Imperial Tobacco Group PLC
28 April 2004
IMPERIAL TOBACCO GROUP PLC ANNOUNCES ITS INTERIM RESULTS FOR THE SIX MONTHS
ENDED 31 MARCH 2004
INTERIM HIGHLIGHTS
* Adjusted (1) operating profit of £560m - up 13%
* Adjusted (1) operating margin up to 38%
* Adjusted (1) pre-tax profit of £454m - up 20%
* Adjusted (1) earnings per share of 45.3p - up 21%
* Interim dividend of 15.0p - up 25%
(1) Operating profit, operating margin, pre-tax profit and earnings per share
are before amortisation and exceptional items
Gareth Davis, Chief Executive, said:
'I am pleased to announce another good performance for the six months ended
March 2004. Given the underlying strength of the business and our strong cash
generation, we have delivered a 21% increase in adjusted earnings per share and
a 25% increase in the interim dividend.
'The trading outlook for the Group for the current financial year remains in
line with our expectations at the start of the year, as we continue to focus on
profitable sales growth, leveraging our multi-product portfolio, and delivering
further cost optimisation throughout the business.'
Enquiries
Alex Parsons
Group Media Relations Manager +44 (0)7967 467 241
Nicola Tate
Investor Relations Manager +44 (0)117 933 7082
Imperial Tobacco Group +44 (0)117 963 6636
Imperial Tobacco Group's interim results are available on our website:
www.imperial-tobacco.com
High-resolution photographs are available to the media free of charge at
www.newscast.co.uk +44 (0)20 7608 1000
FINANCIAL HIGHLIGHTS
for the six months ended 31 March 2004
* Adjusted operating profit (2) £560m up 13% (2003: £497m)
($1,030m)
* Adjusted pre-tax profit (2) £454m up 20% (2003: £377m)
($835m)
* Adjusted profit after tax (2) £330m up 20% (2003: £274m)
($607m)
* Adjusted earnings per share 45.3p up 21% (2003: 37.4p)
(2) (83.4c)
* Interim dividend per share 15.0p up 25% (2003: 12.0p)
(27.6c)
* Turnover £5,453m up 2% (2003: £5,355m)
($10,034m)
* Operating profit £402m - - (2003: £401m)
($740m)
* Pre-tax profit £301m up 4% (2003: £290m)
($554m)
* Profit after tax £191m up 3% (2003: £185m)
($351m)
* Basic earnings per share 26.1p up 4% (2003: 25.1p)
(48.0c)
* Diluted earnings per share 26.0p up 4% (2003: 25.0p)
(47.8c)
(2) Adjusted to exclude the effect of amortisation and exceptional items.
Management believes that reporting results before amortisation and exceptional
items (adjusted operating profit, adjusted profit before tax, adjusted profit
after tax and adjusted earnings per share) provides a better comparison of
underlying business performance for the period.
The exchange rate of US $1.84 to the £1, the pound sterling noon buying rate on
31 March 2004, has been used to translate this statement prepared under UK GAAP.
CHAIRMAN'S STATEMENT
REGIONAL PERFORMANCE HIGHLIGHTS
Turn-
over
Turn-over ex. Oper-ating Oper-ating Oper-ating Oper-ating
ex. Duty Duty Profit Profit Margins Margins
Half Half Half Half Half Half
Year Year Year Year Year Year
2004 2003 2004 2003 2004 2003
£m £m £m £m % %
UK 392 359 209 177 53.3 49.3
-------- -------- -------- -------- -------- --------
Germany 293 298 107 102 36.5 34.2
-------- -------- -------- -------- -------- --------
Rest of
Western
Europe 297 286 151 130 50.8 45.5
-------- -------- -------- -------- -------- --------
Rest of
the World 490 560 93 88 19.0 15.7
-------- -------- -------- -------- -------- --------
Total as 1,472 1,503 560 497 38.0 33.1
adjusted (1)
-------- -------- -------- -------- -------- --------
Amort-isation - - (103) (96)
-------- -------- -------- --------
Exceptional
items - - (55) -
-------- -------- -------- --------
Total as
reported 1,472 1,503 402 401
-------- -------- -------- --------
(1) Results before amortisation and exceptional items.
Our focus on value creation has again delivered a good performance in the first
half of 2004, continuing our track record of sustained profit growth.
Our results reflect the Group's increased business dimensions, both in terms of
our broader geographic base and enlarged brand portfolio supported by an ongoing
focus on cost efficiencies. We have made good progress, with encouraging trends
in both mature and emerging markets, positive developments in Davidoff, Drum and
Rizla and, continuing our focus on costs, several reorganisation initiatives are
underway, particularly in manufacturing.
In the half year to 31 March 2004, adjusted operating profit, before
amortisation and exceptional items, was £560 million, up by 13 per cent on 2003.
Turnover including duty increased by 2 per cent from £5,355 million to £5,453
million. Turnover excluding duty decreased from £1,503 million to £1,472
million. This in part reflected the disposal of the Caritas and Tobaccomat
wholesale businesses at the end of last year, with a £65 million impact on
turnover, but a negligible profit effect. Adjusting for these disposals and an
exchange benefit of £28 million, turnover excluding duty increased slightly,
with pricing and mix improvements offsetting some market volume pressures in the
first half of the year. Group adjusted operating margins showed an excellent
improvement up to 38.0 per cent (2003: 33.1 per cent).
The impact of exchange rate movements on Group profit in the first half of 2004
was not material compared to the first half of 2003; further details by trading
region are set out in the trading performance highlights.
Adjusted profit before tax increased by 20 per cent to £454 million after
charging net interest of £106 million (2003: £120 million).
Reported operating profit reflects amortisation of £103 million (2003: £96
million) and further restructuring costs of £55 million. As announced in
January 2004, the closures of our cigarette manufacturing operations in
Slovenia, Slovakia and Hungary, and the filter production centre in Hungary,
have resulted in a charge of £35 million. These closures are expected to
generate savings of £20 million per annum from 2005 onwards. As part of an
ongoing capacity and infrastructure review, we have incurred further
restructuring costs of £20 million, with anticipated annual cost savings of
around £8 million. We also disposed of a number of surplus properties;
including two in Hamburg and our distribution centre in Bristol. Proceeds in
respect of these sales were £42 million with a £5 million profit on disposal.
After tax and minority interests, we delivered basic earnings per share of 26.1
pence (2003: 25.1 pence), and adjusted earnings per share of 45.3 pence, an
increase of 21 per cent (2003: 37.4 pence).
Your Directors are pleased to declare an increase of 25 per cent in the interim
dividend to 15 pence per share, slightly ahead of our earnings growth,
rebuilding towards our historical annual payout ratio of approaching 50 per cent
of earnings.
The Group continued its high level of cash conversion in the first half, with 83
per cent of adjusted operating profit converted into operating cash flow after
capital expenditure. Closing net debt was £3.7 billion (2003: £4.3 billion),
benefiting from the cash flow generated from trading operations and a favourable
exchange translation movement of £88 million.
TRADING PERFORMANCE
UK
In the UK, we enhanced our leadership positions in both the cigarette and roll
your own tobacco sectors, with this core market contributing 37 per cent of
Group adjusted operating profit in the first half of the year.
UK operating profit increased by 18 per cent to £209 million (2003: £177
million), and margins were up to 53.3 per cent (2003: 49.3 per cent). These
improvements reflect the benefits of a relatively stable UK market size, growth
in market share and improved pricing, which together more than offset the impact
of consumer downtrading.
Our current estimate of the size of the cigarette market is just under 54
billion (2003: 54 billion), with a growing roll your own tobacco market up to
3,000 tonnes (2003: 2,700 tonnes). In the March 2004 Budget, the Chancellor
again increased tobacco duty in line with inflation, equivalent to just over 9
pence per 20 cigarettes.
Building on our market leading position in the UK, our branded cigarette share
grew to 44.6 per cent (2003: 43.8 per cent). This strong performance was due to
the continuing success of the Richmond brand family, and further growth in
Lambert & Butler King Size, which this year is celebrating its silver
anniversary. We also made progress in the roll your own tobacco sector, with
our market share up to 65.1 per cent (2003: 64.2 per cent), driven by Drum and
Golden Virginia.
Germany
In Germany, we delivered an encouraging profit performance in a challenging
market environment, which accounted for 19 per cent of Group adjusted operating
profit in the first half of the year.
Operating profit in Germany was up at £107 million (2003: £102 million), but was
held after adjusting for exchange gains of £5 million. This result reflects a
reduction in cigarette volumes driven by market dynamics, offset by improved
cost efficiencies, as demonstrated by the uplift in our operating margin to 36.5
per cent (2003: 34.2 per cent).
We saw a significant decline in the cigarette market and based on March volume
indicators, we estimate annualised cigarette volumes are down 10 per cent to 124
billion (2003: 138 billion). Some of the cigarette decline was reflected in
further growth of the other tobacco products sector which we estimate was up 12
per cent from 24 billion to 27 billion cigarette equivalents.
The Government's taxation proposals were finalised in December 2003; taxes
increased by 1.2 euro cents per cigarette on 1 March 2004, and will be raised
again on 1 December 2004 and 1 September 2005 by the same amount. Broadly
proportional tax increases on roll your own tobacco will be implemented at the
same time. Given the size of these tax increases, we believe that pressure on
German cigarette market volumes is likely to continue.
At the time of the first tax increase in March, we took the opportunity to
improve the profitability of our portfolio through a manufacturer's price
increase, which should benefit our performance in the second half of the year.
We adopted a pricing strategy which created a broader spread of prices within
the branded cigarette segment. The price of the West brand family was increased
to €3.40 and JPS Red, formerly only available in Eastern Germany, has been
introduced nationally at €3.20, reducing the price gap between the established
branded and private label cigarettes.
Against this background, our overall branded share of the total tobacco market
was 20.7 per cent (2003: 21.1 per cent) and our branded cigarette share declined
to 19.1 per cent (2003: 19.9 per cent). We maintained our market leadership in
other tobacco products, however our share showed a decline to 28.5 per cent
(2003: 30.1 per cent), reflecting increased competition in the make your own
segment. West, the second largest tobacco brand in Germany, benefited from its
wider franchise both in cigarette and other tobacco products and broadly
maintained its market share at 10.9 per cent of the total tobacco market. Our
premium brand Davidoff remained stable at 1.1 per cent, a good performance given
the trends in the market. In addition, we are about to strengthen our make your
own portfolio with the national launch of JPS Singles.
As the German market continues to evolve we will capitalise on the opportunities
that this presents, driving profitability within the market, leveraging our
market leadership in other tobacco products combined with our portfolio strength
in profitable value brands. As part of our ongoing review of operational
efficiency and in anticipation of the changing market dynamics, we have today
announced a restructuring of our German sales and marketing operations.
Rest of Western Europe
The Rest of Western Europe delivered a good performance in a climate of
increasing taxes which depressed volumes in some markets. Against this
background, we have seen both share and profit gains across the region.
Operating profit grew to £151 million (2003: £130 million) and margins
substantially increased to 50.8 per cent from 45.5 per cent in 2003. The
results reflect some encouraging market performances and price increases,
enhanced by cost savings together with a favourable euro exchange gain of £4
million. These benefits were partially offset by some tax-related market
declines, particularly in France and on the ferries.
In France, our cigarette share reached 3.7 per cent in March 2004 (2003: 3.6 per
cent) , and in Ireland our share was 31.4 per cent (2003: 32.4 per cent). In
The Netherlands, West is showing positive growth, bringing our overall cigarette
share to 3.1 per cent (2003: 2.7 per cent). We made good progress in Southern
Europe: in Greece we increased market share to 5.8 per cent (2003: 5.5 per cent)
and in Italy we grew to 0.9 per cent (2003: 0.7 per cent). Given our strength
in profitable cigarette value brands, our portfolio is well placed to benefit as
consumers continue to downtrade as prices rise.
Rising prices also led consumers to migrate to other tobacco products where we
have a number of strong positions including roll your own tobacco, rolling
papers and tubes. Our current estimate of the annual roll your own tobacco
market in the Rest of Western Europe is around 31,000 tonnes, up 3 per cent on
2003, with our share of this segment over 50 per cent. In addition, we
maintained our sector leadership of duty paid tobacco sales in Western European
airports and ferries.
Rest of the World
In the Rest of the World, we made good progress in a number of markets with
improved profitability.
Operating profit grew 6 per cent to £93 million (2003: £88 million) despite an
adverse exchange impact of £13 million. We also improved our margins to 19.0
per cent (2003: 15.7 per cent). Our results reflect good in-market performances
across Asia, Africa, the Middle East and our Duty Free business, along with
increased cost savings. However, performance lagged in Central and Eastern
Europe, affected by market size pressures and trade stock adjustments.
In Asia Pacific, Taiwan continued to recover with our total market share
consistently over 11 per cent. To balance our portfolio, Fusion was launched in
January 2004 in the high-price category, complementing our premium Davidoff
brand.
In China, our partnership with the Yuxi-Hongta Group and the State Tobacco
Monopoly Administration continues to progress well, with West launched in the
major cities of Shanghai and Kunming in December 2003. A new office was
established in Shanghai and the implementation of a new sales and distribution
organisation should further improve performance. In Indo-China, our business
continues to progress ahead of expectations.
In Australia, our key cigarette brand families performed well and we continued
to benefit from our leading position in the growing roll your own tobacco
market.
In Africa, despite political uncertainty in the Ivory Coast, we experienced
overall volume and share growth across the continent. In the Middle East,
Davidoff performed strongly with share gains throughout the region. A range of
new marketing initiatives is being developed that will capitalise on this
positive brand momentum.
In Central and Eastern Europe, we have had a challenging half year with
increasing taxes impacting market sizes in the EU accession markets. In those
markets where tax rises have partly been absorbed by the major manufacturers,
pressure on margins has continued.
Our market share in Poland was broadly held at just under 19 per cent through
the continuing growth of West and the successful launch last year of Route 66,
which compensated for a decline in some traditional local brands.
In Russia, we grew our total market share to 5.1 per cent (2003: 4.8 per cent).
We saw positive developments for both West and Davidoff, but shipment volumes
have been adversely affected by trade stock adjustments.
We have seen a good performance from our Duty Free business in the first half of
the year with a recovery in Asian duty free markets, following the impact of
SARS in this region last year.
Manufacturing
We continued to reduce costs and complexity while enhancing quality throughout
our manufacturing operations, with significant progress made in the first half
of the year.
Despite volume reductions in some markets, productivity and unit costs remained
stable. We expect a substantial improvement in the second half of the year,
benefiting from higher volumes and our ongoing focus on capacity optimisation.
As part of our ongoing commitment to address the over capacity within the Group,
we announced in January the closure of our cigarette production operations in
Slovenia, Slovakia and Hungary, and our filter production centre in Hungary.
These facilities will close in May 2004. This has been achieved through
constructive engagement with the Works Councils and Trade Unions who recognise
the need for flexibility within the extended EU.
Within our business simplification project, we have reduced blends by a further
8 per cent. We continue to focus on the reduction of stock keeping units, which
decreased by 6 per cent in the first half of the year. We are targeting further
reductions in both of these areas by the end of the financial year.
The greenfield project in Turkey is on schedule, with production planned to
start in 2005.
Regulatory Environment
In the last few years, we have seen a trend towards increasing restrictions on
smoking in public places. The European Commissioner for Health and Consumer
Protection recently announced that he has decided not to introduce EU-wide
legislation on smoking in the work place, believing that this can be resolved by
Member States at a national level.
Overall, we have not seen any evidence that public smoking bans, per se, cause
material reductions in consumption. Our view is that the issue should be
resolved by common sense, courtesy and practical solutions, such as
well-ventilated smoking and no-smoking areas. We do not believe that scientific
studies show tobacco smoke to be a cause of disease in non-smokers.
Outlook
In the second half of the year we expect another strong performance from the UK.
In Germany, the impact of the March 2004 manufacturer's price increase should
assist profitability, but we anticipate some further decline in volumes. In the
Rest of Western Europe, we will continue to capitalise on our strong positions
in the growing other tobacco products sector, and will focus on further
opportunities for cigarette share growth. Our Rest of the World business should
benefit from improving trends in a number of key markets in Asia, Africa, the
Middle East, Australasia and our Duty Free business, albeit we expect pressures
in Central Europe to continue.
Looking ahead, our focus remains on profitable sales growth, exploiting our well
positioned portfolio. We will deliver further cost savings and improve
operational efficiencies throughout all aspects of our business, as we seek to
extend our track record of sustainable profit growth for our shareholders.
Derek Bonham
Chairman
CAUTIONARY STATEMENT
All statements, other than statements of historical fact, included herein, are,
or may be deemed to be, forward-looking statements within the meaning of Section
21E of the Securities Exchange Act 1934, as amended. For a discussion of
important factors that could cause actual results to differ materially from
those discussed in such forward-looking statements please refer to Imperial
Tobacco's annual report on Form 20-F for the fiscal year ended 30 September
2003, filed with the Securities and Exchange Commission on 10 February 2004.
INDEPENDENT REVIEW REPORT TO IMPERIAL TOBACCO GROUP PLC
Introduction
We have been instructed by the Company to review the financial information which
comprises the consolidated profit and loss account, the statement of total
recognised gains and losses, the consolidated balance sheet, the summary
consolidated cash flow statement, the notes to the interim statement and the
summary of differences between UK and US generally accepted accounting
principles. We have read the other information contained in the interim report
and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the Directors. The Directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and therefore
provides a lower level of assurance than an audit. Accordingly we do not
express an audit opinion on the financial information. This report, including
the conclusion, has been prepared for and only for the Company for the purpose
of the Listing Rules of the Financial Services Authority and for no other
purpose. We do not, in producing this report, accept or assume responsibility
for any other purpose or to any other person to whom this report is shown or in
to whose hands it may come save where expressly agreed by our prior consent in
writing.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 March 2004.
PricewaterhouseCoopers LLP
Chartered Accountants
Bristol
28 April 2004
Notes:
a) The maintenance and integrity of the Imperial Tobacco Group PLC website is
the responsibility of the Company; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the interim report
since it was initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and
dissemination of financial information may differ from legislation in other
jurisdictions.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the six months ended 31 March 2004
6 months 6 months Year
ended ended ended
31 March 31 March 30 Sept
2004 2003 2003
£m £m £m
Turnover 5,453 5,355 11,412
Duty in turnover (3,981) (3,852) (8,212)
Costs and overheads less other
income (1,070) (1,102) (2,319)
-------- -------- --------
Operating profit 402 401 881
-------- -------- --------
Group operating profit before
amortisation and exceptional items 560 497 1,135
Amortisation (103) (96) (203)
Exceptional items (55) - (51)
-------- -------- --------
Profit on disposal of fixed assets 5 9 12
-------- -------- --------
Profit on ordinary activities before
interest and taxation 407 410 893
Net interest (106) (120) (237)
-------- -------- --------
Profit on ordinary activities before
taxation 301 290 656
Taxation (110) (105) (232)
-------- -------- --------
Profit on ordinary activities after
taxation 191 185 424
Equity minority interests (2) (3) (3)
-------- -------- --------
Profit attributable to shareholders 189 182 421
Dividends (109) (86) (304)
-------- -------- --------
Retained profit for the period 80 96 117
-------- -------- --------
Earnings per ordinary share:
Basic 26.1p 25.1p 58.1p
Adjusted
(before amortisation and
exceptional items) 45.3p 37.4p 90.0p
Diluted 26.0p 25.0p 57.9p
-------- -------- --------
Dividends per ordinary share:
Interim 15.0p 12.0p
Total for 2003 42.0p
-------- -------- --------
All activities derive from continuing operations.
There is no difference between the profit as shown above and that calculated on an historical cost
basis.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
for the six months ended 31 March 2004
6 months 6 months Year
ended ended ended
31 March 31 March 30 Sept
2004 2003 2003
£m £m £m
Profit attributable to shareholders 189 182 421
Exchange movements on retranslation
of net investments and related
borrowings (71) 113 101
Taxation credit on borrowings hedging
overseas equity investments - 6 33
-------- -------- --------
Total recognised gains for the period 118 301 555
-------- -------- --------
CONSOLIDATED BALANCE SHEET
at 31 March 2004
Restated Restated
(see note 2) (see note 2)
31 March 31 March 30 Sept
2004 2003 2003
£m £m £m
Fixed assets
Intangible assets 3,552 3,803 3,807
Tangible assets 638 792 714
Investments 6 7 7
-------- -------- --------
4,196 4,602 4,528
-------- -------- --------
Current assets
Stocks 1,113 1,034 1,009
Debtors 930 890 1,002
Investments 64 93 68
Cash 333 354 321
-------- -------- --------
2,440 2,371 2,400
-------- -------- --------
Creditors: amounts falling due within
one year (2,177) (2,104) (2,875)
-------- -------- ---------
Net current assets/(liabilities) 263 267 (475)
-------- -------- --------
Total assets less current liabilities 4,459 4,869 4,053
Creditors: amounts falling due after
more than one year (3,866) (4,287) (3,485)
Provisions for liabilities and charges (486) (539) (509)
-------- -------- --------
Net assets 107 43 59
-------- -------- --------
Capital and reserves
Called up share capital 73 73 73
Share premium account 964 964 964
Profit and loss account (949) (1,013) (997)
-------- -------- --------
Equity shareholders' funds 88 24 40
Equity minority interests 19 19 19
-------- -------- --------
107 43 59
-------- -------- --------
Reconciliation of movements in shareholders' funds
Restated Restated
(see note 2) (see note 2)
31 March 31 March 30 Sept
2004 2003 2003
£m £m £m
Profit attributable to shareholders 189 182 421
Dividends (109) (86) (304)
------- ------- --------
Retained profit for the period 80 96 117
Credit/(debit) in respect of employee
share schemes 2 (9) (17)
Exchange movements on goodwill previously
written off 37 (71) (83)
Other net exchange movements (71) 113 101
Taxation credit on borrowings
hedging overseas equity investments - 6 33
-------- -------- --------
Net addition to shareholders' funds 48 135 151
Opening shareholders' funds (originally £76m
and £(92)m before prior year
adjustments of £(36)m and £(19)m)
(see note 2) 40 (111) (111)
-------- -------- --------
Closing shareholders' funds 88 24 40
-------- -------- --------
SUMMARY CONSOLIDATED CASH FLOW STATEMENT
for the six months ended 31 March 2004
Restated Restated
(see note 2) (see note 2)
6 months 6 months Year
ended ended ended
31 March 31 March 30 Sept
2004 2003 2003
£m £m £m
Net cash inflow from operating activities 495 51 802
-------- -------- --------
Returns on investments and servicing
of finance (35) (42) (237)
-------- -------- --------
Taxation (55) (31) (154)
-------- -------- --------
Capital expenditure and financial
investment 15 (23) (59)
-------- -------- --------
Acquisitions
Payments to acquire businesses (12) - (2)
Deferred consideration in respect of
prior year acquisitions (387) (47) (47)
-------- -------- --------
Net cash outflow from acquisitions (399) (47) (49)
-------- -------- --------
Equity dividends paid (217) (167) (254)
-------- -------- --------
Net cash (outflow)/inflow before
management of liquid resources and
financing (196) (259) 49
Management of liquid resources - 30 58
-------- -------- --------
Financing 216 254 (126)
-------- -------- --------
Increase/(decrease) in cash in the
period 20 25 (19)
-------- -------- --------
Reconciliation of net cash flow to movement in net debt
6 months 6 months Year
ended ended ended
31 March 31 March 30 Sept
2004 2003 2003
£m £m £m
Increase/(decrease) in cash in the
period 20 25 (19)
Cash (inflow)/outflow from (increase)/
decrease in debt (218) (274) 86
Cash inflow from decrease in liquid
resources - (30) (58)
-------- -------- --------
Change in net debt resulting from cash
flows (198) (279) 9
Currency and other movements 160 (331) (382)
Deferred consideration 385 - -
-------- -------- --------
Movement in net debt in the period 347 (610) (373)
Opening net debt (4,068) (3,695) (3,695)
-------- -------- --------
Closing net debt (3,721) (4,305) (4,068)
-------- -------- --------
NOTES TO THE INTERIM STATEMENT
1. Basis of preparation of the accounts
The results for the six months ended 31 March 2004 and 31 March 2003 are
unaudited. Except for the restatement following a change in accounting policy
as described below, the figures for the year ended 30 September 2003 are taken
from the statutory accounts of Imperial Tobacco Group PLC, which have been
delivered to the Registrar of Companies and upon which an unqualified audit
report was given.
The accounting policies are as stated in the Annual Report and Accounts for the
year ended 30 September 2003, with the exception of the change in accounting
policy following the adoption of UITF Abstract 17 (Revised 2003) 'Employee Share
Schemes' and UITF Abstract 38 'Accounting for ESOP Trusts', for which the half
year and full year results for 2003 have been restated.
2. Changes in accounting policy and presentation
The 2003 half year and full year results have been restated following the
adoption of UITF Abstract 17 (Revised 2003) 'Employee Share Schemes' and UITF
Abstract 38 'Accounting for ESOP Trusts'. Shares held by the Employee and
Executive Benefit Trusts previously shown in the balance sheet as fixed asset
investments are now required to be shown as a deduction from shareholders'
funds. The cost of employee share schemes is charged to the profit and loss
account using the quoted market price of shares at the date of grant less the
exercise price of the share options granted. The charge is accrued over the
vesting period of the shares. There is an exemption from making such a charge
for Inland Revenue approved SAYE schemes and equivalent overseas schemes.
The impact was to reduce investments by £28m at 31 March 2003 and by £36m at 30
September 2003, and increase the deficit in the profit and loss account reserve
by corresponding amounts.
The consolidated cash flow statement has been restated to reflect the
reallocation of the cash payments relating to the purchase of shares from '
Capital expenditure and financial investment' to 'Financing'.
The consolidated profit and loss accounts for the six months ended 31 March 2003
and the year ended 30 September 2003 have not been restated as the effect in any
one period is not material. The impact of the change in accounting policy in
the six months to 31 March 2004 on Group profit after tax is not material.
3. Segmental information (by destination)
The geographical analysis of turnover, duty in turnover and operating profit was as follows:
6 months Year
ended ended
6 months ended 31 March 30 Sept
Turnover 31 March 2004 2003 2003
£m £m £m
UK 2,368 2,132 4,568
Germany 1,248 1,279 2,765
Rest of Western Europe 760 740 1,635
Rest of the World 1,077 1,204 2,444
-------- -------- --------
International 3,085 3,223 6,844
-------- -------- --------
5,453 5,355 11,412
-------- -------- --------
Duty in turnover
UK 1,976 1,773 3,808
Germany 955 981 2,120
Rest of Western Europe 463 454 983
Rest of the World 587 644 1,301
-------- -------- --------
International 2,005 2,079 4,404
-------- -------- --------
3,981 3,852 8,212
-------- -------- --------
Operating profit
UK 209 177 406
Germany 107 102 228
Rest of Western Europe 151 130 307
Rest of the World 93 88 194
-------- -------- --------
International 351 320 729
-------- -------- --------
Trading operations 560 497 1,135
Amortisation (103) (96) (203)
Exceptional items (55) - (51)
-------- -------- --------
402 401 881
-------- -------- --------
4. Exceptional items
The profit on disposal of fixed assets relates to the sale of land and buildings
no longer required by the business.
Exceptional operating costs of £55m comprise £35m in respect of the factory
closures announced in January 2004 and £20m in respect of an ongoing capacity
and infrastructure review. These provisions relate primarily to termination of
employment and fixed asset write-downs.
5. Taxation
Taxation has been calculated on the basis of an estimated effective tax rate of
27.1% pre-amortisation for the full year. This compares with an effective
pre-amortisation tax rate of 27.2% for the 2003 half year and 27.1% for the year
ended 30 September 2003.
6. Earnings per share
6 months ended 6 months Year
31 March 2004 ended ended
31 March 30 Sept
2003 2003
Earnings per share:
Basic 26.1p 25.1p 58.1p
Adjustment for amortisation and
exceptional items 19.2p 12.3p 31.9p
-------- -------- --------
Adjusted 45.3p 37.4p 90.0p
Diluted 26.0p 25.0p 57.9p
-------- -------- --------
Earnings (£m):
Basic 189 182 421
Adjustment for amortisation and
exceptional items 139 89 231
-------- -------- --------
Adjusted 328 271 652
-------- -------- --------
Basic earnings per share are calculated using the weighted average number of ordinary shares
outstanding during the period.
Adjusted earnings per share are calculated before tax-effected exceptional items of £36m and
amortisation of £103m, since the Directors consider that this provides a better comparison of
underlying business performance.
Diluted earnings per share have been calculated by taking into account the weighted average number
of shares that would be issued on conversion into ordinary shares of options held under employee
share schemes.
6 months ended 6 months Year
31 March 2004 ended ended
Number 31 March 30 Sept
2003 2003
Number Number
Weighted average number of
shares outstanding during
the period:
Basic 724,066,990 724,959,301 724,328,162
Effect of share options 3,319,217 3,870,830 3,225,153
---------------- ---------------- ----------------
Diluted 727,386,207 728,830,131 727,553,315
---------------- ---------------- ----------------
7. Reconciliation of operating profit to net cash flow from operating
activities
6 months ended 6 months Year
31 March 2004 ended ended
£m 31 March 30 Sept
2003 2003
£m £m
Operating profit 402 401 881
Depreciation and amortisation 139 138 286
Increase/(decrease) in provisions for
liabilities and charges 23 (39) (69)
(Increase)/decrease in stocks (147) 17 62
Increase in debtors (4) (158) (233)
Increase/(decrease) in creditors 82 (308) (125)
-------- -------- --------
Working capital cash outflow (69) (449) (296)
-------- -------- --------
Net cash inflow from operating activities 495 51 802
-------- -------- --------
8. Analysis of net debt
Current Loans due Loans due
asset within one after one Deferred
Cash invest-ments year year consider-ation Total
£m £m £m £m £m £m
As at 30 September
2003 321 68 (605) (3,427) (425) (4,068)
Cash flow 20 - 285 (503) 385 187
Exchange movements (8) (4) 12 152 8 160
------- -------- -------- -------- -------- --------
As at 31 March 2004 333 64 (308) (3,778) (32) (3,721)
------- -------- -------- -------- -------- --------
The deferred consideration paid during the period relates to the purchase of a
further 9.19% of Reemtsma, for £385m (euro 558m), taking our total holding to
99.2%.
SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES ('GAAP')
The accompanying consolidated financial information has been prepared in
accordance with accounting principles generally accepted in the United Kingdom
('UK GAAP'). Such principles differ in certain respects from generally accepted
accounting principles in the United States ('US GAAP'). A summary of principal
differences and additional disclosures applicable to the Group is set out below.
6 months ended 6 months Year
31 March 2004 ended ended
Explanation £m 31 March 30 Sept
Reference 2003 2003
£m £m
Profit attributable to
shareholders under UK
GAAP 189 182 421
US GAAP adjustments:
Pensions (i) 2 2 2
Amortisation of goodwill (ii) 100 92 194
Amortisation of brands/trade
marks/licences (ii) (50) (44) (102)
Deferred taxation (iii) 4 29 57
Mark to market adjustments
due to non designation of
hedge accounting per
SFAS 133 (iv) (28) (39) (82)
Employee share schemes
(charge)/credit to the profit
and loss account (vi) (1) 6 6
-------- -------- --------
Net income under US GAAP 216 228 496
-------- -------- --------
6 months ended 6 months Year
31 March 2004 ended ended
Explanation 31 March 30 Sept
Reference 2003 2003
Amounts in accordance with
US GAAP:
Basic net income per ordinary
share (vii) 29.8p 31.5p 68.5p
Basic net income per ADS (vii) 59.6p 63.0p 137.0p
Diluted net income per
ordinary share (vii) 29.7p 31.3p 68.2p
Diluted net income per ADS (vii) 59.4p 62.6p 136.4p
Restated Restated
(see (see note 2)
note 2) 30 Sept
Explanation 31 March 2004 31 March 2003
Reference £m 2003 £m
£m
Equity shareholders' funds
under UK GAAP as
previously reported 88 52 76
Prior year adjustments
(see note 2) - (28) (36)
-------- -------- -------
Equity shareholders' funds
under UK GAAP as restated 88 24 40
US GAAP adjustments:
Pensions (i) 346 338 345
Goodwill, less accumulated
amortisation of £(290)m
(2003: £(89)m) (ii) (911) (1,140) (1,060)
Brands/trade marks/licences,
less accumulated
amortisation of £212m
(2003: £106m) (ii) 2,740 2,928 2,921
Deferred taxation (iii) (961) (1,021) (1,008)
Mark to market adjustments
due to non designation of
hedge accounting per SFAS
133 (iv) (15) 56 13
Proposed dividend (v) 109 86 217
Employee share schemes (vi) (2) 1 (1)
-------- -------- -------
Shareholders' funds under
US GAAP 1,394 1,272 1,467
-------- -------- --------
(i) Pensions
Under UK GAAP, pension costs are accounted for under the rules set out in
Statement of Standard Accounting Practice No. 24 (SSAP 24). Its objectives and
principles are broadly in line with those set out in the US accounting standard
for pensions, Statement of Financial Accounting Standard No. 87, 'Employers'
Accounting for Pensions' (SFAS 87). However, SSAP 24 is less prescriptive in
the application of the actuarial method and assumptions to be applied in the
calculation of pension costs.
Group contributions to the Imperial Tobacco Pension Fund are suspended as the
Fund is in surplus. Under UK GAAP, in accordance with SSAP 24, no pension
expense has been reflected in the profit and loss account and no pension asset
has been recognised in the balance sheet for the UK and Irish pension schemes.
A pension liability and related pension expense is recognised for the German
unfunded pension schemes.
Under US GAAP, the annual pension cost comprises the estimated cost of benefits
accruing in the period as determined in accordance with SFAS 87. Under SFAS 87,
a pension asset representing the excess of pension fund assets over benefit
obligations has been recognised in the balance sheet.
(ii) Intangible assets
Both UK and US GAAP require purchase consideration to be allocated to the net
assets acquired at their fair value on the date of acquisition.
Under UK GAAP, goodwill arising and separately identifiable and separable
intangible assets acquired on acquisitions made on or after 27 September 1998
are capitalised and amortised over their useful life, not exceeding a period of
20 years. Prior to 27 September 1998, all goodwill and separately identifiable
and separable intangible assets were written off to reserves on acquisition.
Under US GAAP, identifiable intangible assets are separately valued and
amortised over their useful lives. The separately identifiable intangible
assets included in the US GAAP balance sheet are principally comprised of brand
rights which are being amortised over 25 to 30 years.
The Company adopted SFAS No. 142, 'Goodwill and Other Intangible Assets' (SFAS
142) with effect from 1 July 2001 and accordingly goodwill generated on
acquisitions after this date was not amortised. For purchase transactions prior
to 1 July 2001, goodwill was capitalised and amortised over its useful life.
From 29 September 2002, in accordance with SFAS 142, the Company no longer
amortises goodwill but rather tests such assets for impairment on an annual
basis or where there is an indicator of impairment.
The Company completed an annual impairment review under SFAS 142 at 30 September
2003 and no impairment charge of goodwill was indicated.
(iii) Deferred taxation
Under UK GAAP, deferred taxation is provided in full on all material timing
differences. Deferred tax assets are recognised where their recovery is
considered more likely than not.
US GAAP requires deferred taxation to be provided in full, using the liability
method. In addition, US GAAP requires the recognition of the deferred tax
consequences of differences between the assigned values and the tax bases of the
identifiable intangible assets, with the exception of non tax-deductible
goodwill, in a purchase business combination. Consequently, the deferred tax
liability attributable to identifiable intangible assets has been recognised and
is being amortised over the useful economic lives of the underlying intangible
assets.
(iv) Derivative financial instruments
The Group has entered into certain swap transactions with contractual maturities
exceeding those of the underlying debt being hedged, in anticipation of there
being additional floating rate debt when the existing debt matures. Under UK
GAAP, derivative financial instruments that reduce exposures on anticipated
future transactions may be accounted for using hedge accounting.
US GAAP requires the Group to record all derivatives on the balance sheet at
fair value. The Group has decided not to satisfy the SFAS 133 requirements to
achieve hedge accounting for its derivatives, where permitted, and accordingly
movements in the fair value of derivatives are recorded in the profit and loss
account.
(v) Proposed dividends
Under UK GAAP, dividends paid and proposed are shown on the face of the profit
and loss account as an appropriation of the current period's earnings. Proposed
dividends are provided on the basis of recommendation by the Directors.
Under US GAAP, dividends are recorded in the period in which they are formally
declared.
(vi) Employee share schemes
Under UK GAAP, the cost of employee share schemes is charged to the profit and
loss account using the quoted market price of shares at the date of grant less
the exercise price of the share options granted. The charge is accrued over the
vesting period of the shares. There is an exemption from making such a charge
for Inland Revenue approved SAYE schemes and equivalent overseas schemes.
Under US GAAP, the compensation cost is recognised for the difference between
the exercise price of the share options granted and the quoted market price of
the shares at the date of grant or measurement date and accrued over the vesting
period of the options. For option plans which contain performance criteria,
compensation cost is remeasured at each period end until all performance
criteria have been met.
(vii) Net income per ordinary share
Basic net income per ordinary share has been computed using US GAAP net income
and weighted average ordinary shares. Diluted net income per ordinary share has
been calculated by taking into account the weighted average number of shares
that would be issued on conversion into ordinary shares of options held under
employee share schemes. There would be no significant dilution of earnings if
outstanding share options were exercised.
Each American Depositary Share (ADS) represents two Imperial Tobacco Group PLC
ordinary shares.
FINANCIAL CALENDAR
Ex-dividend date for interim dividend 7 July 2004
Interim dividend record date 9 July 2004
Interim dividend payable 6 August 2004
This information is provided by RNS
The company news service from the London Stock Exchange
