British American Tobacco Regulatory News (BATS)

26 Oct 2006 07:01

British American Tobacco PLC26 October 2006 QUARTERLY REPORT TO 30 SEPTEMBER 2006 26 October 2006 SUMMARY NINE MONTHS RESULTS 2006 2005 Change Revenue - as reported £7,251m £6,884m +5%Profit from operations - as reported £1,944m £1,901m +2% - like-for-like £2,124m £1,961m +8%Adjusted diluted earnings per share 75.00p 66.64p +13% • Reported Group profit from operations was 2 per cent higher at £1,944 million. However, profit from operations would have been 8 per cent higher, or 6 per cent at comparable rates of exchange, if exceptional items and the impact arising from the change in terms of trade following the sale of Etinera are excluded, with all regions except Europe contributing to this good growth. This like-for-like information provides a better understanding of the subsidiaries' trading results. • Group volumes from subsidiaries increased by 1 per cent to 509 billion on both a reported and like-for-like basis, with impressive growth of 16 per cent from the four global drive brands. The reported Group revenue at £7,251 million rose by 5 per cent or 3 per cent at comparable rates of exchange. This volume and revenue growth was achieved across a broad spread of markets. • Adjusted earnings per share rose by 13 per cent as the higher net finance costs and minority interests were more than offset by the improvement in profit from operations, the share of associates' post-tax results, a lower tax rate and the benefit from the share buy-back programme. • The Chairman, Jan du Plessis, commented: "Adjusted diluted earnings per share increased by 13 per cent, which is a very good result, reflecting strong performances from both our subsidiaries and our associates. Although exchange gains are expected to deteriorate further in the fourth quarter, the growth in volume, revenue and profit for the nine months shows that British American Tobacco is on track for a good year." 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 30 SEPTEMBER 2006 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 12 Changes in the Group 12 Restructuring costs 12 Losses/gains on impairment of a business and disposal of brands and jointventure 13 Like-for-like information 13 Net finance costs 14 Associates 15 Taxation 15 Earnings per share 15 Dividends 16 Contingent liabilities 17 Share buy-back programme 17 CHAIRMAN'S COMMENTS British American Tobacco's volumes grew by 1 per cent in the first nine months.At current rates of exchange, revenue was 5 per cent ahead and profit fromoperations excluding exceptional items improved by 8 per cent. Adjusted dilutedearnings per share increased by 13 per cent, which is a very good result,reflecting strong performances from both our subsidiaries and our associates. Wecontinue to benefit from exchange rates, although to a lesser extent than duringthe first six months. As expected, volumes in the third quarter were adversely affected by the timingof shipments in some major markets. The Group's global drive brands grew by animpressive 16 per cent for the nine months. Kent grew by 16 per cent and Dunhillby 5 per cent, while Lucky Strike was 4 per cent down, despite maintaining sharein most of its major markets. Pall Mall was 37 per cent ahead. On a like-for-like basis, profit grew by 6 per cent at comparable rates ofexchange, or by 8 per cent at current rates. Profit increases in a wide range ofmarkets more than compensated for declines in Canada and Germany, underliningthe benefit we derive from our geographic spread of business. The Group has continued to review its manufacturing operations and, on 22September, agreement was reached to close the factory at Zevenaar in theNetherlands. It will close by the end of 2008, with production being transferredto Bayreuth in Germany and Augustow in Poland. The Group's associates had volumes of 173 billion and our share of theirpost-tax results was £348 million. This represents an increase of 21 per cent ifexceptional items are excluded and reflects good performances from ReynoldsAmerican, ITC and STK. The growth in profit from operations, our share of the associates' post-taxprofit, a lower tax rate and the benefit of the share buy-back programme morethan made up for higher net finance costs and minority interests. As a result,adjusted diluted earnings per share increased by 13 per cent to 75.0p. During the quarter, the offer to purchase the minority shareholders inChiletabacos closed, raising the Group's shareholding from 70.4 per cent to 96.4per cent, at a cost of £95 million. The transaction will enhance our earningsper share. At the end of September, a trademark transfer agreement with Philip MorrisInternational was signed, allowing both companies to consolidate the ownershipof certain brands. The transactions are subject to regulatory approval and willresult in a net payment to the Group of US$115 million. Although exchange gains are expected to deteriorate further in the fourthquarter, the growth in volume, revenue and profit for the nine months shows thatBritish American Tobacco is on track for a good year. Jan du Plessis 26 October 2006 Page 2 BUSINESS REVIEW The reported Group profit from operations was 2 per cent higher at£1,944 million. However, as explained on page 13, on a like-for-like basis,profit from operations would have been 8 per cent higher or 6 per cent atcomparable rates of exchange, with all regions except Europe, contributing tothis good growth. This like-for-like information provides a better understandingof the subsidiaries' trading results. Group volumes from subsidiaries increased by 1 per cent to 509 billion on both areported and like-for-like basis. The reported Group revenue rose by 5 per centto £7,251 million. On a like-for-like basis, revenue increased by 6 per cent or4 per cent at comparable rates of exchange. This volume and revenue growth wasachieved across a broad spread of markets. The four global drive brands achieved impressive overall volume growth of 16 percent on a like-for-like basis. Kent volumes grew by 16 per cent with significant increases in Russia, Romania,Ukraine and Chile, as well as good growth in its major market of Japan. Dunhillrose by 5 per cent, driven by strong performances in South Korea, Taiwan andSouth Africa, although it was down in Malaysia. Lucky Strike volumes declined by 4 per cent, mainly as a result of lowerindustry volumes in Germany and Japan, but there were good share growthperformances in a number of key markets. Pall Mall continued its exceptionalgrowth, with an increase of 37 per cent, driven by Germany, Spain, Greece andRussia, together with good performances in many other markets. In Europe, profit at £594 million was £22 million lower than last year as aresult of very competitive trading conditions in a number of markets and theinclusion in the comparative period of a one-off benefit, resulting from thechange in terms of trade following the sale of Etinera. Excluding this benefit,profit decreased by £8 million, with strong growth from Russia, Italy andFrance, more than offset by declines in Germany, Spain, Poland and Ukraine.Regional volumes on a like-for-like basis were 1 per cent higher at 184 billion,with growth in Russia, Spain and Hungary partly offset by declines in Italy,Germany and Ukraine. In Italy, profit grew strongly driven by improved margins after industry priceincreases, lower supply chain costs and overheads savings. Market share waslower as the growth in global drive brands was offset by the decline in domesticbrands. Profit in Germany was down due to excise driven volume declines in the overallmarket, down-trading and increased competition in the low-price segment afterthe end of Stix production. These factors were partly offset by the impact ofcost reductions and the good volume and market share growth of Pall Mall, aswell as the share growth of Lucky Strike, which led to a higher overallcigarette market share. Profit in France grew strongly, benefiting from higher margins and reducedoverheads. Profit in Switzerland was slightly lower due to price competition.Parisienne grew although overall market share was lower with volumes the same aslast year. In the Netherlands, profit was lower due to higher excise levels and pricecompetition, partly offset by cost savings. Profit in Belgium increased withlower costs and stable volumes. In Spain, volumes and market share were upstrongly, driven by Pall Mall, but industry profitability reduced significantlywith intense price competition. Page 3 Business review cont... Profit in Russia grew impressively as a result of higher volumes, an improvedproduct mix, a continued focus on productivity and a stronger exchange rate. Ahigher overall market share resulted from significantly increased volumes ofKent, Dunhill, Vogue and Pall Mall. Romania continued to show good growth involumes and profit, consolidating its leadership position. Volume performancewas driven by Kent, which is now the largest selling brand in the market, aswell as Dunhill. In Ukraine, profitability was reduced due to lower volumes. In Hungary, industryvolumes benefited from improved border controls and Viceroy and Pall Mallvolumes grew significantly. However, profit was slightly lower as pricecompetition and an excise increase more than offset an improved product mix andthe benefits from efficiency programmes. In Poland, industry profitability wasseverely affected by increased excise rates and price competition. In Asia-Pacific, regional profit rose by £48 million to £466 million, mainlyattributable to strong performances in Australia, Malaysia, South Korea and NewZealand. Volumes at 106 billion were 3 per cent higher as strong increases inPakistan, Bangladesh, South Korea and Vietnam were partially offset by declinesin Malaysia and Indonesia. Profit grew strongly in Australia, despite the weaker exchange rate, as a resultof higher margins and cost savings following productivity initiatives. Goodperformances from Winfield and Dunhill, and the launch of Pall Mall, contributedto a higher overall market share in a reduced total market. New Zealand alsoshowed strong profit growth despite a weaker local currency, as marginsincreased but market share was slightly down. In Malaysia, profit increased as higher margins, the favourable product mix, areduction in expenses and the benefit of a stronger local currency more thancovered the impact of lower volumes. Dunhill maintained market share, while PallMall grew share, but total volume declined due to reduced industry volumes,following the growth of illicit trade. In Vietnam, volumes increased but profitwas slightly lower as a result of increased marketing investment. In South Korea, profit grew impressively with a strong growth in market share,driven by Dunhill and Vogue, and cost savings. In addition, volumes weresignificantly higher, reflecting volume distortions last year as a result of theexcise increase at the end of 2004. In Pakistan, market leadership was strengthened through good volume and profitgrowth and an increased overall market share with excellent performances by GoldFlake and Capstan. In Bangladesh, volumes were higher but profit fell due to theimpact of the currency devaluation on costs and additional marketing investment.In Sri Lanka, good profit growth was achieved with higher margins, an improvedproduct mix and productivity initiatives leading to a lower cost base. Despitelower volumes, due to overall industry declines, market share grew with a strongperformance by John Player Gold Leaf. Profit in Latin America increased by £69 million to £447 million due to goodperformances across the region coupled with strong local currencies. Volumesalso grew in many of the markets contributing to an overall increase of 3 percent to 113 billion. In Brazil, performance continued to benefit from marketing initiatives andongoing anti-illicit trade operations by the government, which led to highervolumes and market share. Leaf shipments were slightly ahead of last year. Thehigher volumes, an improved product mix, higher leaf margins and theappreciation of the local currency, led to profit growth. Page 4 Business review cont... The strong profit growth in Mexico was driven by higher margins, an improvedlocal currency, benefits from efficiency programmes and synergy benefits fromthe contract manufacturing agreement with Canada. Volumes were in line with lastyear as the growth in international brands, notably Pall Mall, was offset by thedecline of non-filter and local low-price brands. In Argentina, strong volumegrowth was achieved through an excellent performance by Viceroy and a reductionin illicit trade. However, profit was significantly lower due to pricecompetition. Good profit growth in Chile was achieved by higher volumes and margins, togetherwith the benefits of a stronger currency. There was good market share growthfrom Kent. In Venezuela, higher volumes and increased margins, led by Belmont,resulted in an excellent increase in profit and market share. The CentralAmerica and Caribbean area showed a significant profit growth as a result ofhigher margins, an improved product mix, increased volumes and lower costs. Profit in the Africa and Middle East region grew by £54 million to £362 million,mainly driven by South Africa, Nigeria and Iran, as well as reduced losses inTurkey. Volumes declined by 2 per cent to 74 billion, as a result of Turkey,Levant and supply chain problems in West Africa and the Caucasus, partly offsetby increases in Iran, Egypt and the Gulf. In South Africa, despite the weaker average rand exchange rate, good profitgrowth was achieved as a result of higher margins. There was an improved productmix, as both Dunhill and Rothmans continued their strong growth, although marketshare was slightly down. In Nigeria, despite excise driven price increases,market share grew. Higher prices, together with mix improvements andproductivity gains, helped to deliver a higher profit. In Iran, volumes continued to grow and overall market share increased, resultingin higher profit. Profit in the Arabian Gulf markets rose as volumes increased,mainly driven by good results from Dunhill in Saudi Arabia. In Turkey, higher margins, following industry price increases and lower costs,led to a reduction of losses. However, competitive pressure from new launchesand the price repositioning of some competitor brands impacted Viceroy, whichled to a decrease in volumes and market share. The profit from the America-Pacific region increased by £5 million to£332 million, with a strong performance in Japan offsetting the lower profitcontribution from Canada. Volumes were down 1 per cent to 33 billion as highervolumes from Japan were more than offset by the decline in Canada. The profit contribution from Canada was down £21 million to £215 million,largely due to lower volumes following the growth of illicit trade, a lowermarket share and the costs incurred in the move to direct distribution. This waspartially offset by the impact of higher prices, productivity savings and thestronger Canadian dollar. The shift to low-price products continued, with thepremium segment now representing 52 per cent of the total market compared with57 per cent last year. Imperial Tobacco Canada's total cigarette market sharewas down 2 share points to 53 per cent. Direct distribution was introduced fromthe beginning of September and the speed and scale of retail sign-up is wellahead of expectations, which has led to some initial out-of-stocks. In Japan, the strong growth of Kool generated increased volumes in a decliningtotal market, leading to a new high in market share. Profit rose significantlyas a result of an improved product mix, higher margins and increased volumeswhich more than offset the impact of exchange. Page 5 Business review cont... Unallocated costs, which are net corporate costs not directly attributable toindividual segments, were £5 million higher at £77 million, mainly as a resultof increased pension costs. The above regional profits were achieved before accounting for restructuringcosts, a loss on impairment of a business and a gain on disposal of brands, asexplained on pages 12 and 13. Results of associates The Group's share of the post-tax results of associates' increased by £71million to £348 million. Excluding the exceptional items explained on page 15the Group's share of the post-tax results of associates increased by £58 millionto £331 million. The contribution from Reynolds American, excluding the benefit from thefavourable resolution of tax matters in 2006 and restructuring costs in 2005,was £42 million higher mainly due to improved pricing, cost reductions, thetiming of promotional spending and the impact of the stronger US dollar. Asexplained on page 15, Reynolds American acquired Conwood on 31 May 2006.Reynolds American reported that on a proforma basis, as if it had been ownedsince the beginning of 2005, Conwood delivered strong gains in volume, share andoperating income for the nine months to 30 September 2006. The Group's associate in India, ITC, continued its strong volume growth, and,excluding the one-off items in 2005, this led to an increased profit. Cigarette volumes The segmental analysis of the volumes of subsidiaries is as follows: 3 months to 9 months to Year to30.9.06 30.9.05 30.9.06 30.9.05 31.12.05 bns bns bns bns bns 64.4 65.6 Europe 183.5 183.9 244.0 34.7 34.8 Asia-Pacific 106.1 102.6 137.1 37.5 37.0 Latin America 113.0 109.7 149.3 26.5 25.9 Africa and Middle East 74.0 75.5 102.6 10.3 12.0 America-Pacific 32.8 33.0 45.0 ------- ------- -------- -------- -------- 173.4 175.3 509.4 504.7 678.0 ======= ======= ======== ======== ======== In addition, associates' volumes for the nine months were 172.7 billion (2005:171.2 billion) and, with the inclusion of these, the Group volumes would be682.1 billion (2005: 675.9 billion). Page 6 GROUP INCOME STATEMENT - unaudited 3 months to 9 months to Year to 30.9.06 30.9.05 30.9.06 30.9.05 31.12.05 restated restated restated £m £m £m £m £m Gross turnover (including duty, excise and other taxes of £11,418 million (30.9.05: £10,693 million - 31.12.05: 6,220 6,332 £14,659 million)) 18,669 17,577 23,984 ======= ======= ======= ======== ======= 2,443 2,485 Revenue 7,251 6,884 9,325 Raw materials and consumables (733) (819) used (2,208) (2,072) (2,760) Changes in inventories of finished goods and work 22 7 in progress 61 19 (2) (423) (422) Employee benefit costs (1,182) (1,069) (1,557) (108) (78) Depreciation and amortisation costs (299) (267) (383) 14 27 Other operating income 62 138 179 (596) (552) Other operating expenses (1,741) (1,732) (2,382) ------- ------- ------- -------- ------- 619 648 Profit from operations 1,944 1,901 2,420 after (charging)/crediting: --------------------- ------------------------------------ (116) (100) - restructuring costs (164) (142) (271) - (losses)/gains on impairment of a business and disposal of brands and joint venture (16) 68 72 --------------------- ------------------------------------ --------------------- ------------------------------------ 25 39 Finance income 83 80 118 (110) (98) Finance costs (292) (242) (346) --------------------- ------------------------------------ (85) (59) Net finance costs (209) (162) (228) Share of post-tax results of 105 81 associates and joint ventures 348 277 392 after (charging)/crediting: --------------------- ------------------------------------ (5) - restructuring costs (12) (13) (11) - US Federal tobacco buy-out (11) (12) - brand impairments (29) - exceptional tax credits and 1 other impairments 17 27 57 --------------------- ------------------------------------ ------- ------- ------- -------- ------- 639 670 Profit before taxation 2,083 2,016 2,584 (152) (194) Taxation (518) (547) (690) ------- ------- ------- -------- ------- 487 476 Profit for the period 1,565 1,469 1,894 ======= ======= ======= ======== ======= Attributable to: 446 442 Shareholders' equity 1,447 1,373 1,767 ======= ======= ======= ======== ======= 41 34 Minority interests 118 96 127 ======= ======= ======= ======== ======= Earnings per share 21.73p 21.21p Basic 70.11p 65.35p 84.34p ======= ======= ======= ======== ======= 21.56p 20.98p Diluted 69.57p 64.79p 83.66p ======= ======= ======= ======== ======= See notes on pages 11 to 17. Page 7 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 9 months to Year to 30.9.06 30.9.05 31.12.05 restated restated £m £m £m Differences on exchange (500) 317 425Cash flow hedges- net fair value gains 12 16 17- reclassified and reported in net profit (8) 40 38- reclassified as basis adjustments 3 3Available-for-sale investments- net fair value losses (2) (2) (1)- reclassified and reported in net profit 1 1Net investment hedges- net fair value gains/(losses) 73 (34) (52)Tax on items recognised directly in equity (5) (37) (41) -------- -------- --------Net (losses)/gains recognised directly in equity (429) 303 390Profit for the period page 7 1,565 1,469 1,894 -------- -------- --------Total recognised income for the period 1,136 1,772 2,284 -------------------------------------- shareholders' equity 1,029 1,647 2,128- minority interests 107 125 156 -------------------------------------Employee share options- value of employee services 31 31 42- proceeds from shares issued 26 27 30Dividends - ordinary shares (1,008) (910) (910) - to minority interests (131) (99) (112)Purchase of own shares- held in Employee Share Ownership Trusts (77) (47) (48)- share buy-back programme (399) (394) (501)Acquisition of minority interests (11)Other movements 11 13 17 -------- -------- -------- (422) 393 802Balance at 1 January 6,877 6,117 6,117Change in accounting policy page 11 (42) (42) -------- -------- --------Balance at period end 6,455 6,468 6,877 ======== ======== ======== See notes on pages 11 to 17. Page 8 SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited The analyses for the nine months are as follows: Revenue 30.9.06 30.9.05 Inter Inter External segment Revenue External segment Revenue £m £m £m £m £m £m Europe 2,602 380 2,982 2,595 410 3,005Asia-Pacific 1,313 23 1,336 1,216 12 1,228Latin America 1,312 1 1,313 1,106 1 1,107Africa and Middle East 793 15 808 708 25 733America-Pacific 812 812 811 811 -------- -------- -------- ------- ------- --------Revenue 6,832 419 7,251 6,436 448 6,884 ======== ======== ======== ======= ======= ======== The segmental analysis of revenue is based on location of manufacture andfigures based on location of sales would be as follows: 30.9.06 30.9.05 £m £m Europe 2,637 2,633Asia-Pacific 1,376 1,299Latin America 1,321 1,116Africa and Middle East 1,098 1,024America-Pacific 819 812 ---------- ---------Revenue 7,251 6,884 ========= ========= Profit from operations 30.9.06 30.9.05 Adjusted Adjusted Segment segment Segment segment result result* result result* £m £m £m £m Europe 462 594 559 616Asia-Pacific 463 466 410 418Latin America 447 447 373 378Africa and Middle East 359 362 307 308America-Pacific 290 332 324 327 -------- -------- -------- -------Segmental result 2,021 2,201 1,973 2,047Unallocated costs (77) (77) (72) (72) -------- -------- -------- -------Profit from operations 1,944 2,124 1,901 1,975 ======== ======== ======== ======= *Excluding restructuring costs, loss on impairment of a business and gain ondisposal of brands as explained on pages 12 and 13. Page 9 Segmental analyses of revenue and profit cont... - unaudited The analyses for the year ended 31 December 2005 are as follows: Revenue Location of manufacture Location of sales Inter External 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 ------- ------- ------- -------Revenue 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 jointventure. The segmental analysis of the Group's share of the post-tax results ofassociates and joint ventures for the nine months is as follows: 30.9.06 30.9.05 31.12.05 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* restated £m £m £m £m £m £m Europe 32 32 27 27 39 39Asia-Pacific 67 67 84 57 107 81Africa and Middle East 2 2 1 1 2 2America-Pacific 247 230 165 188 244 267 ------- ------- ------ ------ ------ ------- 348 331 277 273 392 389 ======= ======= ====== ====== ====== ======= *Excluding restructuring costs, US Federal tobacco buy-out, brand impairmentsand exceptional tax credits and other impairments as explained on page 15. Page 10 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited results for the nine months to30 September 2006 and 30 September 2005, together with the audited results forthe year ended 31 December 2005. The annual financial statements for 2005, 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 2005 with the exception of the amendment to IAS21 referred to below.These interim financial statements have been prepared under the historical costconvention, except in respect of certain financial instruments. IAS32 and IAS39 on financial instruments were applied from 1 January 2005 andthe changes to the total equity as at 1 January 2005 principally 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 resulted in a reduction in total equity of £42 million as at 1 January 2005which is shown as the impact of the change in accounting policy on page 8. In December 2005, the International Accounting Standards Board issued both aclarification on and an amendment to IAS21 (the effects of changes in foreignexchange rates). The clarification was immediately applicable for reportedresults. This states that inter company balances between any subsidiary (whichmay itself be a foreign subsidiary) and a foreign subsidiary may form part ofthe Group's investment in that foreign subsidiary and therefore, subject tocertain other tests, the exchange impact can be taken directly to equity ratherthan to net finance costs in the income statement. Previously, only balancesbetween certain companies qualified for this treatment. The quarterly resultsfor the three and nine months to 30 September 2005 have been restatedaccordingly from those originally published last year. This has resulted in anincrease of £nil million in net finance costs for the three months to 30September 2005 and an increase of £3 million in net finance costs for the ninemonths to 30 September 2005 (page 7), with a compensating adjustment todifferences on exchange in the statement of changes in total equity (page 8). The amendment to IAS21 allows inter company balances that form part of areporting entity's net investment in a foreign operation to be denominated in acurrency other than the functional currency of either the ultimate parent or theforeign operation itself. This means that certain exchange differencespreviously taken to the income statement are instead reflected directly inchanges in total equity. As this amendment was only adopted by the EU in 2006,the interim report to 30 June 2006 contained the first published results toreflect this change. The previously published results have been restatedaccordingly, which has resulted in an increase in net finance costs of£4 million for the year ended 31 December 2005 and £1 million and £5 millionrespectively for the three months and the nine months to 30 September 2005. Page 11 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 30.9.06 30.9.05 31.12.05 30.9.06 30.9.05 31.12.05 US dollar 1.820 1.843 1.819 1.868 1.769 1.717Canadian dollar 2.060 2.256 2.206 2.084 2.053 2.005Euro 1.461 1.460 1.463 1.475 1.467 1.455South African rand 12.021 11.626 11.574 14.511 11.247 10.889 CHANGES IN THE GROUP On 29 December 2004, the Group sold Etinera S.p.A., the distribution business ofits Italian subsidiary. In the first nine months of 2005, following the sale,volumes and profits in Italy benefited by 2 billion and £14 million respectivelyfrom a change in the terms of trade with Etinera. Around three-fifths of thesebenefits are expected to reverse over time. On 4 October 2005, the Group announced that it had agreed the sale of its 55 percent stake in BAR Honda, held through BARH Ltd. (BARH), to Honda and the salewas completed on 20 December 2005. For the period 7 January 2005 to 20 December2005, BARH was equity accounted, reflecting shared control with Honda. On 21 October 2005, the Group announced the exercise of its pre-emption rightsover shares in Skandinavisk Tobakskompagni AS, its Danish associate, and thetransaction was completed on 12 December 2005. This increased the Group'sholding from 26.6 per cent to 32.3 per cent at a cost of £95 million, resultingin goodwill of £69 million. On 25 November 2005, the Group acquired Restomat AG, the largest operator ofcigarette vending machines in Switzerland, at a cost of £25 million, resultingin goodwill of £7 million. 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. In August 2006, the Group purchased minority interests in its subsidiary inChile for a cost of £95 million, raising the Group shareholding from 70.4 percent to 96.4 per cent. The goodwill arising on this transaction was £84 millionand the minority interests in Group equity are reduced by £11 million. 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 which covered the cessation of production in the UK,Ireland and Canada, with production to be transferred elsewhere. The profit fromoperations for the year ended 31 December 2005 included a charge forrestructurings of £271 million. Page 12 Restructuring costs cont... Further restructurings continued in 2006 and on 22 September agreement wasreached on the closure of the plant at Zevenaar in the Netherlands. The plantwill close by the end of 2008 with the production being transferred to Bayreuthin Germany and Augustow in Poland. The nine months to 30 September 2006 includesa charge for restructurings of £164 million (2005: £142 million), mainly inrespect of £84 million for the initial costs for Zevenaar and further costs forthe UK and Canada restructurings. LOSSES/GAINS ON IMPAIRMENT OF A BUSINESS AND DISPOSAL OF BRANDS AND JOINTVENTURE The agreement to sell the Italian cigar business described on page 12 resultedin the recognition of an impairment charge of £16 million, which is included indepreciation and amortisation costs in the profit from operations in the ninemonths to 30 September 2006. In April 2005, the Group sold to Gallaher Group plc (Gallaher) its Benson &Hedges and Silk Cut trademarks in Malta and Cyprus, together with the Silk Cuttrademark in Lithuania, resulting in a gain on disposal of £68 million includedin other operating income in the profit from operations. The transactions are inaccordance with contracts of 1993 and 1994, in which Gallaher agreed to acquirethese trademarks in European Union states and the accession of Malta, Cyprus andLithuania necessitated the sale. The transactions in respect of BARH described on page 12 resulted in a gain of£5 million which was included in other operating income in the profit fromoperations for the year ended 31 December 2005. On 29 September 2006, the Group signed a trademark transfer agreement withPhilip Morris International. The Group will sell its Muratti Ambassador brand incertain markets, as well as the L&M and Chesterfield trademarks in Hong Kong andMacao, while acquiring the Benson & Hedges trademark in certain Africancountries, which would result in a net payment to the Group of US$115 million.As the transactions are subject to regulatory approval, they have not beenrecognised in these results to 30 September 2006. LIKE-FOR-LIKE INFORMATION The table below shows like-for-like revenue and profit from operations afterexcluding restructuring costs, loss on impairment of a business and gains ondisposal of brands, as well as the change in terms of trade in Italy. On thisbasis, the revenue for the nine months to 30 September 2006 of £7,251 millionwould represent growth of 6 per cent or 4 per cent at comparable rates ofexchange, and the profit from operations of £2,124 million would representgrowth of 8 per cent or 6 per cent at comparable rates of exchange. Revenue Profit from operations 9 months to 9 months to 30.9.06 30.9.05 30.9.06 30.9.05 £m £m £m £m As reported (page 7) 7,251 6,884 1,944 1,901Etinera - change in terms of trade (28) (14)Restructuring costs (page 7) 164 142Losses/(gains) on impairment of a business and disposal of brands (page 7) 16 (68) ------ ----- ------ ------- Like-for-like 7,251 6,856 2,124 1,961 ======= ===== ======= ======= Page 13 NET FINANCE COSTS Net finance costs comprise: 9 months to 30.9.06 30.9.05 restated £m £m Interest payable (308) (277)Interest and dividend income 90 80Fair value changes - derivatives 154 (151)Exchange differences (145) 186 ------- -------- 9 35 ------- -------- (209) (162) ======= ======== Net finance costs at £209 million were £47 million higher than last year,principally reflecting the impact of derivatives and exchange differences, aswell as higher interest rates. The £9 million gain (2005: £35 million) of fair value changes and exchangedifferences reflects a gain of £3 million (2005: £6 million) from the net impactof exchange rate movements and a gain of £6 million (2005: £29 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. These amounts donot always reflect an economic gain or loss for the Group and, in the quarterlyresults during 2005, the Group noted that it was reviewing the appropriatetreatment of these in the adjusted earnings per share calculations. At the 2005year end the Group decided that, in calculating the adjusted earnings per share,it is appropriate to exclude certain amounts. The adjustments for the ninemonths results to 30 September 2006 are as follows: (a) £nil million (2005: £8 million gain) relating to derivatives for which hedgeaccounting was obtained during 2005. (b) £nil million (2005: £11 million gain) relating to exchange in net financecosts where there is a compensating exchange amount reflected in differences inexchange taken directly to changes in total equity. The adjusted earnings per share for the nine months to 30 September 2005 havebeen adjusted accordingly from those originally reported last year. Excluding the above items, fair value changes and exchange differences are a netgain of £9 million compared to a net gain of £16 million in 2005. Page 14 ASSOCIATES The share of post-tax results of associates and joint ventures is afterexceptional charges and credits. In the nine months to 30 September 2006 Reynolds American benefited from thefavourable resolution of tax matters of which the Group's share was £17 million. In the year ended 31 December 2005, Reynolds American incurred restructuringcosts and a one-off charge related to the stabilisation inventory pool lossesassociated with the US tobacco quota buy-out programme. The Group's share (netof tax) of these amounted to £13 million (30 September 2005: £12 million) and£12 million (30 September 2005: £11 million) respectively. In addition, in thefourth quarter of 2005, Reynolds American benefited from the favourableresolution of tax matters of which the Group's share was £31 million, and alsomodified the previously anticipated level of support between certain brands andthe projected net sales of certain brands, resulting in a brand impairmentcharge of which the Group's share amounted to £29 million (net of tax). In the nine months to 30 September 2005 and the year to 31 December 2005, thecontribution from ITC in India included a benefit of £27 million (net of tax),principally related to the write-back of provisions for taxes partly offset bythe impairment of a non-current investment. 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 24.9 per cent for the nine months to 30September 2006 (30 September 2005: 27.1 per cent) is affected by the inclusionof the share of associates' post-tax profit in the Group's pre-tax results. Theunderlying tax rate for subsidiaries reflected in the adjusted earnings pershare shown below, was 29.7 per cent and 31.1 per cent in 2005 and the decreasereflects the inclusion of a tax credit in Canada in respect of prior years andchanges in the mix of profits. The charge relates to taxes payable overseas. EARNINGS PER SHARE Basic earnings per share are based on the profit for the period attributable toordinary shareholders and the average number of ordinary shares in issue duringthe period (excluding shares held by the Group's Employee Share OwnershipTrusts). For the calculation of the diluted earnings per share the average number ofshares reflects the potential dilutive effect of employee share schemes. The earnings per share are based on: 30.9.06 30.9.05 31.12.05 Earnings Shares Earnings Shares Earnings Shares restated restated £m m £m m £m m Basic 1,447 2,064 1,373 2,101 1,767 2,095Diluted 1,447 2,080 1,373 2,119 1,767 2,112 Page 15 Earnings per share cont... The earnings have been distorted by exceptional items, together with certaindistortions to net finance costs under IFRS (see page 14), and to illustrate theimpact of these distortions, the adjusted diluted earnings per share are shownbelow: Diluted earnings per share 9 months to Year to 30.9.06 30.9.05 31.12.05 restated restated pence pence pence Unadjusted earnings per share 69.57 64.79 83.66Effect of restructuring costs 5.72 6.13 10.13Effect of impairment charge on a business and gainon disposal of brands and joint venture 0.53 (3.21) (3.41)Effect of associates' restructuring costs, US Federaltobacco buy-out, brand impairments and exceptionaltax credits and other impairments (0.82) (0.18) (0.14)Net finance costs adjustments (0.89) (0.90) ------- ------- -------Adjusted diluted earnings per share 75.00 66.64 89.34 ======= ======= ======= Adjusted diluted earnings per share are based on:- adjusted earnings (£m) 1,560 1,412 1,887- shares (m) 2,080 2,119 2,112 Similar types of adjustments would apply to basic earnings per share. For thenine months to 30 September 2006, basic earnings per share on an adjusted basiswould be 75.59p (2005: 67.21p) compared to unadjusted amounts of 70.11p (2005:65.35p). DIVIDENDS The Directors declared an interim dividend out of the profit for the six monthsto 30 June 2006, which was paid on 13 September 2006, at the rate of 15.7p pershare. The interim dividend amounted to £323 million. The comparative dividendfor the six months to 30 June 2005 of 14.0p per share amounted to £293 million. In accordance with IFRS, the interim dividend is charged in the Group resultsfor the third quarter. The results for the nine months to 30 September 2006include the final dividend paid in respect of the year ended 31 December 2005 of33.0p per share, amounting to £685 million (2005: 29.2p per share and £617million), as well as the above interim dividend. Page 16 CONTINGENT LIABILITIES As noted in the Report and Accounts for the year ended 31 December 2005, 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 nine months to 30 September 2006, 28 million shares were boughtat a cost of £399 million (30 September 2005: 37 million shares at a cost of £394 million). During the year to 31 December 2005, 45 million shares were bought at a cost of£501 million. ------------------------------------------------ Copies of this Report will be posted to shareholders on 7 November 2006 and mayalso be obtained during normal business hours from the Company's RegisteredOffice at Globe House, 4 Temple Place, London WC2R 2PG and from our websitewww.bat.com Alan F Porter Secretary 26 October 2006 Page 17 This information is provided by RNS The company news service from the London Stock Exchange