1st Nov 2007 07:02
British American Tobacco PLC01 November 2007 QUARTERLY REPORT TO 30 SEPTEMBER 2007 1 November 2007 SUMMARY NINE MONTHS RESULTS - unaudited 2007 2006 Change Revenue £7,312m £7,251m +1%Profit from operations £2,304m £1,944m +19%Adjusted diluted earnings per share 82.00p 75.00p +9% The reported profit from operations was 19per cent higher at £2,304million, or 8per cent higher if exceptional items are excluded. However, profit from operations, at comparable rates of exchange and excluding exceptional items, would have been 14 per cent higher, with all regions contributing to this strong result. Group volumes from subsidiaries were 504 billion, a decrease of 1per cent, mainly as a result of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany. In the third quarter, volumes rose slightly over the comparable period last year. The four global drive brands achieved an overall volume growth for the nine months of 10per cent, which led to share improvements in many markets. The reported Group revenue increased by 1per cent to £7,312million but, at comparable rates of exchange, would have increased by 6per cent as a result of more favourable pricing and an improving product mix. Adjusted diluted earnings per share rose by 9 per cent, principally as a result of the strong operating profit performance, partly offset by the adverse impact from foreign exchange movements. Basic earnings per share were higher at 82.67p (2006:70.11p). The Chairman, Jan du Plessis, commented "The Group's spread of developed and developing markets has continued to serve shareholders well, with all regions contributing to the strong results at comparable rates of exchange. There were improvements in both product mix and share in a broad range of key markets. Although the momentum of the first six months has been maintained in the third quarter, we do still expect the growth in profit from operations at comparable rates of exchange to slow in the fourth quarter, as a result of generally higher marketing spend and the timing of price increases in Brazil." ENQUIRIES:INVESTOR RELATIONS: PRESS OFFICE:RalphEdmondson/ 020 7845 1180 David Betteridge/Kate Matrunola/ 020 7845 2888Sharon Woodcock 020 7845 1519 Catherine Armstrong BRITISH AMERICAN TOBACCO p.l.c.QUARTERLY REPORT TO 30 SEPTEMBER 2007INDEX PAGE Chairman's comments 2 Business review 3 Group income statement 7 Group statement of changes in total equity 8 Segmental analyses of revenue and profit 9 Accounting policies and basis of preparation 11 Foreign currencies 11 Exceptional items 11 Other changes in the Group 12 Net finance costs 13 Associates 13 Taxation 14 Earnings per share 14 Dividends 15 Contingent liabilities 15 Share buy-back programme 15 CHAIRMAN'S COMMENTS British American Tobacco's adjusted diluted earnings per share rose by 9 percent in the first nine months of 2007. Profit from operations increased by 8 percent if exceptional items are excluded, while, at comparable rates of exchange,profit from operations excluding exceptional items would have grown by 14 percent. The adverse impact from foreign exchange movements was £130 million. The Group's spread of developed and developing markets has continued to serveshareholders well, with all regions contributing to the strong results atcomparable rates of exchange. There were improvements in both product mix andshare in a broad range of key markets. Revenue increased by 1 per cent at current rates but it would have increased by6 per cent at comparable rates of exchange, despite volumes being down 1 percent. The reasons for this slight volume decline are the same as in previousquarters, namely some supply chain disruptions and short term trading patterns.Volumes were up slightly in the third quarter. The growth in revenue at comparable rates illustrates the continuing improvementin the quality of our business. Indeed, our premium volume rose by over 1 percent and accounted for 32 per cent of our total volume from subsidiaries. The global drive brands, which are mostly premium, achieved overall volumegrowth of 10 per cent, with exceptionally strong growth in the third quarter, up18 per cent. Kent was up 18 per cent for the nine months, benefiting from growthin both new and existing markets, and Dunhill rose by 7 per cent. Lucky Strikegrew slightly, despite lower industry volumes in Germany and Japan. Pall Mallcontinued to perform well, growing by 9 per cent. The Group's associate companies had slightly higher volumes of 173 billion andour share of their post-tax results was down 4 per cent at £335 million. Ourshare of their results at comparable rates of exchange and excluding exceptionalitems would have been £356 million, up 8 per cent. Adjusted diluted earnings per share rose 9 per cent to 82.00 pence, principallyas a result of the strong operating profit performance, partly offset by theadverse impact from foreign exchange movements. Some 38 million shares wererepurchased in the nine months at a cost of £612 million and at an average of1630 pence per share. Although the momentum of the first six months has been maintained in the thirdquarter, we do still expect the growth in profit from operations at comparablerates of exchange to slow in the fourth quarter, as a result of generally highermarketing spend and the timing of price increases in Brazil. Jan du Plessis 1 November 2007 Page 2 BUSINESS REVIEW The reported Group profit from operations was 19 per cent higher at£2,304 million or 8 per cent higher if exceptional items, as explained on pages11 and 12, are excluded. However, profit from operations, at comparable rates ofexchange and excluding exceptional items, would have been 14 per cent higher,with all regions contributing to this strong result. Group volumes from subsidiaries were 504 billion, a decrease of 1 per cent,mainly as a result of the high level of trade buying in some markets at the endof 2006, supply chain disruptions in the Middle East and the loss of StiX inGermany. In the third quarter, volumes rose slightly over the comparable periodlast year. The good performance of the global drive brands led to shareimprovements in many markets. Group revenue increased by 1 per cent to£7,312 million but, at comparable rates of exchange, would have increased by 6per cent as a result of favourable pricing and an improving product mix. The four global drive brands continued their good performance and achieved anoverall volume growth of 10 per cent, with a particularly strong performance inthe third quarter, up 18 per cent. Kent grew by 18 per cent with good growth in Russia, Romania, Ukraine and Chile.It also benefited from significant volume increases from the brand migrations inWestern Europe and new markets in Azerbaijan and Kazakhstan. Dunhill rose by 7per cent, driven by strong performances in South Korea, Russia, France, Italy,South Africa and Saudi Arabia, although volumes were lower in Malaysia andTaiwan. Lucky Strike volumes were slightly up as the growth in Spain, Italy, France,Argentina and the Czech Republic was almost offset by declines as a result oflower industry volumes in Germany and Japan. Despite the absence of Pall MallStiX in Germany during 2007, Pall Mall continued its growth with an increase of9 per cent, driven by Italy, Hungary, Russia, Uzbekistan and Turkey, partlyoffset by lower volumes in Romania, Spain and Greece. In Europe, profit at £650 million was up £56 million mainly as a result ofhigher margins in Russia, Romania, Hungary and Spain, partly offset by theimpact of reduced volumes in a number of markets and weaker exchange rates. Atcomparable rates of exchange, profit would have increased by £67 million or 11per cent. Regional volumes were down 2 per cent at 180 billion, with reductionsin Germany, Russia, Switzerland, France and Ukraine partly offset by an increasein Romania. In Italy, volumes and market share were lower although Lucky Strike and PallMall grew share. While margins improved following industry price increases,profit was lower due to reduced volumes, higher marketing expenses and thedisposal of the Toscano cigar business as explained on page 12. Although market share rose in Germany, cigarette volumes declined as industryvolumes were affected by the growth of illicit trade, the end of StiX sales,changes in vending regulations and consumer down trading to other tobaccoproducts. This volume decline, together with lower margins of other tobaccoproducts, led to lower profits. Sales volumes in France were lower in line with the overall industry decline,although Lucky Strike, Pall Mall and Vogue grew market share. Profit wasslightly down as an improved product mix and lower costs were more than offsetby the lower volumes. Following the excise increase in Switzerland at thebeginning of the year, weaker volumes and down-trading led to lower profits. In the Netherlands, market share was higher as a result of the strongperformances by Lucky Strike and Pall Mall, although volumes were marginallydown. Profit was lower as a result of down-trading. Volume and profit in Belgiumwere lower, impacted by a significant excise driven price increase across alltobacco categories. Results in Spain improved significantly, benefiting fromprice increases at the beginning of the year, and volume and market share grewdriven by Lucky Strike. Page 3 Business review cont... Sales volumes in Russia were influenced by trade buying at the end of last yearin anticipation of the new excise system and price increases in December.However, most of the first quarter's shortfall has since been recovered withstrong performances by Kent and Vogue, leading to an increased market share.Profit grew significantly, benefiting from higher margins, an improved productmix and productivity savings. In Romania, the excellent performance of Kent,supported by the growth of Dunhill and Vogue, resulted in a higher market share.Profit increased impressively with volume growth, higher prices and an improvedproduct mix. Profit in Ukraine was higher as better pricing, effective cost control and animproved mix was partly offset by the impact of reduced local brand volumes. InHungary, profit grew substantially, benefiting from improved margins andefficiency programmes. Overall volumes were stable with Viceroy and Pall Mallgrowing strongly. Results in Poland improved with a price increase earlier thisyear and, although volumes were slightly down, market share grew. In Asia-Pacific, profit rose by £32 million to £498 million, mainly attributableto strong performances from Australasia, South Korea, Vietnam, Pakistan andBangladesh, despite the adverse impact of exchange. At comparable rates ofexchange, profit would have increased by £47 million or 10 per cent. Volumes at109 billion were 3 per cent higher as a result of strong growth in Pakistan,South Korea and Vietnam, which were partially offset by declines in Malaysia andBangladesh. In Australia, there was good profit growth as a result of improved margins froma combination of cost reductions and price increases. Profit growth was achieveddespite intensified competitor discounting and industry volume declines, whilemarket share grew with good performances from Dunhill, Pall Mall and Winfield.In New Zealand, strong competition in the low price segment continued to affectvolumes and market share adversely, although Pall Mall and Dunhill showed goodgrowth. As a result, profit was lower despite the benefit of price increases. In Malaysia, the large rise in excise in July 2007 impacted volumes, which werealready declining due to high levels of illicit trade and growth of the lowprice segment, but market share remained resilient, with strong performancesfrom Dunhill and Pall Mall. Although there was higher pricing and an improvedproduct mix, the decline in volumes resulted in lower profit. In Vietnam, profit increased significantly benefiting from better pricing,productivity initiatives and volume growth from expanded distribution. Volumes and market share rose in South Korea, with Dunhill continuing to grow.However, the impact of higher volumes and supply chain savings on profit wasoffset by a weaker local currency. In Taiwan, volume was higher as a result of astrong performance from Pall Mall. This, together with increased prices and costreductions, resulted in higher profit. Pakistan continued its strong volume growth with Gold Flake the majorcontributor, resulting in an increase in overall market share. Higher volumes,coupled with price increases and effective cost management, led to an impressiveprofit performance. In Bangladesh, despite lower volumes due to the growth ofthe low price segment, profit increased as a result of improved pricing andproduct mix. In Sri Lanka, profit benefited from higher margins, better productmix and lower expenses, but this was more than offset by the impact of a weakerexchange rate. Page 4 Business review cont... Profit in Latin America increased by £103 million to £550 million due toexceptionally strong performances in Brazil and Venezuela, partly offset bylower profit in Mexico and the adverse impact of weaker local currencies. Atcomparable rates of exchange, profit would have grown by £127 million or 28 percent. Volumes were 2 per cent down at 111 billion as the increase in Venezuelawas more than offset by declines in Mexico, Argentina and Central America. In Brazil, profit grew significantly, benefiting in the first half of the yearfrom the impact of price increases in anticipation of the excise increase inJuly and an improved product mix. Although cigarette volumes were slightly down,market share was higher. Industry volume in Mexico suffered following a large excise driven priceincrease early in 2007 and this, together with lower market share and a weakercurrency, resulted in lower profit. In Argentina, although profit in localcurrency grew as prices increased after the severe price competition of lastyear, profit reported in sterling and volumes were both lower. In Chile, volumes were in line with last year. Profit grew, despite anunfavourable exchange rate, due to higher margins and strong up-trading to Kentand Lucky Strike. In Venezuela, profit increased strongly, despite the impact ofexchange, due to price rises and higher volumes. Market share grew through goodperformances by Consul and Belmont. The Central America and Caribbean areabenefited from higher margins and more efficient product sourcing, but this wasmore than offset by the impact of exchange and lower industry volumes, as aresult of excise driven price increases. Profit in the Africa and Middle East region fell by £8 million to £354 milliondue to exchange rate movements. However, at comparable rates of exchange, profitwould have increased by £45 million or 12 per cent with strong performances fromSouth Africa and Nigeria. Volumes were 3 per cent lower at 73 billion, due todisruption of supply to the Middle East and the change in distribution model inTurkey. In South Africa, despite the sharply weaker average exchange rate, profit growthwas achieved as a result of market share gains and an improved product mix. Thetwo key brands, Peter Stuyvesant and Dunhill, continued their good performancesand grew volume and share. Strong profit growth in Nigeria was the result of higher margins, productivityinitiatives and an improved product mix. Share performance was particularlystrong for Benson & Hedges, although overall volumes were marginally lower. InSub-Saharan Africa, supply difficulties in West Africa early in the yearimpacted volume and profit, while a number of markets in East Africa grewvolumes, reflecting good progress in reducing illicit trade. In the Middle East, the product mix improved across the area through the growthof premium brands, although profit was adversely affected by distributionproblems and weaker currencies. Dunhill continued its expansion in Saudi Arabiaand the Gulf and grew market share. North Africa showed improved volume andprofit performance, with market share in Egypt growing as a result of strongperformances by Kent and Rothmans. Strong sales in the Caucasus resulted in volume growth with market share andprofit higher than last year. In Turkey, operating losses increased due to theone-off costs associated with the change in the distribution model in Januaryand higher brand support with the launch of new brands. The profit from the America-Pacific region decreased by £12 million to£320 million as a result of lower profit in Canada and the impact of weakerexchange rates. At comparable rates of exchange, profit would have increased by£15 million or 5 per cent. Volumes decreased by 4 per cent to 31 billion, mainlyas a result of the decline in industry volumes in Canada, partly offset by thegrowth in Japan. Page 5 Business review cont... In Canada, profit was down £19 million at £196 million. This was due to thegreater prevalence of illicit product, the increased cost of directdistribution, the continued down-trading to lower priced products and the weakerexchange rate. These were partly offset by higher margins and cost savingsresulting from the transfer of manufacturing to Mexico. At comparable rates ofexchange, profit was down 3 per cent, although profit in the third quarter wasup 14 per cent partly due to the one-off costs related to direct distribution inthe comparable period. The continued growth of Peter Jackson resulted in sharegrowth in the low price segment but, as this was more than offset by the declineof the premium segment, overall market share declined. In Japan, volumes grew despite a significant decline in industry volumes, withstrong performances of Kent and Kool resulting in good market share growth.Profit grew through higher volumes, increased margins and effective costmanagement, largely offset by the impact of unfavourable exchange rates. Unallocated costs, which are net corporate costs not directly attributable toindividual segments, were £3 million lower at £74 million, mainly as a result oftiming of expenses. The above regional profits were achieved before accounting for restructuringcosts and gains/losses on disposal of businesses and brands, as explained onpages 11 and 12. Results of associates The Group's share of the post-tax results of associates decreased by £13 millionto £335 million. Excluding the exceptional item in 2006 explained on page 13,the Group's share of the post-tax results of associates was slightly up at £335million but would have been 8 per cent higher at comparable rates of exchange. The contribution from Reynolds American, excluding the benefit from thefavourable resolution of tax matters in 2006, was £10 million lower due to theimpact of the weaker US dollar. At comparable rates of exchange, thecontribution from Reynolds American would have been 4 per cent higher at£240 million, with pricing and productivity gains at R J Reynolds and theinclusion of Conwood's strong results. As explained on page 13, ReynoldsAmerican acquired Conwood on 31 May 2006 and reported that on a pro-forma USGAAP basis, as if it had been owned since the beginning of 2006, Conwoodincreased volumes, market share and profit. The Group's associate in India, ITC, continued its strong growth and itscontribution to the Group rose by £12 million to £77 million. At comparablerates of exchange, the contribution would have been £78 million, or 20 per centhigher than last year, with the growth helped by one-off costs in 2006. Cigarette volumes The segmental analysis of the volumes of subsidiaries is as follows: 3 months to 9 months to Year to30.9.07 30.9.06 30.9.07 30.9.06 31.12.06 bns bns bns bns bns 65.7 64.4 Europe 180.3 183.5 247.7 34.4 34.7 Asia-Pacific 108.8 106.1 141.9 36.6 37.5 Latin America 110.6 113.0 152.6 26.5 26.9 Africa and Middle East 73.1 75.1 104.8 11.3 10.3 America-Pacific 31.4 32.8 43.8 ------- ------- -------- -------- -------- 174.5 173.8 504.2 510.5 690.8 ======= ======= ======== ======== ======== In addition, associates' volumes for the nine months were 173.2 billion (2006:171.6 billion) and, with the inclusion of these, the Group volumes would havebeen 677.4 billion (2006: 682.1 billion). Page 6 GROUP INCOME STATEMENT - unaudited 3 months to 9 months to Year to30.9.07 30.9.06 30.9.07 30.9.06 31.12.06 £m £m £m £m £m ======== ======== ======== ========= ======== 6,683 6,220 Gross turnover (including duty, 19,017 18,669 25,189 excise and other taxes of £11,705million (30.9.06: £11,418million - 31.12.06: £15,427 million)) ======== ======== ======== ========= ======== 2,587 2,443 Revenue 7,312 7,251 9,762 Raw materials and consumables (683) (733) used (2,069) (2,208) (2,861) Changes in inventories of (33) 22 finished goods and work in progress 45 61 (11) (385) (423) Employee benefit costs (1,096) (1,182) (1,554) Depreciation and amortisation (76) (108) costs (232) (299) (401) 68 14 Other operating income 138 62 181 (666) (596) Other operating expenses (1,794) (1,741) (2,494) -------- -------- -------- --------- -------- 812 619 Profit from operations 2,304 1,944 2,622 ---------------------- --------------------------------------- after (charging)/crediting exceptional items (10) (116) - restructuring costs (50) (164) (216) - gains/(losses) on disposal 45 of businesses and brands 56 (16) 41 ---------------------- --------------------------------------- ---------------------- --------------------------------------- 31 25 Finance income 86 83 110 (109) (110) Finance costs (290) (292) (399) ---------------------- --------------------------------------- (78) (85) Net finance costs (204) (209) (289) Share of post-tax results of 113 105 associates and joint ventures 335 348 431 ---------------------- --------------------------------------- after (charging)/crediting exceptional items - brand impairments (13) - exceptional tax credits 17 17 ---------------------- --------------------------------------- ---------------------- --------------------------------------- 847 639 Profit before taxation 2,435 2,083 2,764 (209) (152) Taxation on ordinary activities (629) (518) (716) -------- -------- -------- --------- -------- 638 487 Profit for the period 1,806 1,565 2,048 ======== ======== ======== ========= ======== Attributable to: 600 446 Shareholders' equity 1,679 1,447 1,896 ======== ======== ======== ========= ======== 38 41 Minority interests 127 118 152 ======== ======== ======== ========= ======== Earnings per share 29.73p 21.73p Basic 82.67p 70.11p 92.08p ======== ======== ======== ========= ======== 29.52p 21.56p Diluted 82.10p 69.57p 91.33p ======== ======== ======== ========= ======== See notes on pages 11 to 15. Page 7 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 9 months to Year to 30.9.07 30.9.06 31.12.06 £m £m £m Differences on exchange 152 (500) (685)Cash flow hedges- net fair value gains 3 12 13- reclassified and reported in net profit (20) (8) (15)Available-for-sale investments- net fair value losses (1) (2) (2)- reclassified and reported in net profit 1 1Net investment hedges- net fair value gains 15 73 117Tax on items recognised directly in equity (13) (5) (12) -------- -------- --------Net gains/(losses) recognised directly in equity 137 (429) (584)Profit for the period page 7 1,806 1,565 2,048 -------- -------- --------Total recognised income for the period 1,943 1,136 1,464 -------------------------------------- shareholders' equity 1,809 1,029 1,334- minority interests 134 107 130 -------------------------------------Employee share options- value of employee services 27 31 41- proceeds from shares issued 24 26 28Dividends - ordinary shares (1,198) (1,008) (1,008)- to minority interests (140) (131) (137)Purchase of own shares- held in employee share ownership trusts (29) (77) (77)- share buy-back programme (612) (399) (500)Acquisition of minority interests (5) (11) (13)Other movements (6) 11 13 -------- -------- -------- 4 (422) (189)Balance at 1 January 6,688 6,877 6,877 -------- -------- --------Balance at period end 6,692 6,455 6,688 ======== ======== ======== See notes on pages 11 to 15. Page 8 SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited Revenue The analyses for the nine months are as follows: 30.9.07 30.9.06 Inter Inter External segment Revenue External segment Revenue restated restated restated £m £m £m £m £m £m Europe 2,642 179 2,821 2,602 380 2,982Asia-Pacific 1,386 16 1,402 1,313 23 1,336Latin America 1,440 416 1,856 1,312 205 1,517Africa and Middle East 876 10 886 793 15 808America-Pacific 347 347 608 608 -------- -------- -------- ------- ------- --------Revenue 6,691 621 7,312 6,628 623 7,251 ======== ======== ======== ======= ======= ======== The analyses for the year ended 31 December 2006 are as follows: Inter External segment Revenue restated restated restated £m £m £m Europe 3,495 526 4,021Asia-Pacific 1,755 27 1,782Latin America 1,780 332 2,112Africa and Middle East 1,063 24 1,087America-Pacific 760 760 ------- ------- --------Revenue 8,853 909 9,762 ======= ======= ======== The segmental analysis of revenue above is based on location of manufacture andthe 2006 analysis has been restated to reflect changes in manufacturingoperations. Figures based on location of sales would be as follows: 30.9.07 30.9.06 31.12.06 £m £m £m Europe 2,667 2,637 3,545Asia-Pacific 1,386 1,376 1,839Latin America 1,444 1,321 1,791Africa and Middle East 1,051 1,098 1,489America-Pacific 764 819 1,098 -------- -------- -----------Revenue 7,312 7,251 9,762 ========= ======== ========= Page 9 Segmental analyses of revenue and profit cont... - unaudited Profit from operations 30.9.07 30.9.06 31.12.06 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* £m £m £m £m £m £m Europe 666 650 462 594 676 781Asia-Pacific 502 498 463 466 609 616Latin America 550 550 447 447 611 611Africa and Middle East 349 354 359 362 444 468America-Pacific 311 320 290 332 385 424 ------- ------- ------- ------ ------ -------Segmental results 2,378 2,372 2,021 2,201 2,725 2,900Unallocated costs (74) (74) (77) (77) (103) (103) ------- ------- ------- ------ ------ -------Profit from operations 2,304 2,298 1,944 2,124 2,622 2,797 ======= ======= ======= ======= ======= ======= *Excluding restructuring costs and gains/losses on disposal of businesses andbrands as explained on pages 11 and 12. The segmental analysis of the Group's share of the post-tax results ofassociates and joint ventures for the nine months is as follows: 30.9.07 30.9.06 31.12.06 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* £m £m £m £m £m £m Europe 34 34 32 32 46 46Asia-Pacific 79 79 67 67 92 92Latin America 1 1Africa and Middle East 1 1 2 2 4 4America-Pacific 220 220 247 230 289 285 ------- ------- ------ ------ ------ ------- 335 335 348 331 431 427 ======= ======= ====== ====== ====== ======= *Excluding brand impairments and exceptional tax credits as explained on page13. Page 10 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited interim results for the ninemonths to 30 September 2007 and 30 September 2006, together with the auditedresults for the year ended 31 December 2006. The annual consolidated financialstatements for 2006, which represent the statutory accounts for that year, havebeen filed with the Registrar of Companies. The auditors' report on thosestatements was unqualified and did not contain any statement concerningaccounting records or failure to obtain necessary information and explanations. From 1 January 2005, the Group has prepared its annual consolidated financialstatements in accordance with International Financial Reporting Standards (IFRS)as adopted by the European Union (EU) and implemented in the UK. These unauditedGroup interim results have been prepared on a basis consistent with the IFRSaccounting policies as set out in the Annual Report and Accounts for the yearended 31 December 2006. These interim financial statements have been preparedunder the historical cost convention, except in respect of certain financialinstruments. FOREIGN CURRENCIES The results of overseas subsidiaries and associates have been translated tosterling as follows: The income statement has been translated at the average rates for the respectiveperiods. The total equity has been translated at the relevant period end rates.For high inflation countries, the local currency results are adjusted for theimpact of inflation prior to translation to sterling at closing exchange rates. The principal exchange rates used were as follows: Average Closing 30.9.07 30.9.06 31.12.06 30.9.07 30.9.06 31.12.06 US dollar 1.988 1.820 1.844 2.037 1.868 1.957Canadian dollar 2.194 2.060 2.091 2.025 2.084 2.278Euro 1.478 1.461 1.467 1.433 1.475 1.484South African rand 14.200 12.021 12.520 14.051 14.511 13.799Brazilian real 3.977 3.970 4.009 3.749 4.055 4.179 EXCEPTIONAL ITEMS (a) Restructuring costs During 2003, the Group commenced a detailed review of its manufacturingoperations and organisational structure, including the initiative to reduceoverheads and indirect costs. The restructuring continued, with majorannouncements during 2005 and 2006 which covered the cessation of production inthe UK, Ireland, Canada and Zevenaar in the Netherlands with production to betransferred elsewhere. The profit from operations for the year ended 31 December2006 included a charge for restructuring of £216 million. The nine months to 30 September 2007 includes a charge for restructuring of£50 million (2006: £164 million), principally in respect of costs associatedwith restructuring the operations in Italy and further costs related torestructurings announced in prior years. On 18 May 2007, the Group's Italiansubsidiary announced the results of a review of its manufacturinginfrastructure, including an intention to consolidate its operations at theplant in Lecce, close its operations at Rovereto and sell its facilities atChiaravalle together with three national brands. The disposal of Chiaravalle wascompleted on 12 September 2007. Page 11 Exceptional items cont... (b) Gains/losses on disposal of businesses and brands On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell itscigar business, Toscano, to Maccaferri for euro 95 million. The sale was subjectto regulatory and governmental approval and was completed on 19 July 2006. Thesale resulted in a loss of £19 million for the year ended 31 December 2006,reflecting a £15 million impairment charge included in depreciation andamortisation costs in the profit from operations and £4 million of other costsincluded in other operating expenses in the profit from operations. A charge of£16 million was reflected in the nine months to 30 September 2006. On 29 November 2006, the Group completed a trademark transfer agreement withPhilip Morris International. Under the arrangement the Group sold its MurattiAmbassador brand in certain markets, as well as the L&M and Chesterfieldtrademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademarkin certain African countries. These transactions resulted in a gain of £60million included in other operating income in the profit from operations. On 20 February 2007, the Group announced that it had agreed to sell its pipetobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for euro 24million. The sale was completed during the second quarter and resulted in a gainof £11 million included in other operating income in the profit from operations.However, the Group has retained the Dunhill and Captain Black pipe tobaccobrands. On 23 May 2007, the Group announced that it had agreed to sell its Belgian cigarfactory and associated brands to the cigars division of SkandinaviskTobakskompagni AS. The sale includes a factory in Leuven as well as trademarksincluding Corps Diplomatique, Schimmelpennick, Don Pablo and Mercator. Thetransaction was completed on 3 September 2007 and a gain on disposal of£45 million is included in other operating income for the nine months to 30September 2007. OTHER CHANGES IN THE GROUP From August 2006, the Group purchased minority interests in its subsidiary inChile for a cost of £91 million, raising the Group shareholding from 70.4 percent to 96.6 per cent. In the year ended 31 December 2006, the goodwill arisingon this transaction was £80 million and the minority interests in Group equitywere reduced by £11 million. Page 12 NET FINANCE COSTS Net finance costs comprise: 9 months to 30.9.07 30.9.06 £m £m Interest payable (277) (308)Interest and dividend income 71 90Fair value changes - derivatives (76) 154Exchange differences 78 (145) ------- -------- 2 9 ------- -------- (204) (209) ======= ======== Net finance costs at £204 million were £5 million lower. The £2 million gain (2006: £9 million) of fair value changes and exchangedifferences reflects a gain of £10 million (2006: £3 million) from the netimpact of exchange rate movements and a charge of £8 million (2006: £6 milliongain) principally due to interest related changes in the fair value ofderivatives. IFRS requires fair value changes for derivatives, which do not meet the testsfor hedge accounting under IAS39, to be included in the income statement. Inaddition, certain exchange differences are required to be included in the incomestatement under IFRS and, as they are subject to exchange rate movements in aperiod, they can be a volatile element of net finance costs. ASSOCIATES The Group's share of post-tax results of associates was £335 million (2006:£348 million) after tax of £190 million (2006: £175 million). For the year to 31December 2006, the share of post-tax results was £431 million after tax of£216 million. The share is after exceptional charges and credits. In the nine months to 30 September 2006 and the year ended 31 December 2006,Reynolds American benefited from the favourable resolution of tax matters ofwhich the Group's share was £17 million. In the year ended 31 December 2006,Reynolds American also modified the previously anticipated level of supportbetween certain brands and the projected net sales of certain brands, resultingin a brand impairment charge of which the Group's share amounted to £13 million(net of tax). On 25 April 2006, Reynolds American announced an agreement to acquire Conwood,the second largest manufacturer of smokeless tobacco products in the US, forUS$3.5 billion, and the acquisition was completed on 31 May 2006. Page 13 TAXATION The tax rate in the income statement of 25.8 per cent for the nine months to 30September 2007 (30 September 2006: 24.9 per cent) is affected by the inclusionof the share of associates' post-tax profit in the Group's pre-tax results. Theunderlying tax rate for subsidiaries reflected in the adjusted earnings pershare shown below, was 29.8 per cent and 29.7 per cent in 2006. The chargerelates to taxes payable overseas. EARNINGS PER SHARE Basic earnings per share are based on the profit for the period attributable toordinary shareholders and the average number of ordinary shares in issue duringthe period (excluding shares held by the Group's employee share ownershiptrusts). For the calculation of diluted earnings per share the average number of sharesreflects the potential dilutive effect of employee share schemes. The earnings per share are based on: 30.9.07 30.9.06 31.12.06 Earnings Shares Earnings Shares Earnings Shares £m m £m m £m m Basic 1,679 2,031 1,447 2,064 1,896 2,059Diluted 1,679 2,045 1,447 2,080 1,896 2,076 The earnings have been affected by exceptional items and to illustrate theimpact of these the adjusted diluted earnings per share are shown below: Diluted earnings per share 9 months to Year to 30.9.07 30.9.06 31.12.06 pence pence pence Unadjusted diluted earnings per share 82.10 69.57 91.33Effect of restructuring costs 1.66 5.72 8.09Effect of disposal of businesses and brands (1.76) 0.53 (1.11)Effect of associates' brand impairmentsand exceptional tax credits (0.82) (0.19) ------- ------- -------Adjusted diluted earnings per share 82.00 75.00 98.12 ======= ======= ======= Adjusted diluted earnings per share are based on:- adjusted earnings (£m) 1,677 1,560 2,037- shares (m) 2,045 2,080 2,076 Similar types of adjustments would apply to basic earnings per share. For thenine months to 30 September 2007, basic earnings per share on an adjusted basiswould be 82.57p (2006: 75.59p) compared to unadjusted amounts of 82.67p (2006: 70.11p). Page 14 DIVIDENDS The Directors declared an interim dividend out of the profit for the six monthsto 30 June 2007, which was paid on 12 September 2007, at the rate of 18.6p pershare. The interim dividend amounted to £377 million. The comparative dividendfor the six months to 30 June 2006 of 15.7p per share amounted to £323 million. In accordance with IFRS, the interim dividend is charged in the Group resultsfor the third quarter. The results for the nine months to 30 September 2007include the final dividend paid in respect of the year ended 31 December 2006 of40.2p per share amounting to £821 million (2006: 33.0p amounting to £685million), as well as the above interim dividend. CONTINGENT LIABILITIES As noted in the Report and Accounts for the year ended 31 December 2006, thereare contingent liabilities in respect of litigation, overseas taxes andguarantees in various countries. Group companies, as well as other leading cigarette manufacturers, aredefendants in a number of product liability cases. In a number of these cases,the amounts of compensatory and punitive damages sought are significant. Atleast in the aggregate and despite the quality of defences available to theGroup, it is not impossible that the results of operations or cash flows of theGroup in particular quarterly or annual periods could be materially affected bythis. Having regard to these matters, the Directors (i) do not consider it appropriateto make any provision in respect of any pending litigation and (ii) do notbelieve that the ultimate outcome of this litigation will significantly impairthe financial condition of the Group. SHARE BUY-BACK PROGRAMME The Group initiated an on-market share buy-back programme at the end of February2003. During the nine months to 30 September 2007, 38 million shares were boughtat a cost of £612 million (30 September 2006: 28 million shares at a cost of £399 million). On 1 October 2007, the Company announced that it had commenced an irrevocablenon-discretionary programme to purchase shares on its own behalf during itsclose period from that date up to and including 31 October 2007. During thisperiod, the Company purchased 4.4 million shares at a cost of £79 million. ----------------------------------------------------------- Copies of this Report will be posted to shareholders and may also be obtainedduring normal business hours from the Company's Registered Office at GlobeHouse, 4 Temple Place, London WC2R 2PG and from our website www.bat.com Nicola Snook Secretary 1 November 2007 Page 15 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
British American Tobacco