British American Tobacco Regulatory News (BATS)

3 May 2007 07:02

British American Tobacco PLC03 May 2007 QUARTERLY REPORT TO 31 MARCH 2007 3 May 2007 SUMMARY THREE MONTHS RESULTS 2007 2006 Change Revenue £2,232m £2,297m -3%Profit from operations £684m £616m +11%Adjusted diluted earnings per share 24.31p 22.05p +10% • The reported profit from operations was 11per cent higher at £684million, or 6per cent higher if exceptional items are excluded. However, the results from all the regions were adversely impacted by exchange. Profit from operations, excluding exceptional items, would have been 18 per cent higher at comparable rates of exchange, with all regions contributing to this strong result except for America-Pacific which was slightly lower than last year. • Group volumes from subsidiaries were 156 billion, a decrease of 3per cent, mainly as a result of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany. The Group saw share improvements across many markets, particularly for its global drive brands. The four global drive brands achieved an overall volume growth of 6per cent. The reported Group revenue was 3per cent lower at £2,232million but, at comparable rates of exchange, would have increased by 6per cent as a result of more favourable pricing and better product mix. • Adjusted diluted earnings per share rose by 10 per cent, benefiting from the increase in profit from operations, an improved contribution from associate companies, lower net finance costs, a lower tax rate and the impact of the share buy-back programme, partly offset by a higher minorities charge. • The Chairman, Jan du Plessis, commented "We have started the year with strong growth in both revenue and operating profit at comparable rates of exchange, as a result of improved pricing and cost savings. In addition, the first quarter has been somewhat flattered by excellent performances in Brazil and South Africa. Looking ahead, it is worth remembering that earnings per share benefited from a number of one-off factors in the second quarter of 2006. For the year as a whole, adverse exchange rates are expected to hold back our earnings per share growth." ENQUIRIES:INVESTOR RELATIONS: PRESS OFFICE:Ralph Edmondson/ 020 7845 1180 David Betteridge/Kate Matrunola/ 020 7845 2888Rachael Brierley 020 7845 1519 Catherine Armstrong BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 31 MARCH 2007 INDEX PAGE Chairman's comments 2 Business review 3 Group income statement 7 Group statement of changes in total equity 8 Segmental analyses of revenue and profit 9 Accounting policies and basis of preparation 11 Foreign currencies 11 Changes in the Group 12 Exceptional items 12 Net finance costs 13 Associates 13 Taxation 13 Earnings per share 14 Contingent liabilities 15 Share buy-back programme 15 CHAIRMAN'S COMMENTS British American Tobacco has made a solid start to 2007 with 10 per cent growth in adjusted diluted earnings per share. Profit from operations was ahead by 6 per cent at current ratesof exchange, if exceptional items are excluded. The results have been particularly affected by foreign exchange and profit from operations would have increased by 18 per cent at comparable rates. Similarly, revenue declined by 3 per cent at current rates but grew by 6 per cent at comparable rates, despite volumes being down 3 per cent. Our good performance is the result of better pricing and the continued growth in our global drive brands, which is improving our product mix. The lower volumes are largely the result of temporary trading patterns in a number of markets, with Russia and the Middle East being the most significant. This performance, together with the benefit of successful cost savings programmes, drove the improvement in profit from operations. Profit grew in every region apart from America-Pacific, where the impact of illicit trade and higher distribution costs in Canada more than offset the good results from Japan. The Group's global drive brands grew by 6 per cent. Kent increased by 10 per cent as a result of good growth in Japan and Russia, as well as a wide range of smaller markets. Dunhill was ahead by 9 per cent, with excellent performances in its key markets of South Korea, Malaysia and South Africa. Lucky Strike was down 1 per cent, primarily as a result of lower industry volumes in Japan and the Netherlands, while Pall Mall was up by 2 per cent. Pall Mall's growth would have been 9 per cent if sales of its fine cut tobacco in Germany are included. Our associate companies' volumes were 60 billion and our share of their post-tax profits was £111 million, a 7 per cent improvement if exceptional items are excluded. At constant rates of exchange, our share would have been £122 million, up 17 per cent. The growth in profit from operations, the improvement in associates, lower net finance costs, a lower tax rate and the benefit of the share buy-back programme, was partly offset by a higher minorities charge. As a result, adjusted diluted earnings per share increased by 10 per cent to 24.31p. During the first quarter, some 7 million shares were bought back at a cost of around £113 million and at an average price of £15.71. The programme will restart following the publication of these results. We have started the year with strong growth in both revenue and operating profitat comparable rates of exchange, as a result of improved pricing and cost savings. In addition, the first quarter has been somewhat flattered by excellent performances in Brazil and South Africa. Looking ahead, it is worth rememberingthat earnings per share benefited from a number of one-off factors in the second quarter of 2006. For the year as a whole, adverse exchange rates are expected to hold back our earnings per share growth. Jan du Plessis 3 May 2007 Page 2 BUSINESS REVIEW The reported Group profit from operations was 11 per cent higher at £684 million or 6 per cent higher if exceptional items, as explained on page 12, are excluded. However, the results from all regions were adversely impacted by exchange. Profit from operations, excluding exceptional items, would have been 18 per cent higher at comparable rates of exchange, with all regions contributing to this strong result except for America-Pacific which was slightly lower than last year. Group volumes from subsidiaries were 156 billion, a decrease of 3 per cent, mainly as a result of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany. The Group saw share improvements across many markets, particularly for its global drive brands. The reported Group revenue was 3 per cent lower at£2,232 million but, at comparable rates of exchange, would have increased by 6 per cent as a result of more favourable pricing and better product mix. The four global drive brands achieved an overall volume growth of 6 per cent. Kent grew by 10 per cent with good growth in Japan, Russia, Romania, Ukraine, Chile and Switzerland, helped by additional volume from the new markets of Azerbaijan and Kazakhstan. Dunhill rose by 9 per cent, driven by strong performances in South Korea, Malaysia, South Africa, Russia and Saudi Arabia, although volume was lower in Taiwan. Lucky Strike volumes were down 1 per cent as the growth in Spain, France, Argentina and the Czech Republic was more than offset by declines as a result of lower industry volumes in Japan and the Netherlands. Pall Mall grew by 2 per cent, hampered by the absence of Pall Mall StiX in Germany in 2007. Growth would have been 9 per cent if sales of fine cut tobacco in Germany are included. In Europe, profit at £182 million was up £14 million, mainly as a result of good performances in Russia, Romania, Italy and Spain, which were partly offset by the impact of reduced volumes in a number of markets and the adverse impact of exchange. At comparable rates of exchange, profit would have increased by £19 million or 11 per cent. Regional volumes were down 7 per cent at 52 billion,with reductions in Russia, Germany, the Netherlands and Ukraine, partly offset by increases in Spain, Romania and Italy. In Italy, profit grew strongly as improved margins after industry price increases, higher volumes and the benefit of the productivity programme, were only partly offset by the absence of the profit from the Toscano cigar brand disposed of in July 2006. Volumes were up with higher share from Pall Mall and Lucky Strike, although there was a slight decline in overall market share. Volumes in Germany declined due to the loss of StiX and the growth of illicit trade. However, the impact of lower volumes and margins, as well as exchange, was largely offset by reduced costs, resulting in slightly lower profit. Sales volumes in France were flat compared to the previous year but profit grew as a result of an improved product mix and lower overheads. In Switzerland, profit decreased as a result of lower volumes and an unfavourable product mix, following the excise increase at the beginning of the year. In the Netherlands, volumes and profit were lower as a result of the impact of industry-wide loading by the trade in 2006, ahead of an excise increase. Profit in Belgium was down following an excise increase but volumes were stable as Pall Mall gained share. Market share in Spain grew with a strong performance by Lucky Strike and this, together with higher margins, led to improved results. Page 3 Business review cont... Sales volumes in Russia were reduced by speculative trade buying at the end of last year in anticipation of the new excise system at the beginning of 2007. Profit, however, grew strongly, benefiting from higher margins and an improved product mix. A higher overall market share was achieved with significantly increased volumes of Dunhill and Vogue, supported by growth from Kent. In Romania, higher prices and volumes, with an improved product mix, resulted in significantly higher profit. Volume performance was driven by Kent, the largest selling brand, as well as Dunhill and Vogue. Volume and profit in Ukraine were lower due to reduced sales of local brands. Profit grew impressively in Hungary, despite an excise increase and heavy price competition, benefiting from improved margins and ongoing efficiency programmes, while Viceroy and Pall Mall grew strongly. In Poland, profitability was lower as a result of price competition and reduced volumes. In Asia-Pacific, profit rose by £12 million to £167 million, mainly attributable to strong performances from Australasia, South Korea, Vietnam and Pakistan, despite the adverse impact of exchange. At comparable rates of exchange, profit would have increased by £24 million or 15 per cent. Volumes at 35 billion were slightly higher as good increases in Pakistan, South Korea and Vietnam were partially offset by declines in Bangladesh and Indonesia. Profit grew in Australia, mainly attributable to improved margins from a combination of product cost reductions and price increases, partly offset by industry volume declines. Although there were heightened levels of competitor discounting during the quarter, the global drive brands continued to perform strongly with share growth from Dunhill and continuing steady progress from Pall Mall. In New Zealand, strong competition in the low price segment continued to affect market share adversely. Profit was lower due to the consequent reduction in volume, partly offset by price increases. In Malaysia, industry volume showed some signs of improvement after three years of decline. Dunhill performed strongly with both volume and share up. However, profit declined due to reduced volumes in the low price segment, the timing of spend and the impact of exchange, partly offset by higher pricing, improved mix and productivity savings. In Vietnam, volumes grew strongly due to product innovation and improved distribution, with outstanding performances from Dunhill and Pall Mall. Profitincreased significantly, driven primarily by higher volumes, favourable productmix and the benefit of productivity initiatives. Volume and profit in South Korea were ahead of last year. Dunhill volumescontinued to grow and this, together with supply chain savings, resulted inincreased profit. Volume in Taiwan was lower, due to the decline in the premiumsegment following a price increase at the end of 2006, leading to lower profitdespite the higher prices and cost reductions. Pakistan continued its growth and volumes increased across all key segments,with Gold Flake the major contributor, resulting in an increase in overallmarket share. The strong volume growth, coupled with price increases andeffective cost management, led to an impressive profit performance. InBangladesh, profit was higher following a price increase and an improvement inthe product mix. However, volumes were lower as a result of the price increases,while market share was down due to the growth of the low price segment. In SriLanka, profit benefited from higher margins and lower expenses, but this wasmore than offset by the effect of a weaker exchange rate. Page 4 Business review cont... Profit in Latin America increased by £25 million to £180 million, due to goodperformances across the region, which more than offset the adverse impact ofweaker local currencies. At comparable rates of exchange, profit would haveincreased by £43 million or 28 per cent. Volumes were marginally down at38 billion as the increases in Brazil and Venezuela were offset by declines inMexico, Argentina and Central America. In Brazil, profit grew strongly, benefiting from higher margins and highervolumes, partly offset by the impact of the weaker local currency. Profit in theleaf business recovered as prices increased, although the shipment volumes werelower than last year. Market share rose and cigarette volumes increased as aresult of a decline in illicit trade, following law enforcement actions. Industry volume in Mexico suffered following excise driven price increases earlyin the quarter and this, together with exchange, resulted in a much reducedprofit. In Argentina, profit rose as prices increased with some recovery fromthe severe price competition in the market, although volumes were lower thanlast year. In Chile, volumes grew slightly and this, coupled with price increases andstrong up-trading to Kent and Lucky Strike, led to higher profit. In Venezuela,profit increased due to price increases, as well as higher volumes and marketshare through good performances by Belmont and Consul. The Central America andCaribbean area benefited from higher margins and more efficient productsourcing. However, profit was down as the benefit from these was more thanoffset by the impact of exchange, as well as lower volumes as a result of exciseand price increases in some markets. Profit in the Africa and Middle East region grew by £10 million to £124 million,mainly driven by South Africa and Nigeria and despite generally weakercurrencies. At comparable rates of exchange, profit would have increased by£41 million or 36 per cent. Volumes were 4 per cent lower at 22 billion,principally as a result of the disruption of supply in the Middle East. In South Africa, despite the sharply weaker average exchange rate, excellentprofit growth was achieved as a result of significant trade buying, prior to theexcise increase in February 2007, and market share gains in the quarter. Themain brand, Peter Stuyvesant, continued its strong performance and grew share,while Dunhill maintained share. In Nigeria, profit increased due to higher prices and an improvement in theproduct mix, with increased market shares for Benson & Hedges and Rothmans,although overall volumes were lower. In sub-Saharan Africa, despite supplydifficulties in certain markets, volume and profits grew in a number of marketsin West and East Africa, with particularly good performances in Kenya, Ugandaand Zambia. In the Middle East, volume and profit were adversely affected by supply chainproblems although premium brands continued to grow and Dunhill performedstrongly in Saudi Arabia. Profit in Egypt benefited from higher volumes and areduction in costs. In Turkey, industry price increases led to higher margins but thevalue-for-money segment has been under increased competitive pressure from newlaunches and the price repositioning of brands, which impacted Viceroy and ledto a decrease in volumes and profitability. The profit from the America-Pacific region decreased by £13 million to£80 million. This was principally due to weaker currencies and, at comparablerates of exchange, profit would have decreased by £2 million or 2 per cent.Volumes were slightly lower at 9 billion. The increase in profit and volumesfrom Japan were more than offset by the lower profit contribution and decline involumes in Canada. Page 5 Business review cont... Profit in Canada was down to £38 million, affected by the greater prevalence ofillicit trade, increased costs of direct distribution, continued down-trading tolower priced products and the weaker exchange rate. These were partly offset byhigher margins and cost savings resulting from the transfer of manufacturing toMexico. At comparable rates of exchange, profit was down by 28 per cent. Marketshare grew slightly in the first quarter, rising to over 53 per cent, comparedto the last quarter of 2006. In Japan, volume and market share grew significantly due to the strongperformances of Kent and Kool, despite the continuing decline in total industryconsumption and a quarter of unusually high competitive activities. Profit roseas a result of the increase in volumes and the benefit of last year'smanufacturers' price increase, which more than offset the impact of exchange. Unallocated costs, which are net corporate costs not directly attributable toindividual segments, were £8 million higher at £41 million, mainly as a resultof higher share scheme and other costs and the timing of expenses. The above regional profits were achieved before accounting for restructuringcosts and losses/gains on disposal of a business and brands, as explained onpage 12. Results of associates The Group's share of the post-tax results of associates decreased by £9 millionto £111 million. Excluding the exceptional item in 2006 explained on page 13,the Group's share of the post-tax results of associates increased by £7 millionto £111 million. The contribution from Reynolds American, excluding the benefit from thefavourable resolution of certain tax matters in 2006, was £3 million higher dueto unusually strong margins for R.J. Reynolds and the inclusion of Conwood,which more than offset the impact of the much weaker US dollar. At comparablerates of exchange, the contribution from Reynolds American would have been£11 million, or 16 per cent, higher than last year. As explained on page 13,Reynolds American acquired Conwood on 31 May 2006 and reported that on aproforma basis, as if it had been owned since the beginning of 2006, Conwoodincreased both its profits and margins. The Group's associate in India, ITC, continued its strong performance and itscontribution to the Group rose by £4 million to £27 million. At comparable ratesof exchange, the contribution would have been £7 million, or 34 per cent, higherthan last year, with the growth assisted by one-off costs in the comparativequarter. Cigarette volumes The segmental analysis of the volumes of subsidiaries is as follows: 3 months to Year to 31.3.07 31.3.06 31.12.06 bns bns bns Europe 51.5 55.4 247.7Asia-Pacific 35.3 34.8 141.9Latin America 37.7 38.1 152.6Africa and Middle East 22.2 23.1 103.3America-Pacific 9.2 9.3 43.8 -------- ------- -------- 155.9 160.7 689.3 ======== ======= ======== In addition, associates' volumes for the quarter were 59.6 billion (2006: 57.2billion) and, with the inclusion of these, total Group volumes would be 215.5billion (2006: 217.9 billion). Page 6 GROUP INCOME STATEMENT - unaudited 3 months to Year to 31.3.07 31.03.06 31.12.06 £m £m £m Gross turnover (including duty, excise and other taxes of £3,587million (31.3.06: £3,739 million - 31.12.06: £15,427million)) 5,819 6,036 25,189 ======= ======= ======== Revenue 2,232 2,297 9,762 Raw materials and consumables used (615) (676) (2,861)Changes in inventories of finished goods and work in progress 25 31 (11)Employee benefit costs (344) (361) (1,554)Depreciation and amortisation costs (74) (106) (401)Other operating income 30 24 181Other operating expenses (570) (593) (2,494) ------- -------- --------Profit from operations 684 616 2,622after (charging)/crediting exceptional items: ___________________________________________- restructuring costs (8) (21) (216)- (losses)/gains on disposal of a business and brands (15) 41 ___________________________________________ ___________________________________________Finance income 30 38 110Finance costs (88) (106) (399) ___________________________________________ Net finance costs (58) (68) (289)Share of post-tax results of associates and joint ventures 111 120 431after (charging)/crediting exceptional items: ___________________________________________ - brand impairments (13)- exceptional tax credits 16 17 ___________________________________________ ------- -------- --------Profit before taxation 737 668 2,764Taxation on ordinary activities (199) (178) (716) ------- -------- --------Profit for the period 538 490 2,048 ======= ======== ======== Attributable to:Shareholders' equity 495 452 1,896 ======= ======== ======== Minority interests 43 38 152 ======= ======== ======== Earnings per shareBasic 24.24p 21.81p 92.08p ======= ======== ======== Diluted 24.06p 21.62p 91.33p ======= ======== ======== See notes on pages 11 to 15. Page 7 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 3 months to Year to 31.3.07 31.3.06 31.12.06 £m £m £m Differences on exchange 4 33 (685)Cash flow hedges- net fair value gains 2 10 13- reclassified and reported in net profit (5) (13) (15)Available-for-sale investments- net fair value losses (1) (2)- reclassified and reported in net profit 1Net investment hedges- net fair value gains 1 9 117Tax on items recognised directly in equity (1) (5) (12) ------- -------- ---------Net gains/(losses) recognised directly in equity 1 34 (584)Profit for the period page 7 538 490 2,048 ------- ------- --------Total recognised income for the period 539 524 1,464 ___________________________________________- shareholders' equity 492 479 1,334- minority interests 47 45 130 ___________________________________________Employee share options- value of employee services 7 9 41- proceeds from shares issued 12 16 28Dividends- ordinary shares (1,008)- to minority interests (41) (39) (137)Purchase of own shares- held in employee share ownership trusts (25) (72) (77)- share buy-back programme (113) (72) (500)Acquisition of minority interests (2) (13)Other movements (10) 6 13 ------- ------- --------- 367 372 (189)Balance 1 January 6,688 6,877 6,877 ------- ------- --------Balance at period end 7,055 7,249 6,688 ======= ======= ======== See notes on pages 11 to 15. Page 8 SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE THREE MONTHS - unaudited Revenue 31.3.07 31.3.06 Inter Inter External segment Revenue External segment Revenue £m £m £m £m £m £m Europe 760 62 822 820 117 937Asia-Pacific 448 10 458 418 2 420Latin America 452 104 556 423 423Africa and Middle East 277 13 290 275 5 280America-Pacific 106 106 237 237 -------- -------- -------- ------- ------- -------- 2,043 189 2,232 2,173 124 2,297 ======== ======== ======== ======= ======= ======== The segmental analysis of revenue is based on location of manufacture and figures based on location of sales would be as follows: 31.3.07 31.3.06 £m £m Europe 782 826Asia-Pacific 448 444Latin America 454 427Africa and Middle East 336 360America-Pacific 212 240 --------- ---------- 2,232 2,297 ========= ========= Profit from operations 31.3.07 31.3.06 Adjusted Adjusted Segment segment Segment segment result result* result result* £m £m £m £m Europe 177 182 149 168Asia-Pacific 167 167 155 155Latin America 180 180 155 155Africa and Middle East 124 124 113 114America-Pacific 77 80 77 93 -------- -------- -------- ------- 725 733 649 685Unallocated costs (41) (41) (33) (33) -------- -------- -------- ------- 684 692 616 652 ======== ======== ======== ======= *Excluding restructuring costs, as well as losses/gains on disposal of a business and brands as explained on page 12. Page 9 Segmental analyses of revenue and profit for the three months - unaudited cont... The analyses for the year ended 31 December 2006 are as follows: Revenue Location of manufacture Location of sales Inter External segment Revenue Revenue £m £m £m £m Europe 3,495 526 4,021 3,545Asia-Pacific 1,755 27 1,782 1,839Latin America 1,780 2 1,782 1,791Africa and Middle East 1,063 24 1,087 1,489America-Pacific 1,090 1,090 1,098 ------- ------- ------- ------- 9,183 579 9,762 9,762 ======= ======= ======= ======= Profit from operations Adjusted Segment result segment result* £m £m Europe 676 781Asia-Pacific 609 616Latin America 611 611Africa and Middle East 444 468America-Pacific 385 424 -------- --------Segment result 2,725 2,900Unallocated costs (103) (103) -------- -------- 2,622 2,797 ======== ======== *Excluding restructuring costs, as well as losses/gains on disposal of a business and brands as explained on page 12. The segmental analysis of the Group's share of the post-tax results of associates and joint ventures is as follows: 31.3.07 31.3.06 31.12.06 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* £m £m £m £m £m £m Europe 12 12 11 11 46 46Asia-Pacific 27 27 23 23 92 92Africa and Middle East 1 1 4 4America-Pacific 72 72 85 69 289 285 ------- ------- ------ ------ ------ ------- 111 111 120 104 431 427 ======= ======= ====== ====== ====== ======= *Excluding brand impairments and exceptional tax credits as explained on page 13. Page 10 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited results for the three monthsto 31 March 2007 and 31 March 2006, together with the audited results for theyear ended 31 December 2006. The annual financial statements for 2006, whichrepresent the statutory accounts for that year, have been filed with theRegistrar of Companies. The auditors' report on those statements was unqualifiedand did not contain any statement concerning accounting records or failure toobtain necessary information and explanations. From 1 January 2005, the Group has prepared its annual consolidated financialstatements in accordance with International Financial Reporting Standards (IFRS)as adopted by the European Union (EU) and implemented in the UK. These unauditedGroup interim results have been prepared on a basis consistent with the IFRSaccounting policies as set out in the Report and Accounts for the year ended31 December 2006. These interim financial statements have been prepared underthe historical cost convention, except in respect of certain financialinstruments. In December 2005, the International Accounting Standards Board issued anamendment to IAS21 on foreign exchange rates. The amendment to IAS21 allowedinter company balances that form part of a reporting entity's net investment ina foreign operation to be denominated in a currency other than the functionalcurrency of either the ultimate parent or the foreign operation itself. Thismeant that certain exchange differences previously taken to the income statementare instead reflected directly in changes in total equity. As this amendment wasonly adopted by the EU in 2006, the interim report to 30 June 2006 contained thefirst published results to reflect this change. The previously published resultswere restated accordingly, but there was no impact on net finance costs for thethree months to 31 March 2006. FOREIGN CURRENCIES The results of overseas subsidiaries and associates have been translated tosterling as follows: The income statement has been translated at the average rates for the respectiveperiods. The total equity has been translated at the relevant period end rates.For high inflation countries, the local currency results are adjusted for theimpact of inflation prior to translation to sterling at closing exchange rates. The principal exchange rates used were as follows: Average Closing 31.3.07 31.3.06 31.12.06 31.3.07 31.3.06 31.12.06 US dollar 1.955 1.753 1.844 1.961 1.735 1.957Canadian dollar 2.290 2.024 2.091 2.263 2.024 2.278Euro 1.492 1.457 1.467 1.473 1.433 1.484South African rand 14.155 10.781 12.520 14.225 10.693 13.799Brazilian real 4.119 3.842 4.009 4.013 3.765 4.179 Page 11 CHANGES IN THE GROUP On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell itscigar business, Toscano, to Maccaferri for euro 95 million. The sale was subjectto regulatory and governmental approval and was completed on 19 July 2006. From August 2006, the Group purchased minority interests in its subsidiary inChile for a cost of £91 million, raising the Group shareholding from 70.4 percent to 96.5 per cent. The goodwill arising on this transaction was £80 millionand the minority interests in Group equity were reduced by £11 million. EXCEPTIONAL ITEMS (a) Restructuring costs During 2003, the Group commenced a detailed review of its manufacturingoperations and organisational structure, including the initiative to reduceoverheads and indirect costs. The restructuring continued, with majorannouncements during 2005 and 2006 which covered the cessation of production inthe UK, Ireland, Canada and Zevenaar in the Netherlands with production to betransferred elsewhere. The profit from operations for the year ended 31 December2006 included a charge for restructuring of £216 million. The three months to 31 March 2007 includes a charge for restructuring of£8 million (2006: £21 million), in respect of further costs related torestructurings announced in prior years. (b) Losses/gains on disposal of a business and brands The sale of the Italian cigar business in 2006 described above resulted in aloss of £19 million, reflecting a £15 million impairment charge included indepreciation and amortisation costs in the profit from operations and £4 millionof other costs included in other operating expenses in the profit fromoperations. The impairment charge is reflected in the three months to 31 March2006. On 29 November 2006, the Group completed a trademark transfer agreement withPhilip Morris International. Under the arrangement the Group sold its MurattiAmbassador brand in certain markets, as well as the L&M and Chesterfieldtrademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademarkin certain African countries. These transactions resulted in a gain of £60million included in other operating income in the profit from operations. On 20 February 2007, the Group announced that it has agreed to sell its pipetobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for euro 24million. The sale, which is staged in a number of phases, is expected to closeby the end of the second quarter. However, the Group has retained the Dunhilland Captain Black pipe tobacco brands. Page 12 NET FINANCE COSTS Net finance costs comprise: 3 months to 31.3.07 31.3.06 £m £m Interest payable (93) (102)Interest and dividend income 29 32Fair value changes - derivatives (19) 26Exchange differences 25 (24) ------- -------- 6 2 ------- -------- (58) (68) ======= ======== Net finance costs at £58 million were £10 million lower than last year,principally reflecting the impact of derivatives and exchange differences, aswell as one off items in 2006 and the benefit of the Group's cash flow since 31March 2006. The £6 million gain (2006: £2 million) of fair value changes and exchangedifferences reflects a gain of £4 million (2006: £1 million loss) from the netimpact of exchange rate movements and a gain of £2 million (2006: £3 million)principally due to interest related changes in the fair value of derivatives. IFRS requires fair value changes for derivatives, which do not meet the testsfor hedge accounting under IAS39, to be included in the income statement. Inaddition, certain exchange differences are required to be included in the incomestatement under IFRS and, as they are subject to exchange rate movements in aperiod, they can be a volatile element of net finance costs. ASSOCIATES The share of post-tax results of associates was £111 million (2006:£120 million) after tax of £62 million (2006: £42 million). For the year to 31December 2006, the share of post-tax results was £431 million after tax of£216 million. The share is after exceptional charges and credits. In the three months to 31 March 2006, Reynolds American benefited from thefavourable resolution of tax matters of which the Group's share was £16 million. In the year ended 31 December 2006, Reynolds American benefited from thefavourable resolution of tax matters of which the Group's share was £17 million.Reynolds American also modified the previously anticipated level of supportbetween certain brands and the projected net sales of certain brands, resultingin a brand impairment charge of which the Group's share amounted to £13 million(net of tax). On 25 April 2006, Reynolds American announced an agreement to acquire Conwood,the second largest manufacturer of smokeless tobacco products in the US, forUS$3.5 billion, and the acquisition was completed on 31 May 2006. TAXATION The tax rate in the income statement of 27.0 per cent for the three months to 31March 2007 (31 March 2006: 26.6 per cent) is affected by the inclusion of theshare of associates' post-tax profit in the Group's pre-tax results. Theunderlying rate for subsidiaries reflected in the adjusted earnings per sharebelow was 31.9 per cent and 32.4 per cent in 2006. The decrease arises primarilyfrom a change in the mix of profits. The charge relates to taxes payableoverseas. Page 13 EARNINGS PER SHARE Basic earnings per share are based on the profit for the period attributable to ordinary shareholders and the average number of ordinary shares in issue during the period (excluding shares held by the Group's employee share ownership trusts). For the calculation of the diluted earnings per share the average number of shares reflects the potential dilutive effect of employee share schemes. The earnings per share are based on: 31.3.07 31.3.06 31.12.06 Earnings Shares Earnings Shares Earnings Shares £m m £m m £m m Basic 495 2,042 452 2,072 1,896 2,059Diluted 495 2,057 452 2,091 1,896 2,076 The earnings have been distorted by exceptional items, together with certain distortions to net finance costs under IFRS in 2006, and to illustrate the impact of these distortions, the adjusted diluted earnings per share are shown below: Diluted earnings per share 3 months to Year to 31.3.07 31.3.06 31.12.06 pence pence pence Unadjusted earnings per share 24.06 21.62 91.33Effect of restructuring costs 0.25 0.67 8.09Effect of disposal of a business and brands 0.48 (1.11)Effect of associates' brand impairments and exceptionaltax credits (0.77) (0.19)Net finance costs adjustments 0.05 ------- ------- -------Adjusted diluted earnings per share 24.31 22.05 98.12 ======= ======= ======= Adjusted diluted earnings per share are based on:- adjusted earnings (£m) 500 461 2,037 - shares (m) 2,057 2,091 2,076 Similar types of adjustments would apply to basic earnings per share. For the three months to 31 March 2007, basic earnings per share on an adjusted basis would be 24.49p (2006: 22.25p) compared to unadjusted amounts of 24.24p (2006: 21.81p). Page 14 CONTINGENT LIABILITIES As noted in the Report and Accounts for the year ended 31 December 2006, thereare contingent liabilities in respect of litigation, overseas taxes andguarantees in various countries. Group companies, as well as other leading cigarette manufacturers, aredefendants in a number of product liability cases. In a number of these cases,the amounts of compensatory and punitive damages sought are significant. Atleast in the aggregate and despite the quality of defences available to theGroup, it is not impossible that the results of operations or cash flows of theGroup in particular quarterly or annual periods could be materially affected bythis. Having regard to these matters, the Directors (i) do not consider it appropriateto make any provision in respect of any pending litigation and (ii) do notbelieve that the ultimate outcome of this litigation will significantly impairthe financial condition of the Group. SHARE BUY-BACK PROGRAMME The Group initiated an on-market share buy-back programme at the end of February2003. During the three months to 31 March 2007, 7 million shares were bought ata cost of £113 million (31 March 2006: 5 million shares at a cost of £72million). __________________________________________________________________________ Copies of this Report will be posted to shareholders and may also be obtainedduring normal business hours from the Company's Registered Office at GlobeHouse, 4 Temple Place, London WC2R 2PG and from our website www.bat.com Nicola Snook Secretary 3 May 2007 Page 15 This information is provided by RNS The company news service from the London Stock Exchange