Interim Results - Part 1

BRITISH AMERICAN TOBACCO PLC 3 August 1999 PART 1 INTERIM REPORT TO 30 JUNE 1999 SUMMARY SIX MONTHS RESULTS 1999 1998 Change Operating profit £ 736m £ 723m + 2% Pre-tax profit £ 661m £ 582m +14% Adjusted earnings per share 24.38p 24.21p + 1% Second interim dividend per 4.3p share * Pre-tax profit is 14 per cent higher at £661 million, principally due to the absence of exceptional charges. Adjusted earnings per share are slightly ahead of last year. * With continuing economic and currency problems in a number of key markets, operating profit was £736 million. This represents an underlying fall of 9 per cent, after excluding initial US settlement costs and the Brazil sales tax recovery from the comparative period. * The Group's cash flow continues to be strong with net cash generation of £494 million and successful refinancing of debt facilities. * The Rothmans International results since the merger in June have not been included in this report and will be reflected in the Group's nine months results. * British American Tobacco is today announcing the details involved in the proposal to restructure Imasco, the Group's associated company in Canada. * The Board is declaring an interim dividend of 4.3p, to be paid on 27 September. This dividend, together with the special interim of 4.0p paid in July, represents a 4 per cent increase over the 1998 interim dividend announced at the third quarter last year. * The Chairman, Martin Broughton, commented 'Although forecasting is clearly difficult in the current circumstances, the Board remains of the view that operating profit before exceptional items for the full year should be close to 1998, before taking account of the Rothmans merger.' ENQUIRIES: 1430 - 1830 hours: 0171 845 1000 KEITH DUNT MICHAEL PRIDEAUX Finance Director Director of Corporate and Regulatory Affairs BRITISH AMERICAN TOBACCO p.l.c. INTERIM REPORT TO 30 JUNE 1999 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 16 Rothmans International 16 Foreign currencies 17 Exceptional items 17 Demerger and restructuring costs 18 Net interest 18 Taxation 18 Earnings per share 18 Dividends 19 Segmental analyses: Associated companies 20 Millennium 20 CHAIRMAN'S COMMENTS 2. Pre-tax profit, at £661 million, was 14 per cent ahead of last year, principally due to the absence of exceptional charges. After excluding exceptional items, as well as the distortion in the Group's tax charge resulting from the US settlement payments, adjusted earnings per share are slightly ahead of last year. The Board has declared a second interim dividend of 4.3p per share, payable on 27 September, making a total interim dividend of 8.3p, a 4 per cent increase when the 4p special interim dividend already paid is included. Although the highlight of the second quarter was plainly the completion of the merger with Rothmans on 7 June, ahead of schedule, these results still cover the pre-merger British American Tobacco, since the enlarged Group will start to report as a whole on publication of the third quarter's results on 26 October. Good progress is being made with all the local mergers, even in territories where there have been complex competition or minority questions to resolve. All important appointments, both at Board and senior operational level, have been announced and I am highly encouraged by the way that the new teams are working together around the world. In addition, the more detailed analysis that has now been undertaken has confirmed that the cost savings of at least £250 million per annum can be achieved as planned and action is already underway. Based on long term trends, we had anticipated that the world cigarette market would remain flat in volume terms during 1999 but it is now apparent that total world market shipments have declined significantly in the first half. At the same time there appears to have been a marked increase in various types of untaxed smoking, particularly in counterfeit. The challenge of managing the business on strategy in this difficult environment can clearly be seen in the 9 per cent fall in our volumes and underlying operating profit. Our volumes have been hit by significant price increases in the US to fund the State Medicaid settlement, by the introduction of a cigarette export tax in Brazil and by weak exports to Asia. More positively, however, the increases in market share in Japan, Germany and other important markets are encouraging, as is the steady profit from Amesca, despite a decline in volumes. Chairman's comments... 3. Although forecasting is clearly difficult in the current circumstances, the Board remains of the view that operating profit before exceptional items for the full year should be close to 1998, before taking account of the Rothmans merger. In operations, continuing our drive towards greater economies of scale and an improved cost base, an extension to the factory in Bayreuth and closures in Spain, Singapore and Surinam were completed. Continuous improvements are being made to our cost structure, helping to keep costs below last year despite the significantly reduced volumes. The Group's cash flow continues to be strong with net cash generation of £494 million. The Group's financial flexibility has been further enhanced by a successful refinancing programme, replacing the US$8 billion facility put in place at the time of the demerger of the financial services businesses. Since regulation and litigation continue to have a significant influence on our share price, there are a number of developments worth commenting on. We have now seen the details of the World Health Organization's proposed 'Tobacco- Free Initiative' and can only repeat our offer to work with the WHO on addressing the problems of under-age smoking, an offer that has thus far been shunned. On the litigation front, Brown & Williamson has continued to defend itself successfully in individual lawsuits, including the first individual environmental tobacco smoke case to come to trial. Class actions continue to be regularly dismissed, as more and more state judges join the federal courts in ruling that individual rather than collective characteristics are the dominant factors in smoking and health cases. The Engle class action, a mammoth three-phase juggernaut which the industry lost as expected in Phase I, will now roll on into Phase II in September. In Phase II, at least part of the burden of proof will shift to the individual plaintiffs. Only if the industry loses any of the nine sample Phase II trials, is it entitled to appeal the entire case. Shareholders may be aware that speculation has recently arisen again about whether the US tobacco manufacturers have insurance policies that provide major product liability coverage. B&W has investigated the matter carefully and the Board's view remains, as stated in last year's Listing Particulars, that shareholders should not place any reliance on B&W having significant coverage of material value. Chairman's comments... 4. British American Tobacco is today announcing the details involved in the proposal to restructure Imasco, through an offer of Can$40 per share, plus the potential for an increase based on the sales proceeds from Shoppers Drug and Genstar. The conditional sale of Canada Trust to TD Bank at Can$67 per Canada Trust share has already been agreed. As a result of the restructuring, our Canadian interests will be focussed on Imperial Tobacco, in line with the Group's strategy, rather than through a 42 per cent stake in a diversified holding company. We are fully committed to developing Imperial Tobacco's extremely well managed business, which has consistently increased its market share over the last 20 years. MARTIN BROUGHTON BUSINESS REVIEW 5. With continuing economic and currency problems in a number of key markets, operating profit was up 2 per cent at £736 million. After excluding initial US settlement costs and the Brazil sales tax recovery from the comparative period, this represents an underlying fall of 9 per cent. The adverse economic conditions, together with the impact of significant price increases in the US following last year's tobacco settlement and the cigarette export tax in Brazil, led to a 9 per cent fall in volumes. Good progress was made in a number of markets including Germany, Japan, Canada, Russia, Romania, Indonesia, India and Venezuela. However, sales of our international brands were adversely affected by downtrading as economic uncertainty hit a number of our priority markets and were 11 per cent down on the first half of last year. State Express 555 total volume continues to be hindered in Asia by the unfavourable environment and the growth in counterfeit, although the performance in Indochina and Taiwan has been positive. Lucky Strike continued to make good progress in its two largest markets of Germany and Japan, although economic conditions adversely affected sales in a number of other markets. Similarly, Kent continues to demonstrate its strength in Japan, as well as Romania, but in many other markets the continued impact of economic difficulties has led to an overall decline. After a mixed first quarter, Benson & Hedges enjoyed a solid second quarter, with West Africa, Australia and the Middle East driving volumes forward. Pall Mall's excellent performance was sustained, with improving sales in markets as varied as Indonesia, Italy and Russia. The lights variants in particular showed significant growth. John Player Gold Leaf's total volumes are still hampered by continuing economic difficulties in Bangladesh. Profit from the America-Pacific region was 12 per cent lower at £215 million. The 1998 comparative excludes the impact of initial settlement charges of £150 million as a result of the Minnesota settlement, but the 1999 results are after charging £22 million for one-off settlement compliance costs and liquidated legal fees. (See note on page 17). Regional volumes were 12 per cent lower mainly as a result of conditions in the US domestic market. Business review continued 6. US domestic market contribution, before common overheads of £123 million, was 8 per cent down on last year. Higher prices, net of increased discounting, were insufficient to cover the effects of lower volume and the settlement costs. US domestic volumes for the six months were adversely affected by higher prices and changing inventory levels at wholesalers. Brown & Williamson's shipment share was similar to the first quarter at 13.6 per cent but this was lower than last year as volumes, especially for GPC, were affected by aggressive competitive discounting. In the latter part of the second quarter there were signs that the level of discounting was moderating. During the second half of 1999 B&W should benefit from their increased investment in retail coverage and in- store presence, to support the repositioning of Kool and the expanded distribution of Lucky Strike. In Japan, the Group achieved higher volumes in a slightly reduced total market. Market share rose to 6.8 per cent from 6.3 per cent in the comparable period last year, as Kent, Lucky Strike and Kool all increased both volume and market share. These higher volumes and timing of expenditure increased Yen results by 25 per cent, but market contribution was down 6 per cent in US dollars due to US$/Yen exchange rates. While currency hedging was beneficial in the half year, the average effective US$/Yen exchange rate was significantly unfavourable compared to the first half last year. Political and economic volatility continued to affect the Asia- Pacific region, with profits 23 per cent lower at £104 million. Volumes were down 18 per cent on the first half of last year although there are signs that volume is beginning to stabilise at the current reduced levels. Export volumes continued to be weak, impacted by adverse trading conditions and a significant increase in counterfeit product in China. This weakness compared to the first half of 1998 had a material effect on regional profits, although elsewhere in the region the results were much improved. In Indonesia, there was again a good performance in difficult conditions with growth in both volumes and profit. However, excise tax changes effective from May 1999 have impacted the profit margins, although these changes remain under discussion with the authorities. Performance in the mature Australasian markets remained strong, with profits up on the same period last year as a result of continued management initiatives in cost control and improved margins. Business review continued 7. In the Latin America region, profit was 13 per cent lower at £139 million. Profits were affected by the adverse situation in Brazil, but elsewhere good performances in Mexico and Venezuela offset lower profits in Chile and Argentina. The 1998 comparative excludes the benefit from the court action to recover sales tax in Brazil (see note on page 17). Regional volumes were 15 per cent down, principally as a result of conditions in Brazil. In Brazil, cigarette volumes were affected by economic volatility while export volumes were 11 billion lower following the introduction of a cigarette export tax. The impact on Souza Cruz of these volume decreases and changes in mix more than offset the benefits from cost reduction initiatives, resulting in lower profits. In this difficult environment, good performances from Free and Carlton enabled Souza Cruz to maintain its market share. The business is on a stronger basis going forward as the economic situation in Brazil is now more stable and a new excise structure was introduced from 1 June 1999. Although market share in Mexico was affected by aggressive competitive activity, profits were higher as a result of increased prices. In Venezuela, despite a difficult environment, there was a good performance as volumes rose leading to increased profit. A swingeing excise increase and downtrading led to reduced margins in Chile, while profits in Argentina were affected by one-off rationalisation costs. In Europe, total volumes were marginally lower than last year. There was a decline in German exports, partly due to the war in Serbia, while volumes in Ukraine and Poland continued to be affected by adverse economic conditions. However, these reductions were largely offset by higher sales of Yava Gold and Pall Mall in Russia, market share and volume growth in Romania and improved volumes in Germany. In the German market, our share rose from 17.7 per cent to 18.5 per cent led by the performance of Lucky Strike. Total regional profit was 7 per cent down at £86 million. The reduction in profit was due principally to the impact of higher pension costs and lower exports on the German business, as well as a change last year in the excise structure in Hungary. In addition, difficult trading conditions continued in the Ukraine. These were only partly offset by improvements due to higher prices in Poland and increased volumes in Romania. In Russia volumes were 19 per cent higher and results were ahead of last year. Business review continued 8. In the Amesca region, volumes were 5 per cent lower than the comparable period last year, largely due to civil war in the Congo and the continued depressed economies in India, Pakistan, Bangladesh and East Africa. Despite these volume declines overall profit was similar to last year at £58 million. In Uzbekistan, results were ahead of last year with improved volumes and market share. In India, good profit growth was achieved from tobacco, principally due to an improved mix, although there was a loss on disposal of non-tobacco interests. There was also a strong performance in South Africa. Good profit growth was achieved in the Middle East, with increased sales in the premium sector of the market. In particular results in Arabia were strong, as the sales mix improved with John Player Gold Leaf and Benson & Hedges showing good growth. Excellent results were generated in Sri Lanka by a combination of increased prices and the sale of the CTC Eagle insurance operations in the second quarter. The contribution to Group profit from Imasco in Canada at £134 million, was 13 per cent higher than last year. In the tobacco business, profit rose 7 per cent to £66 million as a result of higher prices, while an increased market share was again achieved. The total profit from financial services was 14 per cent up at £49 million, reflecting the growth in sales together with strong cost control and higher productivity. Profit from other trading activities was £5 million up at £19 million. The Group's net cash flow from operating activities was up £245 million at £843 million. With net financing costs of £72 million significantly down on the comparable period last year and capital expenditure also lower at £100 million, the net cash generation before dividends increased by £382 million to £494 million. The dividend payments of £125 million are not comparable to last year which included dividends for B.A.T Industries. The cash flows in 1998 were also distorted by flows with the demerged financial services businesses. While the cash flow, after dividends, was £347 million there was a £1.65 billion increase in cash, deposits and current investments. This arose as debt also increases by £1.3 billion as the opportunity was taken in favourable debt markets to raise funds to restructure the Group's debt profile and also, in part, in anticipation of investments to be made in completing the merger with Rothmans International. Business review continued 9. Group Cigarette Volumes 3 months to 6 months to 30.6.99 30.6.98 30.6.99 30.6.98 bns bns Region bns bns 21.0 24.6 America-Pacific 40.7 46.4 14.8 20.7 Asia-Pacific 30.8 37.4 38.3 46.3 Latin America 80.2 94.8 33.1 34.5 Europe 63.2 63.8 47.1 49.6 Amesca 91.4 96.2 8.3 8.1 Imasco 15.6 15.4 ----- ----- ----- ----- 162.6 183.8 321.9 354.0 ===== ===== ===== ===== GROUP RESULTS 10. 3 months to 6 months to Year to 30.6.99 30.6.98 30.6.99 30.6.98 31.12.98 £m £m £m £m £m REVENUE 3,606 3,630 Subsidiary undertakings 7,008 7,028 14,584 556 570 Share of associates 1,354 1,277 2,792 ----- ----- ------ ------ ------ 4,162 4,200 8,362 8,305 17,376 ===== ===== ====== ====== ====== PROFIT 322 261 Subsidiary undertakings 567 564 676 ------- ------- --------------------------- ------- ------- -------- after charging: (150) US tobacco settlements* (150) (613) after crediting: 74 sales tax recovery* 74 74 ------- ------- --------------------------- ------- ------- -------- 73 84 Share of associates* 169 159 335 ----- ----- ------ ------ ------ 395 345 Total operating profit 736 723 1,011 Demerger and restructuring (19) costs* (26) (46) ----- ----- ------ ------ ------ Profit on ordinary 395 326 activities before interest 736 697 965 (36) (49) Net interest* (63) (105) (204) Share of associates (7) (6) net interest (12) (10) (23) ----- ----- ------ ------ ------ 352 271 Profit before taxation 661 582 738 Taxation on ordinary (192) (102) activities* (330) (216) (277) ----- ----- ------ ------ ------ 160 169 Profit after taxation 331 366 461 (20) (37) Minority interests (49) (61) (115) ----- ----- ------ ------ ------ 140 132 Profit for the period 282 305 346 ===== ===== ====== ====== ====== Earnings per share 8.98p 8.47p - basic* 18.09p 19.58p 22.17p ===== ===== ===== ===== ===== 8.89p 8.43p - diluted* 17.92p 19.48p 21.98p ===== ===== ===== ===== ===== 12.95p 12.89p Adjusted earnings per 24.38p 24.21p 46.51p share* ===== ===== ===== ===== ===== *See notes on pages 16 to 21. SEGMENTAL ANALYSES OF TURNOVER AND PROFIT 11. 3 months to 6 months to Year to 30.6.99 30.6.98 30.6.99 30.6.98 31.12.98 £m £m £m £m £m Turnover excluding duty, excise and other taxes 774 631 America-Pacific 1,499 1,178 2,491 208 269 Asia-Pacific 422 498 959 339 432 Latin America 665 817 1,671 335 292 Europe 777 726 1,552 234 261 Amesca 454 442 913 390 321 Imasco 741 709 1,662 ----- ----- ------ ------ ------ 2,280 2,206 4,558 4,370 9,248 ===== ===== ====== ====== ====== Operating profit 123 126 America-Pacific 215 240 535 56 77 Asia-Pacific 104 133 179 67 77 Latin America 139 155 309 46 43 Europe 86 94 164 31 35 Amesca 58 61 110 72 63 Imasco 134 116 253 ----- ----- ------ ------ ------ 395 421 736 799 1,550 (150) US tobacco settlements (150) (613) 74 Sales tax recovery 74 74 ----- ----- ------ ------ ------ 395 345 736 723 1,011 ===== ===== ====== ====== ====== Operating profit restated at comparable rates of 386 345 exchange 726 723 1,011 ===== ===== ====== ====== ====== The net turnover analysis is based on external sales in each region. The figures for the six months ended 30 June 1999 and 30 June 1998 based on regional location of manufacture would not be materially different except for sales from Asia-Pacific to Amesca which amounted to £163 million, 1998 £166 million. The operations of subsidiaries are almost entirely related to tobacco. The Group's share of the operations of associates, analysed by business, is set out on page 20. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 12. 6 months to Year to 30.6.99 30.6.98 31.12.98 £m £m £m Profit for the period 282 305 346 Differences on exchange (140) (47) (69) ------ ------ ------ Total recognised gains related to the period (below) 142 258 277 ====== ====== ====== INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS 6 months to Year to 30.6.99 30.6.98 31.12.98 £m £m £m Balance 1 January 64 (97) (97) Total recognised gains related to the period (above) 142 258 277 Issue of shares 5,089 Dividends from demerged businesses 78 123 Dividends (166) (377) Share options 1 6 42 Utilisation of ACT 30 96 Other movements (31) ------ ------ ------ Balance at period end 5,099 275 64 ====== ====== ====== GROUP BALANCE SHEET 13. 30.6.99 30.6.98 31.12.98 £m £m £m Fixed assets Tangible assets 2,041 2,014 2,048 Investments in associates 532 501 472 Other investments and long term loans 138 116 119 ------ ------ ------ 2,711 2,631 2,639 ------ ------ ------ Current assets Stocks 2,194 2,220 2,165 Debtors 1,456 1,637 1,493 Current investments 549 166 185 Short term deposits and cash 2,165 1,507 970 ------ ------ ------ 6,364 5,530 4,813 Amounts due from demerged businesses* 802 Rothmans International* 5,114 ------ ------ ------ 11,478 6,332 4,813 ------ ------ ------ TOTAL ASSETS 14,189 8,963 7,452 ====== ====== ====== Capital and reserves Shareholders' equity 5,099 275 64 Minority shareholders' equity interest 347 381 323 ------ ------ ------ 5,446 656 387 ------ ------ ------ Other liabilities Provisions for liabilities and charges 668 789 741 Borrowings 5,205 4,812 3,730 Creditors 2,870 2,706 2,594 ------ ------ ------ 8,743 8,307 7,065 ------ ------ ------ TOTAL FUNDS EMPLOYED 14,189 8,963 7,452 ====== ====== ====== * see notes on page 16. GROUP CASH FLOW STATEMENT 14. 6 months to Year to 30.6.99 30.6.98 31.12.98 £m £m £m Net operating cash flow of subsidiary undertakings 812 574 1,096 Dividends from associates 31 24 86 ------ ------ ------ Net cash inflow from operating activities 843 598 1,182 Returns on investments and servicing of finance (72) (173) (282) Taxation paid (177) (143) (281) Capital expenditure and financial investment (100) (170) (351) ------ ------ ------ Net cash generation 494 112 268 Acquisitions less disposals (22) (39) (16) Dividends paid (125) (196) (696) Dividends from demerged businesses 122 242 Cash flow with demerged businesses (51) 668 ------ ------ ------ Cash flow before use of liquid resources and external financing 347 (52) 466 Management of liquid resources (1,441) 108 459 Financing 1,308 210 (803) ------ ------ ------ Increase in cash in the period 214 266 122 ====== ====== ====== Reconciliation of net cash flow to movement in net debt Increase in cash in the period 214 266 122 (Increase)/decrease in debt (1,307) (204) 845 Increase/(decrease) in liquid resources 1,441 (108) (459) ------ ------ ------ Change in net debt resulting from cash flow 348 (46) 508 Other changes (52) (11) (45) Differences on exchange (212) 8 52 ------ ------ ------ Movement in net debt in the period 84 (49) 515 Net debt at 1 January (2,575) (3,090) (3,090) ------ ------ ------ Net debt at period end (2,491) (3,139) (2,575) ====== ====== ====== NOTES TO THE GROUP CASH FLOW STATEMENT 15. 6 months to Year to 30.6.99 30.6.98 31.12.98 1) Net operating cash flow of £m £m £m subsidiary undertakings Operating profit 567 564 676 Depreciation 131 127 297 Increase in stocks (43) (66) (36) Decrease/(increase) in debtors 10 (196) (131) Increase in creditors 172 133 291 (Decrease)/increase in provisions (24) 3 10 Other (1) 9 (11) ------ ------ ------ Net operating cash flow of subsidiaries 812 574 1,096 ====== ====== ====== Differences Cash Other on 1.1.99 flow changes exchange 30.6.99 2) Analysis of £m £m £m £m £m net debt Cash and bank balances 466 633 Overdrafts (113) (97) ------ ------ ------ ------ ------ 353 214 (31) 536 Term borrowings (3,562) (1,319) (14) (150) (5,045) Finance lease obligations (55) 12 (17) (3) (63) Short term deposits 504 1,042 (3) (11) 1,532 Current investments 185 399 (18) (17) 549 ------ ------ ------ ------ ------ (2,575) 348 (52) (212) (2,491) ====== ====== ====== ====== ====== MORE TO FOLLOW IR SSDSSDUUUFDA

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