world. Further regulation is expected, particularly as a result of
the World Health Organisation`s Framework Convention on Tobacco Control (FCTC)
and increasingly active tobacco control activities outside the FCTC.
Regulation risks covering: packaging and labelling; advertising and promotion;
design, contents and emissions of products; testing and measuring; public place
smoking; and industry participation.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
Adoption of differing regulatory regimes in different countries/groups of
countries and/or lack of consensus on interpretation/application.
Adoption of more stringent regulations on communications, such as point of
sale display bans and plain packaging.
Exclusion of industry from participating in engagement with regulators.
Contribution to denormalisation of smoking.
Potential impact on Group
Cost complexity of meeting regulations.
Generic or plain packaging leads to loss of brand equity and commoditisation.
Reduced ability to communicate brand portfolio and innovations, contributing
to an increase in illicit trade.
Reduced consumer acceptability of new product specifications, leading to loss
of volume.
Restriction of industry participation leads to inability to mitigate other
regulatory risks.
Principal activities in place to address risk
Group companies have regulatory strategies in place in order to identify
issues material to their operating environment and develop plans to address
them in a manner consistent with local law and Group policy.
Engagement is sought with scientific and regulatory communities and
stakeholder engagement takes place at global, regional and individual market
levels.
Global monitoring of regulatory trends and developments and analysis of
regulatory proposals to determine impacts, if any, on business.
Development of corporate positions and best practice examples for markets to
address regulation.
Litigation
The Group is involved in a number of legal and regulatory court proceedings in
a number of countries, including the US. These proceedings may be characterised
as covering smoking and health issues and include claims for personal injury
and claims for economic loss arising from the treatment of smoking and health
related diseases. Regulatory proceedings may result in a challenge to new
regulations. A fuller analysis of current legal proceedings to which the Group
is subject is set out on page 35.
Loss of a smoking and health related court case
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
Continuing exposure to new litigation.
Outcomes of legal and regulatory court proceedings in various jurisdications.
Potential impact on Group
Unfavourable outcome or settlement of pending or future litigation.
Material impact on consolidated results of operations, cash flows and
financial position in a particular fiscal quarter or fiscal year.
Principal activities in place to address risk
A specialist centre of expertise, the Strategic Litigation Team (SLT), has
responsibility for directing and managing the litigation risk globally.
Group companies are required to assess their litigation exposure and liaise
with the SLT in connection with specific claims.
Data risks
The Group is increasingly reliant on information technology systems for its
internal communications, controls, reporting and relations with customers and
suppliers, as well as for the management of business information. The loss or
misuse of sensitive information, or its disclosure to outsiders, including
competitors and trading partners, could potentially have a significant adverse
impact on the Group`s business operations and/or give rise to legal liability.
Disruption to the Group`s information technology systems
Principal relevance to Group strategy: Potential impact on Productivity (cost
management)
Principal potential causes
Loss of wide area of communications.
Effects of a computer virus attack.
Loss of operations in a major data centre.
Group data processed stored or transported by IT systems (Group or third
party) is corrupted, lost or disclosed.
Potential impact on Group
Loss or delay in sales or cash collections and/or inability to pay suppliers
or staff.
Goods unable to be shipped.
Loss of telephony or email systems.
Loss or corruption of data.
Delays in meeting statutory or internal reporting requirements.
Reputational loss or legal liability.
Principal activities in place to address risk
Information technology architecture based on established solutions from
leading suppliers, with contingency plans in the event of counterparty failure.
All critical financial and planning systems have secure backup systems and
disaster recovery plans;
largest systems have full failover designs with dual-site hosting.
Comprehensive anti-virus protection in place Group-wide, with external
testing to confirm protection.
Back-up communication links in place for data centres and major sites.
Strict security standards and firewall protection for external links.
Loss of confidential information or malicious manipulation of data
Principal relevance to Group strategy: Potential impact on Productivity (cost
management)
Principal potential causes
Inadequate controls regarding the creation, storage and sharing of
confidential information.
Inadequate access controls to key systems and data.
Potential impact on Group
Loss of revenue and/or profit due to use of inaccurate data, loss of trade
secrets and/or competitors gaining advantage.
Increased costs in restoring lost data and/or reversing inaccurate
transactions.
Regulatory action, civil action and/or criminal prosecution for breach of
legal obligations.
Damage to corporate reputation and loss of shareholder confidence.
Negative impact on share price.
Principal activities in place to address risk
Information technology controls (see above).
Established information security and information technology policies and
procedures.
Promotion of awareness and understanding of information security issues.
Cautionary statement
The Business Review and certain other sections of this document contain
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 these statements 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.
Appendix 2
RELATED PARTY DISCLOSURES
The Group has a number of transactions and relationships with related parties,
as defined in IAS 24 (Related Party Disclosures), all of which are undertaken
in the normal course of business.
Transactions and balances with associates relate mainly to the sale and
purchase of cigarettes and tobacco leaf. Amounts receivable from associates in
respect of dividends included in the table below were GBP68 million (2008:
GBP72 million). The Group`s share of dividends from associates included in
other net income in the table below, was GBP331 million (2008: GBP326 million).
Legal fees recovered from Reynolds American Inc. included in other net income
amounted to GBPnil (2008:
GBP1 million).
In 2008, proceeds of GBP41 million were received from the Group`s participation
in the Reynolds American Inc. share buy-back programme and a further GBP1
million from the repurchase of shares by Procesadora Unitab.
2009 2008
GBPm GBPm
Transactions
- revenue 47 29
- purchases (365) (298)
- other net income 329 325
Amounts receivable at 31 December 78 79
Amounts payable at 31 December (34) (59)
In 2008, the Group realised a gain of GBP139 million on the disposal of its
32.35 per cent holding in the non-cigarette and snus businesses of ST. The gain
on disposal is not included in the above table.
A capital injection was made into BAT Algeria where the minority shareholder
Socalta (Societe Algerienne de Trading Alimentaire) contributed GBP16 million.
This minority contribution was assisted by a loan from another Group subsidiary
of GBP4 million.
The key management personnel of British American Tobacco consist of the members
of the Board of Directors of British American Tobacco p.l.c. and the members of
the Management Board. No such person had any material interest during the year
in a contract of significance (other than a service contract) with the Company
or any subsidiary company. The term key management personnel in this context
includes the respective members of their households.
2009 2008
GBPm GBPm
The total compensation for key management personnel, including
Directors, was:
- salaries and other short term employee benefits 18 18
- post-employment benefits 3 3
- share based payments 9 7
30 28
There were no other long term benefits applicable in respect of key personnel
other than those disclosed in the Remuneration Report in the Annual Report.
In November 2008, the controlling companies of R&R Holdings S.A., Richemont and
Remgro, distributed the 30 per cent of the shares of British American Tobacco
that they indirectly held to their shareholders. A new subsidiary of Richemont
and Remgro, Reinet Investments S.C.A, now owns 4 per cent (2008: 4 per cent) of
the shares of British American Tobacco, while the rest are owned by non-related
individuals and institutions.
ENQUIRIES
British American Tobacco Press Office
David Betteridge / Kate Matrunola / Catherine Armstrong
+44 (0) 20 7845 2888
Investor Relations
Ralph Edmondson / Rachael Brierly
+44 (0) 20 7845 1180 / 1519
25 February 2010
Sponsor: UBS South Africa (Pty) Ltd
Date: 25/02/2010 09:00:02 Produced by the JSE SENS Department.
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