British American Tobacco Regulatory News (BATS)

27 Oct 2005 07:00

British American Tobacco PLC27 October 2005 QUARTERLY REPORT TO 30 SEPTEMBER 2005 27 October 2005 SUMMARY NINE MONTHS RESULTS 2005 2004 Change Profit from operations - as reported £1,901m £3,321m -43% - 'like for like' £1,961m £1,800m +9% Adjusted diluted earnings per share 67.91p 55.07p +23% • The reported Group profit from operations was 43 per cent lower at £1,901 million, mainly due to the impact in 2004 of a significant £1,392 million gain on the Reynolds American transaction. However, profit from operations would have been 9 per cent higher, or 6 per cent at comparable rates of exchange, if exceptional items and the changes in the Group resulting from the merger of the Group's US businesses with R.J. Reynolds and the sale of Etinera, with the resulting change in terms of trade, are excluded. This 'like for like' information provides a better understanding of the subsidiaries' trading results than the 'headline' change in profit from operations. • On a reported basis, Group volumes from subsidiaries were affected by the changes in the Group noted above, resulting in a 2 per cent decrease to 505 billion. Excluding the impact of these transactions, there was good organic volume growth from subsidiaries of 2 per cent. The four global drive brands showed overall growth of 9 per cent on a 'like for like' basis. • Adjusted diluted earnings per share rose by 23 per cent, benefiting from the improved underlying operating performance, reduced net finance costs, a lower effective tax rate and minority interests, as well as the impact of the Reynolds American transaction and the share buy-back programme. While these factors also benefited the basic earnings per share, they were offset by the inclusion of the gain on the Reynolds American transaction in the 2004 comparatives and the basic earnings per share was lower at 65.73p (2004: 121.23p). • The Chairman, Jan du Plessis, commented: "The results as a whole continue to point to a highly satisfactory year, although the comparisons with 2004 will become more demanding, as the final quarter of last year contained significant one-off tax and interest benefits, while the uncertainties inherent in forecasting net finance costs under IFRS remain. However, based on good quality organic volume growth, British American Tobacco has real momentum." ENQUIRIES:INVESTOR RELATIONS: PRESS OFFICE:Ralph Edmondson/ 020 7845 1180 David Betteridge/Teresa La Thangue/ 020 7845 2888Rachael Cummins 020 7845 1519 Emily Brand BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 30 SEPTEMBER 2005 INDEX PAGE Chairman's comments 2Business review 4Group income statement 9Statement of changes in total equity 10Segmental analyses of revenue and profit 11Accounting policies and basis of preparation 13Convertible redeemable preference shares 15Foreign currencies 15Changes in the Group 16Restructuring costs 17Investment costs written off 18Gains on disposal of subsidiaries, non-current investmentsand brands 18Net finance costs 19Associates 20Taxation 20Earnings per share 20Dividends 22Contingent liabilities 22Share buy-back programme 23 CHAIRMAN'S COMMENTS 2. British American Tobacco has maintained its momentum during the firstnine months of 2005 with good 'like for like' growth in profit fromoperations of 9 per cent at current rates of exchange and 6 per centat comparable rates. The exceptional growth in adjusted dilutedearnings per share has also continued, rising by 23 per cent. I expect that shareholders understand by now that changes in thepresentation of the Group's results arising from the move toInternational Financial Reporting Standards (IFRS) are furthercomplicated by the merger of our US businesses with R.J. Reynolds inJuly 2004 and the sale of Etinera in December 2004. Investors areprobably also aware that, in 2005, the results include restructuringcharges and the profit arising from a disposal of brands. The 'like for like' information provided, by adjusting for thesefactors, gives a much better guide to the Group's performance thanthe 43 per cent 'headline' decline in profit from operations asreported on a statutory basis, mainly as a result of the impact ofthe £1.4 billion gain from the Reynolds American transaction in 2004. Adjusted volume from our subsidiary companies was 2 per cent ahead at503 billion cigarettes, a good level of organic volume growth.Strong performances in Russia, Turkey, Pakistan and Bangladesh morethan offset declines in Canada, South Korea, Argentina and Mexico. Our global drive brands continued to improve their growth rate,increasing by 9 per cent as a whole. On a 'like for like' basis, thestar performers continued to be Kent in Russia and Romania, alongwith Pall Mall in Germany and Hungary. Lucky Strike was marginallydown, due to industry declines in some of its key markets, despiteparticular success in France, Serbia, Indonesia and Argentina.Dunhill continued to improve in South Korea and Taiwan. Moving to the regions, Europe, Asia-Pacific, Latin America and Africaand Middle East were all well ahead, while the difficulties in Canadaand Japan remained. Although our market share in Japan is growing,conditions in Canada continue to concern us. The Group's associated companies achieved combined volumes of171 billion cigarettes and our share of their post tax results was£277 million, of which £165 million related to Reynolds American. Adjusted diluted earnings per share rose to 67.9p, an increase of23 per cent. The drivers of this growth are the same as they were atthe half year: a better 'like for like' operating performance,reduced net finance costs, a lower effective tax rate, lower minorityinterests, the Reynolds American transaction and the share buy-backprogramme. Chairman's comments cont... 3. In the first nine months, we have bought back around 37 millionshares at a cost of some £394 million and at an average price of£10.65 per share. We will be back in the market following thepublication of these results. In terms of productivity, negotiations about the proposed factoryclosure at Southampton in the UK have now been concluded and therestructuring costs of £142 million for the nine months principallyrelate to this closure. In addition, Imperial Tobacco Canada hasrecently announced that it is to close its manufacturing facilitiesin Canada and transfer production to the Group's plant in Mexico.Restructuring charges of approximately £200 million will be takenover the next three years, with the largest portion to be takenbefore the end of 2005. The annual savings from the Canadian closureshould be approximately £40 million, once the full benefits have beenrealised. On 21 October, we announced the exercise of our pre-emption rightsover part of Andresen Holdings' shareholding in STK, our Danishassociated company. As a result, the Group's shareholding in STKwill increase from 26.6 per cent to 32.3 per cent, at a purchaseprice of £95 million. We have also recently agreed the sale of ourremaining holding in British American Racing to Honda and confirmedthat we will withdraw from sponsorship of the team at the end of2006. Our commitment to Corporate Social Responsibility has been endorsedby our inclusion, for the fourth year running, in the Dow JonesSustainability Indices. The Group achieved the best scores in 11 outof the 22 areas covered, including all the environmental criteria. It seems appropriate to make a comment on the Supreme Court ofCanada's ruling that the British Columbian government can pursue itsclaim against the Canadian tobacco industry under the provisions ofthat Province's Tobacco Damages and Healthcare Costs Recovery Act.The decision does not find any company to be liable and the case willtake years to bring forward to trial. The results as a whole continue to point to a highly satisfactoryyear, although the comparisons with 2004 will become more demanding,as the final quarter of last year contained significant one-off taxand interest benefits, while the uncertainties inherent inforecasting net finance costs under IFRS remain. However, based ongood quality organic volume growth, British American Tobacco has realmomentum. Jan du Plessis 27 October 2005 BUSINESS REVIEW 4. The reported Group profit from operations was 43 per cent lower at£1,901 million, mainly due to the impact in 2004 of a significant£1,392 million gain on the Reynolds American transaction. However,profit from operations would have been 9 per cent higher, or 6 percent at constant rates of exchange, if exceptional items and thechanges in the Group resulting from the merger of the Group's USbusinesses with R.J. Reynolds and the sale of Etinera, together withthe resulting beneficial changes in terms of trade in Italy, areexcluded (see page 16). This 'like for like' information provides abetter understanding of the subsidiaries' trading results, with thestrong profit performance a reflection of the higher profit in allregions, except America-Pacific. On a reported basis, Group volumes from subsidiaries were affected bythe transactions noted above, resulting in a 2 per cent decrease to505 billion. Excluding the impact of these transactions, there wasgood organic volume growth from subsidiaries, with many marketscontributing to the growth of 2 per cent. The Group continues toinclude make-your-own cigarette 'stix' in volumes. The four global drive brands performed very well and showed overallgrowth of 9 per cent. Kent grew by 17 per cent with outstandingperformances in its major markets of Russia and Romania. Dunhillgrew 7 per cent for the quarter but, as a result of the substantiallyreduced industry volumes earlier this year in South Korea, itdeclined by 4 per cent for the nine months to September. LuckyStrike volumes were marginally lower following industry led volumedeclines in its key markets of Germany, Japan and Spain. Thesedeclines were largely offset by strong performances in France andmany of Lucky Strike's smaller markets. Pall Mall showed exceptionalgrowth of 23 per cent on a 'like for like' basis, as it excelled inall its key markets. In Europe, profit, excluding restructuring costs and the gain ondisposal of brands, increased by £42 million to £616 million, withstrong growth from Russia, Germany, France and Romania. Theintegration of the Smoking Tobacco and Cigars business into therespective markets, together with cost savings across the region,also contributed to the positive result. Regional volumes were up byaround 1 per cent to 184 billion as growth in Russia, France andPoland was offset by declines in Italy and Germany. In Italy, the virtual ban on indoor public smoking effective from thebeginning of this year and an excise increase at the end of last yearresulted in a total market decline of 6 per cent leading to lowerprofit and volumes. Market share was slightly down as a result ofincreased competition in the low-price segment. Profit was affectedby a £16 million reduction as a result of the sale of Etinera at theend of 2004 (see page 16). Business review cont... 5. Germany continued its excellent profit performance. In a reducedmarket size, profit increased substantially, driven by price and mixchanges, a significant reduction in the overall cost base and highercigarette market share, with strong growth from Pall Mall. Volumesin France were up in a total market that has shown signs ofstabilising, although consumer off-take share softened slightly.Profit increased impressively due to the higher volumes, driven bythe global drive brands, and lower costs. Russia continued its excellent performance with strong volume andmarket share growth, principally from the premium brands Kent andVogue. The continued focus on our global drive brands and nationalexpansion led to a better product mix and strong volume growth,resulting in significantly higher profit. In Romania, market sharegrew as Kent and Pall Mall recorded excellent share and volumeperformances resulting in a strengthening of the Group's marketleadership position and higher profits. In Switzerland, although costs were lower, profit and volumes wereadversely affected by an excise increase at the end of last year.Overall market share was slightly down due to increased pricecompetition but Lucky Strike and Pall Mall remained stable withParisienne growing share. In the Netherlands and Belgium, theintegration of the Smoking Tobacco and Cigars business, as well asother cost savings, contributed to improved profit although volumeswere lower. In Poland, profit was higher as volumes rose in anincreased market. Volumes in Ukraine were slightly down but profitgrew strongly as a result of product mix improvements through Kentand Pall Mall. In Hungary, profit and volume were adversely affectedby a continuing decline in the total market and down-trading. In Asia-Pacific, regional profit rose by £41 million to £418 millionas good performances in Australasia and Pakistan, a benefit in thefirst quarter from the timing of an excise payment in South Korea andthe good results from a number of the other markets more than coveredthe reductions in Malaysia and Vietnam. Regional volumes at103 billion were 4 per cent higher as strong increases in Pakistanand Bangladesh were partially offset by volume declines in SouthKorea, Vietnam and Malaysia. Although industry volumes remained under pressure, Australiacontinued its profit growth with stable volumes, higher margins andoverall market share up due to strong performances from Dunhill andWinfield. In New Zealand, higher margins and volumes led toincreased profit. Business review cont... 6. In Malaysia, excise taxes increased by a further 13 per cent afterlast year's severe increase and industry volumes continued to beunder pressure. Market share was in line with last year but profitwas impacted by the lower volumes, adverse product mix, pricecompetition and the contribution to a government sponsored leafprogramme. Although Pall Mall increased share, this was offset byreductions in Dunhill and non-drive brands. In Vietnam, market sharerose but lower industry volumes led to a decline in profit. Consumeroff-take and market share reached an all time high as State Express555 and Craven 'A' continued to grow. South Korea's profit reflected the first quarter excise benefit,although shipments declined significantly due to stocking by thetrade before the excise increase. The strong profit growth in thenine months also reflected productivity gains. Dunhill continued todeliver good share growth, while Vogue was relaunched in August. In Pakistan, higher margins and excellent volume growth by Gold Flakeand John Player Gold Leaf resulted in higher profit and market share.Volumes rose in Bangladesh but profit was lower as down-tradingcontinued and prices were maintained despite an excise increase. InSri Lanka, strong profit and share growth was achieved through JohnPlayer Gold Leaf and Benson & Hedges. In Latin America, profit at £378 million, increased by £53 million,as good performances were delivered in Brazil, Chile, Venezuela andPeru. Volume at 110 billion increased slightly as growth in manymarkets was offset by declines in Mexico and Argentina. In Brazil, profit was higher as the benefits of a stronger localcurrency, price increases, an improved product mix and higher volumesmore than offset increased brand and trade marketing investment andlower export leaf margins. Volumes were higher as a result of majoranti-illicit trade operations by various Government bodies. Good profit growth in Mexico was the result of higher margins,improved product mix and a stronger local currency, partly offset bylower volumes as the total market declined and market share fell inthe low-price segment. In Argentina, profit rose as price increasesoffset the impact of lower volumes and higher marketing investment.Premium brands, mainly Lucky Strike, continued to grow but overallvolumes were affected as price increases benefited the ultralow-price local manufacturers. In Chile, the good profit increase was the result of a strongercurrency, higher volumes and market share as Belmont significantlyimproved its market position. Excellent profit growth in Venezuelawas the result of a general recovery in consumer purchasing power,higher margins and strong volume growth, mainly from Viceroy, leadingto a higher market share. Profit in Peru increased due to a bettermix and lower expenses, as well as higher volumes. Strong profitperformance in the Central America and Caribbean area was driven byhigher volumes and increased margins. Business review cont... 7. Profit in the Africa and Middle East region grew by £49 million to£308 million with good performances mainly from South Africa, Turkeyand Iran. Volumes grew by 8 per cent to 76 billion as a result ofthe strong growth in Turkey and the markets in the Middle East. In South Africa, profit grew, benefiting from an improved product mixas Peter Stuyvesant continued its impressive growth to reach a recordmarket share, together with the stronger rand and higher pricing.These improvements were partially offset by lower volumes as industryvolumes declined due to illicit trade. Market share in Nigeriaincreased in a stable overall market, as a result of the Benson &Hedges and London brands gaining share after the authoritiescontinued to address the illicit trade. Strong volume growth in Iran, from Kent and Montana, resulted in ahigher profit. The Arabian Gulf markets increased volumes but notsufficiently to cover the higher marketing investment, leading tolower profit. Turkey continued to make good progress despite further excise changesthroughout the year, with strong volume growth driven by Viceroywhich increased market share significantly, while Pall Mall share wasstable. Losses were significantly reduced by the volume gains andlower costs. On a comparable basis, the America-Pacific regional profit was£43 million lower at £327 million, and volumes were 4 per cent lower.Profit was down in both Canada and Japan while volumes were alsolower in Canada. As the comparative period included the US tobaccobusinesses now merged with R.J. Reynolds and included in associates(see page 16), reported regional volumes were down by 42 per cent to33 billion and reported profit was £192 million lower. The profit contribution from Canada was down £16 million to£236 million as a result of a decline in volumes and a continuingshift in sales mix to low-price products which more than offset loweroperating costs and the impact of the stronger Canadian dollar. Thelow-price segment continued to grow slowly and represented 41 per centof the market in the third quarter. Within the low-price segment, abudget segment has developed, further widening the price gap betweenpremium brands and low-price products. For the nine months ImperialTobacco's market share declined by 3 percentage points to 56 per cent. In Japan, volumes were up resulting in an increased market share in adeclining total market with Kool and Kent increasing share, whileLucky Strike was stable. Profit was adversely affected by the impactof exchange and the non-recurrence of a benefit from a businessreorganisation included in prior years. This was partly offset byincreases in volumes and lower costs. Business review cont... 8. Unallocated costs, which are net corporate costs not directlyattributable to individual segments, were down £3 million at£72 million. The above regional profits were achieved before accounting forrestructuring costs and gains on the disposal of subsidiaries andbrands (see pages 17 and 18). Results of associates The Group's share of the post tax results of associates increased by£180 million to £277 million, reflecting the inclusion of£165 million for Reynolds American following the transactiondescribed on page 16. On a proforma US GAAP basis, as if thecombination with Brown & Williamson had been completed as of1 January 2004, Reynolds American reported that operating profit forthe nine months to September 2005 increased by 24 per cent and netincome rose 4 per cent. The growth in operating profit was dueprimarily to improved pricing, net merger related synergies and othercost reductions. These factors were partially offset by lowervolumes, higher net costs related to settlements and tobacco growerlegislation and charges related to the sale of the R.J. Reynoldspackaging business. The growth in net income was adversely affectedby the resolution of certain prior year tax matters in 2004. The Group's associated company in India, ITC, continued its strongvolume growth, leading to an increased profit, assisted further byone-off items (see page 20). Cigarette volumes of subsidiaries 3 months to 9 months to Year to30.9.05 30.9.04 30.9.05 30.9.04 31.12.04 Restated Restated Restated bns bns bns bns bns 65.6 64.0 Europe 183.9 181.1 240.2 34.8 32.9 Asia-Pacific 102.6 98.3 131.7 37.0 36.7 Latin America 109.7 108.9 147.6 25.9 25.4 Africa and Middle East 75.5 69.8 97.6 12.0 15.3 America-Pacific 33.0 56.7 68.4----- ----- ----- ----- -----175.3 174.3 504.7 514.8 685.5===== ===== ===== ===== ===== The above segmental analysis has been restated for the change inregional structure as described on page 12. In addition, associates' volumes for the nine months were 171.2 billion(2004: 105.2 billion) and, with the inclusion of these, total Groupvolumes would be 675.9 billion (2004: 620.0 billion). GROUP INCOME STATEMENT - unaudited 9. 3 months to 9 months to Year to30.9.05 30.9.04 30.9.05 30.9.04 31.12.04 £m £m £m £m £m 2,485 2,662 Revenue 6,884 8,201 10,768 Raw materials and consumables (819) (632) used (2,072) (1,964) (2,670) Purchase of finished goods by (285) distribution business (808) (1,086) Changes in inventories of finished goods and work in 7 (30) progress 19 29 4 (422) (364) Employee benefit costs (1,069) (1,187) (1,686) Depreciation and amortisation (78) (71) costs (267) (236) (375) 27 1,434 Other operating income 138 1,513 1,595 (552) (639) Other operating expenses (1,732) (2,227) (2,790)------ ------ ------ ------ ------ 648 2,075 Profit from operations 1,901 3,321 3,760 after: (100) (9) Restructuring costs (142) (50) (206) Investment costs written off (50) Gains on disposal of subsidiaries, non-current 1,392 investments and brands 68 1,392 1,427 (58) (65) Net finance costs (154) (204) (254) Share of post tax results of 81 45 associates 277 97 126 after: (5) (60) Restructuring costs (12) (60) (63) (11) US Federal Tobacco buy-out (11) Exceptional tax credits and 1 41 impairments 27 41------ ------ ------ ------ ------ 671 2,055 Profit before taxation 2,024 3,214 3,632 (194) (195) Taxation (547) (580) (673)------ ------ ------ ------ ------ 477 1,860 Profit for the period 1,477 2,634 2,959====== ====== ====== ====== ====== Attributable to: 443 1,822 Shareholders' equity 1,381 2,526 2,829====== ====== ====== ====== ====== 34 38 Minority interests 96 108 130====== ====== ====== ====== ====== Earnings per share: 21.25p 87.25p Basic 65.73p 121.23p 135.11p====== ====== ====== ====== ====== 21.03p 84.40p Diluted 65.17p 116.89p 131.22p====== ====== ====== ====== ====== See notes on pages 13 to 23. STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 10. 9 months to Year to 30.9.05 30.9.04 31.12.04 £m £m £m Differences on exchange 290 (12) 40Available-for-sale investments (2)Cash flow hedges 41Net investment hedges (34) ------ ------ ------Net gains/(losses) recognised directly in equity 295 (12) 40Profit for the period page 9 1,477 2,634 2,959 ------ ------ ------Total recognised income for the period 1,772 2,622 2,999- shareholders' equity 1,647 2,521 2,879- minority interests 125 101 120Employee share options - value of employee services 31 26 32 - proceeds from shares issued 27 32 36Dividends and other appropriations - ordinary shares (910) (823) (823) - convertible redeemable preference shares (33) (33) - amortisation of discount on preference shares (8) (8) - to minority shareholders (99) (114) (145)Purchase of own shares - held in Employee Share Ownership Trusts (47) (74) (76) - share buy-back programme (394) (368) (492)Other movements 13 7 8 ------ ------ ------ 393 1,267 1,498Balance 1 January 6,117 4,619 4,619Change in accounting policy page 13 (42) ------ ------ ------Balance at period end 6,468 5,886 6,117 ====== ====== ====== See notes on pages 13 to 23. SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE NINE MONTHS - unaudited 11. Revenue 30.9.05 30.9.04 Inter Inter External segment Revenue External segment Revenue £m £m £m £m £m £m Europe 2,595 410 3,005 3,266 489 3,755Asia-Pacific 1,216 12 1,228 1,097 1,097Latin America 1,106 1 1,107 922 7 929Africa and Middle East 708 25 733 601 15 616America-Pacific 811 811 1,772 32 1,804 ----- ----- ----- ----- ----- -----Revenue 6,436 448 6,884 7,658 543 8,201 ===== ===== ===== ===== ===== ===== The analysis for revenue is based on location of manufacture and figures basedon location of sales would be as follows: 30.9.05 30.9.04 £m £m Europe 2,633 3,319Asia-Pacific 1,299 1,201Latin America 1,116 931Africa and Middle East 1,024 958America-Pacific 812 1,792 ------ ------ 6,884 8,201 ====== ====== Profit from operations 30.9.05 30.9.04 Adjusted Adjusted Segment segment Segment segment result result* result result* £m £m £m £m Europe 559 616 532 574Asia-Pacific 410 418 377 377Latin America 373 378 323 325Africa and Middle East 307 308 257 259America-Pacific 324 327 1,907 519 ----- ----- ----- ----- 1,973 2,047 3,396 2,054Unallocated costs (72) (72) (75) (75) ----- ----- ----- ----- 1,901 1,975 3,321 1,979 ===== ===== ===== ===== *Excluding restructuring costs and gains on disposal of subsidiaries andbrands. Segmental Analyses of Revenue and Profit for the nine months cont... - unaudited 12. With effect from 1 January 2005, the Group has changed its regional structure,with South Korea included in Asia-Pacific rather than the America-Pacificregion. The 2004 analyses on page 11 reflect this change as do the IFRSanalyses for the year ended 31 December 2004 below: Revenue Location of manufacture Location of sales External Inter segment Revenue Revenue £m £m £m £m Europe 4,410 637 5,047 4,452Asia-Pacific 1,489 1 1,490 1,629Latin America 1,260 9 1,269 1,273Africa and Middle East 853 2 855 1,339America-Pacific 2,072 35 2,107 2,075 ------ ------ ------ ------ 10,084 684 10,768 10,768 ====== ====== ====== ====== Profit from operations Adjusted Segment result segment result* £m £m Europe 591 750Asia-Pacific 467 495Latin America 438 448Africa and Middle East 357 360America-Pacific 2,010 639 ------ ------ 3,863 2,692Unallocated costs (103) (103) ------ ------ 3,760 2,589 ====== ====== * Excluding restructuring costs, investment costs written off and gains on disposal of subsidiaries and non-current investments. The segmental analysis of the Group's share of post tax results of associatesis as follows: 30.9.05 30.9.04 31.12.04 £m £m £m Europe 27 28 38Asia-Pacific 84 49 67Africa and Middle East 1 1 1America-Pacific 165 19 20 ----- ----- ----- 277 97 126 ===== ===== ===== 13. ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited results for thenine months to 30 September 2005 and 30 September 2004, together withthe unaudited results for the twelve months ended 31 December 2004. Prior to 2005, the Group prepared its audited annual financialstatements and unaudited quarterly results under UK GenerallyAccepted Accounting Principles (UK GAAP). The audited UK GAAP annualfinancial statements for 2004, which represent the statutory accountsfor that year, and on which the auditors gave an unqualified opinion,have been filed with the Registrar of Companies. From 1 January2005, the Group is required to prepare its annual consolidatedfinancial statements in accordance with International FinancialReporting Standards (IFRS) as adopted by the European Union (EU) andimplemented in the UK. As the annual 2005 financial statements willinclude comparatives for 2004, the Group's date of transition to IFRSunder IFRS1 (First time adoption of IFRS) is 1 January 2004 and the2004 comparatives will be restated to IFRS. However, in preparingthe comparative figures for 2004, the Group has chosen to utilise theIFRS1 exemption from the requirement to restate comparativeinformation for IAS32 and IAS39 on financial instruments. To explain how the Group's reported performance and financialposition are affected by this change, the Report and Accounts for theyear ended 31 December 2004 set out on pages 75 to 84 a comparison ofkey figures under UK GAAP for 2004, with unaudited restated IFRSresults and an explanation of the principal differences between UKGAAP and IFRS, together with the accounting policies which are to beused under IFRS. These unaudited Group results for the nine months to 30 September2005 have been prepared on a basis consistent with the IFRSaccounting policies as set out on pages 81 to 84 of the Report andAccounts for the year ended 31 December 2004. These interimfinancial statements have been prepared under the historical costconvention, except in respect of certain financial instruments. Inaddition, these interim financial statements do not comply with allthe disclosures in IAS34 on interim financial reporting and aretherefore not in full compliance with IFRS. As noted above, IAS32 and IAS39 on financial instruments are beingapplied from 1 January 2005 and the changes to the balance sheet asat 1 January 2005 principally reflect: (a) The measurement of available-for-sale investments at fair value.(b) The reclassification of interest accruals to form part of the carrying value of the related asset or liability.(c) The measurement of all derivative financial instruments at fair value.(d) Derecognition of deferred losses on derivatives. Accounting Policies and Basis of Preparation cont... 14. At 1 January 2005, these changes resulted in increases in totalassets of £71 million (derivatives £113 million, trade and otherreceivables £(71) million, available-for-sale investments£16 million, deferred tax £10 million and cash and cash equivalents£3 million) and total liabilities of £113 million (borrowings£188 million, trade and other payables £(170) million, derivatives£92 million and deferred tax £3 million). The increase inborrowings reflects the inclusion of interest accruals, previouslyshown as creditors under UK GAAP, and adjustments to the carryingvalue of borrowings where there is a fair value hedge. Consequently, total equity on 1 January 2005 was £42 million lower,comprising £58 million for recognition of derivative financialinstruments and derecognition of deferred losses on derivatives less£16 million in respect of revaluing available-for-sale investments.The £58 million change is reflected in equity through a £44 millionreduction in the profit and loss reserves and a cash flow hedgingreserve of £26 million, partly offset by a £12 million increase incurrency translation reserves. The impact on the results for thefirst nine months of 2005 is set out in net finance costs on page 19.The Group has adopted the amendment to IAS39 on cash flow hedgeaccounting of forecast intra group transactions from 1 January 2005,as endorsement by the European Union is expected later this year. The effect of the change to IFRS on the profit for the three monthsand nine months to 30 September 2004 and the total equity at30 September 2004 is as follows: Profit for the period Total equity 3 months to 9 months to 30.9.04 30.9.04 30.9.04 £m £m £mUK GAAP 460 994 5,919Post retirement benefits 6 16 (254)Deferred taxation (7) (10) (69)Share schemes (2) (3) (6)Goodwill 132 368 368Disposal of subsidiaries 1,265 1,265Other 6 4 (72) ----- ----- ------IFRS 1,860 2,634 5,886 ===== ===== ====== The total equity under UK GAAP of £5,919 million comprisesshareholders' funds of £5,720 million, as disclosed in the ThirdQuarter Report for 2004, and minority interests of £199 million. Accounting Policies and Basis of Preparation cont... 15. The basis for the adjustments above, together with the implicationsfor the balance sheets as at 1 January 2004 and 31 December 2004 andthe profit for the quarterly results in 2004 and the year ended 31December 2004, are as explained on pages 75 to 80 of the Report andAccounts for the year ended 31 December 2004. The 'Other'adjustments to the total equity above mainly reflect the applicationof IFRS to the Group's carrying value of associated companies asdescribed on page 77 of the Report and Accounts. The 'Other'adjustments to the profit for the three and nine months to 30September 2004 include the impact of not restating previouslyreported quarterly figures for subsequent exchange rate changes asdescribed on page 16. Under UK GAAP, operating profit, net finance costs, taxation andminority interests included the Group's share of the associates'results, whereas the income statement under IFRS only includes theGroup's share of the post tax and minority results of the associatesas one line before the Group's pre-tax profit. These results are based on the IFRS expected to be applicable as at31 December 2005 and the interpretation of those standards. IFRSare subject to possible amendment by and interpretative guidancefrom the International Accounting Standards Board, as well as theongoing review and endorsement by the EU, and are therefore stillsubject to change. These figures may therefore require amendment,to change the basis of accounting and/or presentation of certainfinancial information, before their inclusion in the IFRS financialstatements for the year to 31 December 2005, when the Group preparesits first complete set of IFRS financial statements. CONVERTIBLE REDEEMABLE PREFERENCE SHARES On 7 June 1999, the Company issued 241,734,651 convertibleredeemable preference shares (CRPS) of 25p each to R&R Holdings SAas part consideration for the acquisition of the issued sharecapital of Rothmans International B.V. Subsequently, in accordancewith the terms of the CRPS, 50 per cent of the CRPS was redeemed forcash on 7 June 2000 and the remaining 50 per cent was converted intothe same number of ordinary shares on 3 June 2004. The amortisation of discount on preference shares referred to onpage 10 reflects the difference between the share price at the dateof the Rothmans transaction and the redemption price, which wasbeing amortised over the period to the redemption date. FOREIGN CURRENCIES The results of overseas subsidiaries and associated companies havebeen translated to sterling as follows: The income statement has been translated at the average rates forthe respective periods. The total equity has been translated at therelevant period end rates. For high inflation countries, the localcurrency results are adjusted for the impact of inflation prior totranslation to sterling at closing exchange rates. Foreign currencies cont... 16. The principal exchange rates used were as follows: Average Closing 30.9.05 30.9.04 31.12.04 30.9.05 30.9.04 31.12.04 US dollar 1.843 1.820 1.830 1.769 1.810 1.920Canadian dollar 2.256 2.418 2.384 2.053 2.290 2.300Euro 1.460 1.486 1.475 1.467 1.457 1.413South African rand 11.626 11.979 11.821 11.247 11.717 10.816 Under UK GAAP previously reported quarterly figures were restated tothe average rates for the year to date. Under IFRS, each quarter isnot restated for subsequent movements in foreign exchange during theyear and so the figures remain translated to sterling at the averagerates for the relevant periods. The comparative 2004 figures inthese results reflect this change, as well as the other adjustmentsto IFRS. CHANGES IN THE GROUP On 23 December 2003, the Group completed the acquisition of EnteTabacchi Italiani S.p.A. (ETI), Italy's state tobacco company. On29 December 2004 the Group sold Etinera S.p.A., the distributionbusiness of the Italian subsidiary, for €590 million. Afterallocating the relevant portion of the goodwill on the ETIacquisition to Etinera there was no gain on the disposal. It isestimated that Etinera contributed £823 million of revenue and£30 million of operating profit to the Group results for thenine months to 30 September 2004. In the first nine months of 2005, following the sale of Etinera,volumes and profits in Italy benefited by 2 billion and £14 millionrespectively from a change in the terms of trade with Etinera, butaround 60 per cent of this is expected to reverse over time. The Group announced on 27 October 2003, and completed on 30 July2004, the agreement to combine Brown & Williamson's (B&W) USdomestic businesses with R.J. Reynolds (RJR) under ReynoldsAmerican Inc., a new holding company 58 per cent owned by RJRshareholders and 42 per cent by the Group, through B&W. The Groupalso sold Lane to Reynolds American for US$400 million in cash.This transaction gave rise to goodwill relating to the Group'sinvestment in Reynolds American Inc. and a gain on the partialdisposal of the US domestic businesses. The goodwill on thetransaction is £1,285 million, with a gain on the partial disposalof £1,392 million and £1,389 million included in the profit fromoperations for the nine months to 30 September 2004 and the yearended 31 December 2004 respectively. Changes in the Group cont... 17. The Group consolidated the results of B&W and Lane for the sevenmonths to the end of July 2004, and from that date Reynolds AmericanInc. is accounted for as an associated company. In the nine monthsto 30 September 2005, the Group's share of Reynolds American posttax profit was £165 million (£188 million excluding exceptionalitems). In the nine months to 30 September 2004 B&W and Lanecontributed £965 million of revenue and £149 million of operatingprofit through to the end of July, while the Group's share ofReynolds American post tax profit was £19 million (£38 million afterexcluding exceptional items) for the subsequent two months. Excluding the Etinera, B&W and Lane operating profits, as well asrestructuring costs and the gain on disposal of subsidiaries, fromthe first nine months of 2004 would result in an operating profitfor 2004 of £1,800 million. On this basis, the operating profitfor the first nine months of 2005 of £1,961 million, afterexcluding restructuring costs and the benefit from the change interms of trade in Italy and from the disposal of brands, wouldrepresent growth of 9 per cent. The Group ceased to be the controlling company of British AmericanRacing (Holdings) Ltd. (BAR) on 7 December 2004 when BAR went intoadministration. The Group consequently ceased to consolidate BARfrom that date. In January 2005, a joint venture between BritishAmerican Tobacco and Honda Motor Co. Ltd. acquired the BARbusiness. As there is now shared control with Honda, BAR is equityaccounted from January 2005. On 4 October 2005, the Groupannounced that it had agreed the sale of its shares in BAR to Hondaand the sale is expected to take effect by 31 December 2005. Thegross assets of BAR Honda GP were £24 million at 30 September 2005. On 21 October 2005, the Group announced the exercise of itspre-emption rights over shares in STK, its Danish associatedcompany, for £95 million which will increase the Group's holdingfrom 26.6 per cent to 32.3 per cent. RESTRUCTURING COSTS During 2003, the Group commenced a detailed review of itsmanufacturing operations and organisational structure, including theinitiative to reduce overheads and indirect costs. During 2004,announcements were made principally in respect of a reorganisationof the Group's business in Germany, the closing and downsizing ofsome factories and the integration of the Smoking Tobacco and Cigarsoperations with the cigarette businesses in Europe and the UK. Theprofit from operations for the year ended 31 December 2004 includeda charge for restructurings of £206 million and for the nine monthsto 30 September 2004 included £50 million. Restructuring costs cont... 18. Manufacturing rationalisation continued in 2005. Following theannouncement in June that part of the UK production would betransferred overseas, in July the Group announced that its operatingcompanies in the UK and Ireland were initiating consultations onproposals to cease manufacture and transfer production elsewhere.The restructuring costs of £142 million for the nine months to 30September 2005 principally comprise fixed asset impairment chargesand staff costs in respect of the UK operations. On 20 October 2005, Imperial Tobacco Canada announced that it haddecided to close its cigarette factory in Guelph, Ontario, and itsfine cut/roll-your-own and leaf processing operations in Aylmer,Ontario. This will create restructuring charges of approximately£200 million over the next few years, with the largest portion to betaken before the end of 2005. INVESTMENT COSTS WRITTEN OFF Considering the uncertainty of the timetable and the significanthurdles in establishing a major strategic investment in China, in2004 the Group decided to write off £50 million reflecting all costspreviously capitalised in reaching that stage of the project. GAINS ON DISPOSAL OF SUBSIDIARIES, NON-CURRENT INVESTMENTSAND BRANDS In the year ended 31 December 2004, a gain on partial disposal of£1,389 million (nine months to 30 September 2004: £1,392 million)arose from the agreement to combine Brown & Williamson withR.J. Reynolds, with no gain on the disposal of Etinera, as describedon page 16. In 2004, the Group sold two non-current asset investments, its20 per cent stake in Lakson Tobacco Company in Pakistan and BolloreInvestissement S.A. in France. The total proceeds were £66 million,resulting in a gain on disposal of £38 million included in otheroperating income in the profit from operations. In April 2005, the Group sold to Gallaher Group plc its Benson &Hedges and Silk Cut trademarks in Malta and Cyprus, together with theSilk Cut trademark in Lithuania, resulting in a gain on disposal of£68 million included in other operating income in the profit fromoperations. The transactions are in accordance with contracts of1993 and 1994 in which Gallaher agreed to acquire these trademarks inEuropean Union states and the recent accession of Malta, Cyprus andLithuania necessitated the sale. NET FINANCE COSTS 19. Net finance costs comprise: 9 months to 30.9.05 30.9.04 £m £m Finance costs (234) (273)Finance income 80 69 ----- ----- (154) (204) ===== =====Comprising:Interest payable (277) (278)Interest and dividend income 80 68Fair value changes - derivatives (151)Exchange differences 194 6 ---- --- 43 6 ----- ----- (154) (204) ===== ===== Net finance costs at £154 million were £50 million lower than lastyear principally reflecting the impact of derivatives and exchangedifferences under IFRS as described in (a) and (c) below, togetherwith the benefit of the Group's cash flow since 30 September 2004and interest rates. The £43 million net gain (2004: £6 million) of fair value changesand exchange differences reflects: (a) IAS39 requires all derivatives to be recognised at fair valuein the accounts. This results in a £14 million benefit in the ninemonths on applying fair values to derivatives which do not qualifyfor hedge accounting under IAS39. However, this is principally inrespect of long term structural swaps as part of the Group'streasury management. While valuations under IAS39 will be subjectto volatility over time, the intention is to hold the swaps tomaturity. (b) £10 million related to swaps which in 2004 would have beenincluded in interest payable. (c) £19 million (2004: £6 million) principally reflecting exchangedifferences which were included in reserve movements under UK GAAP. Net finance costs under IFRS, especially with the implementation ofIAS39, are potentially more volatile than under UK GAAP. Asdescribed on page 22, the Group will review the appropriatetreatment of this volatility for the adjusted earnings per sharecalculations prior to publishing the first annual IFRS results for2005. ASSOCIATES 20. The share of post tax results of associates is after restructuringcosts, the US Federal Tobacco buy-out, exceptional tax credits andimpairments of brands and non-current investments. Following the combination of Brown & Williamson with R.J. Reynoldsas described on page 16, the new company Reynolds American incurredrestructuring costs in integrating the two businesses. For theperiod to 31 December 2004 the Group's share of these amounted to£63 million net of tax (30 September 2004: £60 million), mainly inrelation to asset write downs and staff costs. The contributionfrom Reynolds American also included a £49 million (net of tax)impairment charge following the implementation of a review of brandstrategies resulting from the combination of R.J. Reynolds and Brown& Williamson offset by a £49 million (30 September2004: £41 million)exceptional tax credit arising from taxrecoveries. In the nine months to 30 September 2005, ReynoldsAmerican incurred further restructuring costs and a one-off chargerelated to the stabilisation inventory pool losses associated withthe US tobacco quota buy-out programme. The Group's share of theseamounted to £12 million and £11 million respectively. In the nine months to 30 September 2005, the contribution from ITCin India included a benefit of £27 million (net of tax), principallyrelated to the write back of provisions for taxes partly offset bythe impairment of a non-current investment. The tax rate for associates, adjusted to remove exceptional itemsand as reflected in the adjusted earnings per share shown below, was37.4 per cent in 2005 (30 September 2004: 36.0 per cent). Theincrease reflects the inclusion of the US tobacco business inassociated companies following the Reynolds American transaction. TAXATION The tax rates in the income statement of 27.0 per cent in 2005 and18.0 per cent in 2004 are affected by the inclusion of the share ofassociates post tax profit in the Group's pre-tax results and thesignificant gain on the Reynolds American transaction in 2004. Theunderlying tax rate for subsidiaries, adjusted to remove exceptionalitems as reflected in the adjusted earnings per share shown below,was 30.6 per cent in 2005 and 33.4 per cent in 2004, and the decreasereflects changes in the mix of profits. The charge relates to taxespayable overseas. EARNINGS PER SHARE Basic earnings per share are based on the profit for the periodattributable to ordinary shareholders, after deducting theamortisation of discount on the convertible redeemable preferenceshares, and the average number of ordinary shares in issue duringthe period (excluding shares held to satisfy the Group's EmployeeShare Schemes). Earnings per share cont... 21. For the calculation of the diluted earnings per share the averagenumber of shares reflects the potential dilutive effect of employeeshare schemes and, up to their redemption on 3 June 2004, theconvertible redeemable preference shares. The earnings arecorrespondingly adjusted to the amount of earnings prior todeducting the amortisation of discount on the convertible redeemablepreference shares. The earnings per share are based on: 30.9.05 30.9.04 31.12.04 Earnings Shares Earnings Shares Earnings Shares £m m £m m £m mBasic 1,381 2,101 2,518 2,077 2,821 2,088Diluted 1,381 2,119 2,526 2,161 2,829 2,156 The earnings have been impacted by exceptional items and toillustrate the impact of these, the adjusted diluted earnings pershare are shown below: Diluted earnings per share 9 months to Year to 30.9.05 30.9.04 31.12.04 pence pence penceUnadjusted earnings per share 65.17 116.89 131.22Effect of restructuring costs 6.71 4.49 9.32Investment costs written off 2.32Effect of disposal of subsidiaries, non-current investments and brands (3.21) (64.41) (66.33)Effect of exceptional tax credits, impairments and US Federal Tobacco buy-out in associated companies (0.76) (1.90) ------ ------ ------Adjusted earnings per share 67.91 55.07 76.53 ====== ====== ====== Adjusted earnings per share are based on - adjusted earnings (£m) 1,439 1,190 1,650 - shares (m) 2,119 2,161 2,156 Similar types of adjustments would apply to basic earnings pershare. For the nine months to 30 September 2005, basic earnings pershare on an adjusted basis would be 68.49p (2004: 56.90p) comparedto unadjusted amounts of 65.73p (2004: 121.23p). Earnings per share cont... 22. 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 differencesincluded in reserve movements under UK GAAP, are required to beincluded in the income statement under current IFRS. As both theseitems are particularly subject to exchange rate movements in aperiod, they can be a volatile element of reported income, andespecially of net finance costs, and one which does not alwaysreflect an economic gain or loss for the Group. Subject to furtherdevelopments in IFRS during 2005, including interpretations of IFRSand best practice in reporting IFRS results, the Group will reviewthe appropriate treatment of these in the adjusted earnings pershare calculations prior to publishing the first annual IFRS resultsfor 2005. DIVIDENDS In accordance with IFRS the interim dividend amounting to£293 million (30 September 2004: £271 million), paid on 14 September2005, is charged in the Group results for the third quarter. Theresults for the nine months to 30 September 2005 also include thefinal dividend paid in respect of the year ended 31 December 2004amounting to £617 million (30 September 2004: £585 million). CONTINGENT LIABILITIES As noted in the Report and Accounts for the year ended 31 December2004, 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 number ofthese cases, the amounts of compensatory and punitive damages soughtare significant. At least in the aggregate and despite the qualityof defences available to the Group, it is not impossible that theresults of operations or cash flows of the Group in particularquarterly or annual periods could be materially affected by this. 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 23. The Group initiated an on-market share buy-back programme at the endof February 2003. During the nine months to 30 September 2005,37 million shares were bought at a cost of £394 million(30 September 2004: £368 million). During the year to 31 December 2004, 59 million shares were boughtat a cost of £492 million. ****** Copies of this Report will be posted to shareholders and may also beobtained during normal business hours from the Company's RegisteredOffice at Globe House, 4 Temple Place, London WC2R 2PG. Alan F Porter Secretary 27 October 2005 This information is provided by RNS The company news service from the London Stock Exchange