RNS Number:3178P
Gallaher Group PLC
03 September 2003
3 September 2003
ANNOUNCEMENT OF INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 JUNE 2003
HIGHLIGHTS
2003 2002(1)
* Volumes 73.7bn 70.0bn
* Total turnover #4,325m #4,120m
* Adjusted EBITA(2) #305m #289m
* Adjusted PBTA(3) #241m #225m
* Profit before tax #162m #188m
* Adjusted earnings per share(4) 26.6p 25.2p
* Basic earnings per share(5) 15.7p 19.5p
* Interim dividend 9.45p 8.80p
(1) 2002 H1 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 charge.
(4) Adjusted: before amortisation of intangible assets and exceptional charge (net of tax).
(5) Basic: includes amortisation of intangible assets and exceptional charge.
Note: Amortisation of intangible assets was #41m (2002 H1 : #37m) and
exceptional charge was #38m (2002 H1 : nil).
Commenting on the performance, Nigel Northridge, Chief Executive, said:
"These are good results. We have demonstrated volume, profit and dividend
growth. I am particularly pleased with our market share gains in key EU
countries - France, Spain and Italy - and right across the CIS. By completing
our small acquisition in Poland, and successfully concluding joint licensing
agreements with Shanghai Tobacco for China and Russia, we have added new
opportunities for future growth."
Enquiries:
Claire Jenkins - Director, Investor Relations Tel: 01932 832637
Anthony Cardew - CardewChancery Tel: 020 7930 0777
SUMMARY
* Gallaher increased adjusted EBITA 5.2% to #305m (2002 H1: #289m), with
good growth in many of its target markets underpinned by its leading positions
in certain Western European markets. The Group increased total 2003 H1 volume
sales by 5.2% to 73.7bn cigarettes (2002 H1: 70.0bn).
* The Board has declared an interim dividend of 9.45p per ordinary share
(37.80p per ADS) - an increase of 7.4% over the 2002 interim dividend.
* The Group's increasing share of the growing UK low price cigarette sector, and
its strong lead of the premium sector, led to Gallaher's growth in total market
share to 38.3% (2002 H1: 37.7%). This good performance in the UK cigarette market
- which declined around 5% in 2003 H1 - underpinned the Group's robust UK
financial performance. Adjusted UK EBITA was only 1.2% down at #143m
(2002 H1: #145m).
* Gallaher's underlying Continental Europe ("CED") volume growth of 5.7%,
and price increases in certain markets - assisted by the strength of the euro -
drove the increase in CED adjusted EBITA of 15.3% to #123m (2002 H1: #106m).
* The Group outperformed in many of its key CED markets - increasing market share
in France, Spain, Italy and the Balkans - and has established a position in
Poland following the completion of the acquisition of KT Merkury in July 2003.
* Gallaher grew CIS volume sales 11.2%, with sharp growth in Kazakhstan and
Ukraine more than offsetting the effect of a phasing of trade sales in Russia
at the end of 2002, and the extended employee holiday period at the Moscow
factory in January 2003.
* The Group increased its share of sales to consumers in each of its three key
CIS markets, and grew its share of the Russian premium cigarette sector to 2.2%
(2002 H1: 0.3%), as a result of improving distribution and the incremental
marketing investment placed behind its brands, which commenced in the second
half of 2002. Primarily reflecting the weakness of the US dollar - and margin
pressure, which included the increased marketing investment - CIS EBITA was
#14m (2002 H1: #19m).
* Adjusted Rest of World EBITA grew 29.5% to #25m (2002 H1: #19m) as the
Republic of Ireland benefited from currency movements and price increases, and
the Group's operations in Asia Pacific and AMELA recorded good volume growth.
* Gallaher and Shanghai Tobacco have successfully concluded negotiations
on license agreements for China and Russia, which are now awaiting formal
approval from the STMA.
* Gallaher increased cigarette productivity by 4.1% - underpinning a 4.2%
real term reduction in cigarette unit costs - in 2003 H1.
* Following a review of the Group's European operations, which will affect around
430 jobs, Gallaher expects to achieve annualised savings of at least #15m
(by the end of 2005). An exceptional charge of #38m has been included in these
results relating to costs associated with this review.
* Group trading remains in line with expectations for the full year.
CONTENTS
Page
Highlights 1
Summary 2
Contents 3
2003 Interim Results 4
Financial Review 5
Operating Review 8
Outlook 15
Legal and Regulatory Environment 15
Group Profit and Loss Account 19
Group Balance Sheet 20
Statement of Total Recognised Gains and Losses 21
Reconciliation of Movements in Equity Shareholders' Deficit 21
Group Cash Flow Statement 22
Reconciliation of Operating Profit to Net Cash Flow from
Operating Activities 22
Reconciliation of Net Cash Flow to Movement in Net Debt 23
Segmental Information (by Destination) 24
2003 INTERIM RESULTS
Group
Total turnover for the first half of 2003 at #4,325m represented an increase of
5.0% compared with 2002 H1, with cigarette volume sales - of 73.7bn sticks - up
5.2%. Turnover excluding duty ("net turnover") grew 9.4% to #1,752m (2002 H1:
#1,603m).
Earnings before interest, tax, intangible asset amortisation ("EBITA") and
exceptional charge ("adjusted EBITA") increased 5.2% to #305m (2002 H1: #289m).
An exceptional charge of #38m has been included in these first half results
relating to costs associated with the restructuring of Gallaher's European
operations.
Profit before tax, amortisation of intangible assets and the exceptional charge
grew 6.7% to #241m (2002 H1: #225m).
Total operating profit was #226m (2002 H1: #252m) and profit before tax was
#162m (2002 H1: #188m) - both the reductions reflecting the exceptional charge
made in the first half of 2003.
Adjusted earnings per share increased 5.4% to 26.6p (2002 H1: 25.2p). After
deducting intangible asset amortisation and the exceptional charge, net of tax,
basic earnings per share was 15.7p (2002 H1: 19.5p).
Management believes that reporting results before amortisation and exceptional
charges (adjusted EBITA, adjusted PBTA and adjusted earnings per share) provides
a better comparison of underlying business performance for the period under
review.
The comparative results for the first half of 2002 have been restated following
the adoption of new accounting policies that were reflected in the 2002 annual
financial statements. These included the implementation of FRS 17 (Retirement
Benefits) and the re-classification of certain sales incentives. The effect of
the adoption of FRS 17 on the first half of 2002 is to reduce Group EBITA by #3m
and the net interest expense by #4m. By division in 2002, the adoption of FRS 17
reduces UK EBITA by #4m and increases Continental Europe EBITA by #1m.
On 2 July 2003 Gallaher completed the acquisition of KT Merkury, a small
cigarette factory in Poland, for a not material cash sum. Initial losses for
this new business are not expected to be significant.
The Board of Gallaher has declared an interim dividend of 9.45p per ordinary
share (net), an increase of 7.4% over the 2002 interim dividend of 8.80p (net).
This dividend will be paid on 20 November 2003, to all shareholders on the
register at close of business on 19 September 2003. For ADS holders, The Bank of
New York will convert the 37.80p (net) ADS dividend into US dollars, and
distribute it to ADS holders on 28 November 2003.
European operations restructuring
In May 2003, following an extensive review, Gallaher announced the restructuring
of the Group's European operations. Gallaher intends to cease all manufacturing
in the Republic of Ireland and reduce jobs in Austria and the UK. It is
anticipated that around 430 operational jobs will be affected.
The total cost of the restructuring will be in the region of some #50m over the
next two years of which, at 30 June 2003, #38m of costs have been reflected as
an exceptional charge. This relates primarily to estimated redundancy payments
and the impairment of operational plant and machinery. Once the project has been
completed, by the end of 2005, Gallaher expects to achieve annualised savings of
at least #15m.
FINANCIAL REVIEW
United Kingdom
While Gallaher's UK cigarette market share marginally improved in the first half
of 2003, UK turnover decreased 6.3% to #1,758m (2002 H1: #1,876m). The decrease
largely reflects lower cigarette volume sales - down 8.2%, to 10.0bn sticks
(2002 H1: 10.8bn) - and downtrading by consumers to cheaper cigarettes,
partially offset by price increases (UK Government duty and Gallaher's own price
increases).
The volume decline primarily reflects the phasing of trade sales at the end of
2002 and a reduction in the size of the UK duty paid market - estimated at
around 5% - which includes the first time impact on the first half results of
the increase in duty paid allowances for UK travellers returning from the EU
announced by the UK Government in October 2002. Excluding the effect of the
phasing of trade sales, Gallaher's underlying cigarette volume sales were down
some 3.5%.
UK net turnover reduced 5.9% to #285m (2002 H1: #302m).
UK adjusted EBITA was 1.2% down at #143m (2002 H1: #145m) with the decrease in
net turnover largely offset by lower costs, largely volume related, despite the
marketing investment placed behind brands ahead of the introduction of the
advertising ban in February 2003. This reduction in costs resulted in an
improved adjusted EBITA margin of 50.3% (2002 H1: 47.9%).
UK operating profit was #125m (2002 H1: #144m) - the reduction mainly reflecting
the UK exceptional charge of #17m in 2003.
Continental Europe
In 2003, Continental Europe ("CED") delivered a strong underlying performance,
growing turnover by 14.7% to #2,162m, assisted by the strengthening of the euro
(2002 H1: #1,884m). CED volume sales were 22.1bn (2002 H1: 23.6bn). Pro-forma
volume growth was 1.7%, after adjusting for the reallocation of the legacy
Austria Tabak Africa and Middle East business to the Rest of World division from
July 2002, despite the loss of Swedish contract manufactured ("SCM") volumes in
2003. Underlying volume growth - stripping out the SCM volumes from 2002 H1 -
was 5.7%.
CED net turnover increased 13.5% to #1,275m (2002 H1: #1,124m), comprising: CED
tobacco net turnover of #209m (2002 H1: #167m) and distribution net turnover of
#1,066m (2002 H1: #957m). CED adjusted EBITA grew 15.3% to #123m (2002 H1:
#106m) of which #90m (2002 H1: #80m) arose from the tobacco operations and #33m
(2002 H1: #26m) came from the distribution businesses.
In 2003, the Group's share of losses arising from its joint venture with R.J.
Reynolds offset its share of profit from its associate, Lekkerland-Tobaccoland
(2002 H1 'Share of operating profits of joint ventures and associate': #5m).
Efficiency improvements in the distribution businesses underpinned a growth in
distribution EBITA margin to 3.1% (2002 H1: 2.8%). The tobacco operations
adjusted EBITA margin, after adding back inter-company sales to the distribution
businesses, was 34.3% (2002 H1: 31.4%). Reflecting the weighting of the
distribution businesses within the divisional results, CED's adjusted EBITA
margin was 9.6% (2002 H1: 9.5%).
CED operating profit was #87m (2002 H1: #75m), after deducting the CED
exceptional charge of #1m in 2003.
The success of the organic businesses - Gallaher has taken price increases, and
grown market share, in certain European markets - together with euro currency
benefits on translating CED earnings into sterling, have enabled Gallaher to:
offset the initial costs arising from the Gustavus acquisition in July 2002;
compensate for the start-up costs of Reynolds-Gallaher International, which
commenced trading in July 2002; and, absorb the adverse currency impact on
margins of operations outside the euro-zone (particularly in Sweden and Central
and Eastern Europe).
Commonwealth of Independent States
In the Commonwealth of Independent States ("CIS"), strong volume growth in
Kazakhstan and Ukraine more than offset the reduction in Russian volume sales
due to the phasing of trade sales ahead of the 1 January excise duty increase,
and the planned extended factory holiday period.
Despite the backdrop of a substantially weakened US dollar (Gallaher's CIS sales
are largely US dollar denominated), this volume growth - of 11.2%, to 36.3bn
sticks (2002 H1: 32.6bn) - and Gallaher's growing presence in the Russian
premium sector resulted in an 8.8% increase in CIS turnover to #164m, and an
increase in CIS net turnover to #130m (2002 H1: #129m).
CIS EBITA was #14m and operating profit was #9m (2002 H1: #19m and #14m
respectively), reflecting the significantly adverse impact of the translation of
CIS earnings into sterling and margin pressure, including the first time impact
on first half results of the incremental marketing investment in Russia which
commenced in the second half of 2002. Margins were also reduced by the wider
than expected industry absorption of the substantial increase in cigarette
taxation in January - compounded by the strength of the rouble in real terms
relative to the US dollar.
EBITA margin declined to 10.5% (2002 H1: 14.6%) reflecting these factors.
Management anticipates that the distribution of CIS full year earnings will
return to this region's traditional trading pattern of approximately one third
of annual earnings being attributable to the first half.
Rest of World
Gallaher's Rest of World ("RoW") turnover increased 15.3% to #241m, and RoW net
turnover grew 28.7% to #62m (2002 H1: #48m), mainly reflecting favourable
exchange movements in the Republic of Ireland and sharply increased volumes in
Asia Pacific, Africa and the Middle East - in part as a result of the inclusion
of some Africa and Middle East ("AMELA") volumes previously reported within CED.
RoW volume sales totalled 5.3bn cigarettes (2002 H1: 3.0bn). Pro-forma RoW
volume growth was 10.3% (2002 H1, including the CED AMELA volumes: 4.9bn).
In the Republic of Ireland, manufacturer's price increases, currency benefits
and a tight control of operating costs more than compensated for lower volumes
in the reduced Irish market following the significant increase in duty at the
end of 2002. The AMELA operations have suffered from adverse foreign exchange
movements with invoiced sales being denominated in the weakening US dollar, and
much of the cost base in the strengthening euro.
RoW adjusted EBITA rose 29.5% to #25m (2002 H1: #19m), and the adjusted EBITA
margin increased slightly to 39.3% (2002 H1: 39.1%).
RoW operating profit was #5m (2002 H1: #19m) - the reduction mainly reflecting
the RoW exceptional charge of #20m in 2003.
Interest
Lower interest rates and positive cash flow - partly offset by the adverse
impact of the translation of euro interest payable into the sterling equivalent
- resulted in lower net interest charges of #67m before a FRS 17 net financing
credit of #3m. (2002 H1: #68m before FRS 17 net financing credit of #4m). The
average interest rate during the first six months of 2003 was 5.5% (2002 H1:
5.8%).
Adjusted EBITA interest cover - combining both interest and operating components
of FRS 17 into a net pension expense within EBITA - was 4.6 times (2002 H1: 4.3
times), within the Group's target range of between 4.5 and 5.5 times.
Taxation
The tax charge of #57m (2002 H1: #59m) represents an effective rate of 35.3%,
compared with 31.6% for 2002 H1. The increase in the effective rate largely
reflects the higher level of non-deductible goodwill amortisation charged in
2003, primarily as a result of a higher euro exchange rate, and the low
effective tax credit applicable to the exceptional charge. Removal of intangible
amortisation charges and the exceptional charge gives rise to an adjusted
effective tax rate of 26.7% (2002 H1: 26.5%). The Group expects the annual
adjusted effective rate to remain at around this level.
Returns to shareholders
After deducting minority interests of #3m (2002 H1: #2m) earnings for 2003
decreased to #102m (2002 H1: #127m), and - following a 0.3% increase in the
weighted average number of shares in issue - basic earnings per share was 15.7p
(2002 H1:19.5p).
After removing intangible asset amortisation charges of #41m (2002 H1: #37m) and
the 2003 H1 net of tax exceptional charge of #30m, adjusted earnings per share
increased by 5.4% to 26.6p (2002 H1: 25.2p).
Cash flow
Operating cash generation remained high in the first half of 2003. Group
operating profit, as adjusted for the exceptional charge, depreciation and
amortisation ("adjusted EBITDA") was #343m (2002 H1: #317m). The Group's net
working capital increased by #61m, largely as a result of a higher level of duty
paid stocks in the UK reflecting the timing of the manufacturer's price increase
in 2003, partly offset by higher tax creditors in Ireland and certain
Continental Europe markets. As a result, net cash inflow from operating
activities of #280m was broadly level with the comparable period of 2002.
Corporate taxes paid by the Group in the period amounted to #41m, some #11m
lower than last year, principally due to changes in the timing of payments in
Austria.
Net capital investment of #63m was, as anticipated, significantly ahead of the
same period in 2002, reflecting higher investment in production machinery and in
vending equipment. In addition, the comparison is distorted as 2002 benefited
from the sale of certain non-core assets in the UK and Austria. The Group
expects its full year level of capital expenditure to total around #150m, which
includes new investment in Poland following the acquisition of KT Merkury.
Net debt at 30 June 2003 was #2,582m, an increase of #89m compared to the
position at 31 December 2002. The increase is wholly attributable to exchange
rate movements - amounting to #101m - on Gallaher's euro denominated debt.
The 12-month rolling net debt to adjusted EBITDA ratio was 3.8 times (2002 FY:
3.8 times), below the Group's current bank covenant level of 4.0 times.
The Group's debt ratings from Moody's Investor Services and Standard & Poor's
remain unchanged at Baa3 with stable outlook and BBB with stable outlook
respectively.
OPERATING REVIEW
Group
Gallaher's strategy is to create value for its investors through the development
of a balanced portfolio of interests in established and emerging markets across
Europe and Asia - organically and through acquisitions and strategic alliances -
capitalising on its proven ability to build brand equity.
The Group's growth was underpinned by its leading positions in certain Western
European markets in the first six months of 2003. Gallaher's brands performed
strongly, with total volumes increasing 5.2% to 73.7bn cigarettes (2002 H1:
70.0bn), despite tough competitive conditions in some key markets.
The Group continued its Eurasian expansion with gains in market share in
Southern Europe and the CIS, and it has entered the Polish market following the
completion of the acquisition of KT Merkury in July 2003.
United Kingdom
In the UK, Gallaher aims to increase its shares of the growing value cigarette
sector and the handrolling tobacco market, and to defend its leading positions
in the premium cigarette and cigar sectors - achieving an appropriate balance
between sales volumes and the margins achieved on those volumes.
Gallaher's leading positions in the UK premium cigarette and cigar markets
benefited from investment in a final round of advertising in the run-up to the
commencement of the ban on 14 February 2003. This expenditure is expected to
underpin the long-term brand equity of Benson & Hedges, Silk Cut and Hamlet.
The increase in the Government's guidelines for personal tobacco import
allowances for travellers returning from the EU, together with the on-going high
levels of UK tobacco taxation, drove an underlying annualised decline in UK
duty-paid cigarette market volumes of around 5% in the first half of 2003.
- Cigarette
Moderate downtrading from the premium and mid price sectors into value price
cigarettes continued in the first six months of 2003.
The respective shares of retail sales accounted for by each price sector were:
value: 55.8% (2002 H1: 52.9%); mid price: 11.6% (2002 H1: 13.5%); and, premium:
32.6% (2002 H1: 33.6%).
Gallaher's UK retail market share increased to 38.3% (2002 H1: 37.7%). The
Group's principal UK houses, Benson & Hedges and Mayfair, both performed well.
Gallaher's UK volumes declined 8.2% to 10.0bn cigarettes, reflecting the
reduction in the duty paid market noted above and the phasing of trade sales in
December 2002 ahead of the introduction of new packaging with larger health
warnings. Excluding the phasing of trade sales, Gallaher's underlying volumes
reduced some 3.5%.
Benson & Hedges Gold, the UK's leading premium cigarette, broadly maintained its
share of the sector at 26.7%. The Benson & Hedges house was strengthened by the
launch of a new, reduced tar, brand Silver at the end of February. Together,
Gold and Silver maintained the Benson & Hedges house share of the total market
at 9.1%.
Mayfair performed strongly, increasing its share of the total market to 10.1%,
and volumes by 21.3%, benefiting from competitive pricing and the growth of the
value sector. The brand's share of the value sector has grown to 18.2% -
underpinning growth in Gallaher's sector share to 32.9% (2002 H1: 30.5%).
Investment in the promotion of Gallaher's brands to smokers at the point of sale
and to the trade has continued. The Group is well positioned at the point of
sale in the UK. In the first half, the majority of consumer cigarette purchases
through merchandising units were made through Gallaher's units - an important
advantage in a market where communication with smokers is now largely restricted
to the point of sale.
The Group strengthened its sales force through additional recruitment and the
introduction of automated information systems across the field sales force.
- Cigar
The UK cigar market declined some 6% in the first six months of 2003, and the
consumer trend from the higher margin large cigar sector to the small cigar
sector continued.
Gallaher increased its lead of the UK cigar market with a 47.1% share of sales
to consumers (2002 H1: 46.5%). Original Hamlet grew its lead of the large cigar
sector with a share of 54.4% (2002 H1: 53.4%) and Hamlet Miniatures increased
its share of the growing small cigar sector to 32.2% (2002 H1: 31.3%). Hamlet
Aromatic gained a 1.3% share of the small cigar sector, despite only having been
launched in December 2002.
- Tobacco
Gallaher maintained its position in the handrolling tobacco market. The Group's
share of consumer sales was 31.7% (2002 H1: 31.6%), driven by the continued
success of Amber Leaf, which increased market share to 15.8%, offsetting Old
Holborn's market share decline.
Gallaher extended its lead of the declining pipe tobacco market, growing its
share of sales to consumers to 50.3% (2002 H1: 49.6%). The number one pipe
tobacco brand Condor underpinned the Group's position, together with Clan and
Mellow Virginia. These brands occupy three of the four leading brand positions.
Continental Europe
In Continental Europe, Gallaher aims to defend its market leading positions in
Austria and Sweden - balancing volumes and margins - and to grow share
elsewhere.
Gallaher traded robustly in Continental Europe in the first six months of 2003,
despite the above inflation increases in cigarette taxation that have led to
declines in total market volumes in several European states - including France
and Germany. Going forward, the substantial differentials between cigarette
taxation and prices between certain European markets may lead to an acceleration
in the growth of non-domestic market duty paid consumption in high tax markets.
The Group's Continental European volumes of 22.1bn cigarettes, represent an
underlying increase of 5.7% on the comparable period in the previous year (2002
H1, excluding export sales to AMELA which are now reported under the Rest of
World division, and the discontinued Swedish contract manufacturing operations:
20.9bn cigarettes).
- Tobacco Products
Gallaher maintained its lead of the Austrian cigarette market with a 46.2% share
of sales (2002 H1: 49.1%). The Group's key growth brand Memphis Blue increased
market share to 6.1% (2002 H1: 5.5%). This brand's growth was more than offset
by the continued expected decline in the market share of traditional local
brands and lower overall wholesale market volumes.
In Sweden, Gallaher maintained its leading cigarette market position with a
39.7% share of sales to consumers (2002 H1: 41.8%). Level again performed well,
growing market share to 7.4% (2002 H1: 5.0%). Volume sales of this brand
increased by over 40%.
The Group has ceased contract manufacturing in Sweden due to the closure of its
factory at Malmo in 2002, which produced 0.8bn cigarettes under contract in the
first half of that year.
Gallaher's moist oral snuff operations continued to make solid progress.
Gustavus has benefited from increased national distribution coverage - up to
around 60% by June. Volume sales continue to increase, and Gustavus had
established a 1.3% market share by June 2003.
Elsewhere in the EU, Gallaher's trading performance was robust. In Germany, the
Group performed well - increasing its share of the resilient generic cigarette
sector, while maintaining its branded cigarette market share.
Gallaher broadly maintained cigarette market share in Greece at 5.1% and
increased its share of the handrolling tobacco market to 38.4% (2002 H1: 36.7%)
due to growing demand for Old Holborn.
Sales of the Virginia blended Benson & Hedges Metal range underpinned the
Group's success in Western Europe. Strong volume growth from Reynolds-Gallaher
International drove an increase in the Group's total first half cigarette market
shares to: 3.1% in France; 3.1% in Italy; and, 1.8% in Spain. The Group also
strengthened its position in the French cigar market with the launch of Hamlet
Fine Aroma in May.
The Group has continued to develop its operations in Central and Eastern Europe.
Total volumes in these markets increased by 3.3% and Gallaher now has a
pan-Balkan market share of 4.8%. Foundations for further growth have been
strengthened by the opening of an office in Serbia, and trading commenced in
Poland in July following the completion of the acquisition of KT Merkury.
Gallaher's acquired brands in Poland - including Brydzowe and Viva - hold a
market share of 1.7%. The Group intends to build on the base provided by these
brands by launching selected international cigarettes from its comprehensive
brand portfolio - utilising its proven ability to develop strong positions in
emerging markets.
- Distribution
Gallaher's distribution businesses performed well in the first half of 2003.
In Austria, the improvements that were made to TOBA's warehouses and information
systems in 2002 underpinned enhanced margins, which more than offset the impact
of lower first half cigarette market volumes.
In Germany, ATG - the vending company in which Gallaher has a 63.9% holding -
continued to make good progress. The company gained share of both the total and
vending markets - assisted by: the acquisition of new vending sites; continued
rationalisation of existing sites; the introduction of enhanced technology
machines; and, advantageous vending pack pricing relative to retail.
The ongoing implementation of cost saving initiatives at Lekkerland-Tobaccoland
- an associate in which Gallaher has a 25.1% holding - is partly offsetting the
effect of lower German cigarette market volumes, and the impact of the German
government regulations regarding can recycling.
Commonwealth of Independent States
In the CIS, Gallaher aims to grow regional market share while increasing the
proportion of its brands sold in the intermediate and higher priced sectors
across the region.
The Group continued to trade strongly in the CIS in the first six months of
2003. Gallaher increased regional scale: growing market share in Russia,
Kazakhstan and Ukraine; and, increasing total volumes 11.2% to 36.3bn
cigarettes. Reflecting the Group's focus on intermediate and higher price
sectors, CIS hard box, filter, cigarette volume sales grew 23.7%, while lower
margin oval volumes were down over 50%.
- Russia
In Russia, Gallaher increased its share of the total market to 14.5% (2002 H1:
13.9%). Notwithstanding this growth in sales to consumers, the extended holiday
period at the Moscow factory in January resulted in an 8.3% reduction in
invoiced sales volumes, which included a planned strategic reduction in
non-filter oval sales of over 70%.
Within its sales mix, Gallaher continued to increase the proportion of its
brands sold in the intermediate and higher price sectors. Sales in these sectors
accounted for 92.3% of the Group's Russian volumes (2002 H1: 76.0%), reflecting
an increase in hard box, filter, cigarette volume sales of 13.2% in 2003 H1.
LD maintained market share at 5.2% during the first half, underpinning growth
from Sobranie, St George and Troika.
Gallaher increased its share of the premium sub-sector to 2.2% (2002 H1: 0.3%)
as a result of improving distribution and the marketing investment placed behind
its brands, which commenced in the second half of 2002. By June 2003, the
Group's share of the premium sub-sector was 2.8%.
The Group is continuing to build brand equity in Russia. In June, the Sobranie
house was strengthened by the launch of the aspirational White Russian brand,
and a new Slims variant of LD was launched.
- Kazakhstan
Gallaher grew market share substantially to 27.9% in Kazakhstan (2002 H1:
18.6%). Volume sales increased over 50% driven by strong demand for the Group's
brands including Sovereign, LD, Novost, and Sobranie.
Sovereign extended its market leading position, growing share to 14.4% and LD
increased market share to 6.4%.
- Ukraine
The Group grew its share of the Ukrainian market to 11.2% (2002 H1: 6.0%).
Volume sales increased sharply as brands including LD, St George and Troika
gained market share.
Rest of World
In its Rest of World division, Gallaher seeks opportunities for growth in Asia
Pacific and AMELA, while defending its leading position in the high margin
Republic of Ireland market - balancing volumes and margins.
Gallaher grew Rest of World volumes to 5.3bn cigarettes (2002 H1: 3.0bn). This
represents a pro-forma increase of 10.3% (2002 H1, including export sales to
AMELA from Continental Europe: 4.9bn cigarettes).
- Republic of Ireland
Trading conditions in the Republic of Ireland were challenging in the first six
months of 2003, with volume sales of 1.4bn cigarettes (2002 H1: 1.6bn). Total
market volumes declined following the substantial above inflation increase in
excise tax that took place in December 2002, while Gallaher's share of total
shipments was impacted by the phasing of trade sales that occurred ahead of the
duty increase.
Gallaher's trading performance remained resilient. The Group maintained its lead
of the cigarette market, albeit with a reduced share of sales to the trade of
48.9% (2002 H1: 50.7%). Gallaher maintained its leadership of the cigar market
with a 71.2% share.
- AMELA
Gallaher grew pro-forma volume sales in Africa and the Middle East by 24.0% to
3.2bn cigarettes (2002 H1: 0.7bn / 2002 H1, including export sales from
Continental Europe: 2.6bn cigarettes). Strong growth in Africa more than offset
a fall in sales to the Middle East relating to the conflict in the region.
In Africa, the Group has maintained its leading cigarette market position in
Guinea and grown volumes in certain other markets, including Nigeria.
In addition, the Group produced 0.5bn cigarettes under contract (2002 H1:
0.5bn).
- Asia Pacific
In Asia Pacific, Gallaher has continued to build consumer awareness of the
Sobranie brand and develop relationships with its industry partners.
The Group grew regional sales volumes 5.6%, despite the impact of SARS, due to
solid performances in Japan, Duty Free, and China.
Since last year's signing of a letter of intent with the China National Tobacco
Corporation, together with the State Tobacco Monopoly Administration ("STMA"),
excellent progress has been made by the Gallaher and Shanghai Tobacco project
team towards reciprocal manufacturing and distribution agreements in China and
Russia. Following the signing of a heads of agreement in March this year, the
two companies have successfully concluded negotiations on license agreements for
each market, which are now awaiting formal approval from the STMA.
Manufacturing
Gallaher's manufacturing strategy is continuously to maximise value from the
Group's wider operational base through maintaining forefront of operational
efficiency, while maintaining the flexibility required to meet changing market
demands and to support the Group's marketing focused approach.
As part of this strategy, the Group conducted a review of its European
operations, and announced plans in May to cease manufacturing in the Republic of
Ireland and to reduce jobs in the UK and Austria.
In the first half of 2003, Gallaher increased Group cigarette productivity 4.1%
- reflecting improvements in the UK, Continental Europe, and the CIS. This
enhanced productivity and increased efficiency - particularly in the use of leaf
- underpinned a 4.2% reduction in real term Group cigarette unit costs, more
than offsetting the effect of the increased proportion of hard box, filter,
cigarettes in the CIS.
- United Kingdom
Productivity at Gallaher's UK cigarette factory in Lisnafillan increased 10.7%,
driven by greater usage of the ultra high speed king size machines installed in
2002, and the addition of two new longer length complexes - one ultra high speed
and one mid-speed - in the first half of 2003. This enhanced productivity
underpinned a 5.3% reduction in real term unit costs.
The ongoing success of the Amber Leaf flip top pack impacted productivity and
unit costs at the Lisnafillan tobacco factory. Productivity reduced 1.3%, and
real term unit costs increased 2.4%.
Productivity at Gallaher's Cardiff cigar factory increased 13.0%, assisted by
the investments in machinery that have been made in recent years. This
improvement in productivity underpinned a 4.8% reduction in real term unit
costs.
- Continental Europe
The efficiency of Gallaher's Continental European cigarette factories continued
to progress in the first half, due to ongoing organisational and technical
improvements, including those arising from the transfer of Swedish volumes to
Austria in 2002. Productivity increased 3.6%, underpinning a real term reduction
of 4.8% in unit costs.
Following the completion of the acquisition of KT Merkury in July, Gallaher has
initiated a programme of investment in new machinery to modernise the factory in
Gostkow, Poland.
- Commonwealth of Independent States
Notwithstanding the extended holiday period at the Moscow factory in January,
the Group's manufacturing facilities in the CIS substantially increased total
half year output to meet the growing demand for its brands.
Productivity in the CIS increased 3.4% as a result of higher efficiencies and
investment in new technology to meet the higher proportion of hard box, filter,
cigarettes and premium brands. This change in mix contributed to a 1.8% real
term rise in unit costs.
Gallaher's flexibility and ability to meet the growing demand for its products -
including premium cigarettes - has been enhanced during the first half by the
installation of new machinery, including primary processing equipment in Ukraine
and additional cigarette production lines in Kazakhstan.
OUTLOOK
Group trading remains in line with expectations for the full year.
Gallaher's performance in the first half of 2003 again demonstrates the benefits
of the Group's Eurasian strategy - to build a balanced portfolio of interests
across Europe, the CIS, Central Asia and Asia Pacific.
LEGAL AND REGULATORY ENVIRONMENT
Regulation
The global tobacco market has been subject to significant regulatory influence
and/or voluntary agreements in recent years. The Group has a long history of
managing its business successfully within a regulatory climate. In recent years,
the Group has reduced its susceptibility to regulatory changes in any single
country by expanding its international operations. However, it is possible that
regulations in any of its key markets could have an adverse effect on the
Group's sales and operating performance.
The World Health Organisation has adopted a Framework Convention on Tobacco
Control. The tobacco control treaty includes provisions governing, amongst other
matters: advertising and sponsorship; tax and price increases; labelling;
illicit trade; and, environmental tobacco smoke.
Within the EU, a Directive concerning the manufacture, presentation and sale of
tobacco products was adopted in 2001 and is currently being implemented into EU
Member States' national law. Its provisions include: matters relating to
ingredients disclosure; the prohibition of descriptors suggesting that a
particular tobacco product is less harmful than others; new and larger health
warnings; rules allowing for the use of colour photographs or other
illustrations to depict and explain the health consequences of smoking; tar,
nicotine and carbon monoxide ceilings; an assessment of the health effects of
the smoke yield of other substances; and, a proposal for a common list of
ingredients.
The EU adopted a Recommendation on the prevention of smoking and on initiatives
to improve tobacco control in 2002. Its contents include: preventing tobacco
sales to children and adolescents; prohibiting certain forms of advertising and
promotion; obliging tobacco manufacturers to disclose their expenditure on
tobacco advertising; and, providing adequate protection from exposure to
environmental tobacco smoke. Member States may decide whether or not to comply
with this Recommendation.
In 2003, a EU Directive relating to the advertising and sponsorship of tobacco
products was adopted. Its provisions include the prohibition of tobacco
advertising: in the press and other printed publications; in radio broadcasting;
in information society services; and, through tobacco related sponsorship,
including the free distribution of tobacco products. Member States shall comply
with this Directive by 31 July 2005 at the latest.
The EU has also indicated that it is to develop an initiative to ban smoking in
the workplace.
The 10 European countries that will join the EU in May 2004 ("EU Accession
Countries") must comply with the existing laws of the EU at the time of joining
unless transitional arrangements have been previously agreed.
In the UK, the Tobacco Advertising and Promotion Act was adopted in 2002. The
Act prohibited 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 bans 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 2002,
giving wide-ranging powers to the Office of Tobacco Control. In January 2003,
the Minister for Health and Children announced that he would repeal all but one
of the provisions of the Act (that relating to smoking in the workplace,
including bars and hospitality premises), as they had not been notified to the
EU under the Technical Standards Directive. In August 2003, a new Bill was
published giving effect to two EU Directives and a EU Recommendation relating to
tobacco. The Bill includes provision for a comprehensive ban on tobacco
advertising sponsorship and measures relating to the manufacture and sale of
tobacco products.
In Germany, the Government introduced a law on the protection of young people in
2002 whereby the sale of tobacco products to persons under 16 years is
prohibited. In addition, from 2007 cigarettes may only be bought from vending
machines which have youth protection technology installed i.e., consumers will
have to verify their age, for instance, by using age encoded chip cards.
In France, the Government enacted a law in 2003 seeking to restrict tobacco
consumption among young people. The law prohibits: the sale of cigarettes to
children under 16 years; the free distribution of cigarettes to minors; and,
packs of less than 19 cigarettes.
In the Netherlands, the Government has recently introduced tobacco ingredient
disclosure regulations. In August 2003, Gallaher and Philip Morris International
commenced a joint legal challenge to the Dutch regulations, which, Gallaher
believes, do not provide adequate protection for brand recipes. Other tobacco
companies including British American Tobacco and Japan Tobacco International
have also commenced legal proceedings.
In Russia, a federal law on restrictions on the smoking of tobacco came into
force in 2002. The legislation prohibits: smoking in some public places; the
sale of cigarettes to those under 18 years of age; and, the sale of 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 was prohibited, and tobacco products
must display a general and rotational health warning and tar and nicotine smoke
yields.
In the Ukraine, the Parliament approved a Bill in July 2003, restricting tobacco
advertising in the printed media and prohibiting it entirely on television and
radio.
Taxation
In 2002, the EU adopted a Directive increasing the minimum excise rates on all
tobacco products. The provisions also include the introduction of a minimum
excise burden of 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 allowed by the Directive. Member States may also
introduce a minimum excise duty on lower priced cigarettes provided that such
excise duty does not exceed the amount on the most popular price category.
EU Accession Countries will be required to implement significant duty increases
in order to comply with the minimum cigarette excise tax requirements. Many have
been allowed transitional periods - the longest until January 2010 - in which to
comply. 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. The Austrian Government for instance is committed to maintaining the
25-cigarette import limit for Austrians travelling to such EU Accession
Countries. Any increase to the limit could result in significant market decline.
In the UK, tobacco duty was raised in line with inflation in April 2003. 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="0"
purchases). 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. There has
also been an increase in the amount of non-UK duty paid cigarettes and
handrolling tobacco being purchased by travellers returning to the UK from the
EU.
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") and the proposed Euro1 per pack cigarette excise tax
increase in Germany. In France, cigarette taxes increased by 8% in January 2003.
Additionally, there will be a further tax increase in September 2003.
Furthermore, the French Health Ministry has proposed that prices should double
over the next four years, from Euro3.90 to Euro7.50. In Sweden, the introduction of a
minimum excise tax has increased excise payments on lower priced brands by over
8%.
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. As at 29 August 2003,
Gallaher is involved as a defendant in three dormant individual cases in
Scotland where plaintiffs seek damages for ailments claimed to have resulted
from tobacco use. In the Republic of Ireland, the number of individual claims
against Group subsidiaries is currently 14.
Of the 151 claims that have been dismissed or abandoned since 1997, 10
individual plaintiffs have appealed against dismissal. Of the remaining 14
claims, eight 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. Gallaher is
not a party to smoking litigation anywhere else in the world.
It is not possible to predict the outcome of the pending litigation and whilst
there can be no guarantees 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.
Liggett-Ducat continues to be involved in court processes relating to payments
allegedly due for unpaid penalties and fines claimed by the Russian tax
authorities. As at 29 August 2003, the challenges that have been made to the
claims have been successful. Based upon the facts and matters currently known,
management considers that there are meritorious defences against these actions
and that they will be vigorously defended.
Gallaher Group Plc
Group Profit and Loss Account
SIX MONTHS ENDED 30 JUNE 2003
Six months
ended
Six months 30 June Year ended
ended 2002 31 Dec.
30 June 2003 (restated) 2002
US$m * #m #m #m
Turnover of the Group including its share of 7,136 4,325 4,120 8,422
joint ventures and associate
Less share of turnover of joint ventures and (828) (502) (459) (962)
associate
------------- ------------- ------------- -------------
Group turnover 6,308 3,823 3,661 7,460
------------- ------------- ------------- -------------
Group operating profit before exceptional 436 264 247 498
charge
Exceptional charge (63) (38) - -
------------- ------------- ------------- -------------
Group operating profit 373 226 247 498
Share of operating profits of joint ventures - - 5 7
and associate
------------- ------------- ------------- -------------
Total operating profit 373 226 252 505
Net interest and other financing charges (111) (67) (68) (134)
Net retirement benefits financing income 5 3 4 7
------------- ------------- ------------- -------------
Total net interest and other financing (106) (64) (64) (127)
charges
------------- ------------- ------------- -------------
Profit on ordinary activities before taxation 267 162 188 378
Tax on profit on ordinary activities (94) (57) (59) (119)
------------- ------------- ------------- -------------
Profit on ordinary activities after taxation 173 105 129 259
Equity minority interests (5) (3) (2) (4)
------------- ------------- ------------- -------------
Profit for the financial period 168 102 127 255
Dividends (102) (62) (57) (179)
------------- ------------- ------------- -------------
Retained profit for the period 66 40 70 76
------------- ------------- ------------- -------------
Earnings per ordinary share
- Basic 25.9c 15.7p 19.5p 39.3p
- Adjusted (a) 43.9c 26.6p 25.2p 51.2p
- Diluted 25.7c 15.6p 19.5p 39.1p
Dividends per ordinary share
- Interim 15.6c 9.45p 8.80p
- Total for 2002 27.55p
There is no difference between the profit on ordinary activities before taxation
and the retained profit for the financial period stated above and their
historical cost equivalents. Turnover and operating results relate to continuing
operations.
Figures for the six months to 30 June 2002 have been restated to reflect the
adoption of FRS 17 (Retirement benefits) and certain other reclassifications as
explained in the notes to the interim statements.
(a) Before exceptional charge and intangible asset amortisation.
* US dollar equivalents are provided for reader convenience at the 30 June 2003
exchange rate of #1:US$1.650.
Gallaher Group Plc
Group Balance Sheet
AT 30 JUNE 2003
30 June
2002 31 Dec.
30 June 2003 (restated) 2002
US$m * #m #m #m
Fixed assets
Intangible 2,328 1,411 1,382 1,375
assets
Tangible 970 588 566 575
assets
Investments:
Investment in
joint ventures 7 4 3 6
Investment in
associate 183 111 109 109
Other investments 26 16 17 17
------------- ------------- ------------- -------------
216 131 129 132
------------- ------------- ------------- -------------
3,514 2,130 2,077 2,082
------------- ------------- ------------- -------------
Current assets
Stocks 1,165 706 464 466
Debtors 1,252 759 691 788
Non-liquid 2 1 2 1
investments
Cash and liquid 231 140 125 95
investments
------------- ------------- ------------- -------------
2,650 1,606 1,282 1,350
Creditors:
amounts falling
due within one
year
Borrowings (262) (159) (203) (201)
Other (1,893) (1,147) (953) (1,044)
------------- ------------- ------------- -------------
(2,155) (1,306) (1,156) (1,245)
------------- ------------- ------------- -------------
Net current 495 300 126 105
assets
------------- ------------- ------------- -------------
Creditors:
amounts due
after more than
one year
Borrowings (4,229) (2,563) (2,400) (2,387)
Other (10) (6) (11) (6)
------------- ------------- ------------- -------------
(4,239) (2,569) (2,411) (2,393)
Provisions for (122) (74) (47) (49)
liabilities and
charges
Net retirement (130) (79) (10) (82)
benefitsliability
------------- ------------- ------------- -------------
Net (482) (292) (265) (337)
liabilities
------------- ------------- ------------- -------------
Capital and
reserves
Called up share 107 65 65 65
capital
Share premium 193 117 112 117
account
Capital 13 8 8 8
redemption
reserve
Merger reserve 241 146 146 146
Other reserve (1,503) (911) (911) (911)
Profit and loss 419 254 289 213
account (including
retirement benefits
reserve)
------------- ------------- ------------- -------------
Equity (530) (321) (291) (362)
shareholders'
deficit
Equity minority 48 29 26 25
interests
------------- ------------- ------------- -------------
(482) (292) (265) (337)
------------- ------------- ------------- -------------
* US dollar equivalents are provided for reader convenience at the 30 June 2003
exchange rate of #1:US$1.650.
Gallaher Group Plc
Statement of Total Recognised Gains and Losses
SIX MONTHS ENDED 30 JUNE 2003
Six months
ended
Six months 30 June Year ended
ended 2002 31 Dec.
30 June 2003 (restated) 2002
US$m * #m #m #m
Profit for the 168 102 127 255
financial
period
Actuarial loss - - - (108)
recognised on
retirement
benefits
Movement on - - - 30
deferred tax
relating to
actuarial loss
on retirement
benefits
Exchange 2 1 (18) (22)
adjustments on
foreign currency
net investments
------------- -------------
Total recognised 109 155
gains and losses
previously
reported
-------------
Prior year (22)
adjustment
------------- ------------- -------------
Total recognised 170 103 87
gains and losses
in the period
------------- ------------- -------------
Reconciliation of Movements in Equity Shareholders' Deficit
SIX MONTHS ENDED 30 JUNE 2003
Six months
ended
Six months 30 June Year ended
ended 2002 31 Dec.
30 June 2003 (restated) 2002
US$m * #m #m #m
Profit for the 168 102 127 255
financial period
Dividends (102) (62) (57) (179)
Actuarial loss - - - (108)
recognised on
retirement
benefits
Movement on - - - 30
deferred tax
relating to
actuarial loss
on retirement
benefits
Exchange 2 1 (18) (22)
adjustments on
foreign currency
net
investments
Amounts deducted - - (5) (5)
from profit and
loss reserve
in respect of
shares issued to
the QUEST
Issue of - - 7 12
ordinary shares
------------- ------------- ------------- -------------
Net movement in 68 41 54 (17)
equity
shareholders'
deficit
Opening equity (323)
shareholders'
deficit -
previously
reported
Prior year (22)
adjustment
Opening equity (597) (362) (345) (345)
shareholders'
deficit
------------- ------------- ------------- -------------
Closing equity (529) (321) (291) (362)
shareholders'
deficit
------------- ------------- ------------- -------------
* US dollar equivalents are provided for reader convenience at the 30 June 2003
exchange rate of #1:US$1.650.
Gallaher Group Plc
Group Cash Flow Statement
SIX MONTHS ENDED 30 JUNE 2003
Six months
Six months ended Year ended
ended 30 June 31 Dec.
30 June 2003 2002 2002
US$m * #m #m #m
Net cash inflow 462 280 283 519
from operating
activities
Dividends 15 9 7 12
received from
associate and
joint ventures
Returns on (84) (51) (53) (135)
investments and
servicing of
finance
Taxation (68) (41) (52) (101)
Net capital (102) (62) (42) (110)
expenditure
Financial - - 1 1
investment
Acquisitions and (2) (1) (5) (14)
disposals
Equity cash (201) (122) (112) (169)
dividends paid
------------- ------------- ------------- -------------
Net cash inflow 20 12 27 3
before management
of liquid resources
and financing
Management of (3) (2) - 1
liquid resources
Increase/ 46 28 (68) (7)
(decrease) in
debt
Issue of - - - 4
ordinary
shares
------------- ------------- ------------- -------------
Financing 46 28 (68) (3)
------------- ------------- ------------- -------------
Increase/ 63 38 (41) 1
(decrease) in
net cash in the
period
------------- ------------- ------------- -------------
Reconciliation of Operating Profit to Net Cash Flow from Operating Activities
SIX MONTHS ENDED 30 JUNE 2003
Six months
ended
Six months 30 June Year ended
ended 2002 31 Dec.
30 June 2003 (restated) 2002
US$m * #m #m #m
Group operating 373 226 247 498
profit
Depreciation of 84 51 35 74
tangible fixed
assets
Amortisation of 63 38 35 72
intangible fixed
assets
Amortisation of 2 1 1 3
other fixed
assets
Profit on sale - - (1) (1)
of tangible
fixed assets
Decrease/ 79 48 (13) (127)
(increase) in
debtors
Increase in (364) (221) (68) (68)
stocks
Increase in 232 141 44 71
creditors and
provisions
(Decrease)/ (7) (4) 3 (3)
increase in net
retirement
benefits
liability
------------- ------------- ------------- -------------
Net cash inflow 462 280 283 519
from operating
activities
------------- ------------- ------------- -------------
Note: Group operating profit, and the adjustments below this figure, exclude
results relating to joint ventures and associate.
* US dollar equivalents are provided for reader convenience at the 30 June 2003
exchange rate of #1:US$1.650.
Gallaher Group Plc
Reconciliation of Net Cash Flow to Movement in Net Debt
SIX MONTHS ENDED 30 JUNE 2003
Six months
Six months ended Year ended
ended 30 June 31 Dec.
30 June 2003 2002 2002
US$m * #m #m #m
Increase/ 63 38 (41) 1
(decrease) in
net cash in the
period
Increase/ 3 2 - (1)
(decrease) in
liquid resources
(Increase)/ (46) (28) 68 7
decrease in debt
------------- ------------- ------------- -------------
Change in net 20 12 27 7
debt resulting
from cash flows
Exchange (167) (101) (80) (74)
adjustments
Loans acquired - - - (1)
with subsidiary
------------- ------------- ------------- -------------
Movement in net (147) (89) (53) (68)
debt in the
period
Opening net (4,113) (2,493) (2,425) (2,425)
debt
------------- ------------- ------------- -------------
Closing net (4,260) (2,582) (2,478) (2,493)
debt
------------- ------------- ------------- -------------
* US dollar equivalents are provided for reader convenience at the 30 June 2003
exchange rate of #1:US$1.650.
Gallaher Group Plc
Segmental Information (by Destination)
SIX MONTHS ENDED 30 JUNE 2003
Six months
ended
Six months 30 June Year ended
ended 2002 31 Dec.
30 June 2003 (restated) 2002
US$m * #m #m #m
Total Turnover
UK 2,901 1,758 1,876 3,720
Continental Europe 3,567 2,162 1,884 3,899
CIS 270 164 151 331
Rest of World 398 241 209 472
------------- ------------- ------------- -------------
7,136 4,325 4,120 8,422
------------- ------------- ------------- -------------
Duty
UK 2,430 1,473 1,574 3,127
Continental Europe 1,464 887 760 1,574
CIS 56 34 22 50
Rest of World 295 179 161 350
------------- ------------- ------------- -------------
4,245 2,573 2,517 5,101
------------- ------------- ------------- -------------
Total Operating profit
UK
- before amortisation 236 143 145 283
of intangible assets
and exceptional
charge
- amortisation of (2) (1) (1) (2)
intangible assets
- exceptional charge (28) (17) - -
------------- ------------- ------------- -------------
206 125 144 281
Continental Europe
- before amortisation 203 123 106 213
of intangible
assets and
exceptional
charge
- amortisation of (57) (35) (31) (65)
intangible assets
- exceptional charge (2) (1) - -
------------- ------------- ------------- -------------
144 87 75 148
CIS
- before amortisation 23 14 19 42
of intangible
assets
- amortisation of (8) (5) (5) (10)
intangible assets
------------- ------------- ------------- -------------
15 9 14 32
Rest of World
- before amortisation 41 25 19 44
of intangible
assets and exceptional
charge
- exceptional charge (33) (20) - -
------------- ------------- ------------- -------------
8 5 19 44
Total
- before amortisation 503 305 289 582
of intangible
assets and
exceptional
charge
- amortisation of (67) (41) (37) (77)
intangible
assets
- exceptional charge (63) (38) - -
------------- ------------- ------------- -------------
373 226 252 505
------------- ------------- ------------- -------------
* US dollar equivalents are provided for reader convenience at the 30 June 2003
exchange rate of #1:US$1.650.
Notes to the Interim Statements
1. Basis of preparation of the accounts
The interim report has been prepared using accounting policies consistent with
those of Gallaher Group Plc for the year ended 31 December 2002. The accounts
for the six months to 30 June 2003, and those for the comparative period, are
unaudited, but have been reviewed by the Auditors. The review report of the
Auditors follows the notes to the Interim Statements. The figures for the year
ended 31 December 2002 are an abridged version of the Group's published
financial statements for that year which contain an unqualified audit report and
which have been filed with the registrar of companies.
The adoption of FRS 17 (Retirement Benefits) has resulted in the following
restatements to the profit and loss account for the six months ended 30 June
2002 and the balance sheet at 30 June 2002:
Previously
reported Change As restated
#m #m #m
Total operating profit 255 (3) 252
Total net interest and other financing (68) 4 (64)
charges
--------- --------- ---------
Profit on ordinary activities before 187 1 188
taxation
Debtors 792 (101) 691
Provisions for liabilities and (138) 91 (47)
charges
Net retirement benefits liability - (10) (10)
Equity shareholders' deficit (271) (20) (291)
To bring Group practice in line with a standard introduced in the United States
in the second half of 2002, certain sales related incentive costs, previously
included within marketing expenditure, were charged against turnover in the 2002
full year financial statements. This had no impact on EBITA and operating profit
but did slightly increase margins.
Similarly, following a change in German statutory reporting requirements,
Lekkerland-Tobaccoland ("L-T") 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. This
change was also reflected in the 2002 full year financial statements.
Although the impact of these reclassifications is not significant, comparative
results for the six months ended 30 June 2002 have been restated.
2. Exceptional charge
In May 2003, Gallaher announced the restructuring of its European
operations and an exceptional charge of #38m has been included in the results
for the six months to 30 June 2003. The charge primarily relates to estimated
redundancy costs and the impairment of operational plant and machinery. The
effective tax credit associated with this exceptional charge is #8m.
3. Taxation
The tax charges have been calculated using a forecast of the effective tax rate
for each full year, adjusted for the effect of significant events arising in
each six month period.
4. Retirement Benefits
The net retirement benefits liability shown in the balance sheet is the amount
calculated as at 31 December 2002, adjusted for contributions, charges and
finance income in the period. No interim revaluation of the assets and
liabilities of the retirement benefit schemes has been carried out to 30 June
2003 and accordingly, there is no actuarial gain or loss shown in the Statement
of Total Recognised Gains and Losses in respect of the half year. The figures
for the gains and losses and the surplus/deficit for the year to 31 December
2003 will be presented in the annual report to 31 December 2003.
5. Earnings per share
Basic and adjusted earnings per ordinary share are calculated using the weighted
average number of ordinary shares outstanding during the period. Diluted
earnings per share have been calculated by taking into account the weighted
average number of shares that would be issued on conversion into ordinary shares
of options held under the employee sharesave scheme.
Six months
Six months ended Year ended
ended 30 June 2002 31 Dec.
30 June 2003 (restated) 2002
Earnings per share (pence):
Basic 15.7 19.5 39.3
Adjustment for 4.7 - -
exceptional charge (net
of tax)
Adjustment for 6.2 5.7 11.9
intangible asset
amortisation
---------------- ---------------- ----------------
Adjusted 26.6 25.2 51.2
---------------- ---------------- ----------------
Earnings (#m):
Basic 102 127 255
Adjustment for 30 - -
exceptional charge (net
of tax - #8m)
Adjustment for 41 37 77
intangible asset
amortisation
---------------- ---------------- ----------------
Adjusted earnings 173 164 332
---------------- ---------------- ----------------
Weighted average number
of shares:
Ordinary shares in 651,590,464 649,904,123 650,514,242
issue
Shares held by employee (1,731,927) (2,010,819) (2,160,420)
share trusts
---------------- ---------------- ----------------
Shares used in the 649,858,537 647,893,304 648,353,822
calculation of basic
and adjusted
earnings per share
Potentially dilutive 1,724,067 2,476,610 2,316,203
share options
---------------- ---------------- ----------------
Shares used in the 651,582,604 650,369,914 650,670,025
calculation of diluted
earnings per
share
---------------- ---------------- ----------------
6. Contingent Liabilities
In Saudi Arabia, a former distributor of Gallaher International Limited
began a mediation process in 2001 against American Tobacco Company, British
American Tobacco and Gallaher International, related to the termination of a
distribution agreement in October 1995 and claiming damages of US$39,750,000. At
a mediation hearing in June 2001 Gallaher rejected the claim against it in its
entirety, indicating that any proceedings would be vigorously resisted. That
position was subsequently confirmed in writing in July 2001. Gallaher has
received no further communication from the mediator since then.
Gallaher Group Plc
Independent Review Report to Gallaher Group Plc
Introduction
We have been instructed by the company to review the financial information,
which comprises the profit and loss account, the balance sheet, the cash flow
statement, the statement of total recognised gains and losses and the related
notes. We have read the other information contained in the interim report and
considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and therefore
provides a lower level of assurance than an audit. Accordingly we do not express
an audit opinion on the financial information. This report, including the
conclusion, has been prepared for and only for the company for the purpose of
the Listing Rules of the Financial Services Authority and for no other purpose.
We do not, in producing this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or into whose
hands it may come save where expressly agreed by our prior consent in writing.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2003.
PricewaterhouseCoopers LLP
Chartered Accountants
London
2 September 2003
Notes:
(a) The maintenance and integrity of the Gallaher Group Plc website is the
responsibility of the directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the interim report
since it was initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and
dissemination of financial information may differ from legislation in other
jurisdictions.
Gallaher Group Plc
Cautionary statement
This announcement includes forward-looking statements within the meaning of the
US securities laws. 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, litigation outcomes and
timetables, the impact of the restructuring of the European operations, the
successful integration of acquisitions and joint ventures into our group 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, political or commercial conditions, foreign exchange rate
fluctuation, interest rate fluctuations, 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, production or distribution disruptions,
difficulty in managing growth, declining demand for tobacco products, increasing
dependence on sales in the CIS, changes in the supply of tobacco, non payment of
receivables by Gallaher's distributors, the ability to continue Gallaher's
Eurasian expansion, 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. The term "R.J. Reynolds" refers to R.J. Reynolds Tobacco Holdings,
Inc. The term "Reynolds-Gallaher International" refers to the joint venture
company, Reynolds-Gallaher International SARL.
This information is provided by RNS
The company news service from the London Stock Exchange
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IR SSDFAESDSEDU
