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BTI
BTI
BTI - British American Tobacco p.l.c - Preliminary announcement - year ended
31 December 2010
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")
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2010
SUMMARY
2010 2009 Change
Revenue GBP14,883m GBP14,208m +5%
Profit from operations GBP4,318m GBP4,101m +5%
Adjusted profit from GBP4,984m GBP4,461m +12%
operations
Basic earnings per 145.2p 137.0p +6%
share
Adjusted diluted 175.7p 153.0p +15%
earnings per share
Dividends per share 114.2p 99.5p +15%
- Group revenue grew by 5 per cent to GBP14,883 million as
a result of the continued good pricing momentum, the
acquisition of PT Bentoel Investama Tbk made in June
2009 and the favourable impact of exchange rate
movements. Organic Group revenue (see page 1) was up 3
per cent at constant rates of exchange.
- The reported Group profit from operations was 5 per cent
higher at GBP4,318 million. Adjusted profit from
operations (see page 1) was 12 per cent higher and would
have been up 6 per cent at constant rates of exchange.
- Group volumes were 708 billion, down 2 per cent mainly
due to industry declines. However, overall market share
in the Group`s Top 40 markets increased.
- The four Global Drive Brands achieved good overall
volume growth of 7 per cent. Dunhill was up 18 per
cent, Lucky Strike 2 per cent and Pall Mall grew by 8
per cent, while Kent volumes fell 1 per cent due to
industry declines in its main markets.
- Adjusted diluted earnings per share rose by 15 per cent,
principally as a result of the growth in profit from
operations and favourable exchange movements. Basic
earnings per share were up 6 per cent at 145.2p (2009:
137.0p).
- The Board is recommending a final dividend of 81.0p,
payable on 5 May 2011. The total dividend in respect of
2010 is 114.2p, an increase of 15 per cent.
- Free cash flow increased by 23 per cent to GBP3,240
million, 92 per cent of adjusted earnings.
- Share buy-back of GBP750 million announced.
- The Chairman, Richard Burrows, commented "British
American Tobacco remains in very good shape at the end
of 2010. We have increased our competitiveness by
growing our share in key markets and improving our cost
base. There will be further global economic challenges
ahead but we can see strong opportunities for growth
too. That`s why I am confident we can continue to
deliver superior shareholder returns in 2011 and
beyond."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph 020 7845 Christina Dona/ 02020020
Edmondson/ 1180 Kate Matrunola/ 7845 2888
Maya Farhat 020 7845 Catherine Armstrong
1977
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2010
INDEX
PAGE
BUSINESS REVIEW:
Chairman`s statement 2
Chief Executive`s review 4
New Chief Executive`s review 6
Regional review 8
Dividends 13
Risk and uncertainties 14
Going concern 14
Directors` responsibility statement 14
FINANCIAL STATEMENTS:
Group income statement 15
Group statement of comprehensive income 16
Group statement of changes in equity 17
Group balance sheet 18
Group cash flow statement 20
Accounting policies and basis of preparation 21
Non-GAAP measures 22
Foreign currencies 22
Half-yearly analyses of profit 23
Segmental analyses of revenue and profit 24
Rebased regional analysis 27
Adjusting items included in profit from operations 28
Other changes in the Group 29
Net finance costs 29
Associates and joint ventures 30
Taxation 31
Earnings per share 31
Cash flow and net debt movements 33
Retirement benefit schemes 37
Litigation: Franked Investment Income Group Litigation 37
Order
Contingent liabilities and financial commitments 38
Related party disclosures 53
Resumption of share buy-back programme 53
Post balance sheet events 53
Annual Report 53
SHAREHOLDER INFORMATION:
Financial calendar 2011 54
Calendar for the final dividend 2010 54
Corporate information 54
Disclaimers 56
Distribution of announcement 56
APPENDICES
Appendix 1 - Analysis of revenue and profit from 57
operations
Appendix 2 - Key Group risk factors 58
Appendix 3 - Related party disclosures 65
NON-GAAP MEASURES
Adjusted profit from operations is derived after
excluding the adjusting items of subsidiaries (see
page 28) and associates (see page 30) from the profit
from operations.
Organic growth is the growth after adjusting for
mergers and acquisitions and discontinued activities.
Adjustments are made to current and prior year
numbers, based on the 2010 Group position.
Page 1
CHAIRMAN`S STATEMENT
This has been a good year for your company in spite of difficult trading
conditions. The global economic climate has affected consumer spending in
many parts of the world but the inherent strength of your company`s business,
with its worldwide reach to emerging and developed markets, its balanced
portfolio of brands and its consistent focus on innovation, continues to
deliver impressive results and sustained shareholder value.
Strong business performance
Reported revenue rose by 5 per cent to GBP14,883 million at current rates,
while organic revenue rose by 3 per cent at constant rates of exchange.
Adjusted profit from operations increased by 6 per cent at constant rates of
exchange and by 12 per cent to GBP4,984 million at current rates. The benefit
from the translation of our results into sterling was GBP239 million.
This resulted in adjusted diluted earnings per share growing by 15 per cent
to 175.7p.
Our regions all contributed to our very good results. However, the growth in
illicit trade in a number of markets remains a cause for concern. For
example, in Romania - one of our two main markets in our Eastern Europe
region - our market share was up but industry volumes declined significantly
due to large excise-driven price increases that led to a sharp rise in
illicit trade.
Our overall Global Drive Brand volumes grew by 7 per cent in the year and we
increased our overall market share in our Top 40 markets. Despite global
recessionary pressures, we also improved our share of the premium segment in
these markets.
Dividends
The Board has recommended a final dividend of 81.0p per share, which will be
paid on 5 May 2011 to shareholders on the register at 11 March 2011. This
takes the total dividend for the year to 114.2p, an increase of 15 per cent,
and maintains our target of paying out 65 per cent of sustainable earnings in
dividends.
Share buy-back programme
In 2009, the Board decided to suspend the share buy-back programme that
started in 2003, in order to preserve the Group`s financial flexibility
during a period of economic uncertainty. As a result, no shares were bought
back during 2009 and 2010. The Board has approved the resumption of the
programme in 2011 with a value of up to GBP750 million.
Board changes
During 2010, Kieran Poynter joined our Board as a Non-Executive Director.
And, at our forthcoming AGM, Ana-Maria Llopis will retire from the Board
after eight years of excellent service.
At the end of February 2011, Paul Adams, our Chief Executive, retires after
seven years in that role. Paul has made an immense contribution and has led
your Company to a recognised position of pre-eminence in the industry.
Nicandro Durante takes over as Chief Executive on 1 March. He is very
experienced in this industry and, as you will see in this report, he is
committed to continuing our successful strategy and driving growth.
John Daly has joined the Board as Chief Operating Officer and he also has a
lot of experience in the industry and a very good track record.
Ben Stevens, Finance Director, has been appointed as Chief Information
Officer in addition to his Finance role. This means he will have direct
responsibility for the transformation of the Group as we continue to develop
a more integrated approach to the management of the business.
To all our directors on the p.l.c. Board and the Management Board, and to all
our employees around the world, I express my thanks and appreciation for your
efforts that have made this company so successful in 2010. To Paul Adams, I
say thanks and I wish you a long and happy retirement.
Excellence in sustainability
We can be justly proud of our record of excellence in sustainability, which
helps us create wealth for our shareholders as well as creating value for our
stakeholders.
We have long had the brands and people to deliver very good results in our
key markets. During the last ten years, we have become better at
demonstrating that we are running our business responsibly and we have made a
number of important improvements that should ensure your company`s long-term
success.
Our first Social Report was published in 2002 and this year sees our tenth
publication, as our 2010 Sustainability Report is published alongside our
Annual Report at the end of March for the first time.
Chairman`s Statement cont...
Opportunities for growth
British American Tobacco remains in very good shape at the end of 2010. We
have increased our competitiveness by growing our share in key markets and
improving our cost base. There will be further global economic challenges
ahead but we can see strong opportunities for growth too. That`s why I am
confident we can continue to deliver superior shareholder returns in 2011 and
beyond.
Richard Burrows
23 February 2011
CHIEF EXECUTIVE`S REVIEW
A strong business in a tough marketplace
The strength of our companies worldwide and the success of our tried and
tested Group strategy have enabled us to achieve very good growth through a
volatile year, marked by economic uncertainty. Some emerging markets are now
showing strong economic growth and even developed markets are returning to
growth, yet unemployment remains stubbornly high in many parts of the world
and disposable incomes are still under pressure.
So it`s still a tough marketplace but our results show the true quality of
our business. Our geographic diversity and strong positions in markets that
have been least affected by the global recession continue to play a part in
our success. However, the real story is the strength of our brands, the
innovative products we bring to market and the quality of our people.
In 2010 we grew market share, we grew our leading international brands in our
most important markets and we achieved significant productivity savings that
were well ahead of our established targets. Our organic revenue in constant
currency also rose 3 per cent despite a decline in organic volume of 3 per
cent.
Our brands are strong and growing in market share
Our brands are performing well and I believe that this shows the true
vitality of the Company. Collectively, our Global Drive Brands (GDBs) -
Dunhill, Kent, Lucky Strike and Pall Mall - grew by 7 per cent, reflecting
the successful launch of product innovations in key markets and brand
migrations.
What`s pleasing is that we are growing market share where it matters most.
Our overall share in our Top 40 markets grew by 30 basis points to 25.3 per
cent - a really encouraging result.
Productivity enabling growth
Our structural cost base has seen big changes over the past couple of years
and this will continue. This is not just belt tightening, we are
reconfiguring our structural costs as a result of refining our manufacturing
footprint and developing new global systems that reduce local duplication of
effort and resources.
Productivity savings in the supply chain, general overheads and indirect
costs amounted to GBP327 million in 2010 and helped us achieve an overall
operating margin increase from 31.4 to 33.5 per cent. This means we have
achieved our GBP800 million per year productivity savings target for 2012 two
years ahead of schedule. I can see our ability to reduce costs continuing,
especially as we exploit new global systems and processes. So we`ve made good
progress on costs and there`s more to come.
Delivering sustainable growth
Our sustainability performance is also very important to us. It`s all about
creating shared value - how we can create economic value in a way that also
creates value for our stakeholders. The work we have done in this area, not
just in 2010 but over the last decade, has been recognised through external
benchmarking such as the UK`s Business in the Community Corporate
Responsibility Index and the Dow Jones Sustainability Indexes.
We have also received very good feedback on our Sustainability Reports and,
in some cases, we have surprised independent assessors, including some who
are critical of our business, with the openness and transparency of our
reporting and the way we integrate sustainability with our business
priorities and our strategy.
We continue to make progress on our sustainability agenda - not just our
impact on the environment and our people, but also the way we conduct our
operations in the marketplace and throughout our supply chain. Our focus on
the consumer means that we have continued to invest in our brands and the
development of product innovations to drive growth, while we also invest in
the longer term to ensure the business is fit to meet future challenges. This
includes having the research and development capability to support our
investigation of innovative products and our efforts to develop potentially
reduced-harm prototypes.
Chief Executive`s review cont...
Handing over
This report marks the end of an extremely enjoyable, often challenging and
always interesting seven-year period for me as Chief Executive. My successor,
Nicandro Durante, has much to look forward to. I know he will quickly make
the role his own and his drive for success will help to ensure the continued
growth of this excellent business.
I retire from the Company satisfied with the progress we have made and
confident about its future. I`m clearly going to miss it. I`m tremendously
proud of what we`ve achieved and I can only thank my colleagues in the
company - all 60,000 of them - for what we`ve achieved together. I wish them,
Nicandro and the whole business well for the future.
Paul Adams
Chief Executive
NEW CHIEF EXECUTIVE`S REVIEW
A strategy for growth
I am delighted to take on my role at a time when the opportunities for growth
continue to be strong. There`s no doubt that we have our work cut out to
match or exceed the success of the past few years, but I know that we have
the right business model, the right products and the right people, with the
strongest innovations anyone in our industry has at their disposal.
Our strategy certainly won`t change, although we may talk about it in a
slightly different way. Our business model and balanced strategy add value to
all aspects of our business and we believe this sets us apart from our
competitors. We still think that delivering growth is the key to achieving
our vision to lead the global tobacco industry. This means placing an even
greater focus on growth and ensuring that it drives everything we do. Our
growth is funded by productivity and delivered by a winning organisation that
acts responsibly at all times.
Strengthening our business
In 2010, we`ve strengthened our brands, we`ve strengthened our innovations
and we`ve increased market share. We also made good progress on our
sustainability agenda and very good progress on reducing costs.
We grew overall share in our Top 40 markets and I believe that as markets
start to come out of the recession, we are now armed with a stronger
portfolio than we had before and are ready to take advantage of further
growth opportunities. The key indicators are moving in the right direction,
demonstrating the strength of our business.
Our GDBs have grown 7 per cent overall in a declining total market and our
share of the adult smokers under 30 (ASU30) segment increased in our Top 40
markets.
This success has been driven by innovations we have introduced across the
world - such as Lucky Strike Click & Roll in the Americas and Western Europe,
and Dunhill Reloc and Kent Convertibles in Asia-Pacific.
During 2010, we saw our business improve in markets that are fundamental to
our growth strategy - such as Russia, South Korea, Canada, Mexico, Japan,
Nigeria, the GCC, France and Italy. We also announced our intention to move
from five to four regions to reduce complexity in our management structures,
achieve a better balance in the scale of our regions and to make us more
agile in our decision making.
Global outlook
Paul has explained why we are confident we have a sustainable business, but
where will the industry be in 10, 20 or even 40 years` time? Well, one thing
we have always said is that it`s not a good time to predict the long-term
future when you`re in a recession. Even so, few would disagree that the
industry looks very robust for the foreseeable future. Forecasts suggest that
the world market is likely to remain fairly stable at between 5 and 6
trillion cigarettes, more than 40 per cent of which are sold in China.
Even where we see volumes decline, we expect overall market values to grow,
due to changes in the product mix. Our consumer-led innovations will continue
to help us build our premium products and the strength of our brands.
Looking at market size in isolation, we`ve done extrapolations that cover the
next 20 years and that`s where demographics become important. Trends indicate
that individual smokers will consume fewer cigarettes each and smaller
percentages of populations will smoke.
However, with the world`s population predicted to increase to seven billion
by the end of 2012 and nine billion by the end of 2050, we expect there will
be a very sustainable and profitable tobacco industry delivering value for a
long time to come.
The World Health Organisation has forecast that there are likely to be more
smokers in the year 2050 than there are today, despite the impact of
regulation. That is certainly a plausible scenario given the demographics.
Managing risks
We have identified a core list of areas that we believe could represent a
significant risk to our business. As can be seen from our review of the Key
Group risk factors in appendix 2 to this report, we regularly monitor their
potential impact and controls are in place to ensure that, where possible,
they are carefully managed.
New Chief Executive`s review cont...
Competitive landscape
We are looking to grow our business and we believe we can meet our financial
objectives through organic growth alone. However, we continue to monitor
acquisition opportunities around the world and will participate where it
makes financial and strategic sense to do so.
Illicit trade
The illicit trade in tobacco products is a growing threat to legitimate
companies. We support the development of the World Health Organisation`s
Framework Convention on Tobacco Control (FCTC) protocol aimed at creating an
international regulatory framework for addressing illicit trade. However,
other measures from the FCTC may drive significant excise increases, retail
display bans and plain packaging, all of which could play into the hands of
organised crime by creating ideal conditions for further increases in illicit
trade.
A vision for success
Looking to 2011 and the years ahead, our ambitious vision of achieving
leadership of our industry remains as relevant as ever. We still have much to
do to deliver our vision but our strategy for growth and our increasing
competitiveness mean we are well placed to succeed.
We will continue to refresh and enhance our brand portfolio, introducing
consumer-focused innovations where appropriate. Our operational fitness will
also continue to improve, as we implement and roll-out new global systems. I
look forward to the challenges ahead and I know our people around the world
do too.
Nicandro Durante
Chief Executive (from 1 March 2011)
REGIONAL REVIEW
Group revenue grew by 5 per cent in 2010. This was the result of favourable
exchange rate movements, continued good pricing momentum and the acquisition
of PT Bentoel Internasional Investama Tbk (Bentoel) in the middle of 2009.
Organic Group revenue was up 3 per cent at constant rates of exchange.
The reported profit from operations was 5 per cent higher at GBP4,318
million, with a 12 per cent increase if adjusting items (as explained on
pages 28 and 29), are excluded. The major difference between the growth
rates of adjusted profit from operations compared to reported profit, is the
goodwill and trademark impairment write-downs in respect of Turkey, as
further described on page 29. All of the regions contributed to this good
profit result, except for Eastern Europe where there were significantly lower
industry volumes in Romania, driven by illicit trade, and an adverse exchange
rate in Uzbekistan. Adjusted profit from operations was 6 per cent higher at
constant rates of exchange, with all regions growing.
Group volumes from subsidiaries were 708 billion in 2010, down 2 per cent on
last year, despite the acquisition of Bentoel. This was a result of lower
industry volumes in some markets, mainly Turkey, Pakistan, Romania and South
Africa and an increase in illicit trade.
Overall Group market share in its Top 40 markets increased with a
particularly strong performance in the second half of 2010. However, volumes
were down 3 per cent on last year once benefits of the acquisition are
excluded.
The Global Drive Brands achieved good overall volume growth of 7 per cent
following the launch of successful innovations, and this resulted in a
continued improvement in market share. Excluding brand migrations, growth was
3 per cent.
Dunhill increased volumes by 18 per cent in 2010, mainly as a result of brand
migrations in Brazil and South Africa and strong growth in the GCC, Russia,
France, Nigeria and Indonesia. Kent was 1 per cent lower after industry
volume declines in two of its main markets, Japan and Romania, despite
growing market share in both. Volumes were up in Russia, Ukraine and
Uzbekistan.
Lucky Strike volumes were 2 per cent higher with growth in many markets,
including France, Chile and Argentina. However, this was partially offset by
declines in its main markets of Germany, Spain and Japan. Pall Mall volumes
increased by 8 per cent, with growth in Germany, Uzbekistan, Italy, Spain,
Pakistan, Nigeria and Chile, partially offset by lower volumes in Russia,
Romania, Hungary and Turkey.
Other International Brands excluding GDBs grew by 2 per cent, with good
performances by Vogue, Benson & Hedges, Craven `A`, John Player Gold Leaf and
Rothmans.
Adjusted profit from operations* at constant and current rates of exchange is
as follows:
2010 2009
Adjusted profit from Adjusted
operations*
Constant Current profit from
rates rates operations*
GBPm GBPm GBPm
Asia-Pacific 1,195 1,332 1,148
Americas 1,248 1,382 1,186
Western Europe 1,081 1,054 994
Eastern Europe 428 358 409
Africa and Middle East 793 858 724
4,745 4,984 4,461
*Adjusted profit from operations (page 15) is derived after excluding
adjusting items from profit from operations. Adjusting items include
restructuring and integration costs, amortisation of trademarks, goodwill and
trademark impairments and gains on disposal of businesses and trademarks as
explained on pages 28 and 29.
Regional review cont...
In Asia-Pacific, profit was up GBP184 million to GBP1,332 million as a result
of strong performances in Japan, Australia, New Zealand and Bangladesh.
Favourable exchange rates and the acquisition of Bentoel were also
contributing factors. At constant rates of exchange, profit would have
increased by GBP47 million, or 4 per cent. Volumes were 2 per cent higher at
188 billion, due to increases in Bangladesh and Vietnam and the additional
volumes from Bentoel, although these were partially offset by lower volumes
in Australia, Japan, Taiwan and Pakistan.
Australia achieved strong profit growth through higher pricing and continued
cost saving initiatives. Good performances from both Pall Mall and Winfield
led to an increase in market share, although an ad-hoc excise increase in May
2010 resulted in a drop in industry volumes.
In New Zealand, profit increased due to beneficial exchange rate movements
and strong growth in share by Pall Mall. However, volumes were lower,
impacted by an ad-hoc excise increase and a tax equalisation for roll-your-
own products.
Market share in Malaysia was up, as the share gained by Peter Stuyvesant and
the resilient performances by Kent and Dunhill were partially offset by the
impact of down-trading. Volumes were slightly lower due to both legal
industry volume decreases as a result of hefty excise rises and increased
illicit trade. Profit was up as a result of exchange rate movements and price
increases, partially offset by lower volumes and higher marketing investment.
Profit grew strongly in Japan, benefiting from increased margins, exchange
rate movements and lower overheads. Although industry volumes were down,
following the excise rise on 1 October 2010, market share grew. Kent returned
to share growth, driven by the successful launch of Nanotek, and Kool
continued to grow share.
Vietnam had a solid performance, with market share gains and good volume
growth, mainly due to Craven `A`.
South Korea closed the year with market share at a record high, supported by
the successful launch of Kent and the growth of Dunhill in the second half of
the year. However, volumes were lower due to the contraction of the industry.
Profit decreased as a result of lower volumes and investment into the
launches of Kent and Dunhill innovations.
Excise and inflation-led price increases in Pakistan, combined with supply
chain disruption, caused by floods, led to lower volumes and accelerated down-
trading to the low-price segment and the illicit sector. Profit was adversely
affected by the mix deterioration, increased costs and lower volumes.
Bangladesh achieved significantly higher market share. Operating profit was
higher, reflecting improved volumes and the impact of excise-led price
increases, as well as a tight control on costs.
Volumes, market share and profit in Indonesia grew through the acquisition of
Bentoel and the subsequent integration with the existing business. Profit
grew strongly on a comparable basis as a result of higher volumes, price
increases and synergy savings resulting from the integration.
In Americas, profit rose by GBP196 million to GBP1,382 million. This was
mainly due to strong performances from Canada, Brazil and Chile, an improved
product mix and exchange rate benefits. At constant rates of exchange, profit
would have risen by GBP62 million, or 5 per cent. Volumes were down 1 per
cent at 149 billion, with the small decreases experienced in Brazil and
Venezuela as a result of industry declines almost offset by higher volumes in
Canada and Chile.
Profit growth in Brazil was driven by higher pricing, an improved product mix
and a stronger local currency. Market share in the premium segment grew due
to solid performances from Lucky Strike as well as Dunhill after the
migration from Carlton. Overall market share was higher, although price
increases led to lower industry volumes.
Profit in Canada was higher, with the effect of reduced illicit trade, price
increases and exchange rate benefits more than offsetting continued down-
trading. Substantial progress was also made on the cost base. Volume grew
following a significant reduction in illicit trade due to the enforcement
activities of authorities. The Group gained leadership in all cigarette
segments in Canada, which contributed to a significant market share
improvement, driven by John Player Standard.
Regional review cont...
In Mexico, profit was higher as a result of an improved operating margin and
volume stability after many years of market decline, driven by trade-stocking
in December 2010 in anticipation of a price increase. Market share stabilised
with good performances from Pall Mall and Montana and the launch of Dunhill
in the third quarter. In Argentina, Dunhill was launched in the last quarter
of the year, and Lucky Strike showed strong volume and share growth as it
capitalised on consumers` up-trading. However, profit was impacted by lower
volumes and higher marketing investment.
Volumes increased in Chile, driven mainly by strong performances from Lucky
Strike and Pall Mall. Profit grew significantly as a result, enhanced by
price rises ahead of an excise increase, an improved product mix and lower
overheads.
Market share in Venezuela was up in a contracted market. However, price
increases did not cover the impact of currency devaluation on costs, higher
expenses and lower volumes, which resulted in a lower profit. Market share
and volumes in Colombia were maintained, although profit was slightly down.
Profit in Western Europe increased by GBP60 million to GBP1,054 million,
mainly as a result of strong performances in Germany, Belgium, Spain, Poland,
Sweden and the Netherlands, although this was partially offset by declines in
Denmark, Italy and Greece. At constant rates of exchange, profit would have
increased by GBP87 million, or 9 per cent. Regional volumes were 8 per cent
lower at 119 billion as a result of declines in Poland, Germany, Switzerland
and the Netherlands.
In Italy, an improved mix, coupled with a price increase and lower costs,
offset some of the volume decline, although profit was depressed by an
adverse exchange rate. Market share was slightly down on last year, despite
share growth of Global Drive Brands and overall share increasing over the
last quarter.
Profit in Germany increased as a result of higher margins from price
increases in 2009 and lower costs, despite the termination of the Gauloises
license agreement at the end of March. Market share was the same as last
year. On a like-for-like basis, volumes were slightly down in a contracting
market, despite an excellent performance by Pall Mall.
Volumes in France were stable, which kept profit in line with last year.
Improved pricing and lower product costs were offset by an unfavourable
product mix and marketing investment.
Profit and market share were both up strongly in Spain, driven by a
favourable pricing environment and good performances by Pall Mall and Lucky
Strike. Volumes were slightly down in a declining total market.
Profit was maintained in Switzerland, benefiting from price increases and
lower costs. Volumes were lower, impacted by industry contraction. Market
share was down although Parisienne maintained its overall share at an
historic high.
The restructuring of the commercial units of Belgium and the Netherlands into
one organisation was completed on 1 June 2010. There was a good growth in
profit as a result of higher pricing and lower costs.
Profit increased strongly in Poland as two price increases more than offset
the impact of lower industry volumes. Market share decreased despite the
strong growth of Viceroy.
In Greece, industry volume declined due to excise and VAT increases during
the first half of the year and lower consumer disposable income. Although
market share was up, volumes were slightly lower. Profit dropped
significantly due to competitor pricing and as a result of lower volumes.
Volumes and profit in Denmark were lower due to the rationalisation of
various tail brands and down-trading following two significant excise
increases.
Market share grew and volume increased in the United Kingdom, mainly as a
result of the good performance of Pall Mall, which resulted in a significant
increase in profit.
Regional review cont...
Profit in the Eastern Europe region decreased by GBP51 million to GBP358
million. This was principally due to lower volumes and the adverse impact of
exchange rates, mainly in Uzbekistan, although this was partly offset by
price increases. At constant rates of exchange, profit would have increased
by GBP19 million, or 5 per cent. Volumes at 128 billion were 2 per cent
lower, mainly due to industry declines in Romania. Market share grew in the
majority of markets and regional share was also higher.
Price increases and the improved product mix in Russia increased profit.
Market share grew, despite volumes being in line with last year. The Group
achieved leadership in the premium segment and market share leadership in
Moscow, as a result of continued excellent performances by Kent and Dunhill.
Market share in Romania was up strongly, with an impressive performance by
the market leader, Kent. Increased illicit trade due to numerous large excise-
driven price increases meant industry volumes declined significantly. The
volume decline was only partially offset by price increases, leading to a
lower profit.
In Ukraine, market share increased strongly, and excellent profit growth was
achieved as a result of an improved product mix, led by growth in Global
Drive Brands and stronger pricing. Group volumes increased.
Results improved in Kazakhstan due to higher margins. Market share was up as
a result of a strong performance by Kent and Pall Mall. The decrease of the
premium segment resulted in slightly lower volumes.
In Uzbekistan, market share grew strongly, driven by the growth of Kent and
Pall Mall. However, industry volumes were lower as a result of an excise
increase and profit was significantly impacted by adverse exchange rates.
Profit from the Africa and Middle East region grew by GBP134 million to
GBP858 million in 2010. At constant rates of exchange, profit would have
improved by GBP69 million, or 10 per cent, mainly driven by Nigeria and the
Gulf Cooperation Council (GCC). Volumes were 2 per cent lower at 124 billion,
following declines in Turkey, Iran and South Africa. However, these were
partially offset by increases in the GCC, Egypt and Nigeria.
In South Africa, market share grew following strong performances by Peter
Stuyvesant and Kent, aided by the successful migration of Courtleigh to
Dunhill. Volumes were down after an almost doubling of illicit trade.
However, the profit impact of this was mitigated by increased pricing and
cost reduction initiatives, helped by a stronger exchange rate.
Nigeria achieved strong volume growth. Coupled with higher prices and cost
reductions, this led to an impressive profit performance. A reduction in
illicit trade, rural market expansion and effective distribution across all
channels contributed to volume growth. Market share also grew strongly, with
excellent performances from Dunhill and Pall Mall.
In the GCC markets, volume, market share and share in the Premium segment
grew strongly, with Dunhill and John Player Gold Leaf the main contributors.
Profit was significantly higher, benefiting from volume growth and stronger
pricing.
In the rest of the Middle East volumes were lower although this was partially
offset by a strong performance in the Levant. Profit was lower, as a result
of a decline in volumes and higher brand investment in Levant.
An aggressive excise-driven price increase in Turkey in January 2010 led to
an almost doubling of illicit trade. Nevertheless, profit rose as price
increases, favourable exchange movements and reduced production overheads
offset the impact of lower volumes. The brand portfolio acquired in the Tekel
transaction was particularly affected by the growth in illicit trade and
competitor pricing.
In Egypt, volumes and market share continued their impressive growth trend,
despite the excise-led price increases in July. However, profit was adversely
impacted as the excise increase was only partially recovered through higher
prices. Rothmans had a good performance, expanding its leadership position
among international brands.
Regional review cont...
Results of associates
Associates principally comprise Reynolds American and ITC.
The Group`s share of the post-tax results of associates excluding the
adjusting items explained on page 30, increased by 15 per cent to GBP622
million, with a rise of 11 per cent at constant rates of exchange.
The segmental analyses of the Group`s share of the adjusted post-tax results
of associates and joint ventures are as follows:
2010 2009
Adjusted share of Adjusted
post-tax results share of
post-tax
results
Constant Current
rates rates
GBPm GBPm GBPm
Asia-Pacific 194 208 148
Americas 407 412 391
Western Europe - - -
Eastern Europe - - -
Africa and Middle 2 2 2
East
603 622 541
The contribution from Reynolds American increased by 5 per cent to GBP346
million. Excluding the impairment and amortisation of trademarks and
restructuring costs, as well as the past service credit for a health plan in
2009 and the Canadian settlement in 2010, the contribution was 5 per cent
higher at GBP409 million. At constant rates of exchange the increase was 4
per cent.
The Group`s associate in India, ITC, continued its strong profit growth and
its contribution to the Group rose by 35 per cent to GBP195 million.
Excluding the impact of the dilution in the Group`s shareholding, the
contribution was 42 per cent higher at GBP204 million. At constant rates of
exchange, the contribution would have been 33 per cent higher than last year.
Changes to our regional structure
As part of plans to reduce complexity, drive efficiency in management
structures and achieve a better balance in the scale of the regions, the
number of regions is being reduced from five to four from 1 January 2011.
Markets which currently comprise the Eastern Europe region will be merged
into the Africa and Middle East region and the Western Europe region. Russia,
Ukraine, Moldova, Belarus, Caucasus and Central Asia will form part of the
new Eastern Europe, Middle East and Africa region (EEMEA) while Romania,
Bulgaria, Serbia, Montenegro, Albania and Kosovo will become part of the
Western Europe Region. (See page 27).
Cigarette volumes
The segmental analysis of the volumes of subsidiaries is as follows:
6 months to 12 months to
30.06.10 30.06.09 31.12.10 31.12.09
bns bns bns bns
95 88 Asia-Pacific 188 185
73 74 Americas 149 151
59 63 Western Europe 119 130
58 60 Eastern Europe 128 131
63 64 Africa and Middle 124 127
East
348 349 708 724
DIVIDENDS
The Board recommends a final dividend of 81.0 pence per ordinary share of 25p
for the year ended 31 December 2010. If approved by shareholders at the
Annual General Meeting to be held on 28 April 2011, the dividend will be
payable on 5 May 2011 to shareholders registered on either the UK main
register or the South African branch register on 11 March 2011 (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 4 March 2011
Shares commence trading ex dividend (JSE): Monday 7 March 2011
Shares commence trading ex dividend (LSE): Wednesday 9 March 2011
Record date (JSE and LSE): Friday 11 March 2011
Payment date: Thursday 5 May 2011
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 = 11.54580 as at
22 February 2011 (the closing rate on that date as quoted by Bloomberg),
results in an equivalent final dividend of 935.20980 SA cents per ordinary
share. From the close of business on 4 March 2011 until the close of
business on 11 March 2011, 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 7 March 2011 and 11 March 2011, both
days inclusive.
The following is a summary of the dividends declared for the years ended 31
December 2010 and 2009:
2010 2009
Pence GBPm Pence GBPm
per per
share share
Ordinary shares
Interim
- 2010 paid 29 September 33.2 662
2010
- 2009 paid 29 September 27.9 557
2009
Final
- 2010 payable 5 May 2011 81.0 1,607
- 2009 paid 6 May 2010 71.6 1,431
114.2 2,269 99.5 1,988
In accordance with IFRS, the proposed final dividend amounting to GBP1,607
million (2009: GBP1,431 million), payable on 5 May 2011, will be recognised
in the Group accounts for the year ending 31 December 2011. For the year
ended 31 December 2010, the accounts include the final dividend paid in
respect of the year ended 31 December 2009, amounting to GBP1,431 million and
the interim dividend amounting to GBP662 million, paid on 29 September 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 2009 interim dividend, amounting to GBP557 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 2 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
- Legal and compliance
- Data risks
The key Group risks should be read in the context of the cautionary statement
regarding forward looking statements on page 56.
GOING CONCERN
A full 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, is 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
2010 Annual Report that will be available on the Group`s website, www.bat.com
on 28 March 2011.
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,
as well as the current trading activities of the Group, the Directors
consider that the Group has adequate resources to continue operating for the
foreseeable future. The Annual Report has 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 2010. 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 23
February 2011 and is signed on its behalf by:
Richard Burrows Ben Stevens
Chairman Finance Director and CIO
GROUP INCOME STATEMENT
For the year ended 31 December
2010 2009
GBPm GBPm
Gross turnover (including duty, excise and 43,855 40,713
other taxes of GBP28,972 million (2009:
GBP26,505 million))
Revenue 14,883 14,208
Raw materials and consumables used (3,695) (3,983
)
Changes in inventories of finished goods (12) 35
and work in progress
Employee benefit costs (2,550) (2,317
)
Depreciation, amortisation and impairment (897) (611)
costs
Other operating income 207 196
Other operating expenses (3,618) (3,427
)
Profit from operations 4,318 4,101
Analysed as:
- adjusted profit from operations 4,984 4,461
- restructuring and integration costs (311) (304)
- amortisation of trademarks (62) (58)
- impairment of trademarks (44) -
- goodwill impairment (249) -
- gains on disposal of businesses and - 2
trademarks
4,318 4,101
Finance income 27 77
Finance costs (507) (581)
Net finance costs (480) (504)
Share of post-tax results of associates and 550 483
joint ventures
Analysed as:
- adjusted share of post-tax results of 622 541
associates and joint ventures
- trademark amortisation and impairments (1) (65)
- health plan credit - 16
- Canadian settlements (59) -
- dilution in shareholding (9) -
- restructuring costs (3) (9)
550 483
Profit before taxation 4,388 4,080
Taxation on ordinary activities (1,248) (1,124
)
Profit for the year 3,140 2,956
Attributable to:
Owners of the parent 2,879 2,713
Non-controlling interests 261 243
3,140 2,956
Earnings per share
Basic 145.2p 137.0p
Diluted 144.4p 136.3p
The accompanying notes on pages 21 to 53 form an integral part
of this condensed consolidated financial information.
GROUP STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December
2010 2009
GBPm GBPm
Profit for the year (page 15) 3,140 2,956
Other comprehensive income
Differences on exchange
- subsidiaries 502 166
- associates 105 (258)
Differences on exchange reclassified and (3) -
reported in profit for the year
Cash flow hedges
- net fair value losses (106) (72)
- reclassified and reported in profit for the 55 67
year
- reclassified and reported in net assets 3 (1)
Available-for-sale investments
- net fair value gains 4 3
- reclassified and reported in profit for the - (3)
year
Net investment hedges
- net fair value (losses)/gains (31) 238
- differences on exchange on borrowings 74 12
Retirement benefit schemes
- net actuarial gains/(losses) in respect of 193 (295)
subsidiaries
- surplus recognition and minimum funding
obligations in respect
of subsidiaries 58 (76)
- actuarial (losses)/gains in respect of (54) 61
associates net of tax
Tax on items recognised directly in other 1 (71)
comprehensive income
Total other comprehensive income for the 801 (229)
year, net of tax
Total comprehensive income for the year, net 3,941 2,727
of tax
Attributable to:
Owners of the parent 3,664 2,476
Non-controlling interests 277 251
3,941 2,727
The accompanying notes on pages 21 to 53 form an integral
part of this condensed consolidated financial information.
GROUP STATEMENT OF CHANGES IN EQUITY
At 31 December
2010 Attributable to owners of the parent
Share Share Othe Retain Total Non- Total
capita premiu r ed attribut contr equity
l m, rese earnin able ollin GBPm
GBPm capita rves gs to g
l GBPm GBPm owners inter
redemp of ests
tion parent GBPm
and GBPm
merger
reserv
es
GBPm
Balance at 1 506 3,907 1,03 2,168 7,613 299 7,912
January 2010 2
Total 568 3,096 3,664 277 3,941
comprehensive
income for the
year (page 16)
Employee share
options
- value of 67 67 67
employee
services
- proceeds from 3 4 7 7
shares issued
Dividends and
other
appropriations
- ordinary (2,093 (2,093) (2,093)
shares )
- to non- (234) (234)
controlling
interests
Purchase of own
shares
- held in
employee share
ownership (66) (66) (66)
trusts
Non-controlling (12) (12) (12)
interests -
acquisitions
Other movements 26 26 26
Balance at 31 506 3,910 1,60 3,190 9,206 342 9,548
December 2010 0
2009 Attributable to owners of the parent
Share Share Othe Retain Total Non- Total
capita premiu r ed attribut contr equity
l m, rese earnin able ollin GBPm
GBPm capita rves gs to g
l GBPm GBPm owners inter
redemp of ests
tion parent GBPm
and GBPm
merger
reserv
es
GBPm
Balance at 1 506 3,905 955 1,578 6,944 271 7,215
January 2009
Total 77 2,399 2,476 251 2,727
comprehensive
income for the
year (page 16)
Employee share
options
- value of 61 61 61
employee
services
- proceeds from 2 5 7 7
shares issued
Dividends and
other
appropriations
- ordinary (1,798) (1,798)
shares (1,798
)
- to non- (240)
controlling (240)
interests
Purchase of own
shares
- held in
employee share
ownership (94) (94) (94)
trusts
Non-controlling 1 1
interests -
acquisitions
Non-controlling 16 16
interests -
capital
injection
Other movements 17 17 17
Balance at 31 506 3,907 1,03 2,168 7,613 299 7,912
December 2009 2
The accompanying notes on pages 21 to 53 form an integral part of the
condensed consolidated financial information.
GROUP BALANCE SHEET
At 31 December
2010 2009
GBPm GBPm
Assets
Non-current assets
Intangible assets 12,45 12,23
8 2
Property, plant and equipment 3,117 3,010
Investments in associates and joint ventures 2,666 2,521
Retirement benefit assets 122 105
Deferred tax assets 411 350
Trade and other receivables 272 171
Available-for-sale investments 29 26
Derivative financial instruments 128 93
Total non-current assets 19,20 18,50
3 8
Current assets
Inventories 3,608 3,261
Income tax receivable 73 97
Trade and other receivables 2,409 2,344
Available-for-sale investments 58 57
Derivative financial instruments 145 156
Cash and cash equivalents 2,329 2,161
8,622 8,076
Assets classified as held-for-sale 35 30
Total current assets 8,657 8,106
Total assets 27,86 26,61
0 4
The accompanying notes on pages 21 to 53 form an integral
part of this condensed consolidated financial information.
GROUP BALANCE SHEET
At 31 December
2010 2009
GBPm GBPm
Equity
Capital and reserves
Share capital 506 506
Share premium, capital redemption and merger 3,910 3,907
reserves
Other reserves 1,600 1,032
Retained earnings 3,190 2,168
Owners of the parent 9,206 7,613
after deducting
- cost of treasury shares (750) (772)
Non-controlling interests 342 299
Total equity 9,548 7,912
Liabilities
Non-current liabilities
Borrowings 8,916 9,712
Retirement benefit liabilities 770 1,129
Deferred tax liabilities 509 527
Other provisions for liabilities and charges 187 144
Trade and other payables 193 180
Derivative financial instruments 92 94
Total non-current liabilities 10,667 11,786
Current liabilities
Borrowings 1,334 1,370
Income tax payable 467 364
Other provisions for liabilities and charges 282 312
Trade and other payables 5,335 4,727
Derivative financial instruments 227 127
7,645 6,900
Liabilities directly associated with assets - 16
classified as held-for-sale
Total current liabilities 7,645 6,916
Total equity and liabilities 27,860 26,614
The financial statements on pages 21 to 53 form an integral part of
this condensed consolidated financial information
GROUP CASH FLOW STATEMENT
For the year ended 31 December
2010 2009
GBPm GBPm
Cash flows from operating activities
Cash generated from operations (page 35) 5,207 4,645
Dividends received from associates 461 328
Tax paid (1,178) (1,095)
Net cash from operating activities 4,490 3,878
Cash flows from investing activities
Interest received 59 83
Dividends received from investments 2 2
Purchases of property, plant and equipment (497) (450)
Proceeds on disposal of property, plant and 61 39
equipment
Purchases of intangibles (87) (104)
Purchases and proceeds on disposals of (1) 37
investments
Purchase of Bentoel - (370)
Purchase of Tekel cigarette assets - (12)
Proceeds from ST trademark disposals - 187
Purchases of other subsidiaries and - (1)
associates
Proceeds on disposal of subsidiaries 12 -
Net cash from investing activities (451) (589)
Cash flows from financing activities
Interest paid (578) (576)
Interest element of finance lease rental (2) (2)
payments
Capital element of finance lease rental (17) (35)
payments
Proceeds from issue of shares to owners of 3 2
the parent
Proceeds from the exercise of options over 4 5
own shares
held in employee share ownership trusts
Proceeds from increases in and new borrowings 892 1,447
Movements relating to derivative financial (179) (267)
instruments
Purchases of own shares held in employee (66) (94)
share ownership trusts
Purchase of non-controlling interests (12) -
Reductions in and repayments of borrowings (1,582) (1,853)
Dividends paid to owners of the parent (2,093) (1,798)
Dividends paid to non-controlling interests (234) (234)
Net cash from financing activities (3,864) (3,405)
Net cash flows from operating, investing and 175 (116)
financing activities
Differences on exchange 29 (125)
Increase/(decrease) in net cash and cash 204 (241)
equivalents in the year
Net cash and cash equivalents at 1 January 1,979 2,220
Net cash and cash equivalents at 31 December 2,183 1,979
The accompanying notes on pages 21 to 53 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
2010. 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 2009, with the following amendments due
to certain changes in IFRS affecting the Group. These changes are effective
from 1 January 2010:
- The revised IFRS 3 (Business Combinations) and IAS 27 (Consolidated and
Separate Financial Statements) change the accounting for business
combinations and transactions with non-controlling interests. These revised
standards are only to be applied prospectively and so there is no restatement
of transactions prior to the effective date. IFRS 3 Revised has had no impact
on the current period. IAS 27 Revised was applied to the acquisition of
certain non-controlling interests in the year with the difference between the
fair value of the consideration paid and the carrying value of the non-
controlling interest recognised directly in equity. Goodwill is no longer
recognised on acquisition of non-controlling interests where there is no
change in control.
- Also in accordance with IAS 27 Revised, losses in the current year
applicable to non-controlling interests, where their share of accumulated
losses exceed their interest in the equity of a subsidiary, are no longer
allocated to the owners of the parent except to the extent that the Group
has a binding obligation to cover the losses.
- Annual Improvements to IFRS (issued in April 2009) introduce a number of
minor changes including revised disclosures under IFRS 8. As a result of this
amendment, the Group no longer presents a measure of total assets for each
reportable segment as information on total assets and liabilities is not
reported to the chief operating decision maker.
- In addition, a number of other interpretations and revisions to existing
standards have been issued and endorsed which have had no effect on reported
profit or equity or on the disclosures in the financial statements.
The preparation of this condensed consolidated financial information 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 the condensed consolidated financial
information. 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 judgment 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 Management Board as 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 other
than in exceptional circumstances, does not adjust for the normal
transactional gains and losses in operations which are generated by movements
in exchange rates.
In the presentation of financial information, the Group also uses another
measure, organic growth, to analyse underlying business performance. Organic
growth is the growth after adjusting for mergers and acquisitions and
discontinued activities. Adjustments are made to current and prior year
numbers, based on the 2010 Group position.
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 31 and 32.
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.
The principal exchange rates used were as follows:
Average Closing
2010 2009 2010 2009
US dollar 1.546 1.566 1.566 1.615
Canadian dollar 1.592 1.779 1.556 1.693
Euro 1.166 1.123 1.167 1.126
South African rand 11.300 13.091 10.358 11.891
Brazilian real 2.719 3.108 2.599 2.815
Australian dollar 1.682 1.990 1.527 1.796
Russian rouble 46.945 49.535 47.795 48.952
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
30.6.10 31.12.10 31.12.10
GBPm GBPm GBPm
Revenue 7,298 7,585 14,883
Adjusted profit from operations
Asia-Pacific 651 681 1,332
Americas 694 688 1,382
Western Europe 548 506 1,054
Eastern Europe 124 234 358
Africa and Middle East 443 415 858
2,460 2,524 4,984
Restructuring and integration costs (158) (153) (311)
Amortisation of trademarks (31) (31) (62)
Impairment of trademarks - (44) (44)
Goodwill impairment - (249) (249)
Profit from operations 2,271 2,047 4,318
Net finance costs (231) (249) (480)
Share of post-tax results of 239 311 550
associates and joint ventures
Profit before taxation 2,279 2,109 4,388
Taxation on ordinary activities (624) (624) (1,248)
Profit for the period 1,655 1,485 3,140
Earnings per share 76.9p 68.3p 145.2p
Basic
Diluted 76.5p 67.9p 144.4p
Adjusted diluted 87.1p 88.6p 175.7p
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 2 - 2
trademarks
Profit from operations 2,111 1,990 4,101
Net finance costs (219) (285) (504)
Share of post-tax results of 231 252 483
associates and joint ventures
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 73.2p 63.8p 137.0p
Basic
Diluted 72.8p 63.5p 136.3p
Adjusted diluted 77.3p 75.7p 153.0p
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 as the chief operating and decision maker, reviews
current and prior year segmental adjusted revenue, profit from operations of
subsidiaries and adjusted post-tax results of associates and joint ventures
at constant rates of exchange. As a result, the 2010 segmental results are
translated using the 2009 average rates of exchange. The 2009 comparative
figures are also stated at the 2009 actual average rates of exchange.
The analyses of revenue for the 12 months to 31 December 2010 and 31 December
2009, based on location of sales, are as follows:
2010 2009
Revenu Revenu
e Translat e
Consta ion Curren Revenu
nt exchange t e
rates rates
GBPm GBPm GBPm GBPm
Asia-Pacific 3,448 311 3,759 3,270
Americas 3,202 296 3,498 3,156
Western Europe 3,486 (67) 3,419 3,884
Eastern Europe 1,726 (40) 1,686 1,628
Africa and Middle East 2,401 120 2,521 2,270
Total 14,26 620 14,88 14,20
3 3 8
Segmental analyses of revenue and profit cont...
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 2010,
reconciled to profit before tax, are as follows:
2010
Adjuste Adjust
d* ed* Segmen
segment segmen t
result Translat t Adjusti result
Constan ion result ng Curren
t exchange Curren items t
rates ** t rates
rates
GBPm GBPm GBPm GBPm GBPm
Asia-Pacific 1,195 137 1,332 (56) 1,276
Americas 1,248 134 1,382 (36) 1,346
Western Europe 1,081 (27) 1,054 (236) 818
Eastern Europe 428 (70) 358 - 358
Africa and Middle 793 65 858 (338) 520
East
Profit from 4,745 239 4,984 (666) 4,318
operations
Net finance costs (480)
Asia-Pacific 194 14 208 (9) 199
Americas 407 5 412 (63) 349
Africa and Middle 2 - 2 - 2
East
Share of post-tax
results of
associates and 603 19 622 (72) 550
joint ventures
Profit before 4,388
taxation
*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 28 and
30, respectively.
**Translation exchange in Eastern Europe includes exceptional transitional
exchange losses in respect of the Group`s subsidiary in Uzbekistan.
Segmental analyses of revenue and profit cont...
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
are as follows:
2009
Adjusted
* Adjust Segment
segment ing result
result items
GBPm GBPm GBPm
Asia-Pacific 1,148 (59) 1,089
Americas 1,186 (51) 1,135
Western Europe 994 (188) 806
Eastern Europe 409 (16) 393
Africa and Middle 724 (46) 678
East
Profit from 4,461 (360) 4,101
operations
Net finance costs (504)
Asia-Pacific 148 - 148
Americas 391 (58) 333
Africa and Middle 2 - 2
East
Share of post-tax
results of 541 (58) 483
associates and
joint ventures
Profit before 4,080
taxation
*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 28 and
30, respectively.
REBASED REGIONAL ANALYSIS
As part of the plans to reduce complexity and drive efficiency in our
management structures and achieve a better balance in the scale of our
regions, it was decided to reduce the management structure from five regions
to four regions from 1 January 2011. Markets which currently comprise the
Eastern European region will be merged into the Africa and Middle East region
and the Western Europe region. Russia, Ukraine, Moldova, Belarus, Caucasus
and Central Asia will form part of the new Eastern Europe, Middle East and
Africa region (EEMEA) while Romania, Bulgaria, Serbia, Montenegro, Albania
and Kosovo will become part of the Western Europe Region. The following
analysis of revenue and adjusted profit from operations is being provided as
additional information and will be the comparative information used by the
Management Board in 2011 to evaluate segment performance and allocate
resources.
2010
Revenue
GBPm
Asia-Pacific 3,759
Americas 3,498
Western Europe 3,695
Eastern Europe, Middle East and Africa 3,931
Total 14,883
2010
Adjusted*
segment Adjusti Segment
result ng result
items
GBPm GBPm GBPm
Asia-Pacific 1,332 (56) 1,276
Americas 1,382 (36) 1,346
Western Europe 1,103 (236) 867
Eastern Europe, Middle
East 1,167 (338) 829
and Africa
Profit from operations 4,984 (666) 4,318
Net finance costs (480)
Asia-Pacific 208 (9) 199
Americas 412 (63) 349
Western Europe - - -
Eastern Europe, Middle
East 2 - 2
and Africa
Share of post-tax
results of associates 622 (72) 550
and joint ventures
Profit before taxation 4,388
*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 28 and
30, 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 as memorandum information on the face of the income
statement and in the segmental analyses, 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 are included in profit from operations under the following
headings:
2010 2009
GBPm GBPm
Employee benefit costs 163 143
Impairment of tangible and intangible 100 107
assets
Other operating expenses 68 61
Other operating income (20) (7)
Total 311 304
Restructuring and integration costs in 2010 principally relate to: the
continuation of factory closure and downsizing activities in Denmark and
Australia respectively; the closure of the Jawornik factory in Poland, the
Tire factory in Turkey and the Lecce factory in Italy; a voluntary separation
scheme and closure of the printing unit in Argentina and the continued
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. These include
the combining of the Group`s businesses in Belgium, Luxembourg and the
Netherlands and charges for bringing employee benefits costs in the Group`s
subsidiary in Canada in line with the Group`s global practices. In addition,
the Group has recognised impairment charges as a result of the continued
review of its software assets in light of the development of global software
solutions.
Restructuring and integration costs in 2010 also include a payment of US$21
million to Reynolds American relating to the early termination and settlement
of all disputes at issue in respect of the Contract Manufacturing Agreement
dated 30 July 2004, as explained on page 30.
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, Tekel and Bentoel with 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.
Other operating income in 2010 includes gains from sales of surplus land and
buildings in Turkey and Croatia as well as the release of deferred income
from a disposal in 2007. In 2009, other operating income also includes gains
on property disposals and the release of deferred income from a disposal in
2007.
(b) 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 GBP62 million (2009: GBP58
million) is included in depreciation, amortisation and impairment costs in
profit from operations.
Adjusting items included in profit from operations cont...
(c) Impairment of goodwill and trademarks
Goodwill and trademarks recognised as a result of the Tekel acquisition in
2008 have been impaired by GBP249 million and GBP44 million respectively.
Turkey remains an important strategic market for the Group. Although cost
saving initiatives in the acquisition plan have been delivered successfully,
the impairment charge arises from intense pricing competition in 2010
following unforeseen and significant excise increases in Turkey during 2009
and further increases effective from January 2010, which resulted in the
growth of illicit trade and a loss of volumes and market share.
(d) Gains on disposal of businesses and trademarks
The acquisition of the cigarette and snus businesses of Skandinavisk
Tobakskompagni (ST) in 2008 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 with completion in May 2009. The total proceeds from the two packages
resulted in a gain of GBP2 million which is included in other operating
income in profit from operations for the year ended 31 December 2009.
OTHER CHANGES IN THE GROUP
a. Lyfra NV
On 7 April 2010, the Group announced that it had agreed to sell its Belgium
distribution business, Lyfra NV, to Landewyck Group S.a.r.l. The transaction
was completed on 25 June 2010 for a consideration of Euro16 million and
resulted in a gain of GBP5 million. Lyfra contributed GBP215 million to
revenue (GBP473 million for the year to 31 December 2009) and GBP1 million to
profit from operations to 25 June 2010 (GBP1 million for the year to 31
December 2009) in the Western Europe Region.
b. PT Bentoel Internasional Investama Tbk
On 17 June 2009, the Group acquired an 85 per cent stake in Indonesia`s
fourth largest cigarette maker PT Bentoel Internasional Investama Tbk
(Bentoel). A public tender offer for the remaining shares was completed on 26
August 2009, resulting in the acquisition of a further 14 per cent share in
the company, bringing the total shareholding in the Bentoel Group to 99.7 per
cent. This transaction resulted in goodwill of GBP188 million.
On 20 October 2009, it was announced that Bentoel and BAT Indonesia would
enter into a merger plan whereby BAT Indonesia would merge into Bentoel. This
was completed with an effective date of 1 January 2010. The Bentoel name has
been retained and the company remains listed on the Indonesian Stock
Exchange. As part of the merger, certain non-controlling interests were
acquired for GBP3 million and the total shareholding in the merged group is
99.14%.
NET FINANCE COSTS
Net finance costs comprise:
2010 2009
GBPm GBPm
Finance costs 507 581
Finance income (27) (77)
480 504
Comprising:
Interest payable 583 602
Interest and dividend (60) (85)
income
Fair value changes - 209 4
derivatives
Exchange differences (252) (43) (17) (13)
480 504
Net finance costs cont...
Net finance costs at GBP480 million were GBP24 million lower than last year,
principally reflecting the net impact of interest related changes in the fair
value of derivatives and reduced borrowings.
The net GBP43 million gain (2009: GBP13 million) of fair value changes and
exchange differences reflects a GBPnil position (2009: loss of GBP9 million)
from the net impact of exchange rate movements and a gain of GBP43 million
(2009: gain of GBP22 million) principally due to interest related changes in
the fair value of derivatives.
The Group targets interest cover, as calculated under its key central banking
facilities, of greater than five. For 2010 it was 11.2 times (2009: 9.9
times) with the higher cover reflecting increased profit from operations,
lower net debt and the contribution of Bentoel for the whole of 2010, offset
by an increase in finance costs as a result of the acquisition of Bentoel.
ASSOCIATES AND JOINT VENTURES
The Group`s share of the post-tax results of associates and joint ventures
increased by GBP67 million to GBP550 million after net adjusting charges of
GBP72 million (2009: GBP58 million) and after tax of GBP322 million (2009:
GBP291 million). Excluding the adjusting items, the Group`s share of the post-
tax results increased by 15 per cent to GBP622 million (2009: GBP541
million). The following adjusting items are excluded from the calculation of
adjusted diluted earnings per share (page 32).
In the year ended 31 December 2010, Reynolds American recognised a trademark
impairment charge of US$6 million as well as trademark amortisation of US$4
million. The Group`s share of these charges amounted to GBP1 million (net of
tax).
In the year ended 31 December 2010, a subsidiary of Reynolds American, R.J.
Reynolds Tobacco Company Inc. (RJRTC), entered into a comprehensive
settlement agreement with the Canadian federal, provincial and territorial
governments to resolve all the governments` civil claims related to smuggling
in Canada during the 1980s and 1990s. As part of the civil settlement, RJRTC
agreed to pay the governments CA$325 million. In a separate matter, a
subsidiary of R.J. Reynolds Tobacco Holdings Inc., Northern Brands
International Inc., entered into a plea agreement with the Ministry of the
Attorney General of Ontario. As a result of its plea to one count of
conspiracy to aid others in the sale and possession of contraband cigarettes
in the early 1990s, Northern Brands paid a fine of CA$75 million. The Group`s
share of these charges amounted to GBP59 million (net of tax).
Reynolds American also recognised restructuring charges in the year ended 31
December 2010 from the closure of one factory in August 2010 and the planned
closure of another in mid 2011. As a result of these actions, Reynolds
American has recorded charges mostly relating to asset impairment and to a
lesser extent, severance costs. The Group`s share of these charges amounted
to GBP6 million (net of tax).
In the year ended 31 December 2010, RJRTC received a payment of US$21million
as a result of the agreement to terminate early the Contract Manufacturing
Agreement dated 30 July 2004 between RJRTC and BATUS Japan Inc., a wholly
owned Group subsidiary, and settle all disputes at issue between the parties,
as explained on page 65. The Group`s share of this receipt amounted to GBP3
million (net of tax) and is treated as an adjusting item. The receipt (net of
tax) is presented as part of restructuring costs in the post-tax results of
associates and joint ventures in the Group income statement.
During the year, the Group`s interest in ITC decreased from 31.92 per cent to
31.43 per cent as a result of ITC issuing ordinary shares under the Company`s
Employee Stock Option Scheme. This dilution in the Group`s share of ITC
results in a charge of GBP9 million, which under IAS 28 Revised (Investments
in associates) is treated as a potential disposal and included in the income
statement.
Associates and joint ventures cont...
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 has an
amortisation charge of US$5 million in respect of brands. The Group`s share
of this charge 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, but
under IFRS it must be recognised in full in the income statement in 2009. 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. The Group`s share of this charge amounted to GBP9 million (net of
tax).
TAXATION
2010 2009
GBPm GBPm
UK
- adjustment in respect of prior (16) 16
periods
Overseas
- overseas tax 1,270 1,104
- adjustment in respect of prior 24 43
periods
Current tax 1,278 1,163
Deferred tax (30) (39)
1,248 1,124
The tax rates in the income statement of 28.4 per cent in 2010 and 27.5 per
cent in 2009 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 30.2 per cent in 2010 and 30.3 per cent in 2009.
EARNINGS PER SHARE
2010 2009
pence pence
Earnings per share
- basic 145.2 137.0
- diluted 144.4 136.3
Adjusted earnings per share
- basic 176.7 153.8
- diluted 175.7 153.0
Headline earnings per share
- basic 160.9 144.1
- diluted 160.0 143.3
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).
Earnings per share cont...
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 3/2009 `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 page 28) and share of post-tax results of
associates and joint ventures (see page 30). It was also affected by the
write-off of deferred tax assets of GBP35 million in respect of unutilised
losses in Turkey, which has also been treated as an adjusting item. In order
to illustrate the impact of these items, the adjusted diluted earnings per
share are shown below:
Adjusted diluted
earnings per share
2010 2009
pence pence
Unadjusted earnings per share 144.4 136.3
Effect of restructuring and 11.8 11.7
integration costs
Effect of impairment of goodwill and 11.8 -
trademarks
Effect of deferred tax asset written 1.8 -
off
Effect of amortisation of trademarks 2.3 2.1
Effect of associates` adjusting items 3.6 2.9
Adjusted diluted earnings per share 175.7 153.0
Similar types of adjustments would apply to basic earnings per share.
The earnings per share are based on:
2010 2009
Earnin Shares Earnin Shares
gs gs
GBPm GBPm GBPm GBPm
Earnings per share
- basic 2,879 1,983 2,713 1,980
- diluted 2,879 1,994 2,713 1,991
Adjusted earnings per
share
- basic 3,504 1,983 3,046 1,980
- diluted 3,504 1,994 3,046 1,991
Headline earnings per
share
- basic 3,191 1,983 2,853 1,980
- diluted 3,191 1,994 2,853 1,991
Headline earnings per share are calculated by taking the following
adjustments into account:
Diluted headline
earnings per
share
2010 2009
pence pence
Unadjusted earnings per share 144.4 136.3
Effect of impairment of intangibles and 15.6 4.3
property, plant and equipment
Effect of gains on disposal of property, - (0.2)
plant and equipment
Effect of gains on disposal of non-current (0.7) -
assets held-for-sale
Effect of gains on disposal of businesses (0.2) (0.2)
and trademarks
Effect of gains reclassified from the - (0.2)
available-for-sale reserve
Effect of share of associates` trademark and 0.4 3.3
other asset impairments
Effect of dilution in shareholding in 0.5 -
associate
Headline earnings per share 160.0 143.3
CASH FLOW AND NET DEBT MOVEMENTS
a) Alternative cash flow
The IFRS cash flow statement on page 20 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.
2010 2009
GBPm GBPm
Adjusted profit from operations before 4,984 4,461
adjusting items (page 15)
Depreciation, amortisation and impairment 442 446
Other non cash items in operating profit 59 25
Profit from operations before depreciation 5,485 4,932
and impairment
Increase in working capital (61) (100)
Net capital expenditure (523) (515)
Gross capital expenditure (584) (554)
Sale of fixed assets 61 39
Operating cash flow 4,901 4,317
Net interest paid (491) (499)
Tax paid (1,178) (1,095)
Dividends paid to non-controlling interests (234) (234)
Restructuring costs (219) (187)
Dividends from associates 461 328
Free cash flow 3,240 2,630
Dividends paid to shareholders (2,093) (1,798)
Net investment activities - (196)
Purchases of subsidiaries and non- (12) (383)
controlling interests
Disposal of subsidiaries and trademarks 12 187
Net flow from share schemes and other (77) (203)
Net cash flow 1,070 433
External movements on net debt
Exchange rate effects* (41) 672
Net debt disposed/(acquired) 11 (84)
Change in accrued interest and other (39) 28
Change in net debt 1,001 1,049
Opening net debt (8,842) (9,891)
Closing net debt (7,841) (8,842)
* Including movements in respect of debt related derivatives.
Free cash flow is the Group`s cash flow before dividends and investing
activities. Operating cash flow increased by GBP584 million or 14 per cent
to GBP4,901 million, reflecting growth in underlying operating performance.
Taking into account outflows relating to taxation, which were GBP83 million
higher than last year due to higher taxable profits, an increase in
restructuring costs due to the timing of payments and an increase in
restructuring activities, as well as an increase in inflows relating to
dividends received from associates, the Group`s free cash flow was GBP610
million or 23 per cent higher at GBP3,240 million.
The ratio of free cash flow per share to adjusted diluted earnings per share
was 92 per cent (2009: 86 per cent), with free cash flow per share increasing
by 23 per cent (2009: increasing by 2 per cent).
Cash flow and net debt movements cont...
Below free cash flow, the principal cash outflows for 2010 comprise the
payment of the prior year final dividend and the 2010 interim dividend. Also
reflected below free cash flow are cash flows in respect of investing
activities. Proceeds on disposal of subsidiaries of GBP12 million which
arose from the sale of the Group`s Belgian distribution business, Lyfra NV,
as explained on page 29, have been offset by a cash outflow of GBP12 million
arising from the acquisition of non-controlling interests in Bentoel and
subsidiaries in the Eastern Europe Region. The year ended 31 December 2009
included a net outflow of GBP382 million in respect of the purchase of
Bentoel and Tekel, net proceeds of GBP185 million from the ST trademark
disposals and GBP2 million refunded from the original purchase consideration
paid in 2008, as explained on page 35. 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 GBP1,070 million (2009:
GBP433 million inflow). After taking account of exchange rate movements, net
debt disposed, and the change in accrued interest and other, total net debt
was GBP7,841 million at 31 December 2010, down GBP1,001 million from GBP8,842
million on 31 December 2009.
b) Net debt/financing
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:
2010 2009
GBPm GBPm
Net debt due within one year:
Borrowings (1,334) (1,370)
Related derivatives (29) 33
Cash and cash equivalents 2,329 2,161
Current available-for-sale investments 58 57
1,024 881
Net debt due beyond one year:
Borrowings (8,916) (9,712)
Related derivatives 51 (11)
(8,865) (9,723)
Total net debt (7,841) (8,842)
The Group remains confident about its ability to access successfully the debt
capital markets and reviews its options on a continuing basis.
Cash flow and net debt movements cont...
c) IFRS Cash generated from operations
The cash generated from operating activities in the IFRS cash flows on page
20 include the following items:
2010 2009
GBPm GBPm
Profit from operations 4,318 4,101
Adjustments for:
Amortisation and impairment of trademarks 106 58
Amortisation and impairment of other 322 120
intangible assets
Gains on disposal of businesses and (5) (2)
trademarks
Depreciation and impairment of property, 469 433
plant and equipment
Increase in inventories (280) (125)
(Increase) / decrease in trade and other (127) 30
receivables
Increase in trade and other payables 497 174
Decrease in net retirement benefit (153) (127)
liabilities
Increase / (decrease) in provisions for 17 (38)
liabilities and charges
Other non-cash items 43 21
Cash generated from operations 5,207 4,645
d) IFRS Investing and financing activities
The investing and financing activities in the IFRS cash flows on page 20
include the following items:
The purchases and disposals of investments (which comprise available-for-sale
investments and loans and receivables) comprises a net cash outflow in
respect of current investments of GBP1 million (2009: GBP37 million inflow).
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 non-
controlling interests, together with related acquisition costs and the
acquired cash and cash equivalents and overdrafts.
The GBP12 million outflow in 2009 in respect of the acquisition of Tekel
cigarette assets reflected the final payment made at the conclusion of the
acquisition.
The cash outflow in 2009 reflected proceeds of GBP188 million from the
disposal of a small number of ST trademarks in Norway, the payment of the
related disposal costs of GBP3 million and a GBP2 million refund of the
original purchase price.
In 2009, the GBP1 million outflow from purchases of other subsidiaries and
associates principally arises from equity investments in associate companies.
The proceeds on disposal of subsidiaries in 2010 reflects the consideration
received, less cash and cash equivalents disposed of, from the sale of the
Group`s Belgian distribution business, Lyfra NV, as explained on page 29.
Cash flow and net debt movements cont...
The cash outflow of GBP12 million in 2010 for the purchases of non-
controlling interests arises from the acquisition of non-controlling
interests from shareholders who did not want to participate in the merger of
Bentoel and BAT Indonesia, as well as non-controlling interests acquired in
subsidiaries in the Eastern Europe 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) IFRS net cash and cash equivalents
The net cash and cash equivalents in the IFRS cash flows on page 20 comprise:
2010 2009
GBPm GBPm
Cash and cash equivalents per balance sheet 2,329 2,161
Accrued interest (1) (1)
Overdrafts (145) (181)
Net cash and cash equivalents 2,183 1,979
f) Liquidity
The Central Treasury Department is responsible for managing, 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.
The Group has a target, average centrally managed debt maturity, of at least
5 years with no more than 20 per cent of centrally managed debt maturing in a
single rolling year. As at 31 December 2010, the average centrally managed
debt maturity was 7.4 years (2009: 6.6 years) and the highest proportion of
centrally managed debt maturing in a single rolling year was 12.5 per cent
(2009: 18.4 per cent).
In May 2010, the Group repaid a Euro525 million bond. The repayment was
financed from debt issued in November 2009.
On 25 June 2010, the terms of Euro470 million of the Euro1 billion bond
maturing in 2011 were modified by extending the maturity to 2020; at the same
time, the Group issued an additional Euro130 million bond with a maturity of
2020. In addition, Euro413 million of the Group`s Euro750 million bond
maturing in 2012 was purchased and cancelled. At the same time, the Group
issued a new GBP275 million bond with a maturity of 2040.
During the year, the Group`s subsidiary in Brazil received proceeds of GBP410
million (2009: GBP293 million) from short-term borrowings in respect of
advance payments on leaf export contracts and repaid GBP297 million (2009:
GBP241 million) in the year.
It is Group policy that short-term sources of funds (including drawings under
the GBP1 billion euro commercial paper (ECP) programme) are backed by undrawn
committed lines of credit and cash. The ECP programme was undrawn at 31
December 2010 whereas, at 31 December 2009, GBP187 million of ECP was
outstanding.
In December 2010, the Group negotiated a new central banking facility of GBP2
billion with a final maturity date of December 2015. The facility is provided
by 22 banks. The existing central banking facility of GBP1.75 billion, with a
final maturity date of March 2012 was cancelled at the same time. The
facilities were undrawn at the end of both years.
Cash flow and net debt movements cont...
In February 2009, the Group repaid a Euro900 million bond which was financed
by bond issues during 2008 and cash generated from operations.
In May 2009, the Group repaid Malaysian ringgit (MYR) 100 million which was
refinanced in August 2009 by a new MYR250 million bond, due 2014. The
additional proceeds were used to repay MYR150 million in November 2009.
During June 2009, the Group also issued a new GBP250 million bond maturing in
June 2022.
In September 2009 and October 2009, the Group repaid its Euro359 million and
Euro759 million credit facilities used to finance the acquisition of Tekel in
2008. The Euro759 million was refinanced by a new Euro700 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 December 2010, the Euro700 million term loan facility
was partly repaid and the remaining term loan facility of Euro450 million was
extended to October 2013 with the Group able to negotiate improved pricing.
In November 2009, the terms of Euro481 million of the Euro1 billion bond
maturing in 2013 were modified by extending the maturity to 2021. At the same
time, the Group issued an additional Euro169 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.
RETIREMENT BENEFIT SCHEMES
The Group`s subsidiaries operate around 180 retirement benefit arrangements
worldwide. The majority of the scheme members belong to defined benefit
schemes, most of which are funded externally and many of which are closed to
new entrants. The Group also operates a number of defined contribution
schemes.
The present total value of funded scheme liabilities was GBP5,365 million
(2009: GBP5,250 million), while unfunded scheme liabilities amounted to
GBP337 million (2009: GBP282 million). The scheme assets increased from
GBP4,634 million in 2009 to GBP5,134 million in 2010.
After accounting for minimum funding obligations of GBP29 million (2009:
GBP75 million), excluding unrecognised scheme surpluses of GBP51 million
(2009: GBP52 million) and GBP1 million for unrecognised past service cost in
2009, the overall net liability for all pension schemes and healthcare
schemes amounted to GBP648 million at the end of 2010, down from GBP1,024
million at the end of 2009.
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 requirements.
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 26 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 (ECJ) in 2005
and a decision of the ECJ received in December 2006. In July 2008, the case
reverted to a trial in the UK High Court for the UK Court to determine how
the principles of the ECJ decision should be applied in a UK context.
The High Court judgment in November 2008 concluded, amongst many other
things, that dividends received from EU subsidiaries should be, and should
have been, exempt from UK taxation. It also concluded that certain dividends
received before 5 April 1999 from the EU and, in some limited circumstances
after 1993 from outside the EU, should have been treated as franked
investment income with the consequence that advance corporation tax need not
have been paid. Claims for the repayment of UK tax incurred where the
dividends were from the EU can be made back to 1973. The tentative conclusion
reached by the High Court would, if upheld, produce an estimated receivable
of about GBP1.2 billion for British American Tobacco.
Litigation: Franked investment income Group litigation order cont...
The case was heard by the Court of Appeal in October 2009 and the judgment
handed down on 23 February 2010. The Court of Appeal has determined that
various questions should be referred back to the ECJ 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 GBP10 million. Based on advice received, the Company believes it has
realistic prospects of success on further appeal. The Company sought leave to
appeal from the Supreme Court in the UK and the Supreme Court has agreed to
hear the appeal on time limits although no date has yet been set for the
hearing. Several questions are to be referred back to the ECJ for further
clarification.
No potential receipt has been recognised in the current year or the prior
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 Inc. 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
Contingent liabilities and financial commitments cont...
subsidiaries or otherwise to the extent related to B&W`s tobacco business as
conducted in the United States on or prior to 30 July 2004; and
- RJRT agreed to indemnify B&W and each of its associates (other than
Reynolds American Inc. 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.
Included in the US litigation section below are all significant cases where
B&W and/or a UK company is named as a defendant and all cases where RJRT is
named as a defendant as a successor to B&W (the RJRT Successor Cases). The
RJRT Successor Cases are covered by the indemnity explained above. Of the
RJRT Successor Cases, the section below includes details of all cases where
there has been an adverse judgment and also notes favourable judgments.
US litigation
The total number of US product liability cases pending at 31 December 2010
naming B&W was approximately 9,458 (2009: approximately 9,991). Of these,
6,303 cases are RJRT Successor Cases. For all of these cases, British
American Tobacco Group companies have the protection of the indemnity above.
British American Tobacco (Investments) Limited (Investments) has been served
as a codefendant in five of those cases (2009: six). No other UKbased Group
company has been served as a codefendant in any US product liability case
pending as at 31 December 2010. In 2010, there were no US product liability
cases tried to verdict against B&W. No product liability case in which a UK-
based Group company is a defendant was tried in 2010, and one case in which a
UK-based Group company is a defendant started trial in January 2011 (City of
St. Louis - see below). 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 in the 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 healthcare and welfare costs claimed to result
from illnesses associated with smoking. Although B&W continues to be a
defendant in healthcare cost recovery cases involving plaintiffs such as
hospitals and Native American tribes (see below), the vast majority of such
cases have been dismissed on legal grounds.
Further, on 23 November 1998, the major US cigarette manufacturers (including
B&W and RJRT) and the attorneys general of 46 US states and five US
territories executed the Master Settlement Agreement (MSA), which settled
medical reimbursement lawsuits that had been brought by these states and
territories. Under the terms of the MSA, the settling cigarette manufacturers
agreed, among other things, to pay approximately US$246 billion to the
settling states and territories (and to four states that reached separate
settlements of their medical reimbursement actions) over 25 years, and agreed
to various restrictions on US tobacco advertising and marketing. The MSA
includes a credit for any amounts paid by participating manufacturers in
subsequent suits brought by the states` political subdivisions.
At 31 December 2010, three US medical reimbursement suits were pending
against B&W (2009: two). One of these suits was brought by an Indian tribe in
the Indian Tribal Court in South Dakota. Another reimbursement suit (City of
St. Louis) is pending against B&W, Investments and several other
Contingent liabilities and financial commitments cont...
defendants in the state court in Missouri. In City of St. Louis, the
plaintiffs, approximately 40 public and non-profit hospitals in Missouri, are
seeking reimbursement of past and future alleged smoking-related healthcare
costs. On 26 October 2007, the plaintiffs filed a motion requesting the court
to give collateral estoppel effect to the factual findings in the US
Department of Justice case, which motion was denied on 2 June 2010. On 1
December 2009, certain defendants, including B&W and Investments, filed
additional motions for summary judgment. In a series of orders issued from
April 2010 through October 2010, the court granted summary judgment as to the
plaintiffs` claims for fraudulent misrepresentation, negligent
misrepresentation, failure to warn (whether sounding in strict liability or
negligence) and improper marketing, and entered judgment in favour of the
defendants, including B&W and Investments, on these claims. The court also
dismissed the plaintiffs` claims for prejudgment interest, future damages,
and damages allegedly arising out of exposure to environmental tobacco smoke
(ETS), thus reducing the damages claims from the US$2 billion originally
sought to approximately US$600 million. The claims remaining for trial are
product defect (whether sounding in strict liability or negligence),
restitution, civil conspiracy, aiding and abetting and punitive damages. The
trial of this case began on 31 January 2011, and is expected to last
approximately four to six months.
In another recoupment suit (National Committee to Preserve Social Security &
Medicare), the plaintiffs, two taxpayer advocacy groups and a Medicare
recipient diagnosed with lung cancer, alleged that the defendants (including
B&W) are liable for the payment of Medicare beneficiaries` medical costs for
diseases attributable to smoking, pursuant to the Medicare as Secondary Payer
Statute (MSP). On 5 March 2009, the district court in the Eastern District of
New York issued an order granting the defendants` motion to dismiss the
plaintiffs` complaint in its entirety, and denying the plaintiffs` cross
motion for summary judgment. The district court ruled that MSP plaintiffs can
only recover Medicare funds where an alleged tortfeasor`s liability has been
established prior to the plaintiffs` seeking relief under the MSP, and that
the plaintiffs in National Committee had failed to establish such liability.
The plaintiffs filed a notice of appeal to the US Court of Appeals for the
Second Circuit on 20 May 2009. On 4 February 2010, the defendants filed a
motion to dismiss the appeal. On 23 June 2010, the Second Circuit denied the
defendants` motion to dismiss the appeal. On 8 October 2010, a summary order
was entered by the Second Circuit that vacated the judgment of the district
court and remanded the case with instructions to dismiss the complaint for
lack of subject matter jurisdiction. On 22 December 2010, the district court
entered an order of dismissal for lack of subject matter jurisdiction and
directed the Clerk of Court to enter judgment in accordance with the
instructions from the Second Circuit. The Clerk of Court entered judgment in
defendants` favour on 23 December 2010.
(b) Class actions
At 31 December 2010, B&W was named as a defendant in eight (2009: eight)
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
states against individual cigarette manufacturers and their parent
corporations, alleging that the use of the terms `lights` and `ultralights`
constitutes unfair and deceptive trade practices.
The Schwab 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. After six years of
litigation, including before appellate courts, the parties on 13 July 2010
filed a stipulation of dismissal.
The Cleary class action complaint was filed in the 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, alleged 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. The plaintiffs sought disgorgement of
profits. The case was removed to the federal district court on 13 March 2009,
and the federal district court denied the plaintiffs` motion to remand the
case back to the state court via order dated 1 July 2009. On 1 February 2010,
the court granted summary judgment dismissing the plaintiffs` fraudulent
concealment claim, and permitted the plaintiffs to reinstate that claim via a
new plaintiff. The court also granted summary judgment dismissing the
plaintiffs` youth marketing claims and permitted the Marlboro Lights claim to
proceed against defendant Philip Morris. On 22 February 2010, the court
Contingent liabilities and financial commitments cont...
denied the plaintiffs` motion for class certification of all three putative
classes, but granted the plaintiffs leave to reinstate the certification
motion as to the putative class alleging the fraudulent concealment claim if
the plaintiffs identified a new plaintiff to represent that putative class.
On 18 April 2010, the plaintiffs filed a motion for leave to file a Fourth
Amended Complaint, which was granted on 22 April 2010. The Fourth Amended
Complaint alleged that all defendants fraudulently concealed facts regarding
the addictive nature of nicotine, and that defendant Philip Morris
fraudulently marketed Marlboro Lights cigarettes. The plaintiffs sought
disgorgement of profits. On 7 May 2010, the defendants filed a motion to
dismiss the plaintiffs` Fourth Amended Complaint, which motion was granted on
22 June 2010. On 20 August 2010, the plaintiffs filed a notice of appeal in
the US Court of Appeals for the Seventh Circuit. Briefing on the plaintiffs`
appeal commenced in December 2010 and is expected to conclude in February
2011.
In a medical monitoring class action brought on behalf of Louisiana smokers
(Scott) the jury returned a verdict on 28 July 2003 in favour of the
defendants on the plaintiffs` claim for medical monitoring and found that
cigarettes were not defectively designed. However, the jury also made certain
findings against the defendants on claims relating to fraud, conspiracy,
marketing to minors and smoking cessation. Notwithstanding these findings,
this portion of the trial did not determine liability as to any individual
class member or class representative. On 21 May 2004, the jury returned a
verdict in the amount of US$591 million, requiring the defendants to fund a
cessation programme to help eligible class members stop smoking. On 29
September 2004, the defendants posted a US$50 million bond, pursuant to
legislation that limits the amount of the bond to US$50 million collectively
for MSA signatories, and noticed their appeal. RJRT posted US$25 million (the
portions for RJRT and B&W) towards the bond. On 7 February 2007, the
Louisiana Court of Appeals upheld the class certification and found the
defendants responsible for funding smoking cessation for eligible class
members. The appellate court also ruled, however, that no class member who
began smoking after 1 September 1988 could receive any relief, and that only
those smokers whose claims accrued on or before 1 September 1988 would be
eligible for the smoking cessation programme. In addition, the appellate
court rejected the award of prejudgment interest, and struck eight of the
twelve components of the smoking cessation programme. The defendants`
application to the Louisiana Supreme Court for a writ of certiorari was
denied on 7 January 2008. The defendants` petition to the US Supreme Court
for a writ of certiorari was denied on 10 June 2008. On 21 July 2008, the
trial court entered an amended judgment in the case. The court found that the
defendants are jointly and severally liable for funding the cost of a court-
supervised smoking cessation program and ordered the defendants to deposit
approximately US$263 million together with interest from 30 June 2004, into a
trust for the funding of the programme. On 23 April 2010, the Louisiana Court
of Appeals amended but largely affirmed the trial court`s amended judgment.
Pursuant to the judgment, the defendants are required to deposit US$242
million with the court, with interest from 21 July 2008 until paid. In
September 2010, the defendants` application for writ of certiorari or review
by the Supreme Court of Louisiana along with the defendants` motion to stay
execution of the judgment was denied. On 24 September 2010, the US Supreme
Court granted the defendants` motion to stay the judgment pending the US
Supreme Court`s disposition of the defendants` petition for a writ of
certiorari, which was filed on 2 December 2010.
Black is a `lights` class action filed in November 2000 in the Circuit Court,
City of St. Louis, Missouri. B&W removed the case to the US District Court
for the Eastern District of Missouri on 23 September 2005. On 25 October
2005, the plaintiffs filed a motion to remand, which was granted on 17 March
2006. On 16 April 2008, the court stayed the case pending US Supreme Court
review in Good v. Altria Group, Inc. A nominal trial date of 10 January 2011
was scheduled, but trial did not proceed at that time. No new date has been
set.
Brown is a case filed in June 1997 in the Superior Court, San Diego County,
California. On 11 April 2001, the court granted in part the plaintiffs`
motion for certification of a class composed of residents of California who
smoked at least one of the defendants` cigarettes from 10 June 1993 through
23 April 2001, and who were exposed to the defendants` marketing and
advertising activities in California. The plaintiffs seek to recover
restitution, disgorgement of profits and other equitable relief under the
California Business and Professions Code. Certification was granted as to the
plaintiffs` claims that the defendants violated the section of the California
Business and Professions Code pertaining to unfair competition. The court,
however, refused to certify the class under the California Legal Remedies Act
and on the plaintiffs` common law claims. On 7 March 2005, the court granted
the defendants` motion to decertify the class. On 5 September 2006, the
California Court of Appeal affirmed the judge`s order decertifying the class.
On 1 November 2006, the plaintiffs` petition for review with the California
Supreme Court was granted. On 18 May 2009, the California Supreme Court
reversed the decision issued by the trial court and affirmed by the
California Court of Appeal that decertified the class to the extent that it
was based upon the conclusion that all class members were required to
demonstrate standing, and remanded the case to the trial court for further
proceedings regarding whether the class
Contingent liabilities and financial commitments cont...
representatives have, or can demonstrate, standing. On 10 March 2010, the
California Superior Court found that the plaintiffs` `lights` claims were not
pre-empted by the Federal Cigarette Labelling and Advertising Act, rendered
the court`s 30 September 2004 ruling on the issue no longer viable, and
denied the defendants` second motion for summary judgment. The plaintiffs
filed a tenth amended complaint on 10 September 2010. Certain defendants,
including RJRT and B&W, filed answers to the tenth amended complaint on 12
October 2010. Trial is scheduled to begin on 6 May 2011.
Howard is a `lights` class action filed in February 2000 in the Circuit
Court, Madison County, Illinois. A judge certified a class on 18 December
2001. On 6 June 2003, the trial judge issued an order staying all proceedings
pending resolution of Price v. Philip Morris, Inc., a `lights` class action
against Philip Morris, Inc. in the Illinois state court. The plaintiffs
appealed this stay order to the Illinois Fifth District Court of Appeals,
which affirmed the Circuit Court`s stay order on 19 August 2005. There is
currently no activity in the case.
Jones is a case filed in December 1998 in the Circuit Court, Jackson County,
Missouri. The defendants removed the case to the US District Court for the
Western District of Missouri on 16 February 1999. The action was brought by
tobacco product users and purchasers on behalf of all similarly situated
Missouri consumers. The plaintiffs allege that their use of the defendants`
tobacco products has caused them to become addicted to nicotine. The
plaintiffs seek to recover an unspecified amount of compensatory and punitive
damages. The case was remanded to the Circuit Court on 17 February 1999.
There has been limited activity in this case.
Parsons is a case filed in February 1998 in the Circuit Court, Ohio County,
West Virginia. The plaintiff sued asbestos manufacturers, US cigarette
manufacturers, including B&W, among other defendants, seeking to recover US$1
million in compensatory and punitive damages individually and an unspecified
amount for the class in both compensatory and punitive damages. The class was
brought on behalf of persons who allegedly have personal injury claims
arising from their exposure to respirable asbestos fibres and cigarette
smoke. The case has been stayed pending a final resolution of the plaintiffs`
motion to refer tobacco litigation to the judicial panel on multidistrict
litigation filed in In Re: Tobacco Litigation in the Supreme Court of Appeals
of West Virginia. On 26 December 2000, three defendants, Nitral Liquidators,
Inc., Desseaux Corporation of North American and Armstrong World Industries,
filed bankruptcy petitions in the US Bankruptcy Court for the District of
Delaware. Pursuant to the Bankruptcy Code, Parsons is automatically stayed
with respect to all defendants.
Young is a case filed in November 1997 in the Circuit Court, Orleans Parish,
Louisiana. The plaintiffs brought an ETS class action on behalf of all
residents of Louisiana who, though not themselves cigarette smokers, have
been exposed to second-hand smoke from cigarettes which were manufactured by
the defendants, and who allegedly suffered injury as a result of that
exposure. The plaintiffs seek to recover an unspecified amount of
compensatory and punitive damages. On 13 October 2004, the trial court stayed
this case pending the outcome of appellate review in the Scott class action
in Louisiana (discussed above).
In Engle (a case in Florida), a jury awarded a total of US$12.7 million to
three class representatives, and in a later stage of the three-phase trial
procedure adopted in this case, a jury assessed US$17.6 billion in punitive
damages against B&W. On 21 May 2003, the intermediate appellate court
reversed the trial court`s judgment and remanded the case to the trial court
with instructions to de-certify the class. On 16 July 2003, the plaintiffs
filed a motion for rehearing which was denied on 22 September 2003. On 12 May
2004, the Florida Supreme court agreed to review this case and, on 6 July
2006, it upheld the intermediate appellate court`s decision to decertify the
class and vacated the jury`s punitive damages verdict. Further, the Florida
Supreme Court permitted the judgments entered for two of the three Engle
class representatives to stand, but dismissed the judgment entered in favour
of the third Engle class representative. Finally, the Florida Supreme Court
has 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 7 August 2006, the
defendants filed a motion for rehearing before the Florida Supreme Court,
which was granted in part and denied in part, on 21 December 2006. The
Florida Supreme Court`s 21 December 2006 ruling did not amend any of the
earlier decisions` major holdings, which included decertifying the class,
vacating the punitive damages judgment, and permitting individual members of
the former class to file separate suits. Instead, the ruling addressed the
claims on which the Engle jury`s phase one verdict will be applicable to the
individual lawsuits that were permitted to stand. On 1 October 2007, the
United States Supreme Court denied the defendants` request for certiorari
review of the Florida Supreme Court`s decision.
As at 31 December 2010, B&W have been served in approximately 49 Engle
progeny cases in both state and federal courts in Florida. These cases
include approximately 105 plaintiffs. RJRT as a
Contingent liabilities and financial commitments cont...
successor to B&W are named in approximately 6,286 Engle progeny cases. The
plaintiffs` counsel included multiple plaintiffs in most of the cases filed,
so case totals have increased over the past year as Florida courts ordered
cases originally filed as multi-plaintiff actions to be severed.
In the first `phase three` trial of an individual Engle class member
(Lukacs), the jury awarded the plaintiff US$37.5 million in compensatory
damages (B&W`s share: US$8.4 million) on 11 June 2002. On 1 April 2003, the
jury award was reduced to US$25.1 million (B&W`s share: US$5.6 million) but
no final judgment was entered into because the trial court postponed the
entry of final judgment until the Engle appeal was fully resolved. The trial
court, on 14 August 2008, issued an order entering judgment for the plaintiff
that awarded US$24.8 million to the plaintiff (plus interest), for which the
defendants would be jointly and severally liable. On 17 October 2008, the
plaintiff withdrew her request for punitive damages. On 12 November 2008, the
trial court entered final judgment. On 1 December 2008, the defendants filed
a notice of appeal. On 17 March 2010, the Third District Court of Appeal
affirmed the ruling of the trial court. The defendants` motion for rehearing
and petition for rehearing en banc was denied on May 18, 2010. RJRT expensed
and paid the final judgment in the amount of approximately US$15.2 million on
18 June 2010.
As at 31 December 2010, there have been 10 additional phase three Engle
trials naming RJRT as successor to B&W, which proceeded to verdict. Of these
ten trials, three resulted in the plaintiffs` verdicts (Douglas, Putney,
Grossman). In Douglas, the jury awarded US$5 million in compensatory damages
against all defendants on 10 March 2010, allocating US$250,000 of the award
to RJRT. The defendants filed notice of appeal on 28 June 2010. On 29 June
2010, RJRT posted a supersedeas bond in the amount of US$250,000. In Putney,
the jury awarded US$15,086,688 in compensatory damages and US$5 million in
punitive damages on 26 April 2010, allocating US$4,526,000 in compensatory
damages and US$2.5 million in punitive damages to RJRT. The defendants filed
a notice of appeal on 30 August 2010, and the plaintiff filed a notice of
cross appeal on 31 August 2010. On 20 December 2010, RJRT posted a
supersedeas bond in the amount of US$2,372,765. In Grossman, the jury awarded
US$1,934,727 in compensatory damages on 29 April 2010, allocating US$483,682
to RJRT. The defendants filed a notice of appeal on 14 July 2010. The
plaintiff filed a notice of cross appeal on 19 July 2010. On 19 July 2010,
RJRT posted a supersedeas bond in the amount of US$483,682.
In June 2009, the Florida legislature amended its existing bond cap statute
by adding a US$200 million bond cap that applies to all phase three Engle
cases in the aggregate, and establishes individual bond caps for individual
cases in amounts that vary depending on the number of judgments in effect at
a given time. In the absence of further legislative action, this bond cap
will remain in effect until 31 December 2012.
(c) Individual cases
Approximately 3,161 cases were pending against B&W at 31 December 2010 (2009:
3,191) 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
ETS. Of these cases, approximately: (a) 2,590 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) 429 of the individual cases against B&W are cases brought in
consolidated proceedings in West Virginia, where the first phase of the trial
is scheduled to begin on 17 October 2011; (c) 49 are Engle progeny cases that
have been filed directly against B&W, and (d) 93 are cases filed by other
individuals (76 of which name B&W and 17 of which name RJRT as successor to
B&W). As mentioned above there are a further 6,286 Engle progeny cases which
name RJRT as successor to B&W. These cases are subject to the indemnity set
out above and are not detailed here.
There were three individual cases that resulted in verdicts against B&W and
which remained on appeal during 2010 (not including Lukacs, see above):
In December 2003, a New York jury (Frankson) awarded US$350,000 in
compensatory damages against B&W and two industry organisations. In January
2004, the same jury awarded US$20 million in punitive damages. On 22 June
2004, the trial judge granted a new trial unless the parties agreed to an
increase in compensatory damages to US$500,000 and a decrease in punitive
damages to US$5 million, of which US$4 million would be awarded against B&W.
The plaintiff agreed to a decrease in punitive damages, but B&W has not
agreed to an increase in compensatory damages. On 25 January 2005, B&W
appealed to an intermediate New York State appellate court. Oral argument was
heard on 8 May 2006. The appellate court affirmed the judgment on 5 July
2006, except insofar as it dismissed the plaintiff`s design defect claims.
B&W filed a motion for leave to reargue, or in the alternative, for leave to
appeal to the New York Court of Appeals, on 3 August 2006. The intermediate
appellate court denied this motion on 5 October 2006. On 8 December 2006, the
trial judge granted the plaintiff`s
Contingent liabilities and financial commitments cont...
application for entry of judgment in the amounts of US$5 million in punitive
damages and US$175,000 in compensatory damages. The trial court also granted
the plaintiff`s motion to vacate that part of the 2004 order granting a new
trial unless the parties agreed to an increase in compensatory damages to
US$500,000. RJRT posted a bond in the approximate amount of US$8.018 million
on 3 July 2007. B&W appealed from final judgment on 3 July 2007 to an
intermediate New York State appellate court. Oral argument was heard on 28
January 2009. On 29 September 2009, the appellate court issued a decision
modifying the final judgment by deleting the award of punitive damages, and
remanding the case to the trial court for a new trial on the issue of
punitive damages. On 22 December 2009, the plaintiff requested an extension
of time to move for leave to appeal to the New York Court of Appeals, and for
leave to reargue the case to the appellate court. On 15 January 2010, the
appellate court denied the plaintiff`s motion for additional time to seek
leave to appeal to the New York Court of Appeals, but granted the plaintiff
more time to file a motion for leave to reargue to the appellate court. The
plaintiff`s motion for leave to reargue was denied by the appellate court on
12 March 2010. As at 31 December 2010, no date has been set for a new trial
on the issue of punitive damages.
On 1 February 2005, a Missouri jury (Lincoln Smith) awarded US$500,000 in
compensatory damages against B&W and then, on 2 February 2005, awarded US$20
million in punitive damages, also against B&W. On 1 June 2005, B&W filed its
notice of appeal. Oral argument was heard on 31 August 2006. On 31 July 2007,
an intermediate Missouri appellate court affirmed the compensatory damages
award, but it reversed the punitive damages award, reasoning that the
plaintiffs failed to produce sufficient evidence to justify the verdict. The
majority of the court would have remanded the case for a second trial,
limited to punitive damages, but a dissenting judge transferred the case to
the Missouri Supreme Court, as permitted by Missouri law. Oral argument was
heard by the Missouri Supreme Court on 13 February 2008. On 31 July 2008, the
Missouri Supreme Court transferred the case back to the intermediate
appellate court for further proceedings. In a decision entered on 16 December
2008, the intermediate appellate court again upheld the award of compensatory
damages and reversed the jury`s award of US$20 million in punitive damages,
sending the case back to the trial court for a new trial on punitive damages.
Following a new trial, on 20 August 2009, a Missouri jury returned a verdict
awarding US$1.5 million 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. On the same date, the plaintiffs filed a motion
for additur, asking the court to increase the amount of punitive damages from
US$1.5 million to US$20 million, and a motion to vacate, modify or set aside
judgment, or in the alternative, for a new trial. On 21 December 2009, the
court denied the plaintiffs` and B&W`s post-trial motions. On 30 December
2009, B&W filed a notice of appeal. On 31 December 2009, the plaintiffs filed
a notice of appeal. Both appeals remain pending.
On 18 March 2005, a New York jury (Rose) awarded US$1.7 million in
compensatory damages against B&W. On 18 August 2005, B&W filed its notice of
appeal. RJRT posted a bond in the approximate amount of US$2.058 million on 7
February 2006. Oral argument on this appeal was heard on 12 December 2006 by
an intermediate New York appellate court. On 10 April 2008, the appellate
court reversed the judgment in the plaintiff`s favour and ordered that the
case be dismissed. On 8 May 2008, the plaintiff filed a notice of appeal to
New York`s Court of Appeals. On 16 December 2008, the New York Court of
Appeals affirmed the decision of the appellate court dismissing the
plaintiff`s complaint. On 14 January 2009, the plaintiff filed a motion
seeking leave to reargue the 16 December 2008 decision and order of the New
York Court of Appeals, which was denied by an order dated 26 March 2009. The
plaintiff filed a petition for a writ of certiorari in the US Supreme Court
in June 2009, 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 by Imasco
Limited`s subsidiary, Imasco Enterprises, Inc., in 1986 and became a Group
subsidiary following the restructuring of Imasco Limited (now Imperial
Tobacco Canada Limited (Imperial), the Group`s operating company in Canada)
in 2000. Soon after this acquisition, and as part of the acquisition plan,
Genstar Corporation 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 authorised the payment of a
dividend of US$170.2 million in 1986 and a further dividend of US$355 million
in 1987. In 2003, Imperial`s subsidiary, Genstar Pacific Corporation,
divested Flintkote and then, in 2004, Flintkote filed for bankruptcy in the
United States Bankruptcy Court for the District of Delaware. In 2006,
Flintkote, representatives of both the present and future asbestos claimants,
and individual asbestos claimants were permitted by the bankruptcy court to
file a complaint against Imperial and numerous other defendants including
Sullivan & Cromwell LLP, for the recovery of the dividends, plus interest,
and other compensation under various legal and equitable theories, including
seeking a
Contingent liabilities and financial commitments cont...
determination that Imperial is Flintkote`s `alter ego` and is responsible for
all of Flintkote`s asbestos tort liabilities. Sullivan & Cromwell LLP and
Imperial have since filed cross complaints against each other. The parties
are presently engaged in case management discussions to establish the scope
and manner of discovery in this case. Although the Flintkote litigation is at
a preliminary stage, the judge has stated an intention to determine several
discrete issues for resolution in a series of bifurcated bench trials in an
effort to simplify or clarify the determinative issues in the litigation. The
first issue is whether Flintkote`s claim for malpractice against Sullivan &
Cromwell LLP is time barred. On 31 January 2011, the court entered a
preliminary ruling stating that the complaint was time barred and that
Sullivan & Cromwell LLP is entitled to dismissal. The second issue involves
an enquiry into the two dividends and the circumstances surrounding them,
including issues involving fraudulent conveyance. Certain legal issues
regarding fraudulent conveyance were briefed and, at hearings held on 22
December 2010 and 2 February 2011, the court further refined the list of
issues involving fraudulent conveyance. In addition, two other issues have
emerged: (1) whether Flintkote or certain asbestos tort claimants are able to
pursue `alter ego` claims against imperial, and (2) whether Flintkote should
be judicially estopped from asserting certain fraudulent conveyance remedies
in light of prior inconsistent statements it made during the course of the
litigation. While it is expected that bench trials on all of these issues
will occur in 2011, it is unclear when the court might rule on the issues.
In Wisconsin, the authorities have identified potentially responsible parties
(PRPs) to fund the clean up of river sediments in the lower Fox River,
Wisconsin. The pollution was caused by discharges of PCBs from paper mills
and other facilities operating close to the river. The cost of the clean up
work has been estimated to be in excess of US$900 million. Among the
potentially responsible parties are NCR Corporation (NCR) and Appleton Papers
Inc. (Appleton) who are liable for the clean up costs in a large portion of
the river under the terms of a consent decree. In 1978, Industries purchased
what was then NCR`s Appleton Papers Division from NCR. In 1978, Industries
also incorporated a US entity by the name of BATUS, Inc. (BATUS), which in
1980 became the holding company for all of Industries` US subsidiaries,
including Appleton. As the holding company, BATUS obtained insurance policies
for itself and its subsidiaries that included coverage for certain
environmental liabilities. Industries/BATUS spun off the Appleton business in
1990 to Wiggins Teape Appleton p.l.c. and Wiggins Teape Appleton (Holdings)
p.l.c., now known as Arjo Wiggins Appleton Ltd. and Arjo Wiggins US Holdings
Ltd. (collectively, the AWA Entities), obtaining full indemnities from AWA
Entities for past and future environmental claims. Disputes between NCR,
Appleton, the AWA Entities, and Industries as to the indemnities given and
received under the purchase agreement in 1978 have been the subject of
arbitrations in 1998 and 2006. Under the terms of the arbitration awards,
Industries and Appleton/the AWA Entities have an obligation to share the
costs of environmental claims with NCR (60:40), but Industries has never been
required to pay any sums in this regard because Appleton and the AWA Entities
have paid the nonNCR (60 per cent) share of the cleanup costs to date, and
the authorities have not identified Industries or BATUS as PRPs. However,
there is a risk for Industries that Appleton and the AWA Entities will
exhaust the recoverable insurance policies prior to the completion of the
mandated cleanup work and that Appleton and the AWA Entities will not have
sufficient assets of their own to pay the cleanup obligations, leaving
Industries with the responsibility to pay the nonNCR share of the remaining
cleanup costs. There is a further risk that the cleanup costs for the project
will increase beyond current estimates.
UK-based Group companies
Investments has been served in the following US cases pending at 31 December
2010: a medical reimbursement case, City of St. Louis, and Cleary, a class
action (see above under medical reimbursement cases and class actions
respectively); the US Department of Justice case (see below); an anti-trust
case, Daric Smith (see below); and two individual actions, Eiser and Perry,
which are currently dormant. No other UKbased Group company has been served
in a US product liability case pending as at 31 December 2010.
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 RJRT, B&W, Industries and Investments. Industries was
dismissed for lack of personal jurisdiction on 28 September 2000. The
government sought to recover federal funds expended in providing healthcare
to smokers who have developed diseases and injuries alleged to be smoking-
related, and, in addition, sought, pursuant to RICO, disgorgement of profits
the government contends were earned as a consequence of a RICO `enterprise`.
On 28 September 2000, the district court dismissed the portion of the claim
which sought recovery of federal funds expended in providing healthcare to
smokers who have developed diseases and injuries alleged to be smoking-
related. The non-jury trial of the RICO portion of the claim began on
Contingent liabilities and financial commitments cont...
21 September 2004, and ended on 9 June 2005. On 17 November 2004, the US
Court of Appeals for the DC Circuit heard an appeal by the defendants against
an earlier district court decision that disgorgement of profits is an
appropriate remedy for the RICO violations alleged by the government. On 4
February 2005, the DC Circuit allowed the appeal, ruling that the government
could not claim disgorgement of profits. On 17 October 2005, the US Supreme
Court declined to hear the appeal by the US government in respect of the
claim for disgorgement of US$280 billion of past profits from the defendants.
On 17 August 2006, the district court issued its final judgment, consisting
of some 1,600 pages of factual findings and legal conclusions. The court
found 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.
Compliance with the court-ordered remedies may cost RJRT and Investments
millions of dollars, although remedial compliance has been stayed over the
last several years pending appellate review. In addition, the government is
seeking the recovery of roughly US$1.9 million (plus accruable interest) in
litigation costs, with RJRT having already paid approximately US$780,000 in
costs on behalf of itself and B&W. Investments filed a praecipe with the
district court on 28 September 2010 stating that it is not yet obligated to
pay costs inasmuch as there has not been final resolution of all appeals in
this matter (including the extraterritorial reach, if any, of the RICO
statute based on an intervening change in law).
On 10 August 2007, the defendants filed their initial appellate briefs to the
Court of Appeals for the DC Circuit. All defendants filed a joint appellate
brief, and Investments also filed its own brief which raised the issue of
whether Congress intended for RICO to apply to extraterritorial conduct by a
foreign defendant. On 19 November 2007, the government filed its opposition
and cross-appeal brief, seeking to reinstate certain remedial relief,
including its disgorgement claims. On 22 May 2009, a three-judge appellate
panel unanimously affirmed the district court`s RICO liability judgment
against Investments, Altria, Philip Morris, RJRT and Lorillard, ordered the
dismissal of CTR and TI (two defunct US trade associations that were not
covered by the district court`s injunctive remedies), and remanded for
further factual findings and clarification as to whether liability should be
imposed against B&W, based on changes in the nature of B&W`s business
operations. The panel also remanded on four discrete issues relating to the
remedies, including for the district court "to reformulate" the injunction on
the use of low-tar descriptors "to exempt foreign activities that have no
substantial, direct, and foreseeable domestic effects". 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 rehearing en banc were filed on 31 July 2009 and was
denied on 22 September 2009 by the DC Circuit.
On 19 February 2010, the defendants and the government filed certiorari
petitions with the US Supreme Court. On 28 June 2010, the US Supreme Court
declined to grant certiorari on all petitions. On 23 July 2010, Investments
filed a petition for rehearing before the US Supreme Court, on the basis of
an intervening decision by the High Court that invalidated the "effects" test
the district court and DC Circuit both used in concluding that the RICO
statute applied to Investments` foreign conduct. The US Supreme Court denied
Investments` rehearing petition on 3 September 2010.
On 7 July 2010, the DC Circuit issued its remand returning the case to the
district court for further proceedings. On 22 December 2010, the district
court ordered, among other things, that B&W is no longer a defendant and is
therefore not subject to the court`s injunction. On 28 December 2010, the
government filed a motion to compel Investments` compliance with the district
court`s 17 August 2006 order. Investments` opposition to the government`s
motion to compel compliance along with Investments` motion for
reconsideration of the liability judgment against it on the basis of an
intervening change in controlling law was filed on 21 January 2011.
In the Daric Smith case, purchasers of cigarettes in the State of Kansas
brought a class action in the Kansas State Court against B&W, Investments and
certain other tobacco companies seeking injunctive relief, treble damages,
interest and costs. The allegations are that the 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. Following a hearing on 8 December 2008 on the plaintiff`s motion to
compel Investments to produce documents, Investments identified relevant
documents for discovery and Judge Smith (now retired) issued an order
compelling disclosure of all of Investments` documents without an in camera
review. On 15 October 2009, Investments filed a motion for reconsideration of
Judge Smith`s order. A decision on this is awaited. Following the appointment
of a new judge, in October and November 2010, all defendants moved for
summary judgment. Those motions have not yet been fully briefed.
Contingent liabilities and financial commitments cont...
Product liability outside the United States
At 31 December 2010, active claims against the Group`s companies existed in
22 markets outside the US (2009: 22) but the only markets with more than five
claims were Argentina, Brazil, Canada, Chile, Italy, Nigeria, and the
Republic of Ireland (2009: five). Medical Reimbursement actions are being
brought in Canada, Argentina, Brazil, Colombia, Israel, Nigeria, Saudi Arabia
and Spain.
(a) Medical reimbursement cases
Brazil
In August 2007, the Sao Paulo Public Prosecutors office filed a medical
reimbursement claim against Souza Cruz. A similar claim was lodged against
Philip Morris. Souza Cruz`s motion to consolidate the two claims was rejected
and instead this case was removed to a different lower court. Souza Cruz
filed a motion to reconsider the refusal for consolidation and an
interlocutory appeal against assignment to the lower court. At the same time,
the Public Prosecutor filed a motion challenging the connection between the
two cases, which argument the State Court of Appeals accepted in August 2010
and ordered the two cases to progress independently. Souza Cruz subsequently
filed a motion for clarification opposing the ruling, which is now pending
review with the reporting justice. The lower court proceedings against Souza
Cruz are expected to resume in due course.
Canada
In Canada there are three statutory actions for recovery of healthcare costs
arising from the treatment of smoking and health related diseases. These
proceedings name various group companies. Legislation enabling provincial
governments to recover the healthcare costs has been enacted in British
Columbia, New Brunswick, Ontario and Quebec. Actions have begun against
various Group companies in British Columbia, New Brunswick and Ontario. In
Quebec, the Group companies are challenging the legislation, and the Quebec
has not filed its own action. Newfoundland is in the process of referring
legislation to the Newfoundland Court of Appeals. Similar legislation has
also been passed and is also being considered by other Canadian provinces.
The government 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 the
plaintiff`s costs of health care benefits. Imperial, Investments, Industries
and other former Rothmans Group companies are named as defendants. The
constitutionality of the Recovery Act was challenged by certain defendants
and, on 5 June 2003, the British Columbia Supreme Court found the Recovery
Act to be beyond the competence of the British Columbia legislature and,
accordingly, dismissed the government`s claim. The government appealed the
decision to the British Columbia Court of Appeal which, on 20 May 2004,
overturned the lower court`s decision and declared the Recovery Act to be
constitutionally valid. The defendants appealed to the Supreme Court of
Canada in June and the court gave its judgment in September 2005 dismissing
the appeals and declaring the Act to be constitutionally valid.
The federal government was enjoined by a Third Party Notice, and presented a
Motion to Strike the claim out. The hearing took place during the week of 3
March 2008 and the court found in favour of the federal government. The
defendants appealed that decision and the hearing was held during the week of
1 June 2009. On 8 December 2009, the British Columbia Court of Appeal handed
down its decision in both this case and the Knight class action. This appeal
was granted in part. The Court of Appeal held that it was not "plain and
obvious" that the federal government did not owe a duty of care to tobacco
manufacturers or consumers when it implemented its tobacco control strategy.
On 8 February 2010, the federal government sought leave to appeal this
decision to the Supreme Court of Canada. On 10 March, the defendant filed
response materials and a cross appeal. The government of British Columbia
sought leave to oppose the defendants` cross appeal in part. On 20 May, the
Supreme Court of Canada granted leave to appeal both in respect of the
federal government`s application and the defendants` conditional cross
applications. The appeal is scheduled to be heard on 24 February 2011.
The underlying medical reimbursement action remains at a preliminary case
management stage. Damages have not yet been quantified by the plaintiff.
Given the Supreme Court application, and a number of other factors including
delay on the part of the plaintiff in producing his damages modelling
materials, the trial date has been postponed.
Non-Canadian defendants challenged the personal jurisdiction of the British
Columbia Court and those motions were heard in the Supreme Court of British
Columbia. On 23 June 2005, the court dismissed all defendants` motions,
finding that there is a "real and substantial connection" between British
Contingent liabilities and financial commitments cont...
Columbia and the foreign defendants. Subsequently, the defendants were
granted leave to appeal that ruling to the Court of Appeal of British
Columbia. The appeal was dismissed on 15 September 2006. The defendants filed
leave to appeal to the Supreme Court on 10 November 2006, and that
application was denied on 5 April 2007.
The government of New Brunswick has brought a medical reimbursement claim
against domestic and foreign tobacco "manufacturers", pursuant to the
provisions of the Recovery Act passed in that Province in June 2006. The
Company, Investments, Industries, Imperial and Carreras Rothmans Limited (the
UK Companies) have all been named as defendants. The government filed a
statement of claim on 13 March 2008. The Group defendants were served with
the Notice of Action and Statement of Claim on 2 June 2008. A case management
conference was held on 8 January 2009 so that other defendants could
challenge the use of a contingent fee arrangement (CFA) for the plaintiff`s
lawyer. This challenge was refused at first instance. Leave to appeal was
granted on limited grounds. These grounds, upon which leave was denied, were
appealed directly to the Supreme Court of Canada. On May 13, 2010, the New
Brunswick Court of Appeal dismissed Imperial`s appeal. The Supreme Court of
Canada subsequently denied leave on all aspects of the CFA challenge, thus
ending this preliminary challenge. The appeal was dismissed and an
application to appeal to the Supreme Court was denied on 21 October 2010. The
UK Companies have challenged the court`s jurisdiction and in November 2010
all four challenges were refused. Appeals are ongoing. No damages have yet
been quantified by the plaintiff.
The government of the Province of Ontario has also filed a C$50 billion
medical reimbursement claim against domestic and foreign tobacco
"manufacturers", pursuant to the provisions of the Tobacco Damages and Health
Care Costs Recovery Act 2009. The UK Companies have all been named as
defendants. Imperial was served on 30 September 2009 and the UK Companies
were served on 8 October 2009. A case management judge has been appointed and
the jurisdiction motions filed by the UK Companies will be heard first. The
hearing is scheduled for April 2011.
Colombia
British American Tobacco (South America) Limited (BAT South America) was
served on 18 July 2008 in a public interest action that has a medical
reimbursement 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 being sought, the plaintiffs are seeking 25 per cent of smoking-
related healthcare costs since the time that British American Tobacco has
been operating in Colombia. Thereafter, the plaintiffs also request that the
company contribute US$50 million a year to a fund. BAT South America
initially filed preliminary objections to the action, with a view to joining
the claim with another class action, the Sandra Florez action (which made
substantially similar allegations and sought similar relief). However, as the
Florez case was decided in BAT South America`s favour in September 2009, BAT
South America will submit a full defence in due course.
Israel
In Israel, a medical reimbursement claim was brought against Industries, B&W,
Investments and B.A.T (U.K. and Export) Limited (BATUKE), amongst others, by
Clalit Health Services. The plaintiff claims damages of NIS 7.6 billion and
seeks injunctive relief. On 29 March 2005, B&W, Investments and BATUKE argued
for leave to appeal the denial of their application to dismiss the action on
the grounds of remoteness and a decision from the Supreme Court on this issue
is still awaited.
Nigeria
Health care recoupment actions have also been brought by five Nigerian states
(Lagos, Kano, Gombe, Oyo, Ogun) and by the federal government of Nigeria,
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 (BAT Nigeria) has been
named as a defendant in each of the cases; the Company and Investments have
been named as defendants in six of the cases.
As at 31 December 2010, the actions that had been filed by the Attorneys-
General of Ondo State and of Ekiti State were voluntarily discontinued by the
plaintiffs without prejudice to re-file on 5 October 2009 and 18 June 2009,
respectively. The action filed by the Attorney-General of Akwa Ibom State was
struck out without prejudice for lack of prosecution on 19 October 2009.
On 21 February 2008, the Lagos action was voluntarily discontinued by the
plaintiffs. On 13 March 2008, the Lagos Attorney General filed a
substantially similar action which was marked as `qualified` under Lagos
State`s `Fast-Track` system. The `Fast-Track` system provides for resolution
of the dispute within an eight-month time-period after filing. BAT Nigeria,
the Company and Investments
Contingent liabilities and financial commitments cont...
have all been served in the new action, and have filed preliminary
objections. At a hearing on 16 September 2008, because service was yet to be
completed on all defendants, the court directed that the case no longer
qualified to be heard on the `Fast Track`. On 18 September 2009, the court
issued a ruling denying the preliminary objections filed by the Company and
Investments on the basis that the court was competent to hear the case as it
related to those defendants, that the Company and Investments are necessary
parties to the action and that the suit therefore was not liable to be struck
out as against those defendants. On 2 October 2009, the Company and
Investments filed notices of appeal from the entirety of the court`s ruling
as it related to their respective objections. On 15 October and 19 October
2009, respectively, the Company and Investments filed motions to stay all
proceedings pending the resolution of their appeals, which motion was granted
by the High Court on 20 September 2010. On 26 November 2010, the Lagos
Attorney General filed a motion for leave to appeal the High Court`s order
granting a stay, which motion remains pending before the Court of Appeal.
On 8 July 2008, the High Court of Gombe State issued a ruling on the
preliminary objections filed by the Company, Investments and other defendants
in the case, setting aside the service on all defendants and striking out the
Gombe suit. In its decision, the court held that the writs served on the
defendants were invalid, the plaintiff had failed to pay the requisite filing
fees, and that based on these filing defects, the court was not competent to
assume jurisdiction. The court also stated, however, that the plaintiff,
through its statement of claim and affidavit evidence filed in support of its
ex parte motion for leave to serve outside the jurisdiction, had satisfied
the requirements for service outside the jurisdiction. Although the plaintiff
has not appealed from the court`s decision, the plaintiff has filed a renewed
action in the High Court of Gombe State. BAT Nigeria, the Company and
Investments have filed notices of preliminary objection in the renewed
action. On 16 December 2010, the Gombe High Court heard argument on the
defendants` service and jurisdictional objections.
In the Oyo State case the British American Tobacco companies filed
preliminary objections. These were partially granted on 22 June 2010 and
service was set aside. The issuance of the writ was, however, not set aside
and the Company and Investments are appealing this decision based on their
jurisdictional objections. As at 31 December 2010, the appeals remain
pending, and the plaintiff has not re-served the writ on the British American
Tobacco defendants.
In Kano, the preliminary objections filed by the Company and Investments were
dismissed on 16 April 2010. The Company and Investments have appealed the
decision and sought a stay of proceedings. On 13 May 2010, the plaintiff
filed a motion for preliminary injunction which seeks inter alia to prevent
the defendants from marketing tobacco products or causing them to be sold to
underage purchasers or near any primary or secondary school in Kano State. At
a hearing on 8 December 2010 the court heard argument concerning the order in
which the stay application, injunction motion, and other pending matters will
be heard, and adjourned to 20 January 2011 for ruling. On 20 January 2011,
the court ruled that it would first hear Nigeria`s preliminary objections to
the court`s jurisdiction, and subsequently would hear the defendants` stay
applications together with the plaintiff`s injunction motion, and adjourned
to 22 February 2011 for a hearing on BAT Nigeria`s objections.
In Ogun, preliminary objections were filed by BAT Nigeria, the Company and
Investments, but were rejected by the court on 20 May 2010. All three British
American Tobacco defendants have filed appeals. On 24 May 2010, the plaintiff
filed a motion for preliminary injunction which seeks inter alia to prevent
the defendants from marketing tobacco products or causing them to be sold to
underage purchasers or near any primary or secondary school in Ogun State. On
15 and 19 October 2010, the Company and Investments, respectively, filed
motions in the Court of Appeal for a stay of proceedings pending their
appeals. On 21 October 2010, the High Court adjourned proceedings without
date pending resolution of the stay motions. As at 31 December 2010, the
stay motions remain pending before the Court of Appeal and a hearing is
scheduled for 31 March 2011.
Saudi Arabia
In Saudi Arabia, in 2007, there were reports that the Ministry of Health was
pursuing a healthcare recoupment action in the Riyadh General Court against a
number of distributors and agents. As at 31 December 2010, no Group company
has been served with process. The Ministry of Health is reportedly seeking
damages of at least 127 billion Saudi Riyals. Hearings take place on average
every six months.
In addition, a separate medical reimbursement action has reportedly been
filed by the King Faisal Specialist Hospital in the Riyadh General Court,
naming `BAT Company Limited` as a defendant. As at 31 December 2010, no Group
company had been served with process in the action.
Contingent liabilities and financial commitments cont...
Spain
In early 2006, the Junta de Andalucia, in Spain, filed a medical
reimbursement action against the State and tobacco companies (including BAT
Espana S.A.) before the contentious-administrative courts. The State filed
preliminary objections to the Junta`s claim, with tobacco companies filing
supporting briefs. The court upheld these preliminary objections and
dismissed the claim in November 2007. The Junta`s appeal of this ruling to
the Supreme Court was dismissed in September 2009. However, in May 2009, the
Junta also filed a new contentious-administrative claim following inactivity
on their previous claim, which proceedings are still progressing. Preliminary
objections were made in May 2010 and the parties are awaiting the court`s
ruling.
(b) Class actions
Brazil
There are five class actions being brought in Brazil. One is also a medical
reimbursement, and is therefore discussed above.
In 1995, the Associacao de Defesa da Saude do Fumante (ADESF) class action
was filed against Souza Cruz S.A. (Souza Cruz) and Philip Morris in the Sao
Paulo Lower Civil Court alleging that the defendants are liable to a class of
smokers and former smokers for failing to warn of cigarette addiction. The
case was stayed in 2004 pending the defendants` appeal from a decision issued
by the lower civil court on 7 April 2004. That lower court decision held that
the defendants had not met their burden of proving that cigarette smoking was
not addictive or harmful to health, notwithstanding an earlier interlocutory
order that the Sao Paulo Court of Appeals had issued, which directed the
trial court to allow more evidence to be taken before rendering its decision.
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 the defendants with an opportunity to produce evidence. The
case now returns to the lower court for production of evidence and a new
judgment. On 19 March 2009, the Lower Civil Court ordered the previous court-
appointed medical expert to be replaced and a new advertising expert
appointed. The parties have submitted questions to these court-appointed
experts who have both delivered their reports. The plaintiff has provided
comments on both expert reports. Souza Cruz responded with its comments and
submissions from its own experts on 26 November 2010.
The Brazilian Association for the Defense of Consumers` Health (Saudecon)
filed a class action against Souza Cruz in the City of Porto Alegre, Brazil
on 3 November 2008. The plaintiff purports to represent all Brazilian smokers
whom, it alleges, are unable to quit smoking and lack access to cessation
treatments. The plaintiff is seeking an order requiring the named defendants
to fund, according to their market share, the purchase of cessation
treatments for these smokers over a minimum period of two years. Souza Cruz
was served with this complaint on 19 November 2008. On 18 May 2009, the case
was dismissed with judgment on the merits. The plaintiffs appealed in August
2009 and Souza Cruz and Philip Morris both responded. The parties are now
awaiting judgment from the State Court of Appeal`s 10th Civil Chamber.
A class action was filed against Souza Cruz by the Association of Exploited
Consumers of the federal District, requesting a court order to prevent Souza
Cruz selling cigarettes in Brazil. In December 2006, the federal District
Court of Appeals confirmed a favourable lower court decision which had found
the claim groundless and unlawful. The plaintiff appealed that ruling, but on
12 March 2009 the Superior Court affirmed the ruling and rejected the
plaintiff`s appeal. The plaintiff appealed again, but on 23 March 2009, in a
unanimous decision, the Superior Court rejected the plaintiff`s appeal. An
appeal is now pending before the federal Supreme Court.
In 2004, the State of Sergipe instigated a class action seeking compensation
for smokers in Sergipe State who purportedly sought to quit smoking. The
lower court denied the plaintiffs` request for early relief and determined
ANVISA (a federal government health agency) be ordered to join the case as co-
defendants. As ANVISA is a federal agency, 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, however, the
action was stayed on 18 December 2009 pending a decision by the Superior
Court on which court has jurisdiction. On 26 March 2010 the Superior Court
determined that it has jurisdiction of the matter and a decision from the
court is now pending.
Contingent liabilities and financial commitments cont...
Bulgaria
In March 2008, a smoking-related consumer fraud class action was filed in the
Sofia City Court of Bulgaria against 21 defendants, including the following
British American Tobacco-affiliated companies: British-American Tobacco
Polska S.A., British-American Tobacco (Romania) Investments SRL, House of
Prince A/S, and Scandinavian Tobacco S.A. On 24 September 2008, the claim
was dismissed on procedural grounds, and the plaintiff appealed this ruling.
On 11 November 2008, the Court of Appeal granted the plaintiff`s appeal and
on 2 December 2008, the Sofia City Court ordered the plaintiff to meet
various evidentiary and procedural conditions before proceeding further with
this claim. An ex parte hearing took place on 18 November 2010 to allow the
plaintiff to present evidence on his ability to bring the claim and on the
viability of the claim itself. On 24 November 2010, the Sofia City Court
issued an order denying plaintiff the right to proceed with the claim on the
grounds that the class members could not be accurately identified and because
plaintiff lacked adequate funding to pursue the litigation on behalf of the
proposed class. The plaintiff appealed that ruling and on 20 January 2011,
the Court of Appeal affirmed the dismissal of the case.
Canada
There are 10 class actions being brought in Canada against Group companies.
In the Knight class action, a claim has been brought against Imperial under
the Trade Practices Act and the Business Practices and Consumer Protection
Act. The claim includes alleged deceptive practices in relation to the use of
`light` and `mild` descriptors. The Supreme Court of British Columbia
certified a class of all consumers of cigarettes bearing `light` or `mild`
descriptors since 1974 manufactured in British Columbia by Imperial. Imperial
filed an appeal against the certification which was heard in February 2006.
The Appeal Court confirmed the certification of the class but has limited any
financial liability, if proved, to the period from 1997. This is a `lights`
class action in which the 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.
Although the claim arises from health concerns, it does not seek compensation
for personal injury. Instead it seeks compensation for amounts spent on
`light and mild` products and a disgorgement of profits from Imperial. The
motion of the federal government to strike out the third party notice issued
against them by Imperial was heard in February 2006 and was granted but was
appealed by Imperial and the appeal was heard in June 2009 in conjunction
with the British Columbia medical reimbursement. The Court of Appeal went so
far as to say that it was not "plain and obvious" that the federal government
did not owe a duty of care to manufacturers or indeed to the class itself.
Therefore, the government of Canada faces potential liability to claims of
product liability or misrepresentation. The government has appealed this
decision and the appeal will be heard on 24 February 2011.
On 9 December 2009, Imperial was served with a class action filed by Ontario
tobacco farmers and the Provincial Marketing Board. The plaintiffs allege
that, during the timeframe, the companies improperly paid lower prices for
tobacco leaf destined for duty-free products, as opposed to the higher
domestic leaf price. Imperial deposited the amount owing to the government of
Ontario pursuant to the Comprehensive Agreement into an escrow account, as
Imperial believes that the Growers` claim could fall within the definition of
a released claim according to the Comprehensive Agreement. In response, the
Ontario government filed an action against Imperial, seeking a declaration to
the effect that the Growers` action is valid in its own right, and that it is
not a Released Claim. No monetary damages are being claimed against Imperial
by the government of Ontario.
On 26 July 2010, Imperial argued its preliminary motion in the Ontario claim.
Imperial was successful in its application and the court ordered that the
Ontario claim be stayed in favour of the arbitration provisions stipulated in
the Comprehensive Agreement and raised by Imperial in its Notice of
Arbitration. The Province of Ontario has appealed this decision but no
hearing date has been set.
There are currently two class actions in Quebec. On 21 February 2005, the
Quebec Superior Court granted certification in two class actions against
Imperial and two domestic manufacturers, which have a combined value of C$22
billion plus interest and costs. 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. In Quebec,
there is no right of appeal for a defendant upon certification. The
plaintiffs have served a Statement of Claim. Trial in this matter has been
set for 17 October 2011 and discovery is currently under way.
In June 2009, four new smoking and health class actions were filed in Nova
Scotia, Manitoba, Saskatchewan and Alberta, against Canadian manufacturers
and foreign companies, including the UK Companies and Imperial. In June 2010,
two further suits were filed in British Columbia. Proceedings in these
smoking and health class actions have also been served on Imperial. A
jurisdiction motion has
Contingent liabilities and financial commitments cont...
been filed in British Columbia. In Saskatchewan, a number of UK companies
have been released from the action. In Nova Scotia the proceedings have not
progressed. There are service issues in relation to the UK Companies for
Alberta and Manitoba.
Israel
In May 2008, a `lights` class action was brought in Israel against a number
of parties including British American Tobacco`s distributor, which was
dismissed on 16 May 2010. The plaintiff`s time to appeal that order has
expired.
Venezuela
The Venezuelan Federation of Associations of Users and Consumers filed a
class action against the Venezuelan government seeking regulatory controls on
tobacco and recovery of medical expenses for future expenses of treating
smoking-related illnesses in Venezuela. On 19 January 2009, C.A Cigarrera
Bigott Sucs. (Cigarrera Bigott) notified the court of its intention to appear
as a third party. The court adjourned a public hearing, initially scheduled
for 28 July 2009, where Cigarrera Bigott`s status as a third party would be
determined and parties would present evidence and make arguments. On 16
September 2009, the Venezuelan Republic ordered the court to continue the
judicial process. A new date has yet to be scheduled by the court.
(c) Individual personal injury claims
Aside from the US there are approximately 353 individual smoking cases
pending world-wide as at 31 December 2010 against Group companies that are
not detailed here. Over three-quarters of these cases are in Brazil.
At 31 December 2010, there were only five (2009: approximately 634)
individual `lights` cases in Italy pending against British American Tobacco
Italia S.p.A before the justice of the peace courts. As at 31 October 2010,
approximately 4,390 cases had been withdrawn, suspended or resulted in
decisions given in favour of British American Tobacco Italia S.p.A. There are
34 smoking and health cases pending before Italian civil courts, filed by or
on behalf of individuals in which it is contended that diseases or deaths
have been caused by cigarette smoking. There are two labour cases for alleged
occupational exposure pending in Italy. There are also seven smoking and
health cases and two labour cases on appeal related to the same decision but
based on different grounds (Serafini case).
In 2008, three individual smoking and health actions were brought against
British American Tobacco Finland Oy, collectively seeking a total of
approximately Euro349,329 plus interest in damages for smoking related
diseases. On 10 October 2008, the Helsinki District Court dismissed the
plaintiffs` claims in their entirety. Two of the original plaintiffs have
appealed the respective judgments of the District Court. A joint de novo
trial of the appeals was heard on 31 August 2009 before the Helsinki Court of
Appeal. These appeals were dismissed. A further appeal to the Supreme Court
was withdrawn on 9 November 2010. The parties agreed to bear their own costs.
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 in any case, 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 this and 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.
RELATED PARTY DISCLOSURES
The Group`s related party transactions and relationships for 2010 and 2009
are disclosed as Appendix 3 to this announcement.
RESUMPTION OF THE SHARE BUY-BACK PROGRAMME
At the beginning of 2009, the Board suspended the Group`s on-market share buy-
back programme for the time being, in order to preserve the Group`s financial
flexibility during the period of economic uncertainty. Consequently, in the
year ended 31 December 2010, no shares were bought back (2009: none). The
Board has approved the resumption of the on-market share buy-back programme
in 2011 with a value of up to GBP750 million, excluding costs.
POST BALANCE SHEET EVENTS
Disposal of a business by an associate company
On 14 January 2011, Reynolds American Inc. (RAI), announced that it had
reached an agreement to sell Lane Limited to Scandinavian Tobacco Group A/S
(STG). Under the terms of the transaction, STG has agreed to pay US$205
million in cash for Lane. Lane manufactures other tobacco products and
contributes approximately US$0.04 per share to RAI`s annual earnings which
equates to earnings of US$10 million (GBP6 million) for the Group. The Group
disposed of Lane Limited to RAI in 2004. The transaction is expected to
close in the first half of 2011, pending anti-trust review and approval.
ANNUAL REPORT
The financial information set out above does not constitute the Company`s
statutory accounts for the years ended 31 December 2010 or 2009. Statutory
accounts for 2009 have been delivered to the Registrar of Companies and those
for 2010 will be delivered following the Company`s Annual General Meeting.
The auditor`s reports on both the 2009 and 2010 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 www.bat.com on 28 March 2011. 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.
SHAREHOLDER INFORMATION
FINANCIAL CALENDAR 2011
28 April Interim Management Statement
28 April Annual General Meeting
The Mermaid Conference & Events Centre
London
EC4V 3DB
27 July Half-Yearly Report
26 October Interim Management Statement
CALENDAR FOR THE FINAL DIVIDEND 2010
2011
24 February Dividend announced (including amount of dividend per share in
both sterling and rand; applicable exchange rate and conversion date)
4 March Last day to trade (JSE)
7 March to
11 March No transfers between UK main register and South African branch
register; no shares may be dematerialised or rematerialised.
7 March Ex-dividend date (JSE)
9 March Ex-dividend date (LSE)
11 March Record date (LSE and JSE)
5 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
11 March 2011 with an ADR payment date of 10 May 2011.
For the Dividend Reinvestment Plan (DRIP), the last date for elections is 8
April 2011.
CORPORATE INFORMATION
Premium 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
Corporate information cont...
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 Amex Equities (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 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 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 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
23 February 2011
Appendix 1
ANALYSIS OF REVENUE AND PROFIT FROM OPERATIONS
REVENUE
2010 2009
Impac Organi Organic Organi
t c c
Reporte of Revenu adjust- revenue Repor adjust- Organic
d e ted
revenue excha at ments( at reven ments( revenue
nge CC(1) 3) CC(1) ue 3)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Asia- 3,759 311 3,448 (112) 3,336 3,270 - 3,270
Pacific
America 3,498 296 3,202 (117) 3,085 3,156 (170) 2,986
s
Western 3,419 (67) 3,486 (220) 3,266 3,884 (594) 3,290
Europe
Eastern 1,686 (40) 1,726 - 1,726 1,628 - 1,628
Europe
Africa 2,521 120 2,401 - 2,401 2,270 - 2,270
and
Middle
East
Total 14,883 620 14,263 (449) 13,814 14,20 (764) 13,444
8
PROFIT FROM OPERATIONS
2010
Organi
c
Adjusted Organic Adjust
ed
Adjus Adjusted Impact Profit(2 adjust- Profit
ting of ) (2)
Profit items Profit(2) exchang at CC(1) ments(3) at
(2) e CC(1)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Asia- 1,276 (56) 1,332 137 1,195 (19) 1,176
Pacific
Americas 1,346 (36) 1,382 134 1,248 (3) 1,245
Western 818 (236) 1,054 (27) 1,081 (1) 1,080
Europe
Eastern 358 - 358 (70) 428 - 428
Europe
Africa and 520 (338) 858 65 793 - 793
Middle
East
Total 4,318 (666) 4,984 239 4,745 (23) 4,722
Table continues:...
2009
Organic Organic
Adjusted adjust- Adjusted
Profit(2) ments(3) Profit(2)
GBPm GBPm GBPm
1,148 - 1,148
1,186 (6) 1,180
994 (15) 979
409 - 409
724 - 724
4,461 (21) 4,440
Notes:
(1) CC: Constant currencies
(2) Profit: Profit from operations
(3) Organic adjustments: Mergers and acquisitions and discontinued activities
- adjustments are made to the 2009 and 2010
numbers, based on the 2010 Group position
Appendix 2
KEY GROUP RISK FACTORS
This section identifies the main risk factors that may affect the British
American Tobacco Group`s finances and operations.
The following table 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.
This section should also be read in the context of the cautionary statement
regarding forward-looking statements on page 56.
Risk registers are used at Group, regional, area and individual market
levels. They are based on a standardised methodology, which was updated
during 2010 to include information on prevailing trends in relation to each
risk and to simplify and standardise the analysis of their impact and
likelihood, which are now assessed at three levels (high/medium/low), instead
of four previously. The Group risk register provides the basis for the
assessment of the key Group risk factors identified below. It is reviewed by
the Audit Committee twice yearly and one or more key risks are considered in
detail at each Audit Committee meeting. The Board reviews the Group risk
register annually.
The number of risks identified in this section has been reduced in comparison
with previous years. This reflects both the updated risk management
methodology and the Board`s continuing reappraisal of Group risks. It also
ensures that the list identifies only those risks and uncertainties that the
Directors believe to be the principal ones facing the business, consistent
with the guidance issued recently by the Financial Reporting Review Panel.
Illicit trade
Competition from 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 where current economic conditions have resulted in
high unemployment and/or reduced disposable incomes.
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.
- Economic downturn.
- Lack of law enforcement and weak border controls.
Potential impact on Group
- Erosion of brand equity.
- Reduced ability to take price increases.
- 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.
Key Group risk factors cont...
- 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
Excise shocks from tax rate increases or structure changes
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.
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.
- Insufficient capcity to engage with stakeholders in meaningful dialogue
Potential impact on Group
- Consumers reject the Group`s legitimate tax-paid products for products
from illicit sources.
- Reduced 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 including contingency plans.
- Pricing and excise committees at regional, area and individual market
levels.
- Engagement with local tax and customs authorities where appropriate.
- Annual management review of brand portfolio, brand health and equity.
Onerous disputed taxes, interest and penalties
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
- Non-filing or late filing of tax returns or incorrect filings.
- Non-payment or late payments of taxes.
- Unfavourable ruling by tax authorities in disputed areas and aggressive
auditing and/or pursuit of tax claims.
Potential impact on Group
- Significant fines and penalties.
- Disruption and loss of focus on the business due to diversion of
management time.
- Impact on profit and dividend.
Principal activities in place to address risk
- Tax committees.
- Specialist resources available internally to provide advice and guidance
and external advice sought where appropriate.
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 of the Group`s financial management
and treasury operations can be found within the Financial review.
Management of cost base
The Group continues to implement measures to reduce its overall cost base.
There is a risk that targeted reductions will not be achieved and/or that
productivity programmes do not achieve their objectives.
Key Group risk factors cont...
Principal relevance to Group strategy: Potential impact on Productivity
(cost management)
Principal potential causes
- Insufficient resources devoted to productivity programmes due to other
priorities.
- Low prioritisation or resistance to change to overhead focus and
targets.
Potential impact on Group
- Inability to manage cost savings leads to lower profits and reduced
funds for investment in long term growth.
- Reduced shareholder confidence.
Principal controls in place to address risk
- Programme in place to achieve costs savings of GBP800 million by 2012.
- Development of a formal structure to integrate, drive and orchestrate
the delivery of productivity programmes by providing visibility, establishing
targets and enabling benefits tracking.
- Regular tracking of actual productivity savings and forecast
improvements in operating margin and supply chain, overheads and indirects
projects.
Translational foreign exchange rate exposures
The Group faces translational foreign exchange (FX) rate exposures for
earnings/cash flows from its global business.
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
- FX rate exposures arise from exchange rate movements against sterling,
the Group`s reporting currency.
Potential impact on Group
- Fluctuations in translational FX rates of key currencies against
sterling introduce volatility in reported results.
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.
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 required price increases
To the extent that price increases are required to cover cost rises and
deliver profit growth, there is a risk that the Group will be unable to
achieve these.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
- Changes in the global economy reduce consumers` disposable income.
Consumer down-trading.
- Competitors seek volume growth by price discounts or by not taking full
price increases.
Potential impact on Group
- Reduction in volumes.
- Profit growth in the 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.
- Pricing and excise committees at regional, area and individual market
levels.
- Routine brand price trade-off exercises conducted in key markets.
Key Group risk factors cont...
- Competitor analysis and price war simulations.
Geopolitical tensions
Geopolitical tensions, including terrorism have the potential to disrupt the
Group`s business operations.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
- Regional and/or global conflicts.
- Terrorism and political violence.
- Violent organised crime.
- The implementation of trade sanctions.
- Economic policy changes, including nationalisation of assets and
withdrawal from international and bilateral trade agreements.
Potential impact on Group
- Potential loss of life, loss of assets and disruption to normal business
processes.
- Increased costs due to more complex supply chain arrangements and/or the
cost of building new facilities or maintaining inefficient facilities.
- Reduced volumes and impact on profits.
Reputational impact of inability to protect staff and assets from serious
harm.
Principal activities in place to address risk
- Globally integrated sourcing strategy and contingency sourcing
arrangements.
- Security risk modelling, including external risk assessments and the
monitoring of geopolitical and economic policy developments world wide.
- Insurance cover and business continuity planning, including scenario
planning and testing and risk awareness training.
- Security controls for field force, direct store sales, supply chain,
with an emphasis on the protection of Group employees.
Major impact of climate change
Climatic instability and degradation may lead to loss of traditional growing
areas, relocation of office/factory sites, and supply chain disruption.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
- Increased production of CO2 and other greenhouse gases as a result of
human activity.
- Alteration of the earth`s global energy.
- Changes in ocean circulation or atmospheric composition.
- Natural disasters.
Potential impact on Group
- Loss of major leaf growing area, market and/or major transportation
facilities, including ports.
- Inability to obtain adequate supply of leaf and other production
materials.
- Scarcity of skilled staff due to population migration.
- Potential loss of market share to competitors with changes in the
geographical footprint.
Principal activities in place to address risk
- Group-wide sales and operational planning, including a globally
integrated sourcing strategy and contingency sourcing arrangements.
- Group-wide environmental risk modelling and supporting insurance to
cover financial exposure.
- Biodiversity risk and opportunity assessments specific to leaf growing
areas.
- Sustainability implementation plan covering the management and reduction
of - the Group`s impact on natural resources and CO2 generation.
- Research and development, including on drought-resistant tobacco types.
Legal and compliance
Breach of legal and contractual obligations
Key Group risk factors cont...
Non-compliance with any of the laws applicable to group companies that could
expose the Group to liabilities and reputational risks.
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Principal potential causes
- Lack of understanding of applicable national and international laws and
legal principles.
- Lack of understanding of contractual obligations or inconsistent
contractual risks and assumptions.
- Dependency on third parties.
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
- Comprehensive policies and procedures to promote legal compliance.
- Development of template contracts and standard provisions.
- Specialist resources available internally to provide advice and guidance
and external advice sought where appropriate.
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;
and public place smoking.
Strict and restrictive regulation in these areas may impair the Group`s
ability to communicate with adult smokers and/or to meet consumer
expectations and may also impact on its ability to communicate with its
corporate stakeholders. In addition, increased regulation may lead to
increased operating costs and reduced sales.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Principal potential causes
- Strict adoption of FCTC guidelines.
- Adoption of more stringent national regulations, such as point of sale
display bans and plain packaging.
- Adoption of differing regulatory regimes in different countries/groups
of -countries and/or lack of consensus on interpretation/application.
Potential impact on Group
- Cost complexity of meeting regulations.
- Generic or plain packaging leads to loss of brand equity.
- Reduced ability to communicate brand portfolio and innovations, -
contributing to an increase in illicit trade.
- Contribution to the denormalisation of smoking.
- Reduced consumer acceptability of new product specifications, leading to
loss of volume.
- Loss of reputation, penalties and closure of production as a result of
non-compliance.
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.
Key Group risk factors cont...
- Development of dedicated technical and advocacy capabilities, corporate
positions and best practice examples, supported by training, for markets to
address regulation.
- Development of strategies and capabilities to develop and launch
competitive, consumer-acceptable, fit-for-purpose products and new product
initiatives within the changing regulatory environment.
Regulations are passed without the voice of the industry being taken into
account
There is a risk that industry participation in the regulation discussion is
reduced due to inability to engage with authorities and put its points across
effectively.
Principal relevance to Group strategy: Potential impact on Responsibility
(balanced regulation)
Principal potential causes
- Stringent adoption of FCTC guidelines on industry participation.
- National governments fail to take into account the views of tobacco
industry
- The Group`s advocacy of balanced regulation is not considered when
regulation is formulated.
Potential impact on Group
- Exclusion of industry from participating in engagement with regulators
and policy makers.
- Increased cost of business for legitimate industry, lower turnover and
reduced profits
- Diminished shareholder confidence leading to a reduced share price.
Principal activities in place to address risk
- Continued social dialogue.
- Regulatory and stakeholder engagement at global, regional and individual
market levels, including the promotion of best practice in the formulation of
regulation.
Data risks
Loss of confidential information or malicious manipulation of data
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.
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.
- Established information security and information technology policies and
procedures.
- Promotion of awareness and understanding of information security issues.
As noted in the introduction to this section, as a result of the Group`s
updated risk management methodology and in consequence of the Board`s
continuing reappraisal of Group risks, a number of risks previously
considered as key Group risks are no longer assessed as such in terms of
their impact and likelihood, and so are not addressed in the table above.
Nevertheless, they remain on the Group risk register and continued to be
reviewed in accordance with the Group`s risk management procedures. They
include:
- Liquidity risk, including capital structure and leverage;
- Transactional foreign exchange exposures;
- Financial counterparty risks;
- Key Group risk factors cont...
- Wrongly valued acquisition opportunities;
- Retirement benefits;
- Economic crisis impact on secondary supply chain;
- Trading performance in key markets;
- Loss of a smoking and health-related court case; and
- Disruption to the Group`s information technology systems.
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 3
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 GBP77 million (2009:
GBP68 million). The Group`s share of dividends from associates was GBP466
million (2009: GBP331 million). Legal fees recovered from Reynolds American
Inc. included in other net income amounted to GBP1 million (2009: GBPnil).
2010 2009
GBPm GBPm
Transactions
- revenue 38 47
- purchases (442) (365)
- other net income 460 329
Amounts receivable at 31 December 99 78
Amounts payable at 31 December (21) (34)
On 26 May 2010, a wholly owned subsidiary of the Group, BATUS Japan Inc.,
entered into an American blend Cigarette Manufacturing Agreement (referred to
as the 2010 Agreement) with a wholly owned subsidiary of Reynolds American,
R.J. Reynolds Tobacco Company (referred to as RJRTC), with an effective date
of 1 January 2010. Under this Agreement, RJRTC has been appointed BATUS
Japan`s exclusive manufacturer of all BATUS Japan`s requirements for certain
American-blend cigarettes intended to be distributed and sold in Japan for
the five year period expiring on 31 December 2014, subject to the early
termination and extension provisions set out in the agreement. The 2010
Agreement is based on arm`s length terms and conditions.
On the same date, RJRTC and BATUS Japan entered into a letter agreement
terminating the existing Contact Manufacturing Agreement dated 30 July 2004
(referred to as the 2004 Agreement), as amended between the parties, with
effect from midnight on 31 December 2009. The 2004 Agreement was scheduled to
expire on 31 December 2014, subject to early termination and extension
provisions. Under the terms of the letter agreement, certain sections and sub-
sections of the 2004 Agreement will survive the termination, and, in
consideration for RJRTC agreeing to terminate the agreement and in settlement
of all disputes at issue between the parties, BATUS Japan agreed to pay RJRTC
US$21 million. The payment has been presented as an adjusting item and is
included within the Group`s restructuring and integration costs on page 28.
The Group`s share of the income net of tax included within the post-tax
results of Reynolds American is also presented as an adjusting item and is
credited against restructuring costs (see page 30).
In 2010, the Group acquired non-controlling interests of shareholders in
Indonesia and Eastern Europe for GBP3 million and GBP9 million respectively.
These transactions are shown as a GBP12 million reduction to reserves.
The Group sold its Belgian distribution business, Lyfra NV, to Landewyck
Group S.a.r.l in 2010 for a consideration of Euro16 million. The Group`s
German subsidiary has an available-for-sale investment in Landewyck Group
S.a.r.l.
A capital injection was made into BAT Algeria in 2009 where a shareholder
SOCALTA (Societe Algerienne de Trading Alimentaire) contributed GBP16
million. This contribution by a non-controlling interest was assisted by a
loan from another Group subsidiary of GBP4 million.
Related party disclosures cont...
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.
2010 2009
GBPm GBPm
The total compensation for key
management personnel, including
Directors, was:
- salaries and other short term employee 22 18
benefits
- post-employment benefits 3 3
- share based payments 12 9
37 30
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.
24 February 2011
Sponsor: UBS South Africa (Pty) Ltd
Date: 24/02/2011 09:30:53 Produced by the JSE SENS Department.
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