Trading: TSX: ROC
TORONTO, Oct. 26 /CNW/ - Rothmans Inc. today announced strong results for the second quarter and first six months of fiscal 2008, which ended September 30, 2007. The Company also announced a 16% increase in its regular dividend to $1.40 on an annualized basis or $0.35 per quarter from the previous $1.20 annualized rate.
"This increase in our regular dividend reflects both the strength of the Company's balance sheet and the strong financial performance that has been generated by our 60%-owned subsidiary Rothmans, Benson & Hedges Inc. (RBH)," said John Barnett, President and Chief Executive Officer of Rothmans Inc. "Following our record first quarter, RBH continued to generate strong performance this quarter resulting in the improvement of all significant measures of financial performance including sales, earnings and cash flow when compared with the prior year."
Rothmans' earnings for the second quarter were $C33.3 million, or $0.49 basic earnings per share, compared with $28.3 million or $0.42 basic earnings per share in the same quarter of fiscal 2007. For the first six months of this fiscal year, Rothmans' earnings were $67.2 million or $0.99 per share, compared with $57.6 million or $0.85 per share in the first half of the prior year.
Sales at RBH, net of excise duty and taxes, increased to $179.7 million in the most recent quarter from $165.2 million in the second quarter of fiscal 2007. Sales for the first six months of this fiscal year were $357.1 million compared with $328.1 million for the same period a year earlier.
RBH's EBITDA margin for the second quarter was 53.3% compared with 50.6% in the second quarter a year ago, primarily as a result of price increases across all product categories. Price increases were partially offset by volume shifts to the lower priced tier of the cigarette price category and higher general and administrative costs including compensation related expenses. In the first quarter ended June 30, 2007, RBH's EBITDA margin was 55.5%.
RBH shipped a total of 2.8 billion equivalent sticks into the domestic market during the second quarter of fiscal 2008, unchanged from the same period in fiscal 2007. For the six months ended September 30, 2007, domestic shipments were 0.6% higher than in the comparable period of the prior year. Higher price category cigarette volumes continued to offset declines in premium cigarette and fine cut volumes.
Outlook
"The recently released study by the Canadian Tobacco Manufacturers Council detailing continued significant growth in illicit cigarettes within the Canadian marketplace demonstrates that our often expressed concerns relating to contraband product are justified," said Mr. Barnett. "While we remain confident in the ability of RBH's strong product offerings to compete within the tax paid industry, the growth in contraband continues to have a negative effect on all legitimate industry participants including RBH."
Increase to Regular Dividend
The Board of Directors of Rothmans Inc. declared an increase to the Company's regular quarterly dividend. Shareholders of record at the close of business on December 4, 2007 will receive $0.35 per common share payable on December 17, 2007. This represents an increase of 16% over the previous quarterly dividend rate of $0.30 per share.
Analyst Conference Call and Webcast
Rothmans Inc. management will hold a conference call with analysts to discuss the second quarter results at 8:30 a.m. Toronto time, Friday, October 26, 2007. In order to listen to the conference call, shareholders are invited to call 1-866-898-9626 or 416-340-2216.
The call will also be webcast via the Company's investor website, www.rothmansinc.ca. At the completion of the conference call, a recording will be available until November 3, 2007 by calling (416) 695-5800 or 1-800-408-3053 and entering reservation number 3240219. The recording can also be accessed through the investor website.
Media are invited to listen to the call and to contact Karen Bodirsky at (416) 442-3660 for further information.
About Rothmans Inc.
Rothmans Inc. is a widely held, publicly traded Canadian company that participates in the Canadian tobacco industry through 60%-owned Rothmans, Benson & Hedges Inc., Canada's second largest tobacco company. RBH currently employs more than 750 people at its head office in Toronto, its sales offices across Canada and its manufacturing facilities in Brampton, Ontario and Quebec City, Quebec where it has been operating for over 100 years. Rothmans is Canada's only publicly traded company with interests exclusively in the tobacco industry and is listed on the Toronto Stock Exchange under the symbol ROC.
Management's Discussion and Analysis
for the quarter and six months ended September 30, 2007
-------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, provides shareholders with a review of significant developments in the Company's financial performance in the fiscal quarter and six months ended September 30, 2007 compared with the same periods in the prior year. It also discusses factors that could affect future performance. This MD&A should be read in conjunction with the attached unaudited consolidated financial statements for the period ended September 30, 2007, the annual MD&A contained in the 2007 Annual Report and the audited annual consolidated financial statements of the Company for the year ended March 31, 2007. The results reported herein have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) and are presented in Canadian dollars. This MD&A is current as of October 25, 2007.
Responsibility of Management and the Board of Directors
Management is responsible for the information disclosed in this MD&A and has in place the appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee and Board of Directors provide an oversight role with respect to all public financial disclosures by the Company, and have reviewed and approved this MD&A and the accompanying unaudited consolidated financial statements.
Disclosure Controls and Procedures and Internal Controls over Financial
Reporting
The Chief Executive Officer and Chief Financial Officer have designed disclosure controls and procedures, or caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.
With respect to internal controls over financial reporting, the Chief Executive Officer and Chief Financial Officer have designed them, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with Canadian Generally Accepted Accounting Principles.
During the Company's most recent interim period, there were no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
Forward-Looking Statements
Certain statements contained in this MD&A and other sections of this document (in particular the sections entitled "Industry Overview" and "Outlook") constitute "forward-looking statements" and express views as to future events, circumstances and trends relating to RBH's business and the Company. Words such as "plans," "intends," "outlook," "expects," "anticipates," "estimates," "believes," "should" and similar expressions may identify forward-looking statements. Forward-looking statements are based on management's current expectations and assumptions and entail various risks and uncertainties. There is no assurance that any forward-looking statement will materialize. Actual results may differ materially from these expectations and forward-looking statements, if known and unknown risks or uncertainties affect RBH's business or the Company, or if management's expectations or assumptions prove to be inaccurate. Unless otherwise indicated, forward-looking statements describe expectations as of October 25, 2007.
Factors that could cause the Company's actual results to differ materially from the forward-looking statements contained herein include, but are not limited to: government claims and potential claims, including the results of ongoing investigations; product liability claims; increases in the levels of contraband product in the market; increased competition and competitor initiatives; a lower rate of growth in the cigarette price category; continued declines in consumption of tobacco products; RBH's ability to continue to implement price increases; fluctuating wholesaler and consumer purchasing patterns; changes in government taxation policy; changes in government legislation and regulation including legislation banning the display of tobacco products in retail stores; new product standards; and dependence on the domestic tobacco market.
The Company disclaims any obligation or intention to update or revise any forward-looking statement, whether the result of new information, future events or otherwise. Additional information concerning risks and uncertainties affecting RBH's business and the Company and other factors that could cause financial results to fluctuate is set forth below under "Risks and Uncertainties" and "Outlook" and is contained in the Company's filings with Canadian securities regulatory authorities, including the Company's Annual Information Form (in particular under "Legal Proceedings" and "Risk Factors") available on SEDAR at www.sedar.com or on the Company's website at www.rothmansinc.ca.
Terminology used in this MD&A
Throughout this MD&A, "GAAP" refers to Canadian Generally Accepted Accounting Principles, "Rothmans" and "the Company" refer to Rothmans Inc., "RBH" refers to Rothmans, Benson & Hedges Inc., which is 60%-owned by Rothmans Inc., and "EBITDA margin," a key measure of RBH's operating performance, refers to RBH's "earnings before interest, taxes, depreciation and amortization" as a percentage of "sales, net of excise duty and taxes."
EBITDA margin provides a metric allowing period-to-period comparisons of the core RBH operating performance before the impact of changes in capital structure, interest, taxes and capital spending and does not include income from investments earned by the Company or the expenses related to operating Rothmans Inc. as a public company. EBITDA margin is a non-GAAP financial measure that does not have any standardized meaning prescribed by GAAP. It is therefore unlikely to be comparable to similar measures presented by other companies.
The "recent quarter" refers to the three months ended September 30, 2007, and "prior quarter" refers to the three months ended June 30, 2007. "Fiscal 2008" or "recent fiscal year" refers to the fiscal year ending March 31, 2008 and other similar references to a fiscal year (e.g., fiscal 2007) refer to the fiscal year then ended on March 31 (e.g., March 31, 2007).
"The three major suppliers of tobacco products" or "three majors" refers to RBH, Imperial Tobacco Canada Limited (ITL) and JTI-MacDonald Corp. (JTI). "Premium cigarettes" refers to tailor-made cigarettes sold at premium retail prices, "cigarette price category" refers to cigarettes sold at less-than-premium prices and "price category" refers to the combination of the cigarette price category and the fine cut category (loose tobacco and pre-portioned tobacco sticks). "Domestic composite market" refers to all fully tax-paid cigarettes and fine cut tobacco products sold into the Canadian market. "Direct-to-Store Distribution" or "DSD" refers to a distribution model where a tobacco supplier ships directly to retail accounts instead of through a wholesale network. "CTMC" refers to the Canadian Tobacco Manufacturers Council.
New Accounting Pronouncements
As required by The Canadian Institute of Chartered Accountants ("CICA"), on April 1, 2007, the Company adopted CICA Handbook Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation" and Section 1530 "Comprehensive Income".
Section 3855 and 3861 prescribe when a financial asset, financial liability, or non-financial derivative is to be recognized on the balance sheet, and at what amount. It also specifies how financial instrument gains and losses are to be presented. The prospective adoption of this new standard resulted in changes in the accounting and presentation for financial instruments as well as the recognition of certain transitional adjustments that have been recorded in opening retained earnings as described in note 2. As required by the implementation of the new standard, the comparative Interim Consolidated Financial Statements have not been restated.
CICA Handbook Section 1530, "Comprehensive Income," introduces a new requirement to temporarily present certain gains and losses outside net income in other comprehensive income or loss. Refer to note 2 for more details.
The implementation of these Handbook requirements did not have a material impact on the financial results of the Company.
The following are the new accounting standards the Company plans to adopt effective fiscal year ending March 31, 2009. Management is evaluating the standards and their impact on the Company's consolidated financial statements.
The CICA Handbook Section 3031 "Inventories" prescribes the accounting treatment for inventories. Specifically, the section provides guidance on the determination of cost and its subsequent recognition as an expense. Section 3031 applies to interim and annual financial statements for fiscal years beginning on or after January 1, 2008.
CICA Handbook Section 1535 "Capital Disclosures" establishes standards for disclosing information about an entity's capital and how it is managed. This section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007.
CICA Handbook Section 3862 "Financial Instruments Disclosures" deals with additional required disclosures related to financial instruments. The section provides guidance on what disclosure should be included in the financial statements related to items such as significance of financial instruments to the financial position and performance of the Company and the nature and extent of risks associated with financial instruments. Section 3862 applies to interim and annual financial statements for fiscal years beginning on or after October 1, 2007.
Industry Overview
Although it is not possible to provide an accurate estimate of the recent quarter and fiscal year-to-date tax paid industry volumes, RBH management believes that a number of factors continue to affect overall industry shipments, including:
- Contraband - During the recent quarter the CTMC released a study on
the illicit usage of cigarettes in the Canadian marketplace. This
study indicated that 22% of the national cigarette volume being
purchased was contraband product, up from 16.5% found in a similar
study conducted a year earlier.
- Taxes - High taxes reflected in the selling price to the consumer
contribute to probable increases in the presence of contraband
product in the domestic market.
- Seasonal trends in consumer purchasing patterns - The period between
April and September has demonstrated stronger shipments than the
period between October and March. RBH management believes that
smoking restrictions are causing consumer consumption variations
between the summer and winter seasons.
- Fluctuations in wholesaler buying patterns - Swings in wholesaler
purchasing patterns motivated by the timing of tax increases, price
increases, manufacturer trade programs, manufacturer trade terms and
other factors are anticipated to have a significant effect on
quarter-to-quarter sales volumes.
- Continued declines in consumer consumption of tobacco products.
During the first quarter, the Province of Alberta raised its Provincial Tobacco Tax on cigarettes and fine cut products by $5.00 per carton, or equivalent stick basis.
Results at Rothmans, Benson & Hedges Inc.
In the quarter ended September 30, 2007, RBH shipped a total of 2.8 billion equivalent sticks into the domestic market, unchanged from the same period of the prior year and the prior quarter. Fiscal year to date shipments were 0.6% higher than the comparable period of the prior year. Higher price category cigarette volumes continue to offset lower volumes in premium cigarettes and fine cut.
As previously disclosed, the industry no longer shares industry volumetric data through the CTMC. Therefore, RBH no longer has access to information on total tax paid industry volumes and is unable to accurately estimate RBH's market share.
RBH's recent quarter EBITDA margin was 53.3% compared with 50.6% in the quarter ended September 30, 2006 and 55.5% in the quarter ended June 30, 2007. The recent quarter increase in EBITDA margin over the comparable period of the prior year is predominantly due to price increases across all product categories, partially offset by volume shifts to the lower priced tier of the cigarette price category and higher general and administrative costs including compensation related expenses. The recent quarter decrease in EBITDA margin compared with the prior quarter is predominantly due to higher general and administrative costs, including compensation related expenses, partially offset by price increases during the recent quarter and the timing of price increases taken in the prior quarter.
During the recent quarter, RBH increased the price on Mark Ten and Canadian Classics price category brands by $1.00 per carton in Quebec and Ontario, respectively. During the prior quarter, RBH increased the prices charged to wholesalers by $1.00 per carton for the Carreras, Davidoff and ROOFTOP premium brands, $1.50 per carton for all other premium brands and $1.00 per carton for all price category cigarettes other than the Accord brand. Prices on fine cut products, cigars and pipe tobacco were increased by varying amounts depending on format.
Effective July 30 2007, RBH implemented changes to its wholesale distribution terms, moving from a 2% prompt payment discount to a fee-for-service model nationally with the exception of Newfoundland and Labrador where terms remain unchanged.
Rothmans Inc. Financial Results
Basic earnings per share were $0.49 in the recent quarter and $0.99 for the six months ended September 30, 2007 compared with $0.42 and $0.85 in the comparable periods of the prior year.
RBH's sales, net of excise duty and taxes, were $179.7 million in the recent quarter and $357.1 million for the six months ended September 30, 2007 representing an increase of $14.4 million and $29.0 million compared to comparable periods of the prior year. Volume declines in premium cigarettes and fine cut were more than offset by the impact of price increases and price category cigarette volume increases.
Investment income increased to $3.1 million in the recent quarter and $5.8 million in the fiscal year-to-date from $2.3 million and $4.3 million in the comparable periods of the prior year mainly due to the higher average cash and cash equivalents balances held during the quarter and six months ended September 30, 2007.
Operating costs increased to $85.2 million in the recent quarter and $165.2 million in the fiscal year-to-date from $82.6 million and $160.8 million in the comparable periods of the prior year. This is mainly attributable to higher general and administrative costs including compensation related expenses.
Income tax expense was $37.0 million in the recent quarter, resulting in an effective tax rate for the quarter and fiscal year-to-date of 40.0%. The Company expects its effective tax rate for fiscal 2008 to be 40.0%.
Capability to Deliver Results
Cash Flow
RBH's operations generate significant cash resources. These cash resources are currently sufficient to fund interest payments on RBH's long-term debt, capital expenditures and dividends to its shareholders. Based on RBH's historical earnings levels, the dividends received by Rothmans from RBH are expected to be sufficient to fund its operations, pay dividends to its public shareholders and continue to accumulate cash reserves.
RBH's cash flow from operations before changes in working capital was $64.8 million in the recent quarter and $120.3 million for the fiscal year-to-date compared to $52.3 million and $102.8 million in the same periods of the prior fiscal year. RBH's ability to generate cash from operations is generally sufficient to fund the day-to-day financing needs of RBH's business. It is anticipated that additional funds, should they be required, would be obtained through short-term bank borrowings.
During the recent quarter, the Company paid dividends of $20.4 million, representing a dividend of $0.30 per share.
Cash Resources
Cash and short-term investments of $215.0 million at September 30, 2007 represented the consolidated cash resources of the Company versus $172.2 million at March 31, 2007. The increase in cash and short-term investments is predominantly due to earnings from RBH's operations and normal quarterly fluctuations in RBH's working capital requirements. On a non-consolidated basis, Rothmans held cash and cash equivalents of $150.9 million at September 30, 2007, an increase from $120.8 million at March 31, 2007. This increase results from dividends received by the Company from RBH, partially offset by dividends paid by the Company.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Although these estimates are based on management's best knowledge of current events and actions that the Company and RBH may undertake in the future, actual results could differ from these estimates. Other than as discussed below, there are no critical accounting estimates that require disclosure or discussion in this report.
Employee Future Benefits
The actuarial assumptions used to determine the benefit obligation and associated expense of RBH's various defined benefit pension plans and other benefits were not adjusted in the recent quarter. Therefore, the discount rate, the expected return on plan assets and other assumptions remain as described in the annual MD&A for the year ended March 31, 2007.
Litigation Contingent Liabilities
As discussed in the annual MD&A for the year ended March 31, 2007, the Company and RBH have been the subjects of various legal actions, proceedings, investigations and claims. Based on the stage of those proceedings, management is unable to meaningfully estimate the liability, if any, that might result from claims or investigations and neither the Company nor RBH has accrued for potential liabilities. However, the outcome of any claims, proceedings or investigations is uncertain. If successful, these claims, potential claims or outcome of investigations either individually or in the aggregate, could involve significant damages, which would have a significant adverse effect on the financial condition of the Company, and the Company and RBH may not have the resources to satisfy such claims.
Risks and Uncertainties
Various legal actions, proceedings and claims arising out of the sale, distribution, manufacture, development, advertising and marketing of tobacco products are pending, have been threatened or may be instituted against the Company and RBH. These actions, claims and proceedings, both pending and threatened, are described in note 14 to the audited annual consolidated financial statements of the Company for the year ended March 31, 2007 and in note 9 to the interim unaudited consolidated financial statements for the six months ended September 30, 2007. Other than as described below, there have been no developments of a material nature during the fiscal year-to-date concerning these matters.
As previously disclosed, RBH is currently the subject of an ongoing investigation by the RCMP relating to RBH's sales of products exported from Canada in the period 1989 - 1996. This investigation, of which RBH was notified in January 2002, is related to allegations that tobacco products manufactured and exported by RBH were illegally smuggled back into Canada during this period without payment of applicable excise and tobacco taxes and duties. In February 2003, the RCMP filed criminal charges against another Canadian tobacco products supplier and its related parties alleging violations of the Criminal Code (Canada) in connection with the sale and export of tobacco products during the early 1990s. The preliminary hearing concluded in 2006. In May 2007, the Ontario Court of Justice ordered that company and its former chief executive officer to stand trial. Charges against six other executives were dismissed. All parties are seeking judicial review of the judge's decision. Although no action has been commenced and no charges laid against the Company or RBH or any of their present or former employees, officers or directors, the Company and RBH believe that the RCMP and federal and provincial governments are contemplating laying charges or commencing other legal proceedings involving the Company or RBH and certain of their employees, officers and directors relating to or arising from these allegations.
As previously disclosed, in January 2001 the Province of British Columbia initiated a lawsuit in the Supreme Court of British Columbia against RBH, the Company and numerous other Canadian and international tobacco companies and various tobacco trade associations seeking unspecified damages in an amount to cover the costs that allegedly have been, or will be, incurred by the Government of British Columbia in providing health care benefits to British Columbia residents who have allegedly suffered smoking-related illnesses. The action was brought pursuant to the Tobacco Damages and Health Care Costs Recovery Act (British Columbia). The Company was advised in September 2007 that the trial is currently scheduled for the fall of 2010.
As previously disclosed, in June 2006 the Province of New Brunswick passed the Tobacco Damages and Health Care Costs Recovery Act. In September 2007, this Province announced that it had retained a consortium of lawyers on a contingency fee basis to act for it in a proposed action against tobacco product manufacturers to recover health care costs that allegedly have been, or will be, incurred by the Province in respect of alleged smoking-related illnesses.
As previously disclosed, the three majors challenged the constitutionality of the Tobacco Act (Canada), which was enacted by the federal government in 1997. In June 2007, the Supreme Court of Canada issued its decision on the constitutionality of the Tobacco Act (Canada), allowing the appeals of the federal government and dismissing the cross appeals of the three major suppliers of tobacco products. Essentially, the Supreme Court of Canada ruled that the legislative and regulatory provisions at issue, when properly interpreted, were constitutionally valid.
It is not possible to predict the outcome of legal claims or investigations, pending and future, against the Company or RBH. Legal proceedings and investigations are subject to many uncertainties, and it is possible that there will be adverse developments in the claims and investigations pending against the Company and RBH or that these claims and investigations, and any potential future claims and investigations, could be decided unfavourably or settled. An unfavourable outcome or settlement could involve significant damages or significant monetary payments which could have a significant adverse effect on the financial condition of the Company, and the Company and RBH may not have the resources to satisfy such claims.
Additional information concerning legal matters affecting the Company and RBH are contained in the Company's filings with securities regulatory authorities including the Company's 2007 Annual Report and 2007 Annual Information Form (in particular under "Legal Proceedings") which can be accessed at www.sedar.com or on the Company's website at www.rothmansinc.ca.
Outlook
It is believed that the presence of contraband remains a key factor in affecting both RBH and total tax-paid industry volumes. Continued availability of contraband product in the domestic market as a result of high tobacco tax rates across the country may cause further declines in tax-paid industry volumes in the future resulting in a negative impact on RBH's sales volumes.
Competition by each of the three major suppliers of tobacco products in the cigarette price category has led to substantial growth of that category in recent years, and there continues to be a significant degree of variability in the underlying business trends, making it difficult to accurately estimate the impact on consumer purchasing patterns.
Looking ahead, Rothmans expects that a number of factors could affect its financial performance including:
- the success of efforts by the Company, RBH and the industry to defend
themselves against product liability litigation, government and other
claims and charges;
- increased levels of counterfeit and other contraband product that may
occur due to the high tax environment;
- the impact of ITL's direct-to-store distribution program and RBH's
ability to compete based on changes that RBH has made in its
wholesale distribution arrangements;
- a lower rate of growth in the cigarette price category and RBH's
ability to successfully compete in that segment;
- the impact of continued high levels of taxation on consumer
purchasing patterns;
- continued declines in the consumption of tobacco products;
- RBH's ability to continue to implement price increases for its
products;
- RBH's ability to compete successfully in the premium cigarette
category;
- the continued volatility in the cigarette market as a result of the
evolution of the Canadian cigarette price category, varying
wholesaler purchasing patterns and seasonal fluctuations in smoker
consumption;
- the impact of continued restrictive legislation and regulations over
the sale of tobacco products including legislation banning the
display of tobacco products in retail stores;
- RBH's ability to maintain its leading position in the fine cut
segment;
- government tax policy regarding the differentiation in tax rates
applicable to fine cut products in comparison to tailor-made
cigarettes;
- RBH's continued success at maintaining or reducing costs, especially
in view of the potential for regulated changes to product
specifications; and
- the impact of seasonal trends on consumer purchasing patterns, where
the period between April and September demonstrates stronger
shipments than the period between October and March.
Interim Consolidated Statements of Earnings and Retained Earnings
Three months ended Six months ended
(In thousands of dollars, September 30 September 30
except per share amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
EARNINGS
Revenues:
Sales, net of excise duty
and taxes 179,672 165,237 357,103 328,123
Investment income 3,098 2,320 5,775 4,273
------------------------------------------
Total revenues 182,770 167,557 362,878 332,396
Costs:
Operating costs excluding
amortization 85,157 82,643 165,236 160,764
------------------------------------------
Earnings before interest,
income taxes, amortization
and minority interest 97,613 84,914 197,642 171,632
Amortization 2,834 2,967 6,763 5,832
Interest expense (income)
- Long-term debt 2,094 2,095 4,174 4,175
- Other 303 (30) 545 (27)
------------------------------------------
Earnings before income taxes
and minority interest 92,382 79,882 186,160 161,652
Income taxes
- Current 36,766 32,422 73,762 64,614
- Future 196 343 694 1,118
------------------------------------------
Total income taxes 36,962 32,765 74,456 65,732
------------------------------------------
Earnings before minority
interest 55,420 47,117 111,704 95,920
Minority interest 22,074 18,800 44,530 38,332
------------------------------------------
Earnings for the period 33,346 28,317 67,174 57,588
------------------------------------------
------------------------------------------
Earnings per common share
(note 3)
- Basic 0.49 0.42 0.99 0.85
------------------------------------------
------------------------------------------
- Diluted 0.49 0.41 0.98 0.84
------------------------------------------
------------------------------------------
RETAINED EARNINGS
Balance at beginning of
period 100,398 77,379 86,645 68,513
Transitional adjustment on
adoption of new accounting
policies (note 2) - - 344 -
------------------------------------------
Balance at beginning of
period as restated 100,398 77,379 86,989 68,513
Earnings for the period 33,346 28,317 67,174 57,588
------------------------------------------
133,744 105,696 154,163 126,101
Dividends paid:
Common Shares - (20,419) (20,404) (40,838) (40,809)
(Q2 2007 - $0.30 per share)
(Q2 2008 - $0.30 per share)
------------------------------------------
Balance at end of period 113,325 85,292 113,325 85,292
------------------------------------------
------------------------------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Balance Sheets
As at As at
September 30 March 31
(In thousands of dollars) 2007 2007
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 215,018 75,228
Short-term investments - 96,987
Accounts receivable 5,475 8,851
Inventories 187,984 201,637
Prepaid expenses 2,601 1,969
Future income taxes 8,171 3,418
--------------------
Total current assets 419,249 388,090
Property, plant and equipment 68,587 71,023
Future income taxes 5,540 11,339
Prepaid pension benefit cost 20,384 12,958
Long-term debt deferred financing charges - 1,102
Other assets 1,429 1,415
--------------------
515,189 485,927
--------------------
--------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities 55,240 38,067
Excise and other taxes payable 71,410 69,471
Income taxes payable 26,776 31,939
--------------------
Total current liabilities 153,426 139,477
Other long-term liabilities 7,596 17,735
Other employee future benefits 36,497 35,915
Long-term debt 148,829 149,794
Minority interest in subsidiary company 7,788 8,828
--------------------
354,136 351,749
--------------------
SHAREHOLDERS' EQUITY
Capital stock (note 5) 47,728 47,533
Retained earnings (note 2) 113,325 86,645
--------------------
Total shareholders' equity 161,053 134,178
--------------------
515,189 485,927
--------------------
--------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Statements of Cash Flows
Three months ended Six months ended
September 30 September 30
(In thousands of dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by (used in):
OPERATING ACTIVITIES
Earnings for the period 33,346 28,317 67,174 57,588
Adjusted for non-cash items:
Amortization of property,
plant and equipment 2,834 2,900 6,763 5,696
Amortization of financing
charges and bond discount - 67 - 136
Non-cash interest 298 - 535 -
Minority interest 22,074 18,800 44,530 38,332
Future income taxes 196 343 694 1,118
Loss on disposal of property,
plant & equipment 2 - 19 2
Defined & other employee
future benefits expense 1,909 1,570 3,600 2,842
Defined & other employee
future benefits funding (548) (659) (10,444) (4,879)
Long-term incentive plan 5,295 1,321 7,998 2,442
------------------------------------------
65,406 52,659 120,869 103,277
Change in non-cash operating
working capital (note 4) 27,578 38,772 10,703 42,324
------------------------------------------
92,984 91,431 131,572 145,601
------------------------------------------
INVESTING ACTIVITIES
Additions to property,
plant & equipment, net (3,429) (4,126) (4,346) (5,454)
Proceeds on disposal of
short-term investments 168 - 98,782 81,867
------------------------------------------
(3,261) (4,126) 94,436 76,413
------------------------------------------
FINANCING ACTIVITIES
Dividends paid -
By the Company (20,419) (20,404) (40,838) (40,809)
By a subsidiary company
to minority shareholder (23,600) (19,360) (45,800) (49,001)
Proceeds on issuance of
common shares - 58 195 2,013
------------------------------------------
(44,019) (39,706) (86,443) (87,797)
------------------------------------------
Increase in cash and cash
equivalents during the period 45,704 47,599 139,565 134,217
Cash and cash equivalents
at beginning of period,
after adjustment (note 2) 169,314 134,982 75,453 48,364
------------------------------------------
Cash and cash equivalents
at end of period 215,018 182,581 215,018 182,581
------------------------------------------
------------------------------------------
Supplementary Disclosures (note 4)
Rothmans Inc. and subsidiary companies (unaudited)
Notes to the Interim Consolidated Financial Statements (Unaudited)
(Tabular amounts are in thousands of dollars, except for share and per
share data or as otherwise indicated)
1. Summary of Significant Accounting Policies
The interim unaudited consolidated financial statements of Rothmans
Inc. (the "Company") have been prepared in accordance with Canadian
generally accepted accounting principles. The note disclosure in
these interim consolidated financial statements includes only
material changes from the disclosure found in the Company's annual
consolidated financial statements for the year ended March 31, 2007.
Therefore, these interim unaudited consolidated financial statements
and notes should be read in conjunction with those statements. These
interim consolidated financial statements follow the same accounting
policies as the Company's audited annual consolidated financial
statements, except as described in note 2.
2. Change in Accounting Policies
Effective April 1, 2007, the Company adopted The Canadian Institute
of Chartered Accountants (CICA) Handbook Section 1530, "Comprehensive
Income;" Section 3855 "Financial Instruments - Recognition and
Measurement" and Section 3861 "Financial Instruments - Disclosure and
Presentation." The prospective adoption of these new standards
resulted in changes in the accounting and presentation for financial
instruments and the recognition of certain transitional adjustments
that have been recorded in opening retained earnings as described
below. There was no change resulting from the adoption of these
standards that required the Company to record other comprehensive
income. The principal changes in the accounting for financial
instruments due to the adoption of these accounting standards are
described below. As required by the standards, the comparative
Interim Consolidated Financial Statements (unaudited) have not been
restated.
(a) Section 3855 "Financial Instruments - Recognition and
Measurement"
Section 3861 "Financial Instruments - Disclosure and
Presentation"
Under the new standards, financial assets and financial liabilities
are initially recognized at fair value and their subsequent
measurements are dependent on their classification as described
below. Their classification depends on the purpose, for which the
financial instruments were acquired or issued, their characteristics
and the Company's designation of such instruments. The standards
require that all financial assets be classified either as held-for-
trading (HFT), available-for-sale (AFS), held-to-maturity (HTM) or as
loans and receivables. The standards require that all financial
assets, including all derivatives be measured at fair value with the
exception of loans and receivables, assets classified as HTM and AFS
financial assets that do not have quoted market prices in an active
market.
Classification of financial instruments
The following is a summary of the assets and liabilities the Company
evaluated and the accounting policy elected to apply to its
significant categories of financial instruments outstanding as of
April 1, 2007:
Cash Designated as held-for-trading
Cash equivalents and short-term Designated as held-to-maturity
investments or held-for-trading
Accounts receivable Loans and receivables
Accounts payable and accrued Other liabilities
liabilities
Excise tax and other taxes payable Other liabilities
Other long-term liabilities Designated as held-to-maturity
Long-term debt Designated as held-to-maturity
Held-for-trading
HFT financial assets are financial assets typically acquired for
resale prior to maturity. They are measured at fair value at the
balance sheet date. Interest earned and accrued is included in
investment income. The Company designated cash as HFT and it is
measured at fair value as at the balance sheet date. Short term
investments are classified as held-to-maturity or held-for-trading
depending on their nature and Company's intent. Portfolio equity
instruments that are quoted in an active market are designated as
held-for-trading and are accounted for at fair value. There was no
adjustment resulting from this designation.
Held-to-maturity
HTM financial assets are non-derivative financial assets with fixed
or determinable payments and a fixed maturity when the Company has
the intention and the ability to hold these financial assets to
maturity. These financial assets are measured at amortized cost.
Short-term investments are classified as held-to-maturity or
held-for-trading depending on their nature and the Company's intent.
Short-term investments in debt securities are designated as held-to-
maturity and are accounted for at amortized cost. As at the balance
sheet date, interest income receivable of $0.7 million was included
in cash equivalents.
Other long-term liabilities are designated as held-to-maturity and
accounted for at amortized cost. These liabilities are initially
recognized at fair value and subsequently accounted for at amortized
cost. The transitional adjustment reducing other long-term
liabilities amounted to $0.9 million at the date of adoption and this
was reduced by $0.4 million during the period ended September 30,
2007.
Available-for-sale
AFS financial assets are those non-derivative financial assets that
are designated as AFS financial assets, or that are not classified as
loans and receivables, HTM investments or HFT financial assets. AFS
financial assets are carried at fair value with unrealized gains and
losses to be included in other comprehensive income until realized
when the cumulative gain or loss is recognized in earnings. The
Company has not designated any financial assets as AFS.
Loans and receivables
Loans and receivables are accounted for at amortized cost.
Other liabilities
Other liabilities are recorded at amortized cost.
Transaction costs
Transaction costs related to HTM financial assets and liabilities are
netted against the carrying value of the liability and then amortized
over the expected life of the instrument using the effective interest
method. The deferred financing charges relating to the Company's
long-term debt issue were reclassified to the carrying value of the
long-term debt at the date of adoption.
Embedded derivatives
Derivatives embedded in other financial instruments or contracts are
separated from their host contracts and accounted for as derivatives
when their economic characteristics and risks are not closely related
to those of the host contract. Embedded derivatives are measured at
fair value with changes in fair value recognized in earnings. The
Company does not currently have any outstanding contracts with
embedded derivatives.
Determination of fair value
The fair value of a financial instrument is the amount of
consideration that would be agreed between parties. The fair value of
a financial instrument on initial recognition is the transaction
amount given or received. Subsequent to initial recognition, the fair
values of financial instruments that are quoted in active markets are
based on bid prices for financial assets held and offer prices for
financial liabilities. When independent prices are not available, the
fair values are determined using valuation techniques using
observable market data of similar instruments, discounted cash flow
analysis and other valuation techniques commonly used by market
participants. A number of factors such as bid-offer spread and credit
profile are taken into account, as appropriate, when values are
calculated using valuation techniques.
(b) Section 1530 "Comprehensive Income"
The Company determined that as at the date of adoption and for the
year-to-date ended September 30, 2007 there were no material gains or
losses that would be recorded in other comprehensive income or loss.
Transitional adjustments
The impact of adopting these standards as at April 1, 2007 is as
follows:
As at As at
March 31, April 1,
2007 Adjustment 2007
---------------------------------------------------------------------
Assets
Cash and cash equivalents 75,228 225 75,453
Short-term investments 96,987 1,795 98,782
Accounts receivable 8,851 (2,020) 6,831
Long-term debt deferred
financing charges 1,102 (1,102) -
Future income taxes - long-term 11,339 (352) 10,987
Liabilities
Other long-term liabilities 17,735 (926) 16,809
Long-term debt 149,794 (1,102) 148,692
Minority interest 8,828 230 9,058
Shareholders' Equity
Retained earnings 86,645 344 86,989
The following are the new accounting standards the Company plans to
adopt effective fiscal year ending March 31, 2009. Management is
evaluating the standards and their impact on the Company's
consolidated financial statements.
The CICA Handbook Section 3031 "Inventories" prescribes the
accounting treatment for inventories. Specifically, the section
provides guidance on the determination of cost and its subsequent
recognition as an expense. Section 3031 applies to interim and annual
financial statements for fiscal years beginning on or after
January 1, 2008.
CICA Handbook Section 1535 "Capital Disclosures" establishes
standards for disclosing information about an entity's capital and
how it is managed. This section applies to interim and annual
financial statements relating to fiscal years beginning on or after
October 1, 2007.
CICA Handbook Section 3862 "Financial Instruments Disclosures" deals
with additional required disclosures related to financial
instruments. The section provides guidance on what disclosure should
be included in the financial statements related to items such as
significance of financial instruments to the financial position and
performance of the Company and the nature and extent of risks
associated with financial instruments. Section 3862 applies to
interim and annual financial statements for fiscal years beginning on
or after October 1, 2007.
3. Earnings per Common Share
Earnings per common share are calculated based on the weighted
average number of common shares outstanding, the dilution being due
to issued common share options.
Basic Diluted
---------------------------------------------------------------------
Six months ended:
September 30, 2007 68,056,067 68,481,886
September 30, 2006 67,972,277 68,363,645
Three months ended:
September 30, 2007 68,063,808 68,489,090
September 30, 2006 68,016,782 68,390,853
4. Supplementary Cash Flow Disclosures
(a) Changes in non-cash operating working capital:
Three months ended Six months ended
September 30 September 30
---------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------
Accounts receivable 800 1,776 1,356 1,170
Prepaid expenses 742 938 (632) (922)
Inventories 29,749 28,963 13,653 24,858
Other assets (26) 64 (14) 110
Accounts payable and
accrued liabilities 12,234 9,920 (436) (2,942)
Excise and other taxes
payable (26,714) (11,997) 1,939 18,844
Income taxes payable 10,793 9,108 (5,163) 1,206
---------------------------------------------------------------------
27,578 38,772 10,703 42,324
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Other
Three months ended Six months ended
September 30 September 30
---------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------
Income taxes paid 25,974 23,481 78,925 63,576
Interest paid:
- Long-term debt - - 4,164 4,164
- Other 24 21 45 41
5. Capital Stock
Authorized: An unlimited number of common shares
Issued: 68,063,808 (March 31, 2007 - 68,038,008) common shares
September 30 March 31
(in thousands of dollars) 2007 2007
---------------------------------------------------------------------
Balance at beginning of period, April 1 47,533 45,347
Issuance of shares 195 2,186
---------------------------------------------------------------------
Balance at end of period 47,728 47,533
---------------------------------------------------------------------
---------------------------------------------------------------------
In the second quarter of fiscal 2008, no shares (2007 - 5,400) were
issued due to the exercise of stock options.
6. Share Option Plan
A summary of the status of the Company's employee stock option plan
as at the periods ended September 30, 2007 and September 30, 2006 and
changes during the periods ended on those dates are presented below:
---------------------------------------------------------------------
Three months ended September 30
---------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Options Shares price Shares price
---------------------------------------------------------------------
Outstanding at beginning
of period 1,282,600 14.359 1,330,800 14.270
Exercised - - (5,400) 12.320
---------------------------------------------------------------------
Outstanding at end
of period 1,282,600 14.359 1,325,400 14.278
---------------------------------------------------------------------
Options exercisable at
period end 1,282,600 14.359 1,325,400 14.278
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended September 30
---------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Options Shares price Shares price
---------------------------------------------------------------------
Outstanding at beginning
of period 1,308,400 14.291 1,490,800 14.325
Exercised (25,800) 10.878 (165,400) 14.488
---------------------------------------------------------------------
Outstanding at end
of period 1,282,600 14.359 1,325,400 14.278
---------------------------------------------------------------------
Options exercisable at
period end 1,282,600 14.359 1,325,400 14.278
---------------------------------------------------------------------
Under the current share option plan as at September 30, 2007, a total
of 181,800 (2007 - 181,800) common shares were issuable. Given the
limited number of common shares available for issuance under the
Option Plan, the annual grant of options was discontinued effective
fiscal 2006. No options were forfeited during the period.
The following table summarizes information about stock options
outstanding as at September 30, 2007:
Weighted average
Number remaining Number
Range of exercise price outstanding contractual life exercisable
---------------------------------------------------------------------
$8.825(1) 3,000 3.3 3,000
$11.500(1) 143,000 4.1 143,000
$12.320(2) 315,600 6.1 315,600
$14.080(1) 261,400 4.6 261,400
$16.125(1) 248,000 5.2 248,000
$16.620(2) 311,600 7.1 311,600
---------------------------------------------------------------------
1,282,600 1,282,600
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Entitled upon exercise to a payment of $4.00 per share (amount
equal to special dividends paid since date of option grant).
(2) Entitled upon exercise to a payment of $1.50 per share (amount
equal to special dividends paid since date of option grant).
7. Employee Future Benefit Expenses
The Company's defined benefit pension plan and other benefits
expenses are as follows:
Three months ended Six months ended
September 30 September 30
(in thousands of dollars) 2007 2006 2007 2006
---------------------------------------------------------------------
Defined benefit plan expenses
Pension benefit plans 1,028 730 1,839 1,163
Other benefits 881 840 1,761 1,679
---------------------------------------------------------------------
1,909 1,570 3,600 2,842
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company's defined contribution pension plan expenses in the
quarter and year-to-date for fiscal year 2008 were $0.8 million and
$1.8 million, consistent with the same periods of the prior fiscal
year.
8. Seasonality
The period between April and September has demonstrated stronger
industry shipments than the period between October and March. This
seasonality is likely due to smoking restrictions that are causing
consumption variations between summer and winter seasons.
9. Litigation, Claims and Contingencies
The Company and RBH are subject to a number of claims and potential
claims, investigations and legislation, the nature and extent of
which has been described in note 14 of the annual consolidated
financial statements of the Company for the year ended March 31,
2007. Other than as described below, there have been no developments
of a material nature during the fiscal year-to-date concerning these
matters.
As previously disclosed, RBH is currently the subject of an ongoing
investigation by the RCMP relating to RBH's sales of products
exported from Canada in the period 1989 - 1996. This investigation,
of which RBH was notified in January 2002, is related to allegations
that tobacco products manufactured and exported by RBH were illegally
smuggled back into Canada during this period without payment of
applicable excise and tobacco taxes and duties. In February 2003, the
RCMP filed criminal charges against another Canadian tobacco products
supplier and certain related parties alleging violations of the
Criminal Code (Canada) in connection with the sale and export of
tobacco products during the early 1990s. The preliminary hearing
concluded in 2006. In May 2007, the Ontario Court of Justice ordered
that company and its former chief executive officer to stand trial.
Charges against six other executives were dismissed. All parties are
seeking judicial review of the judge's decision. Although no action
has been commenced and no charges laid against the Company or RBH or
any of their present or former employees, officers or directors, the
Company and RBH believe that the RCMP and federal and provincial
governments are contemplating laying charges or commencing other
legal proceedings involving the Company or RBH and certain of their
employees, officers and directors relating to or arising from these
allegations.
As previously disclosed, in January 2001, the Province of British
Columbia initiated a lawsuit in the Supreme Court of British Columbia
against RBH, the Company and numerous other Canadian and
international tobacco companies and various tobacco trade
associations seeking unspecified damages in an amount to cover the
costs that allegedly have been, or will be, incurred by the
Government of British Columbia in providing health care benefits to
British Columbia residents who have allegedly suffered smoking-
related illnesses. The action was brought pursuant to the Tobacco
Damages and Health Care Costs Recovery Act (British Columbia). The
Company was advised in September 2007 that the trial is currently
scheduled for the fall of 2010.
As previously disclosed, in June 2006 the Province of New Brunswick
passed the Tobacco Damages and Health Care Costs Recovery Act. In
September 2007, this Province announced that it had retained a
consortium of lawyers on a contingency fee basis to act for it in a
proposed action against tobacco product manufacturers to recover
health care costs that allegedly have been, or will be, incurred by
the Province in respect of alleged smoking-related illnesses.
It is not possible to predict the outcome of legal claims or
investigations, pending and future, against the Company or RBH. Legal
proceedings and investigations are subject to many uncertainties, and
it is possible that there will be adverse developments in the claims
and investigations pending against the Company and RBH or that these
claims and investigations, and any potential future claims and
investigations, could be decided unfavourably or settled. An
unfavourable outcome or settlement could involve significant damages
or significant monetary payments which could have a significant
adverse effect on the financial condition of the Company, and the
Company and RBH may not have the resources to satisfy such claims.
Additional information concerning legal matters affecting the Company
and RBH are contained in the Company's filings with securities
regulatory authorities including the Company's 2007 Annual Report and
2007 Annual Information Form (in particular under "Legal
Proceedings") which can be accessed at www.sedar.com or on the
Company's website at www.rothmansinc.ca.
10. Comparative Figures
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current period.