1st Nov 2005 07:02
Imperial Tobacco Group PLC01 November 2005 IMPERIAL TOBACCO GROUP PLCPRELIMINARY RESULTS FOR THE 12 MONTHSENDED 30 SEPTEMBER 2005 HIGHLIGHTS * Turnover (excluding duty) of £3,149 million - up 4%* Adjusted** operating profit of £1,307 million - up 7%* Adjusted** pre-tax profit of £1,123 million - up 11%* Adjusted** earnings per share of 112.8p - up 11%* Full year dividend of 56.0p - up 12% Summarising today's announcement, Gareth Davis, Chief Executive, said: "I am pleased to report another set of record results, which again highlight thefundamental strengths of our business - our balanced product and brandportfolio, our broad geographic spread, our ongoing focus on reducing costs andthe effective management of our cash. "I have been particularly pleased with the improvement in our cigarette volumesin the second half of the year, reversing the decline we saw in the first sixmonths. This has included some good performances from our international brandsDavidoff and West, and has been a considerable achievement given the continuingmarket size pressures in some regions. "We also made significant progress in reducing costs and delivering furtherefficiencies across our global manufacturing operations, including an excellent15% improvement in productivity. "Effective cash management has again added to the earnings delivery and ourshare buyback programme will continue while we seek value creating acquisitions. "Our focus remains on creating sustainable shareholder value. We will continueto apply our strategy of growing our operations, both organically and throughacquisitions, and are well placed to build on our successes." ** Operating profit, pre-tax profit and earnings per share are before amortisation and exceptional items NOTES TO EDITORS Imperial Tobacco Group PLC Imperial Tobacco Group PLC is the world's fourth largest international tobaccocompany. The Group manufactures and sells a comprehensive range of cigarettes,tobaccos, rolling papers, filter tubes and cigars in over 130 countriesworldwide. It has around 15,000 employees and 32 manufacturing sites. ENQUIRIESAlex Parsons, Group Media Relations Manager +44 (0)7967 467 241Simon Evans, Group Media Relations Executive +44 (0)7967 467 684Nicola Tate, Investor Relations Manager +44 (0)117 933 7082John Nelson-Smith, Investor Relations Manager +44 (0)117 933 7032 High-resolution photographs are available to the media free of charge at:www.newscast.co.uk +44 (0)20 7608 1000 Imperial Tobacco's 2005 Preliminary Results are available at:www.imperial-tobacco.com FINANCIAL HIGHLIGHTS 2005 2004Adjusted operating profit (1) £1,307m Up 7% £1,218m ($2,313m)Adjusted pre-tax profit (1) £1,123m Up 11% £1,014m ($1,988m)Adjusted profit after tax (1) £820m Up 10% £743m ($1,451m)Adjusted earnings per share (1) 112.8p Up 11% 101.6p (199.7c)Dividend per share 56.0p Up 12% 50.0p (99.1c) Turnover including duty £11,255m Up 2% £11,005m ($19,921m)Turnover excluding duty £3,149m Up 4% £3,032m ($5,574m)Operating profit £1,044m Up 18% £885m ($1,848m)Pre-tax profit £862m Up 25% £688m ($1,526m)Profit after tax £576m Up 28% £450m ($1,020m)Basic earnings per share 79.0p Up 29% 61.4p (139.8c)Diluted earnings per share 78.6p Up 28% 61.2p (139.1c) (1) Adjusted to exclude amortisation and exceptional items. Management believesthat reporting results before amortisation and exceptional items (adjustedoperating profit, adjusted profit before tax, adjusted profit after tax andadjusted earnings per share) provides a better comparison of underlying businessperformance for the year. The exchange rate of US $1.770 to the £1, the pound sterling noon buying rate on30 September 2005, has been used to translate this statement prepared under UKGAAP. CHAIRMAN'S STATEMENT-------------------- With another strong financial and operational performance in 2005, I amdelighted that our strategy for growth has continued to deliver value for ourshareholders. Our strategy is clear. It is to create sustainable shareholder value by growingour business both organically and through acquisitions. Our focus on thisstrategy has transformed Imperial Tobacco over the past nine years into theinternational company it is today. In the past five years total shareholder return was 265 per cent and we haveoutperformed the FTSE All-Share Index by 245 per cent. Contributing to thattrack record, in 2005 total shareholder return was 40 per cent. EARNINGS AND DIVIDEND During the year we delivered some pleasing market and brand performances which,combined with our continuing focus on costs and effective cash management, grewadjusted earnings per share by 11 per cent to 112.8 pence. Basic earnings pershare were 79.0 pence (2004: 61.4 pence). As a result of this successful performance, the Board is recommending a finaldividend of 39.5 pence per share, bringing the total dividend for the year to56.0 pence, up 12 per cent on 2004 (2004: 50.0 pence). Since 2001 we have grownour dividend by 18 per cent compound. This financial performance reflected a number of operational highlights thatclearly demonstrate the effectiveness of our strategy. PERFORMANCE Our core markets of the UK and Germany delivered significant improvements inprofits, against a background of market declines, an excellent achievement.Elsewhere, we grew our cigarette shares in a number of markets across the worldwith some strong brand performances from Davidoff and West. Our drive for efficiencies and further cost savings across the Group hascontinued. The ongoing focus on enhancing productivity and improving operationalefficiencies within our manufacturing operations has resulted in the closure ofthree manufacturing sites in the past year, with further rationalisationannounced in September. We are a highly cash generative tobacco company and we have ensured thatshareholders continue to benefit from our effective cash management byinitiating a rolling share buyback programme in February 2005. We see this as anefficient use of cash whilst we continue to pursue value creating acquisitionopportunities. BOARD CHANGES The Board continues to ensure high standards of corporate governance acrossevery aspect of the business. Each year we conduct a review of Board membershipto ensure that an appropriate level of independent Non-Executive Directors ismaintained through orderly succession, without compromising the effectiveness ofthe Board and mindful of the independence requirements of the Combined Code. Simon Duffy and Sipko Huismans will step down as Non-Executive Directors at ourAGM in January 2006 having served nine years on the Board. In addition DavidThursfield resigned as a Non-Executive Director in October 2005, due to hisincreasing level of external commitments. I would like to thank Simon and Sipkofor their valuable contributions to the business since 1996 and David for hiscontribution since 2003. At our AGM in 2006 Iain Napier, who was appointed asJoint Vice Chairman in December 2004, will take on the role of SeniorIndependent Non-Executive Director. I have been delighted to welcome both Susan Murray and Colin Day asNon-Executive Directors during the year. Both bring a wealth of experience tothe business; Susan has held a number of high-profile marketing and managementroles and Colin is an experienced international executive with a strong trackrecord in the consumer sector. Bruce Davidson, Sales and Marketing Director, resigned from the Board inFebruary. Graham Blashill, formerly Regional Director Western Europe, hasextended his responsibilities to cover all of the Group's global sales andmarketing operations and I was delighted to welcome him to the Board as GroupSales and Marketing Director in October 2005. OUTLOOK Our balance, both geographically and in the breadth of the products and brandswe offer consumers, together with our ingrained focus on costs, leave us wellplaced to continue to grow the business. This, combined with our effective use of cash for value creating acquisitions,further organic investments and share buybacks, should ensure that we continueto deliver sustainable growth for our shareholders. I am grateful to my colleagues on the Board, our senior management team and toour employees worldwide for their impressive contributions and continuedcommitment to Imperial Tobacco's success; my sincere thanks to them all. In conclusion, I am confident that our strategy will continue to deliver goodresults, with our strong management team ensuring excellence in its execution. Derek BonhamChairman OPERATING AND FINANCIAL REVIEW------------------------------ Our focus on a clear and consistent strategy has again produced great results in2005 with double digit earnings per share growth, building on our outstandingtrack record. The fundamental strength of our core business was demonstrated by the improvedprofits we have delivered in the mature markets of the UK and Germany. Across Western Europe, Eastern Europe, the Middle East and Asia we increased ourcigarette shares in many markets due to the strength of our brand portfolio andour focus on trade marketing and sales excellence. This cigarette share growthreflected strong performances from our international strategic brands Davidoffand West, particularly in the Rest of Western Europe, where volumes grew by 11per cent and 31 per cent respectively. Despite a significant cigarette market size reduction in one of our coremarkets, Germany, we have been very encouraged by the positive trend in ouroverall cigarette volumes in the second half of the year, reversing the declineof the first half, with annual volumes up 1.5 per cent year on year. In manufacturing, we continued to focus on the simplification andstandardisation of processes, products and packaging. We have delivered anexcellent improvement in productivity, up by 15 per cent in 2005. This is due tothe closure of a number of factories since May 2004, together with the benefitsof machinery redeployment and underlying efficiency gains. As part of ourongoing manufacturing review, in September 2005 we announced a restructuring ofour European cigarette operations and the consolidation of our rolling papersproduction into Belgium, which will result in the closure of our rolling papersfactory in South Wales. We continually review our cost base to ensure that we are structured efficientlyand effectively in manufacturing, sales and marketing and our central supportfunctions. We are proud of the hallmarks of our business: our strong financial performance,our profitable core markets of the UK and Germany, our international reach, ourbrand equity, our multi-product portfolio, our cost focus and our track recordof successful acquisitions. A fundamental element of our strong financial performance is our ability to turnour profits into cash and ensure its effective utilisation. A rolling sharebuyback programme was initiated in February 2005 on which we spent around £200million during the remainder of the financial year. We continued to invest for sustainable organic growth. With our Turkish factoryopening in April, we initially launched Davidoff and Maxim cigarettes withencouraging early results and we added to the portfolio with the introduction ofWest in September 2005. We increased our direct sales force in Italy and areimproving our route to market capabilities in a number of markets, includingRussia. In China, we built on our already strong relationship with the YuxiHongta Group. We enhanced our position in the Scandinavian market through ourinvestment in Swedish snus manufacturer Skruf, giving us a foothold in snus andalso allowing us to distribute our other products through their establishedselling operation. Our success is not just about our operational performance. It is also about theGroup's responsible behaviour towards a large number of business partners. Thesepartners accept our contribution to the economic growth of many countries andrecognise the engagement of Imperial Tobacco in areas of mutual interest. Ourprogress in this area is demonstrated further in our annual CorporateResponsibility Review, which will be updated in December 2005 and will beavailable on our website www.imperial-tobacco.com. Whilst regulation has increased significantly over the past five years, we areexperienced in developing our business successfully in this environment asdemonstrated by our consistent results. We support sensible and fair regulationthat recognises we are a legitimate business, producing a legal product. Wecontinue our approach of constructive engagement with the authorities in themarkets in which we operate. We believe that sensible regulation combined withwell thought out voluntary agreements is the most effective way forward. From a litigation perspective, we were pleased with the judge's decision in Mayto dismiss on all counts the McTear claim against Imperial Tobacco in Scotland.We have never lost or settled any tobacco litigation and will continue to defendourselves robustly against any further speculative claims. Identifying and developing tomorrow's leaders is a key activity for allbusinesses. Several new initiatives were introduced in the year to develop ourmanagement team, with the aim of further improving performance and instillingthe essence of what makes Imperial Tobacco successful. Our people are dedicated. They are sales and cost focused and have a tremendoustrack record. They are not only good at what they do, they are also committed toshareholder value creation and I join the Chairman in thanking our employeesworldwide for what they have achieved this year on behalf of our shareholders. Our unswerving focus on our strategy, to create sustainable shareholder value bygrowing our operations both organically and through acquisitions, continues toplace the Group in a strong position. 2005 has been a great year for Imperial Tobacco. Looking ahead, I believe thatwe will continue to build on our successes. Gareth DavisChief Executive GROUP OPERATING PERFORMANCE--------------------------- In 2005 a good operational performance, combined with effective cash management,enabled us to deliver 11 per cent growth in adjusted earnings per share. In 2005, adjusted operating profit before amortisation and exceptional itemsgrew 7 per cent to £1,307 million. This growth was driven by our continuingfocus on profitable volume development, capitalising on our broad productportfolio and underpinned by effective cost management. Reported operatingprofit, after amortisation and exceptional items, was up 18 per cent to £1,044million including a reduction in exceptional items to £57 million (2004: £129million). Turnover including duty was £11,255 million compared to £11,005 million in thefinancial year ending 2004. Turnover excluding duty was up 4 per cent to £3,149million (2004: £3,032 million), with the Group's adjusted operating margin up to41.5 per cent (2004: 40.2 per cent). REGIONAL PERFORMANCE HIGHLIGHTS Turn- Turn- Adjusted Adjusted Cigarette Cigarette Fine cut Fine cut over over Ope- Ope- volumes volumes tobacco tobacco ex ex duty rating rating 2005 2004 volumes volumes2004 duty 2004 profit(1) profit(1) bn bn 2005 000's 2005 £m 2005 2004 000's tonnes £m £m £m tonnes UK 812 793 477 454 23.9 25.2 2.1 2.0 -------- -------- -------- -------- -------- -------- -------- --------Germany 630 590 295 237 20.9 23.9 7.1 6.3 -------- -------- -------- -------- -------- -------- -------- --------Rest of Western Europe 644 634 326 329 17.7 16.5 15.6 16.6 -------- -------- -------- -------- -------- -------- -------- --------Rest of the World 1,063 1,015 209 198 112.7 107.0 1.8 1.8 -------- -------- -------- -------- -------- -------- -------- --------Total as adjusted 3,149 3,032 1,307 1,218 175.2 172.6 26.6 26.7 -------- ------- -------- -------- -------- -------- -------- -------- (1) Results before amortisation and exceptional items. In the UK, turnover excluding duty was up 2 per cent to £812 million, withadjusted operating profit up 5 per cent to £477 million. Cigarette volumes weredown to 23.9 billion mainly as a result of market volume declines. The profitimprovement reflected the benefits of price increases, growth in fine cuttobacco and reduced costs, which more than offset cigarette volume declines andthe impact of downtrading. In Germany, turnover excluding duty increased 7 per cent to £630 million, withadjusted operating profit up 24 per cent to £295 million. This performance wasdespite a significant decline in the cigarette market size following successiveduty rises. Our volumes were more resilient than the market, down 13 per cent to20.9 billion, reflecting cigarette share growth. Price increases, growth involumes of other tobacco products and cost efficiencies, both in manufacturingand trading operations, more than compensated for the cigarette volume declinesand the impact of downtrading. In the Rest of Western Europe, turnover excluding duty was up 2 per cent to £644million. Adjusted operating profit was slightly down at £326 million. Theincrease in turnover was driven by cigarette volumes, up 7 per cent to 17.7billion, as market share growth more than compensated for market declines. Ourfine cut tobacco volumes were affected by increased downtrading across theregion. These volume performances, combined with a movement in the geographicsales mix towards southern Europe, resulted in a slight decrease in profits andmargins. In the Rest of the World, turnover excluding duty was up 5 per cent to £1,063million with adjusted operating profit up 6 per cent to £209 million. Ourcigarette volumes were up 5 per cent to 112.7 billion and fine cut tobaccovolumes were stable at 1,800 tonnes. Profits and margins increased, benefitingfrom volume growth, pricing improvements and operating cost reductions, morethan offsetting regional mix effects and market investments. INTEREST The net interest charge for the year decreased to £184 million (2004: £204million) reflecting reduced debt levels and a lower average all-in cost of debtof 5.3 per cent (2004: 5.6 per cent). This was mainly due to higher levels offloating rate debt, the refinancing of our bank facility at improved margins andmaturing capital market debt being replaced with lower cost bank financing.Interest cover before amortisation and exceptional items was 7.1 times (2004:6.0 times). PROFIT BEFORE TAX Group adjusted profit before tax rose 11 per cent to £1,123 million (2004:£1,014 million). After amortisation and exceptional items, reported profitbefore tax increased by 25 per cent to £862 million (2004: £688 million). EXCEPTIONAL ITEMS Reported profit before tax was impacted by exceptional items of £57 million(2004: £129 million) and profit on the sale of fixed assets of £2 million (2004:£7 million). The 2005 exceptional costs related to a number of restructuringinitiatives including the closure of our Montreal, Plattsburgh and Dublinfactories, and the announced restructuring of our European cigarette operationsand the closure of our South Wales factory. These initiatives are anticipated togenerate the following annual savings: Dublin £4 million for year ending 30September 2006; Berlin £10 million and Treforest £3 million both for the yearending 30 September 2007. ACQUISITIONS In September, we acquired a 43 per cent stake of the Swedish snus company,Skruf. The consideration of £6 million was satisfied in cash with a commitmentto purchase the balance of shares by mid 2009. The acquisition will be accountedfor as a 100 per cent owned subsidiary to reflect the substance of thetransaction. The total amortisation charge for the Group for the year was £206 million (2004:£204 million). TAXATION The tax charge for the year was £286 million (2004: £238 million), representingan effective tax rate of 27.0 per cent on profit before amortisation. The taxrate on reported profit before tax was 33.2 per cent. The Group continues tobenefit from lower tax rates applied to a number of overseas subsidiaries. EARNINGS AND DIVIDENDS Adjusted earnings per share increased by 11 per cent to 112.8 pence (2004: 101.6pence) and basic earnings per share increased by 29 per cent to 79.0 pence(2004: 61.4 pence). We have proposed a final dividend for the year of 39.5 pence, such that thetotal dividend for the year is 56.0 pence, an increase of 12 per cent, broadlyin line with our adjusted earnings growth. This dividend will be paid on 17February 2006 to those shareholders on the register at the close of business on20 January 2006. Our dividend policy is progressive, growing dividends broadlyin line with adjusted earnings, with around a 50 per cent payout ratio. The interim dividend of 16.5 pence was paid on 5 August 2005. FINANCING AND LIQUIDITY At the year end, our net debt had decreased to £3.3 billion (2004: £3.6 billion)of which 21 per cent was denominated in sterling, 77 per cent in euros and thebalance in other currencies. In February we refinanced our core bank facilitywith a new €2.25 billion, 5 year facility on improved terms. At the year end 55per cent of gross debt was fixed by interest rate derivatives (2004: 60.2 percent). CASH MANAGEMENT AND CAPITAL EXPENDITURE We have a strong track record of cash conversion averaging 92 per cent over thelast five years and this trend continued in 2005 with operating cash flow afternet capital expenditure representing 104 per cent of adjusted operating profit. Gross capital expenditure was £90 million (2004: £103 million), reflecting amaintenance level of capital expenditure plus investment in our factory inTurkey. Our net capital expenditure was £63 million (2004: £48 million) includingproceeds on disposal of fixed assets of £27 million (2004: £55 million). SHARE BUYBACKS We commenced a share buyback programme in February 2005. By 30 September 2005 wehad spent around £200 million buying back 13.5 million shares, representing 1.9per cent of issued share capital, all of which are held as treasury shares. Theaverage share price paid was 1475 pence, excluding transaction costs. The impact of the share buyback programme for the financial year ended September2005 was to increase adjusted earnings per share by 0.4 pence and basic earningsper share by 0.2 pence, after taking into account an increase in the netinterest charge of £3 million and a decrease in the tax charge of £1 million. ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS The financial statements for the year ended 30 September 2005 have been preparedin accordance with UK accounting standards (UK GAAP). For the year ending 30September 2006, we will report under International Financial Reporting Standards(IFRS). We communicated our assessment of the key changes that implementing IFRS wouldhave had on our results for 2004, in March 2005 and the related presentation isavailable on our website. Excluding the impact of IAS39 on derivatives, ouradjusted results under IFRS for 2004 would have been marginally different due topensions accounting, with all other impacts currently assessed as beingimmaterial. The major impacts on net assets amounted to an uplift of around halfa billion pounds at 1 October 2004. We are preparing a reconciliation of our 2005 UK GAAP primary financialstatements to IFRS which we will release on 24 November 2005. It will be postedto shareholders along with the Annual Report and Accounts and will be availableon our website, www.imperial-tobacco.com. UNITED KINGDOM--------------- We delivered a good performance, building on the progress we have made in recentyears and consolidating our position as the undisputed market leader incigarettes and fine cut tobacco. MARKET DYNAMICS We estimate that the UK cigarette market was down by around 4 per cent to 51billion cigarettes. Consumer downtrading continued with growth in both the ultralow price cigarette and fine cut tobacco sectors. We estimate the fine cuttobacco market grew to 3,000 tonnes (2004: 2,900 tonnes). We operate in a highly regulated environment in which new point of saleadvertising restrictions were introduced in December 2004. The UK Government'sHealth Bill was published on 27 October 2005, and states that from the summer of2007, smoking will be banned in all enclosed public places in England and Wales- apart from private members' clubs and licensed premises that do not serve orprepare food. We anticipate that in Scotland and Northern Ireland a ban on smoking in publicplaces will be implemented on 26 March 2006 and by April 2007 respectively. OUR PERFORMANCE We delivered a strong improvement in operating profits, up 5 per cent to £477million as a result of price increases, growth in fine cut tobacco volumes andcost reductions. Our results reflect the strength of our brand portfolio, which includes the UK'stwo best selling cigarette brand families, Lambert & Butler and Richmond.Lambert & Butler performed well, maintaining 16.0 per cent of the market, whilstRichmond had an excellent year, growing its share by 1.5 percentage points to14.7 per cent. The combined brand families accounted for over 30 per cent of theUK market in 2005. Reflecting market dynamics, our market shares of Regal, Embassy and Superkingsdeclined slightly such that our total UK cigarette market share remained broadlystable at 44.5 per cent. We increased our fine cut tobacco share to 66.3 per cent, with strong growthfrom Golden Virginia, the UK market leader. Our excellent performance in this highly regulated environment reflects ourcontinued investment in our skilled salesforce and supporting technology. Our UK co-marketing and logistics agreement with Philip Morris was renegotiatedfor an additional five years. OUTLOOK The UK market continues to make a major contribution to the Group's overallperformance. In the context of moderate market declines and current marketsector trends, our strong brand portfolio means we are well placed to build onour market leadership positions in cigarette and fine cut tobacco and to furtherdevelop our profits. GERMANY------- Our focus on the profitable development of our German operations has deliveredsignificantly improved results, demonstrating our flexibility to adapt to marketconditions. MARKET DYNAMICS Successive tax increases over the past few years continue to impact the overallmarket size in Germany and we estimate that the total tobacco market in 2005 wasdown by 4 per cent to 144 billion cigarette equivalents (2004: 150 billion). Thecigarette market decreased by 15 per cent to 101 billion cigarettes partiallyoffset by strong growth in other tobacco products, up by 39 per cent, asconsumers sought value brands and products. Reflecting this trend, the low pricebranded cigarette sector continued to grow and accounted for 7.5 per cent ofcigarette sales in September 2005. The third and final stage of the current round of tobacco tax increases wasintroduced in September 2005, following those in March and December 2004. Wepassed on this tax increase to consumers which, for the majority of ourcigarette portfolio, entailed reducing pack sizes from 19 to 17 cigarettes andlowering prices by 20 euro cents. In the case between the German Government and the European Court of Justice(ECJ) regarding the taxation of the Singles make your own product category, theAdvocate General published his opinion in July stating that the Singles categoryshould no longer be taxed as fine cut tobacco but at the same higher rate ascigarettes. The ruling of the ECJ is expected on 10 November 2005. OUR PERFORMANCE Despite a challenging trading environment, operating profit rose by 24 per centto £295 million, due to growth in our cigarette share, increased other tobaccoproduct volumes, price increases and the benefits of cost efficiencies in bothmanufacturing and trading. We were pleased with the growth in our cigarette share up to 19.4 per cent(2004: 18.9 per cent). The market share development of JPS was particularlyimpressive with the brand capturing 1.7 per cent of the cigarette market in the18 months since its launch, finishing the year at 2.8 per cent. Davidoff, PeterStuyvesant and R1 all continued to perform well in the premium sector and Westremained the second largest cigarette brand in Germany with market share of 8.5per cent. Within other tobacco products our volumes have grown strongly, largely driven bythe growth in Singles, up by 36 per cent, although our annual market share inthis sector declined to 24.2 per cent as a result of increased competitoractivity. In the second half our share stabilised reflecting good performancesfrom JPS and the recently launched Fairwind. OUTLOOK The German market will continue to be challenging and particularly if theawaited ECJ ruling is adverse, but we have prepared a variety of portfolioresponses depending on the outcome. Our flexible approach has ensured theimproving profitability of our operations in Germany and we believe that thisflexibility, combined with our broad product portfolio and our strength in valuecigarettes and other tobacco products, will continue to mean we are wellpositioned. REST OF WESTERN EUROPE----------------------We have delivered improvements in our cigarette shares complementing our strongpresence in fine cut tobacco and rolling papers. REGIONAL DYNAMICS We estimate the annual regional cigarette market was down by 3 per cent, but therate of decline slowed in the second half of the year. The regional fine cuttobacco market declined by 2 per cent due to increased prices. Consumerscontinued to economise, stimulating growth in the value segments of bothcigarette and fine cut tobacco. The debate on smoking in public places has intensified across the region thisyear most notably in Italy where further restrictions were introduced. Ourexperience in Ireland bears out our view that there would be an initial marketdecline with the impact diminishing over time. OUR PERFORMANCE The growth in our cigarette shares more than offset the market volume decline.However operating profit was slightly down at £326 million reflecting the changein sales mix and downtrading within fine cut tobacco. In the Netherlands, our cigarette market share grew to 4.9 per cent due to thestrong performance of West and we introduced JPS Red and JPS Silver in June inthe value segment to capitalise on the continued downtrading dynamic. Our finecut tobacco market share was impacted by downtrading; however, we have seenencouraging progress since we launched the value brands Zilver and Evergreenduring the year. Our domestic cigarette market share in Belgium improved in the second half ofthe year with an encouraging performance from Route 66. In Ireland we grew cigarette market share to 25.0 per cent with growth inSuperkings. Although our overall cigarette share declined slightly in France to 3.3 percent, we have strengthened our value offering by extending the JPS family. Wemaintained our market leading position in the fine cut tobacco sector with ourshare at 29 per cent supported by a good performance by Interval. In Greece, despite downtrading, Davidoff continued to perform strongly in thepremium sector with 16 per cent volume growth and with the repositioning of Westand the launch of Maxim Slims our market share rose to 7.0 per cent. In Spain our market share grew to 5.1 per cent, mainly due to the success of theJPS brand family. We are market leaders in the growing fine cut tobacco marketand delivered a strong performance with Golden Virginia. The benefits of investment in a new salesforce in Italy were reflected in ourcigarette share which reached 1.6 per cent with growth from Peter Stuyvesant,Route 66 and West. OUTLOOK Given the current regional dynamics, we believe the breadth of our productportfolio provides us with opportunities for future growth as we continue tostrengthen our position in this region. REST OF THE WORLD----------------- We continued to build our presence and invest for sustainable growth in our Restof the World region. Volumes and profit grew as a result of some strongin-market performances. REGIONAL DYNAMICS This region consists of both mature and developing markets including the keygrowth regions of Asia, Eastern Europe, Africa and the Middle East. Many marketsare highly regulated and we are seeing an increasing level of regulatory debateand activity across the world, in part influenced by the Framework Convention onTobacco Control. OUR PERFORMANCE Operating profit in this region grew by 6 per cent to £209 million with ourperformances across Asia, Eastern Europe, Africa and the Middle East more thanoffsetting the impact of challenging trading conditions in Central Europe andDuty Free. In Asia, we increased our market share in Taiwan to 11.4 per cent with a goodperformance from Boss, benefiting from the introduction of Boss Blue in July. Inboth Vietnam and Laos we grew our volumes and share, with a strong performancefrom Bastos. In China, the co-operation with the Yuxi Hongta Group continued todevelop with a number of collaborative workshops and the extension of the Westbrand distribution to Beijing. In Australia, profits grew despite market declines. Our cigarette share remainedstable at 17.7 per cent with good performances from Peter Stuyvesant andSuperkings. In Central Europe, we continued to develop our business in the region despiteincreasing competitor activity in the ultra low price segment. In Poland, weregained market share momentum following the repositioning of Route 66 and theintroduction of Paramount. Conditions remain challenging across the region andwe continue to focus on balancing profit and volume, with some encouragingrecent brand launches of Paramount, Golden Gate and Moon. In Eastern Europe, our volumes grew. Highlights include our Russian marketshare, up to 5.3 per cent with growth in Maxim, our improved portfolio in theUkraine with the newly introduced Classic and in the Caucasus, volumes rose byover 70 per cent. Following the completion of our new cigarette factory in Turkey and oursubsequent brand launches into the market in April and September, early progressis encouraging. In Africa, our profits grew with positive market share developments in Centraland Western Africa, and in the Middle East, Davidoff continued to extend ourregional presence with volumes up 27 per cent. OUTLOOK There are encouraging opportunities for the Group in this region, given thebroad spread of markets it encompasses. It is through this very diversity thatwe are able to manage our regional performance effectively and we continue tofocus on profitable volume development while investing for future growth. MANUFACTURING------------- We delivered further significant cost savings across our manufacturing base.During the year we continued to focus on the simplification and standardisationof our business while reviewing our global manufacturing portfolio in order toremain competitive and reduce costs. OUR PERFORMANCE Productivity was up by an excellent 15 per cent with increases in all regions.Cigarette unit costs were down by 6 per cent. We further simplified our productportfolio reducing our blends, materials, ingredients and Stock Keeping Units.Blends were down by 10 per cent during the year, bringing the total reduction to41 per cent in the past three years. We continue to manage our Stock KeepingUnits reducing the opening position by some 9 per cent. Reflecting our ongoing commitment to address our surplus production capacity, weclosed our factories in Dublin, Plattsburgh and Montreal enhancing ourproductivity and improving operational efficiencies. In September, we announcedthe closure of the UK rolling papers factory in Treforest, South Wales, and thetransfer and consolidation of production to our larger papers plant in Wilrijk,Belgium. We also announced plans to restructure our European cigaretteoperations, including the relocation of approximately 10 billion cigarettes forthe Central and Eastern Europe markets from Germany to Poland. Standardising our systems is key to our operational efficiency. A consistentproduct quality rating system, a time to market system, standard factory datacollection and control systems and ISO standards for quality and environment allcontributed to reduced waste, lower write-off costs, lower energy usage andimproved factory performance. We have driven a number of improvements in theyear, reflected in our key performance indicators, for example, four sitesgained ISO accreditation. The use of key performance indicators has also helped us in improving our supplychain, which moves more than 700,000 tonnes of products per year. We areimplementing an integrated IT system to improve our performance, in the areas ofstock visibility, sales forecasting and production planning. OUTLOOK We will continue to drive for improvements throughout our manufacturing andsupply chain activities as we have done over the last 20 years, focusing onbusiness simplification in all areas, delivering both improvements in productquality and cost savings, while remaining flexible and responsive to marketdynamics. OPERATING ENVIRONMENT--------------------- In the context of increasing regulation and a challenging global environment wecontinue to build constructive relationships with governments and regulatorybodies world-wide. Our objective remains to ensure that regulation of tobaccoproducts is sound, proportionate and workable. We do not accept withoutchallenge regulation that is flawed, unreasonable or disproportionate, nor do weengage lightly in legal challenges. However, we will do so where we believe it is necessary to protect our business interests. SMOKING IN PUBLIC PLACES In a number of the markets and regions in which we operate the debate on theintroduction of restrictions or outright bans on smoking in public places and inthe workplace has intensified. As stated previously, we support sensibleregulation but believe that outright bans are unnecessary and disproportionate.Our experience in Ireland confirms our view on the impact of restrictions onsmoking in public places. It is clear that smokers will continue to smoke; theremay be an initial dip in consumption but this diminishes over time. FRAMEWORK CONVENTION ON TOBACCO CONTROL (FCTC) Adopted in May 2003, the World Health Organisation's Framework Convention onTobacco Control is the first global tobacco treaty that seeks to regulatetobacco products in a number of areas including tobacco advertising, labelling,product testing and submission of ingredient information, as well as producttraceability. The Convention also addresses tobacco taxation and calls fortightened legislation to clamp down on smuggling and illicit products. Thenumber of ratifications required for the FCTC to take effect was achieved inNovember 2004. We support strong measures to tackle illicit trade and to prevent youth smoking,but we believe that some areas covered by the Convention are more appropriatelyleft to national authorities. EUROPEAN UNION TOBACCO PRODUCT DIRECTIVE (EUTPD) The European Commission published its first report on the application of theEUTPD in July 2005. The report does not call for immediate changes to theDirective. PICTORIAL HEALTH WARNINGS Following the European Council's decision in 2003 concerning the use ofpictorial health warnings on packs, the European Commission published an imagelibrary in May 2005. The use of pictorial health warnings is a Recommendationand is not compulsory. Thailand introduced pictorial health warnings in March 2005 and the AustralianGovernment will require warnings from March 2006. It is our view that the use ofpictorial health warnings is unnecessary. They provide no additional informationto the public about the health risks associated with smoking and are designedsolely to vilify, stigmatise and shock. We are not aware of any evidence to suggest that pictorial health warnings havehad any impact on consumers' smoking behaviour in countries where they havealready been introduced, such as Canada and Brazil. However, we will comply withall legislation that requires us to display them on our products. We shallcontinue to raise our concerns with the relevant authorities. The erosion of our intellectual property rights through ever more intrusivehealth warnings and other information that we are required to print on packs isa cause for concern and we continue to raise this issue with governments andregulatory bodies accordingly. ADVERTISING RESTRICTIONS The European Union Advertising Directive came into effect on 31 July 2005,banning the advertising of tobacco products in the print media, on radiobroadcasts and through tobacco related sponsorship for events such as FormulaOne motor racing and the World Snooker Championship. In 2003, the GermanGovernment took legal action against parts of the Directive, arguing that theregulation of tobacco advertising should be a national responsibility. Weunderstand that a ruling is expected in 2006. In the UK, the Tobacco Advertising and Promotion (Point of Sale) Regulations2004 took effect in December 2004 in England, Wales and Northern Ireland,limiting advertising inside tobacco retailers to a total surface area equivalentto one A5 sheet of paper (including text health warning and quit line telephonenumber). Scotland has introduced almost identical legislation. In March 2004 the Irish Government passed the Public Health Tobacco Act, whichbans product displays and in-store advertising whilst conferring major searchand seize powers on the Office of Tobacco Control. The Act is being challengedin court by a number of tobacco companies including ourselves. We have stringent, self-imposed policies and standards in place that cover ouradvertising and promotional activities worldwide, and we do not believe thatadvertising bans are necessary. Our International Code of Practice for theMarketing of Tobacco Products is available on our websitewww.imperial-tobacco.com. TOBACCO DUTY Significant duty increases took place this year in several Western Europecountries, most notably in Germany and in the Member States that joined the EUin May 2004. We remain concerned that substantial duty increases encourage thegrowth of smuggling, illegal cross-border trading and counterfeiting and we aretotally opposed to such activities. We continue to work with Customs Authoritiesin a number of countries to counter this illegal trade. We have signed Memorandaof Understanding (MoU) in seven countries to date. Discussions are progressingin a further twelve countries. The recent signing of the updated MoU in Chinabetween local authorities and a coalition of tobacco companies (includingImperial) is the result of continuing activities to tackle counterfeit products. TOBACCO-RELATED LITIGATION In Scotland, on 31 May 2005 we received a favourable judgment in the case ofMcTear v. Imperial Tobacco Limited. The judgment found in favour of the Companyon all counts and has not been appealed. Abandonment has been agreed in respectof ten other cases brought against us in Scotland in which individual claimantswere seeking damages for alleged smoking-related effects. The one remaining caseagainst us in Scotland is inactive. In the Republic of Ireland, the number of claims against the Company has fallenfrom 307 in 1997, to 13 (two of which have been dismissed subject to appeals andone whose statement of claim was served out of time and has been returned); 294cases have been dismissed, discontinued or are not proceeding. No case has gonebeyond service of a statement of claim and replies to notices of particulars. In Poland, an individual claimant has served proceedings on us. There have beenseveral preliminary hearings and we anticipate judgment in late 2005/early 2006.During 2005, a further individual filed a claim against us which the courtrejected on the basis that it failed to comply with legal formalities. On 4February 2005 a Health Association filed proceedings against us and othertobacco companies. These proceedings have not been formally served on ImperialTobacco or any of the other tobacco companies. In the Netherlands, we have received claim letters on behalf of 44 individuals,although 15 of those individuals have now withdrawn. Testimony has been takenfrom the majority of the remaining potential claimants at preliminary hearings.No proceedings have been commenced. In Australia, an individual claimant has served proceedings on seven tobaccocompanies, including our Company. A statement of claim has been served. To date, no judgment has been entered against Imperial Tobacco and no action hasbeen settled in favour of a claimant in any tobacco-related litigation involvingImperial Tobacco or any of its subsidiaries. Imperial Tobacco has been advisedby its lawyers that it has meritorious defences to the legal proceedings inwhich damages are sought for alleged smoking-related health effects and tothreatened actions of a similar nature. We will continue to contest all suchspeculative litigation against the Group. FINANCIAL STATEMENTS-------------------- The figures and financial information for the year ended 30 September 2005 donot constitute the statutory financial statements for that year. Those financialstatements have not yet been delivered to the Registrar, nor have the Auditorsyet reported on them. The accounting policies that have been adopted areconsistent with those stated in the Annual Report and Accounts for the periodended 30 September 2004. SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED 30 SEPTEMBER 2005 2005 2004 £m £m Turnover 11,255 11,005Duty inturnover (8,106) (7,973)Costs andoverheads lessother income (2,105) (2,147) --------- ---------Operatingprofit 1,044 885 --------- ---------Group operating profit before amortisation and exceptional items 1,307 1,218Amortisation (206) (204)Exceptionalitems (57) (129) --------- ---------Profit ondisposal offixed assets 2 7 --------- --------Profit on ordinary activities before interest and taxation 1,046 892Net interest (184) (204) --------- --------Profit onordinaryactivitiesbeforetaxation 862 688Taxation (286) (238) --------- ---------Profit onordinaryactivitiesafter taxation 576 450Equityminorityinterests (6) (5) --------- ---------Profitattributabletoshareholders 570 445Dividends (398) (362) --------- --------Retainedprofit for theyear 172 83 --------- --------- Earnings per ordinary share Basic 79.0p 61.4p Adjusted (before amortisation and exceptional items) 112.8p 101.6p Diluted 78.6p 61.2p --------- ---------Dividends per ordinary share Interim 16.5p 15.0p Proposed final 39.5p 35.0p --------- --------- All activities derive from continuing operations. There is no difference between the profit as shown above and that calculated onan historical cost basis. SEGMENTAL INFORMATION 2005 2004 £m £m TurnoverBy destinationUK 4,722 4,776 Germany 2,630 2,478Rest of Western Europe 1,571 1,556Rest of the World 2,332 2,195 ---------- ----------International 6,533 6,229 ---------- ---------- 11,255 11,005 ---------- ----------Duty in turnoverBy destinationUK 3,910 3,983 Germany 2,000 1,888Rest of Western Europe 927 922Rest of the World 1,269 1,180 ---------- -----------International 4,196 3,990 ---------- ---------- 8,106 7,973 ---------- ----------Turnover excluding dutyBy destinationUK 812 793 Germany 630 590Rest of Western Europe 644 634Rest of the World 1,063 1,015 ---------- ----------International 2,337 2,239 ---------- ---------- 3,149 3,032 ---------- ---------- Operating profitBy destinationUK 477 454 Germany 295 237Rest of Western Europe 326 329Rest of the World 209 198 ---------- ----------International 830 764 ---------- ----------Trading operations 1,307 1,218Amortisation (206) (204)Exceptional items (57) (129) ---------- ---------- 1,044 885 ---------- ---------- EARNINGS PER SHARE 2005 2004 Earnings per shareBasic 79.0p 61.4pAdjustment for amortisation and exceptional items 33.8p 40.2p ---------- ----------Adjusted 112.8p 101.6p ---------- ----------Diluted 78.6p 61.2p ---------- ---------- 2005 2004 £m £mEarningsBasic 570 445Adjustment for amortisation and exceptional items 244 291 ------- -------Adjusted 814 736 ------- ------- Adjusted earnings per share are calculated before tax-effected exceptional itemsof £40m (2004: £89m), tax-effected amortisation of intangibles of £6m (2004:£6m) and goodwill amortisation of £198m (2004: £196m), since the Directorsconsider that this provides a better comparison of underlying businessperformance. There would be no significant dilution of earnings if the outstanding shareoptions were exercised. 2005 2004 Number Number Weighted average number of shares outstanding during the yearBasic 721,523,004 724,263,415Effect of share options 3,325,622 3,328,630 ------------ ------------ Diluted 724,848,626 727,592,045 ------------ ------------ SUMMARY CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSESFOR THE YEAR ENDED 30 SEPTEMBER 2005 2005 2004 £m £m Profit attributable toshareholders 570 445Exchange movements on retranslation of net investments and related borrowings 19 (31) -------- --------Total recognised gainsfor the year 589 414 -------- -------- SUMMARY CONSOLIDATED BALANCE SHEETAT 30 SEPTEMBER 2005 2005 2004 £m £m Fixed assets Intangible assets 3,345 3,547 Tangible assets 632 651 Investments 5 7 --------- --------- 3,982 4,205 --------- ---------Current assets Stocks 878 864 Debtors: amounts falling due within one year 1,089 1,019 Debtors: amounts falling due after more than one 53 2 year Investments 25 77 Cash 231 262 --------- --------- 2,276 2,224 --------- ---------Creditors: amounts falling due within one year (2,748) (2,556) --------- ---------Net currentliabilities (472) (332) --------- ---------Total assetsless currentliabilities 3,510 3,873 Creditors: amounts falling due after more than one year (2,843) (3,267)Provisions forliabilitiesand charges (527) (470) ---------- ----------Net assets 140 136 ---------- ----------Capital and reserves Called up share capital 73 73 Share premium account 964 964 Profit and loss account (916) (919) ---------- ----------Equityshareholders'funds 121 118Equityminorityinterests 19 18 ---------- ---------- 140 136 ---------- ---------- RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDSFOR THE YEAR ENDED 30 SEPTEMBER 2005 2005 2004 £m £m Profit attributable to shareholders 570 445Dividends (398) (362) ---------- ----------Retained profit for the year 172 83Payments for the purchase of own shares (201) -Credit in respect of employee share schemes 8 9Exchange movements on goodwill previously writtenoff 5 17Other net exchange movements 19 (31) ---------- ----------Net addition to shareholders' funds 3 78Opening shareholders' funds 118 40Closing shareholders' funds ---------- ---------- 121 118 ---------- ---------- SUMMARY CONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED 30 SEPTEMBER 2005 2005 2004 £m £m Net cash inflow fromoperating activities 1,370 1,241 -------- --------Returns on investmentsand servicing of finance (200) (212) -------- --------Taxation (239) (236) -------- --------Capital expenditure andfinancial investment (63) (48) -------- --------AcquisitionsPayments to acquirebusinesses (6) (27)Deferred consideration in respect of prior year acquisitions - (420) -------- --------Net cash outflow from acquisitions (6) (447) -------- --------Equity dividends paid (373) (326) -------- --------Net cash inflow/(outflow) before management of liquid resources and financing 489 (28) -------- --------Management of liquidresources 58 (8) -------- --------Financing Payments for the purchase of own shares (201) - Net purchase of shares by Employee Share Ownership Trusts (5) - Decrease in borrowings (374) (19)Decrease in cash in the year -------- -------- (33) (55) -------- -------- RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOWFROM OPERATING ACTIVITIES 2005 2004 £m £m Operating profit 1,044 885Depreciation and amortisation 292 310Increase/(decrease) in provisions for liabilities and charges 69 (33) (Increase)/decrease in stocks (11) 121Increase in debtors (106) (18)Increase/(decrease) in creditors 82 (24) -------- --------Working capital cash (outflow)/ inflow (35) 79 -------- --------Net cash inflow from operatingactivities 1,370 1,241 -------- -------- RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 2005 2004 £m £m Decrease in cash in the year (33) (55)Cash outflow from decrease in debt 374 19Cash (inflow)/outflow from (decrease)/increase in liquid resources (58) 8 --------- ---------Change in net debt resulting from cash flows 283 (28)Currency and other movements 22 90Deferred consideration - 418 --------- ---------Movement in net debt in the year 305 480Opening net debt (3,588) (4,068) --------- ---------Closing net debt (3,283) (3,588) --------- --------- ANALYSIS OF NET DEBT Cash Current Loans due Loans Total £m asset within due £m invest- one year after ments £m one £m year £m As at 30 September 2004 262 77 (719) (3,208) (3,588)Cash flow (33) (58) (6) 380 283Exchange movements 2 6 18 (4) 22 ------ ------ ------- --------- ---------As at 30 September 2005 231 25 (707) (2,832) (3,283) ------ ------ ------- --------- --------- SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES ("GAAP") The accompanying consolidated financial information has been prepared inaccordance with accounting principles generally accepted in the United Kingdom("UK GAAP"). Such principles differ in certain respects from generally acceptedaccounting principles in the United States ("US GAAP"). A summary of principaldifferences and additional disclosures applicable to the Group is set out below. Explanation 2005 2004 Reference £m £m Profit attributable to shareholders under UK GAAP 570 445US GAAP adjustments:Pensions (i) 10 3Amortisationof goodwill (ii) 198 196Amortisation of brands/trade marks/ licences (ii) (100) (99)Deferredtaxation (iii) 42 57Mark to market adjustments due to non designation of hedge accounting per SFAS 133 (iv) (35) (50)Employee share schemes charge to the profit and loss account (vi) (5) (9)Net income under US GAAP -------- -------- 680 543 -------- -------- Explanation 2005 2004 Reference Amounts in accordance with US GAAP Basic net income per ordinary share (vii) 94.2p 75.0p Basic net income per ADS (vii) 188.4p 150.0p Diluted net income per ordinary share (vii) 93.8p 74.6p Diluted net income per ADS (vii) 187.6p 149.2p Explanation 2005 2004 Reference £m £m Equity shareholders' funds under UK GAAP 121 118US GAAP adjustments:Pensions (i) 355 343Goodwill, less accumulated amortisation of £(584)m (2004: £(386)m) (ii) (636) (839)Brands/trade marks/licences, less accumulated amortisation of £361m (2004: £261m) (ii) 2,645 2,762Deferredtaxation (iii) (884) (932)Mark to market adjustments due to non designation of hedge accounting per SFAS 133 (iv) (72) (37)Proposeddividend (v) 278 253Employee shareschemes (vi) - (9) -------- --------Shareholders'funds under USGAAP 1,807 1,659 -------- -------- (i) Pensions Under UK GAAP, pension costs are accounted for under the rules set out inStatement of Standard Accounting Practice No. 24 (SSAP 24). Its objectives andprinciples are broadly in line with those set out in the US accounting standardfor pensions, Statement of Financial Accounting Standard No. 87, "Employers'Accounting for Pensions" (SFAS 87). However, SSAP 24 is less prescriptive in theapplication of the actuarial method and assumptions to be applied in thecalculation of pension costs. Under US GAAP, the annual pension cost comprises the estimated cost of benefitsaccruing in the period as determined in accordance with SFAS 87. Under SFAS 87,a pension asset representing the excess of Imperial Tobacco Pension Fund assetsover benefit obligations has been recognised in the balance sheet. (ii) Business combinations Both UK and US GAAP require purchase consideration relating to a businesscombination to be allocated to the net assets acquired at their fair value onthe date of acquisition. Intangible assets Under UK GAAP, fair values are assigned to identifiable intangible assets onlyif the identifiable intangibles are capable of being disposed of or settledseparately, without disposing of a business of the entity. Under US GAAP, identifiable assets are separately valued and amortised overtheir useful lives. The separately identifiable intangible assets included inthe US GAAP balance sheet are principally comprised of brand rights, which arebeing amortised over periods between 25 to 30 years. Goodwill amortisation Under UK GAAP, goodwill arising and separately identifiable and separableintangible assets acquired on acquisitions made on or after 27 September 1998are capitalised and amortised over their usual life, not exceeding a period of20 years. Prior to 27 September 1998, all goodwill and separately identifiableand separable intangible assets were written off to reserves on acquisition. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS142) with effect from 1 July 2001 and accordingly goodwill arising onacquisitions after this date are not amortised. For purchase transactions priorto 1 July 2001, goodwill was capitalised and amortised over its useful life.From 29 September 2002, in accordance with SFAS 142, the Company no longeramortises goodwill but rather tests such assets for impairment on an annualbasis or where there is an indicator of impairment. The Company completed an annual impairment review under SFAS 142 at 30 September2005 and no impairment of goodwill was indicated. For the purposes of the annualimpairment review, goodwill has been allocated to the following reporting unitsof the Group: Manufacturing, UK Sales and Marketing and International Sales andMarketing. (iii) Deferred taxation Under UK GAAP, deferred taxation is provided in full on all material timingdifferences. Deferred tax assets are recognised where their recovery isconsidered more likely than not. US GAAP requires deferred taxation to be provided in full, using the liabilitymethod. In addition, US GAAP requires the recognition of the deferred taxconsequences of differences between the assigned values and the tax bases of theidentifiable intangible assets, with the exception of non tax-deductiblegoodwill, in a purchase business combination. Consequently, the deferred taxliability attributable to identifiable intangible assets has been recognised andis being amortised over the useful economic lives of the underlying intangibleassets. (iv) Derivative financial instruments The Group has entered into certain swap transactions with contractual maturitiesexceeding those of the underlying debt being hedged, in anticipation of therebeing additional floating rate debt when the existing debt matures. Under UKGAAP, derivative financial instruments that reduce exposures on anticipatedfuture transactions may be accounted for using hedge accounting. US GAAP requires the Group to record all derivatives on the balance sheet atfair value. The Group has decided not to satisfy the SFAS No. 133 "Accountingfor Derivative Instruments and Hedging Activities" (SFAS 133) requirements toachieve hedge accounting for its derivatives, where permitted, and accordinglymovements in the fair value of derivatives are recorded in the profit and lossaccount. (v) Proposed dividends Under UK GAAP, dividends paid and proposed are shown on the face of the profitand loss account as an appropriation of the current year's earnings. Proposeddividends are provided on the basis of recommendation by the Directors and aresubject to subsequent approval by shareholders. Under US GAAP, dividends are recorded in the period in which they are approvedby the shareholders. (vi) Employee share schemes Under UK GAAP, the cost of employee share schemes is charged to the profit andloss account using the quoted market price of shares at the date of grant lessthe exercise price of the share options granted. The charge is accrued over thevesting period of the shares. SAYE type schemes are exempt from the requirementto recognise a charge to the profit and loss account. Under US GAAP, the compensation cost is recognised for the difference betweenthe exercise price of the share options granted and the quoted market price ofthe shares at the date of grant or measurement date and accrued over the vestingperiod of the options. For option plans which contain performance criteria,compensation cost is remeasured at each period end until all performancecriteria have been met. The SAYE Scheme is regarded as compensatory and thediscount is accrued over the vesting period of the grant. (vii) Net income per share Basic net income per ordinary share has been computed using US GAAP net incomeand weighted average ordinary shares. Diluted net income per ordinary share hasbeen calculated by taking into account the weighted average number of sharesthat would be issued on conversion into ordinary shares of options held underemployee share schemes. There would be no significant dilution of earnings ifoutstanding share options were exercised. Each American Depositary Share (ADS) represents two Imperial Tobacco Group PLCordinary shares. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included herein, are,or may be deemed to be, "forward-looking statements" within the meaning ofSection 21E of the US Securities Exchange Act 1934, as amended. For a discussionof important factors that could cause actual results to differ materially fromthose discussed in such forward-looking statements please refer to ImperialTobacco's Annual Report on Form 20-F for the fiscal year ended 30 September2004, filed with the Securities and Exchange Commission, on 21 March 2005. FINANCIAL CALENDAR Ex-dividend date for final dividend 18 January 2006Final dividend record date 20 January 2006Final dividend payable 17 February 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Imperial Brands