2nd Quarter & Interims-Part 1

British American Tobacco PLC 1 August 2000 Part 1 INTERIM REPORT TO 30 JUNE 2000 SUMMARY SIX MONTHS RESULTS 2000 1999 Change Operating profit pre-exceptionals £1,175m £757m +55% Pre-tax profit £698m £659m + 6% Adjusted earnings per share 26.38p 24.84p + 6% Interim dividend per share 9.00p 8.30p + 8% * Operating profit 55 per cent higher at £1,175 million, excluding goodwill amortisation and exceptional items, demonstrating the continuing success of last year's merger with Rothmans. There were some excellent results, notably in Europe and Latin America, but trading conditions remained difficult in the US. * Group volumes 23 per cent higher at 396 billion. International brands showed good progress, especially in the lights segment. On a comparable basis, overall volumes were 2 per cent lower with the second quarter showing an improvement on the same quarter last year. * After goodwill and exceptional items, operating profit was 9 per cent up and, after higher net interest, pre-tax profit was 6 per cent ahead. Adjusted earnings per share (on a fully diluted basis) rose by 6 per cent. * The Board is declaring an interim dividend of 9p, to be paid on 18 September, which represents an 8 per cent increase over the comparable payments last year. * The Chairman, Martin Broughton, commented 'Shareholders may well feel that litigation and regulation are obscuring the value that has been created by the merger with Rothmans over the past 18 months. The progress achieved by most of our key international brands in many of the major markets affected by the merger is very encouraging, clearly illustrating the benefits of our additional size and scale. Moreover, the results as a whole demonstrate the increased strength and the improved quality of our business, particularly its much better balance between mature and emerging markets.' ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson 020 7845 1180 David Betteridge/Scott Hailstone/Jody Humble 020 7845 2888 www.bat.com BRITISH AMERICAN TOBACCO p.l.c. INTERIM REPORT TO 30 JUNE 2000 INDEX PAGE Chairman's comments 2-4 Business review 5-9 Group results 10 Segmental analyses of turnover and profit 11 Statement of total recognised gains and losses 12 Interest of British American Tobacco's shareholders 12 Group balance sheet 13 Group cash flow statement 14 Notes to the Group cash flow statement 15 Accounting policies and basis of preparation 16 Changes in the Group 17 Foreign currencies 18 Exceptional items 19 Goodwill amortisation 19 Sale of brands 19 Net interest 19 Taxation 20 Earnings per share 20 Dividends 21 Segmental analyses: Associated companies and joint venture 22 Shareholders' funds 22 CHAIRMAN'S COMMENTS 2. British American Tobacco's operating profit before exceptional items rose by 55 per cent to £1,175 million, demonstrating the continuing success of last year's merger with Rothmans. After goodwill and exceptionals, operating profit was 9 per cent up and, after higher net interest, pre-tax profit was 6 per cent ahead. Adjusted diluted earnings per share rose 6 per cent to 26.38p and the Board has declared an interim dividend of 9p, payable on 18 September. This represents an 8 per cent increase. In terms of business headlines, the main changes compared to last year are significantly higher profits from Europe and Amesca, as well as substantial improvements from Asia-Pacific and Latin America. Profits from America-Pacific are marginally ahead, reflecting the change in Canada and the continuing difficulties in the Brown & Williamson (B&W) US domestic business. Large corporate mergers are currently attracting some criticism for their failure to deliver the benefits originally envisaged. It is therefore reassuring to be able to report to shareholders that the smooth integration of the Rothmans businesses is continuing and that the synergy targets are not only being met but are also being achieved more quickly than we forecast. There have been a number of developments concerning tobacco issues around the world, notably the Engle jury verdict, the UK Health Select Committee Report, two European Union Directives and the announcement of the public hearings that the World Health Organisation (WHO) intends to hold about its proposed Tobacco Free Initiative. Although there have been some important verdicts in favour of the US tobacco industry, they are plainly overshadowed by Engle. The jury's award of US$145 billion against the industry, US$17.6 billion of which is against B&W, is dramatic by any standard. B&W is absolutely confident that the Engle verdict will be reversed eventually during the appeal process, given the inappropriateness of class certification, the significant constitutional issues involved in the case and the numerous errors committed during the trial. The industry has now petitioned to have the case removed to the Federal District Court in Florida. Chairman's comments... 3. If the manifest absurdities of the Engle trial raise the need for tort reform further up Congress's agenda, the saga may ultimately serve some purpose. It would certainly be a fitting tribute to a case that has so clearly demonstrated the extent to which the US legal system has become a business opportunity for lawyers rather than an orderly process for civil redress. The UK Health Select Committee's Report was published in June, including some constructive proposals, despite its predictably hostile tone. Many of the proposals, such as further work to develop lower risk products, reflect our own suggestions. We support sensible regulation of tobacco. We do not, however, accept that either the EU advertising ban or the proposed EU Directive on the Manufacture and Sale of Tobacco Products are sensible in their present form. In addition, they spuriously purport to be measures intended to promote the Single Market. It is encouraging that the Advocate-General of the European Court of Justice has condemned the advertising ban on the grounds that the Single Market cannot be promoted by the elimination of advertising. The tobacco products draft directive, whose legal base is also questionable, would, amongst other things, ban the export of cigarettes yielding over 10mg of tar, seriously threatening jobs in our EU factories. The top prize for verbal gymnastics must go to the WHO's claim that 'tobacco is a communicable disease' on the grounds that 'it is communicated through advertising'. The WHO is now to hold public hearings in October but since participants will be restricted to five minutes of presentation and five pages of written submission, this cannot represent either serious consultation or genuine dialogue. The difficulties British American Tobacco is facing with supra national bodies such as the EU and the WHO are fortunately much less pronounced with national governments around the world. Indeed, we seek to operate in partnership with governments, who are significant economic stakeholders in our business, based on our open acknowledgement that we make a risky product and therefore support sensible regulation. Chairman's comments... 4. Shareholders may well feel that litigation and regulation are obscuring the value that has been created by the merger with Rothmans over the past 18 months. The progress achieved by most of our key international brands in many of the major markets affected by the merger is very encouraging, clearly illustrating the benefits of our additional size and scale. Moreover, the results as a whole demonstrate the increased strength and the improved quality of our business, particularly its much better balance between mature and emerging markets. MARTIN BROUGHTON BUSINESS REVIEW 5. Following the merger with Rothmans, operating profit was up 55 per cent at £1,175 million, excluding goodwill amortisation and the exceptional items set out on page 19. There were some excellent results, notably in Europe and Latin America, but trading conditions remained difficult in the US. The integration of the Rothmans business into British American Tobacco is well advanced and synergy benefits continue to be delivered well ahead of schedule. Volumes were 23 per cent higher at 396 billion. International brands showed good progress, especially in the lights segment, despite volume declines in certain markets. On a comparable basis, overall volumes were 2 per cent lower with the second quarter showing an improvement on the same quarter last year. Lucky Strike continued its return to growth, with volumes around 20 per cent higher as a result of strong performances in Japan, France, Spain and Germany. There was a good performance by the Dunhill brand with excellent results in Malaysia and Taiwan and continued growth in the South Korean market. The good performance was achieved in spite of the abolition of intra-EU duty free. This change also had a negative impact on sales of Benson & Hedges, although the brand is progressing well in its other markets. The trading environment in Asia-Pacific had a detrimental effect on State Express 555 volumes. However, Kent showed strong progress in all its key markets, notably Japan, Romania, Russia and Chile. Peter Stuyvesant generally performed well in its major markets although total volumes were slightly down compared to last year. Lower volumes in Africa and Yemen resulted in the Rothmans brand showing a volume decline. Pall Mall has continued to perform well in Germany, Russia, Italy and Hungary while Viceroy maintained its volume growth in the US, Romania and Jordan. Manufacturing operations continued to deliver savings in material costs through global procurement initiatives. The rationalisation of production facilities resulted in the closure of factories in Geneva, Spennymoor and Granville in Sydney. Business review continued 6. Profit from the America-Pacific region for the six months was £9 million higher at £381 million. This is primarily due to the inclusion of Imperial Tobacco in Canada as a subsidiary, offset by the lower profit contribution from the US domestic market. Volumes were down as a result of lower sales in the US market, not fully covered by the increases elsewhere in the region. The operating profit included for Canada was £167 million in the current half year and £134 million for the same period last year, although these numbers are not comparable (see page 17). However, the profit for the tobacco operations, on a comparable basis for the six months, increased by 10 per cent, mainly as a result of higher prices. Although the Canadian industry's volumes were down by 3 per cent, Imperial's volumes were stable. This led to a market share of over 70 per cent with a growth in share for Du Maurier and Matinee, while Players maintained share. Before common overheads of £116 million, the contribution from the US domestic market decreased by £42 million to £221 million. Brown & Williamson lost market share, primarily in the discount segment where both GPC and Misty's shares were lower as a result of heavy competitive discounting, the rise in grey market activity and the preferential treatment allowed to certain small manufacturers under the MSA agreement. Although Lucky Strike, Viceroy and Capri showed small market share increases, both Kool and Carlton lost share. Encouragingly, the price reduction on GPC implemented in April seems to have stopped the decline in its market share. In Japan, Kent, Lucky Strike and Kool drove further increases in both volume and market share, but the profit contribution was slightly lower due to the timing of marketing expenditure. Dunhill Lights' performance helped the merged businesses in Korea to progress strongly. In Asia-Pacific, the region benefited from the addition of Rothmans' businesses to the Group, despite the brand divestments in Australia and New Zealand, as well as from significant synergy benefits. Volumes rose by almost 14 billion or 45 per cent versus the same period last year with profits £83 million ahead at £171 million. Business review continued 7. In Australia, where the total industry volume was down following tax changes, there were market share gains for Benson & Hedges, Winfield and Dunhill at the top end of the market. These gains, together with the merger, led to higher profits compared to last year. The results in New Zealand reflected the merger as well as a one-off benefit following the May excise tax increase. In Indonesia, profits rose despite lower volumes which were heavily impacted by the change in the excise system. In Malaysia, volumes increased as the economic recovery continued and this, together with synergy benefits, led to significantly higher profits. Exports to the region were lower than last year but, following the merger, the region is much less dependent on profit from this business. The profit in Latin America, at £197 million, increased by £58 million. This was mainly due to strong performances in Brazil and Chile, together with the inclusion of the Rothmans business in Jamaica, partly offset by a deterioration in Argentina. Regional volumes were up 2 billion to 82 billion. In Brazil, Souza Cruz increased volumes and maintained its high market share. Free is the leader in the lights segment, while Hollywood increased market share. The growth in volume and cost reductions contributed to the increase in profit. An excise increase and aggressive competitor activities in Mexico led to a decline in the Group's volumes and market share but, with higher prices, profit was in line with last year. In Chile, both profit and volumes rose. Nobleza- Piccardo gained market share in Argentina and volumes increased. However, results were adversely affected as a consequence of an increase in the social assistance fund tax. The rate of tax was reduced after the period end and margins are now recovering. During the period, the Group increased its shareholding in Nobleza-Piccardo from 70 to over 95 per cent. In Europe, results benefited from the wider market presence following the Rothmans merger. This, coupled with some excellent underlying performances, contributed to the higher profits which advanced by £142 million to £243 million and higher volumes up 36 billion to 99 billion. Business review continued 8. In Germany, profits were well ahead and both Lucky Strike and Pall Mall achieved good volume and market share growth. In Russia, there was excellent progress by Yava and international brands, with results improving despite the continuing programme of marketing investment. Although trading conditions remained difficult, there was an encouraging performance in Ukraine as Prilucky Osoblivy led the recovery in market share. Viceroy and Kent performed very well in Romania, resulting in higher profits and market share. There was a good performance from the smoking tobacco and cigar operations. The excellent results for the region were achieved in spite of volume losses in some markets on a comparable basis, as well as the abolition of intra-EU duty free business since July 1999. The Rothmans merger had a material impact on the Amesca region, with volumes up 27 per cent to over 116 billion and profit £126 million higher at £183 million. The total market in South Africa continued to decline, although at a slower rate, with Peter Stuyvesant increasing both volume and market share. Profits also rose mainly due to cost reductions as a result of the integration of the operations. Elsewhere in Africa results have been adversely impacted by local currency devaluations resulting in reduced purchasing power. Despite the unsettled situation in Zimbabwe leaf sales and processing are proceeding, although behind schedule. While the land occupations threaten the size of next year's crop, appropriate contingency plans are in place. Improving economic conditions have helped in producing excellent growth in profits from our associated companies in India. Volumes are slightly up on last year. In Bangladesh, profit and volumes rose, with John Player Gold Leaf performing strongly. The shortage of foreign currency in Uzbekistan continued to limit production and sales volume. Profit growth in the Middle East benefited from a combination of merger benefits and shipments in advance of duty increases. Business review continued 9. Comparisons of the Group's cash flow for the half year are distorted by a number of factors. Net cash inflow from operating activities, up £20 million at £862 million, reflected the changed working capital position at June of the enlarged Group, as well as integration and Imasco restructuring costs. Net cash generation pre-dividends, at £246 million, was below last year principally due to the above distortions on operating cash flows, as well as the payment of dividends on the preference shares and the timing of interest payments. Dividend payments on the ordinary share capital were higher as a result of the acceleration of payment dates. With a £695 million outflow for the redemption of one half of the preference shares, £841 million of net debt acquired with Imperial Tobacco and a £147 million exchange impact, the Group's net debt rose during the half year by £1,694 million to £4,749 million. Group Cigarette Volumes 3 months to 6 months to Year to 30.6.00 30.6.99 30.6.00 30.6.99 31.12.99 bns bns bns bns bns 27.7 29.3 America-Pacific 53.8 56.3 116.1 21.3 14.8 Asia-Pacific 44.7 30.8 85.1 40.5 38.3 Latin America 82.0 80.2 167.0 54.2 33.1 Europe 99.4 63.2 170.4 60.0 47.1 Amesca 116.5 91.4 213.9 ----- ----- ----- ----- ----- 203.7 162.6 396.4 321.9 752.5 ===== ===== ===== ===== ===== GROUP RESULTS - UNAUDITED 10. 3 months to 6 months to Year to 30.6.00 30.6.99 30.6.00 30.6.99 31.12.99 £m £m £m £m £m REVENUE 5,826 3,589 Subsidiary undertakings 11,114 6,976 18,798 140 557 Share of associates 682 1,351 2,873 ----- ----- ------ ------ ------ 5,966 4,146 11,796 8,327 21,671 ===== ===== ====== ====== ====== PROFIT 501 322 Subsidiary undertakings 802 566 1,099 ------- ------- --------------------------- ------- ------- -------- after charging: acquired stock (80) (9) US tobacco settlements (22) (24) (26) integration costs (44) (357) (94) goodwill amortisation (181) (162) ------- ------- --------------------------- ------- ------- -------- Share of associates and 15 73 joint venture 1 169 380 ------- ------- --------------------------- ------- ------- -------- after charging: Imasco restructuring costs (67) ------- ------- --------------------------- ------- ------- -------- ----- ----- ------ ------ ------ 516 395 Total operating profit 803 735 1,479 Sale of brands 88 ----- ----- ------ ------ ------ Profit on ordinary 516 395 activities before interest 803 735 1,567 (38) (37) Net interest (101) (64) (170) Share of associates' (1) (7) net interest (4) (12) (26) ----- ----- ------ ------ ------ 477 351 Profit before taxation 698 659 1,371 Taxation on ordinary (197) (193) activities (321) (330) (673) ----- ----- ------ ------ ------ 280 158 Profit after taxation 377 329 698 (45) (20) Minority interests (87) (49) (142) ----- ----- ------ ------ ------ 235 138 Profit for the period 290 280 556 ===== ===== ====== ====== ====== Earnings per share 10.44p 8.85p - basic 12.36p 17.96p 25.25p ===== ===== ====== ====== ===== 15.27p 13.98p - adjusted diluted 26.38p 24.84p 52.33p ===== ===== ====== ====== ===== See notes on pages 16 to 22. SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - UNAUDITED 11. 3 months to 6 months to Year to 30.6.00 30.6.99 30.6.00 30.6.99 31.12.99 £m £m £m £m £m Turnover excluding duty, excise and other taxes 1,000 1,168 America-Pacific 2,032 2,246 4,804 326 209 Asia-Pacific 679 424 1,208 424 339 Latin America 793 666 1,461 672 333 Europe 1,383 764 2,359 362 229 Amesca 723 451 1,350 ----- ----- ------ ------ ------ 2,784 2,278 5,610 4,551 11,182 ===== ===== ====== ====== ====== Operating profit 204 203 America-Pacific 381 372 848 95 48 Asia-Pacific 171 88 231 112 68 Latin America 197 139 333 126 54 Europe 243 101 342 99 31 Amesca 183 57 268 ----- ----- ------ ------ ------ 636 404 1,175 757 2,022 Acquired stock (80) (9) US tobacco settlements (22) (24) (26) Integration costs (44) (357) (94) Goodwill amortisation (181) (162) Imasco restructuring (67) costs ----- ----- ------ ------ ------ 516 395 803 735 1,479 ===== ===== ====== ====== ====== Operating profit restated at comparable rates of 506 395 exchange 798 735 1,479 ===== ===== ====== ====== ====== The net turnover analysis is based on external sales in each region. The figures for the six months ended 30 June 2000 and 30 June 1999 based on regional location of manufacture would not be materially different except for sales from Europe to Amesca and Asia-Pacific which amounted to £245 million and £152 million respectively, 1999 £164 million and £175 million. The operations of subsidiaries are entirely related to tobacco. The Group's share of the operations of associates and joint venture, analysed by business, is set out on page 22. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - UNAUDITED 12. 6 months to Year to 30.6.00 30.6.99 31.12.99 £m £m £m Profit for the period 290 280 556 Differences on exchange 43 (138) (268) Revaluation of associated company 1,269 ------ ------ ------ Total recognised gains related to the period (below) 1,602 142 288 ====== ====== ====== INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - UNAUDITED 6 months to Year to 30.6.00 30.6.99 31.12.99 £m £m £m Balance 1 January 4,821 64 64 Total recognised gains related to the period (above) 1,602 142 288 Issue of shares: share options 2 1 3 Rothmans merger 5,089 5,089 Redemption of convertible redeemable preference shares (695) Dividends and other appropriations: ordinary shares (196) (156) (546) convertible redeemable preference shares (11) (10) (54) amortisation of discount on preference shares (13) (20) Other movements 16 (31) (3) ------ ------ ------ Balance at period end 5,526 5,099 4,821 ====== ====== ====== See notes on pages 16 to 22. GROUP BALANCE SHEET - UNAUDITED 13. 30.6.00 30.6.99 31.12.99 £m £m £m Fixed assets Intangible assets 7,466 5,338 Tangible assets 2,645 2,041 2,456 Investments in associates and joint venture 177 532 636 Other investments and long term loans 305 138 210 ------ ------ ------ 10,593 2,711 8,640 ------ ------ ------ Current assets Stocks 3,351 2,194 2,850 Debtors 2,150 1,456 2,000 Acquired businesses awaiting disposal 86 123 Current investments 341 549 768 Short term deposits and cash 2,020 2,165 1,853 ------ ------ ------ 7,948 6,364 7,594 ------ ------ ------ Rothmans International 5,114 ------ ------ ------ TOTAL ASSETS 18,541 14,189 16,234 ====== ====== ====== Capital and reserves Shareholders' funds: Equity 4,779 3,643 3,347 Non-equity 747 1,456 1,474 ------ ------ ------ Total shareholders' funds 5,526 5,099 4,821 Minority shareholders' equity interest 467 347 455 ------ ------ ------ 5,993 5,446 5,276 ------ ------ ------ Other liabilities Provisions for liabilities and charges 1,347 668 1,251 Borrowings 7,110 5,205 5,676 Creditors 4,091 2,870 4,031 ------ ------ ------ 12,548 8,743 10,958 ------ ------ ------ TOTAL FUNDS EMPLOYED 18,541 14,189 16,234 ====== ====== ====== See notes on pages 16 to 22. GROUP CASH FLOW STATEMENT - UNAUDITED 14. 6 months to Year to 30.6.00 30.6.99 31.12.99 £m £m £m Net operating cash flow from subsidiary undertakings (note 1) 862 811 1,995 Dividends from associates 31 90 ------ ------ ------ Net cash inflow from operating activities 862 842 2,085 Returns on investments and servicing of finance (236) (72) (206) Taxation (282) (176) (334) Capital expenditure and financial investment (98) (100) (281) ------ ------ ------ Net cash generation 246 494 1,264 Disposals less acquisitions 116 (22) (216) Equity dividends paid (387) (125) (530) ------ ------ ------ Cash flow before use of liquid resources and external financing (25) 347 518 Management of liquid resources 421 (1,442) (1,340) --------------------------------------- ------- ------- --------- Financing - proceeds from issue of shares 2 1 3 - redemption of shares (695) - increase in debt 325 1,308 853 --------------------------------------- ------- ------- --------- (368) 1,309 856 ------ ------ ------ Increase in cash in the period 28 214 34 ====== ====== ====== Reconciliation of net cash flow to movement in net debt (note 2) Increase in cash in the period 28 214 34 Increase in debt (325) (1,308) (853) (Decrease)/increase in liquid resources (421) 1,442 1,340 ------ ------ ------ Change in net debt resulting from cash flow (718) 348 521 Net debt acquired on purchase of subsidiaries (841) (754) Net funds disposed of on sale of subsidiaries (23) (23) Other changes 12 (29) (33) Differences on exchange (147) (212) (191) ------ ------ ------ Movement in net debt in the period (1,694) 84 (480) Net debt at 1 January (3,055) (2,575) (2,575) ------ ------ ------ Net debt at period end (4,749) (2,491) (3,055) ====== ====== ====== NOTES TO THE GROUP CASH FLOW STATEMENT 15. 6 months to Year to 30.6.00 30.6.99 31.12.99 1) Net operating cash flow from £m £m £m subsidiary undertakings Operating profit 802 566 1,099 Depreciation 174 131 350 Goodwill amortisation 181 162 (Increase)/decrease in stocks (124) (43) 31 (Increase)/decrease in debtors (9) 10 82 (Decrease)/increase in creditors (143) 172 180 (Decrease)/increase in provisions (7) (24) 83 Other (12) (1) 8 ------ ------ ------ Net operating cash flow from subsidiary undertakings 862 811 1,995 ====== ====== ====== Differences Cash Other on 1.1.00 flow changes exchange 30.6.00 2) Analysis of £m £m £m £m £m net debt Cash and bank balances 450 448 Overdrafts (110) (113) ------ ------ ------ ------ ------ 340 28 (33) 335 Term borrowings (5,492) (340) (949) (138) (6,919) Finance lease obligations (74) 15 (15) (4) (78) Short term deposits 1,403 5 99 65 1,572 Current investments 768 (426) 36 (37) 341 ------ ------ ------ ------ ------ (3,055) (718) (829) (147) (4,749) ====== ====== ====== ====== ====== MORE TO FOLLOW

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