British American Tobacco Regulatory News (BATS)

28 Jul 2005 07:02

British American Tobacco PLC28 July 2005 INTERIM REPORT TO 30 JUNE 2005 28 July 2005 SUMMARYSIX MONTHS RESULTS 2005 2004 Change Profit from operations - as reported £1,253m £1,246m + 1% -'like for like' £1,211m £1,124m + 8%Adjusted diluted earnings per share 41.65p 33.87p +23%Interim dividend per share 14.0p 12.7p +10% • The reported Group profit from operations was slightly up at £1,253 million. However, profit from operations was 8 per cent higher 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 small 'headline' increase 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 3 per cent decrease to 329 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 6 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. The basic earnings per share were impacted by the same factors, as well as by exceptional items, partly offset by the conversion of the redeemable preference shares, and increased to 44.48p (2004: 33.98p). • The Board has declared an interim dividend of 14.0p to be paid on 14 September 2005, which represents a 10 per cent increase on last year. • The Chairman, Jan du Plessis, commented "Overall, we have had an exceptional half year, although I feel obliged to remind shareholders that the comparisons with 2004 will inevitably become more demanding, in the light of the one-off tax benefits that occurred in the second half of last year. There are also considerable uncertainties associated with forecasting finance costs under IFRS. However, in a challenging environment for global consumer goods companies, we are demonstrating our ability to achieve organic volume growth. The encouraging profit growth in four of our five regions, the continuing benefit arising from the Reynolds American transaction and the real momentum behind our global drive brands all point to a highly satisfactory year." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson/ 020 7845 1180 David Betteridge/ 020 7845 2888 Teresa La Thangue/Emily BrandRachael Cummins 020 7845 1519 BRITISH AMERICAN TOBACCO p.l.c. INTERIM REPORT TO 30 JUNE 2005 INDEX PAGE Chairman's comments 2Business review 5Independent review report to British American Tobacco p.l.c. 11Group income statement 13Statement of changes in total equity 14Group balance sheet 15Group cash flow statement 17Segmental analyses of revenue and profit 18Accounting policies and basis of preparation 20Convertible redeemable preference shares 23Foreign currencies 23Changes in the Group 24Restructuring costs 25Investment costs written off 25Gains on disposal of subsidiaries, non-current investments and brands 26Net finance costs 26Associates 27Taxation 28Earnings per share 28Cash flow 30Dividends 31Shareholders' funds 32Contingent liabilities 32Share buy-back programme 33 CHAIRMAN'S COMMENTS 2. British American Tobacco has achieved good underlying growth inprofit and exceptional growth in adjusted diluted earnings per shareduring the first half of 2005. On a 'like for like' basis, profitfrom operations in subsidiary companies grew by 8 per cent. As was the case in the first quarter, the changes in presentation asa result of moving to International Financial Reporting Standards(IFRS) are further complicated by the significant transactions thattook place last year. The comparison of the Group's results withthose for the previous half year has been distorted by the merger ofour US businesses with R.J. Reynolds, the sale of Etinera, togetherwith the resulting changes in terms of trade in Italy, restructuringcharges and the profit arising from a disposal of brands. The £42 million restructuring charge principally relates to therecently announced factory rationalisation proposals in the UK, whilethe £68 million profit from the disposal of brands arises from a saleof some trademarks to Gallaher. The adjustments made by removing the above distortions provide 'likefor like' information and therefore give a clearer picture of thesubsidiaries' results than the small 'headline' growth in profit fromoperations. Although reported volumes for the Group's subsidiaries were down3 per cent to 329 billion, the results are significantly better, withgood organic volume growth of 2 per cent, if adjusted for thetransactions referred to earlier. Growth from the best performingmarkets, such as Turkey, Russia, Pakistan, Iran, Romania andBangladesh, more than made up for the declines in Italy, Vietnam andSouth Korea. The Group's global drive brands, Dunhill, Kent, Lucky Strike and PallMall, showed improved overall momentum, increasing by 6 per cent on a'like for like' basis. There were strong performances in Russia,Romania, France and Germany. Kent and Pall Mall continued to achieveoutstanding results, while Lucky Strike resumed growth. Dunhill'svolumes were lower as a result of market declines in South Korea andMalaysia. Profit from four of the Group's five regions was well ahead, growingby 14 per cent on a 'like for like' basis compared to the first halfof 2004, with strong growth in Russia, Germany, France, Australasia,Brazil, Mexico and South Africa. However, in the America-Pacificregion, conditions in Canada and Japan remain very difficult,although Canada's second quarter performance is encouraging andmarket share in Japan is slightly up. Chairman's comments cont... 3. The combined volumes from the Group's associated companies, ReynoldsAmerican, ITC and STK, amounted to 113 billion, an excellentperformance. Our share of their post tax results, which has to beincluded at the pre-tax level under IFRS, was £196 million, of which£114 million relates to Reynolds American. Reynolds Americancontinues to benefit from merger related synergies and other costreductions. Adjusted diluted earnings per share rose to 41.65p, an increase of 23per cent. In addition to the improved underlying operatingperformance, the Group's growth in earnings was driven by reduced netfinance costs, mainly as a result of the impact of IFRS, a lowereffective tax rate, lower minority interests, the Reynolds Americantransaction and the share buy-back programme. During the first half of the year, some 25 million shares were boughtback at a cost of around £260 million and at an average price of£10.40 per share. The programme will restart following thepublication of these results. The Board has declared an interim dividend of 14p per share, in linewith its policy, announced in February 2005, that the interimdividend should represent one-third of the previous year's totaldividend, unless there are any special factors to be taken intoaccount. The dividend will be paid on 14 September to shareholderson the Register at 5 August 2005. The results demonstrate that we are making good progress with thegrowth element of our strategy. There have also been some importantdevelopments in terms of improving our productivity and demonstratingthat we are managing our business in a responsible manner. In July, our operating companies in the UK and Ireland announced thestart of a consultation process about proposals to ceasemanufacturing and transfer production elsewhere. We appreciate thatthis is a difficult step but the companies are committed to doing allthey can to mitigate the impact of job losses. It is, sadly, aninescapable fact that costs in Western Europe are much higher thanelsewhere in the world, as illustrated by the potential savings ofaround £40 million per year. In terms of our focus on managing our business responsibly, the clearhighlight has been the launch of a less harmful form of tobacco,Swedish-style snus, in two test markets, Sweden and South Africa.Snus is not smoked but comes in tiny sachets of moist tobacco thatare placed under the upper lip. The move is part of our continuingcommitment to harm reduction and the early signs from the testmarkets are encouraging, particularly in South Africa, where snus isa virtually unknown product. Chairman's comments cont... 4. We have also recently published our fourth Social Report on ourwebsite, www.bat.com, rather than distributing it as a printeddocument to all shareholders, although we are sending shareholders abooklet providing a sample of the information in the full report. Overall, we have had an exceptional half year, although I feelobliged to remind shareholders that the comparisons with 2004 willinevitably become more demanding, in the light of the one-off taxbenefits that occurred in the second half of last year. There arealso considerable uncertainties associated with forecasting financecosts under IFRS. However, in a challenging environment for global consumer goodscompanies, we are demonstrating our ability to achieve organic volumegrowth. The encouraging profit growth in four of our five regions,the continuing benefit arising from the Reynolds American transactionand the real momentum behind our global drive brands all point to ahighly satisfactory year. Jan du Plessis 28 July 2005 BUSINESS REVIEW 5. The reported Group profit from operations was slightly up at£1,253 million. However, profit would have increased by 8 per cent,or 7 per cent at constant rates of exchange, if exceptional items andthe changes in the Group resulting from the merger of the Group's USbusinesses with R.J. Reynolds and the sale of Etinera, together withthe resulting changes in terms of trade in Italy, are excluded. This'like for like' information provides a better understanding of thesubsidiaries trading results, with a strong profit performancereflecting higher profit in all regions, except America-Pacific. On a reported basis, Group volumes from subsidiaries were affected bythe transactions noted above, resulting in a 3 per cent decrease to329 billion. Excluding the impact of these transactions, there wasgood organic volume growth from subsidiaries, with many marketscontributing to the growth of 2 per cent. As noted in the 2004Report & Accounts, Group volumes now include make-your-own cigarette'stix'. The four global drive brands performed well and showed overall growthof 6 per cent on a 'like for like' basis. Kent grew by 16 per cent with outstanding performances in Russia andRomania. A decline of 10 per cent in Dunhill volumes was mainlyattributable to the substantially reduced industry volumes in SouthKorea, with reductions in Malaysia and South Africa offset byimpressive growth in Taiwan and good increases in the duty-freebusiness. Lucky Strike resumed its growth, improving by 1 per cent despiteindustry led volume declines in its key markets of Germany, Japan andSpain. These declines were more than offset by strong performancesin France and many of Lucky Strike's smaller markets. Pall Mallshowed exceptional growth of 18 per cent on a 'like for like' basis,as it excelled in all its key markets. In Europe, profit, excluding restructuring costs and the gain ondisposal of brands, increased by £38 million to £379 million, withstrong growth from Russia, Germany, France and Romania. Theintegration of the Smoking Tobacco and Cigars business into therespective markets, together with other cost savings across theregion, also contributed to the positive result. Although regionalvolumes were up 1 per cent at 118 billion, they were 1 per cent loweron a 'like for like' basis as strong growth in Russia and increasesin France and Poland were offset by declines in Italy and Germany. Business review cont... 6. In Italy, the virtual ban on indoor public smoking effective from thebeginning of this year resulted in a total market decline, leading tolower profit and volumes. Pall Mall has continued to grow marketshare over the last three quarters with MS market share stable overthe same period. Profit was affected by a net £4 million reductionas a result of the sale of Etinera at the end of 2004 partly offsetby the consequent change in the terms of trade (see page 24). The excellent profit increase in Germany was achieved through priceincreases and cost reductions. Cigarette market share grew in adeclining market through Lucky Strike and Pall Mall, while othertobacco products continued to perform strongly. Market share andvolumes in France were slightly up, driven by Lucky Strike andDunhill, while profit benefited from lower costs. Russia continued its excellent performance as volume grew strongly,driven mainly by the premium brands Kent and Vogue, resulting in anincreased market share. The better product mix and strong volumegrowth led to a significantly higher profit. In Romania, profit waswell ahead due to an improved product mix and the higher margins ofthe drive brands Kent and Pall Mall. In Switzerland, volume and profit were affected by an excise increasein December, but Parisienne continued its share growth with LuckyStrike and Pall Mall stable, although overall market share was down.In the Netherlands and Belgium, the integration of the SmokingTobacco and Cigars business, as well as other cost savings,contributed to improved profit although volumes were lower. InPoland, volumes grew in an increased market with higher market sharefrom Viceroy. This led to a good profit growth. In Ukraine, althoughvolumes were slightly down, profit grew, driven by product miximprovement through Kent and Pall Mall. In Hungary, despite highermarket share, a continuing decline in the size of the market andconsumer down-trading adversely affected volumes and profits. In Asia-Pacific, regional profit rose by £20 million to £259 million.There were good performances in Australasia and Pakistan, a benefitfrom the timing of an excise payment in South Korea and goodperformances in a number of other markets. This more than coveredthe lower profits in Malaysia and Bangladesh. Regional volumes at68 billion were 4 per cent higher as strong increases in Pakistan andBangladesh were partially offset by volume declines in South Korea. Australia continued its profit growth despite a small decline involumes, with higher margins and overall market share up due tostrong performances from Dunhill and Winfield. In New Zealand,higher margins led to increased profit, while volumes were stable. Business review cont... 7. Following the severe excise increase last September, profit inMalaysia was markedly lower as a result of declining volumes, pricecompetition, an adverse product mix, higher marketing investment andthe incremental costs of complying with new regulations. Pall Mallincreased market share, but reductions in Dunhill and non-drivebrands led to a small overall decline in share. In Vietnam, marketshare rose but lower industry volumes led to a decline in profit. Due to the timing of excise payments, South Korea delivered strongprofit growth. Although volumes were lower in a substantiallyreduced total market, there was strong market share growth driven byDunhill. In Pakistan, excellent volume growth by Gold Flake and John PlayerGold Leaf resulted in much higher profit and market share. Volumesincreased in Bangladesh but profit was lower as consumers continuedto down-trade. In Latin America, profit at £239 million increased by £37 million, asgood performances were delivered in Brazil, Mexico, Venezuela andPeru. Volume at 73 billion increased slightly as the impact ofrecent price increases in Mexico and Argentina was offset by volumegrowth in other markets. In Brazil, profit was higher with price increases and an improvedproduct mix, assisted by a stronger local currency. Volumes alsoincreased as a result of major anti-illicit trade operations,involving various Government bodies, although local low pricemanufacturers benefited the most. Good profit growth in Mexico was the result of price increases andproduct mix, partly reduced by lower volumes as the total marketdeclined and market share fell in the low-priced segment. InArgentina, profit rose due to price increases, partly offset by lowervolumes. Volumes were affected by higher prices which benefited thelocal ultra low price manufacturers and also encouraged the growth ofillicit trade. In Chile, a good profit increase resulted from higher volumes, asBelmont significantly improved its market share, and improvedmargins. Excellent profit growth in Venezuela was achieved throughstrong volume growth, leading to an increased market share, andhigher margins. In Peru, profits increased due to a better mix andlower expenses, with volumes also up. A strong profit performance inthe Central America and Caribbean area was driven by higher volumes. Profit in the Africa and Middle East region grew by £33 million to£200 million with good performances especially from South Africa.Volumes grew by 12 per cent to 50 billion as a result of the stronggrowth in Turkey and the markets in the Middle East. Business review cont... 8. In South Africa, profit grew strongly, benefiting from improvedpricing, a better product mix as Peter Stuyvesant continued itsgrowth and the stronger rand, partly offset by slightly lower volumesas the total market declined. The good market share growth inNigeria continued, driven by Benson & Hedges, while profit was inline with last year as the overall market decline resulted in lowervolumes. Volume gains in Iran, following the continued growth of Kent andMontana, together with stable volumes in Iraq, with the growth ofViceroy, resulted in higher profit in both markets. In Egypt, goodvolume growth from Rothmans and the strong performance of Viceroyafter its launch last year, led to a good profit increase. In theArabian Gulf markets, there were increased volumes but higher brandinvestment affected profit. The impressive volume growth in Turkey continued. Pall Mall wassignificantly up and Viceroy increased market share by more than7 percentage points, leading to a reduction in the level of lossesincurred in this market. On a comparable basis, the America-Pacific regional profit was£31 million lower at £206 million, and volume was 4 per cent lower,as profit was down in both Canada and Japan and volumes also fell inCanada. As the comparative period included the US tobacco businessnow merged with R.J. Reynolds and included in associates (see page24), reported regional volumes were down by 49 per cent to 21 billionand reported profit was £174 million lower. The profit contribution from Canada was down £19 million to£150 million as lower operating costs were more than offset by adecline in volumes and an adverse sales mix. This was driven by thecontinued decline of the premium segment, down to 60 per cent of thetotal market, and consequent growth of the low-price segment, whichincreased from 28 per cent to 40 per cent of the market. ImperialTobacco's share of the low-price segment grew from 30 to 39 per cent,giving an overall market share of 57 per cent, down 4 percentagepoints. In Japan, market share was up as volumes were maintained in adeclining total market, with Kool's share higher and Kent stable.Profit was adversely affected by the impact of exchange and the non-recurrence of a benefit from a business reorganisation included inprior periods. However, this was partly offset by a favourableproduct mix, lower overheads and lower marketing investment. Unallocated costs, which are net corporate costs not directlyattributable to individual segments, were up £14 million at£56 million, mainly due to exchange gains in the 2004 comparativeperiod. The above regional profits were achieved before accounting forrestructuring costs and the gain on disposal of brands (see pages 25and 26). Business review cont... 9. Results of associatesThe Group's share of the post tax results of associates increased by£144 million to £196 million, reflecting the inclusion of£114 million for Reynolds American following the transactiondescribed on page 24. On a pro-forma US GAAP basis, as if thecombination with Brown & Williamson had been completed as of1 January 2004, Reynolds American reported that first half 2005operating profit increased 35 per cent and net income rose 43 percent. This was due primarily to improved pricing, merger relatedsynergies and other cost reductions, a benefit related to the MSAPhase II growers' trust and a lower effective tax rate. These factorswere partially offset by lower volume, merger related costs andcharges related to the sale of the R.J. Reynolds packaging business. The Group's associated company in India, ITC, continued its strongvolume growth, leading to an increased contribution which was alsoboosted by one-off items (see page 27). Cash flowThe Group's net cash flow from operating activities at £880 millionwas £71 million lower. The comparison of cash generated fromoperations and dividends received from associates is affected by thetransactions described on page 24, as well as the timing of cashflows and run-off of restructuring provisions. Net cash inflows from investing activities were £40 million comparedto an outflow of £43 million in the comparative half year, despite ahigher level of capital expenditure and relatively flat interestreceived. This change was due mainly to the disposal of intangiblesduring the first half of 2005. Net cash outflows from financing activities were £890 million, down£523 million on the first half of 2004, as in 2005 the proceeds fromnew borrowings exceeded repayments by £308 million while in 2004repayments exceeded proceeds by £246 million. The other principaloutflows were £617 million for dividends to Group shareholders(2004: £585 million), £264 million for the share buy-back programme(2004: £280 million) and £172 million of interest paid(2004: £197 million). The above flows resulted in a net increase of cash and cashequivalents of £30 million compared to a net decrease of £505 millionin the first half of 2004. These cash flows, after an exchange benefit of £27 million, resultedin cash and cash equivalents, net of overdrafts, increasing by £57million in the half year to £1,787 million. Business review cont... 10. Borrowings, excluding overdrafts, at £7,494 million were£427 million higher than at 31 December 2004, principally reflectingincremental net debt of £308 million and an £188 million adjustmentfrom the adoption of IAS39 at 1 January 2005 (see page 21), partlyoffset by a favourable exchange impact of £113 million. The netasset in respect of derivative financial instruments related toborrowings, including external derivatives taken out in respect ofinter company trading, decreased by £2 million to £80 million at30 June 2005, after taking into account an increase of £71 millionarising on the adoption of IAS39. Current available-for-sale investments at 30 June 2005 were£109 million (31 December 2004: £86 million). Current loans andreceivables were £32 million (31 December 2004: £49 million). Cigarette volumes of subsidiaries 3 months to 6 months to Year to30.6.05 30.6.04 30.6.05 30.6.04 31.12.04 Restated Restated Restated bns bns bns bns bns 61.6 61.5 Europe 118.3 117.1 240.2 36.1 33.9 Asia-Pacific 67.8 65.4 131.7 36.4 35.6 Latin America 72.7 72.2 147.6 24.6 23.1 Africa and Middle East 49.6 44.4 97.6 11.4 21.8 America-Pacific 21.0 41.4 68.4----- ----- ----- ----- -----170.1 175.9 329.4 340.5 685.5===== ===== ===== ===== ===== The above segmental analyses has been restated for the change in regionalstructure as described on page 19. In addition, associates' volumes for the six months were 113.1 billion(2004: 56.4 billion) and, with the inclusion of these, total Groupvolumes would be 442.5 billion (2004: 396.9 billion). INDEPENDENT REVIEW REPORT TO BRITISH AMERICAN TOBACCO p.l.c. 11. IntroductionWe have been instructed by the Company to review the financialinformation for the six months ended 30 June 2005, which comprisesthe Group income statement, the statement of changes in total equity,the Group balance sheet, the Group cash flow statement, the segmentalanalyses of revenue and profit for the six months, the accountingpolicies and basis of preparation and the related notes. We haveread the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. Directors' responsibilitiesThe interim report, including the financial information containedtherein, is the responsibility of, and has been approved by theDirectors. The Directors are responsible for preparing the interimreport in accordance with the Listing Rules of the Financial ServicesAuthority. As disclosed on page 81 of the Report and Accounts for the year ended31 December 2004, the next annual financial statements of the Groupwill be prepared in accordance with accounting standards adopted foruse in the European Union. This interim financial information hasbeen prepared in accordance with the basis set out on pages 81 to 84of the Report and Accounts for the year ended 31 December 2004. The accounting policies are consistent with those that the Directorsintend to use in the next annual financial statements. As explainedin the 'Accounting policies and basis of preparation' there is,however, a possibility that the Directors may determine that somechanges are necessary when preparing the full annual financialstatements for the first time in accordance with accounting standardsadopted for use in the European Union. The IFRS standards and IFRICinterpretations that will be applicable and adopted for use in theEuropean Union at 31 December 2005 are not known with certainty at thetime of preparing the interim financial information. Review work performedWe conducted our review in accordance with guidance contained inBulletin 1999/4 issued by the Auditing Practices Board for use in theUnited Kingdom. A review consists principally of making enquiries ofGroup management and applying analytical procedures to the financialinformation and underlying financial data and, based thereon,assessing whether the disclosed accounting policies have beenapplied. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. Independent review report to British American Tobacco p.l.c. cont... 12. It is substantially less in scope than an audit and thereforeprovides a lower level of assurance. Accordingly we do not expressan audit opinion on the financial information. This report,including the conclusion, has been prepared for and only for theCompany for the purpose of the Listing Rules of the FinancialServices Authority and for no other purpose. We do not, in producingthis report, accept or assume responsibility for any other purpose orto any other person to whom this report is shown or into whose handsit may come save where expressly agreed by our prior consent inwriting. Review conclusionOn the basis of our review we are not aware of any materialmodifications that should be made to the financial information aspresented for the six months ended 30 June 2005. PricewaterhouseCoopers LLPChartered Accountants1 Embankment PlaceLondonWC2N 6RH28 July 2005 GROUP INCOME STATEMENT - unaudited 13. 3 months to 6 months to Year to30.6.05 30.6.04 30.6.05 30.6.04 31.12.04 £m £m £m £m £m 2,292 2,904 Revenue 4,399 5,539 10,768 Raw materials and consumables (640) (709) used (1,253) (1,332) (2,670) Purchase of finished goods by (241) distribution business (523) (1,086) Changes in inventories of finished goods and work in 41 12 progress 12 59 4 (342) (434) Employee benefit costs (647) (823) (1,686) Depreciation and amortisation (115) (85) costs (189) (165) (375) 87 36 Other operating income 111 79 1,595 (652) (841) Other operating expenses (1,180) (1,588) (2,790)------ ------ ------ ------ ------ 671 642 Profit from operations 1,253 1,246 3,760 after: (42) (36) Restructuring costs (42) (41) (206) Investment costs written off (50) Gains on disposal of subsidiaries, non-current 68 investments and brands 68 1,427 (50) (85) Net finance costs (96) (139) (254) Share of post tax results of 108 27 associates 196 52 126 after: Restructuring costs (63) Exceptional tax credits and 26 impairments 26------ ------ ------ ------ ------ 729 584 Profit before taxation 1,353 1,159 3,632 (187) (188) Taxation (353) (385) (673)------ ------ ------ ------ ------ 542 396 Profit for the period 1,000 774 2,959====== ====== ====== ====== ====== Attributable to: 510 360 Shareholders' equity 938 704 2,829====== ====== ====== ====== ====== 32 36 Minority interests 62 70 130====== ====== ====== ====== ====== Earnings per share 24.22p 17.33p Basic 44.48p 33.98p 135.11p====== ====== ====== ====== ====== 24.04p 16.72p Diluted 44.14p 32.49p 131.22p====== ====== ====== ====== ====== See notes on pages 20 to 33. STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 14. 6 months to Year to 30.6.05 30.6.04 31.12.04 £m £m £m Differences on exchange 70 (118) 40Cash flow hedges 24Net investment hedges (13) ------ ------ ------Net gains/(losses) recognised directly in equity 81 (118) 40Profit for the period page 13 1,000 774 2,959 ------ ------ ------Total recognised income for the period 1,081 656 2,999- shareholders' equity 996 601 2,879- minority interests 85 55 120Employee share options - value of employee services 19 17 32 - proceeds from shares issued 23 19 36Dividends and other appropriations - ordinary shares (617) (552) (823) - convertible redeemable preference shares (33) (33) - amortisation of discount on preference shares (8) (8) - to minority shareholders (60) (60) (145) Purchase of own shares - held in Employee Share Ownership Trusts (47) (68) (76) - share buy-back programme (264) (280) (492)Other movements 11 5 8 ------ ------ ------ 146 (304) 1,498Balance 1 January 6,117 4,619 4,619Change in accounting policy page 20 (42) ------ ------ ------Balance at period end 6,221 4,315 6,117 ====== ====== ====== See notes on pages 20 to 33. GROUP BALANCE SHEET - unaudited 15. 30.6.05 30.6.04 31.12.04 £m £m £mAssetsIntangible assets 7,612 7,893 7,700Property, plant and equipment 2,167 2,331 2,162Investments in associates and joint ventures 1,965 368 1,717Retirement benefit assets 26 22 16Deferred tax assets 233 464 246Available-for-sale investments 28 35 14Trade and other receivables 157 183 188Derivative financial instruments 150 90 134 ------ ------ ------Total non-current assets 12,338 11,386 12,177 ====== ====== ====== Inventories 2,331 2,598 2,143Income tax receivable 32 34 51Trade and other receivables 1,440 1,729 1,422Available-for-sale investments 109 91 86Derivative financial instruments 86 8 45Cash and cash equivalents 1,860 1,574 1,851 ------ ------ ------Total current assets 5,858 6,034 5,598 ====== ====== ======Total assets 18,196 17,420 17,775 ====== ====== ====== See notes on pages 20 to 33. GROUP BALANCE SHEET - unaudited 16. 30.6.05 30.6.04 31.12.04 £m £m £mCapital and reservesShareholders' funds 5,996 4,093 5,919 after deducting cost of own shares held in Employee Share Ownership Trusts (193) (213) (190)Minority interest 225 222 198 ------ ------ ------Total equity 6,221 4,315 6,117 ====== ====== ====== LiabilitiesBorrowings 5,728 6,344 6,049Retirement benefit liabilities 516 914 548Deferred tax liabilities 236 219 233Other provisions for liabilities and charges 121 217 143Trade and other payables 162 222 144Derivative financial instruments 65 39 41 ------ ------ ------Total non-current liabilities 6,828 7,955 7,158 ====== ====== ====== Borrowings 1,838 759 1,139Income tax payable 318 414 352Other provisions for liabilities and charges 248 232 298Trade and other payables 2,642 3,740 2,682Derivative financial instruments 101 5 29 ------ ------ ------Total current liabilities 5,147 5,150 4,500 ====== ====== ======Total equity and liabilities 18,196 17,420 17,775 ====== ====== ====== See notes on pages 20 to 33. GROUP CASH FLOW STATEMENT - unaudited 17. 30.6.05 30.6.04 31.12.04 £m £m £m Cash generated from operations 1,190 1,346 2,602Dividends received from associates 63 81Taxation (373) (395) (703) ------ ------ ------Net cash from operating activities 880 951 1,980 ====== ====== ======Interest and dividends received 67 63 106 Purchase of property, plant and equipment (122) (103) (315)Proceeds on disposal of property, plant and equipment 5 7 27Purchases and sales of intangible assets 70 (3) (18)Purchases and sales of investments 9 (4) 80Purchases and sales of subsidiaries 11 (3) 203Reynolds American transaction (112) ------ ------ ------Net cash from investing activities 40 (43) (29) ====== ====== ====== Interest paid (172) (197) (351)Payment of finance lease obligations (14) (14) (29) Proceeds from issue of shares and exercise of options 23 19 36Proceeds from increases in and new borrowings 590 845 902Movements relating to derivative financial instruments (28) 16 76Purchases of own shares (311) (348) (568) Reductions in and repayments of borrowings (282) (1,091) (1,280)Dividends paid (696) (643) (979) ------ ------ ------Net cash from financing activities (890) (1,413) (2,193) ====== ====== ====== Net cash from operating, investing and financing activities 30 (505) (242)Differences on exchange 27 (72) (87) ------ ------ ------Increase/(decrease) in net cash andcash equivalents in the period 57 (577) (329)Net cash and cash equivalents at1 January 1,730 2,059 2,059 ------ ------ ------Net cash and cash equivalents at period end 1,787 1,482 1,730 ====== ====== ====== See notes on pages 20 to 33. SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE SIX MONTHS - unaudited 18. Revenue 30.6.05 30.6.04 Inter Inter External Segment Revenue External Segment Revenue £m £m £m £m £m £m Europe 1,687 271 1,958 2,119 315 2,434Asia-Pacific 776 9 785 745 745Latin America 694 1 695 588 5 593Africa and Middle East 448 7 455 387 7 394America-Pacific 506 506 1,351 22 1,373 ----- ----- ----- ----- ----- -----Revenue 4,111 288 4,399 5,190 349 5,539 ===== ===== ===== ===== ===== ===== The analysis for revenue is based on location of manufacture and figures basedon location of sales would be as follows: 30.6.05 30.6.04 Europe 1,704 2,154Asia-Pacific 826 812Latin America 701 594Africa and Middle East 660 615America-Pacific 508 1,364 ------ ------ 4,399 5,539 ====== ====== Profit from operations 30.6.05 30.6.04 Adjusted Adjusted Segment result Segment result* Segment result Segment result* £m £m £m £m Europe 408 379 304 341Asia-Pacific 259 259 239 239Latin America 238 239 202 202Africa and Middle East 200 200 167 167America-Pacific 204 206 376 380 ----- ----- ----- ----- 1,309 1,283 1,288 1,329Unallocated costs (56) (56) (42) (42) ----- ----- ----- ----- 1,253 1,227 1,246 1,287 ===== ===== ===== ===== *Excluding disposal of brands and restructuring costs Segmental Analyses of Revenue and Profit for the six months cont... - unaudited 19. 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 18 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: 30.6.05 30.6.04 31.12.04 £m £m £m Europe 16 19 38Asia-Pacific 65 32 67Africa and Middle East 1 1 1America-Pacific 114 20 ----- ----- ----- 196 52 126 ===== ===== ===== 20.ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited results for the sixmonths to 30 June 2005 and 30 June 2004, together with the unauditedresults 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 six months to 30 June 2005 havebeen prepared on a basis consistent with the IFRS accounting policiesas set out on pages 81 to 84 of the Report and Accounts for the yearended 31 December 2004. These interim financial statements have beenprepared under the historical cost convention, except in respect ofcertain financial instruments. 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... 21. 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,