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BTI - British American Tobacco p.l.c. - Preliminary announcement - year ended 31
December 2011
British American Tobacco p.l.c.
Incorporated in England and Wales
(Registration number: 03407696)
Short name: BATS
Share code: BTI
ISIN number: GB0002875804
("British American Tobacco p.l.c." or "the Company")
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2011
SUMMARY
2011 2010 Change
Revenue GBP15,399m GBP14,883m +3%
Adjusted profit from GBP5,519m GBP4,984m +11%
operations
Profit from operations GBP4,721m GBP4,318m +9%
Adjusted diluted 194.6p 175.7p +11%
earnings per share
Basic earnings per 157.1p 145.2p +8%
share
Dividends per share 126.5p 114.2p +11%
The Group`s organic revenue at constant rates of
exchange grew by 7 per cent with continued good pricing
momentum. Reported Group revenue was up 3 per cent.
Adjusted Group profit from operations increased by 11
per cent. All the regions contributed to this good
profit result. The reported profit from operations was
9 per cent higher at GBP4,721 million. The adjusting
items are set out on page 11 and detailed on pages 22
to 23.
Group volumes were 705 billion, down 0.4 per cent as
the overall market share of the Group increased and
industry volume decline moderated.
The four Global Drive Brands achieved excellent volume
growth of 9 per cent. Dunhill volumes were slightly
higher, Kent was up 10 per cent, Lucky Strike 14 per
cent and Pall Mall grew by 11 per cent.
Adjusted diluted earnings per share rose by 11 per
cent, principally as a result of the growth in profit
from operations. Basic earnings per share were up 8
per cent at 157.1p (2010: 145.2p).
The Board is recommending a final dividend of 88.4p,
payable on 3 May 2012. The total dividend in respect of
2011 is 126.5p, an increase of 11 per cent.
Free cash flow increased by 3 per cent to GBP3,326
million, 86 per cent of adjusted earnings.
28 million shares were bought back at a cost of GBP750
million, excluding transaction costs. A continuation of
the share buy-back to a value of GBP1.25 billion has
been agreed by the Board.
The Chairman, Richard Burrows, commented "2011 has been
a very successful year for your Company and we carry
momentum in market share growth and margin improvement
into 2012. The economic climate around the world is
far from settled but we remain confident that our
strategy should continue to generate growth for our
shareholders in the years ahead."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph 020 7845 Kate Matrunola/ 02020 020
Edmondson/ 1180 Catherine Armstrong 7845 2888
Mike 020 7845
Nightingale/ 1206
Rachael 020 7845
Brierley/ 1519
Maya Farhat 020 7845
1977
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2011
CONTENTS
PAGE
BUSINESS REVIEW:
Chairman`s statement 2
Extract from Chief Executive`s review 3
Regional review 4
Results of associates 8
Dividends 9
Risks and uncertainties 10
Going concern 10
Directors` responsibility statement 10
FINANCIAL STATEMENTS:
Group income statement 11
Group statement of comprehensive income 12
Group statement of changes in equity 13
Group balance sheet 14
Group cash flow statement 16
Accounting policies and basis of preparation 17
Non-GAAP measures* 17
Foreign currencies 18
Segmental analyses of revenue and profit 18
Adjusting items included in profit from operations 22
Other changes in the Group 23
Net finance costs 24
Associates and joint ventures 25
Taxation 26
Earnings per share 27
Cash flow and net debt movements 29
Retirement benefit schemes 33
Litigation: Franked Investment Income Group Litigation 33
Order
Contingent liabilities and financial commitments 33
Related party disclosures 52
Share buy-back programme 52
Non-Executive Director: Conflict of interest and Audit 52
Committee membership
Annual report 52
SHAREHOLDER INFORMATION:
Financial calendar 2012 53
Calendar for the final dividend 2011 53
Corporate information 53
Disclaimers 55
Distribution of report 55
APPENDICES:
Appendix 1 - Analysis of revenue and profit from 56
operations 57
Appendix 2 - Key Group risk factors 64
Appendix 3 - Related party disclosures
*Non-GAAP measures referred to and used in the
preliminary announcement, such as adjusted profit from
operations, organic growth and adjusted diluted earnings
per share, are explained on page 17.
CHAIRMAN`S STATEMENT
2011 has been a very successful year for your Company. While economic
uncertainty continues, our operating environment improved during 2011. Our
results for the year are driven by revenue growth, an improved operating margin,
and growth in market share due to our successful brands, enhanced by the roll-
out of product and packaging innovations.
Market share growth
Overall, industry volumes continued to decline in 2011 but there are signs that
the rate of decline has moderated. Our own volumes were down marginally by 0.4
per cent and we grew market share during the year. These positive results were
spread across many markets around the world.
The expansion of illicit trade is a continuing and growing threat to the
business. Sharp increases in excise duty, pressure on consumers` disposable
income, and ill-considered regulation of our industry, are all making life
easier and more lucrative for traders of illicit products, both contraband and
counterfeit.
Increasing returns to shareholders
Using constant currency exchange rates, revenue rose by 7 per cent on an organic
basis. Adjusted profit from operations grew by 11 per cent to GBP5,519 million,
or by 10 per cent at constant currency exchange rates.
This is reflected in the adjusted diluted earnings per share for 2011 improving
by 11 per cent to 194.6p.
The Board has recommended a final dividend of 88.4p per share, which will be
paid on 3 May 2012 to shareholders on the register at 9 March 2012. This takes
the total dividend for the year to 126.5p, an increase of 11 per cent on last
year, and maintains our target of paying out 65 per cent of earnings in
dividends.
In addition, following the suspension of our share buy-back programme in 2009,
the Board approved the resumption of the programme in 2011. Between the
beginning of March and the end of December 2011, some 28 million shares were
repurchased at a value of GBP750 million, excluding transaction costs.
A continuation of the share buy-back to a value of GBP1.25 billion has been
agreed by the Board.
Board and Audit Committee changes
Ana Maria Llopis retired from the board after the AGM in April 2011. Ann
Godbehere, a Canadian, joined the Board as a Non-Executive Director on 3 October
2011. Paul Adams, former Chief Executive, retired at the end of February 2011
and was succeeded by Nicandro Durante who was introduced to shareholders in his
new role at the AGM.
Christine Morin-Postel has resigned as a member of the Audit Committee with
effect from 21 February 2012 due to a personal conflict of interest, details of
which are set out at the end of this Preliminary Announcement.
Sustainability
Over the years we have built a strong reputation for corporate social
responsibility and sustainability and have been recognised as leaders in our
industry. For example, we were the first tobacco company to be included in the
Dow Jones Sustainability World Index and were included again in 2011. This focus
on running our business responsibly helps us create value for our shareholders
as well as being in the best interests of our other stakeholders.
Continued success
I express my thanks and appreciation to my fellow Directors on the Board; to
management; to our Chief Executive, Nicandro Durante; and, in particular, to all
our 56,000 colleagues around the world.
2011 has been a very successful year for your Company and we carry momentum in
market share growth and margin improvement into 2012. The economic climate
around the world is far from settled but we remain confident that our strategy
should continue to generate growth for our shareholders in the years ahead.
Richard Burrows
22 February 2012
EXTRACT FROM CHIEF EXECUTIVE`S REVIEW
Our proven strategy continues to deliver
The strength of our brands, our consumer-centric innovative products and the
quality of our people have delivered another year of very good earnings growth.
The Group increased overall market share in 2010 and this continued in 2011
despite challenging economic conditions in some markets.
There are signs that the industry volume decline seen in recent years is
moderating but substantial excise-driven price increases in a few markets
continue to affect overall volumes. While industry volume declined again in
2011, our share improvement ensured that Group volumes were virtually unchanged,
down just 0.4 per cent year on year.
Our Global Drive Brands and other international brands once again achieved good
growth in 2011, driven by the launch of product innovations such as Click &
Roll, Reloc and Convertibles in key markets, better retailer relationships and
by improving our speed to market.
Group revenue grew by 7 per cent on an organic basis and at constant rates of
exchange, driven by continued good pricing. The resulting increase in adjusted
profit from operations of 11 per cent has helped us to deliver superior returns
to shareholders once again, with adjusted diluted earnings per share up by 11
per cent on last year.
Our productivity continued to improve in 2011 as we further addressed our cost
base through factory rationalisation, systems standardisation and productivity
savings. This helped us achieve a substantial increase in operating margin from
33.5 to 35.8 per cent. This is well ahead of our target of improving overall
margin by 50-100 basis points per annum.
For the foreseeable future, the world market is likely to remain fairly stable
at around five and a half trillion cigarettes, more than 40 per cent of which
are sold in China. We expect overall market values to grow due to changes in the
product mix and we believe the value of emerging markets will grow more quickly.
Because of this, our geographic diversity and strong positions in emerging
markets remain a key strength.
The tobacco industry remained fairly stable during 2011, with little M&A
activity among the leading industry players. On 26 May 2011, the Group announced
that it had agreed to acquire 100 per cent of privately-owned Protabaco, the
second largest cigarette company in Colombia. The transaction was completed on
11 October 2011 and the deal was financed from internal resources.
We continue to monitor acquisition opportunities around the world and will
participate where it makes financial and strategic sense to do so.
The expansion of illicit trade remains a threat globally, driven by sharp excise
increases and pressure on consumers` disposable income. We support the
development of the World Health Organisation`s Framework Convention on Tobacco
Control (FCTC) protocol aimed at creating an international regulatory framework
for addressing illicit trade. However, we remain critical of other measures
proposed by the FCTC that may drive significant excise increases, retail display
bans and plain packaging - all of these measures could play into the hands of
organised crime by creating ideal conditions for further increases in illicit
trade.
Substantial opportunities
The last year has seen considerable success for the Group and I am excited when
I look to our strengths. We have some great brands and our marketing is based on
powerful consumer insights, supported by differentiated and superior products.
We have market-leading innovations - and we are getting better at deploying
them. We have a great business mix, with a strong presence in emerging markets
and a balanced product portfolio across all segments. We have a fully integrated
supply chain and our systems are becoming more efficient. We have an industry-
leading approach to science and harm reduction and, importantly, we have the
people capable of tackling the challenges ahead.
I am confident that we are well placed to take advantage of the substantial
opportunities ahead for our business and that we can continue to deliver
superior shareholder returns.
Nicandro Durante
22 February 2012
REGIONAL REVIEW
Against the backdrop of global financial uncertainty, generally lower disposable
incomes and political upheaval in some parts of the world, the Group delivered a
strong performance in 2011, achieving all the goals set as part of its long-term
strategy. Reported revenue grew by over 3 per cent as a result of continued good
pricing momentum and stable volumes. At constant rates of exchange, revenue was
up 4 per cent, while on an organic basis at constant rates of exchange, it
increased by 7 per cent.
The reported profit from operations was 9 per cent higher at GBP4,721 million
with an 11 per cent increase in adjusted profit from operations, as explained on
pages 22 to 23. At constant rates of exchange, the adjusted profit increase was
10 per cent. All the regions contributed to this good profit result. Organic
adjusted Group profit from operations, at constant rates of exchange, also
increased by 10 per cent.
Group volumes from subsidiaries were 705 billion, down by 3 billion or 0.4 per
cent. Organic volumes were also 0.4 per cent lower. The Group again grew overall
market share in its Top 40 markets.
The four Global Drive Brands achieved excellent overall volume growth of 9 per
cent following the successful launches of innovations, resulting in the
continued improvement in market share. Dunhill volumes increased slightly as
strong growth in Brazil, Romania and the GCC, and good performances by Malaysia
and Russia, were offset by a decline in South Korea which was affected by
competitor pricing. Excluding the volumes in South Korea, Dunhill volumes were
up 8 per cent. Kent was 10 per cent higher with increased volumes in Romania,
Ukraine, Russia, Egypt and Japan.
Lucky Strike increased volumes by 14 per cent with growth in Spain, Germany,
France, Italy, Japan, Chile and Brazil. Pall Mall volumes rose by 11 per cent
with strong growth in Pakistan, Turkey, Russia and Canada, partially offset by
lower volumes in Mexico and Spain.
The Group announced at the end of 2010 that as part of the plans to reduce
complexity, drive efficiency in management structures and achieve a better
balance in the scale of our regions, it had decided to reduce the management
structure from five to four regions from 1 January 2011. Markets which comprised
the Eastern Europe region, were merged into the Africa and Middle East region
and the Western Europe region. Russia, Ukraine, Moldova, Belarus, Caucasus and
Central Asia form part of the new Eastern Europe, Middle East and Africa region
(EEMEA), while Romania, Bulgaria, Serbia, Montenegro, Albania and Kosovo form
part of the Western Europe region. The 2010 information has been reallocated on
the basis of the new regional structure.
Adjusted profit from operations* at constant and current rates of exchange is as
follows:
2011 2010
Adjusted
Adjusted profit profit
from operations* from
operatio
ns*
Consta Curren
nt t
rates rates
GBPm GBPm GBPm
Asia-Pacific 1,480 1,539 1,332
Americas 1,440 1,441 1,382
Western Europe 1,204 1,228 1,103
EEMEA 1,362 1,311 1,16
7
5,486 5,519 4,98
4
*Adjusted profit from operations (page 11) is derived after excluding adjusting
items from profit from operations. Adjusting items include restructuring and
integration costs, amortisation of trademarks, goodwill impairments and the Fox
River provision as explained on pages 22 and 23.
Regional review cont...
In Asia-Pacific, profit was up GBP207 million to GBP1,539 million as a result of
strong performances in Japan, Bangladesh and Taiwan and favourable exchange
rates in Australia, Japan and New Zealand. At constant rates of exchange, profit
increased by GBP148 million or 11 per cent. Volumes at 191 billion were up 2 per
cent, with increases in Japan, Pakistan and Indonesia partially offset by lower
volumes in South Korea, Australia and New Zealand.
In Australia, the steep excise increase during 2010 impacted industry volumes.
Profit was up as a result of cost saving initiatives, favourable exchange
movements and higher pricing, partially offset by additional costs associated
with the campaign against plain packaging. Market share was slightly lower
although Pall Mall performed well. In New Zealand, volumes decreased following
an ad-hoc excise increase in January 2011. Profit was lower as pricing and
favourable exchange rate movements were more than offset by lower volumes.
Market share grew in Malaysia, driven by the strong performances of Dunhill and
Peter Stuyvesant, although total industry volumes were lower following the
excise led price increases in 2010. Profit was higher, mainly as a result of
exchange rate movements.
In Japan, industry volumes were down sharply following a significant excise
increase in October 2010. However, as a result of the disruption to domestic
production following the tragic events in March 2011, the Group delivered an
exceptionally strong growth in profit and volumes for the year, with underlying
market share higher.
In Vietnam, volumes and market share grew but profit was adversely impacted by
high inflation and an exchange rate devaluation, partially offset by higher
pricing and cost saving initiatives.
Profit in South Korea was impacted by competitor pricing and significant
marketing investment, following a price increase by the Group`s business at the
end of April 2011, the first in the industry in over six years. Lower volumes
also led to a reduction in market share.
In Taiwan, significant profit growth was driven by higher volumes and improved
industry pricing. Good performances by Dunhill and Pall Mall achieved higher
market share.
Volume growth in Pakistan led to a strong increase in market share as Pall Mall
performed well, more than doubling its volumes. Profit was stable, adversely
impacted by higher special excise duties, high inflation and severe price
competition in the low-priced segment. In Bangladesh, both market share and
volumes grew due to the strong performance of Benson & Hedges. Profit increased
as a result of higher volumes, price increases and tight control of costs.
Profit grew in Indonesia following higher volumes, price increases and synergies
resulting from the integration of the business units during 2010 which were
partially offset by higher clove prices and marketing investment. Market share
was marginally lower as the growth of the mild kretek brands was more than
offset by the rationalisation of the brand portfolio.
In Americas, profit rose by GBP59 million to GBP1,441 million, mainly
attributable to a strong performance from Brazil, Venezuela and Mexico and an
improved product mix across the region. At constant rates of exchange, profit
rose by GBP58 million or 4 per cent. Volumes were down 4 per cent at 143
billion, mainly as a result of decreases in Mexico, Brazil, Chile and Venezuela.
In Brazil, strong profit growth was driven by an improved product mix and higher
pricing. Market share and volumes were slightly lower due to the growth of local
duty evaded product. However, volume, share in the premium segment and share
compared to international competitors continued to grow as a result of the solid
performances of Lucky Strike, Dunhill and Free.
Industry volumes were lower in Canada as a result of increased illicit trade,
with aggressive price competition in the low-priced segment fuelling down-
trading. These factors adversely impacted volumes, market share and profit,
although du Maurier and Vogue maintained their share in the premium segment and
John Player Standard remained the number one brand in Canada.
In Mexico, industry volumes declined sharply as a result of excise-led price
increases at the beginning of 2011, as well as increased purchases by the trade
during December 2010 in anticipation of the price increase. Market share was
marginally down on last year, while profit was higher, benefiting from increased
pricing and lower costs.
Regional review cont...
In Argentina, market share was lower despite the growth of Lucky Strike and the
successful launch of Dunhill. Marketing investment was higher with the launch of
new brands and competitors` pricing activities, impacting profitability. Lucky
Strike performed well in Chile, and the very strong market share was maintained.
Volumes were lower, following the steep excise-driven price increases, adversely
impacting profit.
Profit in Venezuela grew strongly as a result of higher pricing, partially
offset by increased costs and lower volumes, although market share rose. Volumes
were down due to industry declines and growth in illicit product. The Group
acquired Protabaco, the second largest cigarette company in Colombia, on 11
October 2011. Protabaco and British American Tobacco Colombia are operating from
January 2012 as one entity with a market share of almost 50 per cent.
Profit in Western Europe increased by GBP125 million to GBP1,228 million, mainly
as a result of strong performances in Germany, Switzerland, Italy, France and
Romania, partially offset by declines in Spain, the Netherlands and Greece. At
constant rates of exchange, profit increased by GBP101 million or 9 per cent.
Regional volumes were marginally lower at 135 billion as a result of declines in
Germany, Switzerland, Italy, Greece and Spain, partially offset by an increase
in Romania.
In Italy, volumes and market share were slightly lower although the Global Drive
Brands performed well. Good profit growth was the result of the improved product
mix, price increases and lower costs, partially offset by the effect of the
volume decline.
Profit increased in Germany as a result of higher pricing and lower costs. The
higher organic market share was driven by excellent performances by Pall Mall
and Lucky Strike although volumes decreased.
In France, volumes were higher and market share increased which, together with
improved pricing and lower product costs, led to an increase in profit. Lucky
Strike and Vogue performed well. Market share in Spain was up strongly, driven
by Pall Mall and Lucky Strike. Industry volumes were lower as a result of the
tough economic conditions, unemployment and an excise-driven price increase at
the end of 2010.
Profit was impacted by a price war during the middle of the year and lower
volumes.
Profit in Switzerland grew strongly as a result of reduced costs and increased
pricing. Volumes were lower but market share grew through the performance of
Kent and Pall Mall. Volumes and profit in Belgium and the Netherlands were lower
but market share increased in Belgium with Pall Mall and Lucky Strike performing
well.
In Romania, excellent increases in profit and volumes were achieved as the
industry benefited from the significant reduction in the level of illicit trade
following the strong action taken by the Government. Market share was higher,
led by Dunhill, Kent and Vogue.
In Poland, despite an industry volume decline, profit, volumes and market share
increased with the growth of Viceroy and Vogue. Market share in Greece was
higher and Peter Stuyvesant achieved leadership in the low-priced segment. The
partial absorption of excise increases by the industry over the last two years
contributed to a drop in profit. In the United Kingdom, Pall Mall performed
well, resulting in market share growth, which, coupled with price increases,
cost management and higher volumes, led to higher profit.
Profit was maintained in Denmark where industry volumes were adversely affected
by the impact of two significant excise-driven price increases. Market share was
recovering by the year end. In Sweden, profit improved as a result of lower
costs, improved pricing and volumes. Market share was also higher.
Regional review cont...
Profit from the Eastern Europe, Middle East and Africa region increased by
GBP144 million to GBP1,311 million. This was principally due to stable volumes
and price increases, partly offset by the adverse impact of exchange rate
movements. At constant rates of exchange, profit increased by GBP195 million or
17 per cent. Volumes at 236 billion were marginally higher than last year with
the increases in Egypt, GCC and Nigeria partially offset by the decline in
Turkey.
In Russia, market share grew, driven by Kent, supported by Dunhill, Pall Mall
and Vogue. Total volumes were in line with last year. Strong profit growth was
the result of price increases, an improved product mix and lower costs.
Market share in Ukraine was higher as volumes increased in a declining total
market, resulting in an increase in profit. Volumes, profit and market share
improved in Kazakhstan due to the strong performance of Pall Mall.
In Turkey, the 2010 excise-driven contraction of the market continued with the
government announcing an unexpected excise rise in October 2011, with a further
increase from January 2013. This, coupled with an increase in illicit trade,
resulted in a steep drop in volumes. Market share declined as a result of
competitor pricing activities. Kent and Pall Mall grew strongly and Lucky Strike
was launched, partially offsetting the volume losses of tail brands. Profit
reduced despite the improved product mix and significant savings initiatives.
In the GCC markets, volumes and market share increased and profit grew strongly,
mainly due to Dunhill`s excellent performance in all the markets. In Egypt,
volumes and market share continued to grow strongly despite the political
instability and a significant excise increase in June. Profit was impacted by
the absorption by manufacturers of some of the excise increases of 2010 and
2011. Rothmans expanded its leadership position amongst International Brands.
In Nigeria, volumes were up and market share continued to grow. Premium brands
posted impressive rises with Dunhill, Benson & Hedges and Rothmans the main
contributors. The improved product mix and higher volumes led to a strong
increase in profit. Growth in market share was primarily driven by marketing
investment. Improved government control saw a reduction in illicit trade.
In South Africa, market share strengthened due to the good performance of the
portfolio. There was a significant increase in the incidence of illicit trade
and down-trading to the low-priced segment. As a result, profit was in line with
last year.
The Group continued its investment in new markets, with the launch of Dunhill in
Morocco after an import and distribution licence was approved, while it
continued to build the business in Algeria.
Cigarette volumes
The segmental analysis of the volumes of subsidiaries is as follows:
6 months to 12 months to
30.6.11 30.6.10 31.12.11 31.12.10
bns bns bns bns
95 95 Asia- 191 188
Pacific
70 73 Americas 143 149
65 66 Western 135 136
Europe
114 114 EEMEA 236 235
344 348 705 708
RESULTS OF ASSOCIATES
Associates principally comprise Reynolds American and ITC.
The Group`s share of post-tax results of associates increased by GBP120 million,
or 22 per cent, to GBP670 million. The Group`s share of the adjusted post-tax
results of associates increased by 6 per cent to GBP659 million, with a rise of
11 per cent at constant rates of exchange.
The segmental analyses of the Group`s share of the adjusted* post-tax results of
associates and joint ventures are as follows:
2011 2010
Adjusted
Adjusted share of share of post-
post-tax results* tax results*
Consta Current
nt rates
rates
GBPm GBPm GBPm
Asia-Pacific 238 225 208
Americas 448 432 412
EEMEA 2 2 2
688 659 622
*Adjusted share of post-tax results of associates and joint ventures is after
the adjusting items, as shown on page 20 and explained on pages 25 and 26.
The adjusted contribution from Reynolds American increased by 5 per cent to
GBP429 million. At constant rates of exchange the increase was 9 per cent.
The Group`s contribution from its associate in India, ITC, was GBP218 million,
up 7 per cent. At constant rates of exchange, the contribution would have been
13 per cent higher than last year.
DIVIDENDS
The Board recommends a final dividend of 88.4 pence per ordinary share of 25p
for the year ended 31 December 2011. If approved by shareholders at the Annual
General Meeting to be held on 26 April 2012, the dividend will be payable on 3
May 2012 to shareholders registered on either the UK main register or the South
African branch register on 9 March 2012 (the record date).
In compliance with the requirements of Strate, the electronic settlement and
custody system used by the JSE Limited (JSE), the following salient dates for
the payment of the final dividend are applicable:
2012
Last Day to Trade (LDT) cum-dividend (JSE): 2 March (Friday)
Shares commence trading ex-dividend (JSE): 5 March (Monday)
Last Day to Trade (LDT) cum-dividend (LSE): 6 March (Tuesday)
Shares commence trading ex-dividend (LSE): 7 March (Wednesday)
Record date (JSE and LSE): 9 March (Friday)
Payment date: 3 May (Thursday)
As the Group reports in sterling, dividends are declared and payable in sterling
except for shareholders on the branch register in South Africa whose dividends
are payable in rand. A rate of exchange of GBP:R = 12.19960 as at 21 February
2012 (the closing rate on that date as quoted by Bloomberg), results in an
equivalent final dividend of 1078.44464 SA cents per ordinary share. From the
commencement of trading on 23 February 2012 until the close of business on 9
March 2012 (both days inclusive), no removal requests between the UK main
register and the South African branch register will be permitted. Further, no
transfers between the UK main register and the South African branch register
will be permitted and no shares may be dematerialised or rematerialised between
5 March 2012 and 9 March 2012, both days inclusive.
The following is a summary of the dividends declared for the years ended 31
December 2011 and 2010:
2011 2010
Pence GBPm Pence GBPm
per per
share share
Ordinary shares
Interim
- 2011 paid 28 38.1 738
September 2011
- 2010 paid 29 33.2 662
September 2010
Final
- 2011 payable 3 May 88.4 1,74
2012 1
- 2010 paid 5 May 2011 81.0 1,620
126.5 2,47 114.2 2,282
9
In accordance with IFRS, the proposed final dividend amounting to GBP1,741
million (2010: GBP1,620 million), payable on 3 May 2012, will be recognised in
the Group accounts for the year ending 31 December 2012. For the year ended 31
December 2011, the accounts include the final dividend paid in respect of the
year ended 31 December 2010, amounting to GBP1,620 million and the interim
dividend amounting to GBP738 million, paid on 28 September 2011. For the year
ended 31 December 2010, the accounts include the final dividend paid in respect
of the year ended 31 December 2009, amounting to GBP1,431 million and the 2010
interim dividend, amounting to GBP662 million.
RISKS AND UNCERTAINTIES
The principal risks and uncertainties affecting the business activities of the
Group were reviewed and updated and are summarised in a table that is attached
as appendix 2 to this announcement. The table provides a brief description of
the key risks to which the Group`s operations are exposed and it identifies, in
each case, their potential impact on the Group and the principal processes in
place to manage the risk.
- Illicit trade;
- Excise and tax;
- Financial;
- Marketplace; and
- Regulation.
The key Group risks should be read in the context of the cautionary statement
regarding forward looking statements on page 55.
GOING CONCERN
A description of the Group`s business activities, its financial position, cash
flows, liquidity position, facilities and borrowings position, together with the
factors likely to affect its future development, performance and position, are
set out in this announcement. Further information will be provided in the
Business Review and Financial Review and in the notes to the financial
statements, all of which will be included in the 2011 Annual Report that will be
available on the Group`s website, www.bat.com on 26 March 2012.
The Group has, at the date of this report, sufficient existing financing
available for its estimated requirements for at least the next twelve months.
This, together with the proven ability to generate cash from trading activities,
the performance of the Group`s Global Drive Brands, its leading market positions
in a number of countries and its broad geographical spread, as well as numerous
contracts with established customers and suppliers across different geographical
areas and industries, provides the Directors with the confidence that the Group
is well placed to manage its business risks successfully in the context of
current financial conditions and the general outlook in the global economy.
After reviewing the Group`s annual budget, plans and financing arrangements, as
well as the current trading activities of the Group, the Directors consider that
the Group has adequate resources to continue operating for the foreseeable
future and that it is therefore appropriate to continue to adopt the going
concern basis in preparing the Annual Report.
DIRECTORS` RESPONSIBILITY STATEMENT
The responsibility statement below has been prepared in connection with the
company`s full Annual Report for the year ended 31 December 2011. Certain parts
thereof are not included within this announcement.
We confirm to the best of our knowledge:
the financial statements, prepared in accordance with IFRS as adopted by the
European Union, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company and the Group; and
the Directors` report (which incorporates the business review), includes a fair
review of the development and performance of the business and the position of
the Group and the Company, together with a description of the principal risks
and uncertainties that they face.
This responsibility statement was approved by the Board of Directors on 22
February 2012 and is signed on its behalf by:
For and on behalf of the Board of Directors:
Richard Burrows Ben Stevens
Chairman Finance Director and Chief Information Officer
22 February 2012
GROUP INCOME STATEMENT
For the year ended 31 December
2011 2010
GBPm GBPm
Gross turnover (including duty, excise and other 46,123 43,855
taxes of GBP30,724 million (2010: GBP28,972
million))
Revenue 15,399 14,883
Raw materials and consumables used (3,507 (3,695)
)
Changes in inventories of finished goods and work 81 (12)
in progress
Employee benefit costs (2,501 (2,550)
)
Depreciation, amortisation and impairment costs (817) (897)
Other operating income 233 207
Other operating expenses (4,167 (3,618)
)
Profit from operations 4,721 4,318
Analysed as:
- adjusted profit from operations 5,519 4,984
- restructuring and integration costs (193) (311)
- amortisation of trademarks (58) (62)
- impairment of trademarks (44)
- goodwill impairment (273) (249)
- Fox River (274)
4,721 4,318
Finance income 117 27
Finance costs (577) (507)
Net finance costs (460) (480)
Share of post-tax results of associates and joint 670 550
ventures
Analysed as:
- adjusted share of post-tax results of associates 659 622
and joint ventures
- issue of shares and change in shareholding 28 (9)
- smoking cessation programme (23)
- gain on disposal of business 22
- Canadian settlements (59)
- other (see page 25) (16) (4)
670 550
Profit before taxation 4,931 4,388
Taxation on ordinary activities (1,556 (1,248)
)
Profit for the year 3,375 3,140
Attributable to:
Owners of the parent 3,095 2,879
Non-controlling interests 280 261
3,375 3,140
Earnings per share
Basic 157.1p 145.2p
Diluted 156.2p 144.4p
Adjusted diluted earnings per share 194.6p 175.7p
All of the activities during both years are in respect of continuing
operations.
The accompanying notes on pages 17 to 52 form an integral part of this
condensed consolidated financial information.
GROUP STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December
2011 2010
GBPm GBPm
Profit for the year (page 11) 3,375 3,140
Other comprehensive income
Differences on exchange
- subsidiaries (411) 502
- associates (109) 105
Differences on exchange reclassified and (4) (3)
reported in profit for the year
Cash flow hedges
- net fair value losses (21) (106)
- reclassified and reported in profit for the 38 55
year
- reclassified and reported in net assets (5) 3
Available-for-sale investments
- net fair value gains 26 4
- reclassified and reported in profit for the (1)
year
Net investment hedges
- net fair value gains/(losses) 62 (31)
- differences on exchange on borrowings (104) 74
Retirement benefit schemes
- net actuarial (losses)/gains in respect of (462) 193
subsidiaries
- surplus recognition and minimum funding 2 58
obligations in respect
of subsidiaries
- actuarial losses in respect of associates (67) (54)
net of tax
Tax on items recognised directly in other 20 1
comprehensive income
Total other comprehensive income for the year, (1,03 801
net of tax 6)
Total comprehensive income for the year, net 2,339 3,941
of tax
Attributable to:
Owners of the parent 2,094 3,664
Non-controlling interests 245 277
2,339 3,941
The accompanying notes on pages 17 to 52 form an integral part
of this condensed consolidated financial information.
GROUP STATEMENT OF CHANGES IN EQUITY
At 31 December
2011 Attributable to owners of the
parent
Shar Share Othe Reta Total Non- Total
e premiu r ined attrib contr equity
capi m, rese earn utable ollin GBPm
tal capita rves ings to g
GBPm l GBPm GBPm owners inter
redemp of ests
tion parent GBPm
and GBPm
merger
reserv
es
GBPm
Balance at 1 January 506 3,910 1,60 3,19 9,206 342 9,548
2011 0 0
Total comprehensive (488 2,58 2,094 245 2,339
income for the year ) 2
Profit for the year 3,09 3,095 280 3,375
(page 11) 5
Other comprehensive (488 (513 (1,001 (35) (1,036)
income for the year ) ) )
(page 12)
Employee share
options
- value of employee 76 76 76
services
- proceeds from 3 2 5 5
shares issued
Dividends and other
appropriations
- ordinary shares (2,3 (2,358 (2,358)
58) )
- to non-controlling (279) (279)
interests
Purchase of own
shares
- held in employee (123 (123) (123)
share ownership )
trusts
- share buy-back (755 (755) (755)
programme )
Non-controlling (10) (10) (10)
interests -
acquisitions
Other movements 32 32 (1) 31
Balance at 31 506 3,913 1,11 2,63 8,167 307 8,474
December 2011 2 6
2010 Attributable to owners of the
parent
Shar Share Othe Reta Total Non- Total
e premiu r ined attrib contr equity
capi m, rese earn utable ollin GBPm
tal capita rves ings to g
GBPm l GBPm GBPm owners inter
redemp of ests
tion parent GBPm
and GBPm
merger
reserv
es
GBPm
Balance at 1 January 506 3,907 1,03 2,16 7,613 299 7,912
2010 2 8
Total comprehensive 568 3,09 3,664 277 3,941
income for the year 6
Profit for the year 2,87 2,879 261 3,140
(page 11) 9
Other comprehensive 568 217 785 16 801
income for the year
(page 12)
Employee share
options
- value of employee 67 67 67
services
- proceeds from 3 4 7 7
shares issued
Dividends and other
appropriations
- ordinary shares (2,0 (2,093 (2,093)
93) )
- to non-controlling (234) (234)
interests
Purchase of own
shares
- held in employee (66) (66) (66)
share ownership
trusts
Non-controlling (12) (12) (12)
interests -
acquisitions
Other movements 26 26 26
Balance at 31 506 3,910 1,60 3,19 9,206 342 9,548
December 2010 0 0
The accompanying notes on pages 17 to 52 form an integral part of this
condensed consolidated financial information.
GROUP BALANCE SHEET
At 31 December
2011 2010
GBPm GBPm
Assets
Non-current assets
Intangible assets 11,99 12,458
2
Property, plant and equipment 3,047 3,117
Investments in associates and joint ventures 2,613 2,666
Retirement benefit assets 105 122
Deferred tax assets 343 411
Trade and other receivables 305 272
Available-for-sale investments 40 29
Derivative financial instruments 179 128
Total non-current assets 18,62 19,2
4 03
Current assets
Inventories 3,498 3,60
8
Income tax receivable 127 73
Trade and other receivables 2,423 2,40
9
Available-for-sale investments 57 58
Derivative financial instruments 159 145
Cash and cash equivalents 2,194 2,32
9
8,458 8,62
2
Assets classified as held-for-sale 37 35
Total current assets 8,495 8,65
7
Total assets 27,11 27,8
9 60
The accompanying notes on pages 17 to 52 form an integral part of
this condensed consolidated financial information.
GROUP BALANCE SHEET
At December 31
2011 2010
GBPm GBPm
Equity
Capital and reserves
Share capital 506 506
Share premium, capital redemption and merger 3,913 3,91
reserves 0
Other reserves 1,112 1,60
0
Retained earnings 2,636 3,19
0
Owners of the parent 8,167 9,20
6
after deducting
- cost of treasury shares (1,53 (750
9) )
Non-controlling interests 307 342
Total equity 8,474 9,54
8
Liabilities
Non-current liabilities
Borrowings 8,510 8,91
6
Retirement benefit liabilities 1,003 770
Deferred tax liabilities 556 509
Other provisions for liabilities and charges 458 187
Trade and other payables 184 193
Derivative financial instruments 87 92
Total non-current liabilities 10,79 10,6
8 67
Current liabilities
Borrowings 1,766 1,33
4
Income tax payable 494 467
Other provisions for liabilities and charges 236 282
Trade and other payables 5,174 5,33
5
Derivative financial instruments 177 227
Total current liabilities 7,847 7,64
5
Total equity and liabilities 27,11 27,8
9 60
The accompanying notes on pages 17 to 52 form an integral part
of this condensed consolidated financial information.
GROUP CASH FLOW STATEMENT
For the year ended 31 December
2011 2010
GBPm GBPm
Cash flows from operating activities
Cash generated from operations 5,537 5,207
Dividends received from associates 476 461
Tax paid (1,447 (1,17
) 8)
Net cash from operating activities 4,566 4,490
Cash flows from investing activities
Interest received 79 59
Dividends received from investments 2 2
Purchases of property, plant and equipment (510) (497)
Proceeds on disposal of property, plant and 45 61
equipment
Purchases of intangibles (107) (87)
Purchases and proceeds on disposals of 3 (1)
investments
Proceeds from associates` share buy-backs 71
Purchase of Protabaco (295)
Proceeds on disposal of subsidiaries 12
Net cash used in investing activities (712) (451)
Cash flows from financing activities
Interest paid (580) (578)
Interest element of finance lease rental (2)
payments
Capital element of finance lease rental (13) (17)
payments
Proceeds from issue of shares to owners of 3 3
the parent
Proceeds from the exercise of options over 2 4
own shares
held in employee share ownership trusts
Proceeds from increases in and new borrowings 1,361 892
Movements relating to derivative financial 5 (179)
instruments
Purchases of own shares (755)
Purchases of own shares held in employee (123) (66)
share ownership trusts
Purchases of non-controlling interests (10) (12)
Reductions in and repayments of borrowings (1,304 (1,58
) 2)
Dividends paid to owners of the parent (2,358 (2,09
) 3)
Dividends paid to non-controlling interests (275) (234)
Net cash used in financing activities (4,047 (3,86
) 4)
Net cash flows (used in)/from operating, (193) 175
investing and financing activities
Differences on exchange (48) 29
(Decrease)/increase in net cash and cash (241) 204
equivalents in the year
Net cash and cash equivalents at 1 January 2,183 1,979
Net cash and cash equivalents at 31 December 1,942 2,183
The accompanying notes on pages 17 to 52 form an integral part
of this condensed consolidated financial information.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information has been extracted from the Annual Report, including
the audited financial statements for the year ended 31 December 2011. This
financial information does not constitute statutory accounts within the meaning
of Section 434 of the Companies Act 2006.
The Group has prepared its annual consolidated financial statements in
accordance with International Financial Reporting Standards (IFRS) as adopted by
the European Union and implemented in the UK.
These financial statements have been prepared under the historical cost
convention, except in respect of certain financial instruments, and on a basis
consistent with the IFRS accounting policies as set out in the Annual Report for
the year ended 31 December 2010.
The Group has not adopted any new and amended IFRSs and IFRIC interpretations
with any significant effect on reported profit or equity or on the disclosures
in the financial statements with effect from 1 January 2011.
The preparation of these condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
revenues, expenses, assets and liabilities and the disclosure of contingent
liabilities at the date of these condensed consolidated financial statements.
Such estimates and assumptions are based on historical experience and various
other factors that are believed to be reasonable in the circumstances and
constitute management`s best judgement at the date of the condensed consolidated
financial statements. In the future, actual experience may deviate from these
estimates and assumptions, which could affect these condensed consolidated
financial statements as the original estimates and assumptions are modified, as
appropriate, in the period in which the circumstances change.
NON-GAAP MEASURES
In the reporting of financial information, the Group uses certain measures that
are not required under IFRS, the generally accepted accounting principles (GAAP)
under which the Group reports. The Group believes that these additional
measures, which are used internally, are useful to users of the financial
information in helping them understand the underlying business performance.
The principal non-GAAP measure which the Group uses is adjusted diluted earnings
per share, which is reconciled to diluted earnings per share. The adjusting
items that mainly drive the reconciling items are separately disclosed, as
memorandum information, on the face of the income statement and are used to
calculate the additional non-GAAP measures of adjusted profit from operations
and adjusted share of post-tax results of associates and joint ventures. All
adjustments to profit from operations and diluted earnings per share are
explained in this announcement.
The Management Board, as the chief operating decision maker, reviews current and
prior year adjusted segmental income statement information of subsidiaries and
associates and joint ventures at constant rates of exchange which provides an
approximate guide to performance in the current year had they been translated at
last year`s rate of exchange. The constant rate comparison provided for
reporting segment information is based on a retranslation, at prior year
exchange rates, of the current year results of the Group`s overseas entities but
other than in exceptional circumstances, does not adjust for the normal
transactional gains and losses in operations which are generated by exchange
movements.
In the presentation of financial information, the Group also uses another
measure, organic growth, to analyse underlying business performance. Organic
growth is the growth after adjusting for mergers and acquisitions and
discontinued activities. Adjustments are made to current and prior year
numbers, based on the 2011 Group position.
Non-GAAP measures cont...
The Group also prepares an alternative cash flow, which includes a measure of
`free cash flow`, to illustrate the cash flows before transactions relating to
borrowings. The Group also provides gross turnover as an additional disclosure
to indicate the impact of duty, excise and other taxes.
Due to the secondary listing of the ordinary shares of British American Tobacco
p.l.c. on the main board of the JSE Limited (JSE) in South Africa, the Group is
required to present headline earnings per share and diluted headline earnings
per share, as alternative measures of earnings per share, calculated in
accordance with Circular 3/2009 `Headline Earnings` issued by the South African
Institute of Chartered Accountants. These are shown on pages 27 and 28.
FOREIGN CURRENCIES
The income and cash flow statements of overseas subsidiaries and associates and
joint ventures have been translated at the average rates for the respective
periods. Assets and liabilities have been translated at the relevant period end
rates. For hyperinflation countries, the local currency results are adjusted
for the impact of inflation prior to translation to sterling at closing exchange
rates.
The principal exchange rates used were as follows:
Average Closing
2011 2010 2011 2010
US dollar 1.604 1.546 1.554 1.566
Canadian dollar 1.586 1.592 1.583 1.556
Euro 1.153 1.166 1.197 1.167
South African rand 11.632 11.300 12.547 10.358
Brazilian real 2.683 2.719 2.899 2.599
Australian dollar 1.554 1.682 1.516 1.527
Russian rouble 47.116 46.945 49.922 47.795
Japanese yen 127.82 135.51 119.57 126.98
6 8 2 2
SEGMENTAL ANALYSES OF REVENUE AND PROFIT
As part of the plans to reduce complexity and drive efficiency in management
structures and achieve a better balance in the scale of our regions, it was
decided to reduce the management structure from five regions to four regions
from 1 January 2011. Markets which comprised the Eastern Europe region were
merged into the Africa and Middle East region and the Western Europe region.
Russia, Ukraine, Moldova, Belarus, Caucasus and Central Asia form part of the
new Eastern Europe, Middle East and Africa region (EEMEA) while Romania,
Bulgaria, Serbia, Montenegro, Albania and Kosovo have become part of the Western
Europe region. The comparatives have been restated according to the new
management structure.
The four geographic regions are the reportable segments for the Group as they
form the focus of the Group`s internal reporting systems and are the basis used
by the chief operating decision maker, identified as the Management Board, for
assessing performance and allocating resources.
Segmental analysis of revenue and profit cont...
The Management Board reviews current and prior year segmental revenue, adjusted
profit from operations of subsidiaries and adjusted post-tax results of
associates and joint ventures at constant rates of exchange. As a result, the
2011 segmental results are translated using the 2010 average rates of exchange.
The 2010 comparative figures are also stated at the 2010 actual average rates of
exchange.
The analyses of revenue for the 12 months to 31 December 2011, and 31 December
2010, based on location of sales, are as follows:
2011 2010
Revenue Translat Reven Reven
Constan ion ue ue
t exchange Curre Resta
rates nt ted
rates
GBPm GBPm GBPm GBPm
Asia-Pacific 4,150 101 4,251 3,759
Americas 3,574 (16) 3,558 3,498
Western Europe 3,532 68 3,600 3,695
EEMEA 4,206 (216) 3,990 3,931
Total 15,462 (63) 15,39 14,88
9 3
Segmental analysis of revenue and profit cont...
The analyses of profit from operations and the Group`s share of the post-tax
results of associates and joint ventures for the year ended 31 December 2011,
reconciled to profit before tax, are as follows:
2011
Adjuste Adjust Segmen
d* ed* t
segment Translat segmen Adjusti result
result ion t ng Curren
Constan exchange result items t
t Curren rates
rates t
rates
GBPm GBPm GBPm GBPm GBPm
Asia-Pacific 1,480 59 1,539 (58) 1,481
Americas 1,440 1 1,441 (15) 1,426
Western Europe 1,204 24 1,228 (153) 1,075
EEMEA 1,36 (51) 1,311 (298) 1,013
2
5,48 33 5,519 (524) 4,995
6
Fox River** (274) (274)
Profit from 5,4 33 5,519 (798) 4,721
operations 86
(460)
Net finance costs
Asia-Pacific 238 (13) 225 28 253
Americas 448 (16) 432 (17) 415
EEMEA 2 2 2
Share of post-tax 688 (29) 659 11 670
results of
associates
and joint ventures
Profit before 4,931
taxation
*The adjustments to profit from operations and the Group`s share of the post-tax
results of associates and joint ventures are explained on pages 22 and 25.
**The Fox River provision made in 2011 (see page 23), has not been allocated to
a segment or segments as it relates to a 1998 settlement agreement. It is
presented separately from the segmental reporting which is used to evaluate
segment performance and to allocate resources.
Segmental analysis of revenue and profit cont...
The analyses of profit from operations and the Group`s share of the post-
taxresults of associates and joint ventures for the year ended 31 December 2010
are as follows:
2010 Restated
Adjusted Segme
* Adjust nt
Segment ing resul
result items t
Current Curre
rates nt
rates
GBPm GBPm GBPm
Asia-Pacific 1,332 (56) 1,276
Americas 1,382 (36) 1,346
Western Europe 1,103 (236) 867
EEMEA 1,167 (338) 829
Profit from 4,984 (666) 4,318
operations
Net finance costs (480)
Asia-Pacific 208 (9) 199
Americas 412 (63) 349
EEMEA 2 - 2
Share of post-tax (72)
results of
associates 622 550
and joint ventures
Profit before 4,388
taxation
*The adjustments to profit from operations and the Group`s share of the post-tax
results of associates and joint ventures are explained on pages 22 and 25.
ADJUSTING ITEMS INCLUDED IN PROFIT FROM OPERATIONS
Adjusting items are significant items in the profit from operations which
individually or, if of a similar type, in aggregate, are relevant to an
understanding of the Group`s underlying financial performance. These items are
separately disclosed either as memorandum information on the face of the income
statement and in the segmental analyses, or in the notes as appropriate. The
Group believes that these items are useful to the users of the Group condensed
financial statements in helping them understand the underlying business
performance and are used to derive the Group`s principal non-GAAP measure which
is adjusted diluted earnings per share.
(a) Restructuring and integration costs
Restructuring costs reflect the costs incurred as a result of initiatives to
improve the effectiveness and the efficiency of the Group as a globally
integrated enterprise. These initiatives include a review of the Group`s
manufacturing operations, overheads and indirect costs, organisational structure
and systems and software used. The costs of these initiatives together with the
costs of integrating acquired businesses into existing operations, including
acquisition costs, are included in profit from operations under the following
headings:
2011 2010
GBPm GBPm
Employee benefit costs 100 163
Depreciation, amortisation and 39 100
impairment costs
Other operating expenses 72 68
Other operating income (18) (20)
Total 193 311
Restructuring and integration costs in 2011 principally relate to the
continuation of: factory closure and downsizing activities in Denmark and
Australia respectively; a voluntary separation scheme and closure of the
printing unit in Argentina; the closure of the Jawornik factory in Poland; the
Lecce factory in Italy and Tire factory in Turkey. The costs also cover the
social plan and other closure activities relating to the Bremen factory closure
in Germany, integration of Productora Tabacalera de Colombia, S.A.S. (Protabaco)
into existing operations, including acquisition costs, as well as other
restructuring initiatives directly related to improving the efficiency and
effectiveness of the Group as a globally integrated enterprise. In addition,
they also include separation packages in respect of permanent headcount
reductions in the Group.
Restructuring and integration costs in 2010 principally relate to: the
continuation of factory closure and downsizing activities in Denmark and
Australia respectively; the closure of the Jawornik factory in Poland and the
Tire Factory in Turkey; the planned closure of the Lecce factory in Italy; a
voluntary separation scheme and closure of the printing unit in Argentina and
the continued integration of Bentoel into existing operations, as well as other
restructuring initiatives directly related to improving the efficiency and
effectiveness of the Group as a globally integrated enterprise. These include
the combining of the Group`s businesses in Belgium, Luxembourg and the
Netherlands and some other activities to reduce the overheads of the Group. The
Group also recognised impairment charges as a result of the continued review of
its software assets in light of the development of global software solutions.
Restructuring and integration costs in 2010 also include a payment of US$21
million to Reynolds American relating to the early termination and settlement of
all disputes at issue in respect of the Contract Manufacturing Agreement dated
30 July 2004.
Other operating income in 2011 includes gains on sale of surplus land and
buildings in Argentina as well as the release of deferred income from a disposal
in 2007. In 2010, other operating income also includes gains on property
disposals and the release of deferred income from a disposal in 2007.
Adjusting items included in profit from operations cont...
(b) Amortisation of trademarks
The acquisitions of Protabaco, Bentoel, Tekel and ST resulted in the
capitalisation of trademarks which are amortised over their expected useful
lives, which do not exceed 20 years. The amortisation charge of GBP58 million
(2010: GBP62 million) is included in depreciation, amortisation and impairment
costs in the profit from operations.
(c) Impairment of goodwill and trademarks
During 2011, the Group impaired the remaining balance of the goodwill in respect
of the Tekel acquisition in 2008, amounting to GBP273 million. This followed a
goodwill and trademark impairment of GBP249 million and GBP44 million
respectively for the year to 31 December 2010. Although cost savings
initiatives in the acquisition plan have been delivered successfully, the
impairment recognised in 2010 was calculated on the basis of no further
significant excise increases. However, the Turkish government announced a
further excise increase effective from October 2011 and an additional increase
effective from January 2013. The excise increases to date have resulted in the
growth of illicit trade and a loss of volumes on market share and this is
expected to continue. Turkey remains an important strategic market for the
Group.
(d) Fox River
A provision of GBP274 million has been made for a potential claim under a 1998
settlement agreement entered into by a Group subsidiary in respect of the clean
up of sediment in the lower Fox River. See contingent liabilities on page 40
for full details.
OTHER CHANGES IN THE GROUP
Productora Tabacalera de Colombia, S.A.S. (Protabaco)
On 11 October 2011, the Group acquired from Flentex Holdings Limited and
Trioumvir Enterprises Limited, both private investor shareholders, a 100 per
cent stake in Productora Tabacalera de Colombia, S.A.S. (Protabaco), for US$461
million (GBP298 million). The purchase price is subject to the final agreement
of adjustments for working capital and net debt with the vendors. The completion
follows earlier approval by Colombia`s competition authority, the
Superintendence of Industry and Commerce, on 2 August 2011.
The goodwill of GBP134 million on the acquisition of the cigarette business of
Protabaco, stated at the exchange rates ruling at the date of the transaction,
arises as follows:
Provisional values:
Fair
Book value Fair
value adjustm value
ents
GBPm GBPm GBPm
Intangible assets 121 121
Property, plant and equipment 37 17 54
Deferred tax asset 1 (1)
Inventories 42 (4) 38
Trade and other receivables 19 19
Cash and cash equivalents 3 3
Retirement benefit liabilities (1) (1)
Deferred tax liabilities (42) (42)
Provisions (5) (9) (14)
Trade and other payables (11) (3) (14)
Net assets acquired 85 79 164
Goodwill 134
Total consideration 298
The goodwill of GBP134 million on the acquisition of the business represents a
strategic premium to strengthen the Group`s position in Latin America`s fourth
largest market, building on British American Tobacco`s existing business and
anticipated synergies, that will arise from combining the businesses in
Colombia, post-acquisition.
Other changes in the Group cont...
In the period from 11 October 2011 to 31 December 2011, the acquired business
contributed revenue of GBP9 million and a loss from operations of GBP13 million
after charging GBP2 million for amortisation of acquired intangibles and GBP10
million in respect of restructuring and integration costs.
If the acquisition had occurred on 1 January 2011, before accounting for
anticipated synergies and restructuring benefits, it is currently estimated that
Group revenue would have been GBP15,452 million and Group profit from operations
would have been GBP4,714 million for the 12 months to 31 December 2011. These
amounts have been estimated based on Protabaco`s results for the period prior to
acquisition, adjusted to reflect changes arising from differences in accounting
policies and the anticipated effect of fair value adjustments. The amounts
estimated for profit from operations are after charging GBP9 million for the
amortisation of acquired intangibles for the period to 11 October 2011.
Acquisition costs of GBP3 million have been expensed as part of other operating
expenses within restructuring and integration costs (see page 22).
Lyfra NV
On 7 April 2010, the Group announced that it had agreed to sell its Belgium
distribution business, Lyfra NV, to Landewyck Group S.a.r.l. The transaction was
completed on 25 June 2010 for a consideration of Euro16 million and resulted in
a gain of GBP5 million. Lyfra contributed GBP215 million to revenue and GBP1
million to profit from operations to 25 June 2010 in the Western Europe region.
Gauloises licence agreement termination
With effect from the end of the first quarter in 2010, the Gauloises licence
agreement applicable in Germany, was terminated. The agreement resulted in a
revenue contribution of GBP37 million and a profit contribution of GBP5 million
to the 2010 results in the Western Europe region.
Phone card distribution business in Brazil
During 2010, the Group made the decision to withdraw from distributing phone
cards in Brazil. The phone card distribution business contributed GBP134
million to revenue and GBP3 million to profit from operations to the 2010
results in the Americas region.
(e) Termination of distributor arrangement
With effect from 1 July 2011, the arrangement by which the Group acted as a
distributor for a third party in Norway, was terminated. This arrangement
contributed GBP57 million to revenue and less than a GBP1 million to profit from
operations in the Western Europe region in 2010, and GBP30 million and GBPnil,
respectively, for the six months ended 31 December 2010.
NET FINANCE COSTS
Net finance costs comprise:
2011 2010
GBPm GBPm
Finance costs (577) (507)
Finance income 117 27
(460) (480)
Comprising:
Interest payable (567) (583)
Interest and dividend income 82 60
Net impact of fair value and exchange 25 43
- fair value changes - derivatives (12) (209)
- exchange differences 37 252
(460) (480)
Net finance costs cont...
Net finance costs at GBP460 million were GBP20 million lower than last year,
reflecting the strong cash generation of the business.
The net GBP25 million gain (2010: GBP43 million) of fair value changes and
exchange differences reflects a GBP9 million loss position (2010: GBPnil
position) from the net impact of exchange rate movements and a gain of GBP34
million (2010: gain of GBP43 million), principally due to the interest related
changes in the fair value of derivatives.
The Group targets interest cover, as calculated under its key central banking
facilities, of greater than five times. For 2011 it was 12.5 times (2010: 11.2
times) with the higher cover reflecting improved adjusted profits before tax.
ASSOCIATES AND JOINT VENTURES
The Group`s share of the post-tax results of associates and joint ventures was
GBP670 million (2010: GBP550 million) after net adjusting income of GBP11
million (2010: GBP72 million charge) and after tax of GBP331 million (2010:
GBP322 million). Excluding the adjusting items, the Group`s share of the post-
tax results increased by 6 per cent to GBP659 million (2010: GBP622 million).
The following adjusting items are excluded from the calculation of adjusted
diluted earnings per share (page 28).
In 2011, the Group`s interest in ITC decreased from 31.43 per cent to 31.04 per
cent as a result of ITC issuing ordinary shares under the company`s employee
stock option scheme. The issue of shares and change in the Group`s share of ITC
resulted in a gain of GBP28 million, which is treated as a partial deemed
disposal and included in the income statement.
During the year, Reynolds American, along with other tobacco companies, was
refused by the US Supreme Court a request to revoke a 2009 order requiring them
to finance a US$278 million smoking cessation programme in Louisiana (Scott
case). The Group`s share of this charge amounts to GBP23 million (net of tax).
In March 2011, Reynolds American sold Lane Limited for US$205 million in cash.
The Group`s share of the gain on disposal of this business amounts to GBP22
million (net of tax).
Reynolds American has also recognised the following amounts which have been
combined in adjusting items and reported as other: Reynolds American reported a
charge of US$64 million in respect of four Engle progeny lawsuits that have
proceeded through the appellate process in the state of Florida. The amount
includes compensatory and punitive damages as well as attorneys` fees and
statutory interest. The Group`s share of this charge amounts to GBP10 million
(net of tax). Reynolds American recognised trademark amortisation and impairment
of US$47 million and the Group`s share of these charges amounted to GBP8 million
(net of tax). Reynolds American reported US$16 million and US$11 million of tax
credits and interest respectively. The Group`s share of these credits amounts
to GBP6 million (net of tax). Reynolds American recognised restructuring costs
of US$23 million. The Group`s share of these charges amounts to GBP4 million
(net of tax).
During 2010, the Group`s interest in ITC decreased from 31.92 per cent to 31.43
per cent as a result of ITC issuing ordinary shares under the Company`s Employee
Stock Option Scheme. This resulted in a charge of GBP9 million.
In the year ended 31 December 2010, a subsidiary of Reynolds American, R.J.
Reynolds Tobacco Company Inc. (RJRTC), entered into a comprehensive settlement
agreement with the Canadian federal, provincial and territorial governments to
resolve all the governments` civil claims related to smuggling in Canada during
the 1980s and 1990s. As part of the civil settlement, RJRTC agreed to pay the
governments C$325 million. In a separate matter, a subsidiary of R.J. Reynolds
Tobacco Holdings Inc., Northern Brands International Inc., entered into a plea
agreement with the Ministry of the Attorney General of Ontario. As a result of
its plea to one count of conspiracy to aid others in the sale and possession of
contraband cigarettes in the early 1990s, Northern Brands paid a fine of C$75
million. The Group`s share of these charges amounted to GBP59 million (net of
tax).
Associates and joint ventures cont...
In the year ended 31 December 2010, Reynolds American recognised the following
amounts which have been combined in adjusting items and reported as other:
Reynolds American also recognised restructuring charges in the year ended 31
December 2010 from the closure of one factory in August 2010 and the planned
closure of another in mid 2011. As a result of these actions, Reynolds American
has recorded charges mostly relating to asset impairment and to a lesser extent,
severance costs. The Group`s share of these charges amounted to GBP6 million
(net of tax). RJRTC received a payment of US$21m as a result of the agreement
to terminate early the Contract Manufacturing Agreement dated 30 July 2004
between RJRTC and BATUS Japan Inc., a wholly owned Group subsidiary, and settle
all disputes at issue between the parties as explained on page 64. The Group`s
share of this receipt amounted to GBP3 million (net of tax) and is treated as an
adjusting item. Reynolds American recognised a trademark impairment charge of
US$6 million as well as trademark amortisation of US$4 million. The Group`s
share of these charges amounted to GBP1 million (net of tax).
TAXATION
2011 2010
GBPm GBPm
UK
- adjustment in respect of prior (16)
periods
Overseas
- overseas tax 1,449 1,270
- adjustment in respect of prior periods 21 24
Current tax 1,470 1,278
Deferred tax 86 (30)
1,556 1,248
The tax rates in the income statement of 31.6 per cent in 2011 and 28.4 per cent
in 2010 are affected by the inclusion of the share of associates` post-tax
profit in the Group`s pre-tax results and by adjusting items. The underlying
tax rate for subsidiaries reflected in the adjusted earnings per share below was
31.2 per cent in 2011 and 30.2 per cent in 2010. The increase is mainly due to
a change in the mix of profits. The charge relates to taxes payable overseas.
EARNINGS PER SHARE
2011 2010
pence pence
Earnings per share
- basic 157.1 145.2
- diluted 156.2 144.4
Adjusted earnings per share
- basic 195.8 176.7
- diluted 194.6 175.7
Headline earnings per share
- basic 168.7 160.9
- diluted 167.7 160.0
Basic earnings per share are based on the profit for the year attributable to
ordinary shareholders and the weighted average number of ordinary shares in
issue during the period (excluding treasury shares).
For the calculation of the diluted earnings per share, the weighted average
number of shares reflects the potential dilutive effect of employee share
schemes.
The presentation of headline earnings per share, as an alternative measure of
earnings per share, is mandated under the JSE Listing Requirements. It is
calculated in accordance with Circular 3/2009 `Headline Earnings`, as issued by
the South African Institute of Chartered Accountants.
Earnings have been affected by a number of adjusting items which impact profit
from operations (see pages 22 and 23) and share of post-tax results of
associates and joint ventures (see pages 25 and 26). For the years to 31
December 2011 and 2010, it was also affected by the write-off of deferred tax
assets of GBP33 million and GBP35 million respectively, which have also been
treated as adjusting items. In order to illustrate the impact of these items,
the adjusted diluted earnings per share are shown below:
2011 2010
pence pence
Unadjusted earnings per share 156.2 144.4
Effect of restructuring and integration 7.4 11.8
costs
Effect of impairment of goodwill and 13.3 11.8
trademarks
Effect of deferred tax asset written off 2.2 1.8
Effect of amortisation of trademarks 2.2 2.3
Effect of Fox River 13.8
Effect of associates` adjusting items (0.5) 3.6
Adjusted diluted earnings per share 194.6 175.7
Similar types of adjustments would apply to basic earnings per share.
Earnings per share cont...
The earnings per share are based on:
2011 2010
Earnin Shares Earnin Share
gs gs s
GBPm m GBPm m
Earnings per share
- basic 3,095 1,970 2,879 1,983
- diluted 3,095 1,982 2,879 1,994
Adjusted earnings per
share
- basic 3,857 1,970 3,504 1,983
- diluted 3,857 1,982 3,504 1,994
Headline earnings per
share
- basic 3,323 1,970 3,191 1,983
- diluted 3,323 1,982 3,191 1,994
Headline earnings per share are calculated by taking the following adjustments
into account:
2011 2010
pence pence
Unadjusted earnings per share 156.2 144.4
Effect of impairment of intangibles and 14.4 15.6
property, plant and equipment
Effect of gains on disposal of non-current (0.5) (0.7)
assets held-for-sale
Effect of gains on disposal of businesses (0.2)
and trademarks
Effect of gains reclassified from the (0.1)
available-for-sale reserve
Effect of share of associates` trademark and
other asset impairments and termination of 0.4 0.4
joint venture
Effect of share of associates` gains on (1.3) -
disposal of assets held-for-sale (1.4) 0.5
Effect of issue of shares and change in
shareholding in associate
Headline earnings per share 167.7 160.0
An alternative measure of headline earnings
per share has been presented below to take
account of the effect of Fox River (see page
23); this measure is in addition to that
mandated by the JSE Listing Requirements.
Headline earnings per share amended for Fox 181.5 160.0
River
CASH FLOW AND NET DEBT MOVEMENTS
a) Alternative cash flow
The IFRS cash flow statement on page 16 includes all transactions affecting cash
and cash equivalents, including financing. The alternative cash flow statement
below is presented to illustrate the cash flows before transactions relating to
borrowings.
2011 2010
GBPm GBPm
Adjusted profit from operations 5,519 4,984
(page 11)
Depreciation, amortisation and 447 442
impairment
Other non-cash items in operating 68 59
profit
Profit from operations before 6,034 5,485
depreciation and impairment
Increase in working capital (281) (61)
Net capital expenditure (566) (523)
Gross capital expenditure (611) (584)
Sale of fixed assets 45 61
Operating cash flow 5,187 4,901
Net interest paid (469) (491)
Tax paid (1,447) (1,178)
Dividends paid to non-controlling (275) (234)
interests
Restructuring costs (217) (219)
Dividends and other appropriations 547 461
from associates
Free cash flow 3,326 3,240
Dividends paid to shareholders (2,358) (2,093)
Share buy-back (including (755)
transaction costs) (311)
Net investment activities
Purchases of subsidiaries, non- (311) (12)
controlling interests and trademarks
Disposal of subsidiaries 12
Net flow from share schemes and (93) (77)
other
Net cash flow (191) 1,070
External movements on net debt
Exchange rate effects* 123 (41)
Net debt disposed 11
Change in accrued interest and other (19) (39)
Change in net debt (87) 1,001
Opening net debt (7,841) (8,842)
Closing net debt (7,928) (7,841)
* Including movements in respect of debt related derivatives.
Free cash flow is the Group`s cash flow before dividends, share buy-back and
investing activities. Operating cash flow increased by GBP286 million or 6 per
cent to GBP5,187 million, reflecting growth in underlying operating performance
partially offset by working capital movements. Taking into account outflows
relating to taxation, which were GBP269 million higher than last year due to
higher taxable profits and an increase in dividends to non-controlling interests
offset by higher dividends and other appropriations from associates due to the
Reynolds share buy-back, the Group`s free cash flow was GBP86 million or 3 per
cent higher at GBP3,326 million.
Cash flow cont...
The ratio of free cash flow per share to adjusted diluted earnings per share was
86 per cent (2010: 92 per cent), with free cash flow per share increasing by 3
per cent (2010: increasing by 23 per cent).
Below free cash flow, the principal cash outflows for 2011 comprise the payment
of the prior year final dividend and the 2011 interim dividend which was GBP265
million higher at GBP2,358 million as well as a GBP755 million outflow due to
the resumption of the on-market share buy-back programme in 2011. Also
reflected below free cash flow are cash flows in respect of investing
activities. During 2011, there was a net cash outflow of GBP295 million
relating to the purchase of Protabaco comprising the purchase price less
acquired net cash and cash equivalents as explained on page 23. In addition,
there was a cash outflow of GBP10 million for the acquisition of non-controlling
interests in Chile and GBP6 million in respect of the purchase of trademarks.
The year ended 31 December 2010 included proceeds on disposal of subsidiaries of
GBP12 million which arose from the sale of the Group`s Belgian distribution
business, Lyfra NV as explained on page 24, offset by a cash outflow of GBP12
million arising from the acquisition of non-controlling interests in Bentoel and
subsidiaries in the EEMEA region.
The other net flows principally relate to the impact of the level of shares
purchased by the employee share ownership trusts and outflows in respect of
certain derivative financial instruments.
The above flows resulted in net cash outflows of GBP191 million (2010: GBP1,070
million inflow). After taking account of other changes, especially exchange
rate movements, total net debt was GBP87 million higher at GBP7,928 million at
31 December 2011 (2010: GBP7,841 million).
b) Net debt
The Group defines net debt as borrowings including related derivatives, less
cash and cash equivalents and current available-for-sale investments. The
maturity profile of net debt is as follows:
2011 2010
GBPm GBPm
Net debt due within one year:
Borrowings (1,766) (1,334)
Related derivatives 5 (29)
Cash and cash equivalents 2,194 2,329
Current available-for-sale 57 58
investments
490 1,024
Net debt due beyond one year:
Borrowings (8,510) (8,916)
Related derivatives 92 51
(8,418) (8,865)
Total net debt (7,928) (7,841)
The Group remains confident about its ability to access the debt capital markets
successfully and reviews its options on a continuing basis.
Cash flow cont...
c) IFRS cash generated from operations
The cash generated from operating activities in the IFRS cash flows on page 16
includes the following items:
2011 2010
GBPm GBPm
Profit from operations 4,721 4,318
Adjustments for:
Amortisation and impairment of 58 106
trademarks
Amortisation and impairment of 365 322
intangible assets
Gains on disposal of businesses (5)
Depreciation and impairment of 394
property, 469
plant and equipment
Increase in inventories (47) (280)
Increase in trade and other (87) (127)
receivables
Increase in trade and other 46 497
payables
Decrease in net retirement benefit (208) (153)
liabilities
Increase in provisions for 232 17
liabilities and charges
Other non-cash items 63 43
Cash generated from operations 5,53 5,20
7 7
d) IFRS Investing and financing activities
The investing and financing activities in the IFRS cash flows on page 16 include
the following items:
The purchases and proceeds on disposals of investments (which comprise
available-
for-sale investments and loans and receivables) comprises a net cash inflow in
respect of current investments of GBP3 million (2010: GBP1 million outflow).
In 2011, the proceeds from associates` share buy-backs reflects proceeds of
GBP71 million in respect of the Group`s participation in the share buy-back
programme conducted by Reynolds American Inc.
In 2011, the cash outflow of GBP295 million arising on the purchase of Protabaco
reflects the settlement of the purchase consideration of GBP298 million less
acquired net cash and cash equivalents of GBP3 million.
In the year ended 31 December 2010, the proceeds of disposal of subsidiaries in
2010 reflects the consideration received, less cash and cash equivalents
disposed of, from the sale of the Group`s Belgium distribution business, Lyfra
NV, as explained on page 24.
The purchase of non-controlling interests of GBP10 million in 2011 relates to
the acquisition of non-controlling interests in Chile. The cash outflow of GBP12
million in 2010 arises from the acquisition of non-controlling interests in
Bentoel and subsidiaries in the EEMEA region.
The movement relating to derivative financial instruments is in respect of
derivatives taken out to hedge cash and cash equivalents and external
borrowings, derivatives taken out to hedge inter company loans and derivatives
treated as net investment hedges. Derivatives taken out as cash flow hedges in
respect of financing activities are also included in the movement relating to
derivative financial instruments, while other such derivatives in respect of
operating and investing activities are reflected along with the underlying
transactions.
Cash flow cont...
e) IFRS net cash and cash equivalents
The net cash and cash equivalents in the IFRS Group cash flow statement on page
16 comprise:
2011 2010
GBPm GBPm
Cash and cash equivalents per 2,194 2,329
balance sheet
Accrued interest (1)
Overdrafts (252) (145)
Net cash and cash equivalents 1,942 2,183
f) Liquidity
The Central Treasury Department is responsible for managing, within an overall
policy framework, the Group`s exposure to funding and liquidity, interest rate,
foreign exchange and counterparty risk arising from the Group`s underlying
operations.
The Group has a target average centrally managed debt maturity of at least 5
years with no more than 20 per cent of centrally managed debt maturing in a
single rolling year. As at 31 December 2011, the average centrally managed debt
maturity was 7.0 years (2010: 7.4 years) and the highest proportion of centrally
managed debt maturing in a single rolling year was 18.3 per cent (2010: 12.5 per
cent).
In June 2011, the Group established a US$2 billion commercial paper programme.
It is Group policy that short-term sources of funds (including drawings under
both the US$ programme and the existing Group GBP1 billion euro commercial paper
(ECP) programme) are backed by undrawn committed lines of credit and cash. At 31
December 2011 GBP85 million of commercial paper was outstanding, while at 31
December 2010 the programme was undrawn.
In November 2011, the Group issued a new Euro600 million bond with a maturity of
November 2021.
In September 2011, the Group repaid a Mexican Peso 1,444 million borrowing which
was due in September 2011 with a new Mexican Peso 1,444 million borrowing due
2014.
In August 2011, the Group extended the maturity date of a US$200 million
facility from 2011 to 2016, and simultaneously increased the size of the
facility to US$240 million. This facility is drawable in Chilean pesos and was
drawn to the value of US$225 million at 31 December 2011. The undrawn element is
available for drawing until February 2013.
In June 2011, the Group repaid a Euro530 million bond. The repayment was
financed from Group cash balances.
During the period, the Group`s subsidiary in Brazil received proceeds of GBP401
million (2010: GBP410 million) from short-term borrowings in respect of advance
payments on leaf export contracts and repaid GBP519 million (2010: GBP297
million).
In May 2010, the Group repaid a Euro525 million bond. The repayment was financed
from debt issued in November 2009. On 25 June 2010, the terms of Euro470
million of the Euro1 billion bond maturing in 2011 were modified by extending
the maturity to 2020; at the same time, the Group issued an additional Euro130
million bond with a maturity of 2020. In addition, Euro413 million of the
Group`s Euro750 million bond maturing in 2012 was purchased and cancelled. At
the same time, the Group issued a new GBP275 million bond with a maturity of
2040.
In December 2010, the Group negotiated a new central banking facility of GBP2
billion with a final maturity date of December 2015. The existing central
banking facility of GBP1.75 billion, with a final maturity date of March 2012
was cancelled at the same time. The facility was undrawn at 31 December 2011 and
2010.
RETIREMENT BENEFIT SCHEMES
The Group`s subsidiaries operate around 175 retirement benefit arrangements
worldwide. The majority of the scheme members belong to defined benefit
schemes, most of which are funded externally and many are closed to new
entrants. The Group also operates a number of defined contribution schemes.
The present total value of funded scheme liabilities was GBP5,675 million (2010:
GBP5,365 million), while unfunded scheme liabilities amounted to GBP346 million
(2010: GBP337 million). The scheme assets increased from GBP5,134 million in
2010 to GBP5,200 million in 2011.
After accounting for minimum funding obligations of GBP2 million (2010: GBP29
million) and excluding unrecognised scheme surpluses of GBP75 million (2010:
GBP51 million), the overall net liability for all pension schemes and healthcare
schemes amounted to GBP898 million at the end of 2011, an increase from GBP648
million at the end of 2010.
Contributions to the defined benefit schemes are determined after consultation
with the respective trustees and actuaries of the individual externally funded
schemes, taking into account the regulatory environment.
LITIGATION: FRANKED INVESTMENT INCOME GROUP LITIGATION ORDER
British American Tobacco is the principal test claimant in an action in the
United Kingdom against HM Revenue and Customs in the Franked Investment Income
Group Litigation Order (FII GLO). There are 25 corporate groups in the FII GLO.
The case concerns the treatment for UK corporate tax purposes of profits earned
overseas and distributed to the UK. The claim was filed in 2003 and the case was
heard in the European Court of Justice (ECJ) in 2005 and a decision of the ECJ
received in December 2006. In July 2008, the case reverted to a trial in the UK
High Court for the UK Court to determine how the principles of the ECJ decision
should be applied in a UK context.
The High Court judgment in November 2008 concluded, amongst many other things,
that dividends received from EU subsidiaries should be, and should have been,
exempt from UK taxation. It also concluded that certain dividends received
before 5 April 1999 from the EU and, in some limited circumstances after 1993
from outside the EU, should have been treated as franked investment income with
the consequence that advance corporation tax need not have been paid. Claims for
the repayment of UK tax incurred where the dividends were from the EU can be
made back to 1973. The tentative conclusion reached by the High Court would, if
upheld, produce an estimated receivable of about GBP1.2 billion for British
American Tobacco.
The case was heard by the Court of Appeal in October 2009 and the judgment
handed down on 23 February 2010. The Court of Appeal has determined that various
questions should be referred back to the ECJ for further clarification. In
addition, the Court determined that the claim should be restricted to six years
and not cover claims dating back to 1973. This time restriction would, if
upheld, reduce the value of the claim to between zero and GBP10 million. Based
on advice received, the Company believes it has realistic prospects of success
on further appeal. The Company sought leave to appeal from the Supreme Court in
the UK and the Supreme Court has agreed to hear the appeal on time limits in
February 2012. Several questions were referred back to the ECJ for further
clarification and a hearing took place in February 2012 at the ECJ. The Courts`
decisions are awaited.
No potential receipt has been recognised in the current year or the prior year,
in the results of the Group, due to the uncertainty of the amounts and eventual
outcome.
CONTINGENT LIABILITIES AND FINANCIAL COMMITMENTS
The Group is subject to contingencies pursuant to requirements that it complies
with relevant laws, regulations and standards. Failure to comply could result in
restrictions in operations, damages, fines, increased tax, increased cost of
compliance, interest charges, reputational damage or other sanctions. These
matters are inherently difficult to quantify.
In cases where the Group has an obligation as a result of a past event existing
at the balance sheet date, it is probable that an outflow of economic resources
will be required to settle the obligation and the amount of the obligation can
be reliably estimated, a provision will be recognised based on best estimates
and management judgment.
Contingent liabilities and financial commitments cont...
There are, however, contingent liabilities in respect of litigation, taxes in
some countries and guarantees for which no provisions have been made.
The Group has exposures in respect of the payment or recovery of a number of
taxes. The Group is and has been subject to a number of tax audits covering,
amongst others, excise tax, value added taxes, sales taxes, corporate taxes,
withholding taxes and payroll taxes.
The estimated costs of known tax obligations have been provided in these
accounts in accordance with the Group`s accounting policies. In some countries,
tax law requires that full or part payment of disputed tax assessments be made
pending resolution of the dispute. To the extent that such payments exceed the
estimated obligation, they would not be recognised as an expense. In some cases
disputes are proceeding to litigation.
While the amounts that may be payable or receivable could be material to the
results or cash flows of the Group in the period in which they are recognised,
the Board does not expect these amounts to have a material effect on the Group`s
financial condition.
Product liability litigation
Group companies, notably Brown & Williamson Holdings, Inc. (formerly Brown &
Williamson Tobacco Corporation) (B&W) as well as other leading cigarette
manufacturers, are defendants, principally in the United States, in a number of
product liability cases. In a number of these cases, the amounts of compensatory
and punitive damages sought are significant.
Indemnity
In 2004, B&W completed the combination of the assets, liabilities and operations
of its US tobacco business with R.J. Reynolds Tobacco Company (RJRT), a wholly-
owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc., pursuant to which
Reynolds American Inc. was formed (the Business Combination). As part of the
Business Combination, B&W contributed to RJRT all of the assets and liabilities
of its US cigarette and tobacco business, subject to specified exceptions, in
exchange for a 42 per cent equity ownership interest in Reynolds American Inc.
As a result of the Business Combination:
B&W discontinued the active conduct of any tobacco business in the United
States;
B&W contributed to RJRT all of its assets other than the capital stock of
certain subsidiaries engaged in non-US businesses and other limited categories
of assets;
RJRT assumed all liabilities of B&W (except liabilities to the extent relating
to businesses and assets not contributed by B&W to RJRT and other limited
categories of liabilities) and contributed subsidiaries or otherwise to the
extent related to B&W`s tobacco business as conducted in the United States on or
prior to 30 July 2004; and
RJRT agreed to indemnify B&W and each of its associates (other than Reynolds
American Inc. and its subsidiaries) against, among other matters, all losses,
liabilities, damages, expenses, judgments, attorneys` fees, etc., to the extent
relating to or arising from such assumed liabilities or the assets contributed
by B&W to RJRT (the RJRT Indemnification).
The scope of the RJRT Indemnification includes all expenses and contingent
liabilities in connection with litigation to the extent relating to or arising
from B&W`s US tobacco business as conducted on or prior to 30 July 2004,
including smoking and health tobacco litigation, whether the litigation is
commenced before or after 30 July 2004 (the Tobacco Litigation).
Pursuant to the terms of the RJRT Indemnification, RJRT is liable for any
possible judgments, the posting of appeal bonds or security, and all other
expenses of and responsibility for managing the defence of the Tobacco
Litigation. RJRT has assumed control of the defence of the Tobacco Litigation
involving B&W, to which RJRT is also a party in most (but not all) of the same
cases. Accordingly, RJRT uses or plans to use the same law firm or firms to
represent both B&W and RJRT in any single or similar case (except in certain
limited circumstances) as RJRT`s interests are typically aligned with B&W`s
interests, as RJRT has substantial experience in managing recognised external
legal counsel in defending the Tobacco Litigation and external counsel have
independent professional responsibilities to represent the interests of B&W. In
addition, in accordance with the terms of the RJRT Indemnification, associates
of B&W have retained control of the defence in certain Tobacco Litigation cases
with respect to which such associates are entitled to indemnification.
Contingent liabilities and financial commitments cont...
Included in the US litigation section below are all significant cases where B&W
and/or a UK company is named as a defendant and all cases where RJRT is named as
a defendant as a successor to B&W (the RJRT Successor Cases). The RJRT Successor
Cases are covered by the RJRT Indemnification. Of the RJRT Successor Cases, the
section below includes details of all cases where there has been an adverse
judgment and also notes favourable judgments.
US litigation
The total number of US product liability cases pending at 31 December 2011
naming B&W was approximately 8,688 (2010: approximately 9,458). Of these, 5,588
cases are RJRT Successor Cases. For all of these cases, British American Tobacco
Group companies have the protection of the RJRT Indemnification. British
American Tobacco (Investments) Limited (Investments) has been served as a co-
defendant in three of those cases (2010: five). No other UK based Group company
has been served as a co-defendant in any US product liability case pending as at
31 December 2011. In 2011, there was one US product liability case tried to
verdict against B&W and Investments (City of St. Louis - see below). There is
one case (Daric Smith - see below) against B&W and Investments scheduled for
trial on 16 July 2012. Since many of these pending cases seek unspecified
damages, it is not possible to quantify the total amounts being claimed, but the
aggregate amounts involved in such litigation are significant, possibly
totalling billions of US dollars. The cases fall into four broad categories:
medical reimbursement cases; class actions; individual cases and other claims.
(a) Medical reimbursement cases
These civil actions seek to recover amounts spent by government entities and
other third party providers on healthcare and welfare costs claimed to result
from illnesses associated with smoking. Although B&W continues to be a defendant
in one healthcare cost recovery case involving a Native American tribe (see
below), the vast majority of such cases have been dismissed on legal grounds.
Further, on 23 November 1998, the major US cigarette manufacturers (including
B&W and RJRT) and the attorneys general of 46 US states and five US territories
executed the Master Settlement Agreement (MSA), which settled medical
reimbursement lawsuits that had been brought by these states and territories.
Under the terms of the MSA, the settling cigarette manufacturers agreed, among
other things, to pay approximately US$246 billion to the settling states and
territories (and to four states that reached separate settlements of their
medical reimbursement actions) over 25 years, and agreed to various restrictions
on US tobacco advertising and marketing. The MSA includes a credit for any
amounts paid by participating manufacturers in subsequent suits brought by the
states` political subdivisions.
At 31 December 2011, one US medical reimbursement suit was pending against B&W
(2010: three). This suit has been brought by an Indian tribe in the Indian
Tribal Court in South Dakota.
Two additional reimbursement cases pending against Group companies as at 31
December 2010 have recently been dismissed. The Nat`l Committee to Preserve
Social Security & Medicare case against B&W and other defendants was dismissed
by the district court on 22 December 2010 and judgment was entered in
defendants` favour on 23 December 2010. The City of St. Louis case against B&W,
Investments and several other defendants was dismissed following a jury verdict
in defendants` favour on 29 April 2011. Final judgment was entered in
defendants` favour on 10 June 2011 and the plaintiffs waived all rights to
appeal this judgment.
(b) Class actions
At 31 December 2011, B&W was named as a defendant in some eight (2010: eight)
separate actions attempting to assert claims on behalf of classes of persons
allegedly injured or financially impacted through smoking or where classes of
tobacco claimants have been certified. If the classes are or remain certified
and the possibility of class-based liability is eventually established, it is
likely that individual trials will be necessary to resolve any claims by
individual plaintiffs. Class action suits have been filed in a number of states
against individual cigarette manufacturers and their parent corporations,
alleging that the use of the terms `lights` and `ultralights` constitutes unfair
and deceptive trade practices.
Contingent liabilities and financial commitments cont...
The Cleary putative class action complaint was filed in state court in Chicago,
Illinois on 3 June 1998 against several defendants, including B&W, B.A.T
Industries p.l.c. (Industries) and Investments. Industries was dismissed on
jurisdictional grounds by an intermediate appellate court on 17 March 2000. The
case was removed to the federal district court on 13 March 2009. After certain
discovery and motion practice, the plaintiffs` motion for leave to file a Fourth
Amended Complaint was granted on 22 April 2010. The Fourth Amended Complaint
alleged that all defendants fraudulently concealed facts regarding the addictive
nature of nicotine and that defendant Philip Morris fraudulently marketed
Marlboro Lights cigarettes, and sought disgorgement of profits. The defendants`
motion to dismiss the Fourth Amended Complaint was granted on 22 June 2010. The
plaintiffs filed a notice of appeal in the US Court of Appeals for the Seventh
Circuit on 20 August 2010. In an order entered on 25 August 2011, the Seventh
Circuit affirmed the federal district court`s order dismissing the case. The
plaintiffs` petition for rehearing with suggestion for rehearing en banc was
denied by the Seventh Circuit on 15 November 2011. The plaintiffs have not
sought further review of this decision.
In a medical monitoring class action brought on behalf of Louisiana smokers
(Scott) the jury returned a verdict on 28 July 2003 in favour of the defendants
on the plaintiffs` claim for medical monitoring and found that cigarettes were
not defectively designed. However, the jury also made certain findings against
the defendants on claims relating to fraud, conspiracy, marketing to minors and
smoking cessation. Notwithstanding these findings, this portion of the trial did
not determine liability as to any individual class member or class
representative. On 21 May 2004, the jury returned a verdict in the amount of
US$591 million, requiring the defendants to fund a cessation programme to help
eligible class members stop smoking. On 29 September 2004, the defendants posted
a US$50 million bond, pursuant to legislation that limits the amount of the bond
to US$50 million collectively for MSA signatories, and noticed their appeal.
RJRT posted US$25 million (the portions for RJRT and B&W) towards the bond. On 7
February 2007, the Louisiana Court of Appeals upheld the class certification and
found the defendants responsible for funding smoking cessation for eligible
class members. The appellate court also ruled, however, that no class member who
began smoking after 1 September 1988 could receive any relief and that only
those smokers whose claims accrued on or before 1 September 1988 would be
eligible for the smoking cessation programme. In addition, the appellate court
rejected the award of prejudgment interest, and struck eight of the twelve
components of the smoking cessation programme. The defendants` application to
the Louisiana Supreme Court for a writ of certiorari was denied on 7 January
2008. The defendants` petition to the US Supreme Court for a writ of certiorari
was denied on 10 June 2008. On 21 July 2008, the trial court entered an amended
judgment in the case. The court found that the defendants are jointly and
severally liable for funding the cost of a court-supervised smoking cessation
programme and ordered the defendants to deposit approximately US$263 million
together with interest from 30 June 2004, into a trust for the funding of the
programme. On 23 April 2010, the Louisiana Court of Appeals amended but largely
affirmed the trial court`s amended judgment. Pursuant to the judgment, the
defendants are required to deposit US$242 million with the court, with interest
from 21 July 2008 until paid. In September 2010, the defendants` application for
writ of certiorari or review by the Supreme Court of Louisiana along with the
defendants` motion to stay execution of the judgment was denied. On 24 September
2010, the US Supreme Court granted the defendants` motion to stay the judgment
pending the US Supreme Court`s disposition of the defendants` petition for a
writ of certiorari. The defendants` petition for writ of certiorari in the US
Supreme Court was denied on 27 June 2011. In August 2011, RJRT paid US$139
million (the portion of the judgment allocated to RJRT and B&W) into the trust.
On 31 October 2011, the plaintiffs requested that defendants pay attorneys` fees
and litigation costs to plaintiffs` counsel. The defendants filed their
opposition to the plaintiffs` request for attorney`s fees on 6 January 2012.
Discovery on this issue is currently continuing.
Black is a `lights` class action filed in November 2000 in the Circuit Court,
City of St. Louis, Missouri. B&W removed the case to the US District Court for
the Eastern District of Missouri on 23 September 2005. On 25 October 2005, the
plaintiffs filed a motion to remand, which was granted on 17 March 2006. On 16
April 2008, the court stayed the case pending US Supreme Court review in Good v.
Altria Group, Inc. On 28 June 2011, the court issued a memorandum removing the
case from the trial docket. A status conference is currently scheduled for 4
February 2013.
Contingent liabilities and financial commitments cont...
Brown is a case filed in June 1997 in the Superior Court, San Diego County,
California. On 11 April 2001, the court granted in part the plaintiffs` motion
for certification of a class composed of residents of California who smoked at
least one of the defendants` cigarettes from 10 June 1993 through 23 April 2001,
and who were exposed to the defendants` marketing and advertising activities in
California. The plaintiffs seek to recover restitution, disgorgement of profits
and other equitable relief under the California Business and Professions Code.
Certification was granted as to the plaintiffs` claims that the defendants
violated the section of the California Business and Professions Code pertaining
to unfair competition. The court, however, refused to certify the class under
the California Legal Remedies Act and on the plaintiffs` common law claims. On 7
March 2005, the court granted the defendants` motion to decertify the class. On
5 September 2006, the California Court of Appeal affirmed the judge`s order
decertifying the class. On 1 November 2006, the plaintiffs` petition for review
with the California Supreme Court was granted. On 18 May 2009, the California
Supreme Court reversed the decision issued by the trial court and affirmed by
the California Court of Appeal that decertified the class to the extent that it
was based upon the conclusion that all class members were required to
demonstrate standing, and remanded the case to the trial court for further
proceedings regarding whether the class representatives have, or can
demonstrate, standing. On 10 March 2010, the California Superior Court found
that the plaintiffs` `lights` claims were not pre-empted by the Federal
Cigarette Labelling and Advertising Act, held the court`s 30 September 2004
ruling on the issue no longer viable and denied the defendants` second motion
for summary judgment. The defendants filed a motion on 9 January 2012 requesting
that the class be decertified because the class representatives do not meet the
requisites of standing, adequacy, or typicality needed to represent the class.
Trial is scheduled to begin on 5 October 2012.
Howard is a `lights` class action filed in February 2000 in the Circuit Court,
Madison County, Illinois. A judge certified a class on 18 December 2001. On 6
June 2003, the trial judge issued an order staying all proceedings pending
resolution of Price v. Philip Morris, Inc., a `lights` class action against
Philip Morris, Inc. in the Illinois state court. The plaintiffs appealed this
stay order to the Illinois Fifth District Court of Appeals, which affirmed the
Circuit Court`s stay order on 19 August 2005. There is currently no activity in
the case.
Jones is a case filed in December 1998 in the Circuit Court, Jackson County,
Missouri. The defendants removed the case to the US District Court for the
Western District of Missouri on 16 February 1999. The action was brought by
tobacco product users and purchasers on behalf of all similarly situated
Missouri consumers. The plaintiffs allege that their use of the defendants`
tobacco products has caused them to become addicted to nicotine. The plaintiffs
seek to recover an unspecified amount of compensatory and punitive damages. The
case was remanded to the Circuit Court on 17 February 1999. There has been
limited activity in this case.
Parsons is a case filed in February 1998 in the Circuit Court, Ohio County, West
Virginia. The plaintiff sued asbestos manufacturers, US cigarette manufacturers,
including B&W, among other defendants, seeking to recover US$1 million in
compensatory and punitive damages individually and an unspecified amount for the
class in both compensatory and punitive damages. The action was brought on
behalf of a class of persons who allegedly have personal injury claims arising
from their exposure to respirable asbestos fibres and cigarette smoke. The case
has been stayed pending a final resolution of the plaintiffs` motion to refer
tobacco litigation to the judicial panel on multidistrict litigation filed in In
Re: Tobacco Litigation in the Supreme Court of Appeals of West Virginia. On 26
December 2000, three defendants, Nitral Liquidators, Inc., Desseaux Corporation
of North American and Armstrong World Industries, filed bankruptcy petitions in
the US Bankruptcy Court for the District of Delaware. Pursuant to the Bankruptcy
Code, Parsons is automatically stayed with respect to all defendants.
Young is a case filed in November 1997 in the Circuit Court, Orleans Parish,
Louisiana. The plaintiffs brought an Environmental Tobacco Smoke (ETS) class
action on behalf of all residents of Louisiana who, though not themselves
cigarette smokers, have been exposed to second-hand smoke from cigarettes which
were manufactured by the defendants, and who allegedly suffered injury as a
result of that exposure. The plaintiffs seek to recover an unspecified amount of
compensatory and punitive damages. On 13 October 2004, the trial court stayed
this case pending the outcome of appellate review in the Scott class action in
Louisiana (discussed above).
Contingent liabilities and financial commitments cont...
In Engle (a case in Florida), a jury awarded a total of US$12.7 million to three
class representatives, and in a later stage of the three-phase trial procedure
adopted in this case, a jury assessed US$17.6 billion in punitive damages
against B&W. On 21 May 2003, the intermediate appellate court reversed the trial
court`s judgment and remanded the case to the trial court with instructions to
de-certify the class. On 16 July 2003, the plaintiffs filed a motion for
rehearing which was denied on 22 September 2003. On 12 May 2004, the Florida
Supreme Court agreed to review this case and, on 6 July 2006, it upheld the
intermediate appellate court`s decision to decertify the class and vacated the
jury`s punitive damages verdict. Further, the Florida Supreme Court permitted
the judgments entered for two of the three Engle class representatives to stand,
but dismissed the judgment entered in favour of the third Engle class
representative. Finally, the Florida Supreme Court has permitted putative Engle
class members to file individual lawsuits against the Engle defendants within
one year of the court`s decision (subsequently extended to 11 January 2008). The
court`s order precludes defendants from litigating certain issues of liability
against the putative Engle class members in these individual actions. On 7
August 2006, the defendants filed a motion for rehearing before the Florida
Supreme Court, which was granted in part and denied in part, on 21 December
2006. The Florida Supreme Court`s 21 December 2006 ruling did not amend any of
the earlier decisions` major holdings, which included decertifying the class,
vacating the punitive damages judgment, and permitting individual members of the
former class to file separate suits. Instead, the ruling addressed the claims on
which the Engle jury`s phase one verdict will be applicable to the individual
lawsuits that were permitted to stand. On 1 October 2007, the United States
Supreme Court denied the defendants` request for certiorari review of the
Florida Supreme Court`s decision.
As at 31 December 2011, B&W has been served in approximately 47 Engle progeny
cases in both state and federal courts in Florida. These cases include
approximately 103 plaintiffs. RJRT as a successor to B&W is named in
approximately 5,572 Engle progeny cases. These 47 B&W cases and 5,572 RJRT have
the benefit of the RJRT Indemnification.
In the first `phase three` trial of an individual Engle class member (Lukacs),
the jury awarded the plaintiff US$37.5 million in compensatory damages (B&W`s
share: US$8.4 million) on 11 June 2002. On 1 April 2003, the jury award was
reduced to US$25.1 million (B&W`s share: US$5.6 million) but no final judgment
was entered into because the trial court postponed the entry of final judgment
until the Engle appeal was fully resolved. The trial court, on 14 August 2008,
issued an order entering judgment for the plaintiff that awarded US$24.8 million
to the plaintiff (plus interest), for which the defendants would be jointly and
severally liable. On 17 October 2008, the plaintiff withdrew her request for
punitive damages. On 12 November 2008, the trial court entered final judgment.
On 1 December 2008, the defendants filed a notice of appeal. On 17 March 2010,
the Third District Court of Appeal affirmed the ruling of the trial court. The
defendants` motion for rehearing and petition for rehearing en banc was denied
on 18 May 2010. RJRT expensed and paid the final judgment in the amount of
approximately US$15.2 million on 18 June 2010. On 21 June 2010, the court
entered an order discharging the supersedeas bonds posted by the defendants.
As at 31 December 2011, approximately 22 additional phase three Engle trials
naming RJRT as successor to B&W have proceeded to verdict. There have been no
additional phase three Engle progeny trials naming B&W individually. Of these 22
trials, approximately 11 resulted in plaintiffs` verdicts. Total damages awarded
against RJRT as successor to B&W in final judgments in these cases are
approximately US$21,493,351. This number is comprised of approximately
US$10,593,351 in compensatory damages and approximately US$10,900,000 in
punitive damages. As of 31 December 2011, RJRT had appealed 10 of these adverse
judgments and all of these appeals remained pending. As of 31 December 2011,
RJRT`s time to file a notice of appeal from the eleventh of these final
judgments had not expired.
In June 2009, the Florida legislature amended its existing bond cap statute by
adding a US$200 million bond cap that applies to all phase three Engle progeny
cases in the aggregate and establishing individual bond caps for individual
cases in amounts that vary depending on the number of judgments in effect at a
given time. In May 2011, Florida removed the provision in this legislation that
would have permitted this bond cap to expire on 31 December 2012. Plaintiffs in
several Engle progeny cases have challenged the constitutionality of the bond
cap. The Florida appellate courts upheld the constitutionality of the bond cap
in each of these cases. One of these appellate courts has since certified to the
Florida Supreme Court the question of whether the bond cap violates the Florida
Constitution. The Florida Supreme Court accepted jurisdiction over the issue of
the constitutionality of the bond cap on 23 January 2012.
Contingent liabilities and financial commitments cont...
(c) Individual cases
Approximately 3,091 cases were pending against B&W at 31 December 2011 (2010:
3,161), which were filed by or on behalf of individuals and in which it is
contended that diseases or deaths have been caused by cigarette smoking or by
exposure to ETS. Of these cases, approximately: (a) 2,586 are ETS cases brought
by flight attendants who were members of a class action (Broin) that was settled
on terms that allow compensatory but not punitive damages claims by class
members; (b) 411 are cases brought in consolidated proceedings in West Virginia,
where the first phase of the trial began on 19 October 2011 but ended in a
mistrial on 8 November 2011; (c) 47 are Engle progeny cases that have been filed
directly against B&W; and (d) 47 are cases filed by other individuals.
As mentioned above there are a further 5,572 Engle progeny cases which name RJRT
as successor to B&W. In addition, there are 16 cases filed by other individuals
naming RJRT as successor to B&W. These cases are subject to the RJRT
Indemnification and are not detailed here.
Of the individual cases that remain pending as of 31 December 2011, two resulted
in verdicts against B&W:
In December 2003, a New York jury (Frankson) awarded US$350,000 in compensatory
damages against B&W and two industry organisations. In January 2004, the same
jury awarded US$20 million in punitive damages. On 22 June 2004, the trial judge
granted a new trial unless the parties agreed to an increase in compensatory
damages to US$500,000 and a decrease in punitive damages to US$5 million, of
which US$4 million would be awarded against B&W. The plaintiff agreed to a
decrease in punitive damages but B&W has not agreed to an increase in
compensatory damages. On 25 January 2005, B&W appealed to an intermediate New
York State appellate court. Oral argument was heard on 8 May 2006. The appellate
court affirmed the judgment on 5 July 2006, except insofar as it dismissed the
plaintiff`s design defect claims. The intermediate appellate court denied B&W`s
motion for leave to reargue, or in the alternative, for leave to appeal to the
New York Court of Appeals on 5 October 2006. On 8 December 2006, the trial judge
granted the plaintiff`s application for entry of judgment in the amounts of US$5
million in punitive damages and US$175,000 in compensatory damages. The trial
court also granted the plaintiff`s motion to vacate that part of the 2004 order
granting a new trial unless the parties agreed to an increase in compensatory
damages to US$500,000. RJRT posted a bond in the approximate amount of US$8.018
million on 3 July 2007. B&W appealed from final judgment on 3 July 2007 to an
intermediate New York State appellate court. Oral argument was heard on 28
January 2009. On 29 September 2009, the appellate court issued a decision
modifying the final judgment by deleting the award of punitive damages, and
remanding the case to the trial court for a new trial on the issue of punitive
damages. On 15 January 2010, the appellate court denied the plaintiff`s motion
for additional time to seek leave to appeal to the New York Court of Appeals,
but granted the plaintiff more time to file a motion for leave to reargue to the
appellate court. The plaintiff`s motion for leave to reargue was denied by the
appellate court on 12 March 2010. As at 31 December 2011, no date has been set
for a new trial on the issue of punitive damages.
On 1 February 2005, a Missouri jury (Lincoln Smith) awarded US$500,000 in
compensatory damages against B&W and then, on 2 February 2005, awarded US$20
million in punitive damages, also against B&W. On 1 June 2005, B&W filed its
notice of appeal. Oral argument was heard on 31 August 2006. On 31 July 2007, an
intermediate Missouri appellate court affirmed the compensatory damages award
but it reversed the punitive damages award, reasoning that the plaintiffs failed
to produce sufficient evidence to justify the verdict. The majority of the court
would have remanded the case for a second trial, limited to punitive damages,
but a dissenting judge transferred the case to the Missouri Supreme Court, as
permitted by Missouri law. Oral argument was heard by the Missouri Supreme Court
on 13 February 2008. On 31 July 2008, the Missouri Supreme Court transferred the
case back to the intermediate appellate court for further proceedings. In a
decision entered on 16 December 2008, the intermediate appellate court again
upheld the award of compensatory damages and reversed the jury`s award of US$20
million in punitive damages, sending the case back to the trial court for a new
trial on punitive damages. Following a new trial, on 20 August 2009, a Missouri
jury returned a verdict awarding US$1.5 million in punitive damages against B&W.
On 24 September 2009, B&W filed a motion for a new trial and a motion for
judgment notwithstanding the verdict. On the same date, the plaintiffs filed a
motion for additur, asking the court to increase the amount of punitive damages
from US$1.5 million to US$20 million, and a motion to vacate, modify or set
aside judgment, or in the alternative, for a new trial. On 21 December 2009, the
court denied the plaintiffs` and B&W`s post-trial motions. On 30 December 2009,
B&W filed a notice of appeal. On 31 December 2009, the plaintiffs
Contingent liabilities and financial commitments cont...
filed a notice of appeal. The appeals were consolidated and oral argument was
held with respect to both appeals on 28 September 2011. A decision remains
pending.
(d) Other claims
The Flintkote Company (Flintkote), a US asbestos production and sales company,
was included in the acquisition of Genstar Corporation by Imasco Limited in 1986
and became a Group subsidiary following the restructuring of Imasco Limited (now
Imperial Tobacco Canada Limited (Imperial), the Group`s operating company in
Canada) in 2000. Soon after this acquisition, and as part of the acquisition
plan, Genstar Corporation began to sell most of its assets, including the non-
asbestos related operations and subsidiaries of Flintkote. The liquidation of
Flintkote assets produced cash proceeds and, having obtained advice from the law
firm of Sullivan & Cromwell LLP (S&C) and other advice that sufficient assets
would remain to satisfy liabilities, Flintkote and Imasco Limited authorized the
payment of a dividend of US$170.2 million in 1986 and a further dividend of
US$355 million in 1987. In 2003, Imperial divested Flintkote and then, in 2004,
Flintkote filed for bankruptcy in the United States Bankruptcy court for the
District of Delaware. In 2006, Flintkote, representatives of both the present
and future asbestos claimants, and individual asbestos claimants were permitted
by the bankruptcy court to file a complaint against Imperial and numerous other
defendants including S&C, for the recovery of the dividends and other
compensation under various legal and equitable theories. S&C and Imperial filed
cross complaints against each other. The case remains in the discovery phase,
but over the last 18 months the court has resolved multiple issues that will
narrow the case. Firstly, following a multi-day bench trial, the court issued a
preliminary decision dismissing S&C. Flintkote settled with S&C for a nominal
sum before the decision was made final. The settlement is subject to bankruptcy
court approval but is expected to become final. Secondly, after a series of
bench trials, on 5 October 2011, the court issued orders deciding multiple
preliminary issues regarding Flintkote`s claims to recover the dividends and
Flintkote`s claim that Imperial is its `alter ego` for purposes of asbestos
liabilities. Among other things, the court`s rulings largely remove Flintkote`s
claim to the US$355 million 1987 dividend. The court also concluded that
Flintkote cannot pursue its alter ego claim (such claims must instead be pursued
by individual asbestos plaintiffs). These rulings were made final on 6 January
2012. The remaining preliminary issue pending is whether Flintkote is stopped
from pursuing certain fraudulent conveyance remedies as a result of contrary
statements it made early in the litigation. Discovery is ongoing and is likely
to continue throughout 2012. Flintkote intends to press the court to set a trial
date in mid-2012 but it appears unlikely that a trial could be held before late
2012 or early 2013.
In Wisconsin, the authorities have identified potentially responsible parties
(PRPs) to fund the clean up of river sediments in the lower Fox River. The
pollution was caused by discharges of Polychlorinated Biphenyls (PCBs) from
paper mills and other facilities operating close to the river. The cost of the
clean up work has been estimated to be in excess of US$900 million. Among the
potentially responsible parties is NCR Corporation (NCR) which is liable for the
clean up costs in a large portion of the river under the terms of a consent
decree and a unilateral administrative order issued by the United States
Environmental Protection Agency.
In 1978, a subsidiary of Industries, later known as Appleton Papers Inc.
(Appleton), purchased what was then NCR`s Appleton Papers Division from NCR. In
1978, Industries also incorporated a US entity by the name of BATUS, Inc.
(BATUS), which in 1980 became the holding company for all of Industries` US
subsidiaries, including Appleton. As the holding company, BATUS obtained
insurance policies for itself and its subsidiaries that included coverage for
certain environmental liabilities. Industries/BATUS spun off the Appleton
business in 1990 via a Demerger Agreement with Wiggins Teape Appleton p.l.c.,
now known as Windward Prospects Ltd (Windward), and Wiggins Teape Appleton
(Holdings) p.l.c., now known as Arjo Wiggins US Holdings Ltd (together, the AWA
Entities), obtaining what Industries believes were full indemnities from the AWA
Entities and Appleton for past and future environmental claims.
Disputes between NCR, Appleton, and Industries as to the indemnities given and
received under the original purchase agreement in 1978 have been the subject of
litigation that was commenced in 1995, a settlement agreement executed in 1998
(the Settlement Agreement), and an arbitration award in 2005. Under the terms of
the Settlement Agreement and the arbitration award, Industries and Appleton
generally have an obligation to share the costs of Fox River environmental
claims with NCR (60:40), but Industries has never been required to pay any sums
in this regard because Appleton and the AWA Entities have paid the non NCR (60
per cent) share of the clean up costs to date, and the governmental authorities
have not identified Industries or BATUS as PRPs. Windward also separately, and
indirectly, indemnified Appleton in respect of the clean up costs.
Contingent liabilities and financial commitments cont...
A trial is currently scheduled to begin in Wisconsin on 21 February 2012 to
determine whether NCR/Appleton is liable for the clean-up costs in the upper
portion of the Fox River. This trial is expected to address issues as to whether
NCR/Appleton is liable as a result of the sale, by a predecessor of NCR`s
Appleton Papers Division, of scrap paper, or "broke", to other paper companies
which in turn discharged PCBs into the river in the course of recycling the
broke.
Industries has become aware that Windward settled the majority of Appleton`s
insurance claims (over which it had control) at what Industries believes
constituted a significant discount, and has made dividend payments to its former
and current shareholders of approximately US$810 million, leaving it holding,
according to its latest accounts, approximately US$100 million of net assets.
Accordingly, there may be a greater risk that the assets of Windward are
insufficient to meet its obligations under the indemnities Industries believes
it has been granted. Appleton`s own accounts indicate limited financial
resources.
In December 2011, Windward asserted that it did not indemnify Industries
pursuant to the terms of the 1990 Demerger Agreement in respect of Industries`
obligations under the Settlement Agreement. Industries disputes Windward`s
position and has commenced proceedings.
While Industries believes it may have defences to claims by NCR against it under
the Settlement Agreement and arbitration award and remains hopeful that Appleton
and the AWA Entities will satisfy their obligations with respect to the Fox
River cleanup, taking into account court decisions, sums paid to date on the
clean-up and other available information, Industries believes it may have an
exposure of some US$426 million (equivalent to GBP274 million) in clean up
related costs. Accordingly, Industries has made a provision of GBP274 million,
which has been treated as an adjusting item in the income statement. This figure
is necessarily subject to uncertainty.
Industries has become aware that NCR is also being pursued by Georgia-Pacific
LLC (Georgia-Pacific), the owner of a facility on the Kalamazoo River in South-
West Michigan which released PCBs into that river. Georgia-Pacific has been
designated as a PRP in respect of that river. Georgia-Pacific contends that NCR
is responsible for, or should contribute to, the clean up costs, because (i) a
predecessor to NCR`s Appleton Paper Division sold "broke" containing PCBs to
Georgia Pacific or others for recycling; (ii) NCR itself sold paper containing
PCBs to Georgia Pacific or others for recycling; and/or (iiii) NCR is liable for
sales to Georgia Pacific or others of PCB containing broke by Mead Corporation,
which, like the predecessor to NCR`s Appleton Papers Division, coated paper with
the PCB-containing emulsion manufactured by NCR. Industries understands that NCR
does not believe that NCR has any liability in relation to the Kalamazoo River
and that it will vigorously contest Georgia-Pacific`s claim. Industries itself
believes that Industries only has potential exposure under the Settlement
Agreement or arbitration award if NCR is unsuccessful in its defence of the
claim and it is found that PCB contamination in the Kalamazoo River is due to
"broke" supplied by a predecessor of NCR`s Appleton Papers Division.
Industries is taking active steps to protect its interests, including seeking to
confirm its indemnities and to procure the repayment of the Windward dividends,
with a view to restoring value to Windward and, accordingly, the indemnities it
believes were granted to Industries.
UK-based Group companies
Investments has been served in the following US cases pending at 31 December
2011: one smoking and health class action (Cleary - see above); one class action
alleging violations of Kansas antitrust and consumer protection laws (Daric
Smith - see below); and two individual actions (Eiser and Perry). Two other
cases which had been pending against Investments as at 31 December 2010 were no
longer pending as at 31 December 2011 (City of St. Louis - see above, and the US
Department of Justice case - see below). The Company and Investments have been
served in one individual action alleging misappropriation of novel ideas and
breach of contract (Gero), although on 7 November 2011, the trial court
dismissed the Company and Investments from the case, which order the plaintiff
appealed on 7 December 2011.
Contingent liabilities and financial commitments cont...
Conduct-based claims
On 22 September 1999, the US Department of Justice brought an action in the US
District Court for the District of Columbia against various industry members,
including RJRT, B&W, Industries and Investments. Industries was dismissed for
lack of personal jurisdiction on 28 September 2000. The government sought to
recover federal funds expended in providing healthcare to smokers who have
developed diseases and injuries alleged to be smoking-related, and, in addition,
sought, pursuant to the Racketeer Influenced and Corrupt Organisations Act
(RICO), disgorgement of profits the government contends were earned as a
consequence of a RICO `enterprise`. On 28 September 2000, the federal district
court dismissed the portion of the claim which sought recovery of federal funds
expended in providing healthcare to smokers who have developed diseases and
injuries alleged to be smoking-related. The non-jury trial of the RICO portion
of the claim began on 21 September 2004, and ended on 9 June 2005. On 17
November 2004, the US Court of Appeals for the DC Circuit heard an appeal by the
defendants against an earlier district court decision that disgorgement of
profits is an appropriate remedy for the RICO violations alleged by the
government. On 4 February 2005, the DC Circuit allowed the appeal, ruling that
the government could not claim disgorgement of profits. On 17 October 2005, the
US Supreme Court declined to hear the appeal by the US government in respect of
the claim for disgorgement of US$280 billion of past profits from the
defendants.
On 17 August 2006, the federal district court issued its Final Judgment and
Remedial Order, consisting of some 1,600 pages of factual findings and legal
conclusions. The court found in favour of the government, and against certain
defendants, including RJRT, B&W and Investments. The court also ordered a wide
array of injunctive relief, including a ban on the use of `lights` and other
similar descriptors. In addition, the Final Judgment and Remedial Order ordered
the defendants to pay the government`s costs, which were US$1.9 million plus
interest.
On 10 August 2007, the defendants filed their initial appellate briefs to the
Court of Appeals for the DC Circuit. All defendants filed a joint appellate
brief, and Investments also filed its own brief which raised the issue of
whether Congress intended for RICO to apply to extraterritorial conduct by a
foreign defendant. On 19 November 2007, the government filed its opposition and
cross-appeal brief, seeking to reinstate certain remedial relief, including its
disgorgement claims. On 22 May 2009, a three-judge appellate panel unanimously
affirmed the federal district court`s RICO liability judgment against
Investments, Altria, Philip Morris, RJRT and Lorillard, ordered the dismissal of
Counsel for Tobacco Research (CTR) and Tobacco Institute (TI) (two defunct US
trade associations that were not covered by the district court`s injunctive
remedies), and remanded for further factual findings and clarification as to
whether liability should be imposed against B&W, based on changes in the nature
of B&W`s business operations. The panel also remanded on four discrete issues
relating to the injunctive remedies, including for the district court "to
reformulate" the injunction on the use of low-tar descriptors "to exempt foreign
activities that have no substantial, direct, and foreseeable domestic effects".
The government`s cross-appeal seeking disgorgement of past profits and the
funding of smoking education and cessation programmes was denied. Investments`
petition for panel rehearing and rehearing en banc was filed on 31 July 2009 and
was denied on 22 September 2009 by the DC Circuit.
On 19 February 2010, the defendants and the government filed certiorari
petitions with the US Supreme Court. On 28 June 2010, the US Supreme Court
declined to grant certiorari on all petitions. On 23 July 2010, Investments
filed a petition for rehearing of its certiorari petition before the US Supreme
Court, on the basis of an intervening decision by the US Supreme Court that
invalidated the "effects" test the federal district court and DC Circuit both
used in concluding that the RICO statute applied to Investments` foreign
conduct. The US Supreme Court denied Investments` rehearing petition on 3
September 2010.
On 7 July 2010, the DC Circuit issued its remand returning the case to the
federal district court for further proceedings. At a status conference on 20
December 2010, the CTR and the TI were dismissed by consent of the parties and
B&W was deemed "not to be a defendant" and was therefore not subject to the
Final Judgment and Remedial Order.
On 28 December 2010, the government filed a motion to compel Investments to
comply with injunctive remedies being sought in the case. On 21 January 2011,
Investments filed its brief in opposition and its motion for reconsideration of
the liability judgment and remedial relief against it based on intervening
change in controlling law governing the extraterritorial application of US
statutes. The government filed its reply in support of its motion to compel and
its opposition to Investments` motion for reconsideration on 7 February 2011.
Investments filed its reply in further support of its motion for reconsideration
on 21 February 2011.
Contingent liabilities and financial commitments cont...
On 28 March 2011, the federal district court issued an opinion granting
Investments` motion for reconsideration in part and denying it in part and
granting the government`s motion to compel in part and denying it in part. The
district court determined that a decision by the US Supreme Court in an
unrelated case issued several years after the district court`s 2006 Final
Judgment and Remedial Order, "rejected the `effects` test for extraterritorial
application", and therefore "invalidated the sole basis for (Investment`s)
liability" in this litigation". As a result, the district court held that the
Final Judgment and Remedial Order no longer applied to Investments
prospectively, and for this reason, Investments would not have to comply with
any of the remaining injunctive remedies being sought by the government. The
district court determined, however, that there was no basis for it to
retrospectively modify Investments` obligation to pay the government`s costs as
a prevailing party under the Final Judgment and Remedial Order, and therefore
ordered Investments to contribute its one-sixth share of the government`s costs.
Investments paid its share of the government`s costs (a total of US$404,243.88
inclusive of interest) on 25 May 2011. (RJRT paid approximately US$782,000 in
costs on behalf of itself and B&W on 28 September 2010.)
The government did not appeal the 28 March 2011 opinion. This means that
Investments is no longer in the case and will not be subject to any injunctive
relief that the court is expected to order against the remaining US defendants.
In the Daric Smith case, purchasers of cigarettes in the state of Kansas brought
a class action in the Kansas State Court against B&W, Investments and certain
other tobacco companies seeking injunctive relief, treble damages, interest and
costs. The allegations are that the defendants participated in a conspiracy to
fix or maintain the price of cigarettes sold in the US, including in the state
of Kansas, in violation of the Kansas Restraint of Trade Act.
Prior discovery disputes involving Investments have now been resolved by motion
and fact discovery is now closed. In late October 2010, the parties participated
in a court-ordered mediation but the case was not resolved. In late October and
early November 2010, all defendants, including Investments, moved for summary
judgment. On 13 May 2011, Investments supplemented its summary judgment motion
on the basis of its de minimis market share and the inapplicability of the
Kansas Restraint of Trade Act to a nonresident (such as Investments) that did
not purchase, sell or manufacture goods in the state of Kansas. The defendants`
summary judgment motions were heard on 18 January 2012 and the Court reserved
ruling.
On 22 July 2011, the plaintiff filed his own summary judgment motions. These
will be briefed and argued, if necessary, after a decision on the defendants`
summary judgment motions is issued. If the case is not dismissed on summary
judgment, trial of the matter is scheduled to begin on 16 July 2012.
In December 2011, the plaintiff filed a motion to file a second amended
petition. The defendants` arguments in opposition to this motion were heard on
18 January 2012 and the Court reserved ruling.
Product liability outside the United States
At 31 December 2011, active claims against the Group`s companies existed in 17
markets outside the US (2010: 22) but the only markets with more than five
claims were Argentina, Brazil, Canada, Italy, Nigeria, and the Republic of
Ireland (2010: seven). Medical reimbursement actions are being brought in
Canada, Argentina, Brazil, Israel, Nigeria, Saudi Arabia and Spain.
(a) Medical reimbursement cases
Argentina
In 2007, the non-governmental organisation the Argentina Tort Law Association
(ATLA) brought a reimbursement action against Nobleza Piccardo S.A.I.C.y.F.
(Nobleza) and Massalin Particulares. A defence was filed by Nobleza on 1 October
2009. Nobleza and the federal government`s preliminary objections were
considered by the Civil Court in late 2009 and, on 23 December 2009, the Civil
Court declared its lack of jurisdiction to hear the claim. On 11 March 2010, the
case was sent to the Contentious-Administrative Court, which determined that it
had jurisdiction over the case. On 24 June 2011, the Contentious-Administrative
Court issued an Order stating that it would decide defendants` outstanding
procedural objections together with the merits of the case. The case will now
enter the evidentiary stage.
Contingent liabilities and financial commitments cont...
Brazil
In August 2007, the Sao Paulo Public Prosecutors office filed a medical
reimbursement claim against Souza Cruz S.A. (Souza Cruz). A similar claim was
lodged against Philip Morris. Souza Cruz`s motion to consolidate the two claims
was rejected and instead this case was removed to a different lower court. Souza
Cruz filed a motion to reconsider the refusal for consolidation and an
interlocutory appeal against assignment to the lower court. At the same time,
the Public Prosecutor filed a motion challenging the connection between the two
cases, which argument the State Court of Appeals accepted in August 2010 and
ordered the two cases to progress independently. On 4 October 2011, the court
dismissed the action against Souza Cruz, with a judgment on the merits. The
plaintiff filed an appeal on 9 January 2012.
Canada
In Canada there are four pending statutory actions for recovery of healthcare
costs arising from the treatment of smoking and health related diseases. These
proceedings name various group companies. Legislation enabling provincial
governments to recover the healthcare costs has been enacted in all 10 provinces
and two of three territories in Canada but has only been proclaimed into force
in British Columbia, New Brunswick, Newfoundland and Labrador, Ontario and
Quebec. Actions have begun against various Group companies, including Imperial,
in British Columbia, New Brunswick, Newfoundland and Labrador, and Ontario. In
Quebec, three Canadian manufacturers, including Imperial, are challenging the
legislation and the Quebec government has yet to issue a statement of claim.
The government of British Columbia brought a claim pursuant to the provisions of
the Tobacco Damages and Health Care Costs Recovery Act 2000 (the Recovery Act)
against domestic and foreign `manufacturers` seeking to recover the plaintiff`s
costs of healthcare benefits. Imperial, Investments, Industries and other former
Rothmans Group companies are named as defendants. The constitutionality of the
Recovery Act was challenged by certain defendants and, on 5 June 2003, the
British Columbia Supreme Court found the Recovery Act to be beyond the
competence of the British Columbia legislature and, accordingly, dismissed the
government`s claim. The government appealed the decision to the British Columbia
Court of Appeal which, on 20 May 2004, overturned the lower court`s decision and
declared the Recovery Act to be constitutionally valid. The defendants appealed
to the Supreme Court of Canada in June 2005 and the court gave its judgment in
September 2005 dismissing the appeals and declaring the Act to be
constitutionally valid.
The federal government was enjoined by a Third Party Notice and presented a
motion to strike out the claim. The hearing took place during the week of 3
March 2008 and the court found in favour of the federal government. The
defendants appealed that decision and the hearing was held during the week of 1
June 2009. On 8 December 2009, the British Columbia Court of Appeal handed down
its decision in both this case and the Knight class action (see below). This
appeal was granted in part. The Court of Appeal held that it was not "plain and
obvious" that the federal government did not owe a duty of care to tobacco
manufacturers or consumers when it implemented its tobacco control strategy.
On 8 February 2010, the federal government sought leave to appeal this decision
to the Supreme Court of Canada. On 10 March 2010, the defendant filed response
materials and a cross appeal. The government of British Columbia sought leave to
oppose the defendants` cross appeal in part. On 20 May 2010, the Supreme Court
of Canada granted leave to appeal both in respect of the federal government`s
application and the defendants` conditional cross applications. The appeal was
heard on 24 February 2011. On 29 July 2011, the Supreme Court of Canada
delivered its opinion, which struck out the third party claims against the
federal government.
The underlying medical reimbursement action remains at a preliminary case
management stage. Damages have not yet been quantified by the plaintiff. Given
the prior pendency of the Supreme Court application, and a number of other
factors including delay on the part of the plaintiff in producing damages
modelling materials, the trial date has been postponed and no trial date is
currently set.
Non-Canadian defendants challenged the personal jurisdiction of the British
Columbia Court and those motions were heard in the Supreme Court of British
Columbia. On 23 June 2006, the court dismissed all defendants` motions, finding
that there is a "real and substantial connection" between British Columbia and
the foreign defendants. Subsequently, the defendants were granted leave to
appeal that ruling to the Court of Appeal of British Columbia. The appeal was
dismissed on 15 September 2006. The defendants filed leave to appeal to the
Supreme Court on 10 November 2006, and that application was denied on 5 April
2007.
Contingent liabilities and financial commitments cont...
The government of New Brunswick has brought a medical reimbursement claim
against domestic and foreign tobacco `manufacturers`, pursuant to the provisions
of the Recovery Act passed in that Province in June 2006. The Company,
Investments, Industries, Carreras Rothmans Limited (the UK Companies) and
Imperial have all been named as defendants. The government filed a statement of
claim on 13 March 2008. The Group defendants were served with the Notice of
Action and Statement of Claim on 2 June 2008. A case management conference was
held on 8 January 2009 so that other defendants could challenge the use of a
contingent fee arrangement (CFA) for the plaintiff`s lawyer. This challenge was
refused at first instance. Leave to appeal was granted on limited grounds. These
grounds, upon which leave was denied, were appealed directly to the Supreme
Court of Canada. On 13 May, 2010, the New Brunswick Court of Appeal dismissed
Imperial`s appeal. The Supreme Court of Canada subsequently denied leave on all
aspects of the CFA challenge, thus ending this preliminary challenge. The appeal
was dismissed and an application to appeal to the Supreme Court was denied on 21
October 2010.
The UK Companies` challenge to the New Brunswick court`s jurisdiction was heard
in June 2010. The court of Queen`s Bench dismissed the UK Companies`
jurisdictional motions on 15 November 2010. The UK Companies sought leave to
appeal this decision in the Court of Appeal of New Brunswick, which leave was
denied 11 April 2011 by a single judge of the Court of Appeal. The UK Companies`
applications for leave to appeal the 11 April 2011 decision of the Court of
Appeal of New Brunswick were dismissed by the Supreme Court of Canada on 13
October 2011. No damages have yet been quantified by the plaintiff. The UK
Companies filed demands for particulars on 15 November 2011.
The government of the Province of Ontario has also filed a C$50 billion medical
reimbursement claim against domestic and foreign tobacco `manufacturers`,
pursuant to the provisions of the Tobacco Damages and Health Care Costs Recovery
Act 2009. The UK Companies have all been named as defendants. Imperial was
served on 30 September 2009 and the UK Companies were served on 8 October 2009.
A case management judge has been appointed and the hearing on the UK Companies`
jurisdiction motions commenced on 23 November 2011. The jurisdiction motion was
heard in November 2011. Judgment was handed down on 4 January 2012 in favour of
the plaintiff in respect of all the UK Companies. The effect of this order is
that the court has determined that it has jurisdiction to hear the claim against
the UK Companies. There is however an automatic right to appeal the judgment to
the Court of Appeals.
The government of the Province of Newfoundland and Labrador filed a health care
reimbursement claim in February 2011 against domestic and foreign tobacco
`manufacturers`, pursuant to the provisions of the Tobacco Health Care Costs
Recovery Act enacted in that Province. The UK Companies have all been named as
defendants. Imperial was served on 1 April 2011, and the UK Companies were
served on 22 March 2011. A case management judge has been appointed. The UK
Companies have challenged the personal jurisdiction of the Newfoundland and
Labrador court. These jurisdictional challenges are currently scheduled for
hearing in May 2012.
Colombia
A medical reimbursement action pending as at 31 December 2010 against British
American Tobacco (South America) Limited in Colombia was dismissed on 10 June
2011.
Israel
In Israel, a medical reimbursement claim was brought against Industries, B&W,
Investments and B.A.T (U.K. and Export) Limited (BATUKE), amongst others, by
Clalit Health Services. The plaintiff claimed damages of NIS7.6 billion and
sought injunctive relief. On 13 July 2011, the Israeli Supreme Court reversed
the trial court`s ruling and dismissed the lawsuit on the grounds of remoteness.
On 28 August 2011, the plaintiff filed a petition for the holding of an
additional hearing before an expanded bench of the Supreme Court. A response on
behalf of the Group company defendants was filed by 27 November 2011. The
Supreme Court denied the plaintiff`s petition for an additional hearing on 28
January 2012. The case is now closed.
Nigeria
Medical reimbursement actions have also been brought by eight Nigerian states
(Lagos, Kano, Gombe, Oyo, Akwa Ibom, Ogun, Ondo and Ekiti) and by the federal
government of Nigeria, each seeking the equivalent of billions of pounds
sterling for costs allegedly incurred by the state and federal governments in
treating smoking-related illnesses. British American Tobacco (Nigeria) Limited
(BAT Nigeria) has been named as a defendant in each of the cases; the Company
and Investments have been named as defendants in seven of the cases.
Contingent liabilities and financial commitments cont...
On 9 October 2009, the actions that had been filed by the Attorneys General of
Ondo State and of Ekiti State were voluntarily discontinued by the plaintiffs
without prejudice to refile by notices dated 5 October 2009 and 18 June 2009,
respectively. The action filed by the Attorney General of Akwa Ibom was struck
out without prejudice on 19 October 2009 for lack of prosecution.
On 21 February 2008, the Lagos action was voluntarily discontinued by the
plaintiffs. On 13 March 2008, the Lagos Attorney General filed a substantially
similar action which was marked as "qualified" under Lagos State`s "Fast-Track"
system, seeking approximately GBP10.9 billion in damages, including special,
anticipatory and punitive damages, restitution and disgorgement of profits, as
well as declaratory and injunctive relief. The "Fast-Track" system provides for
resolution of the dispute within an eight-month time-period after filing. BAT
Nigeria, the Company and Investments have all been served in the new action, and
have filed preliminary objections. At a hearing on 16 September 2008, the court
directed that the case no longer qualified to be heard on the "Fast Track"
because service was yet to be completed on other non-BAT defendants. On 18
September 2009, the court issued a ruling denying the preliminary objections
filed by the Company and Investments on the basis that the court was competent
to hear the case as it related to the Company and Investments, that the Company
and Investments are necessary parties to the action and that the suit therefore
was not liable to be struck out as against the Company and Investments. On 2
October 2009, the Company and Investments filed notices of appeal from the
entirety of the court`s ruling as it related to their respective objections. The
Company and Investments filed their appeal briefs and, on 8 February and 6 July
2011, respectively, the plaintiff filed responding briefs in these appeals with
motions for extensions of time. As at 31 December 2011, the appeals and
plaintiff`s motions for extensions of time remain pending before the Court of
Appeal. On 15 October and 19 October 2009, respectively, the Company and
Investments filed motions to stay all proceedings pending the resolution of
their appeals, which motion was granted by the High Court on 20 September 2010.
On 15 June 2011, the Lagos Attorney General filed a notice of appeal from the
High Court`s order granting a stay of proceedings, which remains pending as at
31 December 2011.
On 8 July 2008, the High Court of Gombe State issued a ruling on the preliminary
objections filed by the Company, Investments and other defendants in the case,
setting aside the service on all defendants and striking out the Gombe suit. In
its decision, the court held that the writs served on the defendants were
invalid, the plaintiff had failed to pay the requisite filing fees, and based on
these filing defects, the court was not competent to assume jurisdiction. The
court also stated, however, that the plaintiff, through its statement of claim
and affidavit evidence filed in support of its ex parte motion for leave to
serve outside the jurisdiction, had satisfied the requirements for service
outside the jurisdiction. Although the plaintiff has not appealed from the
court`s decision, the plaintiff has filed a renewed action in the High Court of
Gombe State. The plaintiff seeks approximately GBP2.4 billion in damages,
including special, anticipatory and punitive damages, restitution and
disgorgement of profits, as well as declaratory and injunctive relief. BAT
Nigeria, the Company and Investments filed notices of preliminary objection in
the renewed action. On 10 February 2011, the High Court denied the preliminary
objections filed by the Company and Investments and the companies appealed the
court`s ruling on 24 February 2011. The companies also filed motions to stay
proceedings in the High Court pending the appeals, and on 19 December 2011 the
High Court adjourned sine die pending resolution of the defendants` appeals. On
8 July 2011, the Company and Investments filed their respective appeal briefs
and their appeals remain pending as at 31 December 2011.
Oyo State seeks approximately GBP1.5 billion in damages, including special,
anticipatory and punitive damages, restitution and disgorgement of profits, as
well as declaratory and injunctive relief. The High Court partially granted the
preliminary objections filed by the Company and Investments on 22 June 2010 and
set aside the service of the writ of summons. The Company and Investments
appealed the court`s order insofar as it denied the remainder of the relief
requested, including the High Court`s decision not to set aside the issuance of
the writ. As at 31 December 2011, the Court of Appeal has yet to set a date for
hearing of the appeals.
Contingent liabilities and financial commitments cont...
In Kano, the plaintiff seeks approximately GBP7.6 billion in damages, including
special, anticipatory and punitive damages, restitution and disgorgement of
profits, as well as declaratory and injunctive relief. Preliminary objections
filed by the Company and Investments were dismissed on 16 April 2010. The
Company and Investments have appealed the decision and sought a stay of
proceedings in the High Court pending appeal. On 13 May 2010, the plaintiff
filed a motion in the High Court for preliminary injunctive relief, seeking,
inter alia, orders to restrain the defendants from various alleged marketing and
distribution practices in Kano State including the sale of tobacco products
within 1000 meters of any public places that are predominately a location for
minors. On 3 February 2011, the Company and Investments filed motions in the
Court of Appeal to stay further proceedings in the High Court. On 14 February
2011, the plaintiff moved to dismiss the stay motions filed by the Company and
Investments before the Court of Appeal. The Court of Appeal hearing on the stay
motions filed by the Company and Investments and the plaintiff`s motions to
dismiss was adjourned on 26 January 2012. No new hearing date has been set. As
at 31 December 2011, no date has been set for continuation of proceedings in the
High Court.
In Ogun, the preliminary objections filed by BAT Nigeria, the Company and
Investments were denied by the court on 20 May 2010. All three BAT defendants
have filed appeals and the Company and Investments have sought a stay of
proceedings pending their appeals. On 24 May 2010, the plaintiff filed a motion
for preliminary injunctive relief in the High Court, seeking, inter alia, orders
to restrain the defendants from committing various alleged marketing and
distribution practices in Ogun State, including the sale of tobacco products
within 1000 meters of any public places that are predominately a location for
minors. On 21 October 2010, the High Court adjourned proceedings sine die
pending resolution of the defendants` stay motions before the Court of Appeal.
On 18 October 2011, the Court of Appeal set 8 May 2012 for hearing of the
Company`s appeal and reserved hearing of the Company`s stay motion. BAT
Nigeria`s and Investments` appeals stand adjourned to 30 May 2012 for hearing of
the Ogun Attorney General`s motions for extensions of time to file responding
briefs on appeal.
The Attorney General of the Federation filed suit on 6 November 2007 against the
Company, Investments, BAT Nigeria and two other defendants, seeking
approximately GBP21.3 billion in damages, including special, anticipatory and
punitive damages, restitution and disgorgement of profits, as well as
declaratory and injunctive relief. The Company, BAT Nigeria, and Investments,
respectively, were served on 16, 18, and 19 December 2007, and filed preliminary
objections. On 27 January 2010, the Attorney General of the Federation filed a
notice of discontinuance of the action as against another defendant, and the
court struck out the action as against that defendant.
Saudi Arabia
In Saudi Arabia, in 2007 there were reports that the Ministry of Health was
pursuing a medical reimbursement action in the Riyadh General Court against a
number of distributors and agents. According to these reports, the Ministry of
Health would reportedly seek damages of at least 127 billion Saudi Riyals. As at
31 December 2011, no Group company has been served with process. A separate
medical reimbursement action was reportedly filed by the King Faisal Specialist
Hospital in the Riyadh General Court, naming `BAT Company Limited` as a
defendant. As at 31 December 2011, no Group company had been served with process
in the action.
Spain
In early 2006, the Junta de Andalucia, in Spain, filed a medical reimbursement
action against the State and tobacco companies (including BAT Espana S.A.)
before the contentious-administrative courts. The State filed preliminary
objections to the Junta`s claim, with tobacco companies filing supporting
briefs. The court upheld these preliminary objections and dismissed the claim in
November 2007. The Junta`s appeal of this ruling to the Supreme Court was
dismissed in September 2009. However, in May 2009, the Junta filed a new
contentious-administrative claim with similar allegations. The defendants filed
procedural objections, which were rejected by the court. The next procedural
step is for the Junta to file its exhibits to the claim which were not attached
to the Writ.
Contingent liabilities and financial commitments cont...
(b) Class actions
Brazil
There are currently four class actions being brought in Brazil. One class action
recently ended in a final defence judgment (see below). One is also a medical
reimbursement (Sao Paulo), and is therefore discussed above.
In 1995, the Associacao de Defesa da Saude do Fumante (ADESF) class action was
filed against Souza Cruz and Philip Morris in the Sao Paulo Lower Civil Court
alleging that the defendants are liable to a class of smokers and former smokers
for failing to warn of cigarette addiction. The case was stayed in 2004 pending
the defendants` appeal from a decision issued by the lower civil court on 7
April 2004. That lower court decision held that the defendants had not met their
burden of proving that cigarette smoking was not addictive or harmful to health,
notwithstanding an earlier interlocutory order that the Sao Paulo Court of
Appeals had issued, which directed the trial court to allow more evidence to be
taken before rendering its decision. On 12 November 2008, the Sao Paulo Court of
Appeals overturned the lower court`s unfavourable decision of 2004, finding that
the lower court had failed to provide the defendants with an opportunity to
produce evidence. The case was returned to the lower court for production of
evidence and a new judgment. On 19 March 2009, the Lower Civil Court ordered
designation of court-appointed medical and advertising experts. The parties
submitted questions to these court-appointed experts who subsequently delivered
their reports. Each party also provided expert reports commenting on the court-
appointed experts` conclusions. On 16 May 2011, the court granted Souza Cruz`s
motion to dismiss the action in its entirety on the merits. Plaintiffs filed an
appeal of the dismissal on 22 July 2011. Souza Cruz filed its response on 5
October 2011. On 10 November 2011, the case records were sent to the Public
Prosecutor Office. On 20 December 2011, the Public Prosecutor Office presented a
non-binding, advisory opinion that rejected most of Souza Cruz`s legal defence
arguments. The case records were sent to the Sao Paulo State Court of Appeals.
The appellate court has not yet issued a ruling.
The Brazilian Association for the Defense of Consumers` Health (Saudecon) filed
a class action against Souza Cruz in the City of Porto Alegre, Brazil on 3
November 2008. The plaintiff purports to represent all Brazilian smokers whom,
it alleges, are unable to quit smoking and lack access to cessation treatments.
The plaintiff is seeking an order requiring the named defendants to fund,
according to their market share, the purchase of cessation treatments for these
smokers over a minimum period of two years. Souza Cruz was served with this
complaint on 19 November 2008. On 18 May 2009, the case was dismissed with
judgment on the merits. The plaintiffs appealed in August 2009 and Souza Cruz
and Philip Morris both responded. On 22 July 2011, the Public Prosecution Office
issued a non-binding opinion saying that the favourable first instance ruling
should be vacated based on procedural issues. On 25 August 2011, the reporting
justice of the appellate court rejected the Public Prosecution Office`s opinion,
finding that the trial court ruling should not be nullified. On 1 November 2011,
the 9th Chamber of the Rio Grande do Sul State Court of Appeals granted the
Public Prosecution Office special appeal, ordering the remittance of the case
records in the first instance to complete proper notification to the Public
Prosecutor Office of the sentence. On 14 December 2011, the Public Prosecution
Office filed a special appeal. Souza Cruz`s counter-arguments were submitted on
10 February 2012.
A class action was filed against Souza Cruz by the Association of Exploited
Consumers of the federal District, requesting a court order to prevent Souza
Cruz selling cigarettes in Brazil. In December 2006, the federal District Court
of Appeals confirmed a favourable lower court decision which had found the claim
groundless and unlawful. The plaintiff appealed that ruling, but on 12 March
2009 the Superior Court affirmed the ruling and rejected the plaintiff`s appeal.
The plaintiff appealed again, but on 23 March 2009, in a unanimous decision, the
Superior Court rejected the plaintiff`s appeal. On 25 November 2011, the
Reporting Justice confirmed the Superior Court of Justice and the Federal
District State Court of Appeals favourable decisions. The case is now closed.
In 2004, the State of Sergipe instigated a class action seeking compensation for
smokers in Sergipe State who purportedly tried to quit smoking. The lower court
denied the plaintiffs` request for early relief and determined ANVISA (a federal
government health agency) be ordered to join the case as co-defendants. As
ANVISA is a federal agency, the case was removed to the federal court where
ANVISA successfully argued that it lacked standing to be sued. The claim against
ANVISA was dismissed and the federal court sent the case back to the lower state
court for proceedings to continue. However, the action was stayed on 18 December
2009 pending a decision by the Superior Court on which court has jurisdiction.
On 26 March 2010 the Superior Court determined that the civil court had
jurisdiction of the matter. On 19 October 2011, the court dismissed the action
with judgment on the merits. The plaintiff filed an appeal on 9 January 2012.
Contingent liabilities and financial commitments cont...
Bulgaria
In March 2008, Mr Nikolay Benchev Yochkolovski filed a smoking-related consumer
fraud class action in the Sofia City Court of Bulgaria against 21 defendants,
including the following British American Tobacco-affiliated companies: British-
American Tobacco Polska S.A., British-American Tobacco (Romania) Investments
SRL, House of Prince A/S, and Scandinavian Tobacco S.A. On 24 September 2008,
the claim was dismissed on procedural grounds and the plaintiff appealed this
ruling. On 11 November 2008, the Court of Appeal granted the plaintiff`s appeal.
On 2 December 2008, the Sofia City Court ordered the plaintiff to meet various
evidentiary and procedural conditions before proceeding further with this claim.
The Sofia Court of Appeal upheld this decision. Following a hearing before the
Sofia City Court, the court denied the plaintiff`s request to allow a class
action to proceed on 26 November 2010. The plaintiff appealed that decision and
on 20 January 2011, the Sofia Court of Appeal, rejected plaintiff`s appeal and
affirmed termination of the proceedings. Thereafter, the plaintiff appealed the
decision to the Bulgarian Supreme Court of Cassation. The Court rejected this
appeal on 3 May 2011.
Canada
There are 10 class actions being brought in Canada against Group companies.
Knight is a `lights` class action in which the plaintiff alleges that the
marketing of light and mild cigarettes is deceptive because it conveys a false
and misleading message that those cigarettes are less harmful than regular
cigarettes. Although the claim arises from health concerns, it does not seek
compensation for personal injury. Instead it seeks compensation for amounts
spent on `light and mild` products and a disgorgement of profits from Imperial.
The Supreme Court of British Columbia certified a class of all consumers of
cigarettes bearing `light` or `mild` descriptors since 1974 manufactured in
British Columbia by Imperial. Imperial filed an appeal against the certification
which was heard in February 2006. The appellate court confirmed the
certification of the class but has limited any financial liability, if proven,
to the period from 1997.
The motion of the federal government to strike out the third party notice issued
against them by Imperial was heard in February 2006 and was granted but was
appealed by Imperial. The appeal was heard in June 2009 in conjunction with the
British Columbia health care reimbursement claim. The Court of Appeal went so
far as to say that it was not "plain and obvious" that the federal government
did not owe a duty of care to manufacturers or indeed to the class itself and,
therefore, the federal government could face potential liability to claims of
product liability or misrepresentation. The federal government appealed the
Court of Appeal`s decision. On 29 July 2011, the Supreme Court unanimously
granted the federal government`s appeal and dismissed the third party claim on
the basis that the federal government`s impugned conduct constituted valid
policy benefiting public health and is therefore not subject to civil liability.
On 9 December 2009, Imperial was served with a class action filed by Ontario
tobacco farmers and the Ontario Flue-Cured Tobacco Growers` Marketing Board (the
Growers` Claim). The plaintiffs allege that, during the timeframe, Imperial
improperly paid lower prices for tobacco leaf destined for duty-free products
that was smuggled back into Canada and sold in the domestic market, as opposed
to the higher domestic leaf price. Imperial deposited the amount owing to the
government of Ontario pursuant to the Comprehensive Agreement into an escrow
account, alleging that the Comprehensive Agreement permitted Imperial to set-off
that amount against costs incurred as a result of the claim (including damages,
if any). In response, the Ontario government commenced an application against
Imperial, seeking the release of the funds (the Ontario Claim). No monetary
damages are being claimed against Imperial by the government of Ontario.
On 26 July 2010, Imperial argued its preliminary motion in the Ontario claim.
Imperial was successful in its application and the court ordered that the
Ontario claim be stayed in favour of the arbitration provisions stipulated in
the Comprehensive Agreement and raised by Imperial in its Notice of Arbitration.
The Ontario government appealed this decision and the hearing date originally
scheduled for 4 January 2011 was heard by the Ontario Court of Appeal on 17
February 2011. The Canadian government intervened in the appeal to support
Ontario government`s position.
Contingent liabilities and financial commitments cont...
On 20 July 2011, the Court of Appeal gave judgment in Imperial`s favour and held
that the funds would remain in escrow pending a decision by an arbitrator on the
issue pursuant to the Comprehensive Agreement. The court also ruled that the
question of whether the Growers` Claim constitutes a `Released Claim` under the
Comprehensive Agreement must be determined by the courts, thereby splitting the
issues. In the meantime, Imperial will proceed with the arbitration. As yet, no
hearing date has been set.
Imperial was recently served with certification materials in the underlying
Growers` Claim. This case remains at a very preliminary stage and no hearing
date has been set.
There are currently two class actions in Quebec. On 21 February 2005, the Quebec
Superior Court granted certification in two class actions against Imperial and
two domestic manufacturers, which have a combined value of C$23 billion plus
interest and costs. The court certified two classes, which include residents of
Quebec who suffered from lung, throat and laryngeal cancer or emphysema as at
November 1998 or developed these diseases thereafter and who smoked a minimum of
fifteen cigarettes a day for at least five years, and residents who were
addicted to nicotine at the time the proceedings were filed and who have since
remained addicted. In Quebec, there is no right of appeal for a defendant upon
certification. The plaintiffs have served a Statement of Claim. The trial in
this matter has been set for 5 March 2012.
In June 2009, four new smoking and health class actions were filed in Nova
Scotia, Manitoba, Saskatchewan and Alberta, against Canadian manufacturers and
foreign companies, including the UK Companies and Imperial. In Saskatchewan, a
number of UK companies have been released from the action. In Nova Scotia the
proceedings have not progressed. There are service issues in relation to the UK
Companies for Alberta and Manitoba.
In June 2010, two further suits were filed in British Columbia. Imperial was
served with the British Columbia suits on 16 July 2010. The Bourassa claim is
allegedly on behalf of all individuals who have suffered chronic respiratory
disease and the McDermid claim proposes a class based on heart disease. Both
claims state that they have been brought on behalf of those who have "smoked a
minimum of 25,000 cigarettes". The UK companies were served on 20 July 2010. The
UK Companies and Imperial proceeded to challenge jurisdiction.
Italy
In 2010, British American Tobacco Italia S.p.A (BAT Italia) was served with
notice of a class action suit filed by an Italian consumer association
(Codacons) and three representative individuals. The main allegations made in
the class action relate to addiction claims and failure to warn. In April 2011,
the class action suit was declared inadmissible by the First Instance Civil
Court of Rome. The Court of Rome considered the action to be manifestly without
merit and held that it was inadmissible on that basis as well as others.
Plaintiffs filed an appeal against the decision issued by the Court of Rome,
challenging the grounds of inadmissibility. The parties presented their final
arguments to the Court of Appeal on 25 January 2012. On 27 January 2012, the
Court of Appeal upheld the lower court`s decision confirming the inadmissibility
of the case.
Venezuela
The Venezuelan Federation of Associations of Users and Consumers filed a class
action against the Venezuelan government seeking regulatory controls on tobacco
and recovery of medical expenses for future expenses of treating smoking-related
illnesses in Venezuela. On 19 January 2009, C.A Cigarrera Bigott Sucs.
(Cigarrera Bigott) notified the court of its intention to appear as a third
party. The court adjourned a public hearing, initially scheduled for 28 July
2009, where Cigarrera Bigott`s status as a third party would be determined and
parties would present evidence and make arguments. On 16 September 2009, the
Venezuelan Republic ordered the court to continue the judicial process. A new
date has yet to be scheduled by the court.
On 12 April 2011, however, the Constitutional Chamber of the Supreme Court of
Justice issued decision number 494, which established the rules for class action
procedures. The court must therefore decide whether Cigarrera Bigott`s
intervention may be admitted under the new procedure prior to the public
hearing. This decision has not yet been issued.
Contingent liabilities and financial commitments cont...
(c) Individual personal injury claims
Aside from the US there are approximately 353 individual smoking cases pending
world-wide as at 31 December 2011 against Group companies that are not detailed
here. Over three-quarters of these cases are in Brazil.
At 31 December 2011, there were only three (compared to aproximately 1,000 cases
in July 2008, which decreased to 634 in July 2009) individual `lights` cases in
Italy pending against BAT Italia before the justice of the peace courts and 43
`lights` cases on appeal. In addition, in 2007, 2,230 cases were filed by a
single plaintiffs` counsel in one jurisdiction (Pescopagano). The court has
confirmed the withdrawal of all of these claims. Because of the type of court
involved, the most that any individual plaintiff can recover in damages is
Euro1,033, plus Euro1,000 in costs and an additional Euro3,000 for enforcement
proceedings. As at 31 December 2011, more than 4,000 cases (including 2,230
Pescopagano cases) had been withdrawn, suspended or resulted in decisions given
in favour of BAT Italia.
As at 31 December 2011, there are 27 smoking and health cases pending before
Italian first instance civil courts, filed by or on behalf of individuals in
which it is contended that diseases or deaths have been caused by cigarette
smoking. There are two labour cases for alleged occupational exposure pending in
Italy. In addition, there are 12 cases on appeal, including two appeals that
relate to the same labour court decision (Serafini) but based on different
grounds.
On 23 June 2003, an individual action was brought in the Danish High Court
against House of Prince A/S and Skandinavisk Tobakskompagni A/S seeking
DKK485,450 (currently approximately Euro65,215) for alleged smoking-related
diseases and loss of earnings. On 8 December 2011, the Court issued Judgment in
favour of the defendants and ordered costs against the plaintiff. On 31 January
2012, the plaintiff filed an appeal.
On 14 September 2011, an individual action was brought in the Zheleznodorozhny
District Court of Khabarovsk, Russia against British American Tobacco-STF (BAT-
STF) and British American Tobacco-Yava (BAT-Yava) among others. The plaintiff
seeks to compel defendants, including BAT-STF and BAT-Yava, to cease production
and sale of tobacco products and to remove their tobacco products from
circulation within the Russian Federation. On 20 October 2011, a statement of
defence was filed for BAT-STF and BAT-Yava. The plaintiff filed to withdraw his
claim and the court accepted the withdrawal of the claim on 22 November 2011.
The plaintiff did not file an appeal within the time permitted. However, the
plaintiff may still be allowed to file an appeal if he can show that there was a
valid reason for missing the appeal deadline.
Conclusion
While it is impossible to be certain of the outcome of any particular case or of
the amount of any possible adverse verdict, the Group believes that the defences
of the Group`s companies to all these various claims are meritorious on both the
law and the facts, and a vigorous defence is being made everywhere. If an
adverse judgment is entered against any of the Group`s companies in any case, an
appeal will be made. Such appeals could require the appellants to post appeal
bonds or substitute security in amounts which could in some cases equal or
exceed the amount of the judgment. In any event, with regard to US litigation,
the Group has the benefit of the RJRT Indemnification. At least in the
aggregate, and despite the quality of defences available to the Group, it is not
impossible that the Group`s results of operations or cash flows in particular
quarterly or annual periods could be materially affected by this and by the
final outcome of any particular litigation.
Having regard to all these matters, the Group (i) does not consider it
appropriate to make any provision in respect of any pending litigation, save
insofar as stated above and (ii) does not believe that the ultimate outcome of
this litigation will significantly impair the Group`s financial condition.
RELATED PARTY DISCLOSURES
The Group`s related party transactions and relationships for 2011 and 2010 are
disclosed as Appendix 3 to this announcement.
SHARE BUY-BACK PROGRAMME
In 2011, the Board approved the resumption of the on-market share buy-back
programme with a value of up to GBP750 million, excluding costs. During the year
ended 31 December 2011, 28 million shares were bought at a cost of GBP 750
million, excluding transaction costs of GBP5 million. (2010: GBPnil).
The Board has approved the continuation of the on-market share buy-back
programme in 2012 with a value of up to GBP1.25 billion, excluding costs.
NON-EXECUTIVE DIRECTOR: CONFLICT OF INTEREST AND AUDIT COMMITTEE MEMBERSHIP
During 2011, a potential conflict of interest arose for Christine Morin-Postel,
a Non-Executive Director of British American Tobacco p.l.c. (the "Company") and
a member of the Company`s Audit Committee, in respect of the British American
Tobacco Group`s (the "Group") exposure to the clean-up costs for pollution in
the Lower Fox River in Wisconsin, USA (the "Fox River Matter"). Further details
of the Fox River Matter are set out in the section on Contingent Liabilities and
Financial Commitments. Group companies have potential direct or indirect causes
of action against the French company, Sequana SA, in relation to a former
subsidiary of it, which subsidiary the Group believes provides an indemnity to
it in relation to the clean-up costs. Ms Morin-Postel is a non-executive
director of a shareholder in Sequana SA.
To date, Ms Morin-Postel has absented herself from any Board or Audit Committee
meetings of the Company when the Fox River Matter has been discussed. She will
continue to do so in future meetings and to facilitate this process further, she
has decided to resign as a member of the Audit Committee with effect from 21
February 2012.
Christine Morin-Postel remains a Non-Executive Director of the Company.
ANNUAL REPORT
The financial information set out above does not constitute the Company`s
statutory accounts for the years ended 31 December 2011 or 2010. Statutory
accounts for 2010 have been delivered to the Registrar of Companies and those
for 2011 will be delivered following the Company`s Annual General Meeting. The
auditors` reports on both the 2010 and 2011 accounts were unqualified, did not
draw attention to any matters by way of emphasis and did not contain statements
under s498(2) or (3) of Companies Act 2006 or equivalent preceding legislation.
The Annual Report will be published on bat.com on 26 March 2012. At that time,
a printed copy will be mailed to shareholders on the UK main register who have
elected to receive it. Otherwise, such shareholders will be notified that the
Annual Report is available on the website and will, at the time of that
notification, receive a Performance Summary (which sets out an overview of the
Group`s performance, headline facts and figures and key dates in the Company`s
financial calendar) together with a Proxy Form and Notice of Annual General
Meeting. Specific local mailing and/or notification requirements will apply to
shareholders on the South African branch register.
SHAREHOLDER INFORMATION
FINANCIAL CALENDAR 2012
Thursday 26 April Interim Management Statement
Thursday 26 April Annual General Meeting
The Banqueting House, Whitehall, London SW1A 2ER
Wednesday 25 July Half-yearly Report
Wednesday 24 October Interim Management Statement
CALENDAR FOR THE FINAL DIVIDEND 2011
2012
Thursday 23 February Dividend announced (including amount of dividend per
share in both sterling and rand; applicable exchange rate and conversion date -
Tuesday 21 February 2012)
Thursday 23 February
to Friday 9 March From the commencement of trading on Thursday 23 February
2012 to Friday 9 March 2012, no removal requests in either direction between the
UK main register and the South African branch register will be permitted
Friday 2 March Last Day to Trade (JSE)
Monday 5 March
to Friday 9 March No transfers between the UK main register and the South
African branch register will be permitted; no shares may be dematerialised or
rematerialised between these inclusive dates
Monday 5 March Ex-dividend date (JSE)
Tuesday 6 March Last Day to Trade (LSE)
Wednesday 7 March Ex-dividend date (LSE)
Friday 9 March Record date (LSE and JSE)
Thursday 3 May Payment date (sterling and rand)
Note: details of the applicable exchange rate can be found under the heading
`Dividends` above.
For holders of American Depositary Receipts (ADRs), the record date for ADRs is
also Friday 9 March 2012 with an ADR payment date of Tuesday 8 May 2012.
CORPORATE INFORMATION
Premium listing
London Stock Exchange (Share Code: BATS; ISIN: GB0002875804)
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ, UK
tel: 0800 408 0094; +44 870 889 3159
Share dealing tel: 0870 703 0084 (UK only)
Your account: www.computershare.com/uk/investor/bri
Share dealing: www.computershare.com/dealing/uk
Web-based enquiries: www.investorcentre.co.uk/contactus
Corporate information cont...
Secondary listing
JSE (Share Code: BTI)
Shares are traded in electronic form only and transactions settled
electronically through Strate.
Computershare Investor Services (Pty) Ltd
PO Box 61051, Marshalltown 2107, South Africa
tel: 0861 100 925; +27 11 870 8222
e-mail enquiries: web.queries@computershare.co.za
American Depositary Receipts (ADRs)
NYSE Amex Equities (Symbol: BTI; CUSIP Number: 110448107)
Sponsored ADR programme; each ADR represents two ordinary shares of British
American Tobacco p.l.c.
Citibank Shareholder Services
PO Box 43077
Providence, Rhode Island 02940-3077, USA
tel: 1-888-985-2055 (toll-free) or +1 781 575 4555
e-mail enquiries: citibank@shareholders-online.com
website: www.citi.com/dr
Publications
British American Tobacco Publications
Unit 80, London Industrial Park, Roding Road, London E6 6LS, UK
tel: +44 20 7511 7797; facsimile: +44 20 7540 4326
e-mail enquiries: bat@team365.co.uk or
Computershare Investor Services (Pty) Ltd in South Africa using the contact
details shown above.
British American Tobacco p.l.c.
Registered office
Globe House
4 Temple Place
London
WC2R 2PG
tel: +44 20 7845 1000
British American Tobacco p.l.c. is a public limited company which is listed on
the London Stock Exchange and the JSE Limited in South Africa. British American
Tobacco p.l.c. is incorporated in England and Wales (No. 3407696) and domiciled
in the UK.
British American Tobacco p.l.c.
Representative office in South Africa
34 Alexander Street
Stellenbosch
7600
South Africa
(PO Box 631, Cape Town 8000, South Africa)
tel: +27 21 888 3722
DISCLAIMERS
This announcement does not constitute an invitation to underwrite, subscribe
for, or otherwise acquire or dispose of any British American Tobacco p.l.c.
shares or other securities.
This announcement contains certain forward looking statements which are subject
to risk factors associated with, among other things, the economic and business
circumstances occurring from time to time in the countries and markets in which
the Group operates. It is believed that the expectations reflected in this
announcement are reasonable but they may be affected by a wide range of
variables which could cause actual results to differ materially from those
currently anticipated.
Past performance is no guide to future performance and persons needing advice
should consult an independent financial adviser.
DISTRIBUTION OF REPORT
This announcement is released to the London Stock Exchange and the JSE Limited.
It may be viewed and downloaded from our website www.bat.com.
Copies of the announcement may also be obtained during normal business hours
from: (1) the Company`s registered office; (2) the Company`s representative
office in South Africa; and (3) British American Tobacco Publications, as above.
Nicola Snook
Secretary
22 February 2012
APPENDIX 1
ANALYSIS OF REVENUE AND PROFIT FROM OPERATIONS
REVENUE
2011 2010
Impa Orga Organ Orga
ct nic ic nic
Repo of Revenu adju reven Repor adju Orga
rted e st- ue ted st- nic
reve exch at ment at reven ment reve
nue ange CC(1) (3) CC(1) ue s(3) nue
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Asia- 4,25 (101 4,150 4,150 3,759 3,75
Pacifi 1 ) 9
c
Americ 3,55 16 3,574 (9) 3,565 3,498 (134 3,36
as 8 ) 4
Wester 3,60 (68) 3,532 3,532 3,695 (282 3,41
n 0 ) 3
Europe
EEMEA 3,99 216 4,206 4,206 3,931 3,93
0 1
Total 15,3 63 15,462 (9) 15,45 14,88 (416 14,4
99 3 3 ) 67
PROFIT FROM OPERATIONS
2011 2010
Orga
nic
Adjus Orga Adju Orga Orga
ted nic sted nic nic
Repor Adjus Adjus Impac Profi adju Prof Adjus adju Adju
ted ting ted t of t(2) st- it(2 ted st- sted
)
Profi items Profi excha at ment at Profi ment Profi
t(2) t(2) nge CC(1) (3) CC(1 t(2) s(3) t(2)
)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Asia- 1,481 58 1,539 (59) 1,480 1,48 1,332 1,33
Pacifi 0 2
c
Americ 1,426 15 1,441 (1) 1,440 1 1,44 1,382 (3) 1,37
as 1 9
Wester 1,075 153 1,228 (24) 1,204 1,20 1,103 (6) 1,09
n 4 7
Europe
EEMEA 1,013 298 1,311 51 1,362 1,36 1,167 1,16
2 7
4,995 524 5,519 (33) 5,486 1 5,48 4,984 (9) 4,97
7 5
Fox (274) 274
River(
4)
Total 4,721 798 5,519 (33) 5,486 1 5,48 4,984 (9) 4,97
7 5
Notes:
(1) CC: Constant currencies
(2) Profit: Profit from operations
(3) Organic adjustments: Mergers and acquisitions and discontinued
activities - adjustments are made to the 2010 and 2011 numbers, based on
the 2011 Group position
(4) The Fox River provision made in 2011 (see page 23), has not been
allocated to a segment or segments as it relates to a 1998 settlement
agreement. It is presented separately from the segmental reporting which
is used to evaluate segment performance and to allocate resources.
APPENDIX 2
KEY GROUP RISK FACTORS
This section identifies the main risk factors that may affect the British
American Tobacco Group.
The following provides a brief description of the key risks to which the Group`s
operations are exposed and identify, in each case, their potential impact on the
Group and the principal activities in place to manage the risk. Each risk is
considered in the context of the Group strategy by identifying the principal
strategic element to which it relates, although other elements may also be
relevant.
It is not the intention to provide an extensive analysis of all risks affecting
the Group but rather to identify only those risks and uncertainties which the
Directors believe to be the principal ones facing the business. Not all of the
factors listed are within the control of the Group and other factors besides
those listed may affect the performance of its businesses. Some risks may be
unknown at present and other risks, currently regarded as immaterial, could turn
out to be material in the future.
The risk factors listed in this section and the specific activities in place to
manage them should be considered in the context of the Group`s internal control
framework. This section should also be read in the context of the cautionary
statement regarding forward-looking statements on page 55.
Risk registers, based on a standardised methodology, are used at Group,
regional, area and individual market level to identify, assess and monitor the
key risks (both financial and non-financial) faced by the business at each
level. Information on prevailing trends, for example whether a risk is
considered to be increasing or decreasing over time, is provided in relation to
each risk and all identified risks are assessed at three levels
(high/medium/low) by reference to their impact and likelihood. Mitigation plans
are required to be in place to manage the risks identified and the risk
registers and mitigation plans are reviewed on a regular basis. At Group level,
specific responsibility for managing each identified risk is allocated to a
member of the Management Board. The Group risk register provides the basis for
the assessment of the key Group risk factors identified below. It is reviewed
regularly by a committee of senior managers chaired by the Finance Director and
twice yearly by the Corporate Committee. In addition, it is reviewed annually by
the Board and twice yearly by the Audit Committee. The Board and each such
Committee reviews changes in the status of identified risks, assessing changes
in impact and likelihood, and the Audit Committee also spends time focusing on
selected key risks in detail.
Developments in the assessment of Group risk
The Board`s assessment of the key risks and uncertainties facing the Group has
remained broadly unchanged over the past year, particularly with regard to
illicit trade, excise and tax and financial risk. However, as a consequence of
the Board`s continuing reappraisal of Group risks and the activities in place to
address them, some risks which have in previous years been considered as key
Group risks are no longer assessed as such in terms of their impact and
likelihood and so are not addressed in the tables below. They are nevertheless
still addressed as Group risks, remain on the Group risk register and continue
to be reviewed in accordance with the Group`s risk management procedures. This
applies, for example, to the loss of confidential information or malicious
manipulation of data, which was included in last year`s table but is no longer
included this year.
Climate change, which has previously been identified as a Group risk, is no
longer considered to be a risk factor itself, but is treated as a potential
cause of more specific risks, such as the inability to obtain adequate supplies
of leaf. It therefore continues to be taken into account in the assessment of
Group risk. Non-compliance with environmental, health and safety measures is now
assessed as a key Group risk, having been identified as a significant compliance
issue facing the Group given the complexity and global nature of its operations
and in light of a number of recent incidents involving workplace accidents. In
addition, increased focus on the regulatory risks facing the Group has
highlighted key areas of risk, now set out separately below. This reflects their
importance in the context of the future development of the Group`s business and
the need to ensure that they are each effectively addressed.
Key Group risk factors cont...
Illicit trade
Competition from Illicit trade
Illicit trade in the form of counterfeit products, smuggled genuine products and
locally manufactured products on which applicable taxes are evaded, continues to
represent a significant and growing threat to the legitimate tobacco industry.
The majority of such illicit products are sold at the bottom end of the market
and in contravention of applicable regulatory requirements. Increasing excise
rates can encourage more consumers to switch to illegal cheaper tobacco products
and provide greater rewards for smugglers. The risk is exacerbated where current
economic conditions have resulted in high unemployment and/or reduced disposable
incomes. Global volume of illicit trade is currently estimated to be up to 12
per cent of consumption. In the next 10 years, we believe that the problem is
likely to increase, driven by the increased regulatory and compliance burden for
legitimate manufacturers and fuelled by further significant excise increases.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Time frame: Long term
Principal potential causes
Sudden and disproportionate excise increases and widening excise differentials
between markets.
Unintended consequences of regulation, e.g. plain packaging, display bans and
ingredients restrictions.
Extra compliance costs imposed on legitimate industry giving competitive
advantages to illicit manufacturers.
Economic downturn.
Lack of law enforcement and weak border controls.
Potential impact on Group
Erosion of brand equity.
Reduced ability to take price increases.
Investment in trade marketing and distribution is undermined.
Product is commoditised.
Lower volumes and reduced profits.
Principal activities in place to address risk
Dedicated Anti-Illicit Trade (AIT) teams operating at global, regional, area and
key market levels and internal cross-functional coordination.
Active engagement with key external stakeholders.
Cross-industry and multi-sector cooperation on a wide range of AIT issues.
Global AIT strategy development supported by a research programme to further the
understanding of the size and scope of the problem.
AIT Intelligence Unit (including a dedicated analytical laboratory) cooperates
with law enforcement agencies in pursuit of priority targets and capacity
building.
Strong internal business conduct and customer approval policies
Excise and tax
Excise shocks from tax rate increases or structure changes
Tobacco products are subject to substantial excise and sales taxes in most
countries in which the Group operates. In many of these countries, taxes are
generally increasing, but the rate of increase varies between countries and
between different types of tobacco products. A number of significant excise
shocks have taken place over the past two years, for example in Romania, Turkey,
Malaysia, Mexico and Japan. To date, the Group has been able to balance these
shocks with its geographic spread, and it continues to develop effective
measures to address the risk.
Key Group risk factors cont...
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Time frame: Long term
Principal potential causes
Government initiatives to raise revenues.
Increases advocated within context of national health policies.
Insufficient capacity to engage with stakeholders in meaningful dialogue.
Potential impact on Group
Consumers reject the Group`s legitimate tax-paid products for products from
illicit sources.
Reduced legal industry volumes.
Reduced sales volume or alteration of sales mix.
Principal activities in place to address risk
Requirement for Group companies to have in place formal pricing and excise
strategies including contingency plans.
Pricing and excise committees at regional, area and individual market levels.
Engagement with local tax and customs authorities, where appropriate.
Annual management review of brand portfolio, brand health and equity.
Onerous disputed taxes, interest and penalties
The Group may face significant financial penalties, including the payment of
interest, if it fails to meet its obligations with regard to the filing of tax
returns and the payment of applicable taxes or in the event of an unfavourable
ruling by a tax authority in a disputed area.
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Time frame: Short term
Principal potential causes
Non-filing or late filing of tax returns or incorrect filings.
Non-payment or late payments of taxes.
Unfavourable ruling by tax authorities in disputed areas and aggressive auditing
and/or pursuit of tax claims.
Potential impact on Group
Significant fines and potential legal penalties.
Disruption and loss of focus on the business due to diversion of management
time.
Impact on profit and dividend.
Principal activities in place to address risk
Tax committees.
Specialist resources available internally to provide advice and guidance and
external advice sought where appropriate.
Engagement with tax authorities at Group, regional and individual market level.
Financial
The Group`s underlying operations give rise to certain financial risks. The
principal risks in this regard, and the controls in place to address them, are
identified below.
Management of cost base
The Group continues to implement measures to reduce its overall cost base. There
is a risk that targeted reductions will fail to be achieved and/or that
productivity programmes do not achieve their objectives.
Key Group risk factors cont...
Principal relevance to Group strategy: Potential impact on Productivity (cost
management)
Time frame: Short term
Principal potential causes
Insufficient resources devoted to productivity programmes due to other
priorities.
Low prioritisation or resistance to change.
Potential impact on Group
Inability to manage cost savings leads to lower profits and reduced funds for
investment in long-term growth.
Reduced shareholder confidence.
Principal controls in place to address risk
Targeted improvements in operating margin through factory rationalisation,
systems standardisation and productivity savings.
Development of a formal structure to integrate, drive and orchestrate the
delivery of productivity programmes by providing visibility and enabling
benefits tracking.
Regular tracking of actual productivity savings and forecast improvements in
operating margin and supply chain, overheads and indirects projects.
Aggregation of planned productivity savings in the annual budget.
Translational foreign exchange rate exposures
The Group faces translational foreign exchange (FX) rate exposures for
earnings/cash flows from its global business.
Principal relevance to Group strategy: Potential impact on Productivity
(capital effectiveness)
Time frame: Short term
Principal potential causes
FX rate exposures arise from exchange rate movements against sterling, the
Group`s reporting currency.
Potential impact on Group
Fluctuations in translational FX rates of key currencies against sterling
introduce volatility in reported results.
Principal activities in place to address risk
While translational FX exposure is not hedged, its impact is identified in
results presentations and financial disclosures; earnings are restated at
constant rates for comparability.
Debt and interest are matched to assets and cash flows to mitigate volatility
where possible.
Marketplace
The Group has substantial operations in over 180 countries. Its results are
influenced by the economic, regulatory and political situations in the countries
and regions in which it has operations, as well as by the actions of
competitors.
Inability to obtain required price increases
To the extent that price increases are required to cover cost rises and deliver
profit growth, there is a risk that the Group will be unable to achieve these.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Time frame: Short term
Principal potential causes
Changes in the global economy reduce consumers` disposable income.
Consumer down-trading.
Competitors seek volume growth by price discounts or by not taking full price
increases.
Key Group risk factors cont...
Potential impact on Group
Inability to capture value generated by innovative products.
Reduction in volumes.
Profit growth in the short term falls below shareholders` expectations.
Reduction in funds for investment in long-term growth.
Principal activities in place to address risk
Strong alignment between pricing and brand portfolio.
Regular regional and management reviews of budgeted pricing scenarios.
Pricing and excise committees at regional, area and individual market levels.
Routine brand price trade-off exercises conducted in key markets.
Competitor analysis and price war simulations.
Geopolitical tensions
Geopolitical tensions, including terrorism, have the potential to disrupt the
Group`s business operations.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Time frame: Short term
Principal potential causes
Regional and/or global conflicts.
Terrorism and political violence.
Violent organised crime.
The implementation of trade sanctions.
Economic policy changes, including nationalisation of assets and withdrawal from
international and bilateral trade agreements.
Potential impact on Group
Potential loss of life, loss of assets and disruption to normal business
processes.
Increased costs due to more complex supply chain arrangements and/or the cost of
building new facilities or maintaining inefficient facilities.
Reduced volumes and impact on profits.
Reputational impact of inability to protect staff and assets from serious harm.
Principal activities in place to address risk
Globally integrated sourcing strategy and contingency sourcing arrangements.
Security risk modelling, including external risk assessments and the monitoring
of geopolitical and economic policy developments worldwide.
Insurance cover and business continuity planning, including scenario planning
and testing and risk awareness training.
Security controls for field force, direct store sales, supply chain, with an
emphasis on the protection of Group employees.
Non-compliance with environmental, operational and health & safety measures
The Group is subject to environmental, health & safety (EHS) laws and
regulations across its operations worldwide. A failure to ensure compliance with
such measures could have a significant impact on the Group`s business.
Principal relevance to Group strategy: Potential impact on Responsibility
(responsible corporate behaviour)
Time frame: Short term
Principal potential causes
Failure to obtain new or renew existing permits and/or licences required for
lawful operations.
Non-compliance with applicable EHS standards and requirements.
Failure to discharge duty of care in operational activities.
Insufficient qualified expertise to ensure compliance with applicable law and
regulations.
Key Group risk factors cont...
Potential impact on Group
Potential civil and/or criminal liability for loss of life or injury.
Potential liability for clean-up costs.
Financial impact of damages awards and/or fines and penalties imposed.
Damage to corporate reputation.
Possible impairment of assets and/or closure of operations, resulting in
additional costs and potential loss of volume and market share.
Principal activities in place to address risk
Management accountability to ensure appropriate compliance mechanisms are in
place, including a registry of applicable licences and permits and the tracking
of local legislative requirements and developments.
EHS governance and committees in place at individual market level, monitored at
regional level, to oversee compliance.
Provision of appropriate EHS training, information and communications at all
levels.
Dedicated global team to provide support in the management of EHS risks.
Key issues and incidents monitored regionally and reported globally.
Regulation
The Group`s businesses operate under increasingly stringent regulatory regimes
around the world. Further regulation is expected, particularly as a result of
the World Health Organisation`s Framework Convention on Tobacco Control (FCTC)
and, increasingly, active tobacco control activities outside the FCTC.
Regulation inhibits Growth strategy
There is a risk that the enactment of regulation that is not evidence based will
put the Group at a competitive disadvantage, interfere with its ability to
differentiate its products and increase costs and complexity.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Time frame: Long term
Principal potential causes
Adoption of FCTC guidelines and adoption of more stringent national regulations.
Adoption of differing regulatory regimes in different countries/groups of
countries and/or lack of consensus on interpretation/application.
Exclusion of the industry from participating in engagement with regulators and
policy makers.
Product regulation which increases complexity and cost.
Potential impact on Group
Contribution to the denormalisation of smoking.
Erosion of brand value and adverse impact on ability to communicate and build
brand equity.
Increased cost of business for legitimate industry, lower turnover and reduced
profits.
Reduced ability to communicate brand portfolio and innovations contributing to
an increase in illicit trade.
Principal activities in place to address risk
Group companies have regulatory strategies in place in order to identify issues
material to their operating environment and develop plans to address them in a
manner consistent with local law and Group policy.
Engagement is sought with scientific and regulatory communities within the
context of the FCTC process, and stakeholder engagement takes place at global,
regional and individual market levels.
Establishment of a dedicated Regulatory Futures team to monitor regulatory
trends and developments, analyse regulatory proposals to determine impacts, if
any, on business and develop initiatives in response.
Development of dedicated technical and advocacy capabilities, corporate
positions and best practice examples, supported by training, for markets to
address regulation.
Key Group risk factors cont...
Reduced ability to meet consumer expectations and increased compliance costs
Restrictive regulation, in particular in relation to the content and design of
tobacco products, may impair the Group`s ability to meet consumer expectations
and may also lead to increased operating costs and reduced sales.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth)
Time frame: Long term
Principal potential causes
Adoption of FCTC guidelines on product design, contents and emissions and
testing and measuring.
Product regulation aimed at reducing the appeal of cigarettes through severe
restrictions on ingredients and design.
Regulation on the content and design of tobacco products which increases
complexity and cost.
Potential impact on Group
Reduced consumer acceptability of new product specifications, leading to loss of
volume and contributing to an increase in illicit trade.
Loss of volume due to regulation in individual markets impacting on established
portfolio.
Cost complexity of meeting regulations.
Loss of reputation, penalties and closure of production as a result of non-
compliance.
Principal activities in place to address risk
Establishment of Leaf Blending Innovation Centre in Brazil to explore and
develop product solutions that are consumer relevant within the developing
regulatory context.
Development of standardised product platforms and a rationalised brand/product
portfolio to reduce the compliance testing and reporting costs.
Effective and globally integrated processes for sales and operations planning
processes, product specification and new product initiatives.
Programme of engagement with scientific and regulatory authorities within the
context of the FCTC process.
Loss of ability directly to communicate with consumer
Strict and restrictive regulation may reduce the Group`s ability to communicate
with adult smokers and may also impact on its ability to communicate with its
corporate stakeholders.
Principal relevance to Group strategy: Potential impact on Growth (organic
revenue growth) and
Responsibility (balanced regulation)
Time frame: Long term
Principal potential causes
Adoption of FCTC guidelines on packaging and labelling, advertising and
promotion.
Adoption of more stringent national regulations, such as point of sale display
bans and plain packaging.
Potential impact on Group
Generic or plain packaging leads to loss of brand equity.
Lower margins through reduced ability to build brand equity and leverage price.
Reduced ability to compete and make new market entries.
Reduced volumes and impact on profits.
Principal activities in place to address risk
Development of comprehensive plans to support markets to prepare for the
implications of an increasingly strict regulatory environment and to address key
regulatory issues.
Development of innovative solutions to evolve brand portfolio, product and
design and product differentiation within the context of regulatory developments
and consistent with Group policy and local law.
Programme of engagement with stakeholders at global, regional and individual
market levels to address key regulatory issues, including plain packaging and
product display initiatives, and identify potential unintended consequences,
such as a contribution to increased illicit trade.
APPENDIX 3
RELATED PARTY DISCLOSURES
The Group has a number of transactions and relationships with related parties,
as defined in IAS 24 (Related Party Disclosures), all of which are undertaken in
the normal course of business.
Transactions and balances with associates relate mainly to the sale and purchase
of cigarettes and tobacco leaf. Amounts receivable from associates in respect of
dividends included in the table below were GBP87 million (2010: GBP77 million).
The Group`s share of dividends from associates, included in other net income in
the table below, was GBP486 million (2010: GBP466 million). Legal fees recovered
from Reynolds American Inc. included in other net income amounted to GBPnil
million (2010: GBP1 million).
2011 2010
GBPm GBPm
Transactions
- revenue 28 38
- purchases (342) (442)
- other net income 487 460
Amounts receivable at 31 December 97 99
Amounts payable at 31 December (40) (21)
On 26 May 2010, a wholly-owned subsidiary of the Group, BATUS Japan Inc.,
entered into an American blend Cigarette Manufacturing Agreement (referred to as
the 2010 Agreement) with a wholly-owned subsidiary of Reynolds American, R.J.
Reynolds Tobacco Company (referred to as RJRTC), with an effective date of 1
January 2010. Under this Agreement, RJRTC has been appointed as BATUS Japan`s
exclusive manufacturer of all BATUS Japan`s requirements for certain American-
blend cigarettes intended to be distributed and sold in Japan for the five year
period expiring on 31 December 2014, subject to the early termination and
extension provisions set out in the agreement. The 2010 Agreement is based on
arm`s length terms and conditions.
On the same date, RJRTC and BATUS Japan entered into a letter agreement
terminating the existing Contract Manufacturing Agreement dated 30 July 2004
(referred to as the 2004 Agreement), as amended between the parties, with effect
from midnight on 31 December 2009. The 2004 Agreement was scheduled to expire on
31 December 2014, subject to early termination and extension provisions. Under
the terms of the letter agreement, certain sections and sub-sections of the 2004
Agreement will survive the termination, and, in consideration for RJRTC agreeing
to terminate the agreement and in settlement of all disputes at issue between
the parties, BATUS Japan agreed to pay RJRTC US$21 million. The payment has been
presented as an adjusting item and is included within the Group`s restructuring
and integration costs (see page 22). The Group`s share of the income net of tax
included within the post-tax results of Reynolds American is also presented as
an adjusting item and is credited against other (see page 25).
In 2011, the Group acquired non-controlling interests of shareholders in Chile
for GBP10 million. This transaction is shown as a GBP10 million reduction to
reserves. In 2010, the Group acquired non-controlling interests of shareholders
in Indonesia and Eastern Europe for GBP3 million and GBP9 million respectively.
These transaction are shown as a GBP12 million reduction to reserves.
The Group sold its Belgium distribution business, Lyfra NV, to Landewyck Group
S.a.r.l in 2010 for a consideration of Euro16 million. The Group`s German
subsidiary has an available-for-sale investment in Landewyck Group S.a.r.l.
Related party disclosures cont...
The key management personnel of British American Tobacco consist of the members
of the Board of Directors of British American Tobacco p.l.c. and the members of
the Management Board. No such person had any material interest during the year
in a contract of significance (other than a service contract) with the Company
or any subsidiary company. The term key management personnel in this context
includes the respective members of their households.
2011 2010
GBPm GBPm
The total compensation for key management
personnel, including
Directors, was:
- salaries and other short term employee 21 22
benefits
- post-employment benefits 3 3
- share based payments 8 12
32 37
There were no other long term benefits applicable in respect of key personnel
other than those disclosed in the Remuneration Report in the Annual Report.
23 February 2012
Sponsor: UBS South Africa (Pty) Ltd
Date: 23/02/2012 09:25:21 Supplied by www.sharenet.co.za
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