28th Feb 2008 07:02
British American Tobacco PLC28 February 2008 28 February 2008 PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2007 SUMMARY 2007 2006 Change Revenue £10,018m £9,762m +3%Profit from operations £2,905m £2,622m +11%Adjusted diluted earnings per share 108.53p 98.12p +11%Dividends per share 66.20p 55.90p +18% The reported profit from operations was 11 per cent higher at £2,905million, or 7 per cent higher if exceptional items are excluded. However, profit from operations, at comparable rates of exchange and excluding exceptional items, would have been 11 per cent higher, with all regions contributing to this strong result. Group volumes from subsidiaries were 684 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. The four Global Drive Brands achieved an overall volume growth of 10 per cent, which led to share improvements in many markets. The reported Group revenue increased by 3 per cent to £10,018 million but, at comparable rates of exchange, would have increased by 5 per cent as a result of more favourable pricing and an improving product mix. Adjusted diluted earnings per share rose by 11 per cent, principally as a result of the strong growth in profit from operations, partly offset by the adverse impact from foreign exchange movements. Basic earnings per share were higher at 105.19p (2006:92.08p). The Board is recommending a final dividend of 47.60p, which will be paid on 7 May 2008. This, together with the interim dividend, will take dividends declared in respect of 2007 as a whole to 66.20p, an increase of 18 per cent. The Chairman, Jan du Plessis, commented "British American Tobacco has had another very good year, with increased profit and share growth in many markets. At a time of considerable economic and financial uncertainty around the world, the Group is in good shape. Over the past five years, we have delivered significant shareholder value with a total return of 294 per cent compared to 89 per cent for the FTSE 100 as a whole." 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. PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2007 INDEX PAGE Chairman's statement 2 Business review 4 Dividends 9 Group income statement 10 Group statement of changes in total equity 11 Group balance sheet 12 Group cash flow statement 14 Segmental analyses of volume, revenue and profit 15 Quarterly analyses of profit 17 Accounting policies and basis of preparation 19 Foreign currencies 19 Exceptional items 19 Other changes in the Group 20 Net finance costs 21 Associates 22 Taxation 22 Earnings per share 23 Cash flow 24 Total equity 27 Contingent liabilities 27 Share buy-back programme 37 Post balance sheet events 37 Annual Report and Accounts 37 Financial calendar 2008 38 Disclaimers 38 CHAIRMAN'S STATEMENT British American Tobacco has had another very good year, with increased profitand share growth in many markets. At current rates of exchange, revenue wasahead by 3 per cent and profit from operations, excluding exceptionals, by 7 percent, despite the £106 million adverse impact of exchange rates. At comparablerates of exchange, revenue was up 5 per cent and profit from operations,excluding exceptionals, up 11 per cent. Adjusted diluted earnings per share increased by 11 per cent to 108.53p. Overthe past five years, our earnings per share have grown by 10 per cent compound,clearly demonstrating our ability to meet our goal of delivering highsingle-figure growth in earnings, on average, over the medium to long term. Sales of the Group's Global Drive Brands improved by 10 per cent, as both Kentand Pall Mall broke through the 50 billion sticks volume level for the firsttime. Kent grew by 19 per cent, driven by the innovative Kent Nanotek in Russia,as well as by growth in Chile, Romania and Ukraine. Dunhill was up 6 per cent,benefiting from new products and packaging, while Lucky Strike grew slightly.Our premium volume grew by 3 per cent, in contrast to the 1 per cent decline inoverall volumes, demonstrating the benefit of our continuing investment ininnovation. 2007 saw the completion of our initial five year programmes of cost savings fromthe supply chain and from overheads and indirects. Over the period, we havesaved over £1 billion in annual costs. The annualised supply chain savings in2007 reached £177 million, bringing the total to £551 million and the overheadsand indirects annualised savings were £100 million, making the total for thatprogramme £455 million. Over the next five years, our target is to achieve further annualised savings of£800 million by 2012, in areas such as supply chain efficiencies, back-officeintegration and management structures. Some of the savings will be reinvested inthe business, so that we can maintain our investment in innovation, distributionand research and development, driving sustainable revenue growth and improvingthe quality of our business. Our share of our associate companies' post-tax results rose by 3 per cent to£442 million, reflecting higher profits from Reynolds American and ITC, partlyoffset by adverse exchange movements. We have announced an agreement to acquire 100 per cent of SkandinaviskTobakskompagni's (ST) cigarette and snus business in exchange for our 32.35 percent holding in ST and the payment of DKK11,384 million (£1,151 million) incash. ST accounts for more than 60 per cent of cigarette sales in Scandinavia. By turning our minority stake in a diversified group into full control of a veryprofitable cigarette business, we will strengthen our market positions inDenmark, Norway, Sweden and Poland and achieve significant synergy benefits. Thetransaction, which is subject to competition approvals, will be funded from acommitted bank facility and, excluding one-off costs, is expected to beimmediately earnings enhancing. We are also delighted to have won the public tender for the cigarette assets ofTekel, the Turkish state owned tobacco company, with a bid of US$1,720 million(£860 million). On completion, which is expected later this year and is subjectto regulatory approvals, the acquisition will raise our market share in Turkey,the eighth largest cigarette market in the world, to some 36 per cent from justover 7 per cent today. Page 2 Chairman's statement cont... The addition of Tekel's portfolio will provide a stronger platform for thegrowth of our international brands such as Kent, Pall Mall and Vogue in theTurkish market. We expect to achieve significant one-off benefits in addition tothe expected cost savings and the transaction, which will also be financed witha committed bank facility, should be earnings enhancing from 2009. During the year, we repurchased some 45 million shares at a cost of £750 millionand at an average price of £16.57. Over the past five years, we have returnedalmost £3 billion to shareholders in share buy-backs. However, in view of ourrefinancing plans following the Tekel and ST transactions, we have decided toscale-back the 2008 share buy-back to some £400 million with a view tomaintaining our credit rating. We will keep the level under review, as we intendto return to the higher level of £750 million announced last year in due course. Once again, following discussions with the Takeover Panel, the Company will beasking independent shareholders at the Annual General Meeting to waive therequirement for R&R to make a bid for the remaining shares in British AmericanTobacco, should their combined interest, which currently stands at 29.95 percent, reach or exceed 30 per cent as a result of our share buy-back programme. In November 2007, Richemont and Remgro made preliminary announcements that theywere considering restructurings that might entail providing their respectiveshareholders with the option of becoming direct shareholders in British AmericanTobacco. We have agreed, if requested, to obtain a secondary listing for ourordinary shares on the Johannesburg Stock Exchange with a view to facilitatingany such restructurings. Shareholders may remember that last year the Board announced a phased increasein the dividend payout ratio, which is planned to reach 65 per cent of long termsustainable earnings in 2008. The Board is therefore proposing a final dividendfor 2007 of 47.60p, taking the total for the year to 66.20p, an increase of 18per cent, representing a payout ratio of 61 per cent. Over the past five years,we have achieved compound dividend growth of 13 per cent. There have been a number of changes to the Board during 2007. Antonio Monteirode Castro retired following an outstandingly successful period as ChiefOperating Officer and was replaced by Nicandro Durante. We have also announcedthat Paul Rayner will be retiring as Finance Director at the AGM, as he needs toreturn to Australia for family reasons. Our thoughts are very much with Paul andhis family at this difficult time. I would like to thank him for his tremendouscontribution to the Group over many years. Paul will be succeeded by BenStevens, currently Regional Director, Europe. Amongst the Non-Executive Directors, Piet Beyers retired in June and Karen deSegundo and Christine Morin-Postel were appointed in October. Ken Clarke will beretiring from the Board at the AGM, having served since 1998. We will miss hiswise counsel very much indeed. Ken will be succeeded as Senior IndependentDirector by Sir Nick Scheele. At a time of considerable economic and financial uncertainty around the world,British American Tobacco is in good shape. Over the past five years, we havedelivered significant shareholder value with a total return of 294 per cent,compared to 89 per cent for the FTSE 100 as a whole. Jan du Plessis Page 3 BUSINESS REVIEW The reported Group profit from operations was 11 per cent higher at £2,905million or 7 per cent higher if exceptional items, as explained on pages 19 and20 are excluded. However, profit from operations at comparable rates of exchangeand excluding exceptional items, would have been 11 per cent higher, with allregions contributing to this strong result. Group volumes from subsidiaries were 684 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. Group revenue increased by 3 per cent to £10,018 million but, at comparablerates of exchange, would have increased by 5 per cent as a result of favourablepricing and improved 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 second half of the year. The good performance of the Global Drive Brands ledto share improvements in many markets. Kent grew by 19 per cent, with excellent growth in Russia, Romania, Ukraine andChile, while volumes were maintained in a reduced Japan market. It alsobenefited from significant volume increases from the brand migrations in WesternEurope and new markets in Azerbaijan and Kazakhstan. Dunhill rose by 6 per cent, driven by strong performances in South Korea,Russia, Italy, South Africa and Saudi Arabia, although volumes were in line withlast year in Malaysia and lower in Taiwan and Australia. Lucky Strike volumes were slightly up as the growth in Spain, Italy, France,Argentina and Brazil was almost offset by declines as a result of lower industryvolumes in Germany and Japan. Despite the absence of Pall Mall StiX in Germany during 2007, Pall Mallcontinued its growth with an increase of 10 per cent, driven by Italy, Hungary,Russia, Uzbekistan, Turkey and Taiwan, partly offset by lower volumes inGermany, Romania, Spain, Greece and Malaysia. In Europe, profit at £842 million was up £61 million or 8 per cent, at bothcurrent and comparable rates of exchange, mainly as a result of higher marginsin Russia, Romania, Hungary and Spain, which more than offset the impact ofreduced volumes in a number of markets. Volumes were down 1 per cent at 245billion, with reductions in Russia, Ukraine, Germany, Italy and Spain partlyoffset by increases in Romania. In Italy, volumes and market share were lower although Lucky Strike, Dunhill andPall Mall grew share. While margins improved following industry price increases,profit was lower due to the reduced volumes, higher marketing expenses and thedisposal of the Toscano cigar business in 2006. In addition, the Group incurred a penalty of euro20 million in the 'cartel case'related to cigarette prices in Italy, where the infringement had been committedprior to the Group's acquisition of ETI. The productivity programme was completed through the consolidation of productioninto one factory and a further reduction in the cost base. Although cigarette market share rose in Germany, driven by Pall Mall, volumesdeclined as industry sales were affected by the growth of illicit trade, the endof StiX sales, changes in vending regulations and consumer down-trading to othertobacco products. This, together with the lower margins of other tobaccoproducts, led to lower profit. Page 4 Business review cont... Sales volumes in France were lower, mainly as a result of the overall industrydecline after public place smoking restrictions and a price increase. LuckyStrike and Pall Mall showed strong growth in market share, with Dunhill andVogue performing well in the premium segment. Profit was up as margins improvedthrough the price increase and cost reductions. The excise increase in Switzerland at the beginning of the year stimulateddown-trading and growth in the trade brand sector, resulting in weaker volumesand lower profits. However, Parisienne and Pall Mall grew market share. Volumes and profit in the Netherlands increased, benefiting from the growth ofLucky Strike, Kent and Pall Mall and the May 2007 price increase, partiallyoffset by consumer down-trading. In Belgium, a significant excise driven priceincrease led to lower volumes and market down-trading. Profit was lower as theimpact of these more than offset higher margins and overhead savings. Results in Spain improved, benefiting from price increases at the beginning of2007 and, although volumes were lower, Lucky Strike showed impressive marketshare growth. Sales volumes in Russia were influenced by trade buying at the end of 2006 inanticipation of the new excise system and price increases in December. However,most of the shortfall was recovered with strong performances by Kent, Vogue andViceroy, leading to an increased market share. Profit grew significantly,benefiting from higher margins, an improved product mix and productivitysavings. In Romania, the excellent performance of Kent, the leading brand in this market,supported by the growth of Dunhill, Vogue and Pall Mall, resulted in a highermarket share. Profit increased impressively with volume growth, higher pricesand an improved product mix. Results in Ukraine improved as better pricing, effective cost control and animproved mix, following a good performance by Kent, was partly offset by theimpact of reduced local brand volumes. In Hungary, profit grew substantially,benefiting from improved margins and efficiency programmes. Overall volumes werestable with Viceroy and Pall Mall growing strongly and Vogue strengthening itsposition in the premium segment. Results in Poland improved significantly asprices increased and volume and market share grew with good performances fromViceroy, Pall Mall and Vogue. In Asia-Pacific, profit rose by £56 million to £672 million, mainly attributableto strong performances from Australasia, Vietnam, Pakistan and Bangladesh,despite the adverse impact of exchange. At comparable rates of exchange, profitwould have increased by £66 million or 11 per cent. Volumes at 145 billion were2 per cent higher as a result of strong growth in Pakistan, South Korea andVietnam, partially offset by declines in Malaysia and Bangladesh. In Australia, profit growth was achieved with improved margins from product costreductions and price increases. Market share grew with good performances fromDunhill, Pall Mall and Winfield. In New Zealand, strong competition affectedmarket share and profit but Pall Mall and Dunhill showed good growth. In Malaysia, the strong performance of Dunhill and, more recently, Pall Mall,resulted in growth in their respective price segments with Dunhill increasingoverall share. However, the large excise increase in July 2007 impacted industryvolumes which were already declining due to high levels of illicit trade andtotal market share was lower. Profit was slightly lower as a result of increasedmarketing expenditure and lower volumes which more than offset the benefits ofhigher pricing and an improved product mix. In Vietnam, profit increased significantly benefiting from better pricing,productivity initiatives and volume growth. Market share was higher, driven by agood performance from Craven 'A'. Page 5 Business review cont... Volumes and market share rose in South Korea, with Dunhill continuing to growstrongly. However, the positive impact of higher volumes, margins and supplychain savings were offset by increased marketing investment and a weaker localcurrency. In Taiwan, volume and profit rose due to a strong performance fromPall Mall, increased prices and cost reductions. Pakistan continued its strong volume growth with Gold Flake the majorcontributor. Overall market share increased confirming our market leadership.Higher volumes, price increases and effective cost management, led to animpressive profit performance. In Bangladesh, despite lower volumes due to thegrowth of the value-for-money segment, profit increased as a result of improvedpricing and product mix. In Sri Lanka, profit and market share continued to grow although overall volumesdeclined due to the security situation and price increases. Profit in Latin America increased by £69 million to £680 million due to goodperformances in key markets such as Brazil and Venezuela, partly offset by lowerprofit in Mexico and the adverse impact of some weaker local currencies. Atcomparable rates of exchange, profit would have increased by £86 million or 14per cent. Volumes were 1 per cent down at 151 billion as the increases inBrazil, Venezuela and Chile were more than offset by declines in Mexico,Argentina and Central America. In Brazil, profit grew strongly, benefiting from higher volumes, price rises inanticipation of the excise increase in July, some improvement in product mix anda stronger local currency. Market share was higher as volumes increased due tostrong brand and trade marketing efforts and the effective anti-illicit tradeenforcement actions by the government. Industry volume in Mexico suffered following a large excise driven priceincrease at the beginning of 2007 and this, together with a lower market shareand a weaker currency, resulted in lower profit. In Argentina, profit grew asprices increased after the severe price competition of the prior year, as wellas a better product mix and cost saving initiatives. Volumes and market share,however, were both down. In Chile, volumes were higher than last year and, despite an unfavourableexchange rate, profit grew due to higher margins and strong up-trading to Kentand Lucky Strike. Volumes in Peru were stable although profit declined due tocompetitive pricing. In Venezuela, profit increased strongly, despite the impact of exchange, due toprice rises and higher volumes, partially offset by increased costs. Marketshare grew through good performances by Consul and Belmont. The Central America and Caribbean area benefited from higher margins and moreefficient product sourcing, but this was more than offset by the impact ofexchange and lower industry volumes, as a result of excise driven priceincreases. Profit in the Africa and Middle East region was £2 million higher at £470million due to exchange rate movements. However, at comparable rates ofexchange, profit would have increased by £53 million or 11 per cent with strongperformances from South Africa and Nigeria. Volumes were 4 per cent lower at 101billion, resulting from supply chain disruption in the Middle East and a changein distribution model in Turkey. Page 6 Business review cont... In South Africa, despite the weaker average exchange rate, good profit growthwas achieved as a result of reductions in illicit trade, an improved product mixand higher margins. The margin improvements were the result of pricing andproductivity improvements across the business. Dunhill recorded its highest evermarket share and Peter Stuyvesant continued its growth. Strong profit growth in Nigeria was the result of higher margins, the benefitsof productivity initiatives and an improved product mix. Share performance wasparticularly strong for Benson & Hedges and was supported by Dunhill and PallMall. Volumes were marginally lower as a result of tradede-stocking following the country's elections. In Sub-Saharan Africa, supply difficulties in West Africa at the beginning ofthe year impacted volume and profit, while a number of markets in East Africadelivered productivity savings and grew volumes reflecting lower levels ofillicit trade. In the Middle East, the brand portfolio mix improved across the area through thegrowth of premium brands, although profit was adversely affected by lowervolumes as a result of supply chain disruptions and weaker currencies. Dunhillcontinued its growth in Saudi Arabia and the Arabian Gulf and grew market share.North Africa showed improved volume and profit performance, with market share inEgypt growing as a result of strong performances by Kent and Rothmans. Volumes, market share and profit in the Caucasus were all well ahead of lastyear. The higher volumes reflected significant increases in Dunhill and Vogue,while Kent remained the leading brand. In Turkey, volumes and market share werehigher but operating losses increased due to the one-off costs associated withthe change in the distribution model in January and higher brand support withthe launch of new brands. The profit from the America-Pacific region increased by £22 million to £446million as a result of higher profit in local currency in Japan and Canada,partly offset by the impact of weaker exchange rates. At comparable rates ofexchange, profit would have increased by £45 million or 11 per cent. Volumesdecreased by 3 per cent to 42 billion, mainly as a result of the decline inindustry volumes in Canada, partly offset by the increase in Japan. In Canada, profit of £276 million was down £4 million from last year. However,profit would have been £4 million higher at comparable rates of exchange, due tohigher margins and lower production costs following the transfer ofmanufacturing to Mexico. The impact of these more than offset the reduction involumes driven by the increased prevalence of illicit product and loss of marketshare. The continued growth of Peter Jackson resulted in share growth in thevalue-for-money segment, but, as this was more than offset by the decline in thepremium segment, the overall market share was lower. In Japan, where there was a significant decline in industry volumes, the growthof market share, profit and volumes continued, driven by the strong performancesof Kent and Kool. Profit grew through higher volumes, increased margins,improved product mix and effective cost management, partly offset by the impactof unfavourable exchange rates. Page7 Business review cont... Unallocated costs, which are net corporate costs not directly attributable toindividual regions, were £107 million (2006: £103 million). The above regional results were achieved before accounting for restructuringcosts and gains/losses on disposal of businesses and brands, as explained onpages 19 and 20. Results of associates Associates principally comprise Reynolds American, ITC and SkandinaviskTobakskompagni (ST). The Group's share of the post-tax results of associatesincreased by £11 million, or 3 per cent to £442 million, after taxation of £246million (2006: £216 million). Excluding the exceptional items explained on page 22, the Group's share of thepost-tax results of associates at £449 million, rose by 5 per cent. However, theGroup's share of these results was particularly affected by the weakening of theaverage US dollar rate against sterling from 1.844 to 2.001 and, at comparablerates of exchange, the increase would have been 11 per cent. The contribution from Reynolds American, excluding exceptional items, was only£4 million higher due to the impact of the weaker US dollar. At comparable ratesof exchange, the contribution from Reynolds American would have been £28 millionhigher at £313 million. The impact of increased pricing, moist-snuff volumes andproductivity more than offset lower cigarette volume and higher settlementexpenses. The results of Reynolds American also reflect the inclusion of the first fullyear of Conwood's results and that company's continued growth. As explained onpage 22, Reynolds American acquired Conwood on 31 May 2006 and reported that ona pro forma US GAAP basis, as if it had been owned since the beginning of 2006,Conwood increased volume, margins and profit. The Group's associate in India, ITC, continued its strong revenue growth and itscontribution to the Group rose by £17 million to £108 million, with the growthhelped by one-off costs in 2006. The contribution from the Group's associate in Denmark, ST, rose by 4 per centto £48 million. Associates' volumes decreased by 4 per cent to 230 billion and, with theinclusion of these, total Group volumes were 914 billion (2006: 930 billion). Page 8 DIVIDENDS The Directors will be recommending to the shareholders at the Annual GeneralMeeting to be held on 30 April 2008, the payment on 7 May 2008 of a finaldividend for the year of 47.6p per ordinary share of 25p. Valid transfers received by the Registrar of the Company up to 7 March 2008,will be in time to rank for payment of this dividend. Ordinary shares goex-dividend on 5 March 2008. The following is a summary of the dividends declared for the years ended 31December 2007 and 2006. 2007 2006 Pence per Pence per share £m share £m Ordinary sharesInterim - 2007 paid 12 September 2007 18.6 377- 2006 paid 13 September 2006 15.7 323Final - payable 7 May 2008 47.6 954- 2006 paid 3 May 2007 40.2 821 ----- ------ ------ ------ 66.2 1,331 55.9 1,144 ===== ====== ====== ====== In accordance with IFRS, the proposed final dividend amounting to £954 million(2006: £821 million), payable on 7 May 2008, will be recognised in the Groupaccounts for the year ending 31 December 2008. For the year ended 31 December2007, the accounts include the final dividend paid in respect of the year ended31 December 2006, amounting to £821 million and the interim dividend amountingto £377 million, paid on 13 September 2006. For the year ended 31 December 2006,the accounts include the final dividend paid in respect of the year ended 31December 2005, amounting to £685 million and the 2006 interim dividend,amounting to £323 million. Page 9 GROUP INCOME STATEMENT For the year ended 31 December 2007 2006 £m £m Gross turnover (including duty, excise and other taxesof £16,216 million (2006: £15,427 million)) 26,234 25,189 ======= ======= Revenue 10,018 9,762 Raw materials and consumables used (2,802) (2,861)Changes in inventories of finished goods and work inprogress 30 (11)Employee benefit costs (1,586) (1,554)Depreciation and amortisation costs (336) (401)Other operating income 205 181Other operating expenses (2,624) (2,494) ------- -------Profit from operations 2,905 2,622after (charging)/crediting ----------------- restructuring costs (173) (216)- net gains/(losses) on disposal of businesses and brands 75 41 ---------------- ----------------Finance income 136 110Finance costs (405) (399) ----------------Net finance costs (269) (289)Share of post-tax results of associates and joint ventures 442 431after (charging)/crediting ---------------- brand impairments (7) (13)- exceptional tax credits 17 ---------------- ------- -------Profit before taxation 3,078 2,764Taxation on ordinary activities (791) (716) ------- -------Profit for the year 2,287 2,048 ======= ======= Attributable toShareholders' equity 2,130 1,896 ======= ======= Minority interests 157 152 ======= ======= Earnings per shareBasic 105.19p 92.08p ======= ======= Diluted 104.46p 91.33p ======= ======= See notes on pages 19 to 38. Page 10 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY For the year ended 31 December 2007 2006 £m £m Differences on exchange 312 (685)Cash flow hedges- net fair value gains 15 13- reclassified and reported in profit for the year (42) (15)Available-for-sale investments- net fair value gains/(losses) 1 (2)- reclassified and reported in profit for the year 1Net investment hedges- net fair value (losses)/gains (35) 117Tax on items recognised directly in equity (19) (12) ------ ------Net gains/(losses) recognised directly in equity 233 (584)Profit for the year page 10 2,287 2,048 ------ ------Total recognised income for the year 2,520 1,464 --------------------- shareholders' equity 2,348 1,334- minority interests 172 130 --------------------Employee share options- value of employee services 37 41- proceeds from shares issued 27 28Dividends - ordinary shares (1,198) (1,008) - to minority interests (173) (137)Purchase of own shares- held in employee share ownership trusts (41) (77)- share buy-back programme (750) (500)Acquisition of minority interests (9) (13)Other movements (3) 13 ------ ------ 410 (189)Balance 1 January 6,688 6,877 ------ ------Balance 31 December 7,098 6,688 ====== ====== See notes on pages 19 to 38. Page 11 GROUP BALANCE SHEET At 31 December 2007 2006 £m £m Assets Non-current assetsIntangible assets 8,105 7,476Property, plant and equipment 2,378 2,207Investments in associates and joint ventures 2,269 2,108Retirement benefit assets 50 29Deferred tax assets 262 273Trade and other receivables 123 192Available-for-sale investments 22 24Derivative financial instruments 153 76 ------- -------Total non-current assets 13,362 12,385 ======= ======= Current assetsInventories 1,985 2,056Income tax receivable 85 59Trade and other receivables 1,845 1,568Available-for-sale investments 75 128Derivative financial instruments 82 124Cash and cash equivalents 1,258 1,456 ------- ------- 5,330 5,391Assets classified as held for sale 36 ------- -------Total current assets 5,366 5,391 ======= ======= ------- -------Total assets 18,728 17,776 ======= ======= See notes on pages 19 to 38. Page 12 GROUP BALANCE SHEET At 31 December 2007 2006Equity £m £m Capital and reservesShareholders' funds 6,880 6,461 -----------------------after deducting cost of treasury shares (296) (197) -----------------------Minority interests 218 227 ------- -------Total equity 7,098 6,688 ======= ======= Liabilities Non-current liabilitiesBorrowings 6,062 5,568Retirement benefit liabilities 357 435Deferred tax liabilities 294 296Other provisions for liabilities and charges 165 161Trade and other payables 149 146Derivative financial instruments 49 29 ------- -------Total non-current liabilities 7,076 6,635 ======= ======= Current liabilitiesBorrowings 861 1,058Income tax payable 227 292Other provisions for liabilities and charges 263 253Trade and other payables 2,976 2,766Derivative financial instruments 225 84 ------- ------- 4,552 4,453 ------- ------- Liabilities directly associated with assets classified as held for sale 2 ------- -------Total current liabilities 4,554 4,453 ======= ======= ------- -------Total equity and liabilities 18,728 17,776 ======= ======= See notes on pages 19 to 38. Page 13 GROUP CASH FLOW STATEMENT For the year ended 31 December 2007 2006 £m £m Cash generated from operations 3,181 2,816Dividends received from associates 285 259Tax paid (866) (713) ------- -------Net cash from operating activities 2,600 2,362 ======= ======= Interest and dividends received 116 121Purchases of property, plant and equipment (416) (425)Proceeds on disposal of property, plant and equipment 46 64Purchases and disposals of intangible assets (50) 2Purchases and disposals of investments 71 (37)Purchases and disposals of minorities and subsidiaries 111 (39)Purchases of associates (1) ------- -------Net cash from investing activities (122) (315) ======= ======= Interest paid (384) (389)Finance lease rental payments (24) (22)Proceeds from issue of shares and exercise of options 27 28Proceeds from increases in and new borrowings 438 1,365Movements relating to derivative financial instruments (89) 142Purchases of own shares (791) (577)Reductions in and repayments of borrowings (427) (1,739)Dividends paid (1,371) (1,147) ------- -------Net cash from financing activities (2,621) (2,339) ======= ======= Net cash flows from operating, investing and financing activities (143) (292)Differences on exchange 47 (96) ------- -------Decrease in net cash and cash equivalents in the year (96) (388)Net cash and cash equivalents at 1 January 1,276 1,664 ------- -------Net cash and cash equivalents at 31 December 1,180 1,276 ======= ======= See notes on pages 19 to 38. Page 14 SEGMENTAL ANALYSES OF VOLUME, REVENUE AND PROFIT For the year ended Volume 31.12.07 31.12.06 bns bns Europe 245.0 247.7Asia-Pacific 145.2 141.9Latin America 150.5 152.6Africa and Middle East 101.0 104.8America-Pacific 42.3 43.8 ------- ------- 684.0 690.8 ======= ======= Revenue 31.12.07 31.12.06 Inter Inter External segment Revenue External segment Revenue restated restated restated £m £m £m £m £m £m Europe 3,621 225 3,846 3,495 526 4,021Asia-Pacific 1,874 22 1,896 1,755 27 1,782Latin America 1,979 585 2,564 1,780 332 2,112Africa and Middle East 1,224 15 1,239 1,063 24 1,087America-Pacific 473 473 760 760 ------- ------- ------- ------ ------ -------Revenue 9,171 847 10,018 8,853 909 9,762 ======= ======= ======= ====== ====== ======= The segmental analysis of revenue is based on location of manufacture and the2006 analysis has been restated to reflect changes in manufacturing operations.Figures based on location of sales are as follows: 31.12.07 31.12.06 £m £m Europe 3,655 3,545Asia-Pacific 1,876 1,839Latin America 1,983 1,791Africa and Middle East 1,445 1,489America-Pacific 1,059 1,098 ------- -------Revenue 10,018 9,762 ======= ======== Page 15 Segmental analyses of volume, revenue and profit cont... Profit from operations 31.12.07 31.12.06 Adjusted Adjusted Segment segment Segment segment result result* result result* £m £m £m £m Europe 782 842 676 781Asia-Pacific 667 672 609 616Latin America 680 680 611 611Africa and Middle East 447 470 444 468America-Pacific 436 446 385 424 ------- ------- ------- ------ 3,012 3,110 2,725 2,900Unallocated costs (107) (107) (103) (103) ------- ------- ------- ------Profit from operations 2,905 3,003 2,622 2,797 ======= ======= ======= ====== *Excluding restructuring costs and net gains/losses on disposal of businessesand brands as explained on pages 19 and 20. The segmental analysis of the Group's share of the post-tax results ofassociates and joint ventures is as follows: 31.12.07 31.12.06 Adjusted Adjusted Segment segment Segment segment result result* result result* £m £m £m £m Europe 48 48 46 46Asia-Pacific 110 110 92 92Latin America 1 1Africa and Middle East 1 1 4 4America-Pacific 282 289 289 285 ------- ------- ------- ------ 442 449 431 427 ======= ======= ======= ====== *Excluding brand impairments and exceptional tax credits as explained on page22. Page 16 QUARTERLY ANALYSES OF PROFIT 3 months to Year to 31.3.07 30.6.07 30.9.07 31.12.07 31.12.07 £m £m £m £m £m Europe 182 222 246 192 842 Asia-Pacific 167 168 163 174 672 Latin America 180 206 164 130 680 Africa and Middle East 124 125 105 116 470 America-Pacific 80 112 128 126 446 ------- ------ ------ ------ ------- 733 833 806 738 3,110 Unallocated costs (41) (4) (29) (33) (107) ------- ------ ------ ------ ------- 692 829 777 705 3,003 Restructuring costs (8) (32) (10) (123) (173) Gains on disposal ofbusinesses and brands 11 45 19 75 ------- ------ ------ ------ ------- Profit from operations 684 808 812 601 2,905 Net finance costs (58) (68) (78) (65) (269) ------- ------ ------- ------ -------Share of post-taxresults of associates and joint ventures 111 111 113 107 442 ------- ------ ------- ------ ------- Profit before taxation 737 851 847 643 3,078 Taxation on ordinaryactivities (199) (221) (209) (162) (791) ------- ------ ------- ------ -------Profit for the period 538 630 638 481 2,287 ======= ====== ======= ====== ======= Earnings per share Basic 24.24p 28.70p 29.73p 22.52p 105.19p ======= ====== ======= ====== ======= Adjusted diluted 24.31p 29.20p 28.49p 26.53p 108.53p ======= ====== ======= ====== ======= Page 17 Quarterly analyses of profit cont... 3 months to Year to 31.3.06 30.6.06 30.9.06 31.12.06 31.12.06 £m £m £m £m £m Europe 168 212 214 187 781 Asia-Pacific 155 150 161 150 616 Latin America 155 148 144 164 611 Africa and Middle East 114 122 126 106 468 America-Pacific 93 132 107 92 424 ------- ------ ------- ------- ------- 685 764 752 699 2,900 Unallocated costs (33) (27) (17) (26) (103) ------- ------ ------- ------- ------- 652 737 735 673 2,797 Restructuring costs (21) (27) (116) (52) (216) ------- ------ ------- ------- ------- Net (losses)/gainson disposal of businesses and brands (15) (1) 57 41 ------- ------ ------- ------- ------- Profit from operations 616 709 619 678 2,622 Net finance costs (68) (56) (85) (80) (289) ------- ------ ------- ------- -------Share of post-taxresults of associates and joint ventures 120 123 105 83 431 ------- ------ ------- ------- ------- Profit before taxation 668 776 639 681 2,764 Taxation on ordinaryacivities (178) (188) (152) (198) (716) ------- ------ ------- ------- -------Profit for the period 490 588 487 483 2,048 ======= ====== ======= ======= ======= Earnings per share 21.81p 26.57p 21.73p 21.97p 92.08pBasic ======= ====== ======= ======= ======= Adjusted diluted 22.05p 27.06p 25.89p 23.12p 98.12p ======= ====== ======= ======= ======= Page 18 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information has been extracted from the Annual Report andAccounts, including the audited financial statements for the year ended 31December 2007. 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 and implemented in the UK. The Group's financial statements for the year ended 31 December 2007 have beenprepared under the historical cost convention, except in respect of certainfinancial instruments. FOREIGN CURRENCIES The results of overseas subsidiaries and associates have been translated tosterling as follows: The income and cash flow statements have been translated at the average ratesfor the respective periods. Assets and liabilities have been translated at therelevant period end rates. For high inflation countries, the local currencyresults are adjusted for the impact of inflation prior to translation tosterling at closing exchange rates. The principal exchange rates used were as follows: Average Closing --------------- --------------- 2007 2006 2007 2006 US dollar 2.001 1.844 1.991 1.957Canadian dollar 2.147 2.091 1.965 2.278Euro 1.462 1.467 1.362 1.484South African rand 14.110 12.520 13.605 13.799Brazilian real 3.894 4.009 3.543 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 twelve months to 31 December 2007 includes a charge for restructuring of£173 million, principally in respect of costs associated with restructuring theoperations in Italy and with the reorganisation of the business across theEurope and Africa and Middle East regions, as well as 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 19 Exceptional items cont... (b) Net 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. 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 twelve months to31 December 2007. On 1 October 2007, the Group agreed the termination of its license agreementwith Philip Morris for the rights to the Chesterfield trademark in a number ofcountries in Southern Africa. This transaction resulted in a gain of £19 millionincluded in other operating income in the profit from operations. 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. In addition, a number of smaller acquisitions ofminority interests were made during 2007 in Africa and Middle East, Europe andAsia-Pacific. Page 20 NET FINANCE COSTS Net finance costs comprise: Year to 31.12.07 31.12.06 £m £m Finance costs (405) (399)Finance income 136 110 ------ ------ (269) (289) ====== ======Comprising:Interest payable (382) (410)Interest and dividend income 111 122Fair value changes - derivatives (143) 212Exchange differences 145 (213) ------ ------ 2 (1) ------ ------ (269) (289) ====== ====== Net finance costs at £269 million were £20 million lower than last year,principally reflecting the impact of lower average net debt, as well as one-offitems. The £2 million gain (2006: £1 million loss) of fair value changes and exchangedifferences reflects a gain of £12 million (2006: £7 million loss) from the netimpact of exchange rate movements and a loss of £10 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. The Group's interest cover was distorted by the impact of the exceptional items,shown in the adjusted earnings per share calculations (page 23), on the profitbefore taxation. On an adjusted basis, interest cover based on profit beforeinterest payable over interest payable remains strong at 9.4x (2006: 8.1x), withthe higher cover reflecting both higher profit and lower interest costs. Netinterest cover, on the basis of profit before net finance costs over net financecosts, was 12.8x (2006: 11.2x). Page 21 ASSOCIATES The share of post-tax results of associates and joint ventures was £442 million(2006: £431 million) after tax of £246 million (2006: £216 million). The shareof associates is after exceptional charges and credits: - In the year ended 31 December 2007, Reynolds American modified the previouslyanticipated level of support between certain brands and the projected net salesof certain brands, resulting in a brand impairment charge of which the Group'sshare amounted to £7 million (net of tax) (2006: £13 million). - In the year ended 31 December 2006, Reynolds American also benefited from thefavourable resolution of tax matters of which the Group's share was £17 million. 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. Theacquisition was funded principally with debt and the fair value of assetsacquired and liabilities assumed was US$4.1 billion and US$0.6 billionrespectively. Included in the assets were US$2.5 billion in respect of goodwilland US$1.4 billion in respect of brands. TAXATION Year to 31.12.07 31.12.06 £m £m UK corporation tax 14Overseas tax 816 743Adjustment in respect of prior periods (51) (62) ------- -------Current tax 765 695Deferred tax 26 21 ------- ------- 791 716 ======= ======= The tax rates in the income statement of 25.7 per cent in 2007 and 25.9 per centin 2006 are affected by the inclusion of the share of associates' post-taxprofit in the Group's pre-tax results. The underlying tax rate for subsidiariesreflected in the adjusted earnings per share below was 29.6 per cent in 2007 and29.6 per cent in 2006. In 2006 the UK corporation tax charge of £14 million isreduced to £nil million by an equal and opposite deferred tax credit of£14 million and did not result in the payment of any UK tax. Page 22 EARNINGS PER SHARE Basic earnings per share are based on the profit for the year attributable toordinary shareholders and the weighted average number of ordinary shares inissue during the year (excluding treasury shares). For the calculation of the diluted earnings per share, the weighted averagenumber of shares reflects the potential dilutive effect of employee shareschemes. The earnings per share are based on: 31.12.07 31.12.06 Earnings Shares Earnings Shares £m m £m mBasic 2,130 2,025 1,896 2,059Diluted 2,130 2,039 1,896 2,076 The earnings have been distorted by exceptional items and to illustrate theimpact of these, the adjusted diluted earnings per share are shown below: Diluted earnings per share Year to 31.12.07 31.12.06 pence pence Unadjusted earnings per share 104.46 91.33Effect of restructuring costs 6.48 8.09Effect of disposal of businesses and brands (2.75) (1.11)Effect of associates' brand impairments andexceptional tax credits 0.34 (0.19) ------- ------- 108.53 98.12 ======= ======= Adjusted earnings per share are based on:- adjusted earnings (£m) 2,213 2,037- shares (m) 2,039 2,076 Similar types of adjustments would apply to basic earnings per share. For theyear to 31 December 2007, basic earnings per share on an adjusted basis would be109.29p (2006: 98.93p) compared to unadjusted amounts of 105.19p (2006: 92.08p). Page 23 CASH FLOW a) The IFRS cash flow includes all transactions affecting cash and cashequivalents, including financing. The alternative cash flow below is presentedto illustrate the cash flows before transactions relating to borrowings. Year to 31.12.07 31.12.06 £m £m Net cash from operating activities beforerestructuring costs and taxation 3,656 3,295Restructuring costs (190) (220)Taxation (866) (713) ------ ------Net cash from operating activities page 14 2,600 2,362Net interest (280) (263)Net capital expenditure (436) (419)Dividends to minority interests (173) (139) ------ ------Free cash flow 1,711 1,541Dividends paid to shareholders (1,198) (1,008)Share buy-back (750) (500)Other net flows 152 (5) ------ ------Net cash flows (85) 28 ====== ====== The growth in underlying operating performance, as well as the timing of workingcapital movements and higher dividends from associates, resulted in a £361million increase in cash flow before restructuring costs and taxation to £3,656million. Although there was a £153 million increase in tax outflows reflecting higherprofits and the timing of payments, with the above operating cash flows andlower restructuring costs, the Group's net cash flow from operating activitieswas £238 million higher at £2,600 million. With higher net interest flows, net capital expenditure and dividends tominority interests, the free cash flow was £170 million higher than 2006 at£1,711 million. However, with the step up in dividends and share buy-back in2007, the total cash outlay on dividends to shareholders and share buy-backexceeds the free cash flow by £237 million. Free cash flow is the Group's cash flow before dividends, share buy-back andinvesting activities. The ratio of free cash flow per share to adjusted dilutedearnings per share was 77 per cent (2006: 76 per cent), with free cash flow pershare increasing by 13 per cent. The other net flows in 2007 principally reflect the sale of the Belgium cigarfactory and associated brands, as well as the disposal of the pipe tobaccobusiness, as described on page 20. The comparative figure for 2006 primarilyrelates to the purchase of minority interests in Chile and shares for theGroup's share based compensation plans, partly offset by the sale of Toscano inItaly and the disposal of brands. The above flows resulted in net cash outflow of £85 million compared to aninflow of £28 million in 2006. After taking account of transactions related toborrowings, the above flows resulted in a net decrease of cash and cashequivalents of £143 million compared to a net decrease of £292 million in 2006,as shown in the IFRS cash flow on page 14. Page 24 Cash flow cont... These cash flows, after a positive exchange impact of £47 million, resulted incash and cash equivalents, net of overdrafts, decreasing by £96 million to£1,180 million in 2007 (2006: £388 million decrease). Borrowings, excluding overdrafts but taking into account derivatives relating toborrowings, were £6,836 million compared to £6,401 million as at 31 December 2006. The increaseprincipally reflected the impact of exchange movements. Current available-for-sale investments at 31 December 2007 were £75 million (31December 2006: £128 million). As a result of the above net debt, comprising borrowings, cash, cash equivalentsand current available for sale investments, was £5,581 million (31 December2006: £4,996 million). b) Cash generated from operations (page 14) Year to 31.12.07 31.12.06 £m £m Profit before taxation 3,078 2,764Share of post-tax results of associates and jointventures (442) (431)Net finance costs 269 289Gains on disposal of businesses and brands (75) (60)Depreciation and impairment of property, plant andequipment 293 367Amortisation and write off of intangible assets 43 34Decrease in inventories 170 21(Increase) in trade and other receivables (83) (105)Increase in trade and other payables 61 57(Decrease) in net retirement benefit liabilities (120) (69)(Decrease) in provisions for liabilities and charges (16) (68)Other 3 17 ------ ------Cash generated from operations 3,181 2,816 ====== ====== c) IFRS Investing and financing activities The investing and financing activities in the IFRS cash flows on page 14 includethe following items: Interest and dividends received include dividends received of £2 million (2006:£2 million). Purchases and disposals of intangible assets include £16 million of salesproceeds for the year to 31 December 2007 (2006: £60 million), mainly from thetrademark sales explained on page 20. Purchases and disposals of investments (which comprise available-for-saleinvestments and loans and receivables) include an inflow in respect of currentinvestments of £65 million for the year to 31 December 2007 (31 December 2006:£41 million outflow) and £6 million sales proceeds from non-current investmentsfor the year to 31 December 2007 (31 December 2006: £4 million). Page 25 Cash flow cont... Purchases and disposals of subsidiaries for the year ended 31 December 2007,principally reflect the proceeds from the sale of the Belgian cigar factory andassociated brands. Purchases and disposals of subsidiaries for the year ended 31December 2006, principally reflect the cost of acquiring minority interests inthe Group's Chilean subsidiary less the proceeds from the sale of Toscano inItaly. These transactions are described on page 20. During the year to 31 December 2007, euro800 million of euro1.7 billion bondswith a maturity of 2009 were replaced by euro1,000 million bonds with a maturityof 2017. During the year to 31 December 2006, euro600 million Eurobonds with amaturity of 2014, £325 million Eurobonds with a maturity of 2016 and euro525million floating rate notes with a maturity of 2010 were issued. The proceeds,together with cash resources, were used to repay bonds including euro1 billionfloating rate notes, a DM1 billion Eurobond and a euro 500 million Eurobond. The movement relating to derivative financial instruments is in respect ofderivatives taken out to hedge cash and cash equivalents and externalborrowings, derivatives taken out to hedge inter company loans and derivativestreated as net investment hedges. Derivatives taken out as cash flow hedges inrespect of financing activities are also included in the movement relating toderivative financial instruments, while other such derivatives in respect ofoperating and investing activities are reflected along with the underlyingtransactions. Purchases of own shares include the buy-back programme as described on page 37,together with purchases of shares held in employee share schemes of £41 millionin 2007 (2006: £77 million). Dividends paid for the year to 31 December 2007 include £1,198 million ofdividends to Group shareholders and £173 million to minority shareholders (2006:£1,008 million and £139 million respectively). d) Net cash and cash equivalents in the cash flow statement comprise: 31.12.07 31.12.06 £m £m Cash and cash equivalents per balance sheet 1,258 1,456Accrued interest (1)Overdrafts (78) (179) ------- ------- 1,180 1,276 ======= ======= Page 26 TOTAL EQUITY 31.12.07 31.12.06 £m £m Share capital 506 517Share premium account 53 48Capital redemption reserves 101 90Merger reserves 3,748 3,748Translation reserve 59 (177)Hedging reserve (11) 10Available-for-sale reserve 16 13Other reserves 573 573Retained earnings 1,835 1,639 ------------------after deducting cost of treasury shares (296) (197) ------------------- ------- -------Total shareholders' funds 6,880 6,461 ------- -------Minority interests 218 227 ------- ------- 7,098 6,688 ======= ======= Total equity was £410 million higher at £7,098 million. The profit retainedafter payment of dividends exceeded the level of the share buy-back by £182million. In addition, exchange movements had a £312 million positive impact onshareholder's funds, reflecting the general weakness of sterling at the end of2007 compared to 2006. CONTINGENT LIABILITIES The Group is subject to contingencies pursuant to requirements that it complieswith relevant laws, regulations and standards. Failure to comply could result inrestrictions in operations, damages, fines, increased tax, increased cost ofcompliance, reputational damage, or other sanctions. These matters areinherently difficult to quantify. In cases where the Group has an obligation as a result of a past event existingat the balance sheet date, it is probable that an outflow of economic resourceswill be required to settle the obligation and the amount of the obligation canbe reliably estimated, a provision would be recognised based on best estimatesand management judgement. There are, however, contingent liabilities in respect of litigation, taxes insome countries and guarantees for which no provisions were made. The Group has exposures in respect of the payment or recovery of a number oftaxes. The Group is and has been subject to a number of tax audits coveringamongst 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 theseaccounts in accordance with the Group's accounting policies. In some countries,tax law requires that full or part payment of disputed tax assessments be madepending resolution of the dispute. To the extent that such payments exceed theestimated obligation, they would not be recognised as an expense. In some casesdisputes are proceeding to litigation. While the amounts that may be payable or receivable could be material to theresults 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'sfinancial condition. Page 27 Contingent liabilities cont... Product liability litigation Group companies, notably Brown & Williamson Holdings, Inc. (formerly Brown &Williamson Tobacco Corporation) (B&W), as well as other leading cigarettemanufacturers, are defendants, principally in the US, in a number of productliability cases. In a number of these cases, the amounts of compensatory andpunitive damages sought are significant. Indemnity On 30 July 2004, B&W completed transactions combining its US tobacco businessassets, liabilities and operations with R.J. Reynolds Tobacco Company. A newcompany called R.J. Reynolds Tobacco Company (RJRT) was created as a result ofthe combination transactions. These transactions (the Business Combination) wereaccomplished through Reynolds American Inc. (RAI), which is a publicly tradedholding company and the indirect parent corporation of RJRT. As a result of theBusiness Combination: (a) B&W discontinued the active conduct of any tobaccobusiness in the US; (b) B&W contributed to RJRT all of its assets other than thecapital stock of certain subsidiaries engaged in non-US businesses and otherlimited categories of assets; (c) RJRT assumed all liabilities of B&W (exceptliabilities to the extent relating to businesses and assets not contributed by B&W to RJRT and other limited categories of liabilities) and contributedsubsidiaries or otherwise to the extent related to B&W's tobacco business asconducted in the US on or prior to 30 July 2004; and, (d) RJRT agreed toindemnify B&W and each of its affiliates (other than RAI and its subsidiaries)against, among other matters, all losses, liabilities, damages, expenses,judgments, attorneys' fees, etc, to the extent relating to or arising from suchassumed liabilities or the assets contributed by B&W to RJRT (the RJRTIndemnification). The scope of the RJRT Indemnification includes all expensesand contingent liabilities in connection with litigation to the extent relatingto or arising from B&W's US tobacco business as conducted on or prior to 30 July2004, including smoking and health tobacco litigation, whether the litigation iscommenced before or after 30 July 2004 (the tobacco litigation). Pursuant to the terms of the RJRT Indemnification, RJRT is liable for anypossible judgments, the posting of appeal bonds or security, and all otherexpenses of and responsibility for managing the defence of the tobaccolitigation. RJRT has assumed control of the defence of the tobacco litigationinvolving B&W and 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 representboth B&W and RJRT in any single or similar case (except in certain limitedcircumstances) as RJRT's interests are typically aligned with B&W's interests,and RJRT has substantial experience in managing recognised external legalcounsel in defending the tobacco litigation, and external counsel haveindependent professional responsibilities to represent the interests of B&W. Inaddition, in accordance with the terms of the RJRT Indemnification, affiliatesof B&W have retained control of the defence in certain tobacco litigation caseswith respect to which such affiliates are entitled to indemnification. US litigation The total number of US product liability cases pending at 31 December 2007involving B&W and/or other Group companies was approximately 3,323 (2006:3,492). At 31 December 2007, UK-based Group companies have been named asco-defendants in six of those cases (2006: seven). In 2007, only one case wastried against B&W, and it resulted in a defence verdict. That case, Menchinini,was an individual case brought by a flight attendant who was a member of theBroin class action (see below). No US cases involving the UK-based Groupcompanies were tried in 2007. Approximately six cases where B&W is a defendantare currently scheduled for trial in 2008, some involving amounts rangingpossibly into the hundreds of millions and even billions of dollars. No case inwhich a UK-based Group company is a defendant is currently scheduled for trialin 2008. Page 28 Contingent liabilities cont... Since many of these pending cases seek unspecified damages, it is not possibleto quantify the total amounts being claimed, but the aggregate amounts involvedin such litigation are significant. The cases fall into four broad categories: (a) Medical reimbursement cases These civil actions seek to recover amounts spent by government entities andother third party providers on healthcare and welfare costs claimed to resultfrom illnesses associated with smoking. Although B&W continues to be a defendantin healthcare cost recovery cases involving plaintiffs such as hospitals andNative American tribes, the vast majority of such cases have been dismissed onlegal grounds. At 31 December 2007, one reimbursement suit was pending against B&W by an Indian tribe in Indian tribal court in South Dakota, and no suits werepending against B&W by county or other political subdivisions of the states. TheMaster Settlement Agreement (MSA) with the 46 states includes a credit for anyamounts paid in suits brought by the states' political subdivisions;nevertheless, RJRT intends to defend and is defending these cases vigorously.Based on somewhat different theories of claim are two non-governmental medicalreimbursement cases and health insurers' claims. One third party reimbursementcase (City of St. Louis), consists of more than 60 public and non-profithospitals in Missouri seeking reimbursement of past and future alleged smokingrelated healthcare costs. A trial date for this case has been set for 11 January2010. B&W was named as a defendant in two cases brought by foreign government entitiesin a single US court (Republic of Panama and State of Sao Paulo) seekingreimbursement of medical costs which they incurred for treatment for persons intheir own countries who are alleged to have smoked imported cigarettes,including those manufactured by B&W. These two cases, originally filed in statecourt in Louisiana, were consolidated and then dismissed by the trial court onthe basis that Louisiana was the inappropriate forum. These plaintiffs filed newcases in the Superior Court for the State of Delaware on 19 July 2005. On 13July 2006, the Delaware Superior Court granted defendants' motion to dismiss.Plaintiffs filed notices of appeal to the Supreme Court of Delaware on 19 July2006, and that Court affirmed the dismissal of plaintiffs' claims on 23 February2007. (b) Class actions At 31 December 2007, B&W was named as a defendant in some 12 (2006: 15) separateactions attempting to assert claims on behalf of classes of persons allegedlyinjured or financially impacted through smoking or where classes of tobaccoclaimants have been certified. Even if the classes remain certified and thepossibility of class-based liability is eventually established, it is likelythat individual trials will still be necessary to resolve any actual claims.Class-action suits have been filed in a number of states against individualcigarette manufacturers and their parent corporations, alleging that the use ofthe terms 'lights' and 'ultralights' constitutes unfair and deceptive tradepractices. A class action complaint (Schwab) was filed in the US District Courtfor 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 thedefendants' practices with respect to the marketing, advertising, promotion andsale of 'light' cigarettes. The court granted plaintiffs' motion for classcertification on 25 September 2006. By order dated 17 November 2006, the SecondCircuit Court of Appeals granted defendants' motion to stay the district courtproceedings in this case, and further granted defendants' petition for leave toappeal the district court's class certification order. Briefing on the appealwas completed on 31 January 2007, and oral argument was heard on 10 July 2007. Adecision on the appeal remains pending. Other types of class-action suits assertclaims on behalf of classes of individuals who claim to be addicted, injured, orat greater risk of injury by the use of tobacco or exposure to environmentaltobacco smoke, or the legal survivors of such persons. Page 29 Contingent liabilities cont... In Engle (Florida), one jury awarded a total of US$12.7 million to three classrepresentatives, and in a later stage of this three phase trial process, a juryassessed US$17.6 billion in punitive damages against B&W. In November 2000, B&Wposted a surety bond in the amount of US$100 million (the amount required byFlorida law) to stay execution of this punitive damages award. On 21 May 2003,the intermediate appellate court reversed the trial court's judgment andremanded the case to the trial court with instructions to decertify the class.On 16 July 2003, plaintiffs filed a motion for rehearing which was denied on 22September 2003. On 12 May 2004, the Florida Supreme Court agreed to review thiscase and, on 6 July 2006, it upheld the intermediate appellate court's decisionto decertify the class, and vacated the jury's punitive damages award. By anorder dated 17 April 2007, the surety bond for the punitive damages was releasedand the US$100 million collateral securing that bond was returned to B&W.Further, the Florida Supreme Court permitted the judgments entered for two ofthe three Engle class representatives to stand, but dismissed the judgmententered in favour of the third Engle class representative. Finally, the Courthas permitted putative Engle class members to file individual lawsuits againstthe Engle defendants within one year of the Court's decision (subsequentlyextended to 11 January 2008). The Court's order precludes defendants fromlitigating certain issues of liability against the putative Engle class membersin these individual actions. On 7 August 2006, defendants filed a motion forrehearing before the Florida Supreme Court, which was granted in part, anddenied in part, on 21 December 2006. The Florida Supreme Court's 21 December2006 ruling did not amend any of the earlier decisions' major holdings, whichincluded decertifying the class, vacating the punitive damages judgment, andpermitting individual members of the former class to file separate suits.Instead, the ruling addressed the claims on which the Engle jury's phase oneverdict will be applicable to the individual lawsuits that were permitted tostand. On 1 October 2007, the United States Supreme Court denied defendants'request for certiorari review of the Florida Supreme Court's decision. At 31December 2007, more than 1,700 plaintiffs had filed lawsuits as purported Engleclass members, and 43 of these suits name B&W as a defendant. All 43 suitsagainst B&W, however, are individual smoker lawsuits that were pending inFlorida before the Florida Supreme Court's 6 July 2006 decision, which have beenre-classified as individual Engle lawsuits. No lawsuits by purported Engle classmembers have been filed against B&W after the Florida Supreme Court's 6 July2006 decision. However, at 31 December 2007, approximately 360 suits named RJRTindividually and as successor in interest to B&W, four suits named RJRT only assuccessor in interest to B&W, and approximately 197 suits named RJRT only in itsindividual capacity. 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'sshare: US$8.4 million). On 1 April 2003, the jury award was reduced to US$25.125million (B&W's share: US$5.65 million) but no final judgment has been entered todate because the Court postponed the entry of final judgment until the Engleappeal was fully resolved. On 12 October 2007, plaintiff filed notice ofcompletion of all appellate review to the trial court. Once final judgment isentered, defendants intend to pursue an appeal. In a Louisiana medical monitoring case brought on behalf of Louisiana smokers(Scott), on 28 July 2003, the jury returned a verdict in defendants' favour onthe medical monitoring claim but made findings against defendants with respectto claims relating to fraud, conspiracy, marketing to minors and smokingcessation. On 21 May 2004, the jury returned a verdict in the amount of US$591million on the class's claim for a smoking cessation programme. On 1 July 2004,the court upheld the jury's verdict and entered final judgment. On 29 September2004, defendants posted a US$50 million bond Page 30 Contingent liabilities cont... (legislation in Louisiana limits the amount of a bond to prevent execution uponsuch a judgment to US$50 million collectively for signatories to the MSA). RJRTposted US$25 million (i.e. the portions for RJRT and B&W) towards the bond. On12 April 2006, the Louisiana Fourth Circuit Court of Appeal heard argument ondefendants' appeal. The appellate court issued a decision on 7 February 2007that affirmed class certification and upheld the smoking cessation programme forcertain smokers who began smoking before 1988, but reduced the US$591 millionjury award by US$312 million and rejected any award of prejudgement interest.The decision also remanded the case to re-determine damages in light of itsholding that no class members who started smoking before 1988 were entitled toany monetary damages. All further proceedings in the trial court have beenstayed, however, pending further appellate review. Defendants (on 2 April 2007)and plaintiffs (on 13 April 2007) both filed petitions for review by theLouisiana Supreme Court, which the Court denied on 7 January 2008. (c) Individual cases Approximately 3,307 cases were pending against B&W at 31 December 2007 (2006:3,471) filed by or on behalf of individuals in which it is contended thatdiseases or deaths have been caused by cigarette smoking or by exposure toenvironmental tobacco smoke (ETS). Of these cases: (a) approximately 75 per centare ETS cases brought by flight attendants who were members of a class action(Broin) that was settled on terms that allow compensatory but not punitivedamages claims by class members; (b) approximately 20 per cent of the individualcases against B&W are cases brought in consolidated proceedings in WestVirginia, where the first phase of trial is scheduled to begin on 17 March 2008;and (c) only about 5 per cent are cases filed by other individuals. Of the individual cases that were decided or remained on appeal during 2007, 3resulted in verdicts against B&W: In December 2003, a New York jury (Frankson) awarded US$350,000 compensatorydamages against B&W and two industry organisations. In January 2004, the samejury awarded US$20 million punitive damages. On 22 June 2004, the trial judgegranted a new trial unless the parties agreed to an increase in compensatorydamages to US$500,000 and a decrease in punitive damages to US$5 million, ofwhich US$4 million would be assigned to B&W. Plaintiffs agreed to a decrease inpunitive 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 appellatecourt. Oral argument was heard on 8 May 2006. The appellate court affirmed thejudgment on 5 July 2006. B&W filed a motion for leave to reargue, or in thealternative, for leave to appeal to the New York Court of Appeals, on 3 August2006. The intermediate appellate court denied this motion on 5 October 2006. On8 December 2006, the trial judge granted plaintiff's application for entry ofjudgment, and granted plaintiff's motion to vacate that part of the 2004 ordergranting a new trial unless the parties agreed to an increase in compensatorydamages to US$500,000. RJRT posted a bond in the approximate amount ofUS$8,018,000 on 3 July 2007. B&W appealed from final judgment on 3 July 2007 toan intermediate New York State appellate court, and its initial appellate briefwas submitted on 3 January 2008. On 1 February 2005, a Missouri jury (Smith) awarded US$500,000 in compensatorydamages against B&W and then, on 2 February 2005, awarded US$20 million inpunitive damages, also against B&W. On 1 June 2005, B&W filed its notice ofappeal. B&W filed its opening appellate brief on 28 April 2006. Oral argumentwas heard on 31 August 2006. On 31 July 2007, an intermediate Missouri appellatecourt affirmed the compensatory damages award, but it reversed the punitivedamages award, reasoning that plaintiff failed to produce sufficient evidence tojustify the verdict. The court remanded the case for a second trial, limited topunitive damages. Page 31 Contingent liabilities cont... On 18 March 2005, a New York jury (Rose) awarded US$1.7 million in compensatorydamages against B&W. On 18 August 2005, B&W filed its notice of appeal. RJRTposted 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 intermediateNew York appellate court, which has not yet rendered a decision. (d) Other claims The Flintkote Company (Flintkote), a US asbestos production and sales company,was included in the acquisition of Genstar Corporation by Imasco in 1986 andbecame a Group subsidiary following the restructuring of Imasco Limited (nowImperial Tobacco Canada Limited (Imperial)) in 2000. Soon after thisacquisition, and as part of the acquisition plan, Genstar began to sell most ofits assets, including the non-asbestos related operations and subsidiaries ofFlintkote. The liquidation of Flintkote assets produced cash proceeds and,having obtained advice that sufficient assets would remain to satisfyliabilities, Flintkote and Imasco authorised the payment of two dividends. In2003, Imperial divested Flintkote and then, in 2004, Flintkote filed forbankruptcy in the United States Bankruptcy Court for the District of Delaware.In 2006, Flintkote, certain representatives of both the present and futureasbestos claimants as well as certain individual asbestos claimants werepermitted by the bankruptcy court to file a complaint against Imperial andnumerous other defendants for the recovery of the dividends and othercompensation under various legal theories. The parties are presently engaged incase management discussions to establish the scope and manner of discovery inthis case. This litigation is at a preliminary stage and is expected to take anumber of years to proceed to trial. In Wisconsin, the authorities have identified potentially responsible parties tofund the clean up of the Fox River, Wisconsin. The pollution was caused bydischarges of toxic material from paper mills operating close to the river. Thecost of the clean up work has been estimated to be in the order of US$600million. Among the potentially responsible parties are NCR Corporation (NCR) andAppleton Papers Inc. (Appleton) who may be liable for a proportion of the cleanup costs. B.A.T Industries p.l.c. (Industries) purchased what was then NCR'sAppleton Papers Division from NCR in 1978 and spun off this business in 1990,obtaining full indemnities from Appleton for past and future environmentalclaims. Disputes between NCR, Appleton and Industries as to the indemnitiesgiven and received under the purchase agreement in 1978 have been the subject ofarbitration in 1998 and 2006. Under the terms of the arbitration awards,Industries and Appleton have an obligation to share the costs of environmentalclaims with NCR, but Industries has never been required to pay any sums in thisregard because Appleton has paid any sums demanded to date. It is believed thatall future environmental liabilities will continue to be met directly byAppleton by self-funding or insurance cover and no demand will be made uponIndustries. Settlement of State Health Care Reimbursement Cases During 2003, agreement was reached on certain disputed MSA payments relating toMSA calculations based on 1999 and 2000 sales. This agreement resulted in abenefit of £27 million which is excluded from the 2003 costs shown in theconsolidated audited annual accounts of the Company for the financial year ended31 December 2004. In other developments, after an Independent Auditor found thatthe terms of the MSA were a 'significant factor' in market share lossesexperienced by signatories to the MSA in 2003, several US tobacco companies,including B&W, asserted their rights under the NPM (or Non-ParticipatingManufacturer) Adjustment provision of the MSA to recover a payment credit oroffset - against their April 2006 payment obligations - for MSA payments made inApril 2004 in respect of cigarettes shipped or sold in the US in 2003. Theamount at stake exceeds Page 32 Contingent liabilities cont... US$1 billion. The settling states oppose these MSA payment reduction claims and,in late April 2006, began filing motions in MSA courts across the countryseeking enforcement of certain MSA provisions and a declaration of the parties'rights under the NPM Adjustment provision of the MSA. Defendants have opposedthese motions, arguing that their NPM Adjustment claims must go instead toarbitration. To date, the overwhelming majority of MSA courts to decide thesemotions have ruled in defendants' favour. UK-based Group companies At 31 December 2007, Industries was a defendant in the US in one class action,the Schwab case mentioned previously. In that case, Industries was substitutedfor the Company as a defendant. British American Tobacco (Investments) Limited(Investments) had been served in one reimbursement case (City of St. Louis), theDepartment of Justice case (see below), one anti-trust case (Smith, see below),two class actions (Cleary and Schwab) and two individual actions (Eiser andPerry). Conduct-based claims On 22 September 1999, the US Department of Justice brought an action in the USDistrict Court for the District of Columbia against various industry members,including RJRT, B&W, Industries and Investments. Industries was dismissed forlack of personal jurisdiction on 28 September 2000. The government sought torecover federal funds expended in providing healthcare to smokers who havedeveloped diseases and injuries alleged to be smoking-related, and, in addition,sought, pursuant to the federal Racketeer Influenced and Corrupt OrganizationsAct (RICO), disgorgement of profits the government contends were earned as aconsequence of a RICO 'enterprise'. On 28 September 2000, the portion of theclaim which sought recovery of federal funds expended in providing healthcare tosmokers who have developed diseases and injuries alleged to be smoking-relatedwas dismissed. The bench (non-jury) trial of the RICO portion of the claim beganon 21 September 2004, and ended on 9 June 2005. On 17 November 2004, theWashington DC Circuit Court of Appeals heard an appeal by the defendants againstan earlier district court decision that disgorgement of profits is anappropriate remedy to the RICO violations alleged by the government. On 4February 2005, the Court of Appeals allowed the appeal, ruling that thegovernment could not claim disgorgement of profits. On 17 October 2005, the USSupreme Court declined to hear the government's appeal in respect of the claimfor disgorgement of US$280 billion of past profits from the US tobacco industry.The disgorgement claim was a centrepiece of the government's claim. On 17 August 2006, the district court issued its final judgment, consisting ofsome 1,600 pages of factual findings and legal conclusions. The court found infavour of the government, and against certain defendants, including B&W andInvestments. The court also ordered a wide array of injunctive relief, includinga ban on the use of 'lights' and other similar descriptors beginning 1 January2007. Compliance with the court-ordered remedies may cost RJRT and Investmentsmillions of dollars. In addition, the government is seeking the recovery ofroughly US$1.9 million in litigation costs. Defendants filed a motion to stayenforcement of the judgment shortly after the judgment was issued. The courtdenied defendants' stay motion on 28 September 2006. Defendants, including B&Wand Investments, filed their notices of appeal to the Washington DC CircuitCourt of Appeals on 11 September 2006, and filed an emergency motion to stay thejudgment before the same court on 29 September 2006. On 31 October 2006, theCourt of Appeals granted defendants' motion to stay enforcement of the judgmentpending the outcome of the appeal. On 10 August 2007, defendants filed theirinitial appellate briefs to the Court of Appeals. All defendants filed a jointappellate brief, and Investments also filed its own brief which raised the issueof whether Congress intended for RICO to apply to extraterritorial conduct by aforeign defendant. On 19 November 2007, the government filed its opposition/cross-appeal brief. Appellate briefing will be completed in May 2008, but a datefor oral argument has not yet been scheduled. Page 33 Contingent liabilities cont... In the Daric Smith case, purchasers of cigarettes in the State of Kansas broughta class action in the Kansas State Court against B&W, Investments and certainother tobacco companies seeking injunctive relief, treble damages, interest andcosts. The allegations are that the defendants participated in a conspiracy tofix or maintain the price of cigarettes sold in the US, including the State ofKansas, in violation of the Kansas Restraint of Trade Act. The matter will bedefended vigorously. Product liability outside the United States At 31 December 2007, active claims against Group companies existed in 18 (2006:18) countries outside the US but the only countries with more than five activeclaims were Argentina, Australia, Brazil, Canada, Chile, Italy, and the Republicof Ireland. Recoupment actions are being brought in Argentina, Brazil, Israel,Nigeria, Spain and Saudi Arabia, and there are also three class actions beingbrought in Brazil. At 31 December 2007, there were some 3,478 (2006: 1,113) filed individual'lights' cases in Italy. This is a significant increase from last year due tothe filing of 2,230 cases by a single plaintiffs' counsel in one jurisdiction(Pescopagano). Of the 2,230 Pescopagano cases, plaintiffs' lawyer has withdrawn472 claims currently before the Court, although the Court has not yet confirmedthe withdrawal of those cases. Plaintiffs' lawyer has also stated his intentionto withdraw the remaining 1,758 cases not yet formally registered. Almost all ofthe individual 'lights' cases filed in Italy, including Pescopagano, are pendingbefore Justices of the Peace courts. Because of the type of court involved, themost that any individual plaintiff can recover is €1,033. To date, more than950 (2006: 678) of these cases (not including Pescopagano cases) have beensuspended or resulted in decisions given in favour of British American TobaccoItalia S.p.A. There are around 33 (2006: 27) smoking and health cases pendingbefore Italian Civil Courts, filed by or on behalf of individuals in which it iscontended that diseases or deaths have been caused by cigarette smoking. Thereare two (2006: two) labour cases for alleged occupational exposure pending inItaly. In Canada, the government of the Province of British Columbia brought a claimpursuant to the provisions of the Tobacco Damages and Health Care Costs RecoveryAct 2000 against domestic and foreign 'manufacturers' seeking to recover theplaintiff's costs of health care benefits. The constitutionality of the 2000 Actwas challenged by certain defendants and, on 5 June 2003, the British ColumbiaSupreme Court found the Act to be beyond the competence of the British Columbialegislature and, accordingly, dismissed the government's claim. The governmentappealed that decision to the British Columbia Court of Appeal which, on 20 May2004, overturned the lower court's decision and declared the Act to beconstitutionally valid. Defendants appealed to the Supreme Court of Canada inJune 2004 and that court gave its judgment in September 2005 dismissing theappeals and declaring the Act to be constitutionally valid. The action is nowset down for trial in September 2010. The federal government has been enjoinedby a Third Party Notice, and has presented a Motion to Strike the claim. Thehearing will take place during the week of 3 March 2008. Non-Canadian defendantschallenged the personal jurisdiction of the British Columbia Court and thosemotions were heard in the Supreme Court of British Columbia. On 23 June 2006,the court dismissed all defendants' motions, finding that there is a 'real andsubstantial connection' between British Columbia and the foreign defendants.Subsequently, defendants were granted leave to appeal. The appeal was dismissedon 15 September 2006. Defendants have filed leave to appeal to the Supreme Courton 10 November 2006. Similar legislation has been enacted, but not yet broughtinto force, in some other Canadian provinces, and is also being considered byother Canadian provinces. In June 2006, the government of New Brunswick passedthe Tobacco Damages and Health Care Costs Recovery Act. It has recentlyannounced that it has hired a consortium of law firms from Canada and the US torepresent the Province and file suit. Page 34 Contingent liabilities cont... In addition, there are five class actions and four individual cases in Canada.In the Knight class action, the Supreme Court of British Columbia certified aclass of all consumers of cigarettes bearing 'light' or 'mild' descriptors since1974 manufactured in British Columbia by Imperial. Imperial filed an appealagainst the certification which was heard in February 2006. The Appeal Courtconfirmed the certification of the class but has limited any financialliability, if proved, to the period from 1997. This is a 'lights' class actionin which plaintiff alleges that the marketing of light and mild cigarettes isdeceptive because it conveys a false and misleading message that thosecigarettes are less harmful than regular cigarettes. Although the claim arisesfrom health concerns, it does not seek compensation for personal injury. Insteadit seeks compensation for amounts spent on 'light and mild' products and adisgorgement of profits from Imperial. The motion of the federal government tostrike out the third party notice issued against them by Imperial was heard inFebruary 2006 and was granted but is currently under appeal by Imperial. Asimilar 'lights' and 'mild' class action claim has been filed in Newfoundland.Imperial has filed a third party notice against the federal government. Thecertification hearing took place in September 2007 and is now under advisement. There are currently two class actions in Quebec. On 21 February 2005, the QuebecSuperior Court granted certification. The court certified two classes, whichinclude residents of Quebec who suffered from lung, throat and laryngeal canceror emphysema, and residents who were addicted to nicotine at the time theproceedings were filed and who have since remained addicted. In Quebec, there isno right of appeal for a defendant upon certification. Plaintiffs have served aStatement of Claim. This litigation is expected to take several years to proceedto trial. The other class action is an attempt to establish a class claiming forpersonal injury or damage to property from fires caused by cigarettes that didnot automatically extinguish on being dropped or left unattended. Certificationof such a class was denied in October 2005. Plaintiffs' appeal was heard on 28/29 January 2008 and judgment is awaited. In 2007, four Nigerian states (Lagos, Kano, Gombe, and Oyo) and the federalgovernment of Nigeria filed separate health care recoupment actions, eachseeking the equivalent of billions of US dollars for costs allegedly incurred bythe state and federal governments in treating smoking-related illnesses. Theactions are still in the preliminary stages. British American Tobacco (Nigeria)Limited, the Company, and Investments have all been named as defendants in thesesuits. At 31 December 2007, the British American Tobacco defendants had filedpreliminary objections in each of the state cases. British American Tobacco(Nigeria) Limited raised preliminary objections based on, inter alia, lack ofstanding by plaintiffs, lack of jurisdiction of the courts over plaintiffs'claims, a failure by plaintiffs to prove that defendants' purported misconductwas the proximate cause of plaintiffs' damages and constitutional argumentsrelating to separation of powers and federalism. Both the Company andInvestments raised preliminary objections to personal jurisdiction and service.The courts in Kano and Gombe are scheduled to hear oral argument on defendants'jurisdiction and service objections in early 2008. It is possible that otherNigerian states will file similar lawsuits in the near future. In Saudi Arabia, there are reports that the Ministry of Health is pursuing ahealth-care recoupment action in the Riyadh General Court against Saudi tobaccodistributors, seeking damages of billions of Saudi Riyals. The identity of thedefendants is unclear at this time. At 31 December 2007, no Group company hadbeen served with process. In addition, a separate recoupment action wasreportedly filed by the King Faisal Hospital on 30 September 2007 in the RiyadhGeneral Court, naming 'BAT Company Limited' as a defendant. At 31 December 2007,no Group company had been served with process in the action. Page 35 Contingent liabilities cont... Other Litigation outside the United States In November 2004, the Royal Canadian Mounted Police (the RCMP) obtained awarrant to search and seize business records and documents at the head office ofImperial in Montreal. The affidavit filed by the RCMP to obtain the searchwarrant made allegations in relation to the smuggling of cigarettes in Canadabetween 1989 and 1994, naming Imperial, the Company, Industries and certainformer directors and employees. No charges have yet been laid. Imperial believesthat it has conducted itself appropriately at all times, but cannot predict theoutcome of any such investigation, or whether additional investigations willoccur. Two actions were started in Russia by a minority shareholder in OJSC CompanyBritish American Tobacco-Yava (BAT-Yava), a Russian incorporated subsidiary ofBritish American Tobacco Holdings (Russia) B.V. The minority shareholder,Branston Holdings (Branston), issued a claim in Moscow seeking to have acontract between BAT-Yava and its sister company invalidated, and issued anotherclaim in the Stavropol region alleging that certain of the directors ofBAT-Yava, and other parties, took various unlawful steps. At first instance, theMoscow Court dismissed the claim and the Stavropol Court ordered the transfer ofthe case filed there to Moscow. The Stavropol case was duly transferred andafter a hearing on the merits on 3 October 2007, the Court dismissed allBranston's claims in full. Branston has now appealed the first instance judgmentand there is a hearing scheduled before the Moscow Court of Appeal on 9 April2008. The Group considers the claim to be without merit and will continue todefend it strenuously. Conclusion While it is impossible to be certain of the outcome of any particular case or ofthe amount of any possible adverse verdict, the Company believes that thedefences of the Group companies to all these various claims are meritorious bothon the law and the facts, and a vigorous defence is being made everywhere. If anadverse judgment is entered against any of the Group companies in any case, anappeal will be made. Such appeals could require the appellants to post appealbonds or substitute security in amounts which could in some cases equal orexceed 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 theaggregate, and despite the quality of defences available to the Group, it is notimpossible that the results of operations or cash flows of the Group inparticular quarterly or annual periods could be materially affected by this andby the final outcome of any particular litigation. Having regard to all these matters, the Directors (i) do not consider itappropriate to make any provision in respect of any pending litigation and (ii)do not believe that the ultimate outcome of this litigation will significantlyimpair the financial condition of the Group. Page 36 SHARE BUY-BACK PROGRAMME The Group initiated an on market buy-back programme at the end of February 2003. During the year to 31 December 2007, 45 million shares were bought at a cost of£750 million (31 December 2006: 35 million shares at a cost of £500 million),bringing the total of the share buy-back programme to 291 million shares, at acost of £2,942 million. POST BALANCE SHEET EVENTS (a) On 22 February 2008, the Group announced that it had won the public tenderfor Tekel, the Turkish state owned tobacco company, with a bid of US$1,720million. The transaction, financed with a committed bank facility, is subject toregulatory approvals and is expected to be completed later this year. Theprivatisation only relates to the cigarette assets of Tekel, which principallycomprise brands, six factories and tobacco leaf stocks. The privatisation doesnot include employees and an announcement on employment by the Group is plannednearer to the completion of the transaction, after dialogue with employees andunions. (b) On 27 February 2008, the Group agreed to acquire 100 per cent ofSkandinavisk Tobakskompagni (ST) cigarette and snus business in exchange for its32.35 per cent holding in ST and payment of DKK11,384 million in cash. Thistransaction, which is subject to approval by he European Commission, is beingfinanced through a committed bank facility and completion is anticipated laterthis year. (c) On 21 February 2008, the Group's associated company Reynolds American,announced that it would receive a payment from Gallaher Limited resulting fromthe termination of a joint venture agreement. While the payments will bereceived over a number of years, in the first quarter of 2008 Reynolds Americanwill recognise a pre-tax gain of US$300 million. ANNUAL REPORT AND ACCOUNTS The financial information in this preliminary announcement does not constitutestatutory accounts within the meaning of section 240 of the Companies Act (asamended). The figures contained herein have been extracted from the Group's Annual Reportand Accounts, including the audited financial statements for the year ended 31December 2007, which will be delivered to the Registrar of Companies. The AnnualReport and Accounts for the year ended 31 December 2006 have been delivered tothe Registrar of Companies. The auditors' report on both these sets of financialstatements were unqualified and did not contain a statement under section 237(2)or section 237(3) of the Companies Act. The Annual Report and Accounts will be published on bat.com at the beginning ofApril 2008. At that time it will be mailed only to those shareholders who haveelected to receive it. Otherwise, shareholders will be notified that the AnnualReport and Accounts is available on the website and will, at the time of thatnotification, receive a Performance Summary (which sets out an overview of theGroup's performance, headline facts and figures and key dates in the Company'sfinancial calendar) together with a Proxy Form and Notice of Annual GeneralMeeting and Circular to Shareholders. Page 37 Annual Report and Accounts cont... FINANCIAL CALENDAR 2008 5 March Ex-dividend date 2007 final dividend 7 March Record date 2007 final dividend 30 April Annual General Meeting The Mermaid Conference & Events CentreLondon EC4V 3DB 7 May Payment date 2007 final dividend 7 May First quarter results announced 31 July Interim results announced 6 August Ex-dividend date for 2008 interim dividend 8 August Record date 2008 interim dividend 17 September Payment date 2008 interim dividend 30 October Third quarter results announced DISCLAIMERS This announcement does not constitute an invitation to underwrite, subscribefor, 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 subjectto risk factors associated with, among other things, the economic and businesscircumstances occurring from time to time in the countries and markets in whichthe Group operates. It is believed that the expectations reflected in thisannouncement are reasonable but they may be affected by a wide range ofvariables which could cause actual results to differ materially from thosecurrently anticipated. Past performance is no guide to future performance and persons needing adviceshould consult an independent financial adviser. ----------------------------------------------- Nicola Snook Secretary 28 February 2008 Page 38 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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