2006 | 2005 | |||||||||||||||
| Volumes(1) |
182.4bn | 173.8bn | up 5.0% | ||||||||||||
| Total sales |
£ | 8,401m | £ | 8,214m | up 2.3% | ||||||||||
| Net sales(2) |
£ | 2,734m | £ | 2,603m | up 5.0% | ||||||||||
| EBITA(3) |
£ | 692m | £ | 670m | up 3.4% | ||||||||||
| PBTA(4) |
£ | 597m | £ | 570m | up 4.9% | ||||||||||
| Profit before tax |
£ | 565m | £ | 516m | up 9.6% | ||||||||||
| Adjusted earnings per share(5) |
65.8p | 63.1p | up 4.3% | ||||||||||||
| Basic earnings per share(6) |
61.6p | 56.5p | up 8.9% |
1. | Volumes exclude German singles. Including the sales of singles, total volumes grew 4.5% to 183.7bn (2005: 175.8bn). | |
2. | Total sales less duty incurred by Group companies. | |
3. | Total profit from operations before amortisation of intangible assets of £19m (2005: £19m) and exceptional charges of £13m (2005: £35m). | |
4. | Profit before tax, amortisation of intangible assets and exceptional charges. | |
5. | Adjusted: before amortisation of intangible assets and exceptional charges (net of tax and minority interests). | |
6. | Basic: includes amortisation of intangible assets and exceptional charges (net of tax and minority interests). |
Note: | As detailed in the Scheme Document (see page four), on the assumption that the recommended cash offer by Japan Tobacco completes, Gallaher will not be proposing a final dividend in respect of 2006. |
Claire Jenkins director, investor relations and group planning
|
Tel: | 01932 372000 | ||
Anthony Cardew Cardew Group
|
Tel: | 020 7930 0777 |
| The successful execution of the Groups strategy ensured that Gallaher continued to deliver organic growth in 2006. |
| Group cigarette volumes were up 5.0% to 182.4bn, driven by the Groups strategic brands portfolio which grew by 9.7% to 91.9bn cigarettes. The portfolio accounted for 50.4% of the Groups total volumes (up from 48.2% in 2005). |
| EBITA from the Groups core markets of the UK, Republic of Ireland, Austria and Sweden was up 2.1% in the second half, although it was down slightly (0.3%) for the full year. Gallaher grew its investment markets EBITA by 16.4% in 2006. |
| In the UK, the Group increased its share of the growing value cigarette and handrolling tobacco markets, and maintained its lead of the high-margin premium cigarette and cigar markets. UK total cigarette market share increased to 38.7%. UK EBITA grew 2.2% to £317m (2005: £310m). |
| Performance from European operations was robust in spite of challenging conditions. Europe EBITA was up 1.9% to £263m (2005: £259m). Gallaher continued to make progress in central and eastern Europe, growing market share in a number of countries. |
| The Group continued to make good progress in the CIS, delivering strong profitable growth across the region. Gallaher grew its strategic brands CIS volume sales by 20.8% to 44.2bn cigarettes. CIS EBITA rose 25.7% to £85m (2005: £67m). |
| Gallaher continued to expand its presence in Asia Pacific, Africa and the Middle East. Total RoW volumes grew 9.0% to 16.1bn cigarettes. However, RoW EBITA was adversely affected by the phasing of trade sales in Sweden, challenging market conditions in Poland and increased sales and marketing investment. RoW EBITA decreased to £27m (2005: £34m), although it increased 18.9% in the second half of the year. |
| Gallaher increased overall cigarette manufacturing productivity by 6.2%, and reduced real term unit costs by 6.3%. |
| Overall current trading remains in line with management expectations. |
- 2 -
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29 | ||||
32 | ||||
36 | ||||
36 |
- 3 -
- 4 -
- 5 -
Total profit | ||||||||||||||||||||||||
Cigarette | Total | Net | from | EBITA | ||||||||||||||||||||
volume(1) | sales | sales | EBITA(2) | operations(3) | margin(4) | |||||||||||||||||||
(bn) | (£m) | (£m) | (£m) | (£m) | (%) | |||||||||||||||||||
UK
change (%) |
-3.4 | +0.3 | +3.5 | +2.2 | +9.1 | n/a | ||||||||||||||||||
2006 |
18.8 | 3,670 | 592 | 317 | 310 | 53.5 | ||||||||||||||||||
2005 |
19.5 | 3,658 | 572 | 310 | 284 | 54.1 | ||||||||||||||||||
Europe : tobacco(5)
change (%) |
+12.3 | +3.0 | +18.4 | +0.9 | -1.0 | n/a | ||||||||||||||||||
2006 |
47.8 | 1,890 | 531 | 196 | 184 | 32.3 | ||||||||||||||||||
2005 |
42.5 | 1,834 | 448 | 194 | 186 | 36.4 | ||||||||||||||||||
Europe : distribution
change (%) |
n/a | +2.1 | -2.8 | +4.9 | +32.3 | n/a | ||||||||||||||||||
2006 |
n/a | 2,000 | 1,068 | 67 | 63 | 6.3 | ||||||||||||||||||
2005 |
n/a | 1,960 | 1,099 | 65 | 48 | 5.9 | ||||||||||||||||||
Europe : total
change (%) |
+12.3 | +2.5 | +3.3 | +1.9 | +5.8 | n/a | ||||||||||||||||||
2006 |
47.8 | 3,890 | 1,599 | 263 | 247 | 16.5 | ||||||||||||||||||
2005 |
42.5 | 3,794 | 1,547 | 259 | 234 | 16.7 | ||||||||||||||||||
CIS
change (%) |
+2.8 | +13.5 | +11.7 | +25.7 | +25.7 | n/a | ||||||||||||||||||
2006 |
99.7 | 540 | 397 | 85 | 85 | 21.3 | ||||||||||||||||||
2005 |
97.0 | 476 | 356 | 67 | 67 | 19.0 | ||||||||||||||||||
RoW
change (%) |
+9.0 | +5.2 | +13.9 | -19.2 | -40.2 | n/a | ||||||||||||||||||
2006 |
16.1 | 301 | 146 | 27 | 18 | 18.8 | ||||||||||||||||||
2005 |
14.8 | 286 | 128 | 34 | 31 | 26.5 | ||||||||||||||||||
Tobacco : total(5)
change (%) |
+5.0 | +2.3 | +10.8 | +3.2 | +5.1 | n/a | ||||||||||||||||||
2006 |
182.4 | 6,401 | 1,666 | 625 | 597 | 35.8 | ||||||||||||||||||
2005 |
173.8 | 6,254 | 1,504 | 605 | 568 | 38.1 | ||||||||||||||||||
Group : total
change (%) |
+5.0 | +2.3 | +5.0 | +3.4 | +7.2 | n/a | ||||||||||||||||||
2006 |
182.4 | 8,401 | 2,734 | 692 | 660 | 25.3 | ||||||||||||||||||
2005 |
173.8 | 8,214 | 2,603 | 670 | 616 | 25.7 |
1. | Volumes exclude German singles. Including the sales of singles, Group cigarette volumes were 183.7bn (2005: 175.8bn) and Europe volumes were 49.1bn (2005: 44.5bn). | |
2. | Total profit from operations before amortisation of intangible assets and exceptional charges. | |
3. | After charging amortisation of intangible assets of £19m (2005: £19m) and exceptional charges of £13m (2005: £35m). | |
4. | Total profit from operations before amortisation of intangible assets and exceptional charges expressed as a percentage of net sales. | |
5. | EBITA margin calculated after adding back inter-company sales to the distribution division of £77m (2005: £85m) that are eliminated on consolidation. |
- 6 -
| Cigarette | |
The shares of cigarette market retail sales accounted for by each
price sector in 2006 were: value: 63.9% (2005: 61.4%); mid-price: 8.1%
(2005: 8.9%); and, premium: 28.0% (2005: 29.7%). The Group has again increased its share of the growing value sector reaching 36.9% (2005: 36.2%) in 2006. This has been achieved mainly due to growth from Benson & Hedges Silver and Sterling, underpinned by a robust performance from Mayfair. The limited edition slide pack contributed to the rise in market share of Benson & Hedges Silver to 2.6% (2005: 2.0%). Sterlings rapid growth continued with its market share growing to 3.4% (2005: 2.1%). The market share of Mayfair, Gallahers largest UK brand, was 13.5% (2005: 13.3%). Gallaher remains the leader of the premium sector with a share of 45.1% (2005: 45.2%). Silk Cuts share of the premium sector grew to 19.7% (2005: 19.4%), assisted by new packaging and the launch of Silk Cut Graphite. Benson & Hedges Gold was robust with total market share at 6.9% (2005: 7.1%). The Groups sales profile by price sector continues to broadly track that of the market: value: 60.8% (2005: 57.6%), mid-price: 6.6% (2005: 7.7%) and premium: 32.6% (2005: 34.7%). |
||
| Cigar | |
Based on customs clearance data, total UK cigar market volumes
declined by around 10% (2005: c. 8%). Within the market, the larger
cigar sector continues to decline, partly offset by growth from the
lower-margin miniature sector. The miniature cigar sector increased
its share of the total market to 46.0% (2005: 43.2%). Gallaher maintained its overall lead of the UK cigar market with a share of 44.1% (2005: 46.1%). Gallahers range of Hamlet miniature cigars increased their market share to 15.7% (2005: 15.4%). This growth has been achieved due to good performances from Hamlet Fine Aroma and Hamlet Smooth. |
- 7 -
| Tobacco | |
Based on customs clearance data, the UK handrolling tobacco market (HRT) grew by around 8% (2005: c. 5%) in 2006. Gallaher believes that improved customs controls reduced cross-border activity and contributed to this market growth. | ||
Gallaher outperformed the HRT market growth. The Groups share increased to 29.5% (2005: 28.7%) and sales volumes increased 14.2% to over 1,000 tonnes. This excellent performance was driven by Amber Leaf the markets fastest growing HRT brand which grew its share of the market to 20.5% (2005: 18.5%). Growth from Old Holborn Yellow helped to stabilise market share for the Old Holborn house at 7.1% (2005: 7.4%). | ||
The small UK pipe tobacco market reduced by 7.8%. Gallaher continued to lead this market with 48.6% of consumer sales (2005: 48.6%). |
- 8 -
| Tobacco | |
Certain markets in Europe experienced challenging trading conditions, however Gallaher was able to offset these difficulties by outperforming cigarette market trends in a number of countries, including: Republic of Ireland; Greece; Bosnia Herzegovina; Hungary; and, Romania. | ||
Gallaher estimates that the underlying duty-paid Austrian cigarette market was broadly stable. The impact of improved border controls on reducing cross-border activity contributed to this stability, which follows a number of years of cigarette market decline. | ||
The Group continues to lead the cigarette market in Austria, although its market share (based on estimated total sales through all distribution channels) reduced to 37.1% (2005: 39.1%). Gallahers market share reduced in 2006 as price competition in the value segment intensified during the first half of the year. The Groups market share has shown signs of stability following the Austrian governments implementation of a minimum price amounting to 3.25 per pack in 2006. Smart leads this new 3.25 price segment, with an estimated market share of 5.5% (2005: 2.0%) in 2006. The estimated market share of Memphis reduced to 19.5% (2005: 23.2%) largely as a result of the increased price competition. Since May, however, it has performed resiliently showing a stable market share in spite of a price increase to 3.50 in August. | ||
The total cigarette market in the Republic of Ireland showed a slight increase of 0.2%. Benson & Hedges Silver was launched during the year and has helped boost the Benson & Hedges house market share to 21.6% (2005: 20.6%). This performance assisted the Group in maintaining its lead of the cigarette market with a share of 49.1% (2005: 49.0%). Gallaher grew its share in other tobacco products excluding distributed brands, Gallahers share of the cigar market was 47.5% (2005: 47.0%) and its share of the tobacco market increased to 27.4% (2005: 25.6%). | ||
In Germany, the total duty-paid factory-made cigarette market declined by 3.9% due to the growth of singles earlier in the year and heightened cross-border activity. Following a change in duty structure, production of singles under finecut taxation ceased on 31 March 2006, although the trade had not fully de-stocked until the fourth quarter. Since the reduced availability of singles, singles consumers have been migrating to a range of other tobacco products. Figures from the German tobacco manufacturers association indicate that there has also been an increase in non duty-paid sales, which grew to an estimated 22.2% (2005: 17.7%) of cigarette consumption in the fourth quarter. | ||
The private label cigarette sectors share of the total market declined to 13.2% (2005: 15.3%), mainly as a result of the consumption of singles. However, since the phasing out of singles products the private label cigarette sector has shown some signs of improvement with increases in monthly sales volumes in the last quarter of 2006. Gallaher maintained its lead of the sector with a share of 51.3% (2005: 50.5%). The Groups branded cigarette market share was maintained at 0.6% (2005: 0.6%). | ||
In France, the total duty-paid cigarette market increased by 1.8%. Gallahers market share remained broadly stable at 2.7% (2005: 2.8%). A smoking ban in public places was introduced in February 2007. | ||
In Italy, the total duty-paid cigarette market grew 2.0%, reflecting a return to more stable conditions following the market declines in 2005 arising from the introduction of increased smoking restrictions. Competition in the value sector contributed to a decline in Gallahers market share to 3.7% (2005: 4.0%). Old Holborn increased share of the growing tobacco market, taking Gallahers market share to 13.5% (2005: 11.9%). Hamlet grew its share of the Italian cigar market to 4.2% (2005: 0.7%) aided by a strong performance from Hamlet Fine Aroma. |
- 9 -
The duty-paid cigarette market in Spain declined by 2.0%. The large domestic segment of the market (American blend and dark tobacco) was stable, declining by just 0.1%, while the much smaller higher-margin virginia segment declined sharply, by 33.0%. The market experienced significant price movements and brand repositioning during the year, particularly in the value sector of the American blend segment. The market share of Gallahers domestic brands declined to 3.6% (2005: 4.6%). The steep decline in the virginia segment impacted the market share of the Groups virginia brands which reduced to 1.3% (2005: 1.7%). Reflecting these conditions, Gallahers total market share declined to 4.9% (2005: 6.3%). Rex drove the Groups higher market share of 11.1% (2005: 10.6%) in the declining Spanish cigar market. Gallahers share of the Spanish tobacco market increased to 4.7% (2005: 3.8%), benefiting from Amber Leaf becoming the fastest-growing top 10 brand. | ||
In the Canary Islands, Coronas delivered another strong performance taking Gallahers share of the cigarette market to 32.1% (2005: 30.1%). Coronas also assisted the Groups growth in Portugal where Gallahers market share rose to 3.2% (2005: 2.8%). | ||
The total cigarette market in Greece declined by around an estimated 1%. Gallahers market share increased slightly to 4.1% (2005: 4.0%). The Group performed well in the growing slims category with La Femme Slims increasing volume sales. Gallaher estimates the HRT market in Greece grew by around 10.6%. Gallahers momentum in this market continued with Old Holborn extending its leading share to 46.8% (2005: 45.0%). | ||
Gallaher continues to make good progress in central and eastern Europe, growing market share in a number of countries. | ||
Ronson has progressed well in Slovenia, resulting in the growth of Gallahers estimated market share to 3.7% (2005: 3.0%). In Hungary, the Groups market share has advanced to an estimated 2.2% (2005: 1.8%) due to a solid performance from LD. | ||
In the Czech Republic, although volume sales were negatively impacted by a change in distribution arrangements during the year, Ronson and LD underpinned Gallahers estimated total market share of 6.8% (2005: 6.6%). | ||
In Romania, successful performances from Saint George and Ronson meant the Group grew domestic cigarette volume sales by 30.2%, increasing domestic market share to 3.4% (2005: 2.0%). In Bosnia-Herzegovina, Gallaher has established an estimated market share of 8.4% (2005: 2.7%) driven by the impressive growth of LD. | ||
In Turkey, Gallaher has established an on-shore manufacturing facility which began production at the end of 2006. In early 2007, sales of Smart and LD for the domestic market commenced. | ||
| Distribution | |
Gallahers Austrian distribution business, TOBA, experienced a more stable market than previous years, largely due to lower levels of cross-border movements. Favourable volumes were more than offset by a weaker sales mix arising from increased price competition. | ||
ATG the German vending company in which Gallaher has a 63.9% holding performed resiliently. It benefited from the outperformance of the branded cigarette sector (decline of 1.5%) versus the market (decline of 3.9%) and from lower operating costs arising from route optimisation and depot rationalisation. | ||
In recognition of new legislation (youth protection) for cigarette vending becoming effective on 1 January 2007, the ATG vending machine park was rationalised from c.140,000 to c.100,000 machines in the final quarter of 2006. | ||
After eliminating the favourable prior year trade tax rebate recognised in Lekkerland the associate in which Gallaher has a 25.1% holding the business performed in line with expectations. |
- 10 -
| Russia | |
Gallaher estimates that the total Russian cigarette market grew by around 1% in the year. | ||
The uptrading trends experienced in the Russian market continued with the premium and mid-price segments, (which make up the higher-priced sector), growing while the intermediate- and lower-priced sectors have declined. The shares of retail sales accounted for by each price sector were: higher-priced: 37.5% (2005: 33.6%); intermediate-priced: 56.1% (2005: 57.9%); and, lower-priced: 6.4% (2005: 8.5%). | ||
The Group maintained its share of the total cigarette market at 17.0% (2005: 16.9%). This has been achieved in spite of a shift in focus away from, and the delisting of, some of the Groups more traditional brands in the base filter segment. As part of the Groups strategy to grow its sales in the higher-priced sector it launched mid-price Glamour, which is performing well. | ||
LD held its market share at 5.3% (2005: 5.3%) in spite of the decline in the value segment as a whole. Marketing efforts such as the Its your game promotion and product initiatives, including blend improvements in the metallic range and some pack redesigns, have all contributed to this resilient performance. | ||
A focused marketing campaign, the introduction of a slims variant and a price repositioning assisted Golden Deer, Shanghai Tobacco Groups brand which Gallaher is producing under license, in exceeding targeted volume sales for the year. Reflecting the Groups improvement in sales mix, Gallahers share of the higher-priced sector grew to 4.3% (2005: 4.2%) and its share of the intermediate-priced sector grew to 26.8% (2005: 25.9%). | ||
During 2006 Gallaher launched its strategic cigar brand Hamlet in Russia. The initial performance of Hamlet Sweet Cherry exceeded expectations. | ||
| Kazakhstan | |
In Kazakhstan, the higher-priced sector again demonstrated a growing share of the market while the intermediate- and lower-priced segments declined. The shares of retail sales accounted for by each price sector were: higher-priced: 42.3% (2005: 36.3%); intermediate-priced: 50.2% (2005: 53.2%); and, lower-priced: 7.5% (2005: 10.5%). |
- 11 -
Gallaher grew its share of the total cigarette market to 37.7% (2005: 37.1%) in spite of price increases across most of the brand portfolio. The growth of Sovereign, the leading brand in the market, continued as it reached a record market share of 18.2% (2005: 17.4%). Sovereigns performance was underpinned by its Golden Fever campaign, improved distribution in rural areas and brand extensions such as Sovereign Slims. | ||
LD maintained its position as the largest value-for-money brand, albeit with a decline in total market share to 9.3% (2005: 10.3%) following the delisting of LD Gold. State Line, the only 21s pack in the market grew share to 2.8% (2005: 2.3%). Sobranie Classic Slims drove the share of higher-priced Sobranie to 4.4% (2005: 3.3%). | ||
Glamour was successfully launched earlier in the year, and reached a share of 0.5% in December. Memphis was launched in the mid-price sector during the third quarter and is performing in line with expectations. | ||
Export volumes from Kazakhstan to neighbouring countries including Kyrgyzstan, Mongolia, Uzbekistan and Armenia increased by over 40%. This growth in exports has been driven by the strategic brands Sovereign, Sobranie and LD. | ||
| Ukraine | |
The overall cigarette market continued to benefit from improved product mix during the year. The shares of retail sales accounted for by each price sector were: higher-priced: 29.1% (2005: 26.7%); intermediate-priced: 63.9% (2005: 63.8%); and, lower-priced: 7.0% (2005: 9.5%). | ||
Gallaher performed well, growing its share of the total cigarette market to 16.9% (2005: 16.2%). Glamour has made strong progress, attaining over a 1% market share in December, assisting the Group to reach 3.3% (2005: 1.6%) of the higher-priced segment. | ||
The Groups share of the intermediate-priced sector increased to 23.7% (2005: 22.9%) fuelled by Ronson which performed well, achieving a total market share of 3.1% (2005: 0.5%) in spite of a number of price increases during the year. |
- 12 -
| Scandinavia and the Baltics | |
In Sweden, the underlying market for duty-paid cigarettes declined by around an estimated 1 2%. Gallaher maintained its leading position, however, the Groups cigarette volume sales were down sharply as a result of the phasing of trade sales and a decline in market share (excluding distributed brands) to 35.8% (2005: 39.1%). | ||
The Group took two price increases across the full portfolio during the year, and as anticipated this resulted in some market share decline. Since the year-end, competitor brands have taken price increases such that there is price parity across the market segments. Premium brands Silk Cut Red and Gold were launched in the first half and, in the fourth quarter, Gallaher launched Ronson in the low price sector. | ||
The snus market in Sweden continued to grow. The Group took price increases across the entire portfolio and was still able to grow snus volume sales by 31.1%. Gallaher recently leveraged the Level cigarette brand to launch Level snus into the lower-price sector. The Group has experienced some market share decline after rationalising its portfolio to focus on three core brands Gustavus in the premium sector, LD in the mid- / value-priced sector and Level in the lower-priced sector. | ||
Silk Cut Red and Gold were launched in Denmark, Estonia, Latvia and Lithuania to enhance the Groups brand portfolios in these markets. | ||
| Poland | |
The Polish market experienced significant price movements and duty absorption during the year. Although conditions showed some signs of improvement during the summer months, a heightened level of competitor activity has since resumed. Throughout this challenging period, Gallaher decided not to reduce prices and experienced a decline in volumes, although Ronson performed robustly growing its market share to 1.6% (2005: 1.3%). The Groups market share was 5.7% (2005: 7.3%). | ||
| Africa and the Middle East | |
Gallahers Africa and Middle Eastern volumes increased to 6.8bn cigarettes compared to 3.4bn in 2005. | ||
Gallaher had an excellent performance in Guinea where it grew cigarette volume sales by 66.5% to 2.8bn (2005: 1.7bn). Ronson the leading brand in Guinea drove this impressive growth assisted by improved distribution arrangements. | ||
Additional investment was made into the South Africa factory in order to meet growing export and contract manufacturing demand. | ||
During the second half of the year, Gallaher began exporting into a number of Middle Eastern countries, including Iran, Iraq and the UAE. The main brands used for these exports are the strategic brands LD and Sobranie. | ||
| Asia Pacific | |
Gallahers Asian cigarette volumes increased by 62.1% to 876m (2005: 540m) mainly as a result of the launch of LD in Taiwan and the expansion of regional duty free. | ||
In Singapore, Gallaher completed the construction of a manufacturing facility and recently began producing product for export throughout the Asia region. Gallaher achieved an estimated 1% market share in Singapore largely driven by Memphis. The Group also attained close to an estimated 1% market share in Taiwan. | ||
In China, three of Gallahers strategic brands are available Sobranie and LD are imported and Memphis is produced under license by Shanghai Tobacco Group. |
- 13 -
| United Kingdom | |
Cigarette productivity in the UK increased by 14.1%, reflecting improvements to working practices and the benefits of the restructuring undertaken since 2003. These productivity improvements contributed to a reduction in cigarette real term unit costs of 10.1% in 2006. | ||
Gallaher increased its tobacco (HRT and pipe) productivity by 21.7%, mainly as a result of: increased demand for Amber Leaf; restructuring benefits; and, efficiencies following the installation of a new primary processing line and high-speed packing equipment. Tobacco real term unit costs decreased by 9.1%, driven mainly by the productivity improvements. | ||
In spite of the overall reduction in the UK cigar market, cigar productivity was maintained at its high level and cigar real term unit costs reduced by 4.1% in the year. | ||
| Europe | |
Cigarette productivity in Austria increased by 6.2%, as a result of efficiency improvements through investment in ultra high-speed machinery and restructuring benefits. | ||
Austrian real term cigarette unit costs reduced by 7.5%. | ||
| Commonwealth of Independent States | |
Cigarette productivity in the CIS increased 4.0%, driven by: higher production volumes; improved working practices; and, investment in new technology and machinery such as slims and super slims machines. | ||
In spite of inflationary cost pressures, the increased productivity together with a continued strong cost focus meant that real term CIS cigarette unit costs reduced by 3.3%. | ||
| Rest of World | |
The Groups factory in Poland increased productivity by 3.7%, assisted by the benefit of higher production volumes, although this was partly offset by the change in production product mix due to the transfer of more labour intensive production volumes from the UK. | ||
The increase in productivity underpinned a reduction in real term unit costs of 6.3%. |
- 14 -
- 15 -
2006 | 2005 | 2004 | 2003(1) | 2002(1) | ||||||||||||||||
ROCE (%)(2) |
28.4 | 27.4 | 26.6 | 23.7 | 22.6 |
1. | ROCE not adjusted following adoption of IFRS in 2005 but presented as previously reported under UK GAAP. | |
2. | Calculated as total operating profit (excluding exceptional charges)/(opening capital employed(3) + closing capital employed(3))/2. | |
3. | Capital employed = total equity + net debt (including accrued interest) + net retirement benefit liabilities + net deferred tax liabilities + other long-term liabilities. |
- 16 -
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Sales |
16,441 | 8,401 | 8,214 | |||||||||
Duty |
(11,091 | ) | (5,667 | ) | (5,611 | ) | ||||||
Other cost of goods sold |
(3,123 | ) | (1,596 | ) | (1,510 | ) | ||||||
Cost of goods sold |
(14,214 | ) | (7,263 | ) | (7,121 | ) | ||||||
Gross profit |
2,227 | 1,138 | 1,093 | |||||||||
Distribution, advertising and selling costs |
(683 | ) | (349 | ) | (340 | ) | ||||||
Administrative expenses |
(340 | ) | (174 | ) | (158 | ) | ||||||
Other income |
29 | 15 | 4 | |||||||||
Operating profit |
1,233 | 630 | 599 | |||||||||
Share of post-tax results of joint ventures and
associates |
59 | 30 | 17 | |||||||||
Total profit from operations(2) |
1,292 | 660 | 616 | |||||||||
Interest and other finance income |
157 | 80 | 77 | |||||||||
Interest and other finance expense |
(343 | ) | (175 | ) | (177 | ) | ||||||
Finance costs net |
(186 | ) | (95 | ) | (100 | ) | ||||||
Profit before taxation |
1,106 | 565 | 516 | |||||||||
Taxation |
(307 | ) | (157 | ) | (144 | ) | ||||||
Profit for the year |
799 | 408 | 372 | |||||||||
Attributable to: |
||||||||||||
Equity shareholders |
789 | 403 | 369 | |||||||||
Minority interests |
10 | 5 | 3 | |||||||||
799 | 408 | 372 | ||||||||||
Earnings per share for profit attributable to equity
shareholders (see note 7) |
||||||||||||
Basic |
120.6 | c | 61.6 | p | 56.5 | p | ||||||
Diluted |
120.2 | c | 61.4 | p | 56.4 | p | ||||||
Adjusted |
128.8 | c | 65.8 | p | 63.1 | p |
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. | |
2. | Details of the exceptional items are set out in note 3. Excluding the impact of net exceptional items of £13m (2005: £35m) and amortisation of intangible assets of £19m (2005: £19m), total profit from operations is £692m (2005: £670m). |
- 17 -
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
ASSETS |
||||||||||||
Non-current assets |
||||||||||||
Property, plant and equipment |
1,250 | 639 | 622 | |||||||||
Intangible assets |
2,800 | 1,431 | 1,452 | |||||||||
Investments in associates |
239 | 122 | 116 | |||||||||
Investments in joint ventures |
27 | 14 | 9 | |||||||||
Deferred tax assets |
59 | 30 | 27 | |||||||||
Retirement benefit assets |
294 | 150 | 56 | |||||||||
Trade and other receivables |
12 | 6 | 4 | |||||||||
Derivative financial instruments |
18 | 9 | 36 | |||||||||
Financial assets at fair value through profit or loss |
14 | 7 | 7 | |||||||||
4,713 | 2,408 | 2,329 | ||||||||||
Current assets |
||||||||||||
Trade and other receivables |
1,593 | 814 | 812 | |||||||||
Inventories |
924 | 472 | 474 | |||||||||
Derivative financial instruments |
41 | 21 | 32 | |||||||||
Cash and cash equivalents |
426 | 218 | 221 | |||||||||
Assets classified as held for sale |
| | 6 | |||||||||
2,984 | 1,525 | 1,545 | ||||||||||
Total assets |
7,697 | 3,933 | 3,874 | |||||||||
LIABILITIES |
||||||||||||
Non-current liabilities |
||||||||||||
Borrowings |
3,756 | 1,919 | 1,594 | |||||||||
Derivative financial instruments |
20 | 10 | | |||||||||
Trade and other payables |
33 | 17 | 6 | |||||||||
Deferred tax liabilities |
207 | 106 | 72 | |||||||||
Retirement benefit liabilities |
121 | 62 | 71 | |||||||||
Provisions for liabilities and charges |
20 | 10 | 29 | |||||||||
4,157 | 2,124 | 1,772 | ||||||||||
Current liabilities |
||||||||||||
Borrowings |
468 | 239 | 816 | |||||||||
Derivative financial instruments |
24 | 12 | 43 | |||||||||
Trade and other payables |
2,094 | 1,070 | 1,032 | |||||||||
Current income tax liabilities |
211 | 108 | 61 | |||||||||
Provisions for liabilities and charges |
54 | 28 | 14 | |||||||||
2,851 | 1,457 | 1,966 | ||||||||||
Total liabilities |
7,008 | 3,581 | 3,738 | |||||||||
Net assets |
689 | 352 | 136 | |||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
- 18 -
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Equity |
||||||||||||
Share capital |
127 | 65 | 65 | |||||||||
Share premium account |
270 | 138 | 134 | |||||||||
Capital redemption reserve |
16 | 8 | 8 | |||||||||
Merger reserve |
286 | 146 | 146 | |||||||||
Other reserve |
(1,783 | ) | (911 | ) | (911 | ) | ||||||
Currency translation reserve |
(37 | ) | (19 | ) | (5 | ) | ||||||
Retained earnings |
1,757 | 898 | 667 | |||||||||
Equity attributable to shareholders |
636 | 325 | 104 | |||||||||
Minority interests |
53 | 27 | 32 | |||||||||
Total equity |
689 | 352 | 136 | |||||||||
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Actuarial gain recognised on retirement benefits |
131 | 67 | 30 | |||||||||
Deferred tax relating to actuarial gain on retirement
benefits |
(37 | ) | (19 | ) | (9 | ) | ||||||
Currency translation differences |
(27 | ) | (14 | ) | 8 | |||||||
Net income recognised directly in equity |
67 | 34 | 29 | |||||||||
Profit for the year |
799 | 408 | 372 | |||||||||
Total recognised income for the year |
866 | 442 | 401 | |||||||||
Attributable to: |
||||||||||||
- equity shareholders |
856 | 437 | 398 | |||||||||
- minority interests |
10 | 5 | 3 | |||||||||
866 | 442 | 401 | ||||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
-19-
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Cash flows from operating activities |
||||||||||||
Cash generated from operations |
1,517 | 775 | 700 | |||||||||
Dividends received from associates and joint
ventures |
31 | 16 | 15 | |||||||||
Income tax paid |
(223 | ) | (114 | ) | (143 | ) | ||||||
Net cash from operating activities |
1,325 | 677 | 572 | |||||||||
Cash flows from investing activities |
||||||||||||
Acquisition of subsidiaries, net of cash acquired |
(117 | ) | (60 | ) | | |||||||
Purchases of property, plant and equipment |
(255 | ) | (130 | ) | (103 | ) | ||||||
Proceeds from sale of property, plant and equipment |
86 | 44 | 21 | |||||||||
Purchases of intangible assets |
(6 | ) | (3 | ) | (75 | ) | ||||||
Decrease in investments in associates and joint
ventures |
2 | 1 | 2 | |||||||||
Net cash from investing activities |
(290 | ) | (148 | ) | (155 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Interest paid |
(272 | ) | (139 | ) | (163 | ) | ||||||
Interest received |
16 | 8 | 44 | |||||||||
Proceeds from issuance of ordinary shares |
8 | 4 | 3 | |||||||||
Purchase of ordinary shares |
(4 | ) | (2 | ) | (1 | ) | ||||||
Net repayment of borrowings |
(327 | ) | (167 | ) | (626 | ) | ||||||
Capital repayment to minority shareholders |
(10 | ) | (5 | ) | | |||||||
Dividends paid to minority interests |
(6 | ) | (3 | ) | | |||||||
Dividends paid to the Companys shareholders |
(436 | ) | (223 | ) | (210 | ) | ||||||
Net cash from financing activities |
(1,031 | ) | (527 | ) | (953 | ) | ||||||
Net increase / (decrease) in cash and cash
equivalents |
4 | 2 | (536 | ) | ||||||||
Cash and cash equivalents at beginning of the year |
429 | 219 | 756 | |||||||||
Exchange losses on cash and cash equivalents |
(10 | ) | (5 | ) | (1 | ) | ||||||
Cash and cash equivalents at the end of the year |
423 | 216 | 219 | |||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
-20-
1. | Accounting policies and basis of preparation | |
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted for use in the European Union and with the parts of the Companies Act 1985 applicable to companies reporting under IFRS. | ||
The preliminary announcement of results for the year ended 31 December 2006 is an excerpt from the forthcoming annual report and financial statements and does not constitute the statutory financial statements of the Group. The income statement, balance sheet, statement of recognised income and expense, cash flow statement and notes to the accounts are extracted from the audited financial statements that have not yet been approved by the shareholders and have not yet been delivered to the registrar. The auditors report is unqualified and does not contain a statement under either section 237(2) or section 237(3) of the Companies Act 1985. |
-21-
2. | Segment information | |
Primary reporting format geographic segments: The Group is organised into four distinct, independently managed, geographic segments: United Kingdom (UK), Europe, Commonwealth of Independent States (CIS) and Rest of World (principally comprising: Africa; Asia Pacific; the Baltics; the Middle East; Poland; and, Scandinavia). |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Sales |
||||||||||||
UK |
7,182 | 3,670 | 3,658 | |||||||||
Europe |
7,613 | 3,890 | 3,794 | |||||||||
CIS |
1,057 | 540 | 476 | |||||||||
Rest of World |
589 | 301 | 286 | |||||||||
16,441 | 8,401 | 8,214 | ||||||||||
Duty |
||||||||||||
UK |
6,024 | 3,078 | 3,086 | |||||||||
Europe |
4,484 | 2,291 | 2,247 | |||||||||
CIS |
280 | 143 | 120 | |||||||||
Rest of World |
303 | 155 | 158 | |||||||||
11,091 | 5,667 | 5,611 | ||||||||||
Total profit from operations |
||||||||||||
UK |
||||||||||||
- before amortisation of
intangible assets and exceptional
items |
621 | 317 | 310 | |||||||||
- amortisation of intangible
assets |
(8 | ) | (4 | ) | (4 | ) | ||||||
- exceptional items |
(6 | ) | (3 | ) | (22 | ) | ||||||
607 | 310 | 284 | ||||||||||
Europe(2) |
||||||||||||
- before amortisation of
intangible assets and exceptional
items |
515 | 263 | 259 | |||||||||
- amortisation of intangible
assets |
(29 | ) | (15 | ) | (15 | ) | ||||||
- exceptional items |
(2 | ) | (1 | ) | (10 | ) | ||||||
484 | 247 | 234 | ||||||||||
CIS |
166 | 85 | 67 | |||||||||
Rest of World |
||||||||||||
- before exceptional items |
53 | 27 | 34 | |||||||||
- exceptional items |
(18 | ) | (9 | ) | (3 | ) | ||||||
35 | 18 | 31 | ||||||||||
Total |
||||||||||||
- before amortisation of
intangible assets and exceptional
items |
1,355 | 692 | 670 | |||||||||
- amortisation of intangible
assets |
(37 | ) | (19 | ) | (19 | ) | ||||||
- exceptional items |
(26 | ) | (13 | ) | (35 | ) | ||||||
1,292 | 660 | 616 | ||||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. | |
2. | Share of post-tax results of associates and joint ventures is £30m (2005: £17m) within the Europe segment. Operating profit of £630m (2005: £599m) comprises total profit from operations less the share of post-tax results of associates and joint ventures. |
-22-
2. | Segment information (continued) | |
Secondary reporting format business segments: The Groups operations comprise two main business segments: the manufacture, marketing and selling of tobacco products (tobacco); and, the distribution of tobacco and non-tobacco products (distribution). The distribution operations are all within the Europe business segment. |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Sales |
||||||||||||
Tobacco |
12,527 | 6,401 | 6,254 | |||||||||
Distribution |
3,914 | 2,000 | 1,960 | |||||||||
16,441 | 8,401 | 8,214 | ||||||||||
Duty |
||||||||||||
Tobacco |
9,267 | 4,735 | 4,750 | |||||||||
Distribution |
1,824 | 932 | 861 | |||||||||
11,091 | 5,667 | 5,611 | ||||||||||
Total profit from operations |
||||||||||||
Tobacco |
||||||||||||
- before amortisation of
intangible assets and exceptional
items |
1,224 | 625 | 605 | |||||||||
- amortisation of intangible
assets |
(29 | ) | (15 | ) | (12 | ) | ||||||
- exceptional items |
(26 | ) | (13 | ) | (25 | ) | ||||||
1,169 | 597 | 568 | ||||||||||
Distribution |
||||||||||||
- before amortisation of
intangible assets and exceptional
items |
131 | 67 | 65 | |||||||||
- amortisation of intangible
assets |
(8 | ) | (4 | ) | (7 | ) | ||||||
- exceptional items |
| | (10 | ) | ||||||||
123 | 63 | 48 | ||||||||||
Total |
||||||||||||
- before amortisation of
intangible assets and exceptional
items |
1,355 | 692 | 670 | |||||||||
- amortisation of intangible
assets |
(37 | ) | (19 | ) | (19 | ) | ||||||
- exceptional items |
(26 | ) | (13 | ) | (35 | ) | ||||||
1,292 | 660 | 616 | ||||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
-23-
3. | Exceptional items | |
Since 2003, Gallaher has been restructuring elements of its European operations, distribution and administration functions. In total, net exceptional charges amounting to £91m were included in the results for the three years ended 31 December 2005. These net charges mainly relate to redundancy costs and the write-down of operational plant and machinery, offset partly through the gains on disposal of land and buildings. | ||
Additional net exceptional charges of £13m have been recorded in the income statement for the year ended 31 December 2006. These charges reflect costs of the post-acquisition integration of Tabacos de Canarias SL and its group and related companies (CITA) into the existing Gallaher operations and the restructuring of support functions in Sweden following changes in distribution arrangements. Such costs are shown net of the negative goodwill arising on the acquisition of CITA and gains on disposals of former factory and depot sites in Austria. | ||
The net charge for the year ended 31 December 2005 amounted to £35m, including a gain of £15m realised on the sale of the former factory site in Dublin. | ||
The tax credit associated with the 2006 net exceptional charge is £5m (year ended 31 December 2005: £8m). | ||
The restructuring gave rise to a net cash outflow in the year to 31 December 2006 of £14m (year ended 31 December 2005: £18m) (notes 8 and 9). |
-24-
4. | Finance costs net |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Interest expense: |
||||||||||||
- bank borrowings |
37 | 19 | 13 | |||||||||
- eurobonds and medium-term notes |
200 | 102 | 114 | |||||||||
- premium on forward foreign exchange
contracts |
4 | 2 | 1 | |||||||||
- other |
10 | 5 | 1 | |||||||||
251 | 128 | 129 | ||||||||||
Interest and other financial income: |
||||||||||||
- bank deposits |
(16 | ) | (8 | ) | (9 | ) | ||||||
- interest rate swaps |
| | (3 | ) | ||||||||
- other |
(2 | ) | (1 | ) | (2 | ) | ||||||
(18 | ) | (9 | ) | (14 | ) | |||||||
Fair value gains on derivative financial
instruments not designated as hedges |
(14 | ) | (7 | ) | (6 | ) | ||||||
Net retirement benefits financing income: |
||||||||||||
- expected return on pension plan assets |
(125 | ) | (64 | ) | (57 | ) | ||||||
- interest on retirement benefit
liabilities |
92 | 47 | 48 | |||||||||
(33 | ) | (17 | ) | (9 | ) | |||||||
Finance costs net |
186 | 95 | 100 | |||||||||
Comprising: |
||||||||||||
- interest and other finance income |
(157 | ) | (80 | ) | (77 | ) | ||||||
- interest and other finance expense |
343 | 175 | 177 |
5. | Taxation | |
The tax charge comprises: |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Current tax |
||||||||||||
- UK tax |
152 | 78 | 62 | |||||||||
- overseas tax |
141 | 72 | 65 | |||||||||
293 | 150 | 127 | ||||||||||
Deferred tax |
||||||||||||
- UK tax |
18 | 9 | 7 | |||||||||
- overseas tax |
(4 | ) | (2 | ) | 10 | |||||||
14 | 7 | 17 | ||||||||||
Total taxation |
307 | 157 | 144 | |||||||||
6. | Dividends | |
Dividends paid to the Groups shareholders in 2006 amounted to £223m (2005: £210m). |
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
-25-
7. | Earnings per share | |
Basic earnings per share is calculated by dividing the earnings attributable to equity shareholders by the weighted average number of ordinary shares outstanding during the year, excluding shares held in the employee benefit trust. | ||
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to take account of potentially dilutive ordinary shares which relate to options granted to employees. | ||
A reconciliation of the earnings and weighted average number of shares used in the calculations is set out below. |
2006 | 2005 | |||||||
Earnings (£m): |
||||||||
Basic and diluted |
403 | 369 | ||||||
Weighted average number of ordinary shares in issue (m): |
||||||||
Ordinary shares in issue |
656.1 | 655.3 | ||||||
Shares held by employee share trusts |
(1.8 | ) | (2.0 | ) | ||||
Shares used in the calculation of basic earnings per share |
654.3 | 653.3 | ||||||
Potentially dilutive share options |
2.1 | 1.6 | ||||||
Shares used in the calculation of diluted earnings per share |
656.4 | 654.9 | ||||||
2006 | 2005 | |||||||
Earnings per share (pence): |
||||||||
Basic earnings per share |
61.6 | 56.5 | ||||||
Adjustment for exceptional items (net of tax and minority
interests) |
1.3 | 3.7 | ||||||
Adjustment for amortisation of intangible assets |
2.9 | 2.9 | ||||||
Adjusted earnings per share |
65.8 | 63.1 | ||||||
Adjusted earnings per share is based on: |
||||||||
Earnings (£m): |
||||||||
Profit for the year attributable to equity shareholders |
403 | 369 | ||||||
Exceptional items (before tax) |
13 | 35 | ||||||
Tax on exceptional items |
(5 | ) | (8 | ) | ||||
Minority share of exceptional items |
| (2 | ) | |||||
Amortisation of intangible assets |
19 | 19 | ||||||
Adjusted earnings |
430 | 413 | ||||||
-26-
8. | Cash generated from operations |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Profit for the period |
799 | 408 | 372 | |||||||||
Adjustments for: |
||||||||||||
- tax |
307 | 157 | 144 | |||||||||
- finance costs net |
186 | 95 | 100 | |||||||||
- share of post-tax results of joint ventures
and associates |
(59 | ) | (30 | ) | (17 | ) | ||||||
- exceptional items |
25 | 13 | 35 | |||||||||
- depreciation (excluding exceptional items) |
163 | 83 | 79 | |||||||||
- amortisation of government grants |
| | (1 | ) | ||||||||
- amortisation of intangible assets included in
subsidiaries |
31 | 16 | 15 | |||||||||
- (profit) / loss on sale of property, plant and
equipment (excluding exceptional items) |
(2 | ) | (1 | ) | 1 | |||||||
- charge in respect of employee share schemes |
10 | 5 | 5 | |||||||||
Changes in working capital (excluding the effects
of acquisitions, exceptional items and
exchange differences): |
||||||||||||
- inventories |
67 | 34 | 5 | |||||||||
- trade and other receivables |
51 | 26 | (10 | ) | ||||||||
- financial assets at fair value through profit
or loss |
2 | 1 | | |||||||||
- trade and other payables |
33 | 17 | 21 | |||||||||
Provisions for liabilities and charges |
(18 | ) | (9 | ) | | |||||||
Retirement benefits assets and liabilities |
(33 | ) | (17 | ) | (16 | ) | ||||||
Cash generated from operations before
exceptional items |
1,562 | 798 | 733 | |||||||||
Cash outflow from exceptional items |
(45 | ) | (23 | ) | (33 | ) | ||||||
Cash generated from operations |
1,517 | 775 | 700 | |||||||||
9. | Proceeds from sale of property, plant and equipment |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Exceptional item proceeds from sale of
properties (note 3) |
18 | 9 | 15 | |||||||||
Proceeds from sale of CITA land |
45 | 23 | | |||||||||
All other proceeds |
23 | 12 | 6 | |||||||||
Proceeds from sale of property, plant and
equipment |
86 | 44 | 21 | |||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
-27-
10. | Reconciliation of movements in net debt | |
Net debt comprises current and non-current borrowings, derivative financial instrument assets and liabilities, and cash and cash equivalents, excluding all accrued interest. |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Increase / (decrease) in cash and cash
equivalents |
4 | 2 | (536 | ) | ||||||||
Decrease in borrowings |
327 | 167 | 626 | |||||||||
Change in net debt resulting from cash flows |
331 | 169 | 90 | |||||||||
Exchange differences |
123 | 63 | 4 | |||||||||
Acquisitions (excluding cash and cash
equivalents) |
(35 | ) | (18 | ) | | |||||||
Other non-cash movements including revaluation
of derivative financial instruments |
13 | 7 | 4 | |||||||||
Decrease in net debt in the year |
432 | 221 | 98 | |||||||||
Net debt at 1 January |
(4,180 | ) | (2,136 | ) | (2,234 | ) | ||||||
Net debt at 31 December |
(3,748 | ) | (1,915 | ) | (2,136 | ) | ||||||
11. | Consolidated statement of changes in equity attributable to shareholders |
2006 | 2006 | 2005 | ||||||||||
US$m(1) | £m | £m | ||||||||||
Opening equity attributable to shareholders |
202 | 104 | (91 | ) | ||||||||
Net income recognised directly in equity |
67 | 34 | 29 | |||||||||
Profit for the year attributable to equity
shareholders |
789 | 403 | 369 | |||||||||
Total recognised income for the year |
856 | 437 | 398 | |||||||||
Employee share option schemes: |
||||||||||||
- value of employee services |
10 | 5 | 5 | |||||||||
- issue of ordinary shares |
8 | 4 | 5 | |||||||||
Increase in own shares held by the employee
benefit trust |
(4 | ) | (2 | ) | (3 | ) | ||||||
Dividends paid to equity shareholders |
(436 | ) | (223 | ) | (210 | ) | ||||||
Closing equity attributable to shareholders |
636 | 325 | 104 | |||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
-28-
2006 | 2006 | |||||||||||
Notes | US$m(1) | £m | ||||||||||
Profit for the year ended 31 December |
||||||||||||
Profit for the year ended 31 December attributable to equity
shareholders as reported in the consolidated income statement
under IFRS |
789 | 403 | ||||||||||
US GAAP adjustments: |
||||||||||||
- pension costs |
(a | ) | (59 | ) | (30 | ) | ||||||
- financial instruments |
(b | ) | (25 | ) | (13 | ) | ||||||
- amortisation of intangible assets |
(c | ) | (55 | ) | (28 | ) | ||||||
- other net |
(d | ) | 2 | 1 | ||||||||
- deferred taxation |
(e | ) | 56 | 29 | ||||||||
Net income under US GAAP |
708 | 362 | ||||||||||
Equity shareholders funds |
||||||||||||
Equity attributable to equity shareholders as reported in the
Consolidated balance sheet under IFRS |
636 | 325 | ||||||||||
US GAAP adjustments: |
||||||||||||
- financial instruments |
(b | ) | (14 | ) | (7 | ) | ||||||
- intangible assets |
(c | ) | 344 | 176 | ||||||||
- other net |
(d | ) | 16 | 8 | ||||||||
- deferred taxation |
(e | ) | (184 | ) | (94 | ) | ||||||
Equity shareholders funds under US GAAP |
798 | 408 | ||||||||||
1. | US dollar equivalents are provided for reader convenience at the 31 December 2006 exchange rate of £1:US$1.957. |
(a) | Pension costs | |
Under IFRS, pension and other post-retirement benefits costs and obligations are determined in accordance with the International Accounting Standard IAS 19 Employee Benefits (IAS 19), whereas under US GAAP these costs and liabilities are determined primarily in accordance with the requirements of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (FAS) No. 87 Employers Accounting for Pensions, FAS 88 Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and FAS 106 Employers Accounting for Post Retirement Benefits other than Pensions except where amended by FAS 158 Employers Accounting for Defined Benefit Pension and Other Post Retirement Plans (FAS 158) an amendment of FASB Statements No. 87, 88, 106 and 132(R), which was adopted in entirety as at 31 December 2006 prospectively. | ||
Actuarial gains and losses are recognised under IAS 19 (Amended), in full in the period in which they occur. They are recognised outside of the income statement in retained earnings and presented in the statement of recognised income and expense in equity. Under US GAAP the Group will continue to apply the corridor approach whereby variations from expected costs are recognised in the income statement over the expected service lives of the employees. |
-29-
Under FAS 158, the Group has recognised the funded status of defined benefit post-retirement plans in its balance sheet as at 31 December 2006, with offsetting adjustments to accumulated other comprehensive income, where previously such balances had not been recognised for the year ended 31 December 2005. The Group has adopted early the special dispensation contained in FAS 158 to change the measurement date to coincide with the financial statement date, thus the measurement period will run over a 15-month period from 1 October 2005 to 31 December 2006. The net periodic benefit cost for the 15-month period has been allocated proportionately between retained earnings and the income statement for 2006. | ||
Under IFRS, the return on plan assets is measured using the market value, whereas, under US GAAP, the Group uses a calculated market-related value, which incorporates asset-related gains and losses over a period of not more than five years. | ||
(b) | Financial instruments | |
Under IFRS, the carrying value of non-derivative financial liabilities has been adjusted for changes in their fair value, with the change recognised in earnings, where subject to effective fair value hedges. Changes in the fair value of foreign exchange derivatives are recognised immediately in earnings except where they are an effective hedge of a net investment in foreign operations in which case the changes are taken direct to equity. | ||
Under US GAAP FAS No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS No. 133), the requirements for determining whether a fair value or net investment hedge is effective differ from the rules provided by relevant standards under IFRS. The Group has decided not to hedge account for any derivative financial instrument under FAS No. 133, and accordingly, changes in the fair values of these instruments have been recognised in the income statement. In addition, no changes in the fair values of the non-derivative financial liabilities hedged under IFRS have been recognised under US GAAP. | ||
(c) | Intangible assets | |
Under UK Generally Accepted Accounting Principles (UK GAAP), prior to transition to IFRS, intangible assets acquired in business combinations, such as brands, were regarded as indistinguishable from goodwill and were subsumed within the goodwill balance. On transition to IFRS, such UK GAAP amounts remain within goodwill. | ||
US GAAP requires that the cost of investment is allocated to the acquired entitys assets and liabilities based on fair values to the acquirer at the date of acquisition. FAS No. 141 Business Combinations provides specific criteria for the initial recognition and measurement of intangible assets separately from goodwill, including the establishment of deferred tax liabilities in respect of those intangible assets acquired. | ||
On transition to IFRS, goodwill is no longer amortised and its transition value is, as under US GAAP, tested annually for impairment and whenever events or circumstances occur that would more likely than not reduce the recoverable amount of the cash-generating unit to which goodwill is allocated to below its carrying value. | ||
Under US GAAP, an impairment loss is indicated only when the carrying value of a long-lived asset is not recoverable from its discounted cash flows. | ||
Under IFRS, negative goodwill is credited to the income statement in the year of acquisition. Under US GAAP FAS No. 141, negative goodwill is allocated on a pro-rata basis, to the fair value of all non-current assets acquired. | ||
(d) | Other US GAAP adjustments | |
Other US GAAP adjustments primarily relate to the accounting for capitalised interest, restructuring costs and payroll taxes in relation to share-based payment expenses. |
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(e) | Deferred taxation | |
Deferred tax is provided on the US GAAP adjustments and on items for which there can be a timing difference in recognition under US GAAP from IFRS. The adjustment at 31 December 2006 relates principally to deferred tax liabilities recognised on acquiring intangible assets under US GAAP that were not recognised under transition rules from UK GAAP to IFRS. |
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a) | The levying of substantial and increasing tax or substantial changes to duty structures and duty charges: Governments in markets where we operate have imposed considerable excise taxes on tobacco products, and some have indicated that these will continue to increase. The continuing impact of price increases in these markets, principally due to substantial duty increases in recent years, has resulted in: |
| pressure on manufacturing and vending margins; | ||
| reduced annual industry volumes; | ||
| greater price competition; | ||
| accelerated trading down by consumers to lower-price cigarette brands or to handrolling tobacco; | ||
| increased legitimate cross-border purchasing by consumers; | ||
| an illegal trade in tobacco products; and, | ||
| growth in counterfeit tobacco products. |
The wide price differentials between high and low taxed countries have led to an increase in legitimate cross-border trade and an illicit market for genuine and counterfeit cigarettes, which is having a significant negative impact on sales in a number of countries. In particular, our business is impacted by the UK governments policy of maintaining duty levels in excess of the duty levels of Europe. This continues to result in cross-border purchasing of cigarettes by travellers returning to the UK and illegal smuggling of cigarettes both genuine and counterfeit into the UK. The entry of accession countries into the European Union has exacerbated the issue of price differentials provoked by different duty structures and rates in EU and adjacent markets. Furthermore, any shortfall in control arrangements at the borders of accession and eastern European countries may continue to impact on the legitimate EU market for tobacco products. Any of these could adversely affect our total profit from operations. | ||
b) | The introduction of minimum tax and minimum price legislation for cigarettes: Minimum tax and price legislation impact on the pricing of our products and the purchasing decisions of consumers. The introduction or withdrawal of such legislation could impact our sales and operating performance. | |
c) | The introduction of supply chain legislation and controls: 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. The Company has a policy of cooperating with regulatory authorities with whom it readily exchanges information to seek to combat illicit trade. In the UK, Gallaher has signed an updated memorandum of understanding (MoU) an anti-smuggling cooperation agreement with HM revenue and customs. The Group has also signed MoUs with Italy, Slovakia and the UN authorities in Kosovo. The Company is discussing similar agreements with customs authorities in other countries. |
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d) | Restrictions such as the prohibition of smoking in many public and work places: Current and potential restrictions and voluntary agreements on smoking in public places and the workplace may reduce the opportunities available for smoking and may reduce the demand for tobacco products. This potential reduction in demand for tobacco products may materially adversely affect our sales and total profit from operations. Gallaher supports sensible measures to accommodate smokers and non-smokers in relation to public places and makes representations to governments on this subject. | |
e) | Restrictions on advertising, marketing and display of tobacco products at the point of sale: Present and proposed regulations restrict the manner in which our products may be marketed and displayed, including restrictions on advertising, sponsorship, promotion, point of sale display and the sampling of tobacco products. Additional regulations restricting these and other aspects of tobacco marketing may be proposed and come into force in the future. These restrictions could significantly reduce our ability to compete, have a material adverse affect on our ability to advertise, promote and build our brands, to promote and introduce new brands and products and to maintain the proprietary nature of our owned and licensed brands, and thus materially adversely affect our sales and total profit from operations. | |
Advertising, promotion and brand building continue to play a key role in our business, with significant expenditure on programmes to support key brands and to develop our performance in markets for new brands and brand extensions. We will use the full range of advertising, promotion, sponsorship and display opportunities allowed to us for as long as these are available and will continue to explore other methods through which we can continue to build our brands. In some countries, we provide in-shop product display units at point of sale. We also employ sales support staff throughout our markets and try to ensure the leveraging of skills and marketing techniques across our businesses and have a group marketing team to facilitate this. | ||
f) | The effect of other regulations relating to the manufacturing, presentation and sale of tobacco products: Governments and regulatory authorities are considering or are introducing further regulations affecting the manufacturing, presentation and sale of tobacco products. These include: |
| restrictions on the minimum number of cigarettes in packs and on access to vending machines; | ||
| display of larger health warnings, graphic pictorial warnings and statements of tar, nicotine and carbon monoxide smoke yields on product packaging; | ||
| prohibition of certain descriptors such as light and mild; | ||
| ingredients testing, communication and usage; | ||
| lower ignition propensity cigarettes; and, | ||
| raising the ages at which cigarettes may be purchased. |
g) | Increasing cost of compliance with regulatory developments: With increased regulation comes the cost of compliance. We ensure, where possible, that we have appropriate dialogue with government with the aim of ensuring that new regulation is proportionate and where appropriate we challenge new regulation. Where possible and appropriate we seek dialogue with other tobacco companies on industry wide regulatory issues. | |
h) | UK OFT enquiry: As detailed in the Groups 2005 annual reports (including the form 20-F), 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. As at 1 March 2007, 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. |
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a) | Product liability claims: To date, there has been no recovery of damages against any of the Groups companies in any action alleging that their tobacco products have resulted in human illnesses. It is not possible to predict the outcome of the pending litigation. The Group believes that there are meritorious defences or suitable indemnities from prior ownership risks to the actions and claims it currently faces and based upon what is known to it actual, pending or prospective actions will not have a material adverse effect upon the results of the Groups operations, its cash flow or its financial condition. There can be no assurance, however, that: |
| favourable decisions will be achieved in the proceedings pending against the Group; | ||
| additional proceedings will not be commenced in the UK or elsewhere globally against the Group; | ||
| the Group will not incur damages; or, | ||
| if the Group incurs damages, such damages will not have a material impact on its operating performance or financial condition. |
Regardless of the outcome of the pending litigation, the costs of defending actions and claims could be substantial and will not be fully recoverable from the claimants, irrespective of whether or not the Group is successful; nor can the Group provide assurance that legal aid or other governmental funding will continue to be denied to claimants in smoking-related health litigation in any jurisdiction in the future, that favourable decisions will be achieved in the proceedings pending against it, that additional proceedings by private, corporate or public sector claimants will not be commenced against it or that it will not incur damages which, if incurred, may be material. | ||
Certain companies in the Group are currently defendants to actions in the Republic of Ireland where plaintiffs are seeking damages for ailments claimed to have resulted from tobacco use or exposure to tobacco smoke. As at 1 March 2007, 163 claims have been dismissed or abandoned since 1997. Currently, there are nine individual claims against Group subsidiaries. In eight of these claims 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. The majority of these claims are subject to a procedural challenge by Gallaher and, to date, two defences have been delivered. The most recent claim of the nine was received in February 2007. Gallaher Dublin Limited and another tobacco company were served with proceedings by an individual claimant, who is acting in person, and who claims to have an ailment related to environmental tobacco smoke. The claim, which is at a very early stage, will be vigorously resisted. | ||
In February 2007, a Gallaher Group subsidiary in the Canary Islands received formal notification of a potential claim by the province of Andalusia against it, the Spanish government and other tobacco companies. To date, no writ of claim has been served on the subsidiary. Should a writ be served, it will be vigorously defended. | ||
Gallaher is not a party to smoking and health litigation anywhere else in the world and there has been no recovery of damages against any Group company in any action alleging that the Groups tobacco products have resulted in human illness. | ||
b) | Aggressive stance to tax assessments by various Russian authorities: 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. Based upon the facts and matters currently known, management considers that there are meritorious defences against these claims. They will be vigorously defended. |
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c) | Termination of the distribution contract of a Middle Eastern distributor: On 4 March 2005, a Group company terminated the distribution contract of a Middle Eastern distributor and commenced proceedings on the same date in the English High Court, seeking a declaration that the contract had been validly terminated for numerous material breaches. On this basis there was no compensation payable in respect of the termination. By its defence and counterclaim served on 1 July 2005, the distributor asserted that the termination was unlawful and claimed significant, but wholly un-particularised losses. In an amended claim received on 24 February 2006, the distributor set out some details of its alleged losses, which it then claimed amounted to about $500m, which primarily relate to hypothetical future profits. Following an order made in December 2006, the distributor has provided security of £1,050,000 for Gallahers costs in defending the counterclaim. The courts order is procedural and does not reflect its views about the merits of the parties cases. Gallaher believes the counterclaim to be without substance, and will continue to contest it vigorously through the court process and at trial, which is currently fixed for April 2007. |
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Gallaher Group Plc (Registrant) |
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By: | /s/ Jacky Stockman | |||
Name: | Jacky Stockman | |||
Date: March 2, 2007 | Title: | Programme Manager, investor relations | ||