[Intl-tobacco] BAT year end statement II
Robert Weissman
rob@essential.org
Thu, 9 Mar 2000 11:37:43 -0500 (EST)
NOTES=09=09=09=0916.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
During 1998 the principal financial services businesses of B.A.T=86Industri=
es=20
p.l.c. were demerged and British American Tobacco p.l.c. became the listed=
=20
parent company for the retained businesses. To comply with company law and=
=20
accounting standards the Group accounts for 1998 included the results of th=
e=20
financial services businesses up to the date of demerger. However, to=20
provide information which is helpful to shareholders of British American=20
Tobacco p.l.c., the Directors also presented financial information prepared=
=20
as if the demerger had taken effect prior to 1998. As this financial=20
information is the basis which more clearly reflects the ongoing operations=
=20
of British American Tobacco p.l.c., it is used for the comparatives in this=
=20
preliminary announcement.
In the segmental analyses published for 1998 the costs of the headquarters=
=20
for B.A.T Industries were shown separately. To provide 1998 comparatives o=
n=20
a more consistent basis with the segmental results for 1999, the=20
comparatives have been restated to allocate these costs within the regional=
=20
results.
During the year two new accounting standards were implemented, being FRS12=
=20
on provisions and FRS13 on financial instruments. While these standards=20
have resulted in some additional disclosures they have not affected profit=
=20
or shareholders=ED equity.
ROTHMANS INTERNATIONAL
On 7 June 1999 British American Tobacco p.l.c. issued 604,336,627 ordinary=
=20
shares and 241,734,651 convertible redeemable preference shares in=20
consideration for the acquisition of Rothmans International. As a result,=
=20
Compagnie Financi=CBre Richemont AG and Rembrandt Group Limited together=20
indirectly own 35 per cent of the fully diluted ordinary share capital of=
=20
British American Tobacco p.l.c., comprising 27.8 per cent of the issued=20
ordinary share capital and 100 per cent of the convertible redeemable=20
preference shares.
As the intention to dispose of the Canadian interests of Rothmans was=20
announced at the outset of the merger, the results of that business are not=
=20
consolidated but their dividend payments are included in the Group=EDs=20
investment income. On 3 February 2000 the Group sold these operations for=
=20
Can$314=86million. The goodwill on the Rothmans transaction reflects this=
=20
disposal value in respect of Rothmans=ED Canadian assets. Therefore the=20
transaction will not result in any profit or loss in 2000.
Goodwill has arisen on the initial acquisition of Rothmans and subsequent=
=20
local restructurings of the enlarged Group=EDs subsidiaries in Singapore,=
=20
Malaysia, Australia, New Zealand and South Africa. These subsequent=20
restructurings resulted in a net cash outflow of =A3434=86million. A provis=
ional=20
figure for the goodwill arising on these transactions of =A35,574=86million=
is=20
being amortised over a period of 20=86 years. The charge for 1999 was =A31=
62=20
million and, in the future, the annual charge in respect of this transactio=
n=20
will be around =A3275=86million.
Rothmans International cont.=09=09=0917.
Integration of the businesses is now well advanced, with most of them being=
=20
managed on a unified basis. The net revenue and operating profit=20
attributable to the Rothmans businesses since acquisition are estimated at=
=20
=A31,626=86million and =A3427=86million respectively.
Notice has been given to the Group by the preference shareholder, under the=
=20
terms of the Merger agreement with Rothmans, of their intention to redeem=
=20
the half of the convertible preference shares redeemable in June 2000. The=
=20
cost of the redemption would be =A3695 million. The preference shares whic=
h=20
remain after June 2000 are redeemable in June 2004.
EXCHANGE RATE EFFECTS
The results of overseas subsidiaries and associates have been translated to=
=20
sterling for the purpose of this report at average rates of exchange. =20
Results were affected by generally weaker average rates against sterling=20
but, with a stronger US dollar, operating profit before exceptional items=
=20
was only marginally affected.
EXCEPTIONAL ITEMS
The integration costs of =A3357 million are the costs incurred in integrati=
ng=20
Rothmans into the British American Tobacco Group. While this indicates tha=
t=20
the final total for such costs will be somewhat higher than the =A3400=86mi=
llion=20
estimate referred to in the Circular to Shareholders issued for the merger,=
=20
the Group is ahead of schedule in achieving the =A3250=86million of annual=
=20
synergy benefits.
The principal exceptional item in the year to 31 December 1998 was a charge=
=20
of =A3613=86million, comprising =A3463=86million for the US cigarette compa=
nies=ED=20
agreement with the Attorneys General in 46 US States to settle outstanding=
=20
Medicaid recovery suits and =A3150=86million resulting from the earlier=20
agreement with the State of Minnesota and Blue Cross and Blue Shield of=20
Minnesota. One-off settlement compliance costs and liquidated legal fees=
=20
totalled =A324=86million in 1999.
Other settlement costs are charged as ongoing costs. Operating profit=20
before exceptional items for the year to 31 December 1999 was after chargin=
g=20
settlement costs of =A3746=86million compared to =A3106=86million in the pr=
ior year.
In the second quarter of 1998 the Group included a sales tax recovery=20
arising from a favourable decision taken by a Regional Federal Court in=20
Brazil, resulting in amounts being recoverable which had previously been=20
paid to the Government as social contributions assessed on the basis of=20
sales.
SALE OF BRANDS
This comprised the profit on the sale of certain of British American=20
Tobacco=EDs brands in Australasia. The sale was required by regulatory=20
authorities as a consequence of the restructuring of the local businesses=
=20
and was implemented on a tax efficient basis.
DEMERGER AND RESTRUCUTURING COSTS=09=09=0918.
This comprised advisory and legal fees for restructuring the=20
B.A.T=86Industries group in 1998, involving the demerger of its principal=
=20
financial services businesses and the formation of British American Tobacco=
=20
p.l.c. as the parent company for the retained businesses.
INTEREST AND INTEREST COVER
The Group is now able to recover interest on the amounts which form the=20
basis for the sales tax recovery in Brazil (see above). The reduction in=
=20
net interest in the year includes =A325=86million in respect of this item, =
as=20
well as gains on cancellation of swap contracts and the benefits of=20
restructuring the Group=EDs debt.
The Group=EDs interest cover was distorted in 1998 and 1999 by goodwill=20
amortisation and exceptional items in operating profit, as well as profit o=
n=20
sale of brands and demerger and restructuring costs. On an adjusted basis,=
=20
interest cover, based on profit before interest paid over interest paid, wa=
s=20
strong at 5.9 (1998: 4.8). On a similar adjusted basis, interest cover=20
based on profit before net interest over net interest, was 10.2 (1998: 7.5)=
=2E
TAXATION
=09=09Year to
=09=0931.12.99=0931.12.98
=09=09 =A3m=09 =A3m
=09UK=09 (15)=09 138
=09Overseas=09 434=09 132
=09=09 ----=09 ----
=09Current taxation=09 419=09 270
=09Deferred taxation=09 114=09 (110)
=09=09 ----=09 ----
=09British American Tobacco p.l.c.
=09 and subsidiary undertakings=09 533=09 160
=09Share of associates=09 140=09 117
=09=09 ----=09 ----
=09=09 673=09 277
=09=09 =3D=3D=3D=3D=09 =3D=3D=3D=3D
=09Effective tax rate=09 49.1%=09 37.5%
=09=09 =3D=3D=3D=3D=09 =3D=3D=3D=3D
The effective tax rate increases in 1999 as a result of goodwill=20
amortisation and charges accrued in 1999 for certain of the US tobacco=20
settlements not being relieved for tax until the following year. As future=
=20
years are expected to show the same pattern for such payments and tax=20
relief, under UK accounting standards there is a distortion to the tax rate=
=20
shown in the accounts for 1999. While the settlement payments should not=
=20
materially distort the tax rate after 1999, there will be a continuing=20
distortion from goodwill amortisation.
EARNINGS PER SHARE=09=09=0919.
Basic earnings per share are based on the profit for the period attributabl=
e=20
to ordinary shareholders and the average number of ordinary shares in issue=
=20
during the period (excluding shares held by the Group=EDs two Employee Shar=
e=20
Ownership Trusts). For periods prior to the demerger of the financial=20
services businesses in 1998, the average number of shares in issue is based=
=20
on 50 per cent of the average number of B.A.T Industries ordinary 25p share=
s=20
in issue, reflecting the issue of one ordinary share in British American=20
Tobacco p.l.c. for every two ordinary shares of B.A.T Industries p.l.c.
For the calculation of diluted earnings per share the average number of=20
shares reflects the potential dilution effect of the exercise of employee=
=20
share options and in 1999, the convertible redeemable preference shares.
The earnings have been affected by a number of exceptional items. To=20
illustrate the impact of the principal distortions, as well as the effect o=
f=20
goodwill amortisation and ACT, adjusted diluted earnings per share are show=
n=20
below:
Diluted earnings per share Year to 31.12.99 31.12.98 =
=20
(pence) (pence) Unadjusted earnings per share 27.02 21.98 =20
Adjustment from net to nil basis (0.32) Effect of goodwill amortisation=
=20
7.82 Effect of US tobacco settlements 0.73 23.89 Effect of=
=20
integration costs 11.27 Effect of sales tax recovery (0.63) =20
(2.35) Effect of sale of brands (2.53) Effect of demerger and
restructuring costs
2.92 Effect of US tobacco settlements on effective tax rate
8.65
------ ------ Adjusted earnings per share 52.33 46.12 =
=20
=3D=3D=3D=3D=3D=3D =3D=3D=3D=3D=3D=3D
Similar types of adjustments would apply to basic earnings per share which,=
=20
on an adjusted basis, would be 52.54p (1998 46.51p) compared to unadjusted=
=20
amounts of 25.25p (1998 22.17p).
GROUP RESERVES
The Group reserve movements are summarised on page 10.
As regards the impact of exchange, the weakening of a number of currencies=
=20
against sterling during 1999 led to an adverse movement of =A3268=86million=
=2E =20
However, the main impact in 1999 was the share issue in respect of the=20
Rothmans merger as described above. The ACT written back of =A396 million =
in=20
1998 arose because of the utilisation of ACT which had been written off to=
=20
reserves in prior years.
CASH FLOW=09=09=09=0920.
The Group cash flow is summarised on page 15 and the comparison of 1999 wit=
h=20
1998 is distorted by the acquisition of Rothmans in 1999 and the demerger=
=20
and change in Group structure in 1998, as well as the exceptional items=20
described above.
Operating cash flows were significantly higher at =A32,085=86million, compa=
red=20
to =A31,182=86million in 1998. This increase principally reflected the=20
inclusion of Rothmans for seven months, a one-off timing benefit as certain=
=20
ongoing US tobacco settlement payments are not made until 2000 and the=20
impact on 1998 of the higher initial payments in respect of US tobacco=20
settlements.
With lower net interest and capital expenditure, despite the inclusion of=
=20
Rothmans operations for the first time, the net cash generation of=20
=A31,264=86million is significantly up on 1998. The material reduction in=
=20
interest cash flow is partly due to one-off timing benefits from the=20
restructuring of Group debt.
In 1999 investing activities showed a net outflow of =A3216=86million mainl=
y as=20
a result of the Rothmans related transactions in Singapore, Malaysia,=20
Australasia and South Africa, less the proceeds on sale of BAT brands noted=
=20
above. Even though the 1999 cash flow reflects the acceleration of Group=
=20
dividend payments, total dividend payments were down as 1998 included=20
payments which were in respect of B.A.T Industries. However, 1998 did=20
benefit from =A3910=86million of cash inflows in respect of the settlement =
of=20
inter company balances and other transactions with the demerged financial=
=20
services businesses.
As a result of the above the net cash inflow was =A3518=86million compared =
to=20
=A3466=86million in 1998, but the Group=EDs net debt position rose =A3480=
=86million to=20
=A33,055=86million reflecting the inclusion of Rothmans debt as well as exc=
hange=20
movements. Group debt rose =A31,946 million to =A35,676=86million, while c=
ash,=20
deposits and current investments increased by =A31,466 million to =A32,621=
=20
million as the Group built up its liquidity. This liquidity served the=20
Group in closing the Imasco transaction and would also be available for the=
=20
potential redemption of the preference shares in 2000.
CONTINGENT LIABILITIES
There are contingent liabilities in respect of litigation, overseas taxes=
=20
and guarantees in various countries. Group companies, notably Brown &=20
Williamson Tobacco Corporation ("B&W") as well as other leading cigarette=
=20
manufacturers, are defendants, principally in the United States, in a numbe=
r=20
of product liability cases, including a substantial number of new cases=20
filed in 1999, although a number of cases were discontinued by claimants=20
(without payment by any defendants) in the year.
Legal Matters outside the United States
At year end, there were no active claims against the Group companies=20
(including those of the former Rothmans Group) in respect of health-related=
=20
claims outside Argentina, Australia, Brazil, Canada, Chile, Eire, Finland,=
=20
France, Germany, Israel, the Netherlands, Pakistan, the Philippines and Sri=
=20
Lanka.
Contingent Liabilities cont.=0921.
US litigation
The total number of US product liability cases pending at year end involvin=
g=20
Group companies was 537 (31 December, 1998, 678 cases). Group companies=20
were named as co-defendants in 161 of those cases (1998, 238 cases). Since=
=20
many of these pending cases seek unspecified damages, it is not possible to=
=20
determine the total amount of claims pending. The cases fall into three=20
principal categories:
(1) Medical reimbursement cases. These civil actions seek to recover=20
amounts spent by government entities and other third party providers on=20
health care and welfare costs claimed to result from illnesses associated=
=20
with smoking. Despite the almost uniform success of the industry=EDs defen=
ce=20
to these to date, the US Federal Government has filed a suit, which will=20
probably not come to trial until 2003.
(2) Class actions. As at 31 December 1999, B&W was named as a defendant in=
=20
some 38 (31 December 1998, 55) separate actions attempting to assert claims=
=20
on behalf of classes of persons allegedly injured by smoking. Despite the=
=20
almost uniform success of the industry=EDs defence to these to date, there =
is=20
one case (Engle, Florida) currently in trial.
(3) Individual cases. Approximately 421 cases were pending against B&W at=
=20
31 December 1999 (31 December 1998, 497), filed by or on behalf of=20
individuals in which it is contended that diseases or deaths have been=20
caused by cigarette smoking or by exposure to environmental tobacco smoke=
=20
(ETS). While the industry continues not to have paid any damages to date,=
=20
two decisions adverse to Philip Morris are currently under appeal.
In addition, conduct-based claims, including antitrust and RICO claims, hav=
e=20
been filed and also threatened in the US but none of these recent cases is=
=20
considered to be meritorious.
Conclusion
While it is impossible to be certain of the outcome of any particular case=
=20
or of the amount of any possible adverse verdict, the Company believes that=
=20
the defences of the Group companies to all these various claims are=20
meritorious both on the law and the facts, and a vigorous defence is being=
=20
made everywhere. If an adverse judgement were entered against any of the=
=20
Group companies in any case, an appeal would be made. Such appeals could=
=20
require the posting of appeal bonds or substitute security by the appellant=
s=20
for the amounts of such adverse judgements. At least in the aggregate and=
=20
despite the quality of defences available to the Group, it is not impossibl=
e=20
that the results of operations or cash flows of the Group in particular=20
quarterly or annual periods could be materially affected by this and by the=
=20
final outcome of any particular litigation.
Having regard to all these matters, the Directors (i) do not consider it=20
appropriate to make any provision in respect of any pending litigation and=
=20
(ii) do not believe that the ultimate outcome of all this litigation will=
=20
significantly impair the financial condition of the Group.
POST BALANCE SHEET EVENT - IMASCO=0922.
On 3 August 1999, the Group announced that it had entered into an agreement=
=20
with Imasco Limited in Canada to acquire the 58 per cent shareholding in=20
Imasco it did not already own. The deal was conditional on the sale of=20
Canada Trust to TD Bank and also envisaged the sale of other non-tobacco=20
interests of Imasco. Thus the Group interests in Canada will be focused on=
=20
Imperial Tobacco rather than through a 42 per cent stake in a diversified=
=20
holding company.
On 15 October the deal was approved by the British American Tobacco=20
shareholders. On 1 February 2000 Imasco announced that the necessary=20
capital reorganisation of that company had been completed following approva=
l=20
by their shareholders.
As at 1 February 2000, Imperial Tobacco Canada Limited became a wholly owne=
d=20
subsidiary of British American Tobacco and Canada Trust was sold, while the=
=20
sale of Shoppers Drug Mart was completed on 4 February. The transaction=20
will be reflected in British American Tobacco=EDs first quarter results for=
=20
2000. The transaction is expected to result in goodwill of around=20
=A32.1=86billion and a significant increase in shareholders=ED funds. The=
=20
increase in net debt, including Imasco=EDs own debt, is approximately=20
=A3900=86million, which will be reduced from the proceeds of the Genstar sa=
le=20
which is well underway.
The Group=EDs share of Imasco=EDs results for January 2000 will include an=
=20
exceptional charge of around Can$147 million for severence and similar=20
payments consequent upon change of control. The restructuring of the=20
investment in Canada will however materially improve the Group=EDs cash flo=
w=20
in 2000.
ANNUAL REPORT AND ACCOUNTS
The above figures have been extracted from the Group's full financial=20
statements which, for the year ended 31 December 1998 have been delivered=
=20
and for the year ended 31 December 1999, will be delivered to the Registrar=
=20
of Companies. Both carry an unqualified audit report. The Annual General=
=20
Meeting will be held on 27 April 2000 at 11.30 a.m.
***
The report and accounts will be posted to shareholders in late March 2000.
Philip Cook
Secretary
7 March 2000
British American Tobacco p.l.c.
Registered in England and Wales no. 3407696