Interim Results

26th Apr 2006 07:02

Imperial Tobacco Group PLC26 April 2006 IMPERIAL TOBACCO GROUP PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2006 HIGHLIGHTS * Cigarette volumes 86.3bn up 9% (2005: 79.5bn)* Revenue (less duty) £1,496m up 3% (2005: £1,454m)* Profit from operations £592m up 4% (2005: £571m)* Adjusted** profit from operations £618m up 5% (2005: £586m)* Basic earnings per share 56.2p up 17% (2005: 48.1p)* Adjusted** earnings per share 54.4p up 12% (2005: 48.6p)* Interim dividend 18.5p up 12% (2005: 16.5p) Results are prepared under International Financial Reporting Standards ("IFRS"). ** Adjusted results are reported before restructuring costs, net retirement benefit finance income and certain fair value changes on derivatives. Summarising today's announcement, Gareth Davis, Chief Executive, said: "This is another strong set of results and I am particularly pleased with thecontinued improvement in our cigarette volumes which were up 9 per cent in thefirst half. "We increased global volumes of our premium international cigarette brand,Davidoff, and delivered further growth in West and JPS in the Rest of WesternEurope. We also achieved a number of other strong regional cigarette brandperformances. These successes, coupled with our leading position in othertobacco products, highlight the strength of our broad product portfolio. "We performed well across all our regions, increasing our leadership in the UKand improving our cigarette market shares in Germany, Europe, Africa, the MiddleEast and Asia. "Our share buyback programme has further enhanced shareholder returns, whileongoing productivity and efficiency gains continue to support our profitdelivery. "The combination of these good operational performances, effective cashmanagement and our continued focus on reducing costs, leaves us well placed tobuild on this positive momentum. "I can confirm that the overall anticipated performance of the Group for thefinancial year to 30 September 2006 remains in line with our expectations at thetime of our March trading update." 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 14,500 employees and 32 manufacturing sites. ENQUIRIES Alex 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 2006 Interim Results are available at:www.imperial-tobacco.com FINANCIAL HIGHLIGHTS for the six months ended 31 March 2006 6 months 6 months ended ended Full year 31 March 31 March ended 2006 2005 30 Sept 2005 * Revenue £5,583m up 5% £5,332m £11,229m ($9,709m)* Revenue less duty £1,496m up 3% £1,454m £3,123m ($2,602m)* Profit from operations £592m up 4% £571m £1,240m ($1,029m)* Adjusted profit from £618m up 5% £586m £1,297m operations ($1,075m)* Profit before tax £547m up 13% £482m £1,078m ($951m) * Basic earnings per share 56.2p up 17% 48.1p 108.6p (97.7c)* Adjusted earnings per 54.4p up 12% 48.6p 112.2p share (94.6c) 2006 2005* Interim dividend per share 18.5p up 12% 16.5p (32.2c) Adjusted profit from operations, net finance costs, profit before tax andearnings per share exclude, where applicable, restructuring costs, netretirement benefit finance income and fair value gains and losses on derivativefinancial instruments. A reconciliation between adjusted and reported profitfrom operations, net finance costs and profit before tax is included within note1 to the accounts and adjusted and reported earnings per share are reconciled innote 6. Management believes that reporting adjusted measures of profit fromoperations, net finance costs, profit before tax and earnings per share providesa better comparison of underlying business performance for the period andreflects the way in which the business is controlled. The term adjusted is not adefined term under International Financial Reporting Standards (IFRS) and maynot be comparable with similarly titled profit measures reported by othercompanies. The exchange rate of US$1.739 to the £1, the pound sterling noon buying rate on31 March 2006, has been used to translate this statement prepared under IFRS. RECONCILIATION OF ADJUSTED PROFIT FROM OPERATIONS AND EPS Half Year 2006 Half Year 2005 Full Year 2005 Profit from Profit from Profit from Operations (1) EPS (2) operations EPS operations EPS £m pence £m pence £m pence As reported 592 56.2 571 48.1 1,240 108.6Restructuring costs 18 1.9 15 1.5 57 5.8Pensions - (2.4) - (1.0) - (2.2)Derivatives 8 (1.3) n/a n/a n/a n/aAdjusted results 618 54.4 586 48.6 1,297 112.2 1 Adjusted profit from operations excludes restructuring costs and the changes in the fair value of derivatives which relate to exchange rate movements. 2 Adjusted earnings per share (EPS) excludes restructuring costs, net pension benefit financing income and changes in the fair value of derivatives which relate to exchange rate movements and interest rate movements. These adjustments have been tax effected. CHAIRMAN AND CHIEF EXECUTIVE'S STATEMENT During the first half of 2006 we have built on our successes and delivered valuefor shareholders. Our broad geographic profile has ensured continued volume andprofit growth, with a number of good brand performances across the business,despite challenging trading conditions in some markets. Our positive sales development, together with consistent efforts to reduce costsand manage our cash effectively, has enabled us to deliver 12 per cent growth inadjusted earnings per share in the first half of the year. FINANCIAL PERFORMANCE Adjusted profit from operations grew by 5 per cent to £618 million (2005: £586million) in the half year to 31 March 2006 and reported profit from operationswas £592 million (2005: £571 million). This performance translated into adjustedearnings per share of 54.4 pence (2005: 48.6 pence) and basic earnings per shareof 56.2 pence (2005: 48.1 pence). At our AGM on 31 January 2006 we announced that we were increasing the level ofour share buyback programme to an annual rate of around £600 million. In thefirst half of the financial year we spent £296 million, including transactioncosts, acquiring some 17.4 million shares. DIVIDEND Your Directors are pleased to declare an increase of 12 per cent in the interimdividend to 18.5 pence (2005: 16.5 pence). This dividend will be paid on 4August 2006 to shareholders on the register at the close of business on 7 July2006. PERFORMANCE OVERVIEW In the first half of 2006 we delivered good operational performances in many ofour markets, building on the positive trends from our last financial year. We performed well in the UK, enhancing our leadership position. In Germany,despite challenging market conditions, we continued to gain cigarette marketshare with a strong performance from JPS. Our Rest of Western Europe operations made excellent progress, growing ourcigarette presence across the region. In our Rest of the World region volumesand profits were significantly ahead compared to the same period last year, witha number of good performances in Asia, Australasia, Africa, the Middle East andCentral and Eastern Europe. We extended our position in Scandinavia with theacquisition of Gunnar Stenberg, a Norwegian distributor of tobacco products andaccessories. Brand highlights in our first half year included growth in global Davidoffvolumes and increases in JPS, West and Interval in the Rest of Western Europe.Our portfolio of value brands, including Paramount, Moon, Golden Gate, Classicand Maxim, also performed well in Central and Eastern Europe. In manufacturing we maintained our focus on business simplification, productquality and cost efficiencies and as a result delivered further productivitygains. At the end of March 2006, we ceased production of Singles productsfollowing a tax change and we announced the restructuring of our factory in Lahr,Germany where they were manufactured. REGULATION We have operated profitably in a highly regulated industry for many years. Asregulation advances across developed and developing markets, our need to managethe corporate affairs environment has never been more important. We believe thatwe continue to be well equipped to effectively manage the challenges presentedby the growth of regulation. We continue to seek to engage in constructivedialogue with governments and regulatory authorities at all levels to achievereasonable, practical and proportionate regulation. OUTLOOK Looking ahead, we believe that the breadth and geographic balance of ourmarkets, products and brands means that we are well placed to deliver continuedgrowth and value for our shareholders. Our focus on profitability and costs should ensure we are efficiently structuredto address changing market dynamics. We will continue to seek and execute valuecreating acquisitions and organic investments around the world, whilst ourongoing share buyback programme will help maintain our balance sheet efficiency. Derek Bonham Gareth DavisChairman Chief Executive FINANCIAL REPORTING The financial statements for the half year ended 31 March 2006 have beenprepared in accordance with the Listing Rules of the Financial ServicesAuthority. In preparing the financial statements the accounting policies thathave been applied are those that the Group expects to be applicable for the yearended 30 September 2006 which are based on International Financial ReportingStandards (IFRS) as adopted in the European Union. In January 2006, we restatedour 2005 interim results, which were originally reported under UK GAAP, inaccordance with IFRS. For full details, visit the investor section of ourwebsite: www.imperial-tobacco.com. Subsequent to releasing our 2005 full year and interim IFRS results we havereclassified certain advertising and promotion expenditure and net pensionbenefit financing income within our income statement. These changes do notimpact the previously reported IFRS profit before tax for the 2005 full year andinterims. Full details of these changes are set out in note 11. GROUP OPERATING PERFORMANCE Half year Half year 2006 2005 Revenue less duty £1,496m £1,454mAdjusted profit from operations £618m £586mAdjusted operating margin 41.3% 40.3%Derivatives £(8)m n/aRestructuring costs £(18)m £(15)mProfit from operations £592m £571m In the half year to 31 March 2006, adjusted profit from operations was £618million, up 5 per cent on the first half of 2005. Revenue less duty was up 3 percent to £1,496 million (2005: £1,454 million), with Group adjusted operatingmargins up at 41.3 per cent (2005: 40.3 per cent). NET FINANCE COSTS Our all in average cost of debt decreased to 5.3 per cent (2005: 5.5 per cent).This was due to higher levels of floating rate debt during the period, therefinancing of our bank facility in February 2005 at improved margins andmaturing capital market debt being replaced with lower cost, shorter term bankfinancing. These factors reduced our adjusted net interest charge to £89 million(2005: £99 million). Adjusted interest cover was 6.9 times (2005: 5.9 times).Reported finance costs of £45 million (2005: £89 million) include net retirementbenefit finance income of £23 million (2005: £10 million) and fair value gainson derivative financial instruments of £21 million (2005: not applicable). PROFIT BEFORE TAX Reported profit before tax increased by 13 per cent to £547 million (2005: £482million). RESTRUCTURING COSTS Reported profit before tax was impacted by restructuring costs of £18 million(2005: £15 million). The 2006 costs relate to the restructuring of our Lahrfactory following the cessation of Singles production from 1 April 2006; annualcost savings of around £4 million are expected in our 2007 financial year. TAXATION The tax charge for the half year was £147 million, representing an effective taxrate of just under 27 per cent. EARNINGS AND DIVIDEND Adjusted earnings per share increased by 12 per cent to 54.4 pence (2005: 48.6pence) and basic earnings per share increased by 17 per cent to 56.2 pence(2005: 48.1 pence). We have declared an increase of 12 per cent in the interim dividend to 18.5pence per share (2005: 16.5 pence). FINANCING At 31 March 2006, our net debt had increased to £3.8 billion from £3.5 billionat 31 March 2005. During April 2006 we agreed an increase in our core bankfacility of euro 1.5 billion on existing terms. In the six months to 31 March 2006, we spent £296 million, including transactioncosts, acquiring 17.4 million shares at an average price of £16.95 per share.The cumulative impact of the share buyback programme on the half year resultswas to increase adjusted and basic earnings per share by 0.7 pence. Since wecommenced our share buyback programme in February 2005 we have spent £497million, including transaction costs, up to 31 March 2006 buying back 30.9million shares, representing 4.2 per cent of issued share capital. REGIONAL PERFORMANCE Revenue Revenue Adjusted Profit Adjusted Profit less duty less duty from Operations from Operations 2006 2005 2006 2005 £m £m £m £m UK 395 388 233 221Germany 284 304 130 136Rest of Western Europe 298 285 148 141Rest of the World 519 477 107 88 ----------- ----------- ----------- -----------Total 1,496 1,454 618 586 ----------- ----------- ----------- ----------- Fine cut Fine cut Cigarette Cigarette tobacco volumes tobacco volumes volumes volumes 2006 2005 2006 2005 000's 000's bn bn tonnes tonnesUK 11.4 11.9 1.0 1.0Germany 9.7 10.2 3.4 3.3Rest of Western Europe 8.7 7.2 7.5 7.1Rest of the World 56.5 50.2 0.8 0.8 ----------- ----------- ----------- -----------Total 86.3 79.5 12.7 12.2 ----------- ----------- ----------- ----------- In the UK, revenue less duty rose 2 per cent to £395 million, with adjustedprofit from operations up 5 per cent to £233 million. Cigarette volumes weredown 4 per cent to 11.4 billion. This profit performance reflects the benefitsof price increases, an improvement in cigarette market share and reduced costs,more than offsetting market volume declines and ongoing downtrading. In Germany, our revenue less duty decreased 7 per cent to £284 million, withadjusted profit from operations down 4 per cent to £130 million. These resultsreflect cigarette market share growth, some pricing benefits and costefficiencies. However, these were more than offset by the overall marketdecline, increased competitor activity in the Singles sector and ongoingdowntrading. In the Rest of Western Europe, our revenue less duty rose 5 per cent to £298million and adjusted profit from operations was also up 5 per cent to £148million. Additional market investments supported growth in cigarette marketshares and volumes which more than offset market declines. We also had somebenefit from trade stocking in advance of a tax change in the Netherlands on 1April 2006. These upsides more than offset the impact of downtrading andchanging sales mix which reflected higher domestic but lower travel retailsales. In the Rest of the World, revenue less duty was up 9 per cent to £519 millionand adjusted profit from operations was up 22 per cent to £107 million. Theseresults reflect strong cigarette volume growth supported by continued investmentin the region partially offset by competitive challenges in Central Europe. OPERATIONAL PERFORMANCE UNITED KINGDOM We delivered a strong operational and financial performance in the UK. MARKET DYNAMICS We estimate that the annualised UK cigarette market averaged 48.4 billion in thefirst half (2005: 50.6 billion) and downtrading continued. The fine cut tobaccomarket grew to 3,100 tonnes (2005: 2,900 tonnes). We increased prices in October 2005 by around 6 pence per pack of 20 cigarettes.In the March Budget, the Chancellor announced a cigarette duty increase of 9pence per pack, in line with inflation, which was passed on to customers. A ban on smoking in public places was implemented in Scotland on 26 March 2006and we anticipate that a similar ban will be implemented in Northern Ireland inApril 2007. The UK Parliament has voted to introduce a comprehensive ban onsmoking in public places in England and Wales which is due to be introduced bythe summer of 2007. OUR PERFORMANCE Adjusted profit from operations rose by 5 per cent to £233 million mainlybenefiting from pricing, cigarette market share gains and cost reductions. Our cigarette market share grew to 45.2 per cent (2005: 44.7 per cent),including 0.6 per cent from Windsor Blue which we launched nationally in January2006. Lambert & Butler recently benefited from the reissue of the successfulCelebration pack, with its average market share stable at 16.0 per cent andmarket share in March up to 16.2 per cent. Richmond delivered another strongperformance, increasing market share to 15.5 per cent (2005: 14.4 per cent). In fine cut tobacco we maintained our leadership position with a market share of65.5 per cent (2005: 66.2 per cent). Drum was up to 15.8 per cent (2005: 15.4per cent) and Golden Virginia, the UK's number one fine cut tobacco, continuedto hold around 50 per cent of the market. OUTLOOK We expect another good performance from our successful brand portfolio in thesecond half of the financial year. GERMANY Despite challenging market conditions, our cigarette market share grew by 1.5percentage points, averaging 20.5 per cent in the first half. MARKET DYNAMICS Following successive tax changes, the last of which occurred in September 2005,the annualised cigarette market declined by 13 per cent to 88 billion (2005: 101billion). However, market volumes of other tobacco products grew to 47 billioncigarette equivalents (2005: 39 billion), including 27 billion Singles (2005: 19billion), resulting in the total annualised tobacco market being down 4 per centto 135 billion cigarette equivalents (2005: 140 billion). The low price branded cigarette sector grew strongly, accounting for 8.9 percent of the market in the first half (2005: 4.5 per cent), whilst private labelshare of the market declined to 14.0 per cent (2005: 16.6 per cent). From 1 April 2006 our production of Singles ceased following a tax change. OUR PERFORMANCE Adjusted profit from operations fell by 4 per cent to £130 million mainly as aresult of cigarette volume declines. Our cigarette market share continued to grow in the first half of the year,averaging 20.5 per cent (2005: 19.0 per cent) driven by a strong performancefrom JPS, up to 3.2 per cent (2005: 1.2 per cent). West market share declined to8.3 per cent (2005: 8.6 per cent) reflecting downtrading pressures, whereasDavidoff performed well in the premium sector, maintaining its market share at1.1 per cent. We sold just over 1.5 billion cigarette equivalents of other tobacco products,excluding Singles, with our share averaging 15.5 per cent (2005: 16.3 per cent),impacted by increased price competition. In preparation for the Singles transition, we launched West Single Tobacco inMarch, an innovative make your own product, complementing our existing portfolioand offering another value alternative for Singles smokers. Our Singles sharedeclined to 24.4 per cent in the first half (2005: 31.5 per cent) as we focusedon profitability despite increased competitor activity. OUTLOOK Market conditions remain uncertain but we believe our broad portfolio willenable us to respond to the changing consumer dynamics. In the second half, ourkey focus will be on managing the migration from Singles to our alternativeproducts. REST OF WESTERN EUROPE We delivered significant gains in cigarette market share across the regioncomplementing our strong presence in fine cut tobacco and rolling papers. MARKET DYNAMICS We estimate that the annual regional cigarette market size was down by 3 percent with the annual regional fine cut tobacco market down 2 per cent. Consumer downtrading was exacerbated by a competitive pricing environment,leading to growth in the value segments for both cigarette and fine cut tobacco. The regulatory debate regarding smoking in public places continues, withrestrictions introduced in Spain and Belgium in January 2006. Belgium is alsothe first EU country to enact legislation requiring pictorial health warnings,in November 2006, in line with the optional EU recommendations. We are opposedto the use of pictorial health warnings in principle, as we believe they addnothing to the public's awareness of the risks associated with smoking, whichare already widely recognised. OUR PERFORMANCE Adjusted profit from operations rose by 5 per cent to £148 million withcigarette share gains in a number of markets. Our cigarette volumes were up 21per cent across the region. In the Netherlands we increased our cigarette market share to 8.2 per cent(2005: 4.3 per cent) with strong contributions from West and JPS. We alsocommenced distribution of Gauloises in January on behalf of Altadis. Our shareof the fine cut tobacco market continued to improve to 51.3 per cent (2005: 50.1per cent) with growth in Zilver and Evergreen. Our cigarette market share in Belgium grew further to 10.2 per cent driven byRoute 66, and in France our cigarette market share was stable at 3.4 per cent,with our fine cut tobacco market share up at 29.0 per cent (2005: 28.9 percent), including a good performance from Interval at 15.6 per cent (2005: 15.1per cent). In Ireland, we estimate that annual cigarette market volumes were up 4 per centto 5.6 billion (2005: 5.4 billion). We grew market share to 25.8 per cent (2005:25.3 per cent) with good performances from John Player Blue and Superkings. Trading conditions in Spain were challenging following excise tax changes andextensive pricing activity. However, JPS continued to deliver strong growthtaking our cigarette market share up to 6.8 per cent (2005: 4.0 per cent) In Greece, our market share increased to 7.0 per cent (2005: 5.8 per cent)driven by Davidoff, up to 3.6 per cent (2005: 2.9 per cent), and supported bygrowth in West. Our cigarette market share remained stable at 1.6 per cent inItaly and we are focussing on the further development of West and PeterStuyvesant. OUTLOOK Going forward our focus continues to be on building our position across theregion with further cigarette market share progress supported by fine cuttobacco development. REST OF THE WORLD We grew volume and profit with some good brand performances across the region. MARKET DYNAMICS This region includes a combination of mature and developing markets includingkey growth areas of Asia, Eastern Europe, Africa and the Middle East. The WHOFramework Convention on Tobacco Control is influencing the regulatoryenvironment in many of these markets. OUR PERFORMANCE Adjusted profit from operations grew by 22 per cent to £107 million withcigarette volumes increasing by 13 per cent. In Asia, our cigarette market share in Taiwan was broadly stable at 11.3 percent, whilst our operations in Vietnam and Laos continued to perform well. In Australia, gains from Peter Stuyvesant and Brandon grew our cigarette marketshare slightly to 17.6 per cent (2005: 17.5 per cent). In Africa, volumes were up 6 per cent with positive cigarette market sharetrends in our major markets, including a good performance from Excellence in theCote d'Ivoire and Good Look in Madagascar. Davidoff delivered strong volumegains in our major Middle East markets. The Central European trading environment was challenging with increased pricecompetition, particularly in Poland and Hungary. However, we continued to gaincigarette market share in a number of our markets following the repositioning ofRoute 66 and the successful launches of Paramount, Moon and Golden Gate in thevalue sector last year. In Eastern Europe, cigarette volumes were up 16 per cent across the region. InRussia our cigarette market share was up to 5.5 per cent with good performancesfrom R1 and Horizon, complemented by a strong regional volume performance fromMaxim. In February 2006 we formed a joint merchandising force in Russia withAltadis to improve efficiencies and increase our retail coverage. In the Ukraine, our cigarette market share remained broadly stable at 18.9 per cent with anencouraging performance from Classic, which we launched last year. One yearafter the opening of our factory in Turkey, our cigarette market share has grownto 0.8 per cent with Davidoff and Maxim supported by the launch of West lastSeptember. Following the acquisitions of the Swedish snus manufacturer, Skruf, in September2005 and the Norwegian distributor of tobacco products, Gunnar Stenberg, inFebruary 2006, we have extended our presence in Scandinavia. OUTLOOK We expect that the overall positive volume developments will continue in thesecond half year. However, trading conditions may remain challenging in CentralEurope. MANUFACTURING Our consistent focus on simplification and standardisation has continued todeliver performance improvements in manufacturing. Productivity was up 9 percent, benefiting from strong volume gains compared to the same period last yearand unit costs were down 7 per cent. This overall performance was supported by further blend and ingredientrationalisation and a focus on Key Performance Indicators in the supply chain tomeasure and control performance. In addition, the reorganisation of our Europeancigarette and rolling papers operations will be completed by June this year,delivering further operational efficiencies. At the end of March 2006, we ceased production of Singles following a tax changeand as a result we announced the restructuring of our factory in Lahr, Germanywhich included some job losses. The remaining employees will continue tomanufacture Eco Cigarillos, which we believe will appeal to Singles consumers.However we shall continue to monitor market developments in line with the needto maintain flexibility within our manufacturing operations in Lahr and toensure that the cost base remains efficient. OUTLOOK We continue to focus on driving improvements across all our manufacturingoperations, both in terms of costs and quality. CAUTIONARY STATEMENT All statements, other than statements of historical fact, included herein, are,or may be deemed to be, forward-looking statements within the meaning of Section21E of the Securities Exchange Act 1934, as amended. For a discussion ofimportant 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 September2005, filed with the United States Securities and Exchange Commission on 16February 2006. INDEPENDENT REVIEW REPORT TO IMPERIAL TOBACCO GROUP PLC Introduction We have been instructed by the Company to review the financial information forthe six months ended 31 March 2006 which comprises a consolidated incomestatement, a consolidated statement of recognised income and expense, aconsolidated balance sheet, a consolidated cash flow statement and associatednotes. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the Directors. The Directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in the accounting policies note, the next annual financialstatements of Imperial Tobacco Group PLC will be prepared in accordance withInternational Financial Reporting Standards as adopted by the European Union.This interim report has been prepared in accordance with the basis set out inthe accounting policies note. The accounting policies are consistent with those that the Directors intend touse in the next annual financial statements. As explained in the accountingpolicies note, there is, however, a possibility that the Directors may determinethat some changes are necessary when preparing the full annual financialstatements for the first time in accordance with International FinancialReporting Standards as adopted by the European Union. The IFRS standards andIFRIC interpretations that will be applicable and adopted by the European Unionat 30 September 2006 are not known with certainty at the time of preparing thisinterim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for theCompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 March 2006. PricewaterhouseCoopers LLP Chartered Accountants Bristol 26 April 2006 Notes a) The maintenance and integrity of the Imperial Tobacco Group PLC website isthe responsibility of the Company; the work carried out by the auditors does notinvolve consideration of these matters and, accordingly, the auditors accept noresponsibility for any changes that may have occurred to the interim reportsince it was initially presented on the website. b) Legislation in the United Kingdom governing the preparation and disseminationof financial information may differ from legislation in other jurisdictions. CONSOLIDATED INCOME STATEMENTfor the six months ended 31 March 2006 6 months 6 months Year ended ended ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Revenue 5,583 5,332 11,229Duty (4,087) (3,878) (8,106)Raw materials and consumables used (324) (312) (651)Changes in inventories of finished goods and work in progress 23 29 3Employment costs (189) (191) (415)Depreciation and amortisation (45) (59) (97)Other operation charges (369) (350) (723) ----------- ----------- -----------Profit from operations 592 571 1,240 ----------- ----------- ----------- Adjusted profit from operations 618 586 1,297Restructuring costs (18) (15) (57)Fair value gains and losses on derivative financial instruments (8) n/a n/a ----------- ----------- -----------Investment income 162 90 180Finance costs (207) (179) (342) ----------- ----------- -----------Net finance costs (45) (89) (162) ----------- ----------- -----------Adjusted net finance costs (89) (99) (184)Net retirement benefits financing income 23 10 22Fair value gains and losses on derivative financial instruments 21 n/a n/a ----------- ----------- -----------Profit before taxation 547 482 1,078Taxation (147) (130) (288) ----------- ----------- -----------Profit for the period 400 352 790 ----------- ----------- -----------Attributable to:Equity holders of the Company 397 349 784Minority interests 3 3 6 ----------- ----------- -----------Earnings per ordinary share - Basic 56.2p 48.1p 108.6p - Diluted 55.9p 47.9p 108.1p ----------- ----------- -----------All activities derive from continuing operations. CONSOLIDATED BALANCE SHEETAT 31 MARCH 2006 31 March 2006 31 March 2005 30 Sept 2005 £m £m £mNon-current assetsIntangible assets 3,620 3,562 3,554Property, plant and equipment 629 648 642Investments in associates 5 6 5Retirement benefit assets 447 153 259Trade and other receivables 2 2 4Deferred tax assets 41 43 62 ----------- ----------- ----------- 4,744 4,414 4,526 ----------- ----------- -----------Current assetsInventories 1,431 1,091 857Trade and other receivables 1,096 970 1,012Current tax assets 51 44 44Cash and cash equivalents 215 315 256Derivative financial instruments 53 - - ----------- ----------- ----------- 2,846 2,420 2,169 ----------- ----------- -----------Total assets 7,590 6,834 6,695 ----------- ----------- -----------Current liabilitiesBorrowings (848) (563) (707)Trade and other payables (1,881) (1,690) (1,528)Current tax liabilities (301) (195) (235)Provisions for liabilities and charges (50) (37) (50)Derivative financial instruments (112) - - ----------- ----------- ----------- (3,192) (2,485) (2,520) ------------ ----------- -----------Non-current liabilitiesBorrowings (3,086) (3,190) (2,775)Derivative financial instruments - (84) (57)Trade and other payables (14) (3) (11)Deferred tax liabilities (140) (122) (133)Retirement benefit liabilities (426) (407) (438)Provisions for liabilities and charges (54) (43) (56) ----------- ----------- ----------- (3,720) (3,849) (3,470) ----------- ----------- -----------Total liabilities (6,912) (6,334) (5,990) ----------- ----------- -----------Net assets 678 500 705 ----------- ----------- ----------- EquityShare capital 73 73 73Share premium account 964 964 964Reserves (378) (556) (351) ----------- ----------- -----------Equity attributable to equity holders of the Company 659 481 686Minority interests 19 19 19 ----------- ----------- -----------Total equity 678 500 705 ----------- ----------- ----------- CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the six months ended 31 March 2006 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Currency translation differences (net of £1m tax) 35 12 19Actuarial gains on post retirement employee benefits (net of £60m tax) 126 29 67 ----------- ----------- -----------Net income recognised directly in equity 161 41 86Profit for the period 400 352 790 ----------- ----------- -----------Total recognised income and expense for the period 561 393 876 ----------- ----------- -----------Attributable to:Equity holders of the Company 558 390 870Minority interests 3 3 6 ----------- ----------- -----------Total recognised income and expense for the period 561 393 876 ----------- ----------- -----------Adoption of IAS 39 attributable to:Equity holders of the Company (6)Minority interests - ------------ (6) ------------ CONSOLIDATED CASH FLOW STATEMENTFor the six months ended 31 March 2006 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Cash flows from operating activities 358 417 1,131 ----------- ----------- -----------Investing activitiesInterest received 5 6 16Purchase of property, plant and equipment (34) (45) (90)Proceeds from sale of property, plant and equipment 12 18 27Purchase of businesses (67) - (6) ----------- ----------- -----------Net cash used in investing activities (84) (21) (53) ----------- ----------- -----------Financing activitiesInterest paid (38) (37) (212)Purchase of treasury shares (296) (40) (201)Proceeds from sale of shares held under Employee Share Ownership Trusts - 1 3Purchase of shares held under Employee Share Ownership Trusts (14) - (8)Increase/(decrease) in borrowings 312 (95) (374)Dividends paid to minority interests (4) - (4)Dividends paid to shareholders (278) (254) (373) ----------- ------------ ------------Net cash used in financing activities (318) (425) (1,169) ----------- ------------ ------------Net decrease in cash and cash equivalents (44) (29) (91) Cash and cash equivalents at start of period 256 339 339Effect of foreign exchange rates 2 5 8Adjustments relating to adoption of IAS 39 from 1 October 2005 1 - - ----------- ----------- -----------Cash and cash equivalents at end of period 215 315 256 ----------- ----------- ----------- ACCOUNTING POLICIES Basis of preparation-------------------- The results for the six months ended 31 March 2006 and 31 March 2005 and for theyear ended 30 September 2005 are unaudited. The statutory accounts for the yearended 30 September 2005 (prepared under UK GAAP) have been delivered to theRegistrar of Companies and upon which an unqualified audit report was given. Theinformation contained within this interim report does not constitute statutoryaccounts as defined in section 240 of the Companies Act 1985. The financial information has been prepared in accordance with the Listing Rulesof the Financial Services Authority. These accounting policies are based on IFRSs, IASs and IFRIC interpretations asadopted by the EU (collectively "IFRS") that the Group expects to be applicablefor the year ended 30 September 2006. IFRS is subject to possible amendment bythe interpretive guidance from the International Accounting Standards Board, aswell as the ongoing review and endorsement by the EU, and is therefore stillsubject to change. These figures may therefore require amendment to change thebasis of accounting and/or presentation of certain financial information, beforetheir inclusion in the IFRS financial statements for the year ending 30September 2006 when the Group prepares its first complete set of IFRS financialstatements. The 2006 financial statements will be the Group's first consolidated financialstatements prepared under IFRS, with a transition date of 1 October 2004.Consequently, the comparative figures for 2005 have been restated in accordancewith the accounting policies set out below. In preparing the comparativefigures, the Group has chosen to utilise the IFRS 1 exemption from therequirement to restate comparative information for IAS 32 "FinancialInstruments: Disclosure and Presentation" and IAS 39 "Financial Instruments:Recognition and Measurement" on financial instruments. In addition, IFRS 1 allows certain further exemptions from retrospectiveapplication of IFRS in the opening balance sheet at 1 October 2004. Where thesehave been used, they are explained in the relevant policy below. The financial statements have been prepared in accordance with the historicalcost convention except as described in the policy for financial instrumentsbelow. Basis of consolidation---------------------- The consolidated accounts comprise Imperial Tobacco Group PLC (the Company) andits subsidiary undertakings, together with the Group's share of the results ofits associates. (i) Subsidiaries Subsidiaries are those entities controlled by the Company. Control exists whenthe Company has the power to govern the financial and operating policies of anenterprise taking into account any potential voting rights. The financialstatements of subsidiaries are included in the consolidated financial statementsfrom the date that control commences until the date that control ceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries. The cost of an acquisition is measured at the fair value of theconsideration plus costs directly attributable to the acquisition. The excess ofthe cost of the acquisition over the Group's share of the fair value of the netidentifiable assets of the subsidiary acquired is recorded as goodwill.Intragroup transactions, balances and unrealised gains on transactions betweenGroup companies are eliminated; unrealised losses are also eliminated unlesscosts cannot be recovered. Where necessary, accounting policies of subsidiarieshave been changed to ensure consistency with the policies adopted by the Group. (ii) Associates Associates are those enterprises in which the Group has the power to exertsignificant influence, but not control, over the financial and operatingpolicies. The consolidated financial statements include the Group's share of thetotal recognised gains and losses of associates on an equity accounted basis,from the date that significant influence commences until the date thatsignificant influence ceases. Where the Group's share of losses exceeds thecarrying amount of the associate, the carrying amount is reduced to nil andrecognition of further losses is discontinued except to the extent that theGroup has incurred obligations in respect of the associate. Foreign currency---------------- Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates (the functional currency). The income and cash flow statements of non-sterling denominated Group entitiesare translated to sterling (the Group's presentation currency) at average ratesof exchange in each period. Assets and liabilities of these undertakings aretranslated at rates of exchange ruling at the balance sheet date. Thedifferences between retained profits and losses translated at average andclosing rates are taken to reserves, as are differences arising on theretranslation to sterling of non-sterling denominated Group entity net assets atthe beginning of the year. Any translation differences that have arisen since 1 October 2004 are presentedas a separate component of equity. As permitted by IFRS 1, any differences priorto this date are not included in this separate component of equity. Foreign currency transactions are initially recorded at the exchange rate rulingat the date of the transaction. Foreign exchange gains and losses resulting fromthe settlement of such transactions and from the translation at exchange ratesruling at the balance sheet date of monetary assets and liabilities denominatedin foreign currencies are recognised in the income statement, except whendeferred in equity as qualifying net investment hedges. Revenue recognition-------------------- Revenue comprises the invoiced value for the sale of goods and services net ofsales taxes, rebates and discounts. Revenue from the sale of goods is recognisedwhen a Group entity has delivered products to the customer, the customer hasaccepted the products and collectibility of the related receivables isreasonably assured. Sales of services which include fees for distributing thirdparty products are recognised in the accounting period in which the services arerendered. Licence fees are recognised on an accruals basis in accordance withthe substance of the relevant agreements. Duty---- In countries where duty is a production tax, duty is included in the incomestatement as an expense. Where duty is a sales tax, duty is deducted fromrevenue. Segmental reporting------------------- A segment is a distinguishable component of the Group that is engaged inproviding products or services within a particular economic environment. The principal activity of the Group is the manufacture, marketing and sale oftobacco and tobacco related products. The management structure is based ongeographical regions. These geographical regions of UK, Germany, Rest of WesternEurope and Rest of the World have been used as the primary reporting segments.The manufacture, marketing and sale of tobacco and tobacco related products is asingle integrated business and as a consequence, the Group has only one businesssegment and no secondary segment disclosure has been made. The central costs areallocated to segments on a consistent basis of revenue less duty. The prices agreed between Group companies for intragroup sales of materials,manufactured goods, charges for royalties, commissions and fees are based onnormal commercial practices which would apply between independent businesses. Financial instruments (2006)---------------------------- Financial assets and financial liabilities are recognised when the Group becomesa party to the contractual provisions of the relevant instrument. Financialassets are derecognised when the rights to receive benefits have expired or beentransferred, and the Group has transferred substantially all risks and rewardsof ownership. Financial liabilities are derecognised when the obligation isextinguished. Non-derivative financial assets are classified as either receivables or cash andcash equivalents. They are stated at amortised cost using the effective interestmethod, subject to reduction for allowances for estimated irrecoverable amounts.A provision for impairment of trade receivables is established when there isobjective evidence that the Group will not be able to collect all amounts dueaccording to the original terms of those receivables. The amount of theprovision is the difference between the asset's carrying amount and the presentvalue of estimated future cash flows, and is recognised in the income statement.For interest-bearing assets, their carrying value includes accrued interestreceivable. Cash and cash equivalents include cash in hand and deposits held on call,together with other short-term highly liquid investments. Non-derivative financial liabilities are stated at amortised cost using theeffective interest method. For borrowings, their carrying value includes accruedinterest payable, as well as unamortised issue costs. The Group transacts derivative financial instruments to manage the underlyingexposure to foreign exchange and interest rate risks. The Group does nottransact derivative financial instruments for trading purposes. However, as theGroup has decided not to hedge account for its derivative financial instrumentsas permitted under IAS 39, they are accounted for through the income statement. Derivative financial assets and liabilities are stated at fair value, whichincludes accrued interest receivable and payable where relevant. Changes in fairvalues are recognised in the income statement in the period in which they arise. Financial instruments (2005)---------------------------- As noted above, the Group has chosen to utilise the IFRS 1 exemption from therequirement to restate comparative information for IAS 32 and IAS 39 onfinancial instruments. For the year ended 30 September 2005, financialinstruments are accounted for in accordance with UK GAAP using the followingpolicies. Derivative financial instruments are used to manage exposure of foreign exchangeand interest rate risks and are not used for trading purposes. Instrumentsqualify for hedge accounting where the underlying asset or liability hascharacteristics which can be directly related to the instrument transacted. Interest differentials arising under interest rate swaps are taken to the incomestatement on an accruals basis and included within interest payable orreceivable. Any premiums or discounts received or paid are amortised over thelives of the instruments. The principal amounts due to be exchanged at maturity under cross-currency swapsare revalued at the exchange rates ruling at the balance sheet date and includedwithin derivative financial instruments. Where forward foreign exchange contracts are used to hedge future transactions,gains and losses are not recognised until the transactions occur. Provisions---------- A provision is recognised in the balance sheet when the Group has a legal orconstructive obligation as a result of a past event, it is more likely than notthat an outflow of resources will be required to settle that obligation, and areliable estimate of the amount can be made. A provision for restructuring is recognised when the Group has approved adetailed and formal restructuring plan, and the restructuring has eithercommenced or has been publicly announced. Future operating losses are notprovided for. Where there are a number of similar obligations, the likelihood that an outflowwill be required in settlement is determined by considering the class ofobligations as a whole. A provision is recognised even if the likelihood of anoutflow with respect to any one item included in the same class of obligationsmay be small. Property, plant and equipment------------------------------ Property, plant and equipment are shown in the balance sheet at their historicalcost less accumulated depreciation and impairment. Historical cost includesexpenditure that is directly attributable to the acquisition of the items.Subsequent costs are included in the assets' carrying amounts or recognised as aseparate asset as appropriate only when it is probable that future economicbenefits associated with them will flow to the Group and the cost of the itemcan be measured reliably. All other repairs and maintenance are charged to theincome statement as incurred. Land is not depreciated. Depreciation is provided so as to write off the initialcost of each asset to their residual values over their estimated useful lives asfollows: Buildings Up to 50 years (straight line)Plant and equipment 2 - 20 years (straight line/reducing balance)Fixtures and motor vehicles 2 - 14 years (straight line) The assets' residual values and useful lives are reviewed and adjusted, ifappropriate, at each balance sheet date. Where the carrying amount of an assetis greater than its estimated recoverable amount, it is written down immediatelyto its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carryingamounts. These are included in the income statement. Intangible assets - goodwill---------------------------- Goodwill represents the excess of the cost of an acquisition over the fair valueof the net identifiable assets and liabilities acquired, both tangible andintangible. Goodwill arising on acquisitions made on or after 27 September 1998 iscapitalised. Previously all goodwill was written off through equity in theperiod of acquisition. Goodwill arising on acquisitions prior to 1 October 2004is stated in accordance with UK GAAP and has not been remeasured on transitionto IFRS as permitted by IFRS 1. Goodwill is tested at least annually forimpairment and carried at cost less accumulated impairment losses. Anyimpairment is recognised immediately in the income statement and cannot besubsequently reversed. Goodwill is allocated to groups of cash-generating unitsfor the purpose of impairment testing. Gains or losses on the disposal of anentity include the carrying amount of goodwill relating to the entity sold. Goodwill previously written off directly to reserves under UK GAAP is notrecycled to the income statement on the disposal of the subsidiary or associateto which it relates. Intangible assets - other------------------------- These consist mainly of acquired trade marks and licences, and computer softwarewhich are carried at cost less accumulated amortisation and impairment. They areamortised on a straight line basis over their useful lives. For trade marks andlicences, the useful life does not exceed 20 years. Computer software is writtenoff over a period that does not exceed five years. Impairment of assets--------------------- Assets that have an indefinite life are not subject to amortisation and aretested at least annually for impairment. Assets that are subject to amortisationare reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss isrecognised in the income statement for the amount by which the carrying amountof the asset exceeds its recoverable amount. The recoverable amount is thehigher of the fair value less costs to sell and the value in use. For thepurpose of assessing impairment, assets are grouped at the lowest levels forwhich there are separately identifiable cash flows (cash-generating units). Retirement benefit costs------------------------ The asset or liability recognised in the balance sheet in respect of definedbenefit pension schemes is calculated in accordance with IAS 19 "EmployeeBenefits", based on the present value of the defined benefit obligations at thebalance sheet date less the fair value of plan assets. The actuarial assumptionsused to calculate the benefit obligations vary according to the economicconditions of the country in which the plan is located. Where the calculationresults in a benefit to the Group, the asset is only recognised where itrepresents a future economic benefit which is actually available to the Group.The asset is limited to the net total of any cumulative unrecognised pastservice costs and the present value of any future refunds from the schemes orreductions in future contributions to the schemes. Actuarial gains and losses arise when the values of plan assets and liabilitiesare re-measured at the balance sheet date. They result where actual eventsduring the year differ from the actuarial assumption in the previous valuation(experience adjustments) and changes in actuarial assumptions. They arerecognised in full in the statement of recognised income and expense in theperiod in which they arise. The Group has taken advantage of the optional exemption under IFRS 1 torecognise all cumulative actuarial gains and losses with respect to employeeretirement benefit schemes in the equity attributable to equity holders of theCompany at 1 October 2004. Dividends--------- Final dividends are recognised as a liability in the Group's financialstatements in the period in which the dividends are approved by shareholders,while interim dividends are recognised in the period in which the dividends arepaid. Inventories----------- Inventories are stated at the lower of cost and net realisable value. Cost isdetermined using the first-in, first-out (FIFO) method. The cost of finishedgoods and work in progress comprises raw materials, direct labour, other directcosts and related production overheads (based on normal operating capacity) butexcludes borrowing costs. Net realisable value is the estimated selling price inthe ordinary course of business, less the estimated costs of completion andselling expenses. Tobacco inventories which have an operating cycle that exceeds twelve months areclassified as current assets, consistent with recognised industry practice. Taxes----- Income tax on the profit or loss for the year comprises current and deferredtax. Current tax is the expected tax payable on the taxable income for the year,using tax rates substantially enacted at the balance sheet date, and anyadjustments to tax payable in respect of previous years. Deferred tax is provided in full on temporary differences between the carryingamount of assets and liabilities in the financial statements, and the tax base.Deferred tax assets are recognised only to the extent that it is probable thatfuture taxable profits will be available against which the temporary differencescan be utilised. Deferred tax assets and liabilities are not discounted. Deferred tax is determined using the tax rates that have been enacted orsubstantially enacted by the balance sheet date, and are expected to apply whenthe deferred tax liability is settled or the deferred tax asset is realised. Deferred tax is provided on temporary differences arising on investments insubsidiaries and associates, except where the timing of the reversal of thetemporary difference is controlled by the Group and it is probable that thetemporary difference will not reverse in the foreseeable future. Tax is recognised in the income statement, except where it relates to itemsrecognised directly in equity, in which case it is recognised in equity. Share-based payments-------------------- The Group applies the requirements of IFRS 2 "Share-based payments" toequity-based employee compensation schemes in respect of awards granted after 7November 2002 which remain unvested at 1 January 2005, the dates specified inIFRS 1. The cost of employees' services received in exchange for the grant of rightsunder equity-based employee compensation schemes is measured at the fair valueof the equity instruments granted and is expensed. The total amount to beexpensed over the vesting period is determined by reference to the fair value ofthe equity instruments granted, excluding the impact of any non-market vestingconditions (e.g. earnings per share). Non-market vesting conditions are includedin assumptions about the number of equity instruments that are expected tobecome exercisable. At each balance sheet date, the Group revises its estimatesof the number of equity instruments that are expected to become exercisable. Itrecognises the impact of the revision of original estimates, if any, in theincome statement, and a corresponding adjustment to equity. The fair value ismeasured based on an appropriate valuation model, taking into account the termsand conditions upon which the equity instruments were granted. In order to manage the related exposure, the Group buys the number of sharesnecessary to satisfy rights to shares arising under equity-based employeecompensation schemes. These shares are accounted for as a deduction from equityattributable to the equity holders of the Company. No additional shares areissued as a result of the equity compensation plan. When the rights areexercised, equity is increased by the amount of the proceeds received. Share capital------------- Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or optionsare shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company's equity share capital (treasuryshares), the consideration paid, including any directly attributable incrementalcosts (net of income taxes), is deducted from equity attributable to the equityholders of the Company until the shares are cancelled, reissued or disposed of.Where such shares are subsequently sold or reissued, any consideration received,net of any directly attributable incremental transaction costs and the relatedincome tax effects, is included in equity attributable to the equity holders ofthe Company. Notes to the interim statement------------------------------ 1. Segmental information (by destination) (a) Primary segment analysis - 6 months ended 31 March 2006 Profit from Revenue Duty operations 2006 2006 2006 £m £m £m UK 2,282 1,887 230 Germany 1,291 1,007 110Rest of Western Europe 811 513 147Rest of the World 1,199 680 105 ----------- ----------- -----------International 3,301 2,200 362 ----------- ----------- ----------- 5,583 4,087 592 ----------- ----------- ----------- (b) Reconciliation of profit from operations to adjusted profit from operations- 6 months ended 31 March 2006 Fair value changes on derivative Net Profit Adjusted profit Restructuring financial retirement from from operations costs instruments benefits operations 2006 2006 2006 2006 2006 £m £m £m £m £m UK 233 - (3) - 230 Germany 130 (18) (2) - 110Rest of Western Europe 148 - (1) - 147Rest of the World 107 - (2) - 105 ----------- ----------- ----------- ----------- -----------International 385 (18) (5) - 362 ----------- ----------- ----------- ----------- ----------- 618 (18) (8) - 592 ----------- ----------- ----------- ----------- ----------- Adjusted ReportedInvestment income 7 - 67 88 162Finance costs (96) - (46) (65) (207) ----------- ----------- ----------- ----------- -----------Profit before taxation 529 (18) 13 23 547 ----------- ----------- ----------- ----------- ----------- (c) Primary segment analysis - 6 months ended 31 March 2005 Profit from Revenue Duty operations 2005 2005 2005 £m £m £m UK 2,294 1,906 221 Germany 1,258 954 136Rest of Western Europe 712 427 127Rest of the World 1,068 591 87 ----------- ----------- -----------International 3,038 1,972 350 ----------- ----------- ----------- 5,332 3,878 571 ----------- ----------- ----------- (d) Reconciliation of profit from operations to adjusted profit from operations- 6 months ended 31 March 2005 Fair value changes on derivative Net Profit Adjusted profit Restructuring financial retirement from from operations costs instruments benefits operations 2005 2005 2005 2005 2005 £m £m £m £m £m UK 221 - n/a - 221 Germany 136 - n/a - 136Rest of Western Europe 141 (14) n/a - 127Rest of the World 88 (1) n/a - 87 ----------- ----------- ----------- ----------- -----------International 365 (15) n/a - 350 ----------- ----------- ----------- ----------- ----------- 586 (15) n/a - 571 ----------- ----------- ----------- ----------- ----------- Adjusted ReportedInvestment income 11 - n/a 79 90Finance costs (110) - n/a (69) (179) ----------- ----------- ----------- ----------- -----------Profit before taxation 487 (15) n/a 10 482 ----------- ----------- ----------- ----------- ----------- (e) Primary segment analysis - 12 months ended 30 September 2005 Profit from Revenue Duty operations 2005 2005 2005 £m £m £m UK 4,710 3,910 460 Germany 2,630 2,000 265Rest of Western Europe 1,571 927 308Rest of the World 2,318 1,269 207 ----------- ----------- -----------International 6,519 4,196 780 ----------- ----------- ----------- 11,229 8,106 1,240 ----------- ----------- ----------- (f) Reconciliation of profit from operations to adjusted profit from operations- 12 months ended 30 September 2005 Fair value changes on derivative Net Profit Adjusted profit Restructuring financial retirement from from operations costs instruments benefits operations 2005 2005 2005 2005 2005 £m £m £m £m £m UK 468 (8) n/a - 460 Germany 294 (29) n/a - 265Rest of Western Europe 326 (18) n/a - 308Rest of the World 209 (2) n/a - 207 ----------- ----------- ----------- ----------- -----------International 829 (49) n/a - 780 ----------- ----------- ----------- ----------- ----------- 1,297 (57) n/a - 1,240 ----------- ----------- ----------- ----------- ----------- Adjusted ReportedInvestment income 22 - n/a 158 180Finance costs (206) - n/a (136) (342) ----------- ----------- ----------- ----------- -----------Profit before taxation 1,113 (57) n/a 22 1,078 ----------- ----------- ----------- ----------- ----------- (g) Use of adjusted measures Management believes that reporting adjusted measures of profit from operations,net finance costs, profit before tax and earnings per share provides a bettercomparison of underlying business performance for the period and reflects theway in which the business is controlled. The principal adjustments made to reported profits are as follows: Restructuring costs------------------- These are costs incurred in integrating acquired businesses and rationalisationinitiatives. These involve one-off significant costs that management does notregard as part of the underlying performance of the Group. Fair value gains and losses on derivative financial instruments--------------------------------------------------------------- IAS 39 requires that all derivative financial instruments be recognised on thebalance sheet at fair value, with changes in the fair value being recognised inthe income statement unless the instrument qualifies for hedge accounting underIAS 39. The Group hedges underlying exposures in an efficient, commercial and structuredmanner. However the strict hedging requirements of IAS 39 lead to somecommercially effective hedge positions not qualifying for hedge accounting. As aresult, the Group has decided not to apply hedge accounting as permitted underIAS 39, and we are excluding the fair value gains and losses on derivativefinancial instruments to measure underlying performance. Net retirement benefit financing income--------------------------------------- The expected return of plan assets and the interest on pension liabilities isincluded within net finance costs. Since these items do not impact cash flowsand can be subject to significant volatility outside management's control theyhave been eliminated from adjusted net finance costs, profit before tax and earnings per share. 2. Restructuring Costs In 2006 restructuring costs of £18m were incurred in respect of the cessation ofSingles production at our Lahr factory. These costs relate primarily totermination of employment and fixed asset write-downs. In the 6 months ended 31 March 2005, restructuring costs of £15m were incurredin respect of the closure of our Dublin and Plattsburgh factories and relatedprimarily to termination of employment and fixed asset write-downs. In the year ended 30 September 2005 restructuring costs of £57m were in respectof the closure of our tube factories in Plattsburgh and Montreal, the cigarettefactory in Dublin and the planned closure in the rolling papers factory atTreforest in South Wales and a significant headcount reduction at the Berlincigarette factory. 3. Net finance costs 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Interest on bank deposits (7) (11) (22)Expected return on pension scheme assets (88) (79) (158)Fair value gains on derivative financial instruments (67) n/a n/a ----------- ----------- -----------Investment income (162) (90) (180) ----------- ----------- -----------Interest on bank and other loans 96 110 206Interest on retirement benefit liabilities 65 69 136Fair value losses on derivative financial instruments 46 n/a n/a ----------- ----------- -----------Finance costs 207 179 342 ----------- ----------- -----------Net finance costs 45 89 162 ----------- ----------- ----------- 4. Taxation Taxation has been calculated on the basis of an estimated effective tax rate of26.9% for the full year. This compares with an effective tax rate of 27.0% forthe 2005 half year and 26.7% for the year ended 30 September 2005. 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m UK taxation 52 54 112Overseas taxation 95 76 176 ----------- --------- ----------Total taxation 147 130 288 ----------- --------- ---------- The table below shows the tax impact of the adjustments made to reported profitafter tax in order to arrive at the adjusted measure of earnings disclosed innote 6. 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Reported taxation 147 130 288Tax on restructuring costs 5 4 15Tax on net retirement benefits financing income (6) (3) (6)Tax on fair value gains and losses on derivative financial instruments (4) n/a n/a ----------- ----------- -----------Adjusted taxation 142 131 297 ----------- ---------- ----------- 5. Dividends Amounts recognised as distributions to ordinary shareholders in the period: 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Final dividend for the year ended 30 Sept 2005 of 39.5p per share (2004: 35.0p) 278 253 253Interim dividend for the year ended 30 Sept 2005 of 16.5p per share - - 120 ----------- ----------- ----------- 278 253 373 ----------- ----------- ----------- The Directors have declared an interim dividend for 2006 of 18.5p per share.This amounts to £129m based on the number of shares ranking for dividend at 31March 2006. 6. Earnings per share Basic earnings per share is based on the profit for the period attributable tothe equity holders of the Company and the weighted average number of ordinaryshares in issue during the period (excluding shares held to satisfy the Group'semployee share schemes and shares purchased by the Company and held as treasuryshares). Diluted earnings per share have been calculated by taking into accountthe weighted average number of shares that would be issued on conversion intoordinary shares of rights held under the employee share schemes. 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Earnings: basic and diluted 397 349 784 ----------- ----------- ----------- Number Number Number in in in millions millions millionsWeighted average number of shares:Shares for basic earnings per share 706.3 725.2 721.6Potentially dilutive share options 3.6 3.5 3.4 ----------- ----------- -----------Shares for diluted earnings per share 709.9 728.7 725.0 ----------- ----------- ----------- Basic earnings per share 56.2p 48.1p 108.6pDiluted earnings per share 55.9p 47.9p 108.1p ----------- ----------- ----------- Earnings are impacted by amounts not considered by management to be part of theunderlying trading of the Group, as described in note 1 above. A reconciliationfrom reported earnings per share to adjusted earnings per share, and theearnings figures (net of tax) used in calculating them is as follows: 31 March 31 March 30 Sept 31 March 2006 31 March 2005 30 Sept 2005 2006 Earnings 2005 Earnings 2005 Earnings EPS £m EPS £m EPS £m Reported basic 56.2p 397 48.1p 349 108.6p 784Restructuring costs 1.9p 13 1.5p 11 5.8p 42Net retirement benefits financing income (2.4)p (17) (1.0)p (7) (2.2)p (16)Fair value gains and losses on derivative financial instruments (1.3)p (9) n/a n/a n/a n/a --------- ----------- -------- -------- -------- --------Adjusted 54.4p 384 48.6p 353 112.2p 810 --------- --------- -------- -------- -------- -------- 7. Reconciliation of cash flow from operating activities 6 months 6 months ended ended Year ended 31 March 2006 31 March 2005 30 Sept 2005 £m £m £m Profit for the period 400 352 790Adjustments for:Taxation 147 130 288Finance costs 207 179 342Investment income (162) (90) (180)Depreciation and amortisation 45 52 94Movement in net retirement benefit provisions - (3) -Movement in other provisions (3) (10) 16 ----------- ----------- -----------Operating cash flows before movements in working capital 634 610 1,350 ----------- ----------- -----------Increase in inventories (557) (246) (11)Increase in trade and other receivables (61) (6) (47)Increase in trade and other payables 452 150 78 ----------- ----------- -----------Movement in working capital (166) (102) 20 ----------- ----------- -----------Taxation paid (110) (91) (239) ----------- ----------- -----------Net cash flow from operating activities 358 417 1,131 ----------- ----------- ----------- 8. Analysis of net debt The movements in cash and cash equivalents, borrowings and derivative financialinstruments in period were as follows: Net cash Derivative and cash Short term Long term financial equivalents borrowings borrowings instruments Total £m £m £m £m £m As at 30 Sept 2005 before IAS 39 transition 256 (707) (2,775) (57) (3,283)IAS 39 transition (note 12) 1 (1) (39) (15) (54) ----------- ----------- ----------- ----------- -----------As at 1 Oct 2005 after IAS 39 transition 257 (708) (2,814) (72) (3,337) ----------- ----------- ----------- ----------- -----------Cash flow (44) (107) (205) - (356)Accretion of interest - (16) (39) - (55)Change in fair values - - - 13 13Currency translation differences 2 (17) (28) - (43) ----------- ----------- ----------- ----------- -----------As at 31 March 2006 215 (848) (3,086) (59) (3,778) ----------- ----------- ----------- ----------- ----------- 9. Purchase of treasury shares During the period the Company continued its share buyback programme purchasing17,355,000 ordinary shares in Imperial Tobacco Group PLC for a total cost of£296m including expenses. The shares purchased to date, representing 4.2% ofissued share capital, have not been cancelled but are held in a treasury sharesreserve within the profit and loss account reserve and represent a deductionfrom equity attributable to the equity holders of the Company. 10. Retirement benefits A full valuation of the Group's retirement benefit plans is performed annuallyas at 30 September. An interim valuation is carried out at 31 March for the mainplans. As part of this interim valuation, the plan assets are revalued based onmarket data at the period end and the scheme liabilities are recalculated toreflect key changes in membership data and revised actuarial assumptions. 11. Reconciliation of IFRS comparatives from previously published UK GAAPfinancial information In 2005, the Group prepared its consolidated financial statements under UK GAAP.With effect from 1 October 2005, the Group is required to prepare itsconsolidated financial statements in accordance with IFRS. The comparativefigures included in this report for the six months ended 31 March 2005 and thefull year ended 30 September 2005 are restated for IFRS and are unaudited. Full details of the restatement and reconciliations from the UK GAAP financialinformation were published on 24 November 2005 (full year ended 30 September2005), and 31 January 2006 (six months ended 31 March 2005), and are availableon our website www.imperial-tobacco.com. Subsequent to releasing our restated 2005 full year and interim results we havereclassified certain advertising and promotion expenditure and net pensionbenefit financing income within our income statement. These changes do notimpact the reported profit before tax. (a) 6 months ended 31 March 2005 Reported Advertising and previously promotion 1 Pensions 2 Revised 2005 2005 2005 2005 £m £m £m £m Revenue less duty 1,464 (10) - 1,454 ----------- ----------- ----------- -----------Profit from operations 581 - (10) 571 ----------- ----------- ----------- -----------Net financing costs (99) - 10 (89) ----------- ----------- ----------- -----------Profit before taxation 482 - - 482 ----------- ----------- ----------- ----------- (b) 12 months ended 30 September 2005 Reported Advertising and previously promotion 1 Pensions 2 Revised 2005 2005 2005 2005 £m £m £m £m Revenue less duty 3,149 (26) - 3,123 ----------- ----------- ----------- -----------Profit from operations 1,262 - (22) 1,240 ----------- ----------- ----------- -----------Net financing costs (184) - 22 (162) ----------- ----------- ----------- -----------Profit before taxation 1,078 - - 1,078 ----------- ----------- ----------- ----------- 1. Certain advertising and promotion expenditure that is linked to volumes soldhas been deducted from revenue rather than included in other operating charges. 2. In line with developing best practice net pension benefit financing income isincluded within net finance costs. At the time of our published 2005 full andinterim restated results this net income was included within profit fromoperations. 12. IAS 39 transition balance sheet In preparing the comparative figures for 2005, the Group has chosen to utilisethe IFRS 1 exemption from the requirement to restate comparative information forIAS 32 and IAS 39 on financial instruments. Therefore, in the preparation of itsfinancial statements in accordance with IFRS for the year ended 30 September2005, the Group has continued to apply the hedge accounting rules of UK GAAP. From 1 October 2005, the Group is required to account for its financialinstruments in accordance with the measurement criteria of IAS 39 and hasrecognised transitional adjustments at this date: (a) The measurement of all derivative financial instruments at fair value;(b) The reclassification of interest accruals to form part of the carrying value of the related cash or borrowings; and(c) Deferred tax on adjustments (a) and (b). Although the Group has taken the decision not to hedge account for itsderivative financial instruments, it is deemed to have applied hedge accountingunder UK GAAP until 30 September 2005 and discontinued hedge accountingprospectively thereafter. Detailed below is a reconciliation between the IFRSrestated balance sheet at 30 September 2005 applying prior UK GAAP hedgeaccounting and the balance sheet after the adoption of IAS 32 and IAS 39. Allderivative financial instruments will continue to be recognised in the balancesheet at fair value with future gains and losses being recognised immediately inearnings. Restatement of consolidated balance sheet to include IAS 32 and IAS 39 as at 1October 2005 Restated IFRS IAS 39 including Restated transition impact IFRS adjustments of IAS 39 £m Notes £m £mNon-current assetsIntangible assets 3,554 3,554Property, plant and equipment 642 642Investments in associates 5 5Retirement benefit assets 259 259Trade and other receivables 4 4Deferred tax assets 62 (c) 43 105 ----------- ----------- ----------- 4,526 43 4,569 ----------- ----------- -----------Current AssetsInventories 857 857Trade and other receivables 1,012 (b) (1) 1,011Current tax assets 44 44Cash and cash equivalents 256 (b) 1 257Derivative financial instruments - (a) 72 72 ----------- ----------- ----------- 2,169 72 2,241 ----------- ----------- -----------Current liabilitiesBorrowings (707) (b) (1) (708)Trade and other payables (1,528) (b) 40 (1,488)Current tax liabilities (235) (235)Provisions for liabilities and charges (50) (50)Derivative financial instruments - (a) (144) (144) ----------- ----------- ----------- (2,520) (105) (2,625) ----------- ----------- -----------Non-current liabilitiesBorrowings (2,775) (b) (39) (2,814)Derivative financial instruments (57) (a) 57 -Trade and other payables (11) (11)Deferred tax liabilities (133) (c) (22) (155)Retirement benefit liabilities (438) (438)Provisions for liabilities and charges (56) (56) ----------- ----------- ----------- (3,470) (4) (3,474) ----------- ----------- ----------- ----------- ----------- -----------Net assets 705 6 711 ----------- ----------- -----------EquityShare capital 73 73Share premium account 964 964Reserves (351) (a)(b)(c) 6 (345) ----------- ----------- -----------Equity attributable to equity holders of the Company 686 6 692 ----------- ----------- -----------Minority interests 19 19 ----------- ----------- -----------Total equity 705 6 711 ----------- ----------- ----------- SUMMARY OF DIFFERENCES BETWEEN IFRS AND US GENERALLYACCEPTED ACCOUNTING PRINCIPLES ("GAAP") With effect from 1 October 2005, the Group is required to prepare itsconsolidated financial statements in accordance with IFRS (as defined in theAccounting Policies note) as adopted by the EU which differ in certain respectsfrom those generally accepted in the United States ("US GAAP"). A summary of theprincipal differences for the six months ended 31 March 2006 is set out below. There are no material differences between the financial information preparedunder IFRS as adopted by the EU and that prepared under published IFRS. Explanation 6 months ended Reference 31 March 2006 £mProfit attributable to the equity holders of the Company under IFRS 397US GAAP adjustments:Pensions (i) (3)Amortisation of other intangible assets (ii) (48)Employee related benefits (iii) (12)Deferred tax on adjustments 17 -----------Net income under US GAAP 351 ----------- Explanation 6 months ended Reference 31 March 2006 Amounts in accordance with US GAAPBasic net income per ordinary share (iv) 49.6pBasic net income per ADS (iv) 99.2pDiluted net income per ordinary share (iv) 49.3pDiluted net income per ADS (iv) 98.6p Explanation 31 March 2006 Reference £mEquity attributable to equity holders of the Company under IFRS 659US GAAP adjustments:Pensions (i) (64)Goodwill (ii) (853)Other intangible assets (ii) 2,655Deferred tax on adjustments (858) -----------Equity attributable to the equity holders of the Company under US GAAP 1,539 ----------- (i) Pensions Under IFRS, pension costs and liabilities are accounted for under the rules setout in IAS 19 "Employee Benefits", whereas under US GAAP these costs andliabilities are determined primarily in accordance with the requirements ofStatement of Financial Accounting Standard 87 "Employers' Accounting forPensions" (SFAS 87), SFAS 88 "Employers' Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits", andSFAS 106 "Employers' Accounting for Post Retirement Benefits other thanPensions". Under IFRS, the pension cost for the period is based on an actuarial valuationat the start of the financial period. The current service cost is charged toprofit from operations. The expected return on plan assets and the interest costare included within finance costs in the income statement. Actuarial gains andlosses arise when the values of plan assets and liabilities are re-measured atthe balance sheet date. They result where actual events during the year differfrom the actuarial assumptions in the previous valuation (experienceadjustments) and changes in actuarial assumptions. They are recognised in fullin the statement of recognised income and expense in the period in which theyarise. The surplus or deficit in plans at the balance sheet date is reported aspart of the Group's consolidated net assets. Under IFRS, the valuations of theassets and liabilities of the Group's most significant plans have been updatedto the interim balance sheet date. Under US GAAP, the pension cost for the period is also based on an actuarialvaluation at the start of the financial period. The current service cost,interest and the expected return on assets are all charged or credited to profitfrom operations for the period. Cumulative differences caused by changes inactuarial assumptions and any differences between the actual and expectedreturns on the plans' assets are amortised over the employees' average remainingservice lives through profit from operations. The valuations of the assets andliabilities of the Group's plans have not been updated under US GAAP to theinterim balance sheet date. (ii) Goodwill and other intangible assets Under US GAAP, the Group allocated a portion of the consideration in pastbusiness combinations to definite lived intangible assets as required by SFAS141 "Business Combinations". Under UK GAAP, these amounts were included ingoodwill. On transition to IFRS, such UK GAAP amounts remain within goodwill andare no longer amortised, but are subject to regular impairment reviews. (iii) Employee related benefits Employee related benefits include adjustments in respect of employee shareschemes and compensated short term absences. Under IFRS, share options are fair valued at their grant dates and the cost ischarged to the income statement over the relevant vesting periods. As permittedunder the transitional rules for IFRS this approach has only been adopted forawards granted after 7 November 2002. Under US GAAP, share options are also fair valued at their grant date andincluded in the income statement over the vesting period of the options inaccordance with SFAS 123 (R) "Share-Based Payment". This approach is applied toall awards that remain unvested, from 1 October 2005. (iv) Net income per ordinary 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. FINANCIAL CALENDAR Ex-dividend date for interim dividend 5 July 2006Interim dividend record date 7 July 2006Interim dividend payable 4 August 2006 This information is provided by RNS The company news service from the London Stock Exchange

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