British American Tobacco Regulatory News (BATS)

4 May 2005 07:01

British American Tobacco PLC04 May 2005 QUARTERLY REPORT TO 31 MARCH 2005 4 May 2005 SUMMARYTHREE MONTHS RESULTS 2005 2004 Change Profit from operations £582m £604m - 4%Adjusted diluted earnings per share 20.10p 15.91p +26% • This is the first time that British American Tobacco has reported its results under International Financial Reporting Standards. • Profit from operations in subsidiary companies was 6 per cent higher if the changes in the Group resulting from the merger of the Group's US businesses with R.J. Reynolds and the sale of Etinera, with the resulting change in its terms of trade, are excluded. This "like for like" information provides a better explanation of the subsidiaries' trading results than the 4 per cent "headline" decline in profit from operations, the difference being simply the result of these changes in the Group. • On a reported basis, Group volumes from subsidiaries were affected by the transactions noted above, resulting in a 3 per cent decrease to 159 billion. Excluding the impact of these transactions, Group volumes from subsidiaries grew by 1 per cent with many good market share performances. The four global drive brands showed overall growth of 2 per cent. • Adjusted diluted earnings per share rose by 26 per cent, benefiting from the higher underlying operating performance, reduced net finance costs due to the impact of IAS39, a lower effective tax rate and minority interests, as well as the impact of the Reynolds American transaction, the Etinera sale and the subsequent change in terms of trade in Italy and the share buy-back programme. The basic earnings per share were impacted by the same factors, partly offset by the conversion of the redeemable preference shares, and increased to 20.26p (2004: 16.65p). • The Chairman, Jan du Plessis, commented "The year has clearly started well, benefiting from the Reynolds American transaction, as well as good profit growth in all regions apart from America-Pacific. Shareholders should, however, remember that the comparisons with 2004 will become more demanding, bearing in mind the various one-off tax benefits in the second half of last year. As a result, the first quarter's 26 per cent growth in earnings per share is obviously not indicative of the outlook for the year as a whole." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson/ 020 7845 1180 David Betteridge/ 020 7845 2888 Rachael Cummins 020 7845 1519 Teresa La Thangue/ Emily Brand BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 31 MARCH 2005 INDEX PAGE Chairman's comments 2Business review 5Group income statement 9Statement of changes in total equity 10Segmental analyses of revenue and profit 11Accounting policies and basis of preparation 13Convertible redeemable preference shares 15Foreign currencies 15Changes in the Group 16Restructuring costs 17Investment costs written off 17Gains on disposal of subsidiaries and non-current investments 17Net finance costs 18Associates 19Taxation 19Earnings per share 19Share buy-back programme 21 CHAIRMAN'S COMMENTS 2. British American Tobacco has clearly made an excellent start to theyear, with profit in four of our five regions being well aheadcompared to the first quarter of 2004. This is the first time that the Group has reported its results underInternational Financial Reporting Standards (IFRS). The changes inpresentation are further complicated by two significant transactionsthat took place last year. Profit from operations in subsidiary companies was 6 per cent higherif the changes in the Group resulting from the merger of the Group'sUS businesses with R.J. Reynolds and the sale of Etinera, with theresulting change in its terms of trade, are excluded. This "likefor like" information provides a better explanation of thesubsidiaries' trading results than the 4 per cent "headline" declinein profit from operations, the difference being simply the result ofthese changes in the Group. Reported volumes from the Group's subsidiaries declined by 3 percent to 159 billion cigarettes but, excluding the impact of theabove transactions, would have been 1 per cent ahead. There werestrong performances in Pakistan, Russia and Turkey. Our global drive brands grew by 2 per cent, reflecting goodperformances in France, Germany, Malaysia, Romania and Russia.While Pall Mall was well ahead, the star performer was Kent, thenumber one premium brand in Russia. The brand continued to improveits market share in the top 30 cities and especially in Moscow,where the launch of Dunhill has also gone extremely well. Dunhillhas grown market share to over 14 per cent in South Korea. LuckyStrike has improved its share of the cigarette market in bothGermany and France compared to the previous quarter. Turning to the regions, the results in America-Pacific are obviouslyconfusing because Brown & Williamson's US business was a subsidiarythis time last year and is now part of Reynolds American, anassociate. If the US is excluded from both periods, the region'sprofits were £35 million lower at £88 million. Canada has sufferedfrom continued down trading, while conditions in Japan are intenselycompetitive. Our performances in the other four regions have been very good, withprofits growing by some £66 million, or 15 per cent. There weregood profit increases in South Korea, Brazil, Mexico, France,Germany, Russia, South Africa and Nigeria. Chairman's comments cont... 3. It is worth noting that under IFRS, net finance costs are likely tobe much more difficult to forecast and may well be more volatile.This is partly because financial instruments, such as derivatives,have to be recognised at fair value. Net finance costs amounted to£46 million but included the benefit of £23 million from fair valuechanges and exchange differences. Excluding the impact of IAS 39,the relevant Standard for derivatives, net finance costs weresimilar to last year. For the Group, one of the most important changes under IFRS concernsthe treatment of the results from associate companies. They nowhave to appear post tax but have to be included at the pre-taxlevel. Our principal associates are Reynolds American, ITC in Indiaand Skandinavisk Tobakskompagni in Denmark. Their combined volumesamounted to 56 billion cigarettes in the first quarter. The Group'sshare of their post tax results was £63 million higher at £88million, principally because of the inclusion of £60 million forReynolds American. As Reynolds American recently announced, the launch of their newbrand portfolio strategy is well underway and steps have been takento strengthen further the performance of the two investment brands,Camel and Kool. The smooth integration has continued and they areon target to deliver the merger related synergies. Changes in the mix of profits have resulted in an underlying taxrate of 31.0 per cent, compared to 35.7 per cent in 2004. Adjusted diluted earnings per share rose by 26 per cent to 20.10p,benefiting from the higher underlying operating performance andreduced net finance costs, a lower effective tax rate and lowerminority interests, as well as the impact of the Reynolds Americantransaction, the Etinera sale and the subsequent change in terms oftrade in Italy and the share buy-back programme. Some 4 million shares were bought back during the period, at a costof £42 million and at an average price of £9.38. As usual, theshare buy-back programme will restart following the publication ofthese results. Chairman's comments cont... 4. The year has clearly started well, benefiting from the ReynoldsAmerican transaction, as well as good profit growth in all regionsapart from America-Pacific, where we expect the difficult tradingconditions in Canada and Japan to continue. Shareholders should, however, remember that the comparisons with2004 will become more demanding, bearing in mind the various one-offtax benefits in the second half of last year. As a result, thefirst quarter's 26 per cent growth in earnings per share isobviously not indicative of the outlook for the year as a whole. Jan du Plessis4 May 2005 BUSINESS REVIEW 5. The reported Group profit from operations was 4 per cent lower at£582 million at current rates of exchange (3 per cent lower atconstant rates). However, profit would have increased by 6 percent, if adjusted to remove the impact of the sale of Etinera,together with the resulting changes in terms of trade in Italy, andto allow for the inclusion of the US tobacco business in associatedcompanies following the Reynolds American transaction (see page 16).All regions showed strong growth apart from America-Pacific. On a reported basis, Group volumes from subsidiaries were affectedby the transactions noted above, resulting in a 3 per cent decreaseto 159 billion. Excluding the impact of these transactions, therewas organic volume growth from subsidiaries of 1 per cent with manygood market share performances. The four global drive brands showedoverall growth of 2 per cent. Kent grew by 19 per cent and PallMall by 6 per cent, while Dunhill and Lucky Strike fell by 11 percent and 5 per cent respectively. Dunhill was adversely affected byan excise change in South Korea and Lucky Strike volumes reflectedoverall industry volume declines in key markets. As noted in the2004 Report & Accounts, Group volumes now include make-your-owncigarette 'stix'. In Europe, profit increased by £30 million to £181 million withstrong performances in Russia, Germany, France and Romania, whilethe integration of the Smoking Tobacco and Cigars business into therespective markets is already delivering benefits. Excluding theimpact of the sale of Etinera, and the resulting changes in theterms of trade, profit would have increased by £17 million.Regional volumes were 2 per cent higher at 57 billion, primarily dueto the growth in Russia and the change in terms of trade in Italy. In Italy, volumes and profit were affected by the introduction inJanuary of a virtual ban on indoor public smoking, resulting in atotal market decline of over 12 per cent. Profit was also affectedby the sale of Etinera at the end of 2004 (see page 16). However,the change in the terms of trade noted above resulted in a one-offincrease in reported volumes and profit. Excluding this distortion,compared to the previous quarter, market share was higher after PallMall and MS improved share, with MS recording growth for the firsttime in several years. Profit in Germany increased strongly through a price increase,improved mix and lower costs. Volumes were lower although there wasshare growth from Pall Mall. Cigarette 'stix' continued to growstrongly and, in a market adversely affected by a steep exciseincrease in December 2004, overall share was up. There wereimproved results from France due to the better sales mix and lowercosts, with volumes and market share both higher. Business review cont... 6. Russia continued its excellent performance with another strongincrease in profit through a better mix and volume increases.Higher volumes and market share were driven by the premium brandKent, supported by the growth of Vogue. In Romania, profitincreased with volume growth and higher margins from Kent and PallMall. In Switzerland, an excise increase in December resulted in lowervolume and slightly reduced profit, although market share wasmaintained as Parisienne and Pall Mall performed strongly. In theNetherlands and Belgium, integration of the Smoking Tobacco andCigars business, as well as cost savings, led to improved profit. In Asia-Pacific, regional profit rose by £13 million to £126 millionas good performances in Australasia and Pakistan, assisted by abenefit from the timing of excise payments in South Korea, more thancovered the reductions in Malaysia and Vietnam. Regional volumes at32 billion were 1 per cent higher as strong increases in Pakistanand Bangladesh were partially offset by volume declines in Vietnamand South Korea. South Korea is now reported under the Asia-Pacificregion, rather than America-Pacific, with the 2004 comparativesadjusted accordingly. Australia continued its profit growth despite a small decline involumes, with higher margins and overall market share up due tostrong performances from Dunhill and Winfield. In New Zealand,profit increased with improved margins, while volumes were stable. Following the severe excise increase last September, profit inMalaysia was lower as a result of pricing activities and theincremental costs of complying with new regulations. In a reducedmarket, Dunhill's share was up on the previous quarter and stablecompared to last year. Pall Mall's share also increased butreductions in other brands led to a small overall decline in marketshare. In Vietnam, market share rose but lower volumes led to adecline in profit. South Korea delivered strong profit growth due to the timing ofexcise payments, which substantially reduced industry volume. Goodmarket share growth was driven by Dunhill. In Pakistan, very strong volume growth by Gold Flake and John PlayerGold Leaf resulted in much higher profit and market share. Volumesincreased in Bangladesh but profit decreased as consumers continuedto down trade. The Latin America region showed strong profit growth of £21 millionto £115 million with all major markets up. Volumes at 36 billionwere slightly lower as increases in Venezuela and Central Americawere offset by declines in Argentina and Mexico. Business review cont... 7. Profit in Brazil was much higher following price increases, assistedby a stronger local currency, with volumes fractionally lower. InVenezuela, higher margins and increased volumes led to profitgrowth, supported by higher disposable income levels and a reductionin imported illegal product. In Mexico, profit was higher as a result of an improved mix andprice increases last year, and was achieved despite lower volumes,increased marketing investment and the depreciation of the currencyagainst sterling. The continued growth of the Group's premium brandvolumes were more than offset by the decline in the mid-priced andlow-priced segments. Elsewhere in the region there were good performances, especially inthe Central America and Caribbean area which showed higher profit asvolumes increased, although volumes were lower in Argentina due tothe continued growth of low price local manufacturers. Profit in the Africa and Middle East region grew by £15 million to£97 million with good performances from South Africa and Nigeria.There was excellent volume growth of 17 per cent to 25 billion,mainly as a result of the strong growth in Turkey and other marketsin the Middle East. In South Africa, profit benefited from a price increase and improvedsales mix as Peter Stuyvesant increased share, while total volumeswere stable. There was a strong increase in market share in Nigeriaand profit rose due to all products now being manufactured locally. There were volume increases from Kent and Montana in Iran andViceroy in Iraq, and profits were higher driven by these volumeincreases. Volume growth in Turkey was outstanding with goodperformances by Viceroy and Pall Mall. While financial resultsworsened as higher excise costs more than offset the volumebenefits, the position improved towards the end of the quarter. On a comparable basis, the America-Pacific regional profit was£35 million lower at £88 million, and volume was 8 per cent lower,as both Canada and Japan showed lower profit and volumes. As thecomparative period included the US tobacco business now merged withR.J. Reynolds and included in associates (see page 16), reportedregional volumes were down by 51 per cent to 10 billion and reportedprofit was £100 million lower. Imperial Tobacco Canada's profit was down £19 million to £64 millionas lower volumes and an adverse sales mix, as a result of continueddown trading, offset lower operating costs. Imperial's share of thegrowing low-priced segment rose from 22 per cent to 36 per cent.However, this is still below its overall cigarette market sharewhich declined from 59 per cent to 55 per cent due to the reductionin the premium segment. Business review cont... 8. Profit in Japan was affected by lower volumes, as the total marketcontinued its decline, together with the impact of exchange and thenon-recurrence of a benefit from a business reorganisation includedin prior periods. Lucky Strike and Kool maintained share, whileKent showed a slight decline, in an intensely competitiveenvironment. Unallocated costs, which are net corporate costs not directlyattributable to individual segments, were up £6 million at£25 million, mainly due to exchange gains in the 2004 comparative. Results of associates The Group's share of the post tax results of associates was up£63 million at £88 million, reflecting the inclusion of £60 millionfor Reynolds American following the transaction described onpage 16. On a pro-forma US GAAP basis, as if the combination withBrown & Williamson had been completed as of 1 January 2004, ReynoldsAmerican reported that first quarter 2005 operating profit increased58 per cent and net income rose 70 per cent. This was due primarilyto increased pricing, merger related synergies and other costreductions, and a benefit related to the MSA Phase II growers'trust. These were partially offset by volume declines, expensesfrom the quota buyout programme and merger related costs. There was an increased profit contribution from the Group'sassociated companies in India, driven by their continued strongvolume growth. Cigarette Volumes of Subsidiaries 3 months to Year to 31.3.05 31.3.04 31.12.04 Restated Restated bns bns bns Europe 56.7 55.6 240.2Asia-Pacific 31.7 31.5 131.7Latin America 36.3 36.6 147.6Africa and Middle East 25.0 21.3 97.6America-Pacific 9.6 19.6 68.4 ----- ----- ----- 159.3 164.6 685.5 ===== ===== ===== In addition, associates' volumes for the quarter were 56.1 billion(2004: 28.1 billion) and, with the inclusion of these, total Groupvolumes would be 215.4 billion (2004: 192.7 billion). GROUP INCOME STATEMENT - unaudited 9. 3 months to Year to 31.3.05 31.3.04 31.12.04 £m £m £m Revenue 2,107 2,635 10,768 Raw materials and consumables used (613) (623) (2,670)Purchase of finished goods by distribution business (282) (1,086)Changes in inventories of finished goods and work in progress (29) 47 4Employee benefit costs (305) (389) (1,552)Depreciation and amortisation costs (74) (80) (357)Other operating expenses (504) (699) (2,518) ------ ------ ------ 582 609 2,589Restructuring costs (5) (206)Investment costs written off (50)Gains on disposal of subsidiaries and non-current investments 1,427 ------ ------ ------Profit from operations 582 604 3,760Net finance costs (46) (54) (254)Share of post tax results of associates 88 25 126 after - restructuring costs (63) - brand impairment (49) - exceptional tax credits 49 ------ ------ ------Profit before taxation 624 575 3,632Taxation (166) (197) (673) ------ ------ ------Profit for the period 458 378 2,959 ====== ====== ======Attributable to: Shareholders' equity 428 344 2,829 ====== ====== ====== Minority interests 30 34 130 ====== ====== ====== Earnings per share basic 20.26p 16.65p 135.11p ====== ====== ====== diluted 20.10p 15.77p 131.22p ====== ====== ====== See notes on pages 13 to 21. STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 10. 3 months to Year to 31.3.05 31.3.04 31.12.04 £m £m £m Differences on exchange (62) (72) 40Cash flow hedges 18Net investment hedges (1) ------ ------ ------Net (losses)/gains recognised directly in equity (45) (72) 40Profit for the period page 9 458 378 2,959 ------ ------ ------Total recognised income for the period 413 306 2,999- shareholders' equity 376 281 2,879- minority interests 37 25 120Employee share options - value of employee services 9 8 32 - proceeds from shares issued 15 12 36Dividends and other appropriations - ordinary shares (823) - convertible redeemable preference shares (33) - amortisation of discount on preference shares (4) (8) - to minority shareholders (22) (23) (145)Purchase of own shares - held in Employee Share Ownership Trusts (10) (63) (76) - other (42) (165) (492)Other movements 3 5 8 ------ ------ ------ 366 76 1,498Balance 1 January 6,117 4,619 4,619Change in accounting policy page 13 (42) ------ ------ ------Balance at period end 6,441 4,695 6,117 ====== ====== ====== See notes on pages 13 to 21. 11. SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE THREE MONTHS - unaudited 31.3.05 31.3.04 Inter Inter External Segment Revenue External Segment Revenue £m £m £m £m £m £m Europe 830 132 962 1,005 152 1,157Asia-Pacific 365 1 366 353 353Latin America 322 322 278 2 280Africa and Middle East 223 4 227 183 1 184America-Pacific 230 230 652 9 661 ----- ----- ----- ----- ----- -----Revenue 1,970 137 2,107 2,471 164 2,635 ===== ===== ===== ===== ===== ===== The analysis for revenue is based on location of manufacture and figuresbased on location of sales would be as follows: 31.3.05 31.3.04 £m £m Europe 832 1,018Asia-Pacific 393 393Latin America 326 281Africa and Middle East 326 290America-Pacific 230 653 ------ ------ 2,107 2,635 ====== ====== 31.3.05 31.3.04 Segment result excluding Segment Segment restructuring result result costs £m £m £m Europe 181 151 151Asia-Pacific 126 113 113Latin America 115 94 94Africa and Middle East 97 82 82America-Pacific 88 183 188 ----- ----- ----- 607 623 628Unallocated costs (25) (19) (19) ----- ----- ----- 582 604 609 ===== ===== ===== 12. Segmental Analyses of Revenue and Profit for the three months cont. - unaudited With effect from 1 January 2005, the Group has changed its regionalstructure, with South Korea included in Asia-Pacific rather than theAmerica-Pacific region. The 2004 analyses on page 11 reflect this changeas do the restated IFRS analyses for the year ended 31 December 2004below: Location of manufacture Location of sales External Inter Segment Revenue Revenue £m £m £m £m Europe 4,410 637 5,047 4,452Asia-Pacific 1,489 1 1,490 1,629Latin America 1,260 9 1,269 1,273Africa and Middle East 853 2 855 1,339America-Pacific 2,072 35 2,107 2,075 ------ ------ ------ ------ 10,084 684 10,768 10,768 ====== ====== ====== ====== Segment result Segment result* £m £m Europe 591 750Asia-Pacific 467 495Latin America 438 448Africa and Middle East 357 360America-Pacific 2,010 639 ------ ------ 3,863 2,692Unallocated costs (103) (103) ------ ------ 3,760 2,589 ====== ====== * Excluding restructuring costs, investment costs written off and gains on disposal of subsidiaries and non-current investments. The segmental analysis of the Group's share of post tax results ofassociates is as follows: 31.3.05 31.3.04 31.12.04 £m £m £m Europe 10 10 38Asia-Pacific 18 14 67Africa and Middle East 1 1America-Pacific 60 20 ----- ----- ----- 88 25 126 ===== ===== ===== 13. ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited results for thethree months to 31 March 2005 and 31 March 2004, together with theunaudited results for the twelve months ended 31 December 2004. Prior to 2005, the Group prepared its audited annual financialstatements and unaudited quarterly results under UK GenerallyAccepted Accounting Principles (UK GAAP). From 1 January 2005, theGroup is required to prepare its annual consolidated financialstatements in accordance with IFRS as adopted by the European Union(EU) and implemented in the UK. As the annual 2005 financialstatements will include comparatives for 2004, the Group's date oftransition to IFRS under IFRS1 (First time adoption of IFRS) is1 January 2004 and the 2004 comparatives will be restated to IFRS.However, in preparing the comparative figures for 2004, the Grouphas chosen to utilise the IFRS1 exemption from the requirement torestate comparative information for IAS32 and IAS39 on financialinstruments. To explain how the Group's reported performance and financialposition are affected by this change, the Report & Accounts for theyear ended 31 December 2004 set out on pages 75 to 84 a comparisonof key figures under UK GAAP for 2004, with unaudited restated IFRSresults and an explanation of the principal differences between UKGAAP and IFRS, together with the accounting policies which are to beused under IFRS. These unaudited Group results for the three months to 31 March 2005have been prepared on a basis consistent with the IFRS accountingpolicies as set out on pages 81 to 84 of the Report & Accounts forthe year ended 31 December 2004. These interim financial statementshave been prepared under the historical cost convention, except inrespect of certain financial instruments. In addition, theseinterim financial statements do not comply with all the disclosuresin IAS34 on interim financial reporting and are therefore not infull compliance with IFRS. As noted above IAS32 and IAS39 on financial instruments are beingapplied prospectively from 1 January 2005 and the changes to thebalance sheet as at 1 January 2005 principally reflect: (a) The measurement of available-for-sale investments at fair value. (b) The reclassification of interest accruals to form part of the carrying value of the related asset or liability. (c) The measurement of all derivative financial instruments at fair value. (d) Derecognition of deferred losses on derivatives. These changes result in increases in total assets of £71 million andtotal liabilities of £113 million, with total equity £42 millionlower. The impact on the first quarter of 2005 is set out in netfinance costs on page 18. As permitted, the Group is adopting theamendment to IAS39 on cash flow hedge accounting of forecast intragroup transactions from 1 January 2005. Accounting Policies and Basis of Preparation cont... 14. The effect of the change to IFRS on total equity as at 31 March 2004and profit for the three months to 31 March 2004 is as follows: Profit for Total equity the period £m £m UK GAAP 4,526 252Post retirement benefits (481) 8Deferred taxation (61) (3)Dividends 585Share schemes (7) (2)Goodwill 125 118Other 8 5 ------ ------IFRS 4,695 378 ====== ====== The total equity under UK GAAP of £4,526 million comprises shareholders'funds of £4,298 million, as disclosed in the First Quarter Report for2004, and minority interests of £228 million. The adjustments above are as explained on pages 75 to 77 of theReport & Accounts for the year ended 31 December 2004. Also underUK GAAP, operating profit, net finance costs, taxation and minorityinterests included the Group's share of the associates' results,whereas the income statement under IFRS only includes the Group'sshare of the post tax and minority results of the associates as oneline before the Group's pre-tax profit. The adjustments to the balance sheets as at 1 January 2004 and31 December 2004, as well as the adjustments to profit for the yearended 31 December 2004, are explained on pages 75 to 78 of theReport & Accounts for the year ended 31 December 2004. Accounting Policies and Basis of Preparation cont... 15. These results are based on the IFRS expected to be applicable as at31 December 2005 and the interpretation of those standards. IFRSare subject to possible amendment by and interpretative guidancefrom the International Accounting Standards Board, as well as theongoing review and endorsement by the EU, and are therefore stillsubject to change. These figures may therefore require amendment,to change the basis of accounting and/or presentation of certainfinancial information, before their inclusion in the IFRS financialstatements for the year to 31 December 2005, when the Group preparesits first complete set of IFRS financial statements. CONVERTIBLE REDEEMABLE PREFERENCE SHARES On 7 June 1999, the Company issued 241,734,651 convertibleredeemable preference shares (CRPS) of 25p each to R&R Holdings SAas part consideration for the acquisition of the issued sharecapital of Rothmans International BV. Subsequently, in accordancewith the terms of the CRPS, 50 per cent of the CRPS was redeemed forcash on 7 June 2000 and the remaining 50 per cent was converted intothe same number of ordinary shares on 3 June 2004. The amortisation of discount on preference shares referred to onpage 10 reflects the difference between the share price at the dateof the Rothmans transaction and the redemption price, which wasbeing amortised over the period to the redemption date. FOREIGN CURRENCIES The results of overseas subsidiaries and associated companies havebeen translated to sterling as follows: The income statement has been translated at the average rates forthe respective periods. The total equity has been translated at therelevant period end rates. For high inflation countries, the localcurrency results are adjusted for the impact of inflation prior totranslation to sterling at closing exchange rates. The principal exchange rates used were as follows: Average Closing 31.3.05 31.3.04 31.12.04 31.3.05 31.3.04 31.12.04 US dollar 1.891 1.838 1.830 1.890 1.819 1.920Canadian dollar 2.319 2.424 2.384 2.286 2.384 2.300Euro 1.442 1.470 1.475 1.454 1.497 1.413South African rand 11.357 12.469 11.821 11.760 11.673 10.816 Foreign currencies cont... 16. Under UK GAAP previously reported quarterly figures were restated tothe average rates for the year to date. Under IFRS, each quarter isnot restated for subsequent movements in foreign exchange during theyear and so the figures remain translated to sterling at the averagerates for the relevant periods. The comparative 2004 figures inthese results reflect this change, as well as the other adjustmentsto IFRS. CHANGES IN THE GROUP On 23 December 2003, the Group completed the acquisition of EnteTabacchi Italiani S.p.A. (ETI), Italy's state tobacco company. On29 December 2004 the Group sold Etinera S.p.A., the distributionbusiness of the Italian subsidiary, for €590 million. Afterallocating the relevant portion of the goodwill on the ETIacquisition to Etinera there was no gain on the disposal. It isestimated that Etinera contributed £223 million of revenue and£10 million of operating profit to the Group results for the threemonths to 31 March 2004. In the first quarter of 2005, following the sale of Etinera,volumes and profits in Italy benefited by 3 billion and £23 millionrespectively from a change in the terms of trade with Etinera, butaround three-quarters of this is expected to reverse over time. The Group announced on 27 October 2003, and completed on 30 July2004, the agreement to combine Brown & Williamson's (B&W) USdomestic businesses with R.J. Reynolds (RJR) under ReynoldsAmerican Inc., a new holding company 58 per cent owned by RJRshareholders and 42 per cent by the Group, through B&W. The Groupalso sold Lane to Reynolds American for US$400 million in cash.This transaction gave rise to goodwill relating to the Group'sinvestment in Reynolds American Inc. and a gain on the partialdisposal of the US domestic businesses. The goodwill on thetransaction is provisionally estimated at £1,285 million, with again on the partial disposal of £1,389 million. The Group consolidated the results of B&W and Lane for the sevenmonths to the end of July 2004, and from that date Reynolds AmericanInc. is accounted for as an associated company. In the three monthsto 31 March 2005, the Group's share of Reynolds American post taxprofit was £60 million while in the three months to 31 March 2004B&W and Lane contributed £388 million of revenue and £65 million ofoperating profit. Excluding the Etinera, B&W and Lane operating profits from the 2004first quarter would result in a profit for 2004 of £529 million.On this basis, the operating profit for the first quarter of 2005of £559 million, after excluding the benefit from the change interms of trade in Italy, would represent growth of 6 per cent. Changes in the Group cont... 17. The Group ceased to be the controlling company of British AmericanRacing (Holdings) Ltd (BAR) on 7 December 2004 when BAR went intoadministration. The Group consequently ceased to consolidate BARfrom that date. In January 2005, a joint venture between BritishAmerican Tobacco and Honda Motor Co. Ltd. acquired the BARbusiness. As there is now shared control with Honda, BAR is equityaccounted from January 2005. RESTRUCTURING COSTS During 2003, the Group commenced a detailed review of itsmanufacturing operations and organisational structure, including theinitiative to reduce overheads and indirect costs. Therestructuring continued during 2004, with further announcementsduring the year principally in respect of a reorganisation of theGroup's business in Germany, the closing and downsizing of somefactories and the integration of the Smoking Tobacco and Cigarsoperations with the cigarette businesses in Europe and the UK. Theresults of subsidiaries for the year ended 31 December 2004 includea charge for restructurings of £206 million and for the three monthsto 31 March 2004 include £5 million. INVESTMENT COSTS WRITTEN OFF Considering the uncertainty of the timetable and the significanthurdles in establishing a major strategic investment in China, in2004 the Group decided to write off all costs previously capitalisedin reaching that stage of the project. GAINS ON DISPOSAL OF SUBSIDIARIES AND NON-CURRENT INVESTMENTS In the year ended 31 December 2004, a gain on partial disposal of£1,389 million arose from the agreement to combine Brown &Williamson with R.J. Reynolds, with no gain on the disposal ofEtinera, as described on page 16. In October 2004, the Group sold two non-current asset investments,its 20 per cent stake in Lakson Tobacco Company in Pakistan andBollore Investissement S.A. in France. The total proceeds were£66 million, resulting in a gain on disposal of £38 million. NET FINANCE COSTS 18. Net finance costs comprise: 3 months to 31.3.05 31.3.04 £m £m Interest payable (95) (89)Interest and dividend income 26 26Fair value changes - derivatives (33)Exchange differences 56 9 --- --- 23 9 ----- ----- (46) (54) ===== ===== Net finance costs at £46 million were £8 million lower than lastyear but, excluding the impact of IAS39 which has only been appliedprospectively from 1 January 2005, they were similar to last year. The £23 million (2004: £9 million) of fair value changes andexchange differences reflects: (a) IAS39 requires all derivatives to be recognised at fair valuein the accounts. This results in a £8 million gain in the quarteron applying fair values to derivatives which do not qualify forhedge accounting under IAS39. However, this is principally inrespect of long term structural swaps as part of the Group'streasury management. While valuations under IAS39 will be subjectto volatility over time, the intention is to hold the swaps tomaturity. (b) £5 million related to swaps where the corresponding amounts in2004 were included in interest paid. (c) £10 million (2004: £9 million) principally reflecting exchangedifferences which were included in reserve movements under UK GAAP. Net finance costs under IFRS, especially with the implementation ofIAS39, are potentially more volatile than under UK GAAP. Asdescribed on page 20, the Group will review the appropriatetreatment of this volatility for the adjusted earnings per sharecalculations prior to publishing the first annual IFRS results for2005. ASSOCIATES 19. The share of post tax results of associates for the year ended31 December 2004 is after restructuring costs, brand impairment andexceptional tax credits. Following the combination of Brown & Williamson with R.J. Reynoldsas described on page 16, the new company Reynolds American incurredrestructuring costs in integrating the two businesses. For theperiod to 31 December 2004 the Group's share of these amounted to£63 million (net of tax), mainly in relation to asset write downsand staff costs. There was also a £49 million (net of tax)impairment charge following the implementation of a review of brandstrategies resulting from the combination of R.J. Reynolds and Brown& Williamson. In addition there was a £49 million exceptional taxcredit arising from tax recoveries in Reynolds American. TAXATION The tax rates in the income statement of 26.6 per cent in 2005 and34.3 per cent in 2004 are affected by the inclusion of the share ofassociates post tax profit in the Group's pre-tax results. Theunderlying tax rate for subsidiaries, reflected in the adjustedearnings per share shown below, was 31.0 per cent in 2005 and35.7 per cent in 2004, and the decrease reflects changes in the mixof profits. On a similar basis the underlying tax rate forassociates was 36.1 per cent in 2005 and 35.4 per cent in 2004 andthe increase reflects the inclusion of the US tobacco business inassociated companies following the Reynolds American transaction. EARNINGS PER SHARE Basic earnings per share are based on the profit for the periodattributable to ordinary shareholders, after deducting theamortisation of discount on the convertible redeemable preferenceshares, and the average number of ordinary shares in issue duringthe period (excluding shares held by the Group's two Employee ShareOwnership Trusts). For the calculation of the diluted earnings per share the averagenumber of shares reflects the potential dilutive effect of employeeshare schemes and, up to their redemption on 3 June 2004, theconvertible redeemable preference shares. The earnings arecorrespondingly adjusted to the amount of earnings prior todeducting the amortisation of discount on the convertible redeemablepreference shares. The earnings per share are based on: 31.3.05 31.3.04 31.12.04 Earnings Shares Earnings Shares Earnings Shares £m m £m m £m mBasic 428 2,113 340 2,042 2,821 2,088Diluted 428 2,129 344 2,181 2,829 2,156 Earnings per share cont... 20. The earnings have been distorted by exceptional items and toillustrate the impact of these distortions, the adjusted dilutedearnings per share are shown below: Diluted earnings per share 3 months to Year to 31.3.05 31.3.04 31.12.04 pence pence pence Unadjusted earnings per share 20.10 15.77 131.22Effect of restructuring costs 0.14 9.32Effect of brand impairment 2.27Investment costs written off 2.32Effect of disposal of subsidiaries and non current investments (66.33)Effect of tax recoveries in associated company (2.27) ------ ------ ------Adjusted diluted earnings per share 20.10 15.91 76.53 ====== ====== ====== Adjusted diluted earnings per share are based on - Adjusted earnings (£m) 428 347 1,650 - Shares (m) 2,129 2,181 2,156 Similar types of adjustments would apply to basic earnings pershare. For the three months to 31 March 2005, basic earningsper share on an adjusted basis would be 20.26p (2004: 16.79p)compared to unadjusted amounts of 20.26p (2004: 16.65p). IFRS requires fair value changes for derivatives, which do not meet thetests for hedge accounting under IAS39, to be included in the incomestatement. In addition, certain exchange differences included in reservemovements under UK GAAP, are required to be included in the incomestatement under current IFRS. As both these items are particularlysubject to exchange rate movements in a period, they can be a volatileelement of reported income, and especially net finance costs, which doesnot always reflect an economic gain or loss for the Group. Subject tofurther developments in IFRS during 2005, including interpretations ofIFRS and best practice in reporting IFRS results, the Group will reviewthe appropriate treatment of these in the adjusted earnings per sharecalculations prior to publishing the first annual IFRS results for 2005. SHARE BUY-BACK PROGRAMME 21. The Group initiated an on-market share buy-back programme at the endof February 2003. During the three months to 31 March 2005,4 million shares were bought at a cost of £42 million. During the year to 31 December 2004, 59 million shares were boughtat a cost of £492 million. ****** Copies of this Report will be posted to shareholders and may also beobtained during normal business hours from the Company's RegisteredOffice at Globe House, 4 Temple Place, London WC2R 2PG. Alan F Porter Secretary 4 May 2005 This information is provided by RNS The company news service from the London Stock Exchange