Gallaher Group PLC
02 March 2005
2 March 2005
PRELIMINARY ANNOUNCEMENT OF RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2004
FINANCIAL HIGHLIGHTS
2004 2003
• Volumes 170.6bn 160.2bn up 6.5%
• Total turnover £9,553m £9,048m up 5.6%
• Net turnover(1) £3,985m £3,641m up 9.5%
• EBITA(2) £651m £627m up 3.9%
• PBTA(3) £529m £501m up 5.8%
• Adjusted profit before tax(4) £446m £418m up 6.7%
• Profit before tax £429m £379m up 13.3%
• Adjusted earnings per share(5) 58.9p 55.5p up 6.1%
• Basic earnings per share(6) 44.5p 38.0p up 16.8%
• Proposed final dividend 21.50p 20.15p up 6.7%
• Proposed total dividend 31.50p 29.60p up 6.4%
(1) Total turnover less duty paid by Group companies.
(2) Total operating profit before amortisation of intangible assets and
exceptional charges.
(3) Profit before tax, amortisation of intangible assets and exceptional
charges.
(4) Profit before tax and exceptional charges.
(5) Adjusted: before amortisation of intangible assets and exceptional charges
(net of tax).
(6) Basic: includes amortisation of intangible assets and exceptional charges.
Note: Amortisation of intangible assets was £83m (2003: £83m) and exceptional
charges were £17m (2003: £39m).
Commenting on the results, Nigel Northridge, chief executive, said:
'2004 was another record year despite difficult trading conditions particularly
in Continental Europe. Organic growth and greater cost efficiency delivered
improved volumes, profit and cash generation. We successfully entered new
markets and continued to grow share in certain key territories, most notably
across the CIS. We remain confident in our future and totally committed to
continuing to maximise shareholder return.'
Enquiries:
Claire Jenkins - director, investor relations Tel: 01932 832637
Anthony Cardew - Cardew Group Tel: 020 7930 0777
PERFORMANCE HIGHLIGHTS
• Gallaher delivered a strong performance by developing its interests in
established and emerging markets across Europe and Asia. Adjusted earnings
per share were up 6.1% to 58.9p. The increase was achieved in spite of
difficult trading conditions and the overall negative impact of foreign
exchange translation.
• Gallaher grew its total cigarette volume sales 6.5% to 170.6bn after
coping with the disruption to volumes in some of the Group's key EU markets
(due to increased taxation and associated cross-border trade). The increase
was driven by market share gains across the CIS and in certain Continental
European countries and resulted in a 5.4% increase in total tobacco
operations EBITA to £585m (2003: £556m).
• UK EBITA grew 5.2% to £302m (2003: £287m), reflecting total UK volume
sales of 20.2bn (down 0.4% on 2003), price increases and lower operating
expenses including benefits from savings from the operational restructuring
programme begun in 2003.
• Gallaher increased Continental European volume sales by 6.4% to 50.5bn
cigarettes. Market share gains in certain markets - including Italy, Poland,
the Czech Republic and the Balkans - more than offset the disruption to
volumes in other markets. This strong performance drove a 2.2% increase in
CE tobacco EBITA to £176m (2003: £172m) in spite of the weakening of the
euro. CE distribution EBITA reduced to £66m (2003: £71m), mainly reflecting
the overall market declines in Austria and Germany.
• In the CIS, the Group delivered strong volume and profit growth. Market
share and sales mix improvements across the region, and price increases,
drove a 10.3% increase in cigarette sales to 91.0bn (2003: 82.5bn). CIS
EBITA was up significantly - by 31.2% - to £57m (2003: £44m), in spite of
the substantially weaker US dollar.
• A decrease in Africa, Middle East and Republic of Ireland volumes and
adverse exchange movements led to a reduced RoW EBITA of £50m (2003: £53m).
The impact of the 11.3% decrease in RoW cigarette volumes to 8.9bn
cigarettes (2003: 10.0bn) and the weaker euro and US dollar were partly
offset through efficiency gains, including cost benefits from the Group's
operational restructuring.
• Gallaher maintained its position at the forefront of manufacturing
efficiency during 2004, increasing Group cigarette manufacturing
productivity 15.1%. This achievement together with lower leaf and NTM costs
drove a real term reduction in unit costs of 6.6%.
• Gallaher generated a cash inflow of £245m in 2004, reflecting a strong
operating performance and a reduction in capital expenditure.
• A proposed final dividend of 21.50p (2003: 20.15p) makes a total
dividend increase of 6.4% to 31.50p (2002: 29.60p).
• Current trading is in line with expectations.
CONTENTS
Page
Financial highlights 1
Performance highlights 2
Contents 3
2004 results 4
Operating review 10
Outlook 17
Group profit and loss account 18
Group balance sheet 19
Statement of total recognised gains and losses 20
Reconciliation of movements in equity shareholders' deficit 20
Group cash flow statement 21
Reconciliation of operating profit to net cash inflow from
operating activities 21
Reconciliation of net cash flow to movements in net debt 22
Segmental information (by destination) 23
Supplementary financial information 24
Legal and regulatory environment 27
Appendix I 33
Appendix II 45
2004 RESULTS
Group
Total turnover for 2004 at £9,553m increased 5.6% against 2003, with cigarette
volume sales up 6.5% to 170.6bn. Turnover excluding duty ('net turnover') grew
9.5% to £3,985m (2003: £3,641m).
Earnings before interest, tax, intangible asset amortisation and exceptional
charges ('EBITA') increased 3.9% to £651m (2003: £627m).
Total tobacco operations EBITA grew 5.4% to £585m (2003: £556m), while the EBITA
from the Continental European distribution businesses reduced to £66m (2003:
£71m).
Profit before tax, amortisation of intangible assets and exceptional charges
('PBTA') increased 5.8% to £529m (2003: £501m).
Total operating profit was £551m (2003: £505m) and profit before tax was £429m
(2003: £379m) - both reflecting trading improvements and lower exceptional
charges of £17m (2003: £39m) relating to the restructuring of Gallaher's
European operations.
Adjusted earnings per share increased 6.1% to 58.9p (2003: 55.5p). After
deducting intangible asset amortisation and exceptional charges, net of tax,
basic earnings per share were 44.5p (2003: 38.0p).
Gallaher's performance was impacted negatively by the effects of foreign
exchange translation - reflecting a marginally weaker euro and a significantly
weaker US dollar. These effects, however, were partly offset at earnings per
share level by Group hedging activity, particularly in respect of the euro.
The board of Gallaher recommends a final dividend of 21.5p per ordinary share,
amounting to a total dividend for the full year of 31.5p per ordinary share
(126.0p per ADS). This represents an increase of 6.4% over the 2003 total
dividend of 29.6p per ordinary share (118.4p per ADS).
Subject to shareholders' approval at Gallaher's AGM on 11 May 2005, the final
dividend will be paid on 24 May 2005 to ordinary shareholders on the register at
close of business on 18 March 2005. For ADS holders, The Bank of New York will
convert the 86.0p ADS final dividend into US dollars, and distribute it to ADS
holders on 31 May 2005.
Management believes that reporting results before amortisation and exceptional
charges (EBITA, PBTA and adjusted earnings per share) provides a better
comparison of underlying business performance.
Exceptional charges
Exceptional charges for 2004 total £17m (2003: £39m). The European operational
and administrative restructuring currently underway in the business continues in
line with management's expectations.
In January 2005, Gallaher announced proposals for a further restructuring of its
European operations. These proposals cover: the closure of the Schwaz cigarette
and Furstenfeld cigar factories in Austria during 2005; additional restructuring
of production at the cigarette and cigar factories at Lisnafillan and Cardiff in
the UK; and, reorganisation of some aspects of the distribution network.
As a consequence, around 250 operational jobs could be affected across the
business. A full employee consultation process is underway.
International Financial Reporting Standards
Gallaher currently prepares its financial statements under UK Generally Accepted
Accounting Principles ('UK GAAP'). For the financial year ending 31 December
2005 (including the six months ending 30 June 2005), the Group will be required
to prepare its consolidated financial statements in accordance with
International Accounting Standards and International Financial Reporting
Standards, together 'IFRS'.
Appendix I to this announcement contains UK GAAP to IFRS reconciliations for
2004.
Changes to segmental disclosures from 2005
Following the changes in board responsibilities effective from October 2004, and
in line with IFRS' principles regarding segmental reporting, the Group has
reviewed the segments under which it reports its financial results. As a result
of this review, the financial information for the year ended 31 December 2005
(and the six months ended 30 June 2005) will be reported under a revised
segmental structure.
Appendix II to this announcement contains IFRS reconciliations between the
current and revised segmental structures for the year ended 31 December 2004 and
the six months ended 30 June 2004.
Segmental review
UK CE CIS RoW Total
(£m) (£m) (£m) (£m) (£m)
Gross turnover
2004 3,680 4,979 409 485 9,553
2003 3,611 4,534 373 530 9,048
Net turnover(1)
2004 568 2,990 307 120 3,985
2003 578 2,637 295 131 3,641
EBITA(2)
2004 302 242 57 50 651
2003 287 243 44 53 627
Total operating profit
2004 291 163 47 50 551
2003 267 169 34 35 505
EBITA margin(3)
2004 (%) 53.2 8.1 18.7 42.0 16.3
2003 (%) 49.7 9.2 14.8 40.3 17.2
(1) Gross turnover less duty paid by Group companies.
(2) Total operating profit before amortisation of intangible assets and
exceptional charges.
(3) Total operating profit before amortisation of intangible assets and
exceptional charges expressed as a percentage of net turnover.
United Kingdom
UK turnover increased 1.9% to £3,680m (2003: £3,611m). The increase largely
reflects price increases (UK government duty and Gallaher's own price increases)
and the phasing of trade sales, partially offset by customers downtrading to
cheaper products and the effects of lower volumes in the cigarette and cigar
markets. Gallaher's cigarette volume sales were marginally lower, but market
share continued to improve.
UK net turnover decreased 1.8% to £568m (2003: £578m).
UK EBITA grew 5.2% to £302m (2003: £287m) mainly reflecting manufacturer's price
increases and lower costs. The growth was affected by downtrading and lower
volumes. Costs benefited from savings from the operational restructuring
programme and the comparison to 2003 which included incremental marketing
investment ahead of the implementation of the Tobacco Advertising and Promotion
Act.
This reduction in costs together with the benefits of the manufacturer's price
increases resulted in an improved EBITA margin of 53.2% (2003: 49.7%).
UK operating profit was £291m (2003: £267m) - the increase reflecting trading
improvements together with lower UK exceptional charges in 2004 of £9m (2003:
£18m).
Continental Europe ('CE')
Continental Europe delivered a strong performance in 2004, growing total
turnover by 9.8% to £4,979m (2003: £4,534m). This growth was achieved in the
face of difficult trading conditions and in spite of the weakening of the euro.
CE cigarette volume sales grew 6.4% to 50.5bn (2003: 47.4bn). Underlying volume
growth was 1.2%, after adjusting for the contribution of Gallaher Poland,
following the acquisition of KT Merkury in July 2003.
CE net turnover increased 13.4% to £2,990m (2003: £2,637m), and was made up of:
CE tobacco net turnover of £446m (2003: £434m); and, distribution net turnover
of £2,544m (2003: £2,203m), benefiting by £490m from the purchase of Lekkerland
Europa ('LEH') by the Group's associate Lekkerland-Tobaccoland ('L-T') in
January 2004. Underlying distribution net turnover declined 6.7%, reflecting
market declines in Austria and Germany.
In 2004, a change in the route to the Italian market for the volumes of the
Group's joint venture with Reynolds American, RGI - through the Gallaher Italia
entity - led to a grossing up of both net turnover and costs by £22m.
CE EBITA was £242m (2003: £243m) of which £176m (2003: £172m) arose from the
tobacco operations and £66m (2003: £71m) came from the distribution businesses.
In 2004, Gallaher took price increases and defended its mature market positions.
The Group also benefited from cost savings arising from the ongoing operational
and administrative restructuring and continued to develop its operations in
newer markets. Together with the continued successful development of RGI, these
factors enabled the tobacco operations to mitigate most of the effect of market
declines across Austria, Sweden, France and Germany and also to absorb both the
start-up costs in Poland and adverse foreign exchange translation effects.
The distribution businesses were also impacted by market declines in Austria and
Germany. The Group's German vending operation, ATG, was particularly affected by
duty increases in March 2004. These adverse factors were partially offset by the
inclusion of LEH from January 2004.
The tobacco operations EBITA margin, after adding back inter-company sales to
the distribution businesses, was 32.7% (2003: 31.9%), mainly reflecting price
increases and improved operating efficiencies across the region. The inclusion
of LEH resulted in a reduction in the distribution EBITA margin to 2.6% (2003:
3.2%). Reflecting the increased weighting of the distribution businesses within
the divisional net turnover, CE's EBITA margin was 8.1% (2003: 9.2%).
CE operating profit was £163m (2003: £169m), after deducting the CE exceptional
charges of £8m (2003: £3m).
Commonwealth of Independent States ('CIS')
The CIS delivered strong volume growth and market share gains across the region.
Volumes increased 10.3% to 91.0bn cigarettes (2003: 82.5bn). This growth was
achieved despite excise duty increases in both Russia and Ukraine and
manufacturer price increases. This strong performance more than offset the
impact of the substantially weaker US dollar (reflecting largely US dollar
denominated sales) and resulted in a 9.8% increase in CIS turnover to £409m
(2003: £373m). CIS net turnover increased 4.2% to £307m (2003: £295m).
CIS EBITA increased 31.2% to £57m (2003: £44m). This substantial growth masks
the significantly adverse impact of the translation of CIS earnings into
sterling, and reflects the ongoing improvement in Gallaher's mix of sales, the
benefits of the Group's own price increases and further improvements in
production cost efficiency. CIS EBITA margin rose to 18.7% (2003: 14.8%).
Rest of World ('RoW')
Gallaher's Rest of World turnover declined 8.5% to £485m (2003: £530m), and RoW
net turnover reduced 8.7% to £120m (2003: £131m). These movements mainly reflect
lower volumes in the Republic of Ireland and the Africa and Middle East
('AMELA') regions and adverse exchange movements. RoW volume sales totalled
8.9bn cigarettes (2003: 10.0bn).
In the Republic of Ireland, manufacturer's price increases and favourable
changes to the cost structure as a result of the factory closure in 2003 helped
to compensate for lower volumes in the reduced Irish market.
Gallaher has also been able to mitigate the effects of reduced volumes in the
AMELA region through tight control of the cost base.
RoW EBITA was £50m (2003: £53m), and the EBITA margin increased to 42.0% (2003:
40.3%).
RoW operating profit was £50m (2003: £35m) - the increase mainly reflecting the
absence of exceptional charges in 2004 (2003: £18m).
Interest
The Group's lower interest charge of £128m before the FRS 17 net financing
credit of £6m (2003: £131m before FRS 17 net financing credit of £5m) was driven
by positive cash flow and the marginally favourable impact of the translation of
euro interest payable into the sterling equivalent. These factors were partly
offset by higher interest costs on variable rate debt, and incremental costs
associated with an €800m eurobond issued in June 2004 (to refinance, together
with internal cash flow, the €900m eurobond maturing in January 2005). This
resulted in a higher average interest rate during 2004 of 5.8% (2003: 5.5%).
EBITA interest cover - combining both interest and operating components of FRS
17 into a net pension expense within EBITA - was 5.1 times (2003: 4.8 times),
within the Group's target range of between 4.5 and 5.5 times.
Taxation
The tax charge of £135m (2003: £126m) represents an effective rate of 31.5%,
compared with 33.3% for 2003. The reduction in the effective rate largely
reflects the low effective tax credit applicable to exceptional charges in 2003.
Removal of intangible amortisation charges and exceptional charges gives rise to
an adjusted effective tax rate of 26.6% (2003: 26.7%).
Returns to shareholders
After deducting minority interests of £4m (2003: £6m) earnings for 2004
increased to £290m (2003: £247m), and - following a 0.3% increase in the
weighted average number of shares in issue - basic earnings per share were 44.5p
(2003: 38.0p).
After removing intangible asset amortisation charges of £83m (2003: £83m) and
net of tax exceptional charges of £11m (2003: £31m), adjusted earnings per share
increased 6.1% to 58.9p (2003: 55.5p).
Cash flow
Operating cash flow before exceptional items increased significantly to £762m
(2003: £712m). Group operating profit before exceptional charges, depreciation
and amortisation ('EBITDA') was £708m (2003: £699m). This EBITDA growth was
supplemented by a reduction in working capital during 2004 of £73m, compared to
a decrease of £24m during 2003. Cash costs relating to the exceptional charges
were £15m (2003: £21m).
Stocks fell by £26m, largely reflecting lower leaf stock. As a consequence of
higher volumes and tobacco excise duty rates, a favourable increase in creditors
of £96m was largely attributable to higher excise duty liabilities. These
favourable movements have been partially offset by a £49m increase in debtors,
again reflecting higher volumes and increased sales prices.
Net finance payments of £129m were £2m less than 2003 and taxation payments of
£90m were £9m lower than the previous year.
Capital expenditure and investments of £110m largely reflect the continuing
investment in production machinery and merchandising equipment. The reduction of
£18m from 2003 is primarily due to a lower level of investment in vending
assets, such costs being required to meet regulatory requirements impacting in
2007.
Net debt at 31 December 2004 was £2,208m, a reduction of £244m compared to 31
December 2003. The decrease was attributable to a cash inflow of £245m
marginally offset through negative exchange rate movements - amounting to £1m -
on Gallaher's euro denominated debt. The Group's weighted average net debt
during the year was £2,211m (2003: £2,407m).
In June 2004, the Group issued an €800m bond maturing in June 2011, the proceeds
of which, together with internal cash flow, have been used to repay the €900m
bond that matured in January 2005. The weighted average maturity of committed
debt at the year-end was 4.1 years (2003: 3.5 years).
The 12-month rolling net debt to adjusted EBITDA ratio was 3.0 times (2003: 3.4
times), below the Group's current bank covenant level of 3.5 times.
The Group's debt ratings from Moody's Investor Services and Standard & Poor's
remain unchanged at Baa3 with stable outlook and BBB with stable outlook
respectively.
OPERATING REVIEW
Group
During 2004, Gallaher continued to create value for investors and to build its
platform for future growth through the development of a balanced portfolio of
interests in established and emerging markets.
The Group's leading positions in mature markets in the EU underpinned gains in
its growth markets across Europe and the CIS - despite the disruption to volumes
in some key EU markets due to increased taxation and associated cross-border
trade.
Gallaher's total volumes grew 6.5% to 170.6bn cigarettes. This growth was driven
by market share gains across the CIS and in certain Continental European
countries including Italy, Poland, the Czech Republic and the Balkans.
Divisional cigarette volumes
2004 2003 Change
(bn) (bn) (%)
UK 20.2 20.3 (0.4)
Continental Europe(1) 50.5 47.4 6.4
CIS 91.0 82.5 10.3
Rest of World 8.9 10.0 (11.3)
Total Group(2) 170.6 160.2 6.5
(1)Total CE volumes excluding those attributable to Gallaher Poland (formerly
KT Merkury), which was acquired in the second half of 2003, increased 1.2% to
46.3bn cigarettes (2003 excluding Gallaher Poland: 45.7bn). Gallaher's Polish
volumes were 4.1bn cigarettes in 2004 (2003 pro-forma Gallaher Poland / KT
Merkury: 2.4bn).
(2)Total Group volumes excluding those attributable to Gallaher Poland
increased 5.0% to 166.5bn cigarettes (2003 excluding Gallaher Poland: 158.5bn).
United Kingdom
In the UK, Gallaher maintained its leading positions in the premium cigarette
and cigar sectors, while continuing to increase its share of the value cigarette
sector.
- Cigarette
Total UK duty-paid cigarette market sales to consumers declined by around 2.5%
during 2004 and downtrading from premium and mid-price cigarettes into value
cigarettes continued.
The shares of retail sales accounted for by each price sector were: value: 59.1%
(2003: 56.6%); mid-price: 10.1% (2003: 11.2%); and, premium: 30.8% (2003:
32.2%).
Gallaher's UK volumes reduced 0.4% to 20.2bn cigarettes. This modest decrease
reflected the reduced market size, partly offset by a small increase in
Gallaher's market share and a soft comparator period in 2003 due to the phasing
of trade sales into December 2002.
The Group's total cigarette market share excluding distributed brands was
slightly up at 38.6% (2003: 38.1%). Gallaher increased its share of the value
cigarette sector to 35.2% (2003: 33.2%) and continued to lead the premium
cigarette sector with a share of 46.5% (2003: 47.4%).
Gallaher's largest UK houses, Mayfair and Benson & Hedges, supported this
performance. Mayfair continued to perform strongly, growing share to 11.7%
(2003: 10.4%) and Benson & Hedges' market share increased to 9.5% (2003: 9.3%).
- Cigar
Total UK cigar market volumes continued to decline, falling by an estimated
9.0%.
Gallaher maintained its lead of the UK cigar market, albeit with a slightly
reduced share of 46.3% (2003: 47.0%). This decline reflected a faster reduction
in the size of the medium cigar sector, where Gallaher has a large share, than
in the size of the small cigar sector, where Gallaher's share is lower.
The market leader Hamlet held its share of the medium cigar sector at 54.6%
(2003: 54.5%) and Hamlet Miniatures' share of the small cigar sector was 31.1%
(2003: 32.0%).
- Tobacco
Total UK handrolling tobacco market volumes grew by an estimated 5.0%.
Gallaher's share was 29.7% (2003: 31.3%) with growth in Amber Leaf's share to
17.0% (2003: 15.9%) being more than offset by the ongoing decline of Old
Holborn.
The small UK pipe tobacco market reduced by an estimated 7.5%. Gallaher
continued to lead this market with a 48.6% share (2003: 49.6%).
Continental Europe
In Continental Europe, Gallaher made progress with its strategy of defending its
leading positions in the mature Austrian and Swedish cigarette markets, while
growing share elsewhere, with notable gains in Italy, Poland, the Czech Republic
and the Balkans.
Gallaher increased its underlying (excluding Poland) Continental European
volumes 1.2% to 46.3bn cigarettes. This was largely due to growth in Italy, the
Czech Republic, the Balkans, and generic cigarettes and was achieved in the face
of substantial taxation-driven volume declines in certain markets across Europe.
The Group's growth in Poland following the acquisition of KT Merkury drove a
6.4% increase in Gallaher's total Continental European volumes to 50.5bn
cigarettes.
- Tobacco products
The duty-paid Austrian cigarette market declined around 5%. Year-end volumes
were supported by a pull forward of sales into 2004 due to increased demand
ahead of a duty and price increase in January 2005. Without this pull forward of
sales, the Austrian market would have declined by around 7.0%, largely as a
result of increased illegal cross-border trade from new EU member states.
Gallaher's Austrian market share was 45.2% (2003: 46.5%). This was a moderate
reduction in market share when compared with the trend in recent years. This was
due to the stabilisation of the Gallaher's core Memphis house's market share at
27.0% (2003: 26.8%), underpinned by modest growth from Memphis Classic.
In Sweden, duty-paid cigarette market volumes reduced some 5%, with an increase
in cross-border trade from new EU member states adding to the underlying rate of
mature market decline.
Gallaher's total market share was 38.2% (2003: 39.1%) with growth from
Gallaher's newer brand, Level, partly offsetting ongoing declines from the
mature brands Blend and Right.
The snus market in Sweden grew 3.6%. Gallaher increased its average share of
this market to 2.4% (2003: 1.3%), despite strong competition from other new
market entrants.
In Germany, the total duty-paid cigarette market declined 15.5% due to
substantial increases in taxation, retail prices and cross-border trade. The
large private label cigarette sector outperformed the wider market with a volume
decline of only 11.3%, increasing its share to 16.9%.
Gallaher extended its lead of the private label cigarette sector, increasing its
share of the total market held through private label cigarettes to 8.5% (2003:
7.3%), while maintaining its branded cigarette market share at 0.7%.
During the second half of 2004, Gallaher launched a range of Ronson cigarettes
and other tobacco products, including packs of 'singles', in the German market.
Initial Ronson sales volumes have been encouraging.
In Greece, the cigarette market has experienced downtrading from premium to
lower-priced products. This trend has impacted Gallaher's principal brand Silk
Cut, which experienced an 8.4% volume decline. In the handrolling tobacco
market, Gallaher increased volumes by 21.0%, driven by the ongoing success of
Old Holborn.
In France, the total duty-paid cigarette market declined 21.1%, as a result of
successive steep increases in cigarette taxation.
Gallaher's total cigarette market share was 3.1% (2003: 3.0%) with robust
performances from both Gallaher's Benson & Hedges Metal range and brands
marketed by Reynolds-Gallaher International, including the recently launched
Austin.
Gallaher also performed well in the French cigar market. Growth from Hamlet
drove an increase in the Group's market share to 1.2% (2003: 0.7%).
In the context of the other large Continental European markets, total duty-paid
cigarette market volumes in Italy and Spain were relatively stable, with
respective declines of 2.3% and 0.4%.
Gallaher's market share in Italy increased to 4.9% (2003: 3.2%). This success
was driven by growth from Benson & Hedges American Blend. The Group's market
share in Spain was 1.7% (2003: 1.6%).
Gallaher has continued to make strong progress in Central and Eastern Europe.
In Poland, the Group's cigarette market share grew in 2004, to reach 4.9% in
December, up from 2.6% in December 2003. Gallaher's average 2004 market share
was 4.0%. The Group's success in Poland is being driven by growth from its
international brands, most notably LD and Level.
Following the accession of the Czech Republic to the EU, and the abolition of
import tariffs, Gallaher has been able to compete in the market at a variety of
price points. The Group made strong progress in the second half, with its market
share reaching 6.2% in December (December 2003: 0.1%), driven by sales of Ronson
. Gallaher's average 2004 market share in the Czech Republic was 1.8%.
Gallaher also made good progress in Estonia and the Balkans, where it opened a
factory in Romania. The Group increased its market share in Estonia to 28.2%
(2003: 23.0%) and grew its pan-Balkan market share to an estimated 5.6% (2003:
4.9%).
- Distribution
Gallaher's distribution businesses were impacted by the market declines in
Austria and Germany.
In Austria, a continued focus on operational costs at TOBA and price increases
in the Austrian cigarette market largely offset the impact of the total market
decline.
In Germany, ATG - the vending company in which Gallaher has a 63.9% holding -
was affected by the decline in total market volumes and downtrading from branded
cigarettes to generic cigarettes and other tobacco products. The branded
cigarette sector declined 16.3%.
In addition to this, ATG was impacted by disadvantageous optical pricing in the
vending channel following the duty increase in March - although the subsequent
duty increase in December created parity in optical pricing between the
cigarette vending and retail markets for premium brands.
The impact of these unfavourable market conditions on ATG was partly mitigated
by a focus on operational cost reduction (including further rationalisation of
vending sites) and higher margins following the price increases in the German
market.
ATG's share of total cigarette sales was 6.0% (2003: 5.9%).
The lower German cigarette market volumes also impacted Lekkerland-Tobaccoland
('L-T') - an associate in which Gallaher has a 25.1% holding. This impact was,
however, more than offset by L-T's acquisition of Lekkerland Europa in January
2004.
Commonwealth of Independent States
Gallaher's strategy of growing market share in the CIS, while continuing to
enhance its sales mix across the region, delivered good results.
CIS cigarette markets developed in association with wider economic prosperity
with a growing proportion of smokers choosing intermediate- and higher-priced
brands.
In the region's largest market, Russia, the higher-priced sector's share of the
total market increased to 30.2% (2003: 26.0%), the intermediate-priced sector
maintained its share at 58.7% and the proportion of the market held by the
low-price sector reduced to 11.1% (2003: 15.3%).
In addition to this positive price sector development, prices within sectors
were increased.
Gallaher grew its total CIS volumes 10.3% to 91.0bn cigarettes and improved its
mix of sales. This volume gain was driven by market share increases in all three
of Gallaher's principal regional markets, Russia, Kazakhstan and Ukraine.
- Russia
Gallaher grew its share of the total Russian cigarette market to 16.4% (2003:
15.0%).
This achievement was due to the success of a variety of brands across the
intermediate- and higher-priced sectors. These included St George, Troika and
Sobranie. The growth of these brands was underpinned by the ongoing strength of
LD, which slightly increased market share to 5.3% (2003: 5.2%).
The Group continued to grow its share in the higher value cigarette sectors,
increasing its share of the higher-priced sector to 3.7% (2003: 2.3%) and its
share of the intermediate-priced sector to 24.5% (2003: 21.9%).
- Kazakhstan
Gallaher grew its share of the total cigarette market in Kazakhstan to 35.1%
(2003: 30.0%). This advance was driven by gains from brands across price sectors
including Sovereign, Sobranie and LD.
Gallaher increased its lead of the higher-priced sector with a share of 58.7%
(2003: 49.2%), and grew its share of the intermediate sector to 25.7% (2003:
21.3%). The Group's share of these two sectors combined was 37.7% (2003: 34.5)%.
The Group also increased export volumes from Kazakhstan to adjacent markets,
including Kyrgyzstan.
- Ukraine
Gallaher grew its share of the total cigarette market in Ukraine to 14.5% (2003:
11.6%) due to advances from intermediate-priced brands including Level, St
George and Troika.
Gallaher increased its share of the intermediate-priced sector to 20.0% (2003:
15.6%).
Rest of World
In its Rest of World division, Gallaher continued defending its share in the
high margin Republic of Ireland market, while establishing positions elsewhere.
The Group's total Rest of World volumes declined 11.3% to 8.9bn cigarettes. This
decline was due to lower Africa and Middle East volumes (including those
manufactured under contract) and a reduction in Irish market volumes.
- Republic of Ireland
The total cigarette market in the Republic of Ireland declined 11.3% in 2004.
This reduction was influenced by successive above inflation duty increases and
the ban on workplace smoking that came into force at the end of March.
Gallaher's cigarette volume sales were 2.8bn (2003: 3.1bn). The Group maintained
its lead of the cigarette market with a share of 49.1% excluding distributed
brands (2003: 49.5%).
- AMELA
Gallaher's AMELA (Africa and Middle East) volumes reduced 13.2% to 4.9bn
cigarettes (2003: 5.6bn). Growth in Nigeria was more than offset by a reduction
in volumes elsewhere including those manufactured under contract.
The Group is planning to increase its flexibility and competitiveness in
developing markets by employing lower-cost production for these markets, using
its factory in Poland or on-shore facilities where appropriate.
Gallaher has agreed to purchase a factory site in South Africa and intends to
commence local production of its mainstream brands during 2005.
- Asia Pacific
Asia Pacific cigarette volumes increased 14.6% to 0.4bn cigarettes with strong
performances in China, Taiwan and regional duty free. Sales of other tobacco
products also grew significantly as Gallaher commenced production of cigars for
the Japanese market.
In China, on-shore production of Memphis commenced in May under license with
Shanghai Tobacco Group and permission was received from the China National
Tobacco Import Export Company to import LD into the market.
In Singapore, Memphis was launched in November and Gallaher is continuing to
build foundations for future growth throughout the Asia Pacific region.
Manufacturing
Gallaher maintained its position at the forefront of manufacturing efficiency
during 2004.
Assisted by benefits from the European operational restructuring programme
announced in May 2003, the Group increased its overall cigarette manufacturing
productivity (defined as output per worked hour) 15.1%. Together with lower leaf
and non-tobacco material ('NTM') costs, this achievement drove a reduction of
6.6% in Group unit costs in real terms.
Since the year-end, Gallaher has announced proposals for further restructuring
of its European operations. While maintaining total Group production capacity,
these proposals would enhance Gallaher's competitive position and allow the
Group to retain the flexibility to meet changing market demands.
Gallaher proposes to close the Schwaz cigarette and Furstenfeld cigar factories
in Austria during 2005, and to further restructure production at its cigarette
and cigar factories at Lisnafillan and Cardiff in the UK. A full employee
consultation process is underway.
In seeking to grow its Eastern European and developing markets business,
Gallaher plans to establish on-shore production where appropriate, and
concentrate remaining production for developing markets in its factory in
Poland. The Group commenced on-shore production in Romania in the second half of
2004 and its brands are being manufactured under contract in Bosnia and
Macedonia.
- United Kingdom
Productivity at Gallaher's Lisnafillan cigarette factory increased 22.0%.
This advance was due to higher volumes following the transfer of production for
the Republic of Ireland from Dublin in late 2003 and a reorganisation of working
practices, which included job reductions.
Real term unit costs reduced 11.9%. This improvement was driven by the increased
productivity and assisted by lower tobacco and NTM costs.
Productivity at Gallaher's Lisnafillan tobacco factory increased 11.7%, as a
result of both higher volumes and increased efficiencies. This improvement
contributed to a real term reduction in unit costs of 5.7%. The factory's
efficiency was enhanced further through the installation of a new primary
processing line at the end of 2004. This development is part of an investment
programme designed to increase the factory's efficiency and flexibility.
Productivity at Gallaher's Cardiff cigar factory reduced 14.8% as a result of a
significant increase in the number and complexity of brand packs being produced
to serve export markets. On a like-for-like basis, productivity relating to core
UK volumes was broadly flat.
The changes in brand pack mix and requirements for more expensive packaging led
to a real term increase in unit costs of 4.0%.
- Continental Europe
Cigarette productivity at Gallaher's Continental European factories in Austria
increased 10.7%. This improvement resulted from the restructuring announced in
2003, together with improved factory efficiencies. A new ultra high-speed line
has been installed in Gallaher's largest Austrian factory in Linz and the Group
plans to install additional ultra high-speed lines in both Linz and Hainburg
during 2005. Real term cigarette unit costs reduced 6.9%.
In Gallaher's factory in Poland, the installation of new production equipment,
together with improved working practices, enabled the Group to meet higher
demand while creating the flexibility needed to produce a growing portfolio of
brands. These combined factors gave rise to an increase in productivity of
56.3%.
Real term unit costs reduced 4.2%, with the increase in productivity being
offset by factors including depreciation associated with the new machinery.
Gallaher commenced on-shore production in Romania in October, following the
leasing of a factory in Bucharest.
- Commonwealth of Independent States
Cigarette productivity in the CIS increased 14.5%, driven by higher production
volumes - particularly in Ukraine.
To facilitate this volume growth in Ukraine, additional machinery has been
redeployed from within the Group and a new slims cigarette manufacturing line
has been installed.
The increased productivity, together with stable raw material costs, gave rise
to a real term improvement in unit costs of 4.4%.
The Group's ability to meet the strong demand for its brands in Russia is being
enhanced through the installation of new high-speed making and packing capacity
at its factory in Moscow.
The Kazakhstan operation has also increased capacity to meet volume growth in
domestic and export products. The factory's infrastructure is being upgraded and
additional machinery has been transferred to Kazakhstan from within the Group.
OUTLOOK
Gallaher's good performance in 2004 demonstrated the strength of the Group's
strategy and the platform for growth it has created. In the face of challenging
conditions, Gallaher grew volumes, revenues and earnings and continued to make
progress with its ongoing drive to increase efficiency. The Group's strong cash
generation underpinned further expansion in developing markets.
Going forward, Gallaher remains confident and totally committed to continuing to
maximise shareholder return.
Current trading remains in line with expectations.
Gallaher Group Plc
Group profit and loss account
YEAR ENDED 31 DECEMBER 2004
2004 2004 2003
US$m* £m £m
Turnover of the Group
including its share of joint
ventures and associates 18,341 9,553 9,048
Less share of turnover of
joint ventures and associates (2,761) (1,438) (1,055)
------------- ------------- -------------
Group turnover 15,580 8,115 7,993
Group operating profit before
exceptional charges 1,058 551 539
Exceptional charges (33) (17) (39)
------------- ------------- -------------
Group operating profit 1,025 534 500
Share of operating profits of
joint ventures and associates 33 17 5
------------- ------------- -------------
Total operating profit 1,058 551 505
Net interest and other
financing charges (246) (128) (131)
Net retirement benefits
financing income 12 6 5
------------- ------------- -------------
Total net interest and other
finance charges (234) (122) (126)
------------- ------------- -------------
Profit on ordinary activities
before taxation 824 429 379
Tax on profit on ordinary
activities (259) (135) (126)
------------- ------------- -------------
Profit on ordinary activities
after taxation 565 294 253
Equity minority interests (8) (4) (6)
------------- ------------- -------------
Profit for the financial year 557 290 247
Dividends (395) (206) (193)
------------- ------------- -------------
Retained profit for the
financial year 162 84 54
------------- ------------- -------------
Earnings per ordinary share
- Adjusted (a) 113.1c 58.9p 55.5p
- Basic 85.4c 44.5p 38.0p
- Diluted 85.2c 44.4p 37.9p
Dividends per ordinary share
- Final proposed 41.3c 21.50p 20.15p
- Total for the year 60.5c 31.50p 29.60p
There is no difference between the profit on ordinary activities before taxation
and the retained profit for the financial year stated above and their historical
cost equivalents. Turnover and operating results relate to continuing
operations.
(a) Before intangible asset amortisation and exceptional charges.
* US dollar equivalents are provided for reader convenience at the 31 December
2004 exchange rate of £1:US$1.92.
Gallaher Group Plc
Group balance sheet
AT 31 DECEMBER 2004
2003
2004 2004 (restated**)
US$m* £m £m
Fixed assets
Intangible assets 2,529 1,317 1,399
Tangible assets 1,160 604 595
Investments: - investment in
joint ventures 15 8 6
- investment in associates 217 113 112
- other investments 15 8 11
------------- ------------- -------------
247 129 129
------------- ------------- -------------
3,936 2,050 2,123
------------- ------------- -------------
Current assets
Stocks 929 484 504
Debtors 1,668 869 783
Non-liquid investments 4 2 1
Cash and liquid investments 1,346 701 116
------------- ------------- -------------
3,947 2,056 1,404
Creditors: amounts falling due
within one year
Borrowings (1,459) (760) (139)
Other (2,411) (1,256) (1,117)
------------- ------------- -------------
(3,870) (2,016) (1,256)
Net current assets 77 40 148
------------- ------------- -------------
Total assets less current
liabilities 4,013 2,090 2,271
Creditors: amounts falling due after
one year
Borrowings (4,183) (2,179) (2,429)
Other (10) (5) (5)
------------- ------------- -------------
(4,193) (2,184) (2,434)
Provisions for liabilities and
charges (121) (63) (53)
Net retirement benefits
liability (121) (63) (68)
------------- ------------- -------------
Net liabilities (422) (220) (284)
------------- ------------- -------------
Capital and reserves
Called up share capital 125 65 65
Share premium account 248 129 125
Capital redemption reserve 15 8 8
Merger reserve 280 146 146
Other reserve (1,749) (911) (911)
Profit and loss account (incl.
retirement benefits reserve) 599 312 252
------------- ------------- -------------
Equity shareholders' deficit (482) (251) (315)
Equity minority interests 60 31 31
------------- ------------- -------------
(422) (220) (284)
------------- ------------- -------------
This summary financial statement was approved by the board on 1 March 2005 and
signed on its behalf by Nigel Northridge and Mark Rolfe.
* US dollar equivalents are provided for reader convenience at the 31 December
2004 exchange rate of £1:US$1.92.
**The adoption of UITF Abstract 17 (Revised 2003) and UITF 38 in 2004 has
required the 2003 Group balance sheet to be restated. Other investments have
been reduced by £8m with a corresponding charge to the profit and loss account
reserve.
Gallaher Group Plc
Statement of total recognised gains and losses
YEAR ENDED 31 DECEMBER 2004
2004 2004 2003
US$m* £m £m
Profit for the financial year 557 290 247
Actuarial loss recognised on
retirement benefits (27) (14) (4)
Movement on deferred tax
relating to actuarial loss
on retirement benefits 10 5 1
Exchange adjustments on
foreign currency
net investments (27) (14) (4)
------------- ------------- -------------
Total recognised gains and
losses for the year 513 267 240
------------- ------------- -------------
Reconciliation of movements in equity shareholders' deficit
YEAR ENDED 31 DECEMBER 2004
2003
2004 2004 (restated**)
US$m* £m £m
Profit for the financial year 557 290 247
Dividends (395) (206) (193)
Debit in respect of employee
share schemes (2) (1) (3)
Actuarial loss recognised on
retirement benefits (27) (14) (4)
Movement on deferred tax
relating to actuarial loss
on retirement benefits 10 5 1
Exchange adjustments on
foreign currency net
investments (27) (14) (4)
Issue of ordinary shares 8 4 8
------------- ------------- -------------
Net movement in equity
shareholders' deficit 124 64 52
Opening equity shareholders'
deficit - previously reported (590) (307) (362)
Prior year adjustment (16) (8) (5)
Opening equity shareholders'
deficit (606) (315) (367)
------------- ------------- -------------
Closing equity shareholders'
deficit (482) (251) (315)
------------- ------------- -------------
* US dollar equivalents are provided for reader convenience at the 31 December
2004 exchange rate of £1:US$1.92.
**The adoption of UITF Abstract 17 (Revised 2003) and UITF 38 in 2004 has
required the 2003 reconciliation of movements in equity shareholders' deficit to
be restated. Opening equity shareholders' deficit is increased by £5m, while the
Group recognises a debit of £3m in respect of employee share schemes within the
profit and loss reserve for the year.
Gallaher Group Plc
Group cash flow statement
YEAR ENDED 31 DECEMBER 2004
2003
2004 2004 (restated**)
US$m* £m £m
Net cash inflow from operating
activities 1,434 747 691
Dividends received from
associates and joint ventures 19 10 14
Returns on investments and
servicing of finance (248) (129) (131)
Taxation (173) (90) (99)
Capital expenditure and
financial investment (188) (98) (117)
Acquisitions and disposals (4) (2) (15)
Equity cash dividends paid (376) (196) (183)
------------- ------------- -------------
Net cash inflow before
management of liquid 464 242 160
resources and financing
Management of liquid resources (1,046) (545) (2)
Increase/(decrease) in debt 637 332 (113)
Purchase of ordinary shares (2) (1) (1)
Issue of ordinary shares 8 4 3
------------- ------------- -------------
Financing 643 335 (111)
------------- ------------- -------------
Increase in net cash in the
year 61 32 47
------------- ------------- -------------
Reconciliation of operating profit to net cash inflow from operating activities
YEAR ENDED 31 DECEMBER 2004
2004 2004 2003
US$m* £m £m
Group operating profit before
exceptional charges 1,058 551 539
Depreciation of tangible fixed
assets 153 80 83
Amortisation of intangible
fixed assets 148 77 77
Amortisation of other fixed
assets 2 1 3
(Profit)/loss on sale of
tangible fixed assets (2) (1) 1
(Increase)/decrease in debtors (94) (49) 22
Decrease/(increase) in stocks 50 26 (15)
Increase in creditors and
provisions 184 96 17
Decrease in net retirement
benefits liability (36) (19) (15)
------------- ------------- -------------
Net cash inflow from operating
activities before 1,463 762 712
exceptional items
Cash outflow relating to
exceptional charges (29) (15) (21)
------------- ------------- -------------
Net cash inflow from operating
activities 1,434 747 691
------------- ------------- -------------
* US dollar equivalents are provided for reader convenience at the 31 December
2004 exchange rate of £1:US$1.92.
**The adoption of UITF Abstract 17 (Revised 2003) and UITF 38 in 2004 has
required the 2003 Group cash flow statement to be revised. Financial investment
is reduced by £1m, with a corresponding increase to the cost of purchase of own
shares.
Gallaher Group Plc
Reconciliation of net cash flow to movement in net debt
YEAR ENDED 31 DECEMBER 2004
2004 2004 2003
US$m* £m £m
Increase in net cash in the
year 61 32 47
Increase in liquid resources 1,046 545 2
(Increase)/decrease in debt (637) (332) 113
------------- ------------- -------------
Change in net debt resulting
from cash flows 470 245 162
Exchange adjustments (2) (1) (121)
------------- ------------- -------------
Movement in net debt in the
year 468 244 41
Net debt at 1 January (4,708) (2,452) (2,493)
------------- ------------- -------------
Net debt at 31 December (4,240) (2,208) (2,452)
------------- ------------- -------------
Basis of preparation
The preliminary announcement of results for the year ended 31 December 2004 is
an excerpt from the forthcoming annual report and financial statements and does
not constitute the statutory financial statements of the Group. The 2004 figures
are extracted from the audited financial statements that have not yet been
approved by the shareholders and have not yet been delivered to the registrar.
The comparative figures are extracted from the latest published financial
statements that have been delivered to the registrar as amended where applicable
for a prior year adjustment reflecting a change in accounting policy. The
auditors' reports in respect of both years were unqualified and do not contain a
statement under either Section 237(2) or Section 237(3) of the Companies Act
1985.
* US dollar equivalents are provided for reader convenience at the 31 December
2004 exchange rate of £1:US$1.92.
Gallaher Group Plc
Segmental information (by destination)
YEAR ENDED 31 DECEMBER 2004
2004 2004 2003
US$m* £m £m
Total turnover
UK 7,066 3,680 3,611
Continental Europe 9,559 4,979 4,534
CIS 785 409 373
Rest of World 931 485 530
------------- ------------- -------------
18,341 9,553 9,048
------------- ------------- -------------
Duty
UK 5,975 3,112 3,033
Continental Europe 3,819 1,989 1,897
CIS 196 102 78
Rest of World 701 365 399
------------- ------------- -------------
10,691 5,568 5,407
------------- ------------- -------------
Total operating profit
UK
- before amortisation of
intangible assets and
exceptional charges 580 302 287
- amortisation of intangible
assets (4) (2) (2)
- exceptional charges (17) (9) (18)
------------- ------------- -------------
559 291 267
Continental Europe
- before amortisation of
intangible assets and
exceptional charges 465 242 243
- amortisation of intangible
assets (136) (71) (71)
- exceptional charges (16) (8) (3)
------------- ------------- -------------
313 163 169
CIS
- before amortisation of
intangible assets 109 57 44
- amortisation of intangible
assets (19) (10) (10)
------------- ------------- -------------
90 47 34
Rest of World
- before amortisation of
intangible assets and
exceptional charges 96 50 53
- exceptional charges - - (18)
------------- ------------- -------------
96 50 35
Total
- before amortisation of
intangible assets and
exceptional charges 1,250 651 627
- amortisation of intangible
assets (159) (83) (83)
- exceptional charges (33) (17) (39)
------------- ------------- -------------
1,058 551 505
------------- ------------- -------------
* US dollar equivalents are provided for reader convenience at the 31 December
2004 exchange rate of £1:US$1.92.
SUPPLEMENTARY FINANCIAL INFORMATION
Weighted average cost of capital ('WACC')
Gallaher utilises project-specific WACCs at the time it evaluates investment
opportunities, taking into account the circumstances (including geographic
location) of each potential investment opportunity at the time. For general
performance purposes, however, management currently utilises a minimum hurdle
rate of 7%.
Return on capital employed ('ROCE')
2004 2003 2002 2001 2000(1)
ROCE (%)(2) 25.7 23.7 22.6 28.2 59.7
(1) ROCE not adjusted for changes in accounting policies in 2002 but presented
as previously reported.
(2) Calculated as total operating profit (excluding exceptional charges)/
(opening capital employed(3) + closing capital employed(3))/2. These ROCEs are
all calculated under UK GAAP.
(3) Capital employed = total net liabilities including net retirement benefits
liability + net debt + provisions + net retirement benefits liability + accruals
and deferred income due after more than one year.
Following the capital restructuring driven by the acquisition of Austria Tabak
in 2001, Gallaher has displayed steady growth in ROCE, reflecting Gallaher's
earnings growth and focus on driving efficiency from its capital investment.
Five-year summary of shareholder returns
2004 2003 2002 2001 2000(1)
Adjusted EPS (p) 58.9 55.5 51.2 46.9 41.0
Dividend (p) 31.50 29.60 27.55 25.45 23.75
(1) EPS not adjusted for changes in accounting policies in 2002 but presented as
previously reported.
Since 2000 adjusted earnings per share have increased at a cumulative average
rate of 9.5% per annum.
Since 2000 dividends have increased at a cumulative average rate of 7.3% per
annum, reflecting Gallaher's dividend policy of consistently growing dividends,
while recognising the need to balance equity and debt holders' interests.
Five-year summary of key financial indicators
2004 2003 2002 2001 2000(1)
EBITA interest cover(2)(3) 5.1 4.8 4.4 5.2 4.7
Net debt / EBITDA(2)(3) 3.0 3.4 3.8 4.5 2.9
Effective tax rate(4) 26.6% 26.7% 26.2% 23.6% 26.0%
Dividend cover(5) 1.87 1.88 1.86 1.84 1.72
Dividend yield(6) 4.0% 4.9% 4.5% 5.4% 5.6%
Net debt / market capitalisation(6) 43% 63% 62% 80% 54%
Enterprise value / EBITDA(2)(3)(6)(7) 10.3 9.0 10.0 10.2 8.4
(1) Results not adjusted for changes in accounting policies in 2002 but
presented as previously reported.
(2) Excludes exceptional charges.
(3) FRS 17 financing credit added back in 2004, 2003, 2002 and 2001.
(4) Excludes exceptional charges and amortisation charges.
(5) Calculated on adjusted earnings per share.
(6) Based on closing share price as at 31 December of each year.
(7) Excludes joint ventures and associates.
Treasury policies and financial risks
The Group has a centralised treasury function that is responsible for the
management of the Group's financial risks together with its liquidity and
financing requirements. The treasury function is not a profit centre and the
objective is to manage risk at optimum cost. Treasury operations are conducted
within a framework of policies and guidelines authorised by the board, and are
monitored by a treasury committee. This framework provides flexibility for the
best execution of board approved strategies. Summaries of treasury activities
and exposures are reported on a regular basis to the board. The internal control
environment is also reviewed regularly.
The Group holds or issues financial instruments to finance its operations and to
manage the interest rate and foreign exchange risks arising from its operations
and from its sources of finance.
Financing and liquidity
The Group's principal sources of financing in 2004 have been bond issues, bank
borrowings and retained profits. It is the Group's policy to maintain sufficient
committed borrowing facilities, with a mix of long- and short-term debt, to
enable the Group to meet its business objectives.
At the year-end, bond issues amounted to £2,650m, comprising: a £250m bond
maturing in February 2013; a £300m bond maturing in May 2009; an €800m bond
maturing in June 2011; a €375m bond maturing in August 2008; a €750m bond
maturing in October 2006; a €900m bond maturing in January 2005; and, European
medium term notes amounting to £100m. In addition, at the year-end, the Group's
committed bank facilities comprised: amortising term loans of €231m with a final
repayment date in 2007; and, a syndicated revolving facility of £500m maturing
in March 2008.
The weighted average maturity of committed debt at the year-end was 4.1 years
(2003: 3.5 years).
The Group's credit ratings are BBB (Stable Outlook) and Baa3 (Stable Outlook)
from Standard & Poor's, a division of the McGraw-Hill Companies, and Moody's
Investors Service Limited respectively. These ratings allow the Group to access
the international capital markets and issue debt to a global investor base.
Certain of the Group's debt instruments contain covenants that if the Group's
credit rating is downgraded below BBB minus in the case of Standard & Poor's or
below Baa3 in the case of Moody's, additional interest accrues from the next
interest period at the rate of 1.25 percentage points, in the case of certain
bonds issued by the Group (€750m in October 2001, €900m in January/March 2002,
£250m in February 2003 and €800m in June 2004), and 1.0 percentage points in the
case of the Group's current committed syndicated bank facility. In the event
that both credit ratings are subsequently raised or reaffirmed to BBB minus and
Baa3, respectively, the additional interest no longer accrues from the next
interest period.
The only financial covenants applying to the Group's facilities relate to the
committed syndicated revolving bank facility. At the year-end these require
Gallaher to maintain interest cover above 3.5 times based on pre-FRS 17 EBITDA,
and net debt below a multiple of pre-FRS 17 EBITDA of 3.5 times. The Group
continues to comply with all borrowing obligations, and financial covenants have
been satisfied with an EBITDA interest cover at 5.8 times and a net debt
multiple of 3.0 times at 31 December 2004.
Interest rate risk
The Group is exposed to fluctuations in interest rates on its net debt. In order
to manage the impact of adverse variations in interest rates on the Group's
profits, the Group borrows at fixed and floating rates of interest and uses
interest rate derivatives, where necessary, to maintain a target level of fixed
interest rate cover in the current and subsequent two years of between 40% and
80% of the level of core debt. At the year-end, fixed interest rate debt
represented approximately 70% of total net debt. All interest rate derivative
transactions have been accounted for as hedges.
Interest rate management improves the accuracy of the business planning process
and helps manage the level at which EBITA covers net interest expense, which the
Group currently aims to target at levels between 4.5 and 5.5 times.
Foreign currency risk
Due to the international nature of its operations, the Group is exposed to
exchange rate fluctuations on the translation of the results of overseas
subsidiaries into sterling and trading transactions in foreign currencies.
For translation purposes: the average exchange rates used in 2004 were sterling/
US dollar: £1/US$1.833 (2003: £1/US$1.635) and sterling/euro: £1/€1.473 (2003:
£1/€1.446); and, the 31 December rates in 2004 were sterling/US dollar: £1/
US$1.920 (2003: £1/US$1.790) and sterling/euro: £1/€1.412 (2003: £1/€1.418).
The Group makes limited use of derivative financial instruments to hedge balance
sheet translation exposures. On significant acquisitions of overseas companies,
borrowings are raised in the local currency to minimise the translation risk. It
remains the Group's policy not to hedge profit and loss account translation
exposures.
Transaction exposures are hedged where deemed appropriate and where they can be
reliably forecast with the use of forward exchange rate contracts.
Bank counter-party risk
The Group has cash and bank deposits and other financial instruments that give
rise to credit risks in the event of non-performance by counter-parties. Credit
risk is managed by limiting the aggregate amount of exposure to any one
counter-party and the Group's policy of only selecting major international
financial institutions with a strong investment grade credit rating.
LEGAL AND REGULATORY ENVIRONMENT
The global tobacco market is subject to significant regulatory influence,
including: the levying of substantial tax and duty charges; restrictions on
advertising and marketing; the display of larger health warnings and statements
of tar, nicotine and carbon monoxide smoke yields on product packaging;
regulations on the smoke yields of cigarettes; the provision of tobacco
ingredients information to regulators; the prohibition of certain descriptors
such as 'light' and 'mild', and, increased restrictions such as the prohibition
of smoking in many public places and raising the ages at which cigarettes may be
purchased.
The Group has a long history of managing its business successfully within a
regulatory climate. In recent years, the Group has reduced its susceptibility to
regulatory changes in any single country by expanding its international
operations. However, it is possible that regulations could have an adverse
effect on the Group's sales and operating performance.
Regulation
At a global level, the World Health Organisation Framework Convention on Tobacco
Control ('WHO FCTC') came into force in February 2005. As at 24 February 2005,
57 countries have ratified the Convention. These countries will be legally bound
by the provisions of the Treaty which sets international standards on tobacco
price and tax increases, tobacco advertising and sponsorship, labelling, illicit
trade and environmental tobacco smoke. The WHO FCTC Conference of the Parties
('COP') will determine further procedural and technical issues relating to the
future development of the Treaty.
The EU constitution was adopted in June 2004, extending the competence of the EU
to establish tobacco-related measures that have as their direct objective the
protection of public health.
In May 2004, 10 additional European countries joined the EU. These countries
were required to comply with the existing laws of the EU at the time of joining
except for certain transitional arrangements.
Within the EU, a directive concerning the manufacture, presentation and sale of
tobacco products was adopted in 2001 and has been implemented into EU member
states' national law. In 2005, the EU is expected to report on the application
of the directive and indicate features that should be reviewed or developed in
light of developments in scientific or technical knowledge. Also, the EU
Commission has adopted a decision that establishes the rules for the use of
colour photographs or other illustrations to depict and explain the health
consequences of smoking. It is for member states to decide whether to introduce
such pictorial health warnings and on which product groups. As at 24 February
2005, only Belgium has confirmed that it intends to introduce pictorial warnings
on cigarette packs.
In 2003, an EU directive relating to the advertising and sponsorship of tobacco
products was adopted. Its provisions include the prohibition of tobacco
advertising: in the press and other printed publications; in radio broadcasting;
in information society services; and, through tobacco-related sponsorship,
including the free distribution of tobacco products. Member states are required
to comply with this directive by 31 July 2005 at the latest. The German
government and others have commenced a legal challenge to the directive in the
European Court of Justice ('ECJ').
In December 2004, the ECJ upheld the ban on the sale of certain oral tobacco
products (i.e., snus) outside Sweden, following a legal challenge by a Swedish
manufacturer.
A number of European countries have established legislation that restricts or
prohibits smoking in public places and the workplace, which may also include
bars and restaurants. Other countries have recently enacted further legislation
or are considering additional restrictions. These countries include Austria,
Italy, Norway, Republic of Ireland, Spain, Sweden and the UK.
In Austria, the Tobacco Act was amended in November 2004 to implement various
provisions of the EU Advertising and Sponsorship Directive and the WHO FCTC.
From January 2005, the Act prohibits smoking in public places with certain
exceptions. Additionally, the HORECA sector and the ministry of health have
concluded a voluntary agreement establishing designated smoking and non-smoking
zones by the end of 2006. The Act also prohibits: the sale of cigarette packs of
less than 20 cigarettes; sampling of tobacco products in tobacconist stores six
months after a product launch; advertising in the press and cross border
sponsorships from 1 August 2005; and, billboard and cinema advertising and
national sponsorships from 1 January 2007.
In Germany, the sale of cigarette packs of less than 17 cigarettes was
prohibited in 2004. From 2007, cigarettes may only be bought from vending
machines which have youth protection technology installed.
In the Netherlands, the government has introduced tobacco ingredient information
regulations. In August 2003, Gallaher and two Altria subsidiaries commenced a
joint legal challenge to the Dutch regulations, which, Gallaher believes, do not
provide adequate protection for brand recipes. Other tobacco companies have also
brought similar claims. The court proceedings are expected to be heard in April
2005.
In the Republic of Ireland, the Public Health (Tobacco) (Amendment) Act 2004,
was signed into law in March 2004, purporting to give effect to two EU
directives and an EU recommendation relating to tobacco. The Act includes
provision for a comprehensive ban on tobacco advertising and sponsorship,
measures relating to the manufacture, presentation and sale of tobacco products,
and a ban on smoking in all public places with certain limited exceptions.
Gallaher, along with seven other plaintiffs, has begun legal proceedings which
will challenge certain parts of both the Public Health (Tobacco) Act 2002 and
the Public Health (Tobacco) (Amendment) Act 2004. The case is likely to be heard
in the commercial court in 2005.
In Sweden, a Bill is expected to be introduced to Parliament in 2005, which, if
enacted, will severely restrict tobacco advertising and sponsorship and prohibit
self-service.
In the UK, the Tobacco Advertising and Promotion Act was enacted in 2002. The
Act prohibited sponsorship by tobacco companies from July 2003, although
transitional provisions allow an exemption for 'exceptional global events' until
July 2005. The Tobacco Advertising and Promotion (Point of Sale) Regulations
2004 came into force in December 2004 and significantly restrict the size,
format and content of tobacco advertisements that may be published at point of
sale and on tobacco vending machines. A joint legal challenge by Gallaher and
other tobacco companies in the UK to the planned Point of Sale Regulations was
not upheld. Separately, the government's White Paper 'Choosing Health' was
published in November 2004, which proposes the prohibition of smoking in all
enclosed public places and workplaces in England by 2008. The only notable
exception to this are pubs which do not prepare and serve food, although a
smoking ban would still apply in the area around the bar.
In August 2003, the UK Office of Fair Trading ('OFT') notified Gallaher of an
enquiry into vertical agreements between manufacturers and retailers in the UK
cigarette, tobacco and tobacco-related markets. Gallaher is co-operating with
the enquiry that remains at an information gathering stage. At this stage, it is
not possible to assess whether or not the OFT will reach an adverse decision.
Similarly, it is not possible, in the event that an adverse decision is reached,
to assess the extent (if any) of any fines. However, in the event that the OFT
considers a company has infringed UK competition law, it has the authority to
levy a fine against the infringing company. Until 30 April 2004, the maximum
fine could not exceed 10 per cent of that company's UK turnover during the
relevant period. As from 1 May 2004, that limit is set by reference to worldwide
turnover although it is unclear whether this new limit applies retrospectively.
The Company has been advised that any fine would be net of duty payments. In the
three years ended 31 December 2003, the Company's aggregate net turnover was
£1,776m (and its worldwide turnover was £8,701m). In the event of an adverse
decision by the OFT, however, the Company would have significant rights of
appeal. As at 24 February 2005, no notice has been filed by the OFT indicating
its intention to reach an adverse decision in relation to this matter. In any
event, the Company intends to defend its position vigorously.
Outside of the EU, in Kazakhstan new and larger health warning requirements were
adopted and outdoor tobacco advertising prohibited in 2004.
In Russia, amendments to the federal law on Restrictions on Tobacco Smoking will
come into force in June 2005. These include restrictions on the retail sale of
tobacco products and the prohibition of tobacco smoking in certain workplaces
and public places, excluding specially designated smoking zones and the
hospitality sector. Also, legislation is being considered which would, if
enacted: restrict tobacco advertising; abolish tobacco manufacturing licensing;
increase the size of health warnings on tobacco products; and, limit the
ingredients used in the manufacture of tobacco.
In Ukraine, the Parliament has adopted legislation requiring the labelling of
cigarette packs with a production date and maximum retail price from July 2005.
A transitional period to sell out existing stocks has been provided.
Additionally, the maximum tar and nicotine smoke yields for filter and oval
cigarettes should not be more than 15/1.3 mg and 22/1.5 mg respectively.
Tobacco taxation
In 2002, the EU adopted a directive increasing the minimum excise rates on all
tobacco products. The provisions also include the introduction of a minimum
excise burden of €60 per thousand cigarettes on the most popular price category
of cigarettes ('MPPC'), which will increase to €64 per thousand cigarettes in
July 2006. For certain member states, transitional periods to comply with these
minimum cigarette rates are allowed by the directive. Additionally, a number of
member states have introduced a minimum cigarette excise duty, which relates to
the duty levied on the MPPC in those countries. The EU Commission is reviewing
this directive and is planning to report to the Council and Parliament with its
recommendations in 2006.
Many new EU countries are required to implement significant duty increases in
order to comply with the minimum cigarette excise tax requirements. Eight
countries have been allowed transitional periods - the longest until January
2010 - in which to comply. Any relaxation of the controls on personal imports
from new EU states into the previous 15 member states could have a significant
negative impact on sales in neighbouring countries in the transitional periods.
In 2004, the European Commission tabled a proposal to simplify the directive on
the holding and movement of products subject to excise duty by abolishing the
indicative levels of intra-EU tobacco imports for personal use. A decision is
expected in 2005.
In certain European markets, excise duty increases continue to have an impact on
prices, sales and margins. These include large tax increases in Austria,
Germany, France, Netherlands and changes in cigarette taxation in Italy.
In the UK, tobacco duty was raised in line with inflation in March 2004. The
impact of high taxation in the UK cigarette market, resulting in high prices,
has led to reduced annual industry volumes, greater price competition and
trading down by consumers to lower-price cigarette brands.
Gallaher believes that the wide price differentials between high and low taxed
countries both inside Continental Western Europe and other parts of the world
have led to an increase in legitimate cross-border trade. They have also led to
an illicit market for genuine and counterfeit cigarettes in a number of EU
countries. Gallaher is totally opposed to cigarette and tobacco smuggling and
the Group continues to support and endorse regulatory authorities' activities to
stop smuggling of tobacco products. Gallaher has a policy of co-operating with
regulatory authorities with whom it readily exchanges information to seek to
combat illicit trade. In January 2005 Gallaher, and other tobacco companies
attended and made written submissions to a UK parliamentary committee (Treasury
Sub-committee) inquiry into excise duty fraud. The Company's submission and oral
evidence described steps it has taken to prevent its products forming part of
the illicit trade in tobacco and a number of proposals which may help to reduce
further the contraband trade in cigarettes (the submission is published on the
Company's website: www.gallaher-group.com).
Outside of the EU, Kazakhstan is expected to join the World Trade Organisation
('WTO') which may also result in changes to excise rates. In Russia, the mixed
tobacco excise system has been confirmed for 2005. At present, tobacco excise
duty is levied on the ex-factory price. However, a proposal to change the basis
of the excise duty calculation to the retail price in 2006 is expected to be
considered in 2005.
Litigation
Certain companies in the Group are currently defendants in actions in the UK and
the Republic of Ireland, where the plaintiffs are seeking damages for ailments
claimed to have resulted from tobacco use or exposure to tobacco smoke. As at 24
February 2005, Gallaher is involved as a defendant in four individual cases in
Scotland where plaintiffs seek damages for ailments claimed to have resulted
from tobacco use; three of these cases are dormant and the fourth, begun in May
2004 against Gallaher Limited and another tobacco company, is at a very early
stage and in any event has been stayed until July 2005. In the Republic of
Ireland, to date, of the 160 claims that have been dismissed or abandoned since
1997, two plaintiffs' appeals against the dismissal by the Court of their claims
remain outstanding. Currently, the number of individual claims against Group
subsidiaries is 11. In each of these cases, statements of claim have been
delivered making wide-ranging allegations against Group subsidiaries and other
tobacco companies, and against the Republic of Ireland, the attorney general and
the minister for health and children, who are also named as defendants in some
of those cases. Each of these claims are subject to procedural applications or
challenges by Gallaher. No defence will be delivered by Gallaher pending the
conclusion of all of these procedural matters.
In Poland, a Group company, along with other tobacco companies, received a
letter in December 2004 from a health association threatening legal proceedings
on behalf of an unspecified number of individuals. The Group understands that
proceedings were filed against the companies on 4 February 2005, although at
this stage the nature of the allegations is unclear.
Gallaher is not a party to smoking litigation anywhere else in the world.
To date, there has been no recovery of damages against any Group company in any
action alleging that its tobacco products have resulted in human illnesses. It
is not possible to predict the outcome of the pending litigation. Gallaher
believes that there are meritorious defences to these actions and claims and
that the pending actions will not have a material adverse effect upon the
results of the operations, the cash flow or financial condition of the Group.
The pending actions and claims will be vigorously contested. There can, however,
be no assurance that favourable decisions will be achieved in the proceedings
pending against the Group, that additional proceedings will not be commenced in
the UK or elsewhere against Group companies, that those companies will not incur
damages, or that, if incurred, such damages will not have a material impact on
Gallaher's operating performance or financial condition. Regardless of the
outcome of the pending litigation, the costs of defending these actions and
claims could be substantial and will not be fully recoverable from the
plaintiffs, irrespective of whether or not they are successful.
Liggett-Ducat continues to be involved in court processes relating to payments
allegedly due for unpaid taxes, penalties and fines claimed by the Russian tax
authorities. As at 24 February 2005, all the challenges that have been made to
the claims have been successful. Based upon the facts and matters currently
known, management considers that there are meritorious defences against these
claims and that they will be vigorously defended.
Gallaher Group Plc
Cautionary statement
This announcement includes 'forward-looking statements' within the meaning of
the US securities laws. All statements other than statements of historical fact
included in this announcement, including, without limitation, statements
regarding Gallaher's future financial position, strategy, impact of market
trends and price increases, dividend policy, exchange rates, anticipated
investments, projected sales, costs and results (including growth prospects in
particular regions), plans, projects to enhance efficiency, impact of
governmental regulations or actions, impact of IFRS, litigation outcomes and
timetables, the successful integration of acquisitions and joint ventures into
our Group, objectives of management for future operations and effects of
restructuring activities, may be deemed to be forward-looking statements.
Although Gallaher believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Important factors could cause
actual results to differ materially from Gallaher's expectations including,
without limitation, changes in general economic, political or commercial
conditions, foreign exchange rate fluctuation, interest rate fluctuations
(including those from any potential credit rating decline), competitive product
and pricing pressures, the impact of excise tax increases, regulatory
developments, the uncertainties of litigation, difficulties in integrating
acquisitions and joint ventures, production or distribution disruptions,
difficulty in managing growth, declining demand for tobacco products, increasing
dependence on sales in the CIS and other emerging markets, changes in the supply
of tobacco and non-payment of receivables by our distributors as well as other
uncertainties detailed from time to time in Gallaher's public filings and
announcements. The risks included here are not exhaustive. Moreover, we operate
in a very competitive and rapidly changing environment. New risk factors emerge
from time to time and it is not possible for us to predict all such risk factors
on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of
actual results.
Definitions
The terms 'Gallaher' and 'Group' refer to Gallaher Group Plc and its
subsidiaries. The term 'Liggett-Ducat' refers to the Liggett-Ducat group of
companies. The term 'ATG' refers to Tobaccoland Automatengesellschaft mbH & Co
KG. The term 'Lekkerland-Tobaccoland' refers to Lekkerland-Tobaccoland GmbH & Co
KG. The term 'Lekkerland Europa' refers to Lekkerland-Europa Holding GmbH. The
term 'TOBA' refers to Tobaccoland Austria (Tobaccoland Handels GmbH). The term
'KT Merkury' refers to Kompania Tytoniowa Sp.z.o.o. The term 'Reynolds American'
refers to Reynolds American, Inc. The terms 'RGI' and 'Reynolds-Gallaher
International' refer to the joint venture company, R.J. Reynolds-Gallaher
International SARL. The term 'Shanghai Tobacco Group' refers to the Shanghai
Tobacco (Group) Corp. The term 'Altria' refers to Altria Group, Inc.
APPENDIX I
IFRS FINANCIAL INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2004
Introduction
Gallaher Group Plc currently prepares its financial statements under UK
Generally Accepted Accounting Principles ('UK GAAP'). For the financial year
ending 31 December 2005 (including the six months ending 30 June 2005), the
Group will be required by European Law to prepare its consolidated financial
statements in accordance with International Accounting Standards ('IAS') and
International Financial Reporting Standards ('IFRS'); these financial statements
will include comparative information prepared under IFRS. The application of
these collective standards is referred to throughout this document as 'IFRS'.
The following UK GAAP to IFRS reconciliations have been provided to explain how
Gallaher's reported performance and financial position are impacted by the
transition to IFRS:
- reconciliation of consolidated profits for the year ended 31 December 2004;
- reconciliation of consolidated profits for the six months to 30 June 2004;
- reconciliation of shareholders' equity as at 31 December 2004 and 1 January
2004; and,
- reconciliation of shareholders' equity as at 30 June 2004.
These reconciliations should be read in conjunction with the notes on the basis
of preparation and explanation of adjustments which follow the reconciliations.
It is important to note that although this financial information has been
prepared on the basis of IFRS expected to be available for use as at 31 December
2005, these standards are subject to ongoing review and endorsement by the
European Commission and are therefore still subject to potential change.
Information contained within this document may require updating for any audit
adjustments or subsequent amendment to IFRS and the related interpretive
guidance required for first time adoption or those new standards that the Group
may elect to adopt early. New or amended standards may be available for early
adoption, although adoption is not compulsory in 2005. Updated IFRS information
will be issued if there are any significant changes in accounting policy or
treatment.
IFRS will not have any impact on Gallaher's reported net cash flows. However,
the presentation of the cash flow statement will change as required by IFRS.
Since these changes do not impact net cash flows, no reconciliation has been
presented.
The supplementary IFRS financial information provided in this section is
unaudited.
Gallaher Group Plc
Reconciliation of consolidated profits from UK GAAP to IFRS
FOR THE YEAR ENDED 31 DECEMBER 2004
IFRS adjustments
------------------------------
As Share of Amortisation Financial Deferred Other As
reported results of of purchased instruments taxation reported
under UK associates goodwill under
GAAP and joint IFRS
ventures
£m £m £m £m £m £m £m
Note A B C D E
Turnover of
the Group
including
its share of
joint
ventures
and associates 9,553 n/a
Less share
of turnover of
joint
ventures
and associates (1,438) n/a
-----------
Group
turnover 8,115 8,115
Group
operating
profit before
exceptional
charges 551 67 (2) 616
Exceptional
charges (17) (17)
Share of
results of
joint
ventures
and associates 17 (3) 5 19
----------- -----------
Total
operating
profit 551 618
- Net
interest
and other
financing
charges (128) 1 (127)
- Net
retirement
benefits
financing
income 6 1 7
- Financial
instruments
mark to
market
adjustments n/a 6 6
----------- -----------
Total net
interest
and other
financing
charges (122) (114)
----------- -----------
Profit
before
taxation 429 504
Taxation (135) 2 (2) (7) (142)
----------- -----------
Profit
after
taxation 294 362
Equity
minority
interests (4) (4)
----------- -----------
Profit for
the
financial
year 290 358
Dividends (206) 10 (196)
----------- ----------- ----------- ----------- ----------- -------- -----------
Retained
profit for
the
financial
year 84 - 72 4 (7) 9 162
----------- ----------- ----------- ----------- ----------- ------- -----------
Earnings
per share
- basic 44.5p 55.0p
- diluted 44.4p 54.9p
- adjusted* 58.9p 58.7p
* Before amortisation of intangible assets and exceptional charges.
Note: The above profit and loss account has been presented in UK GAAP format.
The income statement under IFRS may differ as per the requirements of IAS 1
'Presentation of Financial Statements'.
For an explanation of the adjustments to UK GAAP, see the notes under 'Key
differences between UK GAAP and IFRS impacting Gallaher and explanation of
adjustments'.
Gallaher Group Plc
Reconciliation of consolidated profits from UK GAAP to IFRS
FOR THE YEAR ENDED 31 DECEMBER 2004
IFRS adjustments
-----------------------
Segmental As reported Share of results Amortisation Other As reported
note under UK of associates of purchased under IFRS
disclosure GAAP and joint goodwill
ventures
£m £m £m £m £m
Note A B E
Total
turnover
UK 3,680 3,680
Continental
Europe 4,979 (1,438) 3,541
CIS 409 409
Rest of
World 485 485
----------- -----------
9,553 8,115
Duty
UK 3,112 3,112
Continental
Europe 1,989 1,989
CIS 102 102
Rest of
World 365 365
----------- -----------
5,568 5,568
Total
operating
profit
UK
- before
amortisation
of intangible
assets and
exceptional
charges 302 302
-amortisation
of
intangible
assets (2) (1) (3)
-exceptional
charges (9) (9)
----------- -----------
291 290
Continental
Europe
- before
amortisation
of intangible
assets and
exceptional
charges 242 (3) 239
-amortisation
of
intangible
assets (71) 62 (1) (10)
-exceptional
charges (8) (8)
----------- -----------
163 221
CIS
- before amortisation
of intangible
assets 57 57
-amortisation
of
intangible
assets (10) 10 -
----------- -----------
47 57
Rest of
World
- before
amortisation
of intangible
assets and
exceptional
charges 50 50
-amortisation
of
intangible
assets and
exceptional
charges - -
----------- -----------
50 50
Total
- before
amortisation
of intangible
assets and
exceptional
charges 651 (3) 648
- amortisation
of
intangible assets (83) 72 (2) (13)
- exceptional
charges (17) (17)
----------- -----------
551 618
Note: The above segmental note reflects the information currently disclosed
under UK GAAP. Under IFRS, the format of the segmental information will change.
For an explanation of the adjustments to UK GAAP, see the notes under 'Key
differences between UK GAAP and IFRS impacting Gallaher and explanation of
adjustments'.
Gallaher Group Plc
Reconciliation of consolidated profits from UK GAAP to IFRS
FOR THE SIX MONTHS ENDED 30 JUNE 2004
IFRS adjustments
------------------------------
As Share of Amortisation Financial Deferred Other As
reported results of of purchased instruments taxation reported
under UK associates goodwill under
GAAP and joint IFRS
ventures
£m £m £m £m £m £m £m
Note A B C D E
Turnover of
the Group
including its
share of
joint
ventures and
associates 4,673 n/a
Less share of
turnover of
joint
ventures
and
associates (719) n/a
-----------
Group
turnover 3,954 3,954
Group operating
profit before
exceptional
charges 260 34 294
Exceptional
charges (9) (9)
Share of
results of
joint ventures
and associates 9 (2) 2 9
----------- -----------
Total operating
profit 260 294
- Net interest
and other
financing
charges (63) 1 (62)
- Net
retirement
benefits
financing
income 3 3
- Financial
instruments
mark to
market
adjustments n/a - -
----------- -----------
Total net
interest and
other
financing
charges (60) (59)
----------- -----------
Profit before
taxation 200 235
Taxation (64) 1 - (3) (66)
----------- -----------
Profit after
taxation 136 169
Equity
minority
interests (2) (2)
----------- -----------
Profit for
the
financial
year 134 167
Dividends (65) (66) (131)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Retained
profit for
the
financial
year 69 - 36 - (3) (66) 36
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings per
share
- basic 20.6p 25.6p
- diluted 20.6p 25.6p
- adjusted* 27.8p 27.4p
* Before amortisation of intangible assets and exceptional charges.
Note: The above profit and loss account has been presented in UK GAAP format.
The income statement under IFRS may differ as per the requirements of IAS 1
'Presentation of Financial Statements'.
For an explanation of the adjustments to UK GAAP, see the notes under 'Key
differences between UK GAAP and IFRS impacting Gallaher and explanation of
adjustments'.
Gallaher Group Plc
Reconciliation of consolidated profits from UK GAAP to IFRS
FOR THE SIX MONTHS ENDED 30 JUNE 2004
IFRS adjustments
-----------------------
Segmental As reported Share of results Amortisation Other As reported
note under UK of associates of purchased under IFRS
disclosure GAAP and joint goodwill
ventures
£m £m £m £m £m
Note A B E
Total
turnover
UK 1,853 1,853
Continental
Europe 2,414 (719) 1,695
CIS 171 171
Rest of
World 235 235
----------- -----------
4,673 3,954
Duty
UK 1,567 1,567
Continental
Europe 946 946
CIS 45 45
Rest of
World 175 175
----------- -----------
2,733 2,733
Total
operating
profit
UK
- before
amortisation
of
intangible
assets and
exceptional
charges 148 1 149
-amortisation
of
intangible
assets (1) (1) (2)
- exceptional
charges (5) (5)
----------- -----------
142 142
Continental
Europe
- before
amortisation
of
intangible
assets and
exceptional
charges 120 (2) 118
-amortisation
of
intangible
assets (35) 31 (4)
-exceptional
charges (4) (4)
----------- -----------
81 110
CIS
- before
amortisation
of intangible
assets 15 15
-amortisation
of
intangible
assets (5) 5 -
----------- -----------
10 15
Rest of
World
- before
amortisation
of intangible
assets and
exceptional
charges 27 27
-amortisation
of intangible
assets and
exceptional
charges - -
----------- -----------
27 27
Total
- before
amortisation
of
intangible
assets and
exceptional
charges 310 (2) 1 309
-amortisation
of
intangible
assets (41) 36 (1) (6)
-exceptional
charges (9) (9)
----------- -----------
260 294
Note: The above segmental note reflects the information currently disclosed
under UK GAAP. Under IFRS, the format of the segmental information will change.
For an explanation of the adjustments to UK GAAP, see the notes under 'Key
differences between UK GAAP and IFRS impacting Gallaher and explanation of
adjustments'.
Gallaher Group Plc
Reconciliation of shareholders' equity from UK GAAP to IFRS
FOR THE YEAR ENDED 31 DECEMBER 2004
For the year As at
ended 1 Jan 2004
31 Dec 2004
£m £m
Note Equity shareholders' deficit under
UK GAAP (251) (315)
A Associates and joint ventures 3 4
B Write back of goodwill
amortisation 73 -
C Fair value of financial
instruments (27) (33)
D Deferred tax
- on financial instruments 8 10
- on unremitted earnings (28) (18)
- on acquisition fair values (3) (4)
- other items (7) (10)
E Proposed dividend adjustment 141 131
---------------- ----------------
Equity shareholders' deficit under
IFRS (91) (235)
---------------- ----------------
Reconciliation of shareholders' equity from UK GAAP to IFRS
FOR THE SIX MONTHS ENDED 30 JUNE 2004
For the six
months
ended
30 June 2004
£m
Note Equity shareholders' deficit under UK GAAP (247)
A Associates and joint ventures 4
B Write back of goodwill amortisation 29
C Fair value of financial instruments (33)
D Deferred tax
- on financial instruments 10
- on unremitted earnings (23)
- on acquisition fair values (4)
- other items (7)
E Proposed dividend adjustment 65
----------------
Equity shareholders' deficit under IFRS (206)
----------------
For an explanation of the adjustments to UK GAAP, see the notes under 'Key
differences between UK GAAP and IFRS impacting Gallaher and explanation of
adjustments'.
Basis of preparation
This financial information is not intended to represent a set of financial
statements. The purpose of this disclosure is to explain the impact on Gallaher
of the transition to IFRS.
The financial information presented has been prepared on the basis of IFRS as
issued by the International Accounting Standards Board ('IASB'). These standards
are subject to ongoing amendment by the IASB and subsequent endorsement by the
European Commission ('EC') and are therefore subject to possible change.
Information contained within this document may require updating for any audit
adjustments or subsequent amendment to IFRS and the related interpretive
guidance required for first time adoption or those new standards that the Group
may elect to adopt early. In preparing this financial information, it has been
assumed that the EC will also endorse IFRS 2 'Share-based Payment' and the
amendment to IAS 19 'Employee Benefits - Actuarial Gains and Losses, Group Plans
and Disclosures' which was issued by the IASB on 16 December 2004.
On 19 November 2004, the EC endorsed an amended version of IAS 39 'Financial
Instruments: Recognition and Measurement' rather than the full version as
previously published by the IASB. This financial information complies with both
the full version of IAS 39 issued by the IASB and the revised version adopted by
the EC as the differences between the versions have no current impact on
Gallaher's accounting policies.
Transitional arrangements and transition date
The rules for first-time adoption of IFRS are set out in IFRS 1 'First-time
adoption of International Financial Reporting Standards'. A company must
identify its transition date (being the first day of the first accounting period
for which IFRS is to be applied), determine its IFRS accounting policies, and
then apply these retrospectively in order to determine its opening IFRS balance
sheet as at the transition date. Gallaher has determined the transition date to
be 1 January 2004. IFRS 1 allows a number of optional exemptions and has some
mandatory exceptions to this principle to ease the transition requirements of
first-time adoption. Where Gallaher has taken advantage of these exemptions they
are noted below.
The SEC has indicated that it will give European companies an exemption from
presenting two years of comparative information in their 2005 IFRS financial
statements filed for US GAAP purposes in their Form 20-F. Gallaher has assumed
that this exemption will be confirmed. If this position is not confirmed by the
SEC, the Group's date of transition would move to 1 January 2003. This would
impact the IFRS information given in this document.
Key differences between UK GAAP and IFRS impacting Gallaher and explanation of
adjustments
The following notes highlight the key differences between UK GAAP and IFRS that
have a material effect on the financial reporting of the Group. This is not
intended to represent a complete list of Gallaher's accounting policies.
A Associates and joint ventures
Under UK GAAP, Gallaher accounted for joint ventures using the 'gross equity'
method, showing Gallaher's share of joint venture turnover as part of total
turnover and Gallaher's share of joint venture operating profit separately
following the Group's operating profit. Associates were accounted for using the
'equity' method, whereby Gallaher's share of associates' operating profit was
shown separately following the Group operating profit. The Group's share of
associates' and joint ventures' interest and tax were included in the Group's
totals for those amounts.
Under IFRS, Gallaher will account for both joint ventures and associates using
the equity method. The presentation of the results of joint ventures and
associates will change however as IAS 1 'Presentation of financial statements'
requires that the share of post-tax profits from joint ventures and associates
be presented as a separate item on the face of the income statement. A
reclassification adjustment of £3m has been made to deduct the associates and
joint ventures' interest and tax from the 'share of results' line. The share of
associates and joint ventures turnover will no longer be presented on the face
of the profit and loss account, but will instead be disclosed in the notes to
the accounts. There is no impact on the net profit or earnings per share of
Gallaher as a result of this change, however, segmental turnover, results and
operating margins will all be impacted.
The accounting policies of the Group's associates and joint ventures
(principally Lekkerland Tobaccoland) have also been impacted by the adoption of
IFRS. The net impact on the opening balance sheet is an increase in the Group's
investments in associates and joint ventures of £4m. The adjustment mainly
relates to the recognition of deferred tax assets. The adoption of IFRS by the
associates and joint ventures does not have a material impact on Group profit in
2004.
B Goodwill amortisation and business combinations
IFRS 3 'Business Combinations' introduces significant changes to accounting for
acquisitions compared to UK GAAP. In particular, more separable intangibles
could be recognised on acquisition of a business, and goodwill arising on
acquisition is not amortised, but instead is subject to an annual impairment
review.
IFRS 1 allows that IFRS 3 may be applied prospectively from the IFRS transition
date. Gallaher will utilise this exemption. The impact of IFRS 3 and the
associated transition arrangements on Gallaher are:
- accounting for acquisitions made before 1 January 2004 will not be restated as
a result of the IFRS transition; and,
- the goodwill balance recorded as at 1 January 2004, including that recorded in
the investment in associates line, will no longer be amortised. The results for
the year ended 31 December 2004 will be restated to reverse the goodwill
amortisation charge of £72m recorded under UK GAAP.
The reversal of the goodwill amortisation charge does not impact the Group's tax
charge.
In the future, the goodwill balance will be subject to reviews for impairment
performed annually, or more regularly if events prove it to be necessary.
Impairment reviews were carried out as at 1 January 2004 and 31 December 2004 in
accordance with IAS 36 'Impairment of Assets'. No impairments were identified.
C Financial instruments
IAS 32 'Financial instruments: Disclosure and presentation' and IAS 39
'Financial instruments: Recognition and Measurement' address the accounting for,
and financial reporting of, financial instruments. Currently, there is no UK
standard that comprehensively addresses accounting for financial instruments and
hedge accounting.
Gallaher uses certain derivative financial instruments for the purposes of
hedging foreign exchange and interest rate risk. Under UK GAAP, a form of hedge
accounting was applied to these derivative financial instruments meaning that
changes in the market value of the derivative instrument were matched against
changes in the value of the underlying hedged exposure. Some of these derivative
instruments were held off balance sheet for at least part of their lives with
their impact disclosed in the notes to the accounts.
IAS 39 requires that all derivative financial instruments must be recognised on
the balance sheet and measured at fair value. The standard places significant
restrictions on the use of hedge accounting as specific designation and
effectiveness criteria must be satisfied; the hedge accounting methodology is
also different.
Gallaher has applied IAS 32 and IAS 39 from 1 January 2004 onwards. Gallaher has
and continues to hedge underlying exposures in an effective manner with a
medium-term perspective, although market values can be volatile in the
short-term. However, some of Gallaher's hedged positions fail to meet the strict
hedging criteria under IAS 39 and as a consequence, the reported annual
financing charge under IFRS is likely to become more volatile.
The balance sheet impact of the implementation of IAS 39 is to recognise a
charge to equity of £33m in the opening IFRS balance sheet as at 1 January 2004;
this represents the fair value of all derivatives brought onto the balance sheet
for the first time and the adjustment to the carrying value of borrowings which
are hedged. A related deferred tax liability of £10m has been recorded in the
opening balance sheet. The transition to the new standards also impacts the 2004
finance charge which benefits from a credit of £6m, representing the change in
fair value of these derivatives during 2004. The related tax charge is £2m.
D Taxation
IAS12 'Income taxes' covers accounting for both current and deferred taxation.
There is no difference in the accounting for current taxation between IAS 12 and
the existing UK standard FRS 16 'Current tax'.
The basis of recognising deferred tax is significantly different under IAS 12
compared to the UK standard, FRS 19 'Deferred taxation'. Under UK GAAP, deferred
tax was recognised only on timing differences that arose from the inclusion of
gains and losses in tax assessments in periods different from those in which
they were recognised in the financial statements. Under IFRS, deferred tax must
be recognised in respect of all taxable temporary differences arising between
the tax base and the accounting base of balance sheet items. This means that
deferred tax is recognised on certain temporary differences that would not have
given rise to deferred tax under UK GAAP.
Specific differences relevant to Gallaher include:
- deferred tax is recognised on unremitted earnings of foreign subsidiaries
where there is a plan to remit such earnings; this treatment gives rise to an
adjustment compared to UK GAAP of £18m in the opening balance sheet. There is a
£10m deferred tax charge to the 2004 profit and loss account relating to the
unremitted amounts earned during the year. No deferred tax liability has been
recognised in respect of temporary differences relating to investments in
subsidiaries since realisation of such differences can be controlled and is not
probable in the foreseeable future;
- deferred tax must be recognised on all step-ups to fair values made as a
result of acquisitions. This results in an additional deferred tax liability of
£4m in the opening balance sheet; and,
- a further £10m deferred tax liability has been recognised in the opening
balance sheet which relates to various small valuation and temporary timing
differences.
E Other adjustments
The following points list those areas of IFRS that have an impact on Gallaher,
but do result in any significant financial adjustments.
(a) Share-based payments
Under UK GAAP, Gallaher recognised a profit and loss account charge in respect
of employee share options based on the difference between the exercise price of
the option and the market value of a Gallaher share at the option grant date.
This charge was often small or zero.
IFRS 2 'Share-based payment' requires that Gallaher recognises a charge
representing the fair value of employee share options awarded. The fair value is
calculated using the Black-Scholes options valuation model and is charged to
income over the relevant option vesting periods, adjusted to reflect actual and
expected levels of vesting. A charge will be recognised from 1 January 2004
onwards in respect of options granted to employees on or after 7 November 2002.
The operating profit impact in 2004 is a charge of £1m.
(b) Pensions and other post-employment benefits
Gallaher accounts under UK GAAP for pensions and other post-employment benefits
in accordance with FRS 17 'Retirement benefits', which it adopted in the year
ended 31 December 2002.
Under UK GAAP, in accordance with FRS 17, the full surplus or deficit for each
retirement benefit scheme, representing the difference between the market value
of the scheme assets and the present value of the accrued liabilities, is
recognised as an asset or liability on the balance sheet, net of deferred tax
where appropriate. Actuarial gains and losses arising from differences between
the assumptions and actual experience (e.g., the difference between expected and
actual returns on assets) and differences arising from changes in assumptions
are recognised in full in the statement of total recognised gains and losses.
Under IFRS, retirement benefits fall within the scope of IAS 19 'Employee
benefits'. Like FRS 17, this standard requires retirement benefit liabilities to
be valued using the projected unit actuarial method, but IAS 19 gives a number
of options for the treatment of actuarial gains and losses.
The Group has elected to adopt early the amendment to IAS 19 issued by the IASB
on 16 December 2004, which allows all actuarial gains and losses to be
immediately charged or credited to equity through the statement of recognised
income and expense. This amendment brings IAS 19 methodology substantially in to
line with FRS 17.
Despite some valuation differences between the standards still remaining, there
is no material net difference between the balance sheet surpluses or deficits
computed under FRS 17 at 1 January 2004 and 31 December 2004 and the equivalent
assets or liabilities recognised under IAS 19 (amended).
Under IAS 19, plan surpluses are classified as non current assets, plan deficits
are classified as non-current liabilities and any associated deferred tax
balances are disclosed separately. This gross presentation contrasts with FRS
17, under which the net retirement benefit surplus or deficit is presented below
net assets in the balance sheet, net of the associated deferred tax.
Additionally, under IFRS there is a change in the presentation of interest
relating to the employer service cost. This interest will be charged against
operating profit as per IAS 19, whereas under UK GAAP, it had been charged as a
financing cost. In the 2004 profit and loss account, this adjustment results in
a £1m reclassification from interest to operating profit.
(c) Reclassification of computer software
Under UK GAAP, all computer software is included within tangible fixed assets in
the balance sheet, but under IFRS only computer software that is integral to
another fixed asset may be included in tangible fixed assets. All other
separately identifiable computer software must be recorded separately as an
intangible asset. The charge to profit in respect of such computer software
under IFRS is classified as amortisation of intangible assets rather than
depreciation of tangible fixed assets.
The depreciation of such software for the year ended 31 December 2004 of £2m has
been reclassified from depreciation to amortisation.
(d) Proposed dividends
Under current UK Company Law, it is normal practice for companies to provide for
dividends approved subsequent to the year-end. This practice is not permitted
under IFRS.
Therefore, under IFRS, the final dividend for the year ended 31 December 2004,
£141m, cannot be provided for in the 2004 income statement. Similarly, there is
an adjustment to the opening balance sheet as at 1 January 2004 of £131m.
APPENDIX II
CHANGES TO SEGMENTAL DISCLOSURES FROM 2005
On 1 October 2004, Gallaher announced a board responsibility change that led to
Neil England taking responsibility for most of Continental Europe as well as
retaining responsibility for the UK and the Republic of Ireland. On the same
date, Stewart Hainsworth became a board director and took over responsibility
for Scandinavia and the Baltics as well as retaining responsibility for the CIS,
Poland and AMELA regions.
Following this board management restructure and the transition to IFRS for the
year ending 31 December 2005, management has reviewed the primary segments under
which the Group reports its financial information. As a result, the financial
information for the year ending 31 December 2005 will be reported under a new
segmental structure.
The revised primary segments will reflect the underlying management structure,
in line with IFRS. Ireland will be reported within the new 'Western Europe
Division' ('WED'), alongside the existing Continental Europe business that is
managed by Neil England. Scandinavia, the Baltics and Poland, which are now the
responsibility of Stewart Hainsworth, will be reported under the 'Rest of World'
segment. The UK and CIS segments have remained unchanged.
To illustrate the impact of the planned changes, attached below are
reconciliations of the periods ended 31 December 2004 and 30 June 2004 reported
profit and loss account segmental disclosures.
Illustration of segment changes
Current segmental reporting structure:
UK CE CIS RoW
UK Continental Europe Russia Republic of Ireland
Scandinavia Ukraine AMELA
Baltics Kazakhstan Asia Pacific
Poland Other
New segmental reporting structure:
UK (unchanged) WED CIS (unchanged) RoW
UK Continental Europe Russia AMELA
Republic of Ireland Ukraine Asia Pacific
Kazakhstan Scandinavia
Baltics
Poland
Other
Gallaher Group Plc
Reconciliation from former segments to revised segments
FOR THE YEAR ENDED 31 DECEMBER 2004
Former Adjustment Revised
segments segments
under under
IFRS IFRS
£m £m £m
Group turnover
UK 3,680 3,680
Continental Europe 3,541 (3,541) -
Western Europe - 3,836 3,836
CIS 409 - 409
Rest of World 485 (295) 190
----------- ----------- -----------
8,115 - 8,115
Duty
UK 3,112 - 3,112
Continental Europe 1,989 (1,989) -
Western Europe - 2,283 2,283
CIS 102 - 102
Rest of World 365 (294) 71
----------- ----------- -----------
5,568 - 5,568
Total operating profit
UK
- before amortisation of intangible
assets and exceptional
charges 302 - 302
- amortisation of intangible assets (3) - (3)
- exceptional charges (9) - (9)
----------- ----------- -----------
290 - 290
Continental Europe
- before amortisation of intangible
assets and exceptional
charges 239 (239) -
- amortisation of intangible assets (10) 10 -
- exceptional charges (8) 8 -
----------- ----------- -----------
221 (221) -
Western Europe
- before amortisation of intangible
assets and exceptional
charges - 260 260
- amortisation of intangible assets - (10) (10)
- exceptional charges - (5) (5)
----------- ----------- -----------
- 245 245
CIS
- before amortisation of intangible
assets 57 - 57
- amortisation of intangible assets - - -
----------- ----------- -----------
57 - 57
Rest of World
- before amortisation of intangible
assets and exceptional
charges 50 (21) 29
- amortisation of intangible assets - - -
exceptional charges - (3) (3)
----------- ----------- -----------
50 (24) 26
Total
- before amortisation of intangible
assets and exceptional
charges 648 - 648
- amortisation of intangible assets (13) - (13)
- exceptional charges (17) - (17)
----------- ----------- -----------
618 - 618
Gallaher Group Plc
Reconciliation from former segments to revised segments
FOR THE SIX MONTHS ENDED 30 JUNE 2004
Former Adjustment Revised
segments segments
under under
IFRS IFRS
£m £m £m
Group turnover
UK 1,853 - 1,853
Continental Europe 1,695 (1,695) -
Western Europe - 1,842 1,842
CIS 171 - 171
Rest of World 235 (147) 88
----------- ----------- -----------
3,954 - 3,954
Duty
UK 1,567 - 1,567
Continental Europe 946 (946) -
Western Europe - 1,093 1,093
CIS 45 - 45
Rest of World 175 (147) 28
----------- ----------- -----------
2,733 - 2,733
Total operating profit
UK
- before amortisation of intangible
assets and exceptional charges 149 - 149
- amortisation of intangible assets (2) - (2)
- exceptional charges (5) - (5)
----------- ----------- -----------
142 - 142
Continental Europe
- before amortisation of intangible
assets and exceptional charges 118 (118) -
- amortisation of intangible assets (4) 4 -
- exceptional charges (4) 4 -
----------- ----------- -----------
110 (110) -
Western Europe
- before amortisation of intangible
assets and exceptional charges - 130 130
- amortisation of intangible assets - (4) (4)
- exceptional charges - (1) (1)
----------- ----------- -----------
- 125 125
CIS
- before amortisation of intangible
assets 15 - 15
- amortisation of intangible assets - - -
----------- ----------- -----------
15 - 15
Rest of World
- before amortisation of intangible
assets and exceptional charges 27 (12) 15
- amortisation of intangible assets - - -
- exceptional charges - (3) (3)
----------- ----------- -----------
27 (15) 12
Total
- before amortisation of intangible
assets and exceptional charges 309 - 309
- amortisation of intangible assets (6) - (6)
- exceptional charges (9) - (9)
----------- ----------- -----------
294 - 294
This information is provided by RNS
The company news service from the London Stock Exchange
