british american tobacco p.l.c. annual report 2008 - Financial review (1 of 5)

Profit from operations

The reported Group revenue at £12,122 million grew by 21 per cent and profit from operations at £3,572 million grew by 23 per cent.

The percentage increases in revenue and profit from operations as reported and after adjusting items, acquisitions and at constant rates of exchange, are shown in the table below.

In assessing the performance of the business, reported profit can be distorted by adjusting items. For this reason, we also show these items excluded from the profit from operations to demonstrate what management believes to be the underlying profit from the business. These adjusting items are described further below. The profit from operations, excluding adjusting items, grew by 24 per cent.

During 2008, revenue growth was enhanced through the acquisition of the cigarette and snus businesses of Skandinavisk Tobakskompagni (ST) and the purchase of the cigarette assets of Tekel, the Turkish state tobacco company.

2007 was the last year of the 5 year programme of cost savings, achieving annual savings of £1,006 million in total from supply chain, overheads and indirects. The new 5 year target, to achieve annual savings of £800 million by 2012, was announced at the beginning of 2008. It includes areas such as supply chain efficiencies, back office integration and management structures. During the first year of the programme, savings of over £245 million were delivered, putting us very much on track to deliver the annual savings target of £800 million by 2012.

These cost reduction initiatives resulted in the profit from operations excluding adjusting items, as a percentage of revenue, improving to 30.7 per cent compared to 30.0 per cent in 2007 and 28.8 per cent in 2006.

More details of the Group’s operating performance, excluding adjusting items and unallocated costs, can be found in the Regional review. Unallocated costs, which are net corporate costs not directly attributable to regional segments of the business, were £110 million (2007: £106 million).

Percentage increases in revenue and in profit from operations

Adjusting items

The adjusting items below, all included in the profit from operations, are separately disclosed as memorandum information on the face of the income statement and in the segmental analysis. They help to provide a better understanding of the Group’s underlying financial performance.

During 2008, the Group continued its review of manufacturing operations and organisational structure, including initiatives to reduce overheads and indirect costs. Costs were incurred in respect of restructuring announced in prior years, the closing of the Bologna factory in Italy and costs in respect of the integration of the Tekel and ST businesses into existing operations. Total restructuring costs were £160 million for 2008, compared to £173 million for 2007.

On 31 July 2008, Imperial Tobacco Canada announced that it reached a resolution with the federal and provincial governments with regard to the investigation related to the export to the United States of Imperial Tobacco Canada products in the late 1980s and early 1990s. A plea of guilty was entered to a regulatory violation of a single count of Section 240(i)(a) of the Excise Act and Imperial Tobacco Canada paid a fine of Can$200 million (£102 million) which was expensed in 2008. It has also entered into a 15 year civil agreement with the federal and provincial governments, in order, amongst other things, to assist the governments in their future efforts against illicit trade. Imperial Tobacco Canada has entered into an agreement to pay a percentage of its annual net sales revenue going forward for 15 years, up to a maximum of Can$350 million, which will be expensed as it is incurred.

The acquisitions of the assets of Tekel and the ST businesses resulted in the capitalisation of trademarks which are amortised over their expected useful lives. The 2008 amortisation charge in respect of trademarks amounted to £24 million.

As part of the ST transaction, the Group realised a gain of £139 million with the disposal of its 32.35 per cent holding in the non-cigarette and snus businesses of ST.

In 2007, the Group sold its pipe tobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for €24 million, resulting in a gain of £11 million. The Group also sold its Belgian cigar factory and associated trademarks to the cigars division of Skandinavisk Tobakskompagni AS, which realised a gain on disposal of £45 million.

On 1 October 2007, the Group agreed the termination of its license agreement with Philip Morris for the rights to the Chesterfield trademark in a number of countries in southern Africa. This transaction resulted in a gain of £19 million.