Interim Results
British American Tobacco PLC
26 July 2007
INTERIM REPORT TO 30 JUNE 2007 26 July 2007
SUMMARY
SIX MONTHS RESULTS - unaudited 2007 2006 Change
Revenue £4,725m £4,808m -2%
Profit from operations £1,492m £1,325m +13%
Adjusted diluted earnings per share 53.51p 49.11p +9%
Interim dividend per share 18.6p 15.7p +18%
• The reported profit from operations was 13 per cent higher at £1,492 million,
or 10 per cent higher if exceptional items are excluded. However, profit from
operations, excluding exceptional items, would have been 18 per cent higher
at comparable rates of exchange, with all regions except for America-Pacific
contributing to this strong result.
• Group volumes from subsidiaries were 330 billion, a decrease of 2 per cent,
mainly as a result of the high level of trade buying in some markets at the
end of 2006, supply chain disruptions in the Middle East and the loss of
StiX in Germany. The four global drive brands achieved an overall volume
growth of 6 per cent, which led to share improvements in many markets. The
reported Group revenue declined by 2 per cent to £4,725 million but, at
comparable rates of exchange, would have increased by 4 per cent as a result
of more favourable pricing and better product mix.
• Adjusted diluted earnings per share rose by 9 per cent, principally
benefiting from the increase in profit from operations. Basic earnings
per share were higher at 52.94p (2006 48.38p).
• The Board has declared an interim dividend of 18.6p, an 18 per cent increase
on last year, to be paid on 12 September 2007.
• The Chairman, Jan du Plessis, commented "As a result of global drive brand
growth and improved pricing, British American Tobacco has had a strong six
months, despite the substantial impact of foreign exchange. However, there
have recently been significant excise increases in a number of key markets,
while the level of our investment in expanding distribution and rolling out
our global drive brands is set to rise over the next few months. We therefore
expect our growth in profit from operations at comparable rates of exchange
to slow in the second half of the year."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph Edmondson/ 020 7845 1180 David Betteridge/Kate Matrunola/ 020 7845 2888
Rachael Brierley 020 7845 1519 Catherine Armstrong
BRITISH AMERICAN TOBACCO p.l.c.
INTERIM REPORT TO 30 JUNE 2007
INDEX
PAGE
Chairman's comments 2
Business review 3
Independent review report to British American Tobacco p.l.c. 7
Group income statement 8
Group statement of changes in total equity 9
Group balance sheet 10
Group cash flow statement 12
Segmental analyses of revenue and profit 13
Accounting policies and basis of preparation 15
Foreign currencies 15
Exceptional items 15
Other changes in the Group 16
Net finance costs 17
Associates 17
Taxation 18
Earnings per share 18
Cash flow 19
Dividends 21
Shareholders' funds 22
Contingent liabilities 22
Share buy-back programme 22
CHAIRMAN'S COMMENTS
British American Tobacco increased its adjusted diluted earnings per share by 9
per cent in the first six months of 2007. Excluding exceptional items, profit
from operations improved by 10 per cent. These results were affected by a £115
million impact from adverse foreign exchange movements; at comparable rates of
exchange, profit from operations excluding exceptional items would have grown by
18 per cent.
The strength derived from the Group's unique geographic diversity is amply
illustrated by the growth in profit from operations at comparable rates of
exchange of 35 per cent in Latin America, 25 per cent in Africa and the Middle
East and 14 per cent in Asia Pacific.
Revenue declined by 2 per cent at current rates but would have increased by 4
per cent at comparable rates of exchange, despite volumes being 2 per cent
lower. This downturn reflects some supply chain disruptions, particularly in the
Middle East, and some short-term trading patterns, with Russia being the most
significant.
We continue to achieve price increases and the progress of our global drive
brand portfolio, driven by successful product and packaging innovations such as
the launch of Kent Nanotek in Russia, is enriching our product mix.
Our global drive brands grew by 6 per cent. Kent was up 11 per cent, while
Dunhill improved by 8 per cent and Lucky Strike was down 3 per cent, primarily
as a result of lower industry volumes in its key markets of Germany and Japan.
Pall Mall rose by 4 per cent, despite the loss of StiX in Germany but, if its
roll-your-own business in Germany is included, was up 9 per cent.
Our associate companies, Reynolds American in the US, ITC in India and STK in
Denmark, had volumes of 118 billion and our share of their post-tax results was
£222 million. Excluding exceptional items, our share of their results at
comparable rates of exchange would have been 6 per cent higher.
Adjusted diluted earnings per share rose 9 per cent to 53.5p, principally
benefiting from the growth in profit from operations.
The Board has declared a significantly increased interim dividend of 18.6p per
share, up 18 per cent. It will be paid on 12 September to shareholders on the
Register at 3 August. This is consistent with our policy that the interim will
normally represent one-third of the previous year's total dividend. In addition,
some 22 million shares were repurchased in the six months to 30 June at a cost
of £358 million and at an average price of 1621p per share. The programme will
restart shortly.
As a result of global drive brand growth and improved pricing, British American
Tobacco has had a strong six months, despite the substantial impact of foreign
exchange. However, there have recently been significant excise increases in a
number of key markets, while the level of our investment in expanding
distribution and rolling out our global drive brands is set to rise over the
next few months. We therefore expect our growth in profit from operations at
comparable rates of exchange to slow in the second half of the year.
Jan du Plessis
26 July 2007
Page 2
BUSINESS REVIEW
The reported Group profit from operations was 13 per cent higher at
£1,492 million or 10 per cent higher if exceptional items, as explained on pages
15 and 16, are excluded. However, profit from operations, excluding exceptional
items, would have been 18 per cent higher at comparable rates of exchange, with
all regions except for America-Pacific, contributing to this strong result.
Group volumes from subsidiaries were 330 billion, a decrease of 2 per cent,
mainly as a result of the high level of trade buying in some markets at the end
of 2006, supply chain disruptions in the Middle East and the loss of StiX in
Germany. The performance of the global drive brands led to share improvements in
many markets. Group revenue declined by 2 per cent to £4,725 million but, at
comparable rates of exchange, would have increased by 4 per cent as a result of
favourable pricing and a better product mix.
The four global drive brands continued to perform well and achieved an overall
volume growth of 6 per cent.
Kent grew by 11 per cent with solid growth in Russia, Romania, Ukraine, Chile
and Switzerland, helped by additional volume from the new markets in Azerbaijan
and Kazakhstan. Dunhill rose by 8 per cent, driven by strong performances in
South Korea, South Africa, Russia and Saudi Arabia, although volumes were lower
in Taiwan and Australia.
Lucky Strike volumes were down 3 per cent as the growth in Spain, France,
Argentina and Italy was more than offset by declines as a result of lower
industry volumes in Germany and Japan. Despite the absence of Pall Mall StiX in
Germany during 2007, Pall Mall continued its growth with an increase of 4 per
cent, driven by Italy, Russia, Uzbekistan and Hungary, partly offset by lower
volumes in Germany, Romania and Spain. Growth would have been 9 per cent if
sales of the roll-your-own business in Germany were included.
In Europe, profit at £404 million was up £24 million mainly as a result of
higher margins in Russia, Romania, Hungary and Spain, partly offset by the
impact of reduced volumes in a number of markets and weaker exchange rates. At
comparable rates of exchange, profit would have increased by £34 million or 9
per cent. Regional volumes were down 4 per cent at 115 billion, with reductions
in Germany, Russia, Spain and Ukraine partly offset by increases in Romania,
Poland and Italy.
In Italy, volumes were up with increased market share for Lucky Strike, Pall
Mall and Dunhill, although overall share was down. Profit was in line with last
year as improved margins from industry price increases and the benefit of the
productivity programme were offset by the absence of the profit from the Toscano
cigar business disposed of in July 2006.
Total tobacco volumes in Germany declined as industry volumes were affected by
the growth of illicit trade and the end of StiX sales, although both Pall Mall
and overall market share grew. Profit was lower as the benefit from higher
prices was more than offset by the reduction in volumes.
Sales volumes in France were lower although Lucky Strike and Pall Mall grew
market share. Profit rose as a result of an improved product mix, lower
overheads and reduced variable costs. In Switzerland, weaker volumes and
downtrading following the excise increase at the beginning of the year led to
lower profits.
In the Netherlands, Lucky Strike and Pall Mall both grew market share but profit
was lower, impacted by downtrading following an excise increase. Profit and
volumes in Belgium were down, affected by a significant excise driven price
increase. Results in Spain improved significantly, benefiting from higher
prices. Overall market share grew, driven by Lucky Strike, although total
volumes were lower.
Page 3
Business review cont...
Sales volumes in Russia were influenced by trade buying at the end of last year
in anticipation of the new excise system and price increases in December.
However, some of the first quarter's volume shortfall has been recovered with
strong performances by Kent and Vogue, leading to an increased market share.
Profit grew strongly, benefiting from higher margins, and an improved product
mix. In Romania, market leadership was strengthened with the growth of Kent,
Dunhill and Vogue. This, together with higher prices and an improved product
mix, resulted in a significant increase in profit.
In Ukraine, results improved and Kent grew strongly, although overall volumes
were lower due to reduced sales of local brands. In Hungary, profit grew
impressively, benefiting from improved margins and efficiency programmes, with
Viceroy and Pall Mall volumes growing well. In Poland, volumes and market share
were up and results improved after a price increase earlier this year.
In Asia-Pacific, profit rose by £30 million to £335 million, mainly attributable
to strong performances from Australasia, South Korea, Vietnam and Pakistan,
despite the adverse impact of exchange. At comparable rates of exchange, profit
would have increased by £44 million or 14 per cent. Volumes at 74 billion were 4
per cent higher as a result of strong growth in Pakistan, South Korea and
Vietnam which was partially offset by declines in Bangladesh and Indonesia.
Profit grew in Australia, mainly as a result of improved margins from a
combination of product cost reductions and price increases, partly offset by the
impact of industry volume declines and intensified competitor discounting.
Market share rose with good performances from Dunhill, Pall Mall and Winfield.
In New Zealand, strong competition in the low price segment continued to affect
market share adversely. Profit was lower as the consequent reduction in volume
more than offset the benefit from price increases.
In Malaysia, despite volumes being impacted by higher levels of illicit trade
and the rapid growth of the low price segment, the strong performance of Dunhill
meant that market share was only slightly lower. Profit declined due to lower
volumes, competitor discounting and the impact of exchange, partly offset by
higher pricing and an improved product mix.
In Vietnam, profit increased significantly benefiting from a favourable product
mix, productivity initiatives and volume growth with expanded distribution.
In South Korea, volumes and market share rose with Dunhill and Vogue continuing
to make good progress and this, together with supply chain savings, resulted in
strong profit growth. In Taiwan, profit improved due to higher prices, cost
reductions and increased volumes with a good performance from
Pall Mall.
Pakistan continued its strong volume growth with Gold Flake the major
contributor, resulting in a rise in overall market share. Increased volumes,
coupled with price increases and effective cost management, led to an impressive
profit performance. In Bangladesh, despite lower volumes, profit was higher with
improved margins. In Sri Lanka, profit benefited from higher margins, better
product mix and lower expenses but this was more than offset by the impact of a
weaker exchange rate.
Profit in Latin America increased by £83 million to £386 million due to good
performances in Brazil, Venezuela and Chile, partly offset by the adverse impact
of weaker local currencies. At comparable rates of exchange, profit would have
increased by £107 million or 35 per cent. Volumes were 2 per cent down at
74 billion with declines in Mexico, Argentina and Central America and Caribbean,
only partly offset by the increase in Venezuela.
In Brazil, excellent profit growth resulted from higher prices in anticipation
of an excise increase and an improved product mix, partly offset by the weaker
local currency. Cigarette volumes were stable and market share was higher.
Page 4
Business review cont...
Industry volume in Mexico suffered following excise driven price increases early
in 2007 and this, together with lower market share and the impact of exchange,
resulted in lower profit. In Argentina, profit was up as prices increased after
the severe price competition of last year, although volumes were lower.
In Chile, profit grew despite an unfavourable exchange rate, due to higher
margins and up-trading to Kent and Lucky Strike, both of which increased market
share. Profit in Peru rose with a lower cost base and a slight growth in
volumes. In Venezuela, profit increased strongly despite the impact of exchange,
due to price increases and higher volumes, with good performances by Consul and
Belmont. The Central America and Caribbean area benefited from more efficient
product sourcing, but this was more than offset by the impact of exchange and
lower industry volumes as a result of excise and price increases.
Profit in the Africa and Middle East region grew by £13 million to £249 million,
mainly driven by South Africa and Nigeria. At comparable rates of exchange,
profit would have increased by £59 million or 25 per cent. Volumes were 3 per
cent lower at 47 billion, resulting from disruption of supply to the Middle East
and the change in distribution model in Turkey.
In South Africa, despite the sharply weaker average exchange rate, profit growth
was achieved as a result of price increases, market share gains and an improved
product mix. The two main brands, Peter Stuyvesant and Dunhill, continued their
impressive performance.
Profit growth in Nigeria was the result of higher margins, an improved product
mix and productivity initiatives. Share performance was particularly strong for
Benson & Hedges, although overall volumes were lower. In sub-Saharan Africa,
supply difficulties in West Africa early in the year impacted volume and profit,
while a number of markets in East Africa grew volumes, reflecting good progress
in reducing illicit trade.
In the Middle East, product mix improved across the area through the growth of
premium brands, although profit was adversely affected by supply chain problems
and a weaker US dollar. Dunhill continued its expansion into Saudi Arabia and
grew market share while overall volumes were up. North Africa continued to show
volume and profit growth, mostly in Egypt where market share grew through Kent
and Rothmans.
In Turkey, operating losses increased due to the one-off costs associated with
the change in the distribution model in January.
The profit from the America-Pacific region decreased by £33 million to
£192 million as a result of lower profit in Canada and the impact of weaker
exchange rates. At comparable rates of exchange, profit would have decreased by
£12 million or 5 per cent. Volumes decreased by 11 per cent to 20 billion, lower
in both Japan and in Canada, mainly as a result of declines in industry volumes.
The profit contribution from Canada was down £29 million to £107 million. This
was due to the greater prevalence of illicit product, the higher initial cost of
direct distribution, the continued down-trading to lower priced products and the
weaker exchange rate. These were partly offset by higher prices and cost savings
resulting from the transfer of manufacturing to Mexico. At comparable rates of
exchange, profit was down by 13 per cent. The continued growth of Peter Jackson
and the benefits from a more robust and effective direct sales and distribution
network, resulted in slight share growth for the second consecutive quarter.
Page 5
Business review cont...
In Japan, industry volumes were materially lower due to trade buying in June
2006 in anticipation of an excise increase. However, due to the performances of
Kent and Kool, there was good market share growth. Profit was adversely impacted
by the lower volumes and the weaker exchange rate, partly offset by higher
pricing, a better product mix and effective cost management.
Unallocated costs, which are net corporate costs not directly attributable to
individual segments, were £15 million lower at £45 million, mainly as a result
of timing of expenses.
The above regional profits were achieved before accounting for restructuring
costs and gains/losses on disposal of businesses and brands, as explained on
pages 15 and 16.
Results of associates
The Group's share of the post-tax results of associates decreased by £21 million
to £222 million. Excluding the exceptional item in 2006 explained on page 17,
the Group's share of the post-tax results of associates decreased by £4 million
to £222 million but it would have been 6 per cent higher at comparable rates of
exchange.
The contribution from Reynolds American, excluding the benefit from the
favourable resolution of tax matters in 2006, was £13 million lower due to the
impact of the weaker US dollar. At comparable rates of exchange, the
contribution from Reynolds American would have been slightly higher at
£158 million. The impact of margin improvements from pricing, product mix and
costs was offset by lower volumes as the first half of 2006 benefited from
timing of shipments. As explained on page 17, Reynolds American acquired Conwood
on 31 May 2006 and reported that on a proforma US GAAP basis, as if it had been
owned since the beginning of 2006, Conwood increased both its profits and
margins.
The Group's associate in India, ITC, continued its strong performance and its
contribution to the Group rose by £7 million to £54 million. At comparable rates
of exchange, the contribution would have been £57 million, or 21 per cent higher
than last year, with the growth assisted by one-off costs in 2006.
Cash flow
The IFRS cash flow on page 12 includes all transactions affecting cash and cash
equivalents, including financing. The alternative cash flow on page 19 is
presented to illustrate the cash flows before transactions relating to
borrowings. This shows Group free cash flow of £752 million, £359 million higher
than 2006, with the growth in underlying operating profit, as well as working
capital movements reflecting timing and one-off differences in 2006 and 2007.
Cigarette volumes
The segmental analysis of the volumes of subsidiaries is as follows:
3 months to 6 months to Year to
30.6.07 30.6.06 30.6.07 30.6.06 31.12.06
bns bns bns bns bns
63.1 63.7 Europe 114.6 119.1 247.7
39.1 36.6 Asia-Pacific 74.4 71.4 141.9
36.3 37.4 Latin America 74.0 75.5 152.6
24.0 24.8 Africa and Middle East 46.6 48.2 104.8
10.9 13.2 America-Pacific 20.1 22.5 43.8
______ ______ ______ ______ ______
173.4 175.7 329.7 336.7 690.8
====== ====== ====== ====== ======
In addition, associates' volumes for the six months were 118.3 billion (2006:
115.6 billion) and, with the inclusion of these, the Group volumes would be
448.0 billion (2006: 452.3 billion).
Page 6
INDEPENDENT REVIEW REPORT TO BRITISH AMERICAN TOBACCO p.l.c.
Introduction
We have been instructed by the Company to review the consolidated financial
information for the six months ended 30 June 2007, which comprises the Group
income statement, the Group statement of changes in total equity, the Group
balance sheet, the Group cash flow statement, the segmental analyses of revenue
and profit, the accounting policies and basis of preparation and the related
notes. We have read the other information contained in the Interim Report and
considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
Directors' responsibilities
The Interim Report, including the financial information contained therein, is
the responsibility of, and has been approved by the Directors. The Listing Rules
of the Financial Services Authority require that the accounting policies and
presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where any changes, and
the reasons for them, are disclosed.
The Interim Report has been prepared in accordance with the basis set out in the
Accounting Policies and Basis of Preparation in the Interim Report for the six
months to 30 June 2007.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the disclosed accounting policies have
been applied. A review excludes audit procedures such as tests of controls and
verification of assets, liabilities and transactions. It is substantially less
in scope than an audit and therefore provides a lower level of assurance.
Accordingly we do not express an audit opinion on the consolidated financial
information. This report, including the conclusion, has been prepared for and
only for the Company for the purpose of the Listing Rules of the Financial
Services Authority and for no other purpose. We do not, in producing this
report, accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the consolidated financial information as presented for the
six months ended 30 June 2007.
PricewaterhouseCoopers LLP
Chartered Accountants
London
26 July 2007
Page 7
GROUP INCOME STATEMENT - unaudited
3 months to 6 months to Year to
30.6.07 30.6.06 30.6.07 30.6.06 31.12.06
£m £m £m £m £m
Gross turnover (including duty, excise and other taxes of
£7,609 million
(30.6.06: £7,641 million - 31.12.06:
6,515 6,413 £15,427 million)) 12,334 12,449 25,189
======= ======= ======= ======= =======
2,493 2,511 Revenue 4,725 4,808 9,762
(771) (799) Raw materials and consumables used (1,386) (1,475) (2,861)
Changes in inventories of finished
53 8 goods and work in progress 78 39 (11)
(367) (398) Employee benefit costs (711) (759) (1,554)
(82) (85) Depreciation and amortisation costs (156) (191) (401)
40 24 Other operating income 70 48 181
(558) (552) Other operating expenses (1,128) (1,145) (2,494)
------- ------- ------- ------- -------
808 709 Profit from operations 1,492 1,325 2,622
after (charging)/crediting exceptional items
-------------------- ---------------------------------
(32) (27) - restructuring costs (40) (48) (216)
- gains/(losses) on disposal of businesses and
11 (1) brands 11 (16) 41
-------------------- ---------------------------------
-------------------- ---------------------------------
25 20 Finance income 55 58 110
(93) (76) Finance costs (181) (182) (399)
-------------------- ---------------------------------
(68) (56) Net finance costs (126) (124) (289)
Share of post-tax results of
111 123 associates and joint ventures 222 243 431
-------------------- ---------------------------------
after (charging)/crediting exceptional items
- brand impairments (13)
1 - exceptional tax credits 17 17
-------------------- ---------------------------------
------- ------- ------- ------- -------
851 776 Profit before taxation 1,588 1,444 2,764
(221) (188) Taxation on ordinary activities (420) (366) (716)
------- ------- ------- ------- -------
630 588 Profit for the period 1,168 1,078 2,048
======= ======= ======= ======= =======
Attributable to:
584 549 Shareholders' equity 1,079 1,001 1,896
======= ======= ======= ======= =======
46 39 Minority interests 89 77 152
======= ======= ======= ======= =======
Earnings per share
28.70p 26.57p Basic 52.94p 48.38p 92.08p
======= ======= ======= ======= =======
28.52p 26.39p Diluted 52.58p 48.01p 91.33p
======= ======= ======= ======= =======
See notes on pages 15 to 22.
Page 8
GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited
6 months to Year to
30.6.07 30.6.06 31.12.06
£m £m £m
Differences on exchange 88 (377) (685)
Cash flow hedges
- net fair value gains 5 11 13
- reclassified and reported in net profit (6) (11) (15)
Available-for-sale investments
- net fair value losses (1) (3) (2)
- reclassified and reported in net profit (2) 1
Net investment hedges
- net fair value gains 15 63 117
Tax on items recognised directly in
equity (13) 3 (12)
-------- -------- --------
Net gains/(losses) recognised directly
in equity 86 (313) (584)
Profit for the period page 8 1,168 1,078 2,048
-------- -------- --------
Total recognised income for the period 1,254 765 1,464
--------------------------------------
- shareholders' equity 1,159 694 1,334
- minority interests 95 71 130
--------------------------------------
Employee share options
- value of employee services 17 21 41
- proceeds from shares issued 19 20 28
Dividends (821) (685) (1,008)
- ordinary shares
- to minority interests (84) (85) (137)
Purchase of own shares
- held in employee share ownership trusts (29) (77) (77)
- share buy-back programme (358) (239) (500)
Acquisition of minority interests (2) (13)
Other movements (8) 9 13
-------- -------- --------
(12) (271) (189)
Balance at 1 January 6,688 6,877 6,877
-------- -------- --------
Balance at period end 6,676 6,606 6,688
======== ======== ========
See notes on pages 15 to 22.
Page 9
GROUP BALANCE SHEET - unaudited
30.6.07 30.6.06 31.12.06
£m £m £m
ASSETS
Non-current assets
Intangible assets 7,561 7,704 7,476
Property, plant and equipment 2,192 2,195 2,207
Investments in associates and joint
ventures 2,212 2,198 2,108
Retirement benefit assets 37 37 29
Deferred tax assets 265 258 273
Trade and other receivables 143 125 192
Available-for-sale investments 19 26 24
Derivative financial instruments 79 63 76
-------- -------- --------
Total non-current assets 12,508 12,606 12,385
-------- -------- --------
Current assets
Inventories 2,208 2,362 2,056
Income tax receivable 50 26 59
Trade and other receivables 1,503 1,635 1,568
Available-for-sale investments 95 127 128
Derivative financial instruments 93 134 124
Cash and cash equivalents 1,141 1,926 1,456
-------- -------- --------
5,090 6,210 5,391
Assets classified as held for sale 53 69
-------- -------- --------
Total current assets 5,143 6,279 5,391
-------- -------- --------
-------- -------- --------
TOTAL ASSETS 17,651 18,885 17,776
======== ======== ========
See notes on pages 15 to 22.
Page 10
GROUP BALANCE SHEET - unaudited
30.6.07 30.6.06 31.12.06
£m £m £m
EQUITY
Capital and reserves
Shareholders' funds after deducting 6,440 6,373 6,461
----------------------------------------
- cost of own shares held in employee share
ownership trusts (174) (212) (197)
----------------------------------------
Minority interests 236 233 227
-------- -------- --------
Total equity 6,676 6,606 6,688
-------- -------- --------
LIABILITIES
Non-current liabilities
Borrowings 5,440 5,988 5,568
Retirement benefit liabilities 395 482 435
Deferred tax liabilities 304 257 296
Other provisions for liabilities and charges 145 165 161
Trade and other payables 152 165 146
Derivative financial instruments 82 29 29
-------- -------- --------
Total non-current liabilities 6,518 7,086 6,635
-------- -------- --------
Current liabilities
Borrowings 1,194 1,895 1,058
Income tax payable 281 269 292
Other provisions for liabilities and charges 230 267 253
Trade and other payables 2,665 2,695 2,766
Derivative financial instruments 82 63 84
-------- -------- --------
4,452 5,189 4,453
Liabilities directly associated with assets
classified as held for sale 5 4
-------- -------- --------
Total current liabilities 4,457 5,193 4,453
-------- -------- --------
-------- -------- --------
TOTAL EQUITY AND LIABILITIES 17,651 18,885 17,776
======== ======== ========
See notes on pages 15 to 22.
Page 11
GROUP CASH FLOW STATEMENT - unaudited
6 months to Year to
30.6.07 30.6.06 31.12.06
£m £m £m
Cash generated from operations 1,434 1,078 2,816
Dividends received from associates 94 86 259
Tax paid (410) (378) (713)
-------- -------- --------
Net cash from operating activities 1,118 786 2,362
-------- -------- --------
Interest and dividends received 50 62 121
Purchases of property, plant and equipment (157) (166) (425)
Proceeds on disposal of property, plant and equipment 27 13 64
Purchases and disposals of intangible assets (2) (14) 2
Purchases and disposals of investments 37 (25) (37)
Purchases and disposals of subsidiaries (6) (1) (39)
-------- -------- --------
Purchases of associates (1)
Net cash from investing activities (51) (131) (315)
Interest paid (173) (176) (389)
Finance lease rental payments (11) (11) (22)
Proceeds from issue of shares and exercise of options 19 20 28
Proceeds from increases in and new borrowings 445 1,642 1,365
Movements relating to derivative financial
instruments (13) 51 142
Purchases of own shares (387) (316) (577)
Reductions in and repayments of borrowings (300) (862) (1,739)
Dividends paid (904) (771) (1,147)
-------- -------- --------
Net cash from financing activities (1,324) (423) (2,339)
-------- -------- --------
Net cash flows from operating, investing and
financing activities (257) 232 (292)
Differences on exchange 10 (74) (96)
-------- -------- --------
(Decrease)/increase in net cash and
cash equivalents in the period (247) 158 (388)
Net cash and cash equivalents at 1 January 1,276 1,664 1,664
-------- -------- --------
Net cash and cash equivalents at period end 1,029 1,822 1,276
======== ======== ========
See notes on pages 15 to 22.
Page 12
SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited
The analyses for the six months are as follows:
Revenue 30.6.07 30.6.06
Inter Inter
External segment Revenue External segment Revenue
restated restated restated
£m £m £m £m £m £m
Europe 1,683 125 1,808 1,712 262 1,974
Asia-Pacific 932 17 949 854 13 867
Latin America 939 253 1,192 862 101 963
Africa and
Middle East 546 9 555 527 21 548
America-Pacific 221 221 456 456
------- ------- ------- ------- ------- -------
Revenue 4,321 404 4,725 4,411 397 4,808
======= ======= ======= ======= ======= =======
The segmental analysis of revenue is based on location of manufacture and the
2006 analysis has been restated to reflect changes in manufacturing operations.
Figures based on location of sales would be as follows:
30.6.07 30.6.06
£m £m
Europe 1,708 1,743
Asia-Pacific 932 907
Latin America 944 869
Africa and Middle East 664 728
America-Pacific 477 561
------- -------
Revenue 4,725 4,808
======= =======
Profit from operations
30.6.07 30.6.06
Adjusted Adjusted
Segment segment Segment segment
result result* result result*
£m £m £m £m
Europe 376 404 344 380
Asia-Pacific 339 335 305 305
Latin America 386 386 303 303
Africa and Middle East 247 249 234 236
America-Pacific 189 192 199 225
------- ------- ------- -------
Segmental results 1,537 1,566 1,385 1,449
Unallocated costs (45) (45) (60) (60)
------- ------- ------- -------
Profit from operations 1,492 1,521 1,325 1,389
======= ======= ======= =======
*Excluding restructuring costs and gains/losses on disposal of businesses and
brands as explained on pages 15 and 16.
Page 13
Segmental analyses of revenue and profit cont... - unaudited
The analyses for the year ended 31 December 2006 are as follows:
Revenue Location of manufacture Location of sales
Inter
External segment Revenue Revenue
restated restated restated
£m £m £m £m
Europe 3,495 526 4,021 3,545
Asia-Pacific 1,755 27 1,782 1,839
Latin America 1,780 332 2,112 1,791
Africa and Middle East 1,063 24 1,087 1,489
America-Pacific 760 760 1,098
------- ------- ------- -------
Revenue 8,853 909 9,762 9,762
======= ======= ======= =======
The above analysis has been restated to reflect changes in manufacturing
operations.
Profit from operations
Adjusted
Segment result segment result*
£m £m
Europe 676 781
Asia-Pacific 609 616
Latin America 611 611
Africa and Middle East 444 468
America-Pacific 385 424
-------- --------
Segmental results 2,725 2,900
Unallocated costs (103) (103)
-------- --------
Profit from operations 2,622 2,797
======== ========
*Excluding restructuring costs and gains/losses on disposal of businesses and
brands as explained on pages 15 and 16.
The segmental analysis of the Group's share of the post-tax results of
associates and joint ventures for the six months is as follows:
30.6.07 30.6.06 31.12.06
Adjusted Adjusted Adjusted
Segment segment Segment segment Segment segment
result result* result result* result result*
£m £m £m £m £m £m
Europe 21 21 20 20 46 46
Asia-Pacific 55 55 48 48 92 92
Latin America 1 1
Africa and
Middle East 1 1 1 1 4 4
America-Pacific 144 144 174 157 289 285
------ ------ ------ ------ ------ ------
222 222 243 226 431 427
====== ====== ====== ====== ====== ======
*Excluding brand impairments and exceptional tax credits as explained on page
17.
Page 14
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information comprises the unaudited interim results for the six
months to 30 June 2007 and 30 June 2006, together with the audited results for
the year ended 31 December 2006. The annual consolidated financial statements
for 2006, which represent the statutory accounts for that year, have been filed
with the Registrar of Companies. The auditors' report on those statements was
unqualified and did not contain any statement concerning accounting records or
failure to obtain necessary information and explanations.
From 1 January 2005, the Group has prepared its annual consolidated financial
statements in accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union (EU) and implemented in the UK. These unaudited
Group interim results have been prepared on a basis consistent with the IFRS
accounting policies as set out in the Annual Report and Accounts for the year
ended 31 December 2006. These interim financial statements have been prepared
under the historical cost convention, except in respect of certain financial
instruments.
FOREIGN CURRENCIES
The results of overseas subsidiaries and associates have been translated to
sterling as follows:
The income statement has been translated at the average rates for the respective
periods. The total equity has been translated at the relevant period end rates.
For high inflation countries, the local currency results are adjusted for the
impact of inflation prior to translation to sterling at closing exchange rates.
The principal exchange rates used were as follows:
Average Closing
30.6.07 30.6.06 31.12.06 30.6.07 30.6.06 31.12.06
US dollar 1.971 1.791 1.844 2.006 1.850 1.957
Canadian dollar 2.235 2.038 2.091 2.134 2.057 2.278
Euro 1.482 1.455 1.467 1.486 1.447 1.484
South African rand 14.120 11.317 12.520 14.149 13.191 13.799
Brazilian real 4.028 3.919 4.009 3.864 4.003 4.179
EXCEPTIONAL ITEMS
(a) Restructuring costs
During 2003, the Group commenced a detailed review of its manufacturing
operations and organisational structure, including the initiative to reduce
overheads and indirect costs. The restructuring continued, with major
announcements during 2005 and 2006 which covered the cessation of production in
the UK, Ireland, Canada and Zevenaar in the Netherlands with production to be
transferred elsewhere. The profit from operations for the year ended 31 December
2006 included a charge for restructuring of £216 million.
The six months to 30 June 2007 includes a charge for restructuring of
£40 million (2006: £48 million), principally in respect of costs associated with
restructuring the operations in Italy and further costs related to
restructurings announced in prior years. On 18 May 2007, the Group's Italian
subsidiary announced the results of a review of its manufacturing
infrastructure, including an intention to consolidate its operations at the
plant in Lecce, close its operations at Rovereto and sell its facilities at
Chiaravalle together with three national brands. The disposal of Chiaravalle is
expected to be completed by the end of the third quarter. In the second quarter,
this has resulted in the separate classification of the assets and liabilities
as held for sale in the Group balance sheet.
Page 15
Exceptional items cont...
(b) Gains/losses on disposal of businesses and brands
On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell its
cigar business, Toscano, to Maccaferri for euro 95 million. The sale was subject
to regulatory and governmental approval and was completed on 19 July 2006. The
sale resulted in a loss of £20 million, reflecting a £16 million impairment
charge included in depreciation and amortisation costs in the profit from
operations and £4 million of other costs included in other operating expenses in
the profit from operations. The impairment charge was reflected in the six
months to 30 June 2006.
On 29 November 2006, the Group completed a trademark transfer agreement with
Philip Morris International. Under the arrangement the Group sold its Muratti
Ambassador brand in certain markets, as well as the L&M and Chesterfield
trademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademark
in certain African countries. These transactions resulted in a gain of £60
million included in other operating income in the profit from operations.
On 20 February 2007, the Group announced that it had agreed to sell its pipe
tobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for euro 24
million. The sale was completed during the second quarter and resulted in a gain
of £11 million included in other operating income in the profit from operations.
However, the Group has retained the Dunhill and Captain Black pipe tobacco
brands.
On 23 May 2007, the Group announced that it had agreed to sell its Belgian cigar
factory and associated brands to the cigars division of Skandinavisk
Tobakskompagni AS. The sale includes a factory in Leuven as well as trademarks
including Corps Diplomatique, Schimmelpennick, Don Pablo and Mercator. The
transaction is expected to be completed later this year and the assets and
liabilities are classified as held for sale in the Group balance sheet.
OTHER CHANGES IN THE GROUP
From August 2006, the Group purchased minority interests in its subsidiary in
Chile for a cost of £91 million, raising the Group shareholding from 70.4 per
cent to 96.6 per cent. The goodwill arising on this transaction was £80 million
and the minority interests in Group equity were reduced by £11 million.
Page 16
NET FINANCE COSTS
Net finance costs comprise:
6 months to
30.6.07 30.6.06
£m £m
Interest payable (185) (203)
Interest and dividend income 53 63
Fair value changes - derivatives (36) 141
Exchange differences 42 (125)
-------- --------
6 16
-------- --------
(126) (124)
======== ========
Net finance costs at £126 million were similar to last year.
The £6 million gain (2006: £16 million) of fair value changes and exchange
differences reflects a gain of £6 million (2006: £7 million) from the net impact
of exchange rate movements and a gain of £nil million (2006: £9 million)
principally due to interest related changes in the fair value of derivatives.
IFRS requires fair value changes for derivatives, which do not meet the tests
for hedge accounting under IAS39, to be included in the income statement. In
addition, certain exchange differences are required to be included in the income
statement under IFRS and, as they are subject to exchange rate movements in a
period, they can be a volatile element of net finance costs. These amounts do
not always reflect an economic gain or loss for the Group. In calculating the
adjusted earnings per share for the six months to 30 June 2006, a £4 million
gain was excluded as it related to exchange where there was a compensating
exchange loss taken directly to total equity.
ASSOCIATES
The share of post-tax results of associates was £222 million (2006:
£243 million) after tax of £120 million (2006: £108 million). For the year to 31
December 2006, the share of post-tax results was £431 million after tax of
£216 million. The share is after exceptional charges and credits.
In the six months to 30 June 2006 and the year ended 31 December 2006, Reynolds
American benefited from the favourable resolution of tax matters of which the
Group's share was £17 million. In the year ended 31 December 2006, Reynolds
American also modified the previously anticipated level of support between
certain brands and the projected net sales of certain brands, resulting in a
brand impairment charge of which the Group's share amounted to £13 million (net
of tax).
On 25 April 2006, Reynolds American announced an agreement to acquire Conwood,
the second largest manufacturer of smokeless tobacco products in the US, for
US$3.5 billion, and the acquisition was completed on 31 May 2006.
Page 17
TAXATION
The tax rate in the income statement of 26.4 per cent for the six months to 30
June 2007 (30 June 2006: 25.3 per cent) is affected by the inclusion of the
share of associates' post-tax profits in the Group's pre-tax results. The
underlying rate for subsidiaries reflected in the adjusted earnings per share
below was 30.8 per cent and 30.6 per cent in 2006. The charge relates to taxes
payable overseas.
EARNINGS PER SHARE
Basic earnings per share are based on the profit for the period attributable to
ordinary shareholders and the average number of ordinary shares in issue during
the period (excluding shares held by the Group's employee share ownership
trusts).
For the calculation of the diluted earnings per share the average number of
shares reflects the potential dilutive effect of employee share schemes.
The earnings per share are based on:
30.6.07 30.6.06 31.12.06
Earnings Shares Earnings Shares Earnings Shares
£m m £m m £m m
Basic 1,079 2,038 1,001 2,069 1,896 2,059
Diluted 1,079 2,052 1,001 2,085 1,896 2,076
The earnings have been affected by exceptional items, together with certain
distortions to net finance costs under IFRS in 2006, and to illustrate the
impact of these the adjusted diluted earnings per share are shown below:
Diluted earnings per share
6 months to Year to
30.6.07 30.6.06 31.12.06
pence pence pence
Unadjusted earnings per share 52.58 48.01 91.33
Effect of restructuring costs 1.32 1.61 8.09
Effect of disposal of businesses and brands (0.39) 0.50 (1.11)
Effect of associates' brand impairments and
exceptional tax credits (0.82) (0.19)
Net finance costs adjustments (0.19)
------- ------- -------
Adjusted diluted earnings per share 53.51 49.11 98.12
======= ======= =======
Adjusted diluted earnings per share are based on:
- adjusted earnings (£m) 1,098 1,024 2,037
- shares (m) 2,052 2,085 2,076
Similar types of adjustments would apply to basic earnings per share. For the
six months to 30 June 2007, basic earnings per share on an adjusted basis would
be 53.88p (2006: 49.49p) compared to unadjusted amounts of 52.94p (2006:
48.38p).
Page 18
CASH FLOW
a) The IFRS cash flow includes all transactions affecting cash and cash
equivalents, including financing. The alternative cash flow below is presented
to illustrate the cash flows before transactions relating to borrowings.
6 months to Year to
30.6.07 30.6.06 31.12.06
£m £m £m
Net cash from operating activities
before restructuring costs and taxation 1,604 1,236 3,295
Restructuring costs (76) (72) (220)
Taxation (410) (378) (713)
------ ------ ------
Net cash from operating activities (page 12) 1,118 786 2,362
Net interest (135) (140) (263)
Net capital expenditure (148) (167) (419)
Dividends to minority interests (83) (86) (139)
------ ------ ------
Free cash flow 752 393 1,541
Dividends paid to shareholders (821) (685) (1,008)
Share buy-back (358) (239) (500)
Other net flows 25 (51) (5)
------ ------ ------
Net cash flows (402) (582) 28
====== ====== ======
The Group's net cash flow from operating activities at £1,118 million was
£332 million higher, with the growth in underlying operating performance, as
well as working capital movements reflecting timing and one-off differences in
2006 and 2007.
With relatively small changes in net interest and dividends paid to minorities,
as well as lower net capital expenditure, the free cash flow was £752 million,
£359 million higher than 2006.
Below free cash flow, the cash flows for the first six months of the year
include the payment of the prior year final dividend (2007: £821 million - 2006:
£685 million). The share buy-back also results in an outflow of £358 million
(2006: £239 million). The change in other net outflows from a £51 million
outflow in 2006 to a £25 million inflow in 2007 principally reflects the reduced
purchase of own shares to be held in employee share ownership trusts and the
disposal of trade marks in 2007.
The above flows resulted in net cash outflows of £402 million (30 June 2006:
£582 million outflow - 31 December 2006: £28 million inflow). After taking
account of transactions related to borrowings, especially net new borrowings,
the above flows resulted in a net decrease of cash and cash equivalents of £257
million, (30 June 2006: £232 million increase - 31 December 2006: £292 million
decrease) as shown in the IFRS cash flow on page 12.
These cash flows, after a positive exchange impact of £10 million, resulted in
cash and cash equivalents, net of overdrafts, decreasing by £247 million in 2007
(30 June 2006: £158 million increase - 31 December 2006: £388 million decrease).
Page 19
Cash flow cont...
In addition, the cash outflows were also the principal reason why borrowings,
excluding overdrafts but taking into account derivatives relating to borrowings,
were £6,544 million compared to £6,401 million at 31 December 2006.
Current available-for-sale investments at 30 June 2007 were £95 million (30 June
2006: £127 million and 31 December 2006: £128 million).
As a result of the above, total borrowings including related derivatives, net of
cash, cash equivalents and current available-for-sale investments, were £5,419
million (31 December 2006: £4,996 million).
b) IFRS cash generated from operations (page 12)
6 months to Year to
30.6.07 30.6.06 31.12.06
£m £m £m
Profit before taxation 1,588 1,444 2,764
Share of post-tax results of associates (222) (243) (431)
Net finance costs 126 124 289
Gains on disposal of brands and joint ventures (11) (60)
Depreciation and impairment of property, plant
and equipment 141 174 367
Amortisation and impairment of intangible assets 15 17 34
(Increase)/decrease in inventories (146) (202) 21
Decrease/(increase) in trade and other receivables 134 (66) (105)
(Decrease)/increase in trade and other payables (94) (100) 57
(Decrease) in net retirement benefit liabilities (55) (49) (69)
(Decrease) in other provisions for liabilities and
charges (43) (49) (68)
Other 1 28 17
------ ------ ------
1,434 1,078 2,816
====== ====== ======
c) IFRS investing and financing activities
The investing and financing activities in the IFRS cash flows on page 12 include
the following items:
Interest and dividends received include dividends received of £1 million (30
June 2006: £1 million - 31 December 2006: £2 million).
Purchases and disposals of intangible assets include £16 million of sales
proceeds for the six months to 30 June 2007 and £60 million for the year to
31 December 2006, mainly from the brands sale explained on page 16.
Purchases and disposals of investments (which comprise available-for-sale
investments and loans and receivables) include an inflow in respect of current
investments of £33 million for the six months to 30 June 2007 (30 June 2006: £27
million outflow - 31 December 2006: £41 million outflow) and £4 million sales
proceeds of non-current investments for the six months to 30 June 2007 (30 June
2006: £2 million - 31 December 2006: £4 million).
Purchase and disposals of subsidiaries for the year ended 31 December 2006,
principally reflected the cost of acquiring minority interests in the Group's
Chilean subsidiary, less the proceeds from the sale of Toscano as explained on
page 16.
Page 20
Cash flow cont...
In the six months to 30 June 2007, euro 800 million of notes with a maturity of
2009 were replaced by a euro 1,000 million bond with a maturity of 2017. In the
six months to 30 June 2006, euro 1,000 million floating note rates were repaid,
while euro 600 million Notes with a maturity of 2014, £325 million Notes with a
maturity of 2016 and euro 525 million Notes with a maturity of 2010 were issued.
In addition, there was a net draw down on the Revolving Credit Facility of £400
million during the six months to 30 June 2006.
The movement relating to derivative financial instruments is in respect of
derivatives taken out to hedge cash and cash equivalents and external
borrowings, derivatives taken out to hedge inter company loans and derivatives
treated as net investment hedges. Derivatives taken out as cash flow hedges in
respect of financing activities are also included in the movement relating to
derivative financial instruments, while other such derivatives in respect of
operating and investing activities are reflected along with the underlying
transactions.
Purchases of own shares include the buy-back programme as described on page 22,
together with purchases of shares held in employee share schemes (30 June 2007:
£29 million - 30 June 2006: £77 million - 31 December 2006: £77 million).
Dividends paid for the six months to 30 June 2007 include £821 million of
dividends to Group shareholders and £83 million to minority shareholders (30
June 2006: £685 million and £86 million respectively - 31 December 2006: £1,008
million and £139 million respectively).
d) Net cash and cash equivalents in the Group cash flow statement comprise:
30.6.07 30.6.06 31.12.06
£m £m £m
Cash and cash equivalents per balance sheet 1,141 1,926 1,456
Less accrued interest (1) (2) (1)
Overdrafts (111) (102) (179)
------- ------- -------
1,029 1,822 1,276
======= ======= =======
DIVIDENDS
The Directors have declared an interim dividend for the six months to 30 June
2007, for payment on 12 September 2007, at the rate of 18.6p per share. This
interim dividend amounts to £377 million. The comparative dividend for the six
months to 30 June 2006 of 15.7p per share amounted to £322 million. Valid
transfers received by the Registrar of the Company up to 3 August 2007 will be
in time to rank for payment of the interim dividend.
In accordance with IFRS, the interim dividend will be charged in the Group
results for the third quarter. The results for the six months to 30 June 2007
include the final dividend paid in respect of the year ended 31 December 2006 of
40.2p per share amounting to £821 million (30 June 2006: 33.0p amounting to £685
million).
Page 21
SHAREHOLDERS' FUNDS
30.6.07 30.6.06 31.12.06
£m £m £m
Share capital 509 520 517
Share premium account 52 47 48
Capital redemption reserves 98 87 90
Merger reserves 3,748 3,748 3,748
Translation reserve (94) 74 (177)
Hedging reserve 9 13 10
Available-for-sale reserve 11 14 13
Other reserves 573 573 573
Retained earnings 1,534 1,297 1,639
after deducting
------------------------------
- cost of own shares held in employee share
ownership trusts (174) (212) (197)
------------------------------
------- ------- -------
Shareholders' funds 6,440 6,373 6,461
======= ======= =======
CONTINGENT LIABILITIES
As noted in the Report and Accounts for the year ended 31 December 2006, there
are contingent liabilities in respect of litigation, overseas taxes and
guarantees in various countries.
Group companies, as well as other leading cigarette manufacturers, are
defendants in a number of product liability cases. In a number of these cases,
the amounts of compensatory and punitive damages sought are significant. At
least in the aggregate and despite the quality of defences available to the
Group, it is not impossible that the results of operations or cash flows of the
Group in particular quarterly or annual periods could be materially affected by
this.
Having regard to these matters, the Directors (i) do not consider it appropriate
to make any provision in respect of any pending litigation and (ii) do not
believe that the ultimate outcome of this litigation will significantly impair
the financial condition of the Group.
SHARE BUY-BACK PROGRAMME
The Group initiated an on-market share buy-back programme at the end of February
2003. During the six months to 30 June 2007, 22 million shares were bought at a
cost of £358 million (30 June 2006: 17 million shares at a cost of £239 million).
Copies of this Report will be posted to shareholders and may also be obtained
during normal business hours from the Company's Registered Office at Globe
House, 4 Temple Place, London WC2R 2PG and from our website www.bat.com
Nicola Snook
Secretary
26 July 2007
Page 22
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