1st Quarter Report - Part 1
British American Tobacco PLC
2 May 2001
PART 1
QUARTERLY REPORT TO 31 MARCH 2001 2 May 2001
SUMMARY
2001 2000 Change
Operating profit pre-exceptionals £597m £545m +10%
Pre-tax profit £463m £223m +108%
Adjusted earnings per share 12.54p 11.49p +9%
* Operating profit was 10 per cent higher, excluding
goodwill amortisation and exceptional items, with all
regions contributing to this result.
* Pre-tax profit, up 108 per cent, benefited from the
absence of last year's exceptional charges. Adjusted
earnings per share (on a fully diluted basis) rose
9 per cent to 12.54p.
* Group volumes grew by over 1 per cent to 195 billion,
the first increase on a comparable basis in two years.
The mix of our brand portfolio continued to improve and
sales of our international brands showed strong
progress with volumes increasing by over 5 per cent.
* The Chairman, Martin Broughton, commented 'We have
clearly made a sound start to 2001. For the full year,
we expect to achieve a good increase in both operating
profit before exceptional items and adjusted earnings
per share, the two key measures of our financial
progress.
As an example of the growth opportunities that exist
for us, I am delighted to be able to announce that
British American Tobacco and the Chinese Government are
currently in discussions with a view to the
establishment of a new joint venture company in China.'
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BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 31 MARCH 2001
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
Accounting policies and basis of preparation 13
Changes in the Group 13-14
Foreign currencies 14-15
Exceptional items 15
Goodwill amortisation 15
Sale of business 15
Net interest 16
Taxation 16
Earnings per share 16-17
Segmental analyses: associated companies and
joint ventures 18
CHAIRMAN'S COMMENTS 2.
British American Tobacco has made a sound start to 2001,
with operating profit before exceptional items up 10 per
cent to £597 million and adjusted earnings per share ahead
by 9 per cent at 12.5p. Every single region contributed to
the increase in profit. Group volumes grew by over 1 per
cent to 195 billion cigarettes and our four drive brands,
Lucky Strike, Kent, Dunhill and Pall Mall, performed
exceptionally well.
Lucky Strike's total volume was up 10 per cent, with strong
growth in Germany, France and Spain. Kent improved by 4 per
cent, continuing to make progress in the markets where it
has been relaunched. Dunhill was 10 per cent ahead, driven
by the brand's success in South Korea and Malaysia. Pall
Mall increased by 16 per cent, following the US launch and
continued success in a range of European markets.
This pleasing performance has been accompanied by the usual
perplexing developments on the regulatory front. The
European Union Directive on Tobacco Control is a prime
example. Its ban on exports of products above an EU tar and
nicotine ceiling will have no impact on health overseas, yet
will cost thousands of EU jobs. It seeks mandatory lower
tar and nicotine yields, yet aims to ban descriptors which
help consumers to recognise lower yield products, and which
have helped the consumer trend towards using them. The
entire Directive has a dubious legal basis and has been
characterised throughout by the lack of a proper regulatory
impact assessment.
A lack of consultation also seems to be one of the World
Health Organisation's (WHO) defining characteristics. As
the serious negotiations on its Framework Convention for
Tobacco Control begin, it is clear that they could take many
years. There is a long way to go and behind the WHO's
rhetoric governments will now have more opportunities to
shape the outcomes, ensuring that their sovereignty is not
undermined, or their domestic priorities ignored. At some
point, I believe that it will be difficult for the WHO to
continue ignoring the views of tobacco stakeholders. We
continue to offer an open door to dialogue, along with our
support to governments for soundly-based, national
regulatory solutions.
Chairman's comments cont... 3.
For example, our companies throughout the world co-operate
extensively with governments, parents, teachers and NGOs in
under-age smoking prevention programmes. Last month, we,
and the other two largest international tobacco groups,
launched a long term drive to tackle youth smoking globally,
reinforced with a well researched TV advertising campaign,
now running in 38 European countries.
In the UK, British American Tobacco is also helping to fund
a national programme to make the CitizenCard proof-of-age
card more widely available. This has been warmly welcomed
by the Government. Our support has led to CitizenCard
becoming Britain's fastest growing proof-of-age card.
The Business in the Environment Survey of Corporate
Environmental Engagement rated us fifth best of all the
FTSE 100 companies, a tribute to the attention we have been
paying to environmental issues.
On the litigation front, the broadly favourable trend in the
tobacco industry's favour has continued. The US industry's
success in the Fontana trial, the first of the Phase 2 Broin
individual environmental tobacco smoke suits in Florida, was
particularly noteworthy because these types of case
represent approximately two-thirds of the total number
currently faced by Brown & Williamson.
At the time of these results which, this year, coincide with
our Annual General Meeting, I usually provide shareholders
with some information concerning the Board's view of the
Group's likely performance for the year as a whole. We have
clearly made a sound start to 2001. For the full year, we
expect to achieve a good increase in both operating profit
before exceptional items and adjusted earnings per share,
the two key measures of our financial progress.
The recovery in the Group's share price, when compared to
the depressed level of a year ago, is obviously encouraging
but I believe that it does not yet reflect the ability of
our proven management team to generate good sustainable
growth in profits and cash over the long term.
Chairman's comments cont... 4.
As an example of the growth opportunities that exist for us,
I am delighted to be able to announce that British American
Tobacco and the Chinese Government are currently in
discussions with a view to the establishment of a new joint
venture company in China.
In anticipation of a positive outcome to these discussions,
the Chinese Government has granted its approval for the
signing of an agreement this month, which will secure our
rights to use land for building a factory at Mianyang in
Sichuan Province. The size of the site should provide us
with the opportunity to build a business of significant
scale.
There is obviously some way to go on this exciting development
and we will be providing more information in due course, as the
project progresses.
China is not only the largest tobacco market but, with over
300 million smokers, it actually represents one third of the
entire world cigarette market. British American Tobacco has
a long history of involvement in China, without which it
would have been difficult, if not impossible, to achieve
this significant breakthrough.
The Chinese Government has done an excellent job in
modernising the sector and we believe we can help the
Chinese tobacco industry to develop still further and
participate fully in the global market.
MARTIN BROUGHTON
BUSINESS REVIEW 5.
Operating profit was 10 per cent higher at £597 million,
excluding exceptional items and goodwill amortisation as
explained on page 15, with all regions contributing to this
result.
Group volumes at 195 billion rose by over 1 per cent
compared to last year. This reflected increases in a number
of markets, while the mix of our brand portfolio continued
to improve. Sales of our international brands showed strong
progress with volumes increasing by over 5 per cent. The
four drive brands, namely Lucky Strike, Kent, Dunhill and
Pall Mall, performed exceptionally well and grew by 10 per
cent.
Further progress on our factory rationalisation programme
has been made with completion of factory closures in
Malaysia and the roll-your-own plant in Winston Salem.
During the quarter the Group also sold its pipe tobacco
business in South Africa (see page 15).
On 22 March 2001, the management of the Belgian companies
announced their intention to restructure their operations.
Assuming that, after the appropriate local consultation, the
changes can be implemented, the consequent restructuring
costs will be charged at that time. This will be the final
element in accounting for the restructuring following the
Rothmans merger.
Profit from the America-Pacific region for the first quarter
was £198 million, an increase of £17 million or 9 per cent,
reflecting improvements in all markets. Shipment volumes
declined by 2 billion to 24 billion as a result of lower
volumes in the US and Japan, only partly offset by Canada
and Korea.
The profit from Canada was £84 million, compared to a profit
of £73 million for the same period last year. However, on a
comparable basis (see page 14), profit grew by 6 per cent,
mainly as a result of higher volumes and prices. Imperial
Tobacco Canada advanced its market share through increased
volumes of du Maurier, Player's and Matinee.
The US domestic market profit improved by £6 million to
£72 million. This increase was due to higher pricing,
together with reduced costs, which were only partly offset
by lower volumes.
Business review cont... 6.
Brown & Williamson's market share fell to 10.6 per cent.
The decline was driven by high competitive promotional
volume entering the pipeline during the quarter and
affecting all brands. Volumes were also affected by the
restrictive contracts with retailers imposed by competitors,
as well as cheaper brands from some of the small
manufacturers who receive preferential treatment under the
MSA. After promising results in the test market, Pall Mall
Filter was launched nationwide at the beginning of the
quarter as a value-for-money brand.
In Japan, where total industry volumes fell, the Group
increased market share to 8 per cent and profits rose with
Kent and Kool driving this growth. The growth in profit was
due mainly to the favourable impact of the SCAT acquisition
and the absence of new brand launch spending in the quarter,
partially offset by lower shipment volumes and higher
selling expenses.
Substantial progress was achieved in Korea, where Dunhill
Lights continued to be a major driver of volume and market
share growth.
In Asia-Pacific, the profit of £96 million was £18 million
or 23 per cent ahead of the same period last year,
benefiting from significant synergy benefits being realised
in Australasia and Malaysia with all major rationalisation
and distribution changes completed. Volumes at 20 billion
were 16 per cent lower than the same period last year,
mainly due to the drop of low-margin volumes in Indonesia
following the excise changes.
The Australasian businesses delivered very strong profit
growth despite excise-led market volume declines in
Australia and New Zealand. Following the excise increases
and the introduction of a general sales tax last year,
Australia had another excise increase in February 2001.
Better margins, growing market share in Winfield and Benson
& Hedges, and significant merger benefits continued to be
the main drivers of profit growth in Australia. In New
Zealand, profits were ahead of last year as the decrease in
volumes was more than offset by improved margins, cost
savings and merger benefits.
In Malaysia, profit was well ahead despite slower than
expected economic growth and increasing competitor
activities. The higher profit was attributable to improved
margins, merger benefits and the continuing strong
performance of Dunhill.
Business review cont... 7.
Indonesia saw a drop in volumes, market share and profit as
the change in the excise system in 2000 and the cumulative
effect of excise increases continued to depress performance.
These excise changes were particularly favourable to Kretek
and small manufacturers, but recently the government has
taken a more balanced view. The reorganisation to align the
company structure to the significant reduction in market
share was completed early this year.
Strong first quarter profits were achieved in Vietnam, with
Craven 'A' continuing its good performance. In Singapore,
Dunhill continued to perform well and increased market
share. In Taiwan, market share grew strongly against the
same period last year, again due to the consistent success
of Dunhill.
In Latin America, profit at £97 million increased by
£9 million, or 10 per cent, compared to last year mainly due
to higher contributions from Argentina, Mexico, Venezuela
and Chile. Regional volumes of 40 billion were down by
1 billion mainly due to lower volumes in Mexico and
Argentina, partially offset by higher volumes in Brazil.
In Brazil, Souza Cruz's volumes benefited from the growth in
Derby, following its price repositioning at the end of 2000.
This contributed to an increase in market share for the
brand and the company. However, operating profit was lower,
largely as a result of currency devaluation.
In a reduced Mexican market, the Group's volume and market
share were lower but profits increased due to higher prices
and lower expenses. In Venezuela, profits rose mainly due
to higher volumes and a better sales mix. Chile reported
higher profits due to price increases, lower variable costs
and timing of expenditure. Domestic volumes were in line
with last year and the high market share has been
maintained.
In Argentina, market share improved despite the slight
decline in volumes resulting from the more difficult
economic conditions. Profits increased as a result of
restoration of industry profit margins following the
reduction in the social assistance fund tax rate agreed with
the government in June 2000. Although volumes were lower,
profits in Central America were in line with last year and
market share increased, mainly due to the good performance
of Delta and Belmont.
Business review cont... 8.
Total profits in Europe were £115 million, which is
£1 million lower than last year. This is a consequence of
the change in accounting for an associated company which
resulted in only a quarter's results being included compared
to six months in the comparable quarter and, on a like-for-
like basis, profits would have been 7 per cent ahead. The
growth in profits was to a large extent driven by higher
volumes, which have increased by 14 per cent to 52 billion.
Growth in volumes led to better results in Russia, Romania
and Ukraine. In Russia, the surge in sales of Yava combined
with volume increases for higher margin brands, primarily
Kent and Vogue, contributed to improved profits. The
continued success of Prilucky Osoblivy, now the largest
brand in Ukraine, benefited results in that market.
Profits were also higher in Germany, resulting from a slight
improvement in margins, as our company became the number two
player in that market. Synergy related savings led to better
results in Switzerland, whereas a combination of higher
volumes and prices drove an improvement in Hungary. The
regional profit growth was achieved despite fierce price
competition in Poland, industry margin erosion in Ireland
and overall market decline in the UK.
Volumes achieved by the smoking tobacco and cigar operations
were slightly down compared to last year and this was mainly
driven by increased competitive price pressure within the
economy fine cut sector in some of the core markets. Market
segment shares for the mainstream brands are being
maintained and operating profit is in line with the same
period last year.
In the Amesca region, profit at £91 million was £9 million
or 11 per cent higher than last year as good results were
achieved in South Africa, Pakistan, Bangladesh and the
Middle East, as well as by the associated companies in
India. These positive results were reduced by lower profits
in Uzbekistan and a number of markets in Africa. Volumes of
59 billion for the region, exceeded last year by 5 per cent.
Despite a total market decline in South Africa, operating
profit was higher as a result of price increases and synergy
benefits. These offset the lower volumes and the loss of
two months' earnings from the pipe tobacco business that was
sold for a profit during the quarter (see page 15). Both
Peter Stuyvesant and Benson & Hedges grew market share.
Business review cont... 9.
In other parts of Africa, volumes and profits continued to
suffer as a result of economic decline, civil unrest and
excise changes in a number of markets. In North Africa, the
results reflect the costs associated with setting up the new
operations in Egypt.
The results in the Middle East improved, reflecting volume
gains and increased market share, coupled with cost
reductions. Although volume was similar to last year in
Uzbekistan, higher product costs adversely affected
performance for the period.
The Group's associated companies in India produced excellent
results with higher profits despite a reduction in volumes.
This improvement primarily reflects price benefits.
Sri Lanka maintained its dominant market share but, with an
overall market decline, showed lower volumes which led to a
decline in profits.
In Pakistan, total volume almost doubled with market share
substantially higher, benefiting profit. This outstanding
performance followed a price repositioning last year, with
the improvement mainly driven by Gold Flake and Capstan. In
Bangladesh, total volume increased with market share gains
driven by strong growth from John Player Gold Leaf. The
improvement in profits reflected the volume gains, partly
offset by increased marketing and other costs.
The above results were achieved before accounting for any
exceptional items and goodwill amortisation which are
described on page 15.
Group Cigarette Volumes
3 months to Year to
31.3.01 31.3.00 31.12.00
bns bns bns
America-Pacific 24.0 26.1 109.4
Asia-Pacific 19.6 23.4 86.5
Latin America 40.5 41.5 164.5
Europe 51.7 45.2 208.1
Amesca 59.4 56.5 238.0
----- ----- -----
195.2 192.7 806.5
===== ===== =====
GROUP RESULTS - unaudited 10.
3 months to Year to
31.3.01 31.3.00 31.12.00
Restated Restated
£m £m £m
REVENUE
Subsidiary undertakings 6,145 5,356 23,578
Share of associates and joint
Ventures 293 545 1,253
----- ----- ------
6,438 5,901 24,831
===== ===== ======
PROFIT
Subsidiary undertakings 474 304 1,739
------------------------------- -------- --------- ---------
After charging:
US restructuring costs (119)
Acquired stock (83) (83)
Integration costs (18) (126)
Goodwill amortisation (97) (86) (376)
------------------------------- -------- --------- ---------
Share of associates and joint
Ventures 26 (15) 61
------------------------------- -------- --------- ---------
After charging:
Imasco restructuring costs (69) (71)
------------------------------- -------- --------- ---------
----- ----- ------
Total operating profit 500 289 1,800
Sale of business 35
----- ----- ------
Profit on ordinary activities
before interest 535 289 1,800
Net interest (70) (63) (269)
Share of associates' net (2) (3) (9)
interest
----- ----- ------
Profit before taxation 463 223 1,522
Taxation on ordinary activities (193) (104) (660)
----- ----- ------
Profit after taxation 270 119 862
Minority interests (44) (42) (170)
----- ----- ------
Profit for the period 226 77 692
===== ===== ======
Earnings per share
- basic 10.34p 3.15p 29.53p
===== ===== ======
- adjusted diluted 12.54p 11.49p 56.93p
===== ===== ======
See notes on pages 13 to 18.
SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - unaudited 11.
3 months to Year to
31.3.01 31.3.00 31.12.00
£m £m £m
Turnover excluding duty, excise
and other taxes
America-Pacific 948 1,065 4,092
Asia-Pacific 356 357 1,405
Latin America 384 383 1,615
Europe 738 715 2,904
Amesca 414 354 1,599
------ ------ ------
2,840 2,874 11,615
====== ====== ======
Operating profit
America-Pacific 198 181 878
Asia-Pacific 96 78 361
Latin America 97 88 425
Europe 115 116 541
Amesca 91 82 370
------ ------ ------
597 545 2,575
US restructuring costs (119)
Acquired stock (83) (83)
Integration costs (18) (126)
Goodwill amortisation (97) (86) (376)
Imasco restructuring costs (69) (71)
------ ------ ------
500 289 1,800
====== ====== ======
Operating profit restated at
comparable rates of exchange 495 289 1,800
====== ====== ======
The net turnover analysis is based on external sales in each
region. The figures for the three months ended 31 March 2001 and
31 March 2000 based on regional location of manufacture would not
be materially different except for sales from Europe to Amesca
and Asia-Pacific which amounted to £159 million and £80 million
respectively, 2000 £124 million and £91 million.
The operations of subsidiaries are entirely related to tobacco.
The Group's share of the operations of associates and joint
ventures, analysed by business, is set out on page 18.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - unaudited 12.
3 months to Year to
31.3.01 31.3.00 31.12.00
Restated Restated
£m £m £m
Profit for the period 226 77 692
Differences on exchange (49) (125) (221)
Revaluation of associated company 1,266 1,248
------ ------ ------
Total recognised gains related to the
period (below) 177 1,218 1,719
====== ====== ======
As shown below the cumulative effect of the accounting policy
change was £81 million at 1 January 2001.
INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - unaudited
3 months to Year to
31.3.01 31.3.00 31.12.00
Restated Restated
£m £m £m
Balance 1 January 5,178 4,821 4,821
Accounting policy change (81) (95) (95)
------ ------ ------
Balance 1 January restated 5,097 4,726 4,726
Total recognised gains related to the
period (above) 177 1,218 1,719
Issue of shares - share options 3 1 3
Redemption of convertible redeemable
preference shares (695)
Dividends and other appropriations:
ordinary shares (623)
convertible redeemable preference
shares (35)
amortisation of discount on
preference shares (4) (9) (22)
Other movements 4 9 24
------ ------ ------
Balance at period end 5,277 5,945 5,097
====== ====== ======
See notes on pages 13 to 18.
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