5 March 2003
GALLAHER GROUP PLC
PRELIMINARY ANNOUNCEMENT OF RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2002
HIGHLIGHTS
2002 2001(1)
- Volumes 152.7bn 107.4bn up 42.2%
- Total turnover �8,422m �5,719m up 47.3%
- Total EBITA(2) �582m �472m up 23.2%
- PBTA(3) �455m �392m up 15.7%
- Profit before tax �378m �329m up 14.9%
- Adjusted earnings per share 51.2p 46.9p up 9.2%
(4)
- Basic earnings per share(5) 39.3p 38.1p up 3.0%
- Proposed final dividend 18.75p 17.30p up 8.4%
- Proposed total dividend 27.55p 25.45p up 8.3%
(1) 2001 financial results restated to reflect accounting policy
changes.
(2) Total operating profit before amortisation of intangible assets
and exceptional charge.
(3) Profit before tax, amortisation of intangible assets and
exceptional charges.
(4) Adjusted: before amortisation of intangible assets and
exceptional charges.
(5) Basic: includes amortisation of intangible assets and
exceptional charges.
Note: Amortisation of intangible assets was �77m (2001: �33m) and
exceptional charges were nil (2001 : �12m cost of sales / �18m
finance).
Commenting on the performance, Nigel Northridge, Chief Executive, said:
"We continue to transform Gallaher into a truly international tobacco company
by investing our cash flow into areas with good growth prospects. Overall our
2002 performance - we increased adjusted earnings per share by 9.2% -
demonstrates our ability to deliver shareholder value. Current trading in 2003
is in line with management and market expectations."
Enquiries:
Claire Jenkins - Director, Investor Relations Tel: 01932 832637
Anthony Cardew - CardewChancery Tel: 020 7930 0777
SUMMARY
- Gallaher's 2002 results again demonstrate the benefits of the Group's
Eurasian strategy. The Group's market strength throughout Western Europe
underpins Gallaher's growing positions in Central and Eastern Europe, the
CIS, Central Asia and Asia Pacific.
- The Group lifted full year volume sales to 152.7bn cigarettes, 18.2% above
the pro-forma figure for 2001 of 129.2bn (the combination of Gallaher and
Austria Tabak's 2001 full year volume sales). The increase was driven by
strong growth across the Group's international operations.
- Gallaher's total UK volume sales of 21.4bn cigarettes (2001: 21.5bn) were
underpinned by a 10.3% increase in UK value sector volumes. The recent
downward trend in market share was reversed during the second half of 2002.
The planned incremental marketing spend in the UK reduced UK EBITA to �283m
(�299m).
- Continental European pro-forma volumes increased 10.5% to 45.7bn cigarettes
(Gallaher and Austria Tabak's 2001 full year Continental European volume
sales combined: 41.3bn). Good growth was recorded across the region,
spearheaded by Benson & Hedges American blend variants and Memphis.
Continental European EBITA was �213m (2001: �97m).
- Gallaher has signed a purchase contract for the acquisition of KT Merkury,
a small cigarette factory in Poland with a 2% domestic market share.
- CIS volumes rose by 26.0% to 74.3bn cigarettes (2001: 59.0bn), with strong
growth across the region. CIS EBITA grew 39.9% to �42m (2001: �30m) despite
significant sales and marketing investment in Russia - reflecting the
strong volume growth, and an improvement in the mix of sales.
- Rest of World volumes increased 53.0% to 11.3bn cigarettes (2001: 7.4bn),
with stable sales in the Republic of Ireland underpinning growth in the
Group's AMELA operations. In Asia Pacific, Gallaher grew in-market sales by
11.1%. Increased investment in Asia Pacific, and increased costs in AMELA
reduced Rest of World EBITA to �44m (2001: �46m).
- Gallaher has signed a heads of agreement, and formed a joint project team,
with Shanghai Tobacco to advance the proposed dual manufacturing and
distribution agreements in China and Russia outlined in the letter of
intent signed with the CNTC.
- 2003 has begun well - with current trading in-line with management and
market expectations - and management remains confident that Gallaher will
continue to increase returns to shareholders.
2002 RESULTS
Group
Assisted by the first full year contribution from Austria Tabak, total turnover
for 2002 at �8,422m was up 47.3% compared to 2001, with cigarette volume sales
- of 152.7bn sticks - up 42.2%. Earnings before interest, tax, intangible asset
amortisation and exceptional charge ("adjusted EBITA") grew by 23.2% to �582m.
Total operating profit was �505m (2001: �427m). Profit before tax, amortisation
of intangible assets and exceptional charges grew by 15.7% to �455m. Profit
before tax was �378m (2001: �329m). Adjusted earnings per share increased 9.2%
to 51.2p. Basic earnings per share was 39.3p (2001: 38.1p).
The Board of Gallaher recommends a final dividend of 18.75p per ordinary share,
amounting to a total dividend for the full year of 27.55p per ordinary share
(110.20p per ADS). This represents an increase of 8.3% over the 2001 total
dividend of 25.45p per ordinary share (101.80p per ADS).
Subject to shareholders' approval at Gallaher's AGM on 14 May 2003, the final
dividend will be paid on 22 May 2003 to ordinary shareholders on the register
at close of business on 21 March 2003. For ADS holders, The Bank of New York
will convert the 75.00p ADS final dividend into US dollars, and distribute it
to ADS holders on 30 May 2003.
Gallaher has adopted a number of new accounting policies in 2002, including
implementing FRS 17 (Retirement Benefits), and comparative results have been
restated accordingly. The effect of the adoption of FRS 17 is to reduce Group
EBITA in 2002 by �9m (2001: �8m). By division, the adoption of FRS 17 has:
reduced UK EBITA in 2002 by �8m (2001: �7m); increased Continental Europe EBITA
by �1m (2001: nil); and, reduced Rest of World EBITA by �2m (2001: �1m). The
2002 interest charge includes an FRS 17-related financing credit of �7m (2001:
�14m). Full details on FRS 17, and the other new accounting policies, are set
out on page 24.
Management believes that reporting results before amortisation and exceptional
charges (PBTA, adjusted EBITA and adjusted earnings per share) provides a
better comparison of business performance for the period under review.
International restructuring
Following the accelerated expansion of the Group's international business over
the last three years, Gallaher restructured its overseas operations at the
start of 2002. The Group integrated its Continental European businesses into a
single unit, headquartered in Vienna, and its Commonwealth of Independent
States operations into a division which reports into Moscow, thereby generating
additional revenue and efficiency synergies. As first reported in its 2002
interim report, the Group's segmental analysis now reflects this operational
restructuring.
United Kingdom
In 2002, UK turnover increased by 0.9% to �3,720m (2001: �3,685m). This growth
reflects increases in UK Government duty and Gallaher's own price increases,
offset partly by a 0.5% decrease in volumes to 21.4bn cigarettes. Turnover
excluding duty ("net turnover") decreased 2.0% to �593m due to an increase in
sales incentive costs.
Post-FRS 17 EBITA reduced 5.6% to �283m (2001: �299m), principally because of
increased marketing investment, ahead of the implementation of the Tobacco
Advertising and Promotion Act 2002 on 14 February 2003. EBITA margin reduced to
47.7% (2001: 49.5%). Total operating profit declined 5.6% to �281m (2001: �
298m).
Following the UK Government's announcement on 29 October 2002 that the guide
levels for tobacco imports for personal use for travellers returning from the
EU would increase, there are initial indications that the volumes of duty paid
cigarettes and handrolling tobacco being purchased by travellers in the EU have
increased. As such, there is expected to be some negative impact on the size of
the UK duty paid market in the near term. Gallaher's Continental European
division will benefit from increased sales to travellers within the EU which
should at Group level partly mitigate the negative impact on UK volumes. The
Government's announcement also included additional measures for HM Customs to
tackle criminal gangs who trade in contraband cigarettes and tobacco, which
Gallaher considers will partly offset the impact of the increased personal
allowances in the medium term.
Continental Europe
Austria Tabak's first full year contribution, following its acquisition in
August 2001, has greatly assisted Continental Europe's sharp increases in:
turnover at �3,899m (2001: �1,339m); net turnover at �2,325m (2001: �805m); and
EBITA at �213m (2001: �97m) of which �57m (2001: �13m) came from the
distribution businesses including associates and joint ventures. The division's
low EBITA margin of 9.2% (2001: 12.0%) reflects the impact of the low margin
distribution businesses acquired during 2001. Total operating profit was �148m
(2001: �75m).
The integration of Austria Tabak and Gallaher's organic businesses into the
enlarged Continental European division has been highly successful, offsetting
the initial losses arising from the Gustavus acquisition in July 2002, and the
start-up costs of the American Blend joint venture with R.J. Reynolds ("RGI"),
which commenced in July 2002.
On 28 February 2003 Gallaher signed a purchase contract for the acquisition of
KT Merkury, a small cigarette factory in Poland, for a not material sum in
cash. Initial losses of this new business are not expected to be significant.
In the medium term, based on continued benefits from integration synergies, and
from the closure of the factory in Malm�, Sweden, together with higher volumes
arising from the UK Government's decision to increase the guide levels for
personal travellers returning from the EU - along with benefits from RGI -
management is targeting good growth in this region.
Commonwealth of Independent States
CIS performed well, increasing turnover 26.9% to �331m (2001: �261m) and net
turnover by 24.7% to �281m (2001: �226m) reflecting strong volume growth. At
the start of 2002 Gallaher commenced trading on-shore in Ukraine.
EBITA has grown by 39.9% to �42m and EBITA margins have increased to 14.9%
(2001: 13.3%) reflecting the volume growth and mix improvements across the
region. Total operating profit was �32m (2001: �20m).
Russia has continued to see the market moving up towards the higher price
sector driving top line growth. Gallaher has commenced significant incremental
sales and marketing investment behind its higher price brands in Russia. The
Group has also invested behind ST Dupont through the joint arrangement with
Sampoerna International.
In 2002, Kazakhstan's performance benefited from: its integration into the CIS
division; the move on-shore of primary production; and strong performances
across the brand portfolio.
Overall, strong growth in Russia and Kazakhstan has more than offset the start
up losses in Ukraine, where revenue gains have been offset by significant
promotional support behind the brands in Gallaher's first year of on-shore
production.
The Group continues to expect that enhanced growth in the CIS division -
arising from the improved position in Kazakhstan, and the establishment of the
Ukrainian operation - will largely offset the incremental marketing and sales
investment in Russia in the short and medium term. Looking further forward,
Gallaher is confident that the integration of the CIS operations - together
with the incremental marketing and sales investment in Russia - should provide
good benefits to the Group.
Rest of World
Gallaher's remaining overseas operations increased turnover by 8.9% to �472m
(2001: �434m) and net turnover by 18.9% to �122m (2001: �103m) reflecting
strong volume growth, which was assisted by the recommencement of the lower
margin African, Middle East and Latin America ("AMELA") business.
Post-FRS 17 adjusted EBITA in 2002 was �44m (2001: �46m). The Republic of
Ireland, the main profit component of this division, has had another good year.
Although the Irish market continues to soften, Gallaher's volume sales have
remained flat as market share has grown. Improved efficiency from factory
investment also contributed to EBITA growth.
Outside Ireland, Gallaher invested in incremental marketing support behind
brands in Korea and, with Gallaher's partner Sampoerna International, in
Malaysia, and, as anticipated, the Group experienced a reduction in
profitability of its AMELA business due to increased costs associated with
recommencing distribution. As a result, the Rest of World adjusted EBITA margin
declined to 35.9% (2001: 45.1%).
Total operating profit in 2002 was �44m (2001: �34m). In 2001 Gallaher incurred
an exceptional charge of �12m in making full provision against inventory and
receivables associated with the cessation of a distribution agreement with the
Group's principal distributor for AMELA markets at that time. There has been no
release from this provision during 2002.
Interest
The Group's net interest charge in 2002 was �127m (2001: �98m). Following the
adoption of FRS 17, the 2002 net interest charge includes a net retirement
benefit financing credit of �7m (2001: �14m) from returns on pension scheme
assets less interest charged on pension scheme liabilities and other
post-retirement obligations. The decrease in this net retirement benefit
financing credit predominantly reflects the increased financing cost associated
with an increase in pension scheme liabilities, arising as a result of the
acquisition of Austria Tabak. Furthermore, there has been a reduction in the
returns from pension scheme assets largely as a consequence of the decline in
world equity markets over the last three years.
Although Gallaher has continued to see strong cash generation and a lower
average borrowing cost of 5.8% (2001: 6.3%), net interest cost increased
in-line with higher average borrowings following the acquisition of Austria
Tabak, which required new bank facilities during 2001. These facilities were
subsequently largely refinanced through the issue of bonds. One-off up front
costs of �18m associated with the bank facilities were reported as exceptional
finance charges in 2001 (2002: nil).
EBITA interest cover - combining both interest and operating components of FRS
17 into a net pension expense within EBITA - was 4.4 times (2001: 5.2 times
excluding exceptional charges), close to the Group's target range of between
4.5 and 5.5 times.
Taxation
The tax charge of �119m (2001: �83m) represents an effective rate of 31.6%,
compared with 25.4% for 2001. The increase in the effective rate largely
reflects the higher level of non-deductible goodwill amortisation charged in
2002 and the release in 2001 of a deferred tax provision for UK tax payable on
dividends paid by non-UK subsidiaries. Removal of intangible amortisation
charges gives rise to an adjusted effective tax rate of 26.2% (2001: 23.6%).
Over the medium term, the adjusted effective rate is expected to increase
slightly.
In May 2002, the Inland Revenue accepted that interest paid by Gallaher on
borrowings incurred at the time of its demerger in 1997 would be deductible for
tax purposes, in line with the treatment adopted by the Group.
Returns to shareholders
After deducting minority interests of �4m (2001: �6m) earnings for 2002
increased 6.4% to �255m (2001: �240m), and - following a 3.2% increase in the
weighted average number of shares in issue - basic earnings per share increased
3.0% to 39.3p (2001: 38.1p). In July 2001 the Group completed the issue of
35.7m new ordinary shares to part finance the acquisition of Austria Tabak. The
number of potentially dilutive share options in existence at 31 December 2002
does not result in a significant difference between basic and diluted earnings
per share.
After removing amortisation charges of �77m (2001: �33m) and exceptional 2001
charges (including related tax credits), adjusted earnings per share have
increased by 9.2% to 51.2p (2001: 46.9p).
Stripping out the impact of adopting FRS 17, adjusted earnings per share
increased 11.6% to 51.4p (2001: 46.1p).
Cash flow
The Group continued to be highly cash generative in 2002, with a net cash
inflow from operating activities of �519m (2001: �591m). This largely reflects
a 23.9% increase in adjusted EBITDA (earnings before interest, taxation,
depreciation, amortisation and exceptional charge), excluding joint ventures
and associates, to �644m (2001: �519m), offset by increased levels of working
capital investment year on year.
In 2002, the increased working capital investment is largely attributable to:
higher trade debtors in the UK at the end of the year; higher levels of duty
paid finished goods in Continental Europe and the Republic of Ireland;
increased trade debtors in the CIS in line with top line growth - accelerated
ahead of duty increases in January 2003 and an extended winter holiday period;
and, partly offset by increased excise duty payable in the UK and Continental
Europe. These short term working capital increases at the end of 2002 are
already largely reversed.
Capital expenditure and financial investment was �109m (2001: �118m).
Investment in tangible fixed assets amounted to �130m (2001: �113m) although
this was partly financed by proceeds of �29m (2001: �5m) principally from the
disposal of non-core assets by Austria Tabak, including the sale of the Malm�
factory site. The UK saw continued investment in its: production facilities;
kiosks and gantries; and SAP information systems, which successfully went live
in June 2002. Continental Europe continued to invest in ATG, to meet regulatory
requirements impacting in 2007, and the CIS saw investment in its production
facilities and its distribution infrastructures.
It is anticipated that the Group's investment in tangible fixed assets will
remain at this level in the short term.
Net expenditure on acquisitions and disposals in 2002 saw a further �14m of
investment principally comprising payments associated with completing the
acquisition of Austria Tabak and the acquisition of Gustavus - a small Swedish
snuff manufacturer. In 2001 total expenditure on acquisitions, less net cash
acquired, amounted to �1,154m.
Higher net finance payments of �135m (2001: �89m) reflect a full year of
financing the Austria Tabak acquisition. Increased dividend payments of �169m
(2001: �151m) were partly offset by dividends received from L-T of �12m (2001:
nil).
Bank loans amounting to �536m were repaid during 2002 principally from the
proceeds of a Euro900m Eurobond issued in 2002.
The short term working capital increases at the end of the year, which have
already been largely reversed, and adverse foreign exchange effects, arising
from the impact of a stronger Euro on the Group's predominantly Euro-based
debt, have led to the Group's net debt increasing to �2,493m at the year end
(2001: �2,425m). The strengthening of the Euro, particularly during the last
quarter of 2002, resulted in exchange revaluations increasing net debt by �74m.
The Group's weighted average level of net debt in 2002 was �2,310m.
OPERATING REVIEW
Group
Gallaher's accelerated international expansion in 2002 was underpinned by its
strong position in the UK market. The Group's full year cigarette volume sales
totalled 152.7 billion sticks, representing a pro-forma increase of 18.2% over
the previous year (2001 Group volumes, including Austria Tabak's full year
sales: 129.2 billion cigarettes).
In addition to the Group's geographic restructuring of operations in 2002,
Gallaher consolidated its cigar activities into a single management structure.
United Kingdom
Gallaher has strong positions in the UK cigarette, cigar and tobacco markets.
The Group's strong relationships with trade customers were enhanced by
increased investment in the direct sales force and by the development of new
concept merchandising equipment. This state-of-the-art equipment has been
adopted by three leading multiple retailers and some three thousand independent
stores.
Over the past six years, Gallaher has altered the mix of its total promotional
spend in the UK - increasing the proportion allocated to sales force,
point-of-sale and sales incentive activities, and decreasing the proportion
allocated to traditional above-the-line activities. In anticipation of the 2003
advertising ban, incremental marketing investment was placed behind the Group's
key brands throughout 2002. This included press and poster advertising
supporting Benson & Hedges and Mayfair, and award winning press and radio
advertising for Hamlet.
Gallaher's advertising drive continued in the first six weeks of 2003. A press
and poster campaign, using the famous `Cut Silk' theme, maximised Silk Cut's
brand equity ahead of the ban. Similarly, Hamlet was supported by the final
instalment of the `Happiness Is*' radio and press campaign.
Gallaher is the principal sponsor of the Jordan Formula 1 team in 2003. The
agreement provides continued support for Benson & Hedges across the Group's key
markets for that brand.
Gallaher's continued close co-operation with HM Customs & Excise, to reduce
cross-border smuggling, was strengthened by the signing of a Memorandum of
Understanding between the two parties in April 2002.
- Cigarette
During the period January to October 2002, the UK duty paid cigarette
market remained broadly stable compared to 2001, assisted by HM Customs'
border controls. On 29 October, the UK Government announced that the
indicative allowance for tobacco imports for personal use for travellers
returning from the EU was being increased from 800 to 3,200 cigarettes
per trip. This development had a slightly negative impact upon the size
of the UK duty paid market towards the end of the year.
Gallaher maintains a strong position in the UK cigarette market. A
downward trend in market share during 2001 and early 2002 was reversed
during the second half of 2002. The Group's full year market share was
37.7%, excluding brands involving distribution rights only (2001:
38.5%). In January 2003, the Group's retail market share stood at 38.6%.
Downtrading from the premium sector into the value sector moderated in
2002. The mid price sector - which consists primarily of longer-length
brands - was impacted by the development of a longer-length segment in
the value sector.
The premium sector contracted to 34.2% of the total UK duty paid
cigarette market in 2002 (2001: 35.7%). The mid price sector declined
more steeply to account for 12.7% of the market (2001: 14.9%), and the
value sector grew to 53.1% of the market (2001: 49.4%).
Gallaher maintained its commanding lead of the premium sector with a
49.8% share of sales to consumers. Benson & Hedges Gold remained the
leading premium cigarette in the UK with a total market share of 9.3%.
The Group's brands in the mid price sector were impacted by the decline
of this sector and experienced reduced volumes.
Gallaher grew volume sales of value brands by 10.3%. Sales volumes of
the Group's leading value cigarette brand Mayfair increased by 17.8%.
Dorchester and Sterling also performed strongly with volume growth of
13.4% and 63.9% respectively.
Mayfair's total market share grew to 8.3% from 7.5% in 2001 - supported
by the launch of Mayfair Superkings in June. By December, Mayfair had a
9.8% share of sales to consumers.
Gallaher launched a new, reduced tar, brand - Benson & Hedges Silver -
at the end of February 2003. Extensive pre-launch press and poster
advertising, along with direct mail and point-of-sale promotion,
supported the brand's debut.
- Cigar
Gallaher has a commanding lead of the UK cigar market with a 46.3% share
of sales to consumers in 2002 (2001: 47.3%). Original Hamlet held its
primary position in the large whiff sector with a share of 53.3%, and
Hamlet Miniatures increased its share of the growing small whiff sector
to 31.7%. The Hamlet house was strengthened further in December by the
launch of two new products: Hamlet Miniatures Filter and Hamlet
Aromatic.
- Tobacco
The Group has a strong position in the handrolling tobacco market.
Market share in 2002 was 31.6% (2001: 32.2%). Amber Leaf enjoyed a 21.2%
volume increase, and grew market share to account for 13.9% of sales.
The Group launched a new handrolling tobacco brand - Mayfair - in
February 2003, to build on the success of the Amber Leaf flip top pack
and leverage the equity of the Mayfair cigarette brand.
Gallaher increased its lead of the pipe tobacco market in 2002,
achieving a 49.1% share of sales to consumers. Gallaher's position was
underpinned by the number one pipe brand Condor, together with Clan and
Mellow Virginia. These brands occupy three of the four leading brand
positions.
Continental Europe
Gallaher's Continental European division, headquartered in Vienna, benefited
from the integration of the Group's legacy operations and those of Austria
Tabak in 2002. Cigarette volume sales totalled 45.7 billion sticks,
representing a pro-forma increase of 10.5% over the previous year (2001 Group
volumes, including Austria Tabak's full year sales: 41.3 billion cigarettes).
- Tobacco
In Austria, Gallaher maintained its lead of the cigarette market with a
48.6% share of sales (2001: 50.8%).
Memphis Blue increased sales volumes by 15.0%, and grew market share to
5.7%, from 4.9% in 2001. Benson & Hedges' growing presence in the
Austrian market was supported by the launch of Benson & Hedges Red 25s.
The volume growth of these brands was more than offset by an expected
decline in sales of traditional local brands.
In Sweden, Gallaher increased its lead of the cigarette market,
achieving a 41.4% share of sales (2001: 40.7%). This strong performance
was led by the growth of Level, which achieved a 6.1% market share in
2002 - despite having only been launched the previous year. Level was
introduced into the Danish market in January 2003.
Gallaher gained the manufacturing capability to enter the Swedish snuff
market through the acquisition of Gustavus, a local producer of both
loose and portioned snuff in 2002.
The Gustavus brand was introduced into a selection of retail outlets
throughout the last quarter of the year, and has been well received by
retailers and consumers. The brand's growth is being assisted by
increased national distribution coverage and Gallaher's Swedish sales
force. By the year end, Gustavus' share of the growing Swedish snuff
market was approaching 1%.
In Germany, sales of Benson & Hedges and Nil led Gallaher's pro-forma
branded volume growth of 3.3%, and the Group's leading position in the
German generic cigarette sector was enhanced by a 14.1% increase in
volumes.
Following the formation of the joint venture company Reynolds-Gallaher
International ("RGI") - and the transfer of manufacturing to Austria,
with the attendant American blend expertise - sales of Benson & Hedges
American blended cigarettes gained momentum in France, Spain and Italy,
complementing Gallaher's Virginia blend market positions.
In France, Gallaher's total market share - including 100% of the sales
associated with RGI - increased to 2.9%, assisted by the launch of
Benson & Hedges American Blend 10s and 30s. Volumes of Benson & Hedges
American Blend grew by 14.5%. Total volumes remained broadly stable at
over 2.3 billion sticks.
In Italy, total cigarette volumes more than doubled, spearheaded by
sales of Benson & Hedges American Blend, which increased nearly
eightfold compared to 2001. By December 2002, the brand had a 1.9%
market share.
Gallaher also performed well in Spain, growing total volumes by 5.9%,
and increasing sales of Benson & Hedges Red by 20.4%.
Reynolds was launched in the Canary Islands in October. The brand was
introduced into the French, Italian and Spanish markets in early 2003.
Initial trade and consumer response to Reynolds has been positive.
In Greece, Gallaher's cigarette market share stood at 5.1%. The Group
launched Odyssey a new cigarette formulated specifically to appeal to
local Greek smokers in January 2003.
Gallaher's share of the Greek handrolling tobacco market grew to 36.6%,
driven by a 33.7% increase in volume sales of Old Holborn and the launch
of Amber Leaf.
Export sales to EU accession states in the Baltics and Central Europe,
and Balkan markets, increased by 56.4% to 5.9 billion sticks.
Gallaher grew volumes in the Baltic accession states of Estonia, Latvia
and Lithuania by 36.0%. This growth was driven by the launch of Vermont
into these markets at the beginning of 2002. The Group broadly
maintained its strong market position in Estonia, with a 24.3% share of
sales to consumers.
Gallaher strengthened its position in the Central European accession
states by opening offices in the Czech Republic and Hungary. The Group
also enhanced its brand portfolio in the region, by launching the Benson
& Hedges metal range in Hungary, the Czech Republic, Slovenia and
Slovakia.
Further south, sales to Balkan states increased sharply, driven by the
success of Memphis and Ronson in Romania, Serbia, Kosovo and Bosnia.
Gallaher's position has been further strengthened in the region by the
opening of an office in Romania. By the end of 2002, the Group held a
pan-Balkan market share of some 4%.
Gallaher has signed a purchase contract to acquire KT Merkury, a
domestic Polish cigarette manufacturer. The Group believes it can
develop a solid position in the Polish market - building on the existing
2% share held by Merkury's brands, which include Strong and Viva.
Gallaher will expand production capacity in the Polish Gostkow factory,
and launch one or more of its strategic international brands. The Group
owns the trademark for brands including Benson & Hedges, Silk Cut, LD
and Sobranie in Poland.
- Distribution
Gallaher's distribution businesses performed well in 2002. The division
has benefited from the additional focused management brought to it by
Gallaher, and the rationalisation and improvement of its physical
infrastructure and employee base.
In Austria, Tobaccoland's sales of both tobacco and non-tobacco products
increased - assisted by the stable Austrian cigarette market and growth
in the market for pre-paid phone cards. Improvements were made to
Tobaccoland's warehouse in Vienna during the year; good progress was
made in updating information systems; and, the efficiency of the
company's distribution was enhanced through the implementation of route
optimisation projects.
Gallaher has signed a three-year contract with Philip Morris to
distribute that company's brands in Austria through to the end of 2005.
This distribution contract complements the companies' contract
manufacturing agreement.
The performance of the Group's cigarette vending operation in Germany,
Tobaccoland-Automatengesellschaft ("ATG"), started to stabilise in 2002.
ATG benefited from improvements in vending market conditions and
operational efficiency.
The decline in the branded cigarette sector in Germany abated in 2002,
and pricing parity for premium brands between vending and retail was
re-established at the start of the year.
ATG's operating efficiency has been enhanced by: machine park
rationalisation and improvement; the closure of five warehouses; and,
continued route optimisation.
Gallaher has rationalised ATG's machine park through the removal of
certain machines, and the acquisition of a small number of machines from
local operators in order to increase coverage in key strategic areas.
Additionally, machines have been improved in terms of location and
technology. By the end of 2002, 31,000 machines had been upgraded to
comply with forthcoming youth protection requirements.
Gallaher owns 25.1% of Lekkerland-Tobaccoland ("L-T") - Germany's
leading tobacco and food wholesaler. This operation's performance was
robust in 2002, helped by stable tobacco sales and an increase in sales
of pre-paid phonecards. The integration of L-T's tobacco and food
businesses facilitated the closure of six warehouses during the year,
and the effectiveness of the company's remaining infrastructure was
enhanced by the deployment of new processes and technology.
In 2003, the Group expects L-T's sales to be impacted by German
government regulations regarding can recycling. The effect of this
impact on sales, however, is not expected to be significant in terms of
the Group.
Commonwealth of Independent States
Gallaher continued to achieve strong growth across the CIS region in 2002.
Volume sales increased by 26.0% to total 74.3 billion sticks, and the Group
increased its share of consumer sales in each of its three key markets.
- Russia
In Russia, Gallaher increased total volume sales by 13.1% to 63.0
billion sticks. The Group's full year retail market share grew to 13.3%
from 12.9% in 2001. By December, Gallaher's retail market share reached
13.7% - driven by the strength of the Group's brands and increased
national distribution coverage.
Within the Russian cigarette market, the higher price sector continued
to grow its share of retail sales to 23.3% in 2002 (2001: 18.5%). Within
this sector, the premium sub-sector is becoming increasingly significant
- accounting for 8.1% of the retail market in 2002 (2001: 6.8%).
To maximise the opportunities for long term growth in Russia, Gallaher
is addressing this growing consumer preference through the introduction
of higher price brands.
Gallaher believes that its brand building expertise - leveraging off its
national Russian distribution network - will enable the Group to develop
a solid position in the premium sub-sector over the medium term, thereby
improving the Group's overall long term prospects in this market.
Within its sales mix, Gallaher continued to increase the growth of its
brands in the intermediate and higher price sectors. In 2002, sales in
these sectors accounted for 81.9% of the Group's Russian volumes (2001:
65.4%).
LD's solid 5.5% retail market share underpinned sharp volume growth from
Troika, Saint George and Novost in the intermediate price sector; and,
from Sobranie and Sovereign in the higher price sector. In 2002,
Gallaher established a 3.5% share of the higher price cigarette sector,
up from 1.2% in 2001.
- Kazakhstan
In Kazakhstan, Gallaher's volume sales doubled to 5.8 billion sticks.
Over 90% of these sales were in the higher and intermediate price
sectors. The Group's full year share of consumer sales grew strongly to
20.4% from 12.2% in 2001. By December, Gallaher's market share stood at
22.9%.
The Group's brands performed strongly. Sovereign became the leading
cigarette in Kazakhstan with a market share of 12.2%, and LD - which was
launched in 2001 - experienced a sharp increase in market share to
account for 5.1% of sales to consumers. Sobranie Classic was
successfully launched in early 2002; and, by December, gained a market
share of 1.0%.
- Ukraine
Gallaher gained market share swiftly in Ukraine during 2002. The Group's
brands accounted for 7.5% of sales to consumers for the full year (2001:
2.4%), and volumes totalled 5.5 billion sticks.
This strong performance was led by LD, which gained a 3.3% share of
sales to consumers by December. Higher and intermediate price brands
accounted for some 70% of Gallaher's volume sales in this market.
Rest of World
Gallaher achieved strong volume growth in its Rest of World division during
2002. Total cigarette volumes grew by 53.0% to 11.3 billion sticks, largely
reflecting a resumption of sales to markets in Africa and the Middle East.
- Republic of Ireland
In the Republic of Ireland, Gallaher's cigarette brands performed
strongly; maintaining volume sales despite a modest decline in the
overall market. The Group's leading cigarette market share grew to 50.7%
from 49.5% in 2001. This solid performance was led by Benson & Hedges,
which widened its number one brand position, to hold an 18.7% share of
sales (2001: 17.7%).
Gallaher grew its leading position in the Irish cigar market to hold a
72.9% share of sales. The Group's share of the tobacco market declined
moderately to 38.1%.
- Asia Pacific
Gallaher made good progress in Asia Pacific in 2002. In-market sales
increased by 11.1% to 345 million cigarettes. The Group's growth was led
by robust performances from Sobranie Classic in North East Asia; and
Sobranie Pinks, Mints and Cocktail in Asian Duty Free markets. In
December, Sobranie Pinks, Mints and Blues were launched into Korea's
large slims market.
The Group has strengthened its network of relationships in the region.
Following the signing of the letter of intent with the China National
Tobacco Corporation, solid headway has been made towards the
commencement of the agreement announced in 2002. Gallaher and Shanghai
Tobacco have formed a joint project team, and signed a heads of
agreement, to progress the details of the proposed on-shore manufacture
and distribution of a Gallaher brand in China, and the reciprocal
production and distribution of a Chinese brand in Russia.
In January 2003, the Group bought the business of its third party
representative agent - Gold Bond - in China, for a not material sum in
cash. Gallaher's position in China has been strengthened by the
establishment of representative offices in Beijing, Shanghai and
Guangzhou.
Gallaher also formed two joint ventures with Sampoerna International
during the year.
- AMELA
Gallaher organised its AMELA and contract manufacturing operations for
export outside of Europe into a single business unit in 2002, so as to
maximise regional benefits in the medium term.
Volume sales increased to 7.5 billion sticks. This strong performance
was driven by impressive growth from Sovereign and Dorchester
International, which increased combined sales volumes by more than four
times as they re-entered certain markets, and strong growth of Ronson in
West Africa. Volumes manufactured under contract increased 10.2%.
Manufacturing
Gallaher's manufacturing operations performed impressively in 2002: the Group's
organic operations, and those of Austria Tabak, were integrated; cigarette
production was increased substantially; product quality was enhanced; and,
productivity (labour/manufacturing output efficiency levels) improvements were
achieved across the Group's Eurasian divisions.
- United Kingdom
The successful implementation of a SAP resource planning system has
significantly improved the operational planning process, and helped with
the introduction of a range of more effective and efficient methods of
working at Gallaher's Lisnafillan cigarette factory. The system covers
the complete manufacturing process, from the collection of sales
forecasts, to the planning of machine schedules and material
requirements.
In addition, the installation of new machinery, including three Ultra
High Speed complexes, has led to improvements in cigarette quality and
productivity. Cigarette productivity at Lisnafillan increased by 8.7% in
2002. Despite short term increases in tobacco and NTM costs, cigarette
unit costs were reduced modestly in real terms when compared to 2001.
As part of the closure of the Group's factory at Malm� in Sweden,
production of Rolling and John Silver handrolling tobacco was
transferred to Lisnafillan's tobacco factory. Tobacco productivity was
increased by 4.2% when compared to 2001, and unit costs were reduced by
3.5% in real terms.
The continued introduction of state-of-the-art packing machinery at the
Group's cigar factory in Cardiff drove improvements in efficiency, and
facilitated the launch of Hamlet Miniatures Filter. Overall productivity
at the factory increased by 14.2% in 2002. Cigar unit costs were reduced
by 4.3% in real terms when compared to 2001.
- Continental Europe
Gallaher's Continental European manufacturing division performed
impressively in 2002 - contributing both new capacity and new expertise
to the Group.
The Group's Austrian cigarette factories have substantially increased
production due to: the transfer of Swedish cigarette volumes from Malm�;
the transfer of American blend production from Lisnafillan; new volumes
attributable to RGI; and, organic growth. The factories successfully
faced challenges associated with the reorganisation of the sites owing
to transfers of machinery and the training of new machine crews.
Underlying productivity increased by 2.9%.
In addition to the production of cigars for the Austrian market, the
Group's cigar factory at F�rstenfeld commenced production of Terranos
for export to the French market, and Hamlet Aromatic for export to the
UK.
- Commonwealth of Independent States
Gallaher substantially increased production in the CIS in 2002 to meet
the growing demand for its brands across the region. Productivity in the
Group's factories increased, despite the disruption associated with the
re-organisation and installation of machinery in Russia, and the
transfer of machinery from Russia to Kazakhstan and Ukraine.
Gallaher's cigarette factory in Moscow increased volumes and enhanced
efficiency, while remaining highly flexible in order to meet the
changing requirements of Russian consumers. Overall productivity grew by
43.7% - driven by a reduction in crewing levels, the introduction of
faster machinery, and enhanced performances from existing machines.
In Kazakhstan, Gallaher's factory at Almaty more than doubled volume
output, and increased productivity by 46.0% during 2002. The factory
benefited from additional machinery and staff training. Machinery was
transferred to Almaty from Moscow and the UK, and staff received
training at the Group's Moscow factory.
Gallaher's Ukrainian factory at Cherkassy began production in February
2002. The factory has continuously increased volume output, productivity
and flexibility throughout the year.
- Republic of Ireland
Gallaher's cigarette factory in Dublin had a strong year in 2002,
producing record volumes and increasing productivity by 2.7%.
OUTLOOK
Gallaher's 2002 results again demonstrate the benefits of the Group's Eurasian
strategy. The Group's market strength throughout Western Europe underpins
Gallaher's growing positions in Central and Eastern Europe, the CIS, Central
Asia and Asia Pacific.
2003 has begun well - with current trading in-line with management and market
expectations - and management remains confident that Gallaher will continue to
increase returns to shareholders.
Gallaher Group Plc
Group Profit and Loss Account
YEAR ENDED 31 DECEMBER 2002
2002 2002 2001
US$m* �m (restated)
�m
Turnover of the Group including its 13,559 8,422 5,719
share of joint ventures and associate
Less share of turnover of joint (1,549) (962) (303)
ventures and associate
------------- ------------- -------------
Group turnover 12,010 7,460 5,416
------------- ------------- -------------
Group operating profit before 802 498 438
exceptional charge
Exceptional charge - - (12)
------------- ------------- -------------
Group operating profit 802 498 426
Share of operating profits of joint 11 7 1
ventures and associate
------------- ------------- -------------
Total operating profit 813 505 427
Exceptional finance charges - - (18)
Net interest and other financing (215) (134) (94)
charges
Net retirement benefits financing 11 7 14
income
------------- ------------- -------------
Total net interest and other finance (204) (127) (98)
charges
------------- ------------- -------------
Profit on ordinary activities before 609 378 329
taxation
Tax on profit on ordinary activities (191) (119) (83)
------------- ------------- -------------
Profit on ordinary activities after 418 259 246
taxation
Equity minority interests (7) (4) (6)
------------- ------------- -------------
Profit for the financial year 411 255 240
Dividends (288) (179) (165)
------------- ------------- -------------
Retained profit for the year 123 76 75
------------- ------------- -------------
Earnings per ordinary share
- Basic 63.3c 39.3p 38.1p
- Adjusted (a) 82.4c 51.2p 46.9p
- Diluted 62.9c 39.1p 38.0p
Dividends per ordinary share
- Final proposed 30.2c 18.75p 17.30p
- Total for the year 44.4c 27.55p 25.45p
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 exceptional charges and intangible asset amortisation.
* US dollar equivalents are provided for reader convenience at the 31
December 2002 exchange rate of �1:US$1.610.
Gallaher Group Plc
Group Balance Sheet
AT 31 DECEMBER 2002
2002 2002 2001
US$m* �m (restated)
�m
Fixed assets
Intangible assets 2,214 1,375 1,367
Tangible assets 926 575 552
Investments:
Investment in joint ventures 10 6 3
Investment in associate 175 109 105
Other investments 27 17 18
------------- ------------- -------------
212 132 126
------------ ------------ ------------
3,352 2,082 2,045
------------ ------------ ------------
Current assets
Stocks 750 466 385
Debtors 1,269 788 673
Non-liquid investments 2 1 1
Cash and liquid investments 153 95 144
------------ ------------- ------------
2,174 1,350 1,203
Creditors: amounts falling due within
one year
Borrowings (324) (201) (233)
Other (1,681) (1,044) (934)
------------ ------------ -------------
(2,005) (1,245) (1,167)
Net current assets 169 105 36
------------ ------------ ------------
Total assets less current liabilities 3,521 2,187 2,081
Creditors: amounts falling due after
one year
Borrowings (3,843) (2,387) (2,336)
Other (10) (6) (6)
------------ ------------ -------------
(3,853) (2,393) (2,342)
Provisions for liabilities and (79) (49) (50)
charges
Net retirement benefits liability (132) (82) (10)
------------ ------------ -------------
Net liabilities (543) (337) (321)
------------- ------------- -------------
Capital and reserves
Called up share capital 105 65 65
Share premium account 188 117 105
Capital redemption reserve 13 8 8
Merger reserve 235 146 146
Other reserve (1,467) (911) (911)
Profit and loss account (including 343 213 242
retirement benefits reserve)
------------ ------------- -------------
Equity shareholders' deficit (583) (362) (345)
Equity minority interests 40 25 24
------------ ------------- -------------
(543) (337) (321)
------------ ------------- -------------
This summary financial statement was approved by the Board on 4 March 2003 and
signed on its behalf by Nigel Northridge and Mark Rolfe.
* US dollar equivalents are provided for reader convenience at the 31 December
2002 exchange rate of �1:US$1.610.
Gallaher Group Plc
Group Cash Flow Statement
YEAR ENDED 31 DECEMBER 2002
2002 2002 2001
US$m* �m �m
Net cash inflow from operating 836 519 591
activities
Dividends received from associate 19 12 -
Returns on investments and servicing (217) (135) (89)
of finance
Taxation (163) (101) (111)
Capital expenditure (177) (110) (116)
Financial investment 2 1 (2)
Acquisitions and disposals (23) (14) (1,154)
Equity cash dividends paid (272) (169) (151)
------------ ------------- -------------
Net cash inflow/(outflow) before 5 3 (1,032)
management of liquid resources and
financing
Management of liquid resources 2 1 13
(Decrease)/increase in debt (11) (7) 844
Issue of ordinary shares 6 4 148
------------ ------------- -------------
Financing (5) (3) 992
------------ ------------- -------------
Increase/(decrease) in net cash in 2 1 (27)
the year
------------ ------------- -------------
Reconciliation of Movements in Equity Shareholders' Deficit
YEAR ENDED 31 DECEMBER 2002
2002 2002 2001
US$m* �m (restated)
�m
Profit for the financial year 411 255 240
Dividends (288) (179) (165)
Actuarial loss recognised on (174) (108) (161)
retirement benefits
Movement on deferred tax relating to 48 30 47
actuarial loss on retirement benefits
Exchange adjustments on foreign (35) (22) 8
currency net investments
Amounts deducted from profit and loss (8) (5) (1)
reserve in respect of shares issued
to the QUEST
Issue of ordinary shares 19 12 149
------------ ------------ ------------
Net (decrease)/increase in equity (27) (17) 117
shareholders' deficit
Opening equity shareholders' deficit (520) (323) (549)
- previously reported
Prior year adjustment (36) (22) 87
------------ ------------ ------------
Opening equity shareholders' deficit (556) (345) (462)
- restated
------------ ------------ ------------
Closing equity shareholders' deficit (583) (362) (345)
------------ ------------ ------------
* US dollar equivalents are provided for reader convenience at the 31
December 2002 exchange rate of �1:US$1.610.
Gallaher Group Plc
Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities
YEAR ENDED 31 DECEMBER 2002
2002 2002 2001
US$m* �m (restated)
�m
Group operating profit 802 498 426
Exceptional charge - - 12
Depreciation of tangible fixed assets 119 74 50
Amortisation of intangible fixed 116 72 32
assets
Amortisation of other fixed assets 5 3 1
(Profit)/loss on sale of tangible (2) (1) 2
fixed assets
Loss on sale of fixed asset - - 1
investments
Increase in debtors (205) (127) (49)
(Increase)/decrease in stocks (109) (68) 51
Increase in creditors and provisions 116 71 59
(Decrease)/increase in net retirement (6) (3) 6
benefits liability
------------ ------------ ------------
Net cash inflow from operating 836 519 591
activities
------------ ------------ ------------
Reconciliation of Net Cash Flow to Movement in Net Debt
YEAR ENDED 31 DECEMBER 2002
2002 2002 2001
US$m* �m �m
Increase/(decrease) in net cash in 2 1 (27)
the year
Decrease in liquid resources (2) (1) (13)
Decrease/(increase) in debt 11 7 (844)
------------ ------------- ------------
Change in net debt resulting from 11 7 (884)
cash flows
Exchange adjustments (119) (74) 15
Current asset investments acquired - - 23
with subsidiary
Loans acquired with subsidiary (2) (1) (175)
------------ ------------ ------------
Movement in net debt in the year (110) (68) (1,021)
Net debt at 1 January (3,904) (2,425) (1,404)
------------ ------------ ------------
Net debt at 31 December (4,014) (2,493) (2,425)
------------ ------------ ------------
Basis of Preparation
The preliminary announcement of results for the year ended 31 December 2002 is
an excerpt from the forthcoming annual report and financial statements and does
not constitute the statutory financial statements of the Group. The 2002
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 restated to
reflect accounting policy changes and certain reclassifications. 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 2002 exchange rate of �1:US$1.610.
Gallaher Group Plc
Segmental Information (by Destination)
YEAR ENDED 31 DECEMBER 2002
2002 2002 2001
US$m* �m (restated)
�m
Total Turnover
UK 5,989 3,720 3,685
Continental Europe 6,277 3,899 1,339
CIS 533 331 261
Rest of World 760 472 434
------------ ------------ ------------
13,559 8,422 5,719
------------ ------------ ------------
Duty
UK 5,034 3,127 3,080
Continental Europe 2,534 1,574 534
CIS 81 50 35
Rest of World 564 350 331
------------ ------------ ------------
8,213 5,101 3,980
------------ ------------ ------------
Total Operating profit
UK
- before amortisation of intangible 456 283 299
assets
- amortisation of intangible assets (3) (2) (1)
------------ ------------ ------------
453 281 298
Continental Europe
- before amortisation of intangible 343 213 97
assets
- amortisation of intangible assets (105) (65) (22)
------------ ------------ ------------
238 148 75
CIS
- before amortisation of intangible 68 42 30
assets
- amortisation of intangible assets (16) (10) (10)
------------ ------------ ------------
52 32 20
Rest of World
- before amortisation of intangible 70 44 46
assets and exceptional charge
- exceptional charge - - (12)
------------ ------------ ------------
70 44 34
Total
- before amortisation of intangible 937 582 472
assets and exceptional charge
- amortisation of intangible assets (124) (77) (33)
- exceptional charge - - (12)
------------ ------------ ------------
813 505 427
------------ ------------ ------------
* US dollar equivalents are provided for reader convenience at the 31 December
2002 exchange rate of �1:US$1.610.
SUPPLEMENTARY FINANCIAL INFORMATION
Impact of change in accounting policies
During 2002 the Accounting Standards Board ("ASB") delayed the mandatory
implementation of a new accounting standard for Retirement Benefits ("FRS 17")
in order to allow UK and International standards boards an opportunity to agree
how to converge their different approaches. However, the ASB continues to
encourage UK companies to voluntarily adopt FRS 17. Gallaher regards the new
standard to be superior to the current standard SSAP 24 "Accounting for Pension
Costs". Accordingly, Gallaher has voluntarily adopted FRS 17 in 2002 and
results for 2001 have been restated.
The effect of this change in policy is to reduce EBITA and operating profit in
2002 by �9m (2001: �8m) and reduce net interest cost by �7m (2001: �14m),
resulting in a decrease in pre tax profit of �2m (2001: �6m increase).
Excluding the impact of adopting FRS 17, adjusted EBITA grew by 23.2% to �591m
(2001: �480m), total operating profit was �514m (2001: �435m), and adjusted
earnings per share grew by 11.6% to 51.4p (2001: 46.1p).
Adoption of FRS 17 has resulted in a charge of �22m being booked through the
statement of total recognised gains and losses ("STRGL"), reflecting a prior
year adjustment. In addition, an actuarial loss recognised on retirement
benefits, net of the associated deferred tax movement, of �78m (2001: �114m)
has been charged through the STRGL. This charge largely represents the
difference between the actual return on pension scheme assets and the expected
return on the market value of assets at 1 January 2002 and is attributable to
the continuing decline in world equity markets.
Provisions for retirement benefits are based on assumptions used to determine
the cost of meeting future retirement benefit obligations. These assumptions
are based on actual historical experience and are set after consultation with
the Group's actuaries.
The Group also adopted FRS 19 (Deferred Tax), which has not had a material
impact on reported results and no prior year adjustments have been necessary.
To bring Group practice in line with a recently introduced standard in the
United States, certain sales related incentive costs, previously included
within marketing expenditure, are now charged against turnover. This has no
impact on EBITA and operating profit but does slightly increase margins.
In addition, since the acquisition of Austria Tabak certain revenue and cost
items have been reclassified. Now, only excise duties paid by Group companies
are taken into account when calculating net turnover which is used to calculate
margins. Following a change in German statutory reporting requirements, L-T now
only recognises in turnover the commission it earns as an agent on the sale of
telephone cards, whereas previously the full value of these sales were recorded
in turnover, with the difference between the sales value and the commission
retained by L-T recorded as a cost of sales.
Although the impact of these reclassifications is not significant, comparative
results have been restated.
Weighted average cost of capital ("WACC")
Gallaher utilises project-specific WACCs when evaluating investments, 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%.
Five year summary of shareholder returns and key financial indicators
2002(1) 2001(1) 2000(2) 1999(2) 1998(2)
Adjusted EPS (p) 51.2 46.9 41.0 36.9 32.2
Growth (%) 9.2 14.4 10.9 14.8
(1) After changes in accounting policies.
(2) Results not restated but presented as previously reported.
Since 1998, when Gallaher presented its first full year results as a public
company, dividends have increased by a cumulative average growth rate of 7.7%,
reflecting Gallaher's dividend policy of consistently growing dividends, whilst
recognising the need to balance equity and debt holders interests.
2002(1) 2001(1) 2000(2) 1999(2) 1998(2)
EBITA interest cover(3) 4.4 5.2 4.7 5.6 5.5
(5)
Effective tax rate(4) 26.2% 3.6% 26.0% 28.7% 31.3%
Dividend cover(6) 1.86 1.84 1.72 1.66 1.57
Dividend yield(7) 4.5% 5.4% 5.6% 8.6% 5.0%
Net debt/market 62% 80% 54% 51% 61%
capitalisation(7)
Enterprise value/EBITDA 10.0 10.2 8.4 5.8 10.7
(3)(5)(7)(8)
TSR since demerger on 30 193% 112% 81% 2% 50%
May 1997(7)
(1) After changes in accounting policies.
(2) Indicators not restated but reflect previously reported results.
(3) Excludes exceptional charges.
(4) Excludes exceptional charges and amortisation charges.
(5) FRS 17 financing credit added back in 2002 and 2001.
(6) Calculated on adjusted earnings per share.
(7) Based on closing share price as at 31 December of each year.
(8) 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 2002 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 �1,808m, comprising a �300m bond
maturing in May 2009, a Euro375m bond maturing in August 2008, a Euro750m bond
maturing in October 2006, a Euro900m bond maturing in January 2005 and European
medium term notes amounting to �189m. Since the year end, the Group issued a �
250m bond maturing in February 2013. In addition, at the year end, the Group's
committed bank facilities comprised amortising term loans of Euro295m with a final
repayment date in 2007, a syndicated revolving facility of �900m maturing in
June 2006 and working capital facilities amounting to �125m maturing in April
2003.
Since the year end, Gallaher has commenced negotiation with a group of banks to
refinance the syndicated revolving facility of �900m and the working capital
facilities of �125m with a �650m syndicated revolving facility, with �150m
maturing in March 2004 and �500m maturing in March 2008. Gallaher has also
cancelled �400m of the current syndicated revolving facility with effect from
19 February 2003.
The weighted average maturity of committed debt at the year end was 3.5 years
(2001: 4.3 years). Following the post year end bond issue and the anticipated
refinancing of the syndicated revolving facility, the weighted average maturity
of committed debt will increase to 4.2 years with a spread of maturities
extending to 2013, designed to ensure that the amount of debt maturing in any
year is within the Group's ability to repay or refinance.
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 the
following bonds issued by the Group: Euro750m in October 2001, Euro900m in January/
March 2002 and �250m in February 2003, and 0.9 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 revolving bank facilities. At the year end these require Gallaher to
maintain interest cover above 3.5 times based on pre-FRS 17 EBITDA; net debt
below a multiple of pre-FRS 17 EBITDA of 4.0 times at 31 December 2002, falling
to below 3.5 times by 31 December 2004; and consolidated net debt to remain
below �3,000m. The Group continues to comply with all borrowing obligations,
and financial covenants have been satisfied with an EBITDA interest cover at
5.0 times and a net debt multiple of 3.8 times at 31 December 2002.
It is anticipated that the new �650m committed syndicated revolving facility
will require Gallaher to satisfy the same financial covenants with the
exception that the consolidated net debt will no longer be required to remain
below �3,000m.
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
25% and 75% of the level of core debt. At the year end, fixed interest rated
debt represented approximately 70% of total gross debt. The effective fixed
interest rate payable has been lowered by the sale of interest rate swap
options, floors and caps. 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.
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
Gallaher has established and adheres to a number of policies and principles
governing the Group's conduct which underpin the Group's relationship both to
those responsible for public health and those who choose to smoke. Gallaher
believes that it operates with a sense of responsibility and responsiveness to
the issues surrounding smoking and health, recognising the rights and
responsibilities of governments around the world to regulate the manufacture,
distribution and marketing of tobacco products. For its own part, the Group has
an established range of corporate and environmental policies consistent with
its standing.
The tobacco market in developed economies has been subject to significant
regulatory influence and/or voluntary agreements in recent years, including:
the levying of substantial tax and duty charges; the imposition of restrictions
on advertising and marketing; the display of larger health warnings and
statements of tar, nicotine and carbon monoxide smoke yields on cigarette
packaging; regulations on the smoke yields of cigarettes; the disclosure of
ingredients in tobacco products; 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 age at which cigarettes may be
purchased.
The Group has a long history of managing its business successfully within a
regulatory climate. Over the years it has had the opportunity of dialogue with
successive governments and politicians of various parties and has co-operated
on a range of issues related to tobacco and smoking. In recent years, the Group
has reduced its susceptibility to regulatory changes in any single country by
expanding its international operations, including the acquisitions of
Liggett-Ducat and Austria Tabak.
Advertising, promotion and brand building have continued to play a key role in
the Group's business, with significant expenditure on programmes in the UK and
overseas to support its key brands and to develop markets for new brands and
brand extensions. Gallaher believes that it markets tobacco products to adult
smokers in a responsible way and has policies in place that govern the
advertising and promotion of its products throughout the world. It will use the
full range of advertising and sponsorship opportunities allowed to it for as
long as these are available. However, further regulation in respect of
advertising, promotion and sponsorship in its key markets could have an adverse
effect on the Group's sales and operating performance.
Pending/Proposed Regulation
Within the EU, a Directive on the approximation of the laws, regulations and
administrative provisions of the EU Member States concerning the manufacture,
presentation and sale of tobacco products was adopted in June 2001 and is
currently being implemented into EU Member States' national law. Its provisions
include, amongst other matters, requirements that:
- by December 2002, and annually thereafter, Member States require
manufacturers and importers of tobacco products to submit to them a list
of all ingredients, and quantities thereof, used in the manufacture of
those tobacco products by brand name and type;
- from October 2003, texts, names, trade marks and figurative or other
signs suggesting that a particular tobacco product is less harmful than
others shall not be used on the packaging of tobacco products marketed
within the European Community;
- from October 2003, each unit packet of cigarettes marketed within the EU
(October 2005 for other tobacco products) must carry new and
significantly larger health warnings on the front and back;
- from January 2004, the smoke yield of cigarettes released for free
circulation, marketed or manufactured in the EU Member States shall not
be greater than: 10mg per cigarette for tar; 1mg per cigarette for
nicotine; and 10mg per cigarette for carbon monoxide;
- by January 2005, as regards cigarettes manufactured within, but exported
from, the European Community, Member States may apply the smoke yield
limits as provided in the Directive but shall, in any event, do so by 1
January, 2007 at the latest;
- by December 2002, the Commission shall adopt rules allowing for the use
of colour photographs or other illustrations to depict and explain the
health consequences of smoking (this provision is not mandatory for all
Member States but those that decide to introduce such `pictorial health
warnings' may do so from January 2004. These rules have not yet been
issued);
- Member States may also require tobacco manufacturers to carry out any
other tests as may be required by the competent national authorities in
order to assess the smoke yield of other substances produced by their
tobacco products on a brand-by-brand-basis and type-by-type-basis and in
order to assess the effects of those other substances on health, taking
into account, inter alia, their addictiveness; and,
- no later than December 2004, and every two years thereafter, the
Commission will report on the application of the Directive and on a wide
range of issues which should be reviewed or developed in the light of
developments in the scientific and technical knowledge. Amongst other
matters, this will include a proposal for a common list of ingredients.
In December 2002, the EU reached a political agreement to adopt a Proposal for
a Directive of the European Parliament and of the Council on the approximation
of the laws, regulations and administrative provisions of the Member States
relating to the advertising and sponsorship of tobacco products. 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 shall bring into force the laws, regulations and
administrative provisions necessary to comply with this Directive by July 2005
at the latest.
Also in December 2002, the European Council adopted a Recommendation on the
prevention of smoking and on initiatives to improve tobacco control. It
recommends that Member States adopt appropriate legislative and/or
administrative measures in accordance with national practices and conditions
that include: restricting the access of tobacco sales to children and
adolescents; prohibiting certain forms of advertising and promotion for tobacco
products reaching children and adolescents; preventing the sale of cigarettes
in packages of fewer than 20; providing adequate protection from exposure to
environmental tobacco smoke; and obliging tobacco manufacturers to disclose
their expenditure on tobacco advertising. Member States may decide whether or
not to comply with this Recommendation.
The 10 European countries which are expected to join the EU in mid 2004
("Accession Countries") must comply with the existing laws (`acquis
communitaire') of the EU at the time of joining unless transitional
arrangements have been previously agreed.
The World Health Organisation has adopted a draft treaty on the Framework
Convention on Tobacco Control - a new legal instrument that may include tobacco
advertising, illicit trade, tax and duty-free sales, packaging and labelling,
liability and compensation and agricultural subsidies. The Convention is
expected to be presented to the participating Member States for adoption in May
2003.
In the UK, the Tobacco Advertising and Promotion Act was adopted in November
2002. The Act prohibits the advertising and promotion of tobacco products
including billboards, press, and free distribution of samples from February
2003, and in-pack promotion schemes from May 2003. The Act also provides for a
ban on sponsorship by tobacco companies from July 2003, although transitional
provisions allow an exemption for `exceptional global events' until July 2005.
Point of sale advertising and brand sharing regulations are expected to be
published shortly.
In the Republic of Ireland, the Public Health (Tobacco) Act was adopted in
March 2002, giving wide-ranging powers to the Office of Tobacco Control. The
Act also allowed for new regulations and controls on the sale and marketing of
tobacco products and the smoking of tobacco products in public places. Parts of
this Act were the subject of a legal challenge by Gallaher (Dublin) Ltd and
other tobacco manufacturers. In January 2003, the Minister for Health and
Children announced that he intended to repeal all but one of the provisions of
the Act, as they had not been notified to the EU under the Technical Standards
Directive. He has also indicated that he intends to notify the EU as
appropriate and re-enact the relevant provisions. In the circumstances, the
proceedings challenging the Act ended, with the Court awarding the companies
bringing the challenge their costs. Nevertheless, the Irish Minister for Health
and Children has announced an intention to introduce regulations seeking to ban
smoking in the workplace in the Republic of Ireland from January 2004, relying
upon the one provision of the Act that is not to be repealed.
In Germany, the government is introducing a law on the protection of young
people, whereby the sale of tobacco products to persons under 16 years is
prohibited. In addition, cigarettes from vending machines may only be bought
through specially designed chip cards as of January 2007. Purchases of
cigarettes will be allowed only where the cardholders are over 16 years old.
In Russia, a federal law on restrictions on the smoking of tobacco was
introduced in January 2002. The legislation prohibits smoking in some public
places; the sale of cigarettes to those under 18 years of age; and loose
cigarettes or packs containing fewer than 20 cigarettes. Furthermore, from
January 2003, the production and import of filter cigarettes with smoke yields
exceeding 14mg of tar and 1.2mg of nicotine are prohibited; and tobacco
products must display a general and rotational health warning and tar and
nicotine smoke yields.
Tobacco Taxation
In February 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 Euro60 per thousand cigarettes on the most popular
price category of cigarettes from 1 July 2002, increasing to Euro64 per thousand
cigarettes in July 2006. For certain Member States, transitional periods to
comply with the new cigarette rates are provided by the Directive.
EU Accession Countries will be required to implement significant duty increases
in order to comply with the minimum cigarette excise tax requirements. Many
Accession Countries have been allowed transitional periods - the longest until
January 2010 - in which to comply with the Euro64 per thousand cigarette excise
tax minimum. The maintenance of the current controls on personal imports from
Accession States into existing EU States could have a significant impact on
sales in neighbouring countries such as Austria and Germany in the transitional
periods.
A significant factor affecting the Group's operations is the excise taxes
levied on tobacco products. In the UK, for instance, duty increases represent
an annual direct increase in the Group's cost of sales, which, if passed on to
the consumer, would be expected to affect the consumption of tobacco products.
The Group has generally passed on the full duty increases to its customers in
recent years, with the result that these amounts are included in turnover and
cost of sales.
In the UK, one of the Group's key markets, following many years of above
inflation tax increases, the Chancellor raised tobacco duty in line with
inflation in the March 2001 and April 2002 Budgets. However, the impact of high
taxation in the UK cigarette market, resulting in high prices, has led to
reduced annual industry volumes, greater price competition, trading down by
consumers to lower price cigarette brands, and a growth in non-UK duty paid
cigarette consumption (both smuggled and legitimate cross border purchases).
These changes have a particular impact upon the Group, as a large proportion of
its UK sales are in the premium sector of that cigarette market. Gallaher
believes that the wide price differentials between the UK and Continental
Western Europe and other parts of the world have led to a significant smuggled
market for legitimate and counterfeit cigarettes. HM Customs and Excise
estimates that, for the year ended 31 March 2002, approximately 21% of
cigarettes and approximately 52% of handrolling tobacco smoked in the UK market
was smuggled.
In certain important Continental European markets, excise duty increases
continue to have an impact on prices, sales and margins. These include, for
instance, the introduction of the second stage of the extraordinary duty
increase ("anti-terror tax") in Germany, and minimum excise tax levels in
Sweden and France.
The Group supports and endorses regulatory authorities to stop smuggling of
tobacco products. Gallaher has a history of co-operation with investigations
into smuggling and readily exchanges relevant information with the authorities
on a regular basis. In April 2002, Gallaher was the first cigarette
manufacturer to sign a Memorandum of Understanding with HM Customs and Excise,
designed to cement co-operation between the Group and HM Customs and Excise.
In October 2002, the UK Government announced an increase in the indicative
levels of intra-EU tobacco imports for personal use from 800 to 3200 cigarettes
and from 1kg to 3kg for handrolled tobacco. Gallaher believes that initial
indications demonstrate that there has been an increase in the amount of non-UK
duty paid cigarettes and handrolling tobacco being purchased by personal
travellers in the EU, and, as such, there may be some negative impact on the
size of the UK duty paid market in the near term. The Government's announcement
also included additional measures for HM Customs and Excise to tackle criminal
gangs who trade in contraband cigarettes and tobacco. Gallaher believes that
these measures will partly offset in the medium term the impact of the increase
in personal allowances.
Litigation
Certain companies in the Group are currently defendants in actions in the UK
and Ireland, where the plaintiffs are seeking damages for ailments claimed to
have resulted from tobacco use or exposure to tobacco smoke. There are no
current or pending claims in England and Wales against Gallaher. As at 28
February 2003, Gallaher is involved as a defendant in three dormant individual
cases in Scotland and one claim in Northern Ireland where plaintiffs seek
damages for ailments claimed to have resulted from tobacco use. In the Republic
of Ireland, since 1997, 138 claims have been dismissed or discontinued. The
number of individual claims against Group subsidiaries is currently 28. In
those claims, 13 Statements of Claim have been served upon Group subsidiaries
and other tobacco companies, making wide-ranging allegations against such
companies and against Ireland, the Attorney General and the Minister for Health
and Children, who are also named as defendants in some of those cases. The
relevant Group companies will serve defences to these claims as soon as each
claim is fully particularised. 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.
Tax Inspectorates of the Russian Federation Ministry of Taxes and Levies (the
"Tax authorities") have made various demands for payments allegedly due from
Group subsidiaries, CJSC Liggett-Ducat and its affiliate LD Trading. The Tax
authorities assert an entitlement to unpaid taxes, penalties and fines. The
facts and matters underlying the claims are complex. In accordance with local
procedure, the way such claims are determined is through court process. As at
28 February 2003, all the challenges that have been made to the claims have
been successful, although there are entitlements to appeal. Based upon the
facts and matters currently known, management considers that there are
meritorious defences against these claims, and that they will be defended
vigorously.
Gallaher Group Plc
Cautionary statement
This announcement includes forward-looking statements within the meaning of
Section 27A of the US Securities Exchange Act of 1934, as amended. All
statements other than statement of historical fact included in this
announcement, including, without limitation, statements regarding Gallaher's
future financial position, strategy, dividend policy, projected sales, costs
and results (including growth prospects in particular regions), plans, impact
of governmental regulations or actions, the successful integration of Austria
Tabak and other acquisitions into our group, progress in completing an
agreement with the China National Tobacco Corporation, and objectives of
management for future operations, 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 conditions, foreign exchange
rate fluctuation, interest rate fluctuations (including those resulting 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 completing and integrating
acquisitions and joint ventures and production or distribution disruptions,
difficulty in managing growth, declining demand for tobacco products,
increasing dependence on sales in the CIS and risks to factories, as well as
other uncertainties detailed from time to time in Gallaher's filings with the
US Securities and Exchange Commission. 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 "Austria Tabak" refers to the Gallaher Austria 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 "TOBA" refers to Tobaccoland Austria (Tobaccoland Handels GmbH).
The term "BAT" refers to British American Tobacco p.l.c. The term "Philip
Morris" refers to Philip Morris International, Inc., a subsidiary of Altria
Group, Inc.
END
