British American Tobacco Regulatory News (BATS)

3 May 2006 07:01

British American Tobacco PLC03 May 2006 QUARTERLY REPORT TO 31 MARCH 2006 3 May 2006 SUMMARY THREE MONTHS RESULTS 2006 2005 Change Revenue -as reported £2,297m £2,107m +9% - like-for-like £2,297m £2,060m +12% Profit from operations - as reported £616m £582m +6% - like-for-like £652m £559m +17% Adjusted diluted earnings per share 22.05p 19.26p +14% • Reported Group profit from operations grew 6 per cent to £616 million. However, profit from operations would have been 17 per cent higher or 8 per cent at constant rates of exchange, if exceptional items and the impact arising from the change in terms of trade following the sale of Etinera are excluded. This like-for-like information provides a better understanding of the subsidiaries' trading results. All the regions contributed to this good result. • Group volumes from subsidiaries grew by 1 per cent to 161 billion on a reported basis, while, on a like-for-like basis, growth was 3 per cent. The four global drive brands achieved an excellent overall volume growth of 14 per cent or 18 per cent on a like-for-like basis. • Revenue, on a like-for-like basis, increased by 12 per cent or 5 per cent at constant rates of exchange. • Adjusted diluted earnings per share rose by 14 per cent, as a result of the increase in the profit from operations, the improved contribution from associate companies and the benefit from the share buy-back programme, partially offset by higher taxation and minority interests. Basic earnings per share were higher at 21.81p (2005: 20.35p). • The Chairman, Jan du Plessis, commented "British American Tobacco has made a good start to 2006, with the first quarter's results maintaining the momentum achieved in 2005. Although exchange gains are unlikely to continue at the recent level as the year progresses, there is no doubt that the Group is performing well." ENQUIRIES:INVESTOR RELATIONS: PRESS OFFICE:Ralph Edmondson/ 020 7845 1180 David Betteridge/ 020 7845 2888Rachael Cummins 020 7845 1519 Teresa La Thangue/ Catherine Armstrong BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 31 MARCH 2006 INDEX PAGE Chairman's comments 2Business review 3Group income statement 7Group statement of changes in total equity 8Segmental analyses of revenue and profit 9Accounting policies and basis of preparation 11Foreign currencies 12Changes in the Group 12Restructuring costs 13Losses/gains on impairment of a business and disposal of brands and joint venture 14Net finance costs 14Associates 15Taxation 16Earnings per share 16Contingent liabilities 17Share buy-back programme 18 CHAIRMAN'S COMMENTS 2. British American Tobacco has made a good start to 2006, with thefirst quarter's results maintaining the momentum achieved in 2005.On a like-for-like basis, volumes in subsidiary companies were aheadby 3 per cent and profit from operations increased by 17 per cent to£652 million at current rates of exchange, or by 8 per cent atcomparable rates of exchange. Adjusted diluted earnings per share rose by 14 per cent to 22.05p, asa result of the increase in profit from operations, the improvedcontribution from associate companies and the benefit from the sharebuy-back programme, partially offset by higher taxation and minorityinterests. During the three months to 31 March 2006, some 5 millionshares were repurchased at a cost of £72 million and at an averageprice of 1435p per share. The programme will start up again shortly. The strong performance from the Group's global drive brands hasimproved still further on 2005, with overall growth of 18 per cent ona like-for-like basis. Kent and Dunhill grew by 14 and 12 per centrespectively, while Lucky Strike was down 7 per cent, as a result oftrading conditions in a number of its key markets. The starperformer, once again, was Pall Mall, up by 47 per cent, driven bygrowth in existing markets as well as new launches. The growth in our global drive brands continues to improve thequality of our business, with revenue on a like-for-like basisimproving by 12 per cent at current rates of exchange and by 5 percent at comparable rates. British American Tobacco's associate companies had volumes of57 billion and our share of their post-tax profits excludingexceptional items was £104 million, up from £88 million in the firstquarter of 2005, as a result of good earnings growth from bothReynolds American and ITC. It is worth drawing shareholders' attention to the announcement madeby Reynolds American on 25 April about the acquisition of Conwood, thesecond largest manufacturer of smokeless tobacco products in the US,for US$3.5 billion. This major strategic move into a fast-growing andprofitable category is consistent with our own views about theimportance of smokeless tobacco. We have made a good start to the year. Although exchange gains areunlikely to continue at the recent level as the year progresses,there is no doubt that the Group is performing well. Jan du Plessis 3 May 2006 BUSINESS REVIEW 3. The reported Group profit from operations was 6 per cent higher at£616 million. However, as explained on page 13, on a like-for-likebasis, profit from operations would have been 17 per cent higher or 8per cent at constant rates of exchange. This like-for-likeinformation provides a better understanding of the subsidiaries'trading results. All the regions contributed to this good result. Group volumes from subsidiaries grew by 1 per cent to 161 billion ona reported basis, while, on a like-for-like basis, growth was 3 percent. On a like-for-like basis, revenue grew by 12 per cent or 5 percent at constant rates of exchange. The four global drive brands achieved an excellent overall volumegrowth of 14 per cent. On a like-for-like basis, this reflectedoverall growth of 18 per cent. Kent grew by 14 per cent with strongperformances in Russia, Romania, Ukraine and Chile, while Dunhillrose 12 per cent mainly driven by a significant increase in SouthKorea and strong growth in Taiwan and South Africa. Lucky Strikevolumes were down by 7 per cent as a result of competitive pricingactivities in Spain and lower industry volumes in Germany. Pall Mallcontinued its exceptional growth, increasing by 47 per cent, drivenby Germany, Russia, Spain, Greece and Malaysia. In Europe, profit was £13 million lower at £168 million, as 2005included a one-off benefit arising from the change in terms of tradefollowing the sale of Etinera. Excluding this benefit, profit was£10 million higher, with growth from Russia, France, Hungary and theNetherlands, partly offset by declines in Germany, Poland and Spain.Volumes on a like-for-like basis were up 3 per cent at 56 billionwith growth in Russia, Hungary, France and the Netherlands partlyoffset by declines in Ukraine, Italy and Germany. In Italy, the market as a whole is recovering after the introductionlast year of a virtual ban on indoor public smoking. Like-for-likeprofit grew as margins improved with higher industry pricing,although volumes and overall market share were lower. In Germany, profit was affected by lower volumes, with the decline inoverall market size, and reduced margins in Pall Mall due tocompetitive pricing, partially offset by overheads savings.Cigarette market share grew mainly due to Pall Mall. Profit in France grew strongly, benefiting from the timing ofshipments, higher margins and a better product mix as Lucky Strikeand Pall Mall increased market share. Profit in Switzerlandincreased mainly due to the benefit of last year's price increase.Despite the growth of Parisienne, overall market share was down dueto launches of low-price trade brands. In the Netherlands, cost savings and the impact of the timing ofshipments ahead of an excise increase, resulted in higher profit. InBelgium, profit was down due to lower volumes, while pricerepositionings in Spain by a number of companies reducedprofitability significantly. Business review cont... 4. In Russia, market share grew with Pall Mall, Kent and Vogue upsubstantially, driven by continued product innovation in the premiumand international segments. Volumes were significantly higher and,with product mix improvements and a focus on productivity, profitincreased strongly. Market leadership in Romania was consolidatedwith higher market share, driven by an excellent performance fromKent, while profit benefited from a better mix and favourablepricing. In Ukraine, profitability was impacted by reduced volumes. InPoland, although overall volume and market share increased, profitwas affected by market down-trading. Profit in Hungary rose due tolower costs and higher volumes from Viceroy. In Asia-Pacific, profit rose by £29 million to £155 million, mainlyattributable to Australasia and Malaysia, assisted by generallystronger currencies. Volumes at 35 billion were 10 per cent higheras strong increases in several markets were only partially offset bya decline in Malaysia. Profit grew strongly in Australia despite a reduced total market,with higher margins and increased volumes and market share due togood performances from Winfield and Holiday. In New Zealand, profitincreased significantly with higher margins and volumes, althoughmarket share was down due to the growth in the low-price segment. In Malaysia, industry volumes continued to decline after exciseincreases in the past two years and the growth in illicit trade.Overall market share was marginally lower although Dunhill stabilisedand Pall Mall grew strongly, while profit rose as costs were reduced.In Vietnam, volume increased with further market share growth fromState Express 555 but profit was lower due to an increase inmarketing investment. South Korea's industry volumes were significantly higher, reflectingindustry volume distortions last year as a result of the exciseincrease at the end of 2004. Market share continued to grow, drivenby Dunhill and Vogue, but profit was slightly lower as the impact ofthe one-off excise benefit last year more than offset the increase involumes. In Pakistan, profit rose and market share was up significantly, withexcellent volume growth by Gold Flake and Capstan. Volumes rosestrongly in Bangladesh but profit fell due to down-trading and theimpact of the currency devaluation on costs. In Sri Lanka, profitwas slightly up and market share increased with a strong performanceby John Player Gold Leaf. Profit in Latin America increased by £40 million to £155 million dueto good performances in many markets and strong local currencies.Volumes at 38 billion increased by 5 per cent, with growth in mostmarkets. Business review cont... 5. In Brazil, profit was well ahead with higher cigarette volumes, abetter product mix and local currency appreciation, although thelatter had an adverse impact on leaf export margins. Market shareand volumes benefited from the good performances by Carlton andHollywood and continuing anti-illicit trade operations. The strong profit growth in Mexico was driven by improving volumesand margins, as well as the improved local currency. In Argentina,volume grew impressively with an excellent performance by Viceroy,but profit was lower due to reduced margins in response to theincrease in ultra low-price products from local competitors. Good profits from Chile reflected volume growth, an improved productmix and a stronger currency. In Venezuela, higher prices and volumesled to an excellent increase in profit. The Central America andCaribbean area profit rose with price increases, an improved productmix and higher volumes. Profit in Africa and Middle East grew by £17 million to £114 millionmainly driven by South Africa and Nigeria. There were also reducedlosses from Turkey but investment in new markets continued. Volumesdeclined by 8 per cent to 23 billion, primarily due to Turkey. In South Africa, good profit growth was achieved as a result of thestronger currency, cost savings and higher margins. The product mixcontinued to improve, as Peter Stuyvesant continued its growth, andboth Dunhill and Rothmans grew strongly. Volumes increased inNigeria, leading to a higher market share and a growth in profit. In Iran, market share, volumes and profits all grew, but profit inthe Arabian Gulf markets was lower after volumes declined. The low-price segment in Turkey has been under increased competitive pressurewhich led to a decrease in volume and market share. However, highermargins, following industry price increases, resulted insignificantly reduced losses. Profit in America-Pacific increased by £5 million to £93 million,although volumes fell 3 per cent to 9 billion as the volume declinein Canada more than offset the increase in Japan. The profit contribution from Canada was down £4 million to£60 million, largely due to lower volumes following the growth incontraband, partially offset by the impact of the stronger Canadiandollar and the reduction in overheads. Profit was also affected bythe continuing shift to low-price products, with the premium segmentnow representing 57 per cent of the total market compared with 61 percent. Imperial Tobacco Canada's total cigarette market sharedecreased by 1 share point to 56 per cent. Business review cont... 6. In Japan, continued momentum from last year led to new highs inmarket share, with strong performances of Kool and Kent generatingincreased market share in a lower total market. Profit was up due tovolume growth and cost management. Unallocated costs, which are net corporate costs not directlyattributable to individual segments, were £8 million higher at£33 million, mainly as a result of increased pension and employeeshare scheme costs. The above regional profits were achieved before accounting forrestructuring costs and a charge on impairment of a business asexplained on pages 13 and 14. Results of associates The Group's share of the post-tax results of associates increased by£32 million to £120 million, partly due to the favourable resolutionof tax matters in Reynolds American. Excluding this benefit, whichhas been treated as an exceptional item, the Group's share of thepost-tax results of associates would have increased by £16 million to£104 million. The contribution from Reynolds American, excluding the exceptionalitem noted above, was £9 million higher mainly due to improvedpricing and productivity, as well as the impact of the strongerUS dollar. The Group's associate company in India, ITC, continued its strongvolume growth, leading to an increased profit. Cigarette Volumes The segmental analysis of the volumes of subsidiaries is as follows: 3 months to Year to 31.3.06 31.3.05 31.12.05 bns bns bns Europe 55.4 56.7 244.0Asia-Pacific 34.8 31.7 137.1Latin America 38.1 36.3 149.3Africa and Middle East 23.1 25.0 102.6America-Pacific 9.3 9.6 45.0 ----- ----- ----- 160.7 159.3 678.0 ===== ===== ===== In addition, associates' volumes for the quarter were 57.2 billion(2005: 56.1 billion) and, with the inclusion of these, total Groupvolumes would be 217.9 billion (2005: 215.4 billion). GROUP INCOME STATEMENT - unaudited 7. 3 months to Year to 31.3.06 31.3.05 31.12.05 restated £m £m £m Gross turnover (including duty, excise and other taxes of £3,739 million (31.3.05: £3,257 million - 31.12.05: £14,659 million)) 6,036 5,364 23,984 ====== ====== ======Revenue 2,297 2,107 9,325 Raw materials and consumables used (676) (613) (2,760)Changes in inventories of finished goods and work in progress 31 (29) (2)Employee benefit costs (361) (305) (1,557)Depreciation and amortisation costs (106) (74) (383)Other operating income 24 24 179Other operating expenses (593) (528) (2,382) ------ ------ ------Profit from operations 616 582 2,420after (charging)/crediting: - restructuring costs (21) (271) - (losses)/gains on impairment of a business and disposal of brands and joint venture (15) 72 Finance income 38 20 118Finance costs (106) (64) (342)Net finance costs (68) (44) (224)Share of post-tax results of associates and joint ventures 120 88 392 after crediting/(charging): - restructuring costs (13) - US Federal tobacco buy-out (12) - brand impairments (29) - exceptional tax credits and other impairments 16 57 ------ ------ ------Profit before taxation 668 626 2,588Taxation (178) (166) (690) ------ ------ ------Profit for the period 490 460 1,898 ====== ====== ======Attributable to: Shareholders' equity 452 430 1,771 ====== ====== ====== Minority interests 38 30 127 ====== ====== ====== Earnings per share: Basic 21.81p 20.35p 84.53p ====== ====== ====== Diluted 21.62p 20.20p 83.85p ====== ====== ====== See notes on pages 11 to 18. GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 8. 3 months to Year to 31.3.06 31.3.05 31.12.05 restated £m £m £m Differences on exchange 33 (64) 421Cash flow hedges- net fair value gains 10 20 17- reclassified and reported in net profit (13) 6 38- reclassified as basis adjustments 1 3Available-for-sale investments- net fair value losses (1) (1)- reclassified and reported in net profit 1 1Net investment hedges- net fair value gains/(losses) 9 (1) (52)Tax on items recognised directly in equity (5) (9) (41) ------ ------ ------Net gains/(losses) recognised directly in equity 34 (47) 386Profit for the period page 7 490 460 1,898 ------ ------ ------Total recognised income for the period 524 413 2,284- shareholders' equity 479 376 2,128- minority interests 45 37 156Employee share options - value of employee services 9 9 42 - proceeds from shares issued 16 15 30Dividends - ordinary shares (910) - to minority interests (39) (22) (112)Purchase of own shares - held in Employee Share Ownership Trusts (72) (10) (48) - share buy-back programme (72) (42) (501)Other movements 6 3 17 ------ ------ ------ 372 366 802Balance at 1 January 6,877 6,117 6,117Change in accounting policy page 11 (42) (42) ------ ------ ------Balance at period end 7,249 6,441 6,877 ====== ====== ====== See notes on pages 11 to 18. 9. SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE THREE MONTHS - unaudited Revenue 31.3.06 31.3.05 Inter Inter External segment Revenue External segment Revenue £m £m £m £m £m £m Europe 820 117 937 830 132 962Asia-Pacific 418 2 420 365 1 366Latin America 423 423 322 322Africa and Middle East 275 5 280 223 4 227America-Pacific 237 237 230 230 ----- ----- ----- ----- ----- -----Revenue 2,173 124 2,297 1,970 137 2,107 ===== ===== ===== ===== ===== ===== The segmental analysis of revenue is based on location of manufacture andfigures based on location of sales would be as follows: 31.3.06 31.3.05 £m £m Europe 826 832Asia-Pacific 444 393Latin America 427 326Africa and Middle East 360 326America-Pacific 240 230 ------ ------Revenue 2,297 2,107 ====== ====== Profit from operations 31.3.06 31.3.05 Adjusted Segment segment Segment result result* result £m £m £m Europe 149 168 181Asia-Pacific 155 155 126Latin America 155 155 115Africa and Middle East 113 114 97America-Pacific 77 93 88 ----- ----- -----Segmental result 649 685 607Unallocated costs (33) (33) (25) ----- ----- -----Profit from operations 616 652 582 ===== ===== ===== *Excluding restructuring costs and a charge on impairment of a business. Segmental Analyses of Revenue and Profit for the three months cont. - unaudited 10. The analyses for the year ended 31 December 2005 are as follows: Revenue Location of manufacture Location of sales External Inter segment Revenue Revenue £m £m £m £m Europe 3,456 569 4,025 3,497Asia-Pacific 1,646 3 1,649 1,758Latin America 1,541 4 1,545 1,555Africa and Middle East 964 34 998 1,405America-Pacific 1,108 1,108 1,110 ------ ------ ------ ------ 8,715 610 9,325 9,325 ====== ====== ====== ====== Profit from operations Adjusted Segment result segment result* £m £m Europe 696 784Asia-Pacific 517 531Latin America 524 530Africa and Middle East 425 434America-Pacific 354 436 ------ ------Segmental result 2,516 2,715Unallocated costs (96) (96) ------ ------Profit from operations 2,420 2,619 ====== ====== * Excluding restructuring costs and gains on disposal of brands and joint venture. The segmental analysis of the Group's share of the post-tax results ofassociates and joint ventures is as follows: 31.3.06 31.3.05 31.12.05 Adjusted Adjusted Segment segment Segment Segment segment result result* result result result* £m £m £m £m £m Europe 11 11 10 39 39Asia-Pacific 23 23 18 107 81Africa and Middle East 1 1 2 2America-Pacific 85 69 60 244 267 ----- ----- ----- ----- ----- 120 104 88 392 389 ===== ===== ===== ===== ===== *Excluding restructuring costs, US Federal tobacco buy-out, brand impairments and exceptional tax credits and other impairments. 11. ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited results for thethree months to 31 March 2006 and 31 March 2005, together with theaudited results for the twelve months ended 31 December 2005. Theaudited annual financial statements for 2005, which represent thestatutory accounts for that year, will be filed with the Registrarof Companies. The auditors report on those statements isunqualified and does not contain any statement concerning accountingrecords or failure to obtain necessary information and explanations. From 1 January 2005, the Group has prepared its annual consolidatedfinancial statements in accordance with International FinancialReporting Standards (IFRS) as adopted by the European Union (EU) andimplemented in the UK. These unaudited Group interim results havebeen prepared on a basis consistent with the IFRS accountingpolicies as set out in the Report and Accounts for the year ended31 December 2005. These interim financial statements have beenprepared under the historical cost convention, except in respect ofcertain financial instruments. In addition, these financialstatements do not comply with all the disclosures in IAS34 oninterim financial reporting and are therefore not in full compliancewith IFRS. IAS32 and IAS39 on financial instruments were applied from 1 January2005 and the changes to the total equity as at 1 January 2005principally reflect: (a) The measurement of available-for-sale investments at fair value.(b) The measurement of all derivative financial instruments at fair value.(c) Derecognition of deferred losses on derivatives. This results in a reduction in total equity of £42 million as at1 January 2005 which is shown as the impact of the change inaccounting policy on page 8. In December 2005, the International Accounting Standards Boardissued both a clarification on and an amendment to IAS21 (theeffects of changes in foreign exchange rates). The clarificationwas immediately applicable for reported results. This states thatinter company balances between any subsidiary (which may itself be aforeign subsidiary) and a foreign subsidiary may form part of theGroup's investment in that foreign subsidiary and therefore, subjectto certain other tests, the exchange impact can be taken directly toequity rather than to net finance costs in the income statement.Previously, only balances between certain companies qualified forthis treatment. The quarterly results for the three months to 31March 2005 have been restated accordingly from those originallypublished last year. This has resulted in a reduction of £2 millionin net finance costs (page 7) with a compensating adjustment todifferences on exchange in the statement of changes in total equity(page 8). Accounting Policies and Basis of Preparation cont... 12. The amendment to IAS21 will allow inter company balances that formpart of a reporting entity's net investment in a foreign operationto be denominated in a currency other than the functional currencyof either the ultimate parent or the foreign operation itself. Thiswill mean that certain exchange differences currently taken to theincome statement will instead be reflected directly in changes intotal equity. However, this amendment is not applicable for Groupreporting until it is adopted by the EU but, as this is expected in2006, it has been allowed for in the adjusted earnings per sharecalculations (page 17). FOREIGN CURRENCIES The results of overseas subsidiaries and associate 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 31.3.06 31.3.05 31.12.05 31.3.06 31.3.05 31.12.05 US dollar 1.753 1.891 1.819 1.735 1.890 1.717Canadian dollar 2.024 2.319 2.206 2.024 2.286 2.005Euro 1.457 1.442 1.463 1.433 1.454 1.455South African rand 10.781 11.357 11.574 10.693 11.760 10.889 CHANGES IN THE GROUP On 29 December 2004 the Group sold Etinera S.p.A., the distributionbusiness of its Italian subsidiary. In the first quarter of 2005,following the sale, volumes and profits in Italy benefited by3 billion and £23 million respectively from a change in the termsof trade with Etinera. Around two-thirds of these benefits areexpected to reverse over time. Changes in the Group cont... 13. The table below shows like-for-like revenue and profit fromoperations after excluding restructuring costs and a charge onimpairment of a business, as well as the change in terms of trade inItaly. On this basis, the revenue for the three months to 31 March2006 of £2,297 million would represent growth of 12 per cent or 5per cent at constant rates of exchange, and the profit fromoperations of £652 million would represent growth of 17 per cent or8 per cent at constant rates of exchange. Revenue Profit from operations 3 months to 3 months to 31.3.06 31.3.05 31.3.06 31.3.05 £m £m £m £mAs reported (page 7) 2,297 2,107 616 582Etinera - change in terms of trade (47) (23)Exceptional items (page 7) 36 ------ ------ ------ ------Like-for-like 2,297 2,060 652 559 ====== ====== ====== ====== On 4 October 2005, the Group announced that it had agreed the saleof its 55 per cent stake in BAR Honda, held through BARH Ltd(BARH), to Honda and the sale was completed on 20 December 2005.For the period 7 January 2005 to 20 December 2005, BARH was equityaccounted, reflecting shared control with Honda. On 21 October 2005, the Group announced the exercise of its pre-emption rights over shares in Skandinavisk Tobakskompagni AS, itsDanish associate company, and the transaction was completed on12 December 2005. This increased the Group's holding from 26.6 percent to 32.3 per cent at a cost of £95 million, resulting ingoodwill of £69 million. On 25 November 2005, the Group acquired Restomat AG, the largestoperator of cigarette vending machines in Switzerland, at a cost of£25 million, resulting in goodwill of £7 million. On 10 March 2006, the Group's Italian subsidiary signed an agreementto sell its cigar business, Toscano, to Maccaferri for euro 95million. Completion of the sale is subject to regulatory andgovernmental approval. 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 and 2005, with majorannouncements during 2005 which covered the cessation of productionin the UK, Ireland and Canada, with production to be transferredelsewhere. The profit from operations for the year ended31 December 2005 includes a charge for restructurings of£271 million. The three months to 31 March 2006 includes a chargeof £21 million (2005: £nil) mainly in respect of further costs forthe UK and Canada restructurings. LOSSES/GAINS ON IMPAIRMENT OF A BUSINESS AND DISPOSAL OF BRANDS AND JOINT VENTURE 14. The proposed sale of the Italian cigar business described on page 13resulted in the recognition of an impairment charge of £15 million,which is included in depreciation and amortisation costs in theprofit from operations in the first quarter of 2006. In April 2005, the Group sold to Gallaher Group plc (Gallaher) itsBenson & Hedges and Silk Cut trademarks in Malta and Cyprus,together with the Silk Cut trademark in Lithuania, resulting in again on disposal of £68 million included in other operating incomein the profit from operations. The transactions are in accordancewith contracts of 1993 and 1994, in which Gallaher agreed to acquirethese trademarks in European Union states and the accession ofMalta, Cyprus and Lithuania necessitated the sale. The transactions in respect of BARH described on page 13 resulted ina gain of £5 million which is included in other operating income inthe profit from operations for the year ended 31 December 2005. NET FINANCE COSTS Net finance costs comprise: 3 months to 31.3.06 31.3.05 restated £m £m Interest payable (102) (95)Interest and dividend income 32 26Fair value changes - derivatives 26 (33)Exchange differences (24) 58 --- --- 2 25 ----- ----- (68) (44) ===== ===== Net finance costs at £68 million were £24 million higher than lastyear principally reflecting the impact of derivatives and exchangedifferences. The £2 million gain (2005: £25 million) of fair value changes andexchange differences reflects a gain of £4 million (2005:£12 million) from the net impact of exchange rate movements and aloss of £2 million (2005: £13 million gain) principally due to theeffect of interest rates on the fair value of derivatives. Net finance costs cont... 15. IFRS requires fair value changes for derivatives, which do not meetthe tests for hedge accounting under IAS39, to be included in theincome statement. In addition, certain exchange differences arerequired to be included in the income statement under current IFRSand, as they are subject to exchange rate movements in a period,they can be a volatile element of net finance costs. These amountsdo not always reflect an economic gain or loss for the Group and, inthe quarterly results during 2005, the Group noted that it wasreviewing the appropriate treatment of these in the adjustedearnings per share calculations. At the 2005 year end the Groupdecided that, in calculating the adjusted earnings per share, it isappropriate to exclude certain amounts. The adjustments for thequarterly results to 31 March are as follows: (a) £nil million (2005: £8 million gain) relating to derivatives forwhich hedge accounting was obtained during 2005. (b) £1 million loss (2005: £10 million gain) relating to exchange innet finance costs where there is a compensating exchange amountreflected in differences in exchange taken directly to changes intotal equity. (c) £nil million (2005: £2 million gain) relating to exchange in netfinance costs which, when the revised IAS21 on foreign exchangerates is endorsed by the EU as expected in 2006, will be takendirectly to changes in total equity (see page 12). The adjusted earnings per share for the three months to 31 March2005 have been adjusted accordingly from that originally reportedlast year. Excluding the above items, fair value changes and exchangedifferences are a net gain of £3 million compared to a net gain of£5 million in 2005. ASSOCIATES The share of post-tax results of associates and joint ventures isafter exceptional charges and credits. In the three months to 31 March 2006 Reynolds American benefitedfrom the favourable resolution of tax matters of which the Group'sshare was £16 million. Associates cont... 16. In the year ended 31 December 2005, Reynolds American incurredrestructuring costs and a one-off charge related to thestabilisation inventory pool losses associated with the US tobaccoquota buy-out programme. The Group's share (net of tax) of theseamounted to £13 million and £12 million respectively. In addition,in the fourth quarter of 2005, Reynolds American benefited from thefavourable resolution of tax matters of which the Group's share was£31 million, and also modified the previously anticipated level ofsupport between certain brands and the projected net sales ofcertain brands resulting in a brand impairment charge of which theGroup's share amounted to £29 million net of tax. In the year to 31 December 2005, the contribution from ITC in Indiaincluded a benefit of £26 million (net of tax), principally relatedto the write-back of provisions for taxes partly offset by theimpairment of a non-current investment. On 25 April 2006, Reynolds American announced an agreement toacquire Conwood, the second largest manufacturer of smokelesstobacco products in the US, for US$3.5 billion. Completion of theacquisition is subject to regulatory approval but the transaction isexpected to close by the end of the second quarter. TAXATION The tax rates in the income statement of 26.6 per cent for the threemonths to 31 March 2006 (31 March 2005: 26.5 per cent) are affectedby the inclusion of the share of associates' post-tax profit in theGroup's pre-tax results. The underlying tax rate for subsidiaries,reflected in the adjusted earnings per share shown below, was 32.4per cent in 2006 and 32.1 per cent in 2005 and the increase reflectschanges in the mix of profits. The charge relates to taxes payableoverseas. EARNINGS PER SHARE Basic earnings per share are based on the profit for the periodattributable to ordinary shareholders and the average number ofordinary shares in issue during the period (excluding shares held bythe Group's Employee Share Ownership Trusts). For the calculation of the diluted earnings per share the averagenumber of shares reflects the potential dilutive effect of employeeshare schemes. The earnings per share are based on: 31.3.06 31.3.05 31.12.05 Earnings Shares Earnings Shares Earnings Shares £m m £m m £m mBasic 452 2,072 430 2,113 1,771 2,095Diluted 452 2,091 430 2,129 1,771 2,112 Earnings per share cont... 17. The earnings have been distorted by exceptional items, together withcertain distortions to net finance costs under IFRS (see page 15),and to illustrate the impact of these distortions, the adjusteddiluted earnings per share are shown below: Diluted earnings per share 3 months to Year to 31.3.06 31.3.05 31.12.05 restated pence pence pence Unadjusted earnings per share 21.62 20.20 83.85Effect of restructuring costs 0.67 10.13Effect of impairment charge on a business and gain on disposal of brands and joint venture 0.48 (3.41)Effect of associates' restructuring costs, US Federal tobacco buy-out, brand impairments and exceptional tax credits and other impairments (0.77) (0.14)Net finance costs adjustments 0.05 (0.94) (1.09) ------ ------ ------Adjusted diluted earnings per share 22.05 19.26 89.34 ====== ====== ====== Adjusted diluted earnings per share are based on: - adjusted earnings (£m) - shares (m) 461 410 1,887 2,091 2,129 2,112 Similar types of adjustments would apply to basic earnings pershare. For the three months to 31 March 2006, basic earningsper share on an adjusted basis would be 22.25p (2005: 19.40p)compared to unadjusted amounts of 21.81p (2005: 20.35p). CONTINGENT LIABILITIES As noted in the Report and Accounts for the year ended 31 December2005, 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 numberof these cases, the amounts of compensatory and punitive damagessought are significant. At least in the aggregate and despite thequality of defences available to the Group, it is not impossiblethat the results of operations or cash flows of the Group inparticular quarterly or annual periods could be materially affectedby this. Contingent liabilities cont... 18. Having regard to these matters, the Directors (i) do not consider itappropriate to make any provision in respect of any pendinglitigation and (ii) do not believe that the ultimate outcome of thislitigation will significantly impair the financial condition of theGroup. SHARE BUY-BACK PROGRAMME The Group initiated an on-market share buy-back programme at the endof February 2003. During the three months to 31 March 2006,5 million shares were bought at a cost of £72 million (31 March2005: £42 million). During the year to 31 December 2005, 45 million shares were boughtat a cost of £501 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 3 May 2006 This information is provided by RNS The company news service from the London Stock Exchange