UK operating profit in the year increased to £406 million from £390 million in 2002 and margins were up to 53.4 per cent (2002: 51 per cent). These increases reflect share growth, the benefits of manufacturer’s price increases and a reduced cost base, partly offset by downtrading effects.
Operating profit in Germany rose to £228 million in 2003 from £67 million in 2002. This result incorporates a full year of Reemtsma results, a positive overall trading performance, synergy benefits and a favourable euro exchange gain of approximately £20 million. In addition, a reduced cost base compared to that applied in the previous Reemtsma business helped the significant uplift in operating margins to 35.3 per cent in the year, compared to a proforma margin for the enlarged Group of 23 per cent.
In the Rest of Western Europe, operating profit in the year grew to £307 million from £217 million in 2002. These results reflect strong underlying trading together with the first full year of Reemtsma results and the synergy benefits from the combination, with local cost savings being partly offset by an additional central overhead allocation. In addition, a favourable euro exchange gain of approximately £30 million further enhanced reported profit. Operating margins improved to 47.1 per cent compared with 43.8 per cent in 2002.
In the Rest of the World, operating profit in the year increased to £194 million from £115 million in 2002.This increase incorporates a full year of Reemtsma results and reflects some encouraging performances despite challenging conditions in certain markets, notably those impacted by SARS, political unrest and the conflict in the Middle East. The expected synergies have been achieved, but these have been partly offset by currency losses of approximately £27 million. Operating margins nevertheless have shown a good improvement to 17 per cent in the year from the proforma margins of 15 per cent for the enlarged Group.
INTEREST
The increase in the Group’s interest charge for the year to £237 million, up from £147 million before the exceptional finance charge of £33 million in 2002, was mainly as a result of the full year’s cost of financing the Reemtsma acquisition. Additionally, the strengthening of the euro increased the interest charge on the euro portfolio of debt by £14 million, offset by lower interest rates on the floating element of debt and cheaper bank facilities following the refinancing during the year. This resulted in an all-in cost of debt in 2003 of 6.1 per cent (2002: 6.1 per cent); excluding fees the cost of core debt was 5.6 per cent (2002: 5.7 per cent). Interest cover before amortisation and exceptional items was 4.8 times (2002: 5.4 times).
PROFIT BEFORE TAX
Group adjusted profit before tax increased by 40 per cent to £898 million. Of this increase, exchange rate movements have contributed a net £9 million. Reported profit before tax, after amortisation and exceptional items was £656 million (2002: £423 million).
In the year, profit before tax was increased by an exceptional gain of £12 million on the sale of the Dublin factory site. Other disposals, including the fermentation and printing plant at Lahr, the Caritas wholesale business and Liberty cigars in Germany, had no material effect on the reported results. The £81 million provision brought forward in respect of the integration of Reemstma was fully utilised and further costs associated with synergies of £42 million were charged in the year. In addition, £5 million was provided in respect of the closure of the Meppel factory in The Netherlands, and a further £4 million in respect of the final element of the October 2001 restructuring.
Profit was also enhanced by £7 million in respect of overpaid VAT, following a recent court case won by Sinclair Collis Limited concerning the VAT treatment of vending machines.
Reported profit before tax was also subject to an increased amortisation charge of £203 million (2002: £83 million).
TAXATION
The tax charge for the year was £232 million, representing an effective tax rate of 27.1 per cent (2002: 27.7 per cent) on profit before non-deductible amortisation. The tax rate on reported profit before tax was 35.4 per cent. The Group continued to benefit from lower tax rates applied to certain overseas subsidiaries and we expect this benefit to remain.
SUSTAINED PROFIT GROWTH 1997 – 2003
ADJUSTED OPERATING PROFIT (£’s million)
EARNINGS AND DIVIDENDS
In 2003, the Group has delivered basic earnings per share of 58.1 pence (2002: 41.0 pence) and adjusted earnings per share of 90.0 pence (2002: 68.4 pence), an increase of 32 per cent. The proposed final dividend for 2003 is 30.0 pence per share, bringing the total dividend for the year to 42.0 pence per share, a 27 per cent increase.This is consistent with the Group’s dividend policy of growing dividends broadly in line with earnings, but allowing for the cash impact of restructuring in the year.
Total shareholder return since our Listing in 1996 was 294 per cent (2002: 290 per cent) at the end of September 2003, compared with an overall return of 26 per cent (2002: 8 per cent) from the FTSE All-Share Index.
We have consistently delivered adjusted earnings and dividend growth, with compound returns of 18 per cent and 15 per cent respectively since 1996.
FINANCING AND LIQUIDITY
During the year, the Group refinanced the remaining portion of the Reemtsma acquisition bank facilities with a syndicated facility, signed in December 2002, of €2.4 billion committed facilities and £400 million uncommitted facilities.
The weakening of sterling, principally against the euro during the year, has adversely affected our reported net debt at the year end by £400 million compared to the previous year. At the year end, net debt including the deferred consideration for the remaining 9.99 per cent of the Reemtsma acquisition was £4.1 billion (2002: £3.7 billion), of which 16.5 per cent was denominated in sterling, 82.8 per cent in euros and 0.7 per cent in other currencies. At the year end, 76.7 per cent of gross debt (2002: 85.1 per cent) was fixed by way of interest rate derivatives. TOTAL SHAREHOLDER RETURN INDEX
CASH FLOW
The Group consistently converts a high level of adjusted operating profit into operating cash flow after net capital expenditure, with an average conversion rate since 1997 of 87 per cent. In 2003, there were two working capital timing differences and cash outflows associated with the utilisation of the integration provision which affected the headline cash conversion rate. Adjusting for these factors, the underlying cash conversion rate was 100 per cent.
The working capital timing differences arose principally from the profile of periodic UK VAT settlements and the impact of higher debtors as a result of the timing of the manufacturer’s price increases in the UK.
In 2003, these factors, combined with a significant exchange translation movement on net debt of £400 million, have resulted in an increase in closing net debt to £4.1 billion as at 30 September 2003.
CASH FLOW RECONCILIATION (BILLIONS)
UNDERLYING CASH CONVERSION 100%
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