2nd Quarter Report
Six Months Ended
September 30, 2005
Trading: TSX: ROC
TORONTO, Oct. 28 /CNW/ - Rothmans Inc. today announced increased earnings
for the second quarter of fiscal 2006, ended September 30, 2005.
Rothmans earnings for the second quarter of fiscal 2006 were
$30.1 million, or $0.44 basic earnings per share, compared with $26.4 million
or $0.39 basic earnings per share in the second quarter of fiscal 2005. For
the first six months of this fiscal year, Rothmans' earnings were
$59.8 million or $0.88 per share, compared with $50.2 million or $0.75 per
share in the first half of the prior year.
Sales, net of excise duty and taxes, at 60%-owned subsidiary Rothmans,
Benson & Hedges Inc. increased to $174.8 million in the most recent quarter
compared with $166.7 million in the second quarter of fiscal 2005. Sales for
the first six months of this fiscal year were $350.8 million versus
$328.5 million for the same period a year earlier.
RBH's EBITDA margin increased to 50.1% compared with 48.7% in the prior
quarter and 46.3% in the quarter ended September 30, 2004. This increase was
principally due to increased volumes of price category cigarettes, higher
prices across all product categories, and reduced materials costs, which more
than offset lower premium cigarette and fine cut volumes.
RBH's share of the total domestic composite market was 31.0% for the
quarter ended September 30, 2005, compared with 31.1% in the previous quarter
and 29.1% in the second quarter of fiscal 2005. Its premium cigarette share
was 15.6%, compared with 15.5% in the previous quarter and 15.6% during the
second quarter of last year. RBH's share of the domestic price cigarette
category of 43.8% compared with 44.4% and 40.4% in the prior quarter and
second quarter of fiscal 2005. In the fine cut market, RBH's share was 59.2%,
down from 60.3% in the prior quarter and 59.9% in the second quarter of fiscal
2005. RBH's share of the total domestic price category was 46.8%, compared
with 47.8% and 45.4% in the prior quarter and second quarter of fiscal 2005.
"Rothmans, Benson & Hedges Inc.'s strategic focus has continued to result
in solid sales, earnings and an improved EBITDA margin," said John Barnett,
President and Chief Executive Officer of Rothmans Inc. "While the market
remains volatile, we believe the latest quarter demonstrates that RBH is well
positioned to continue to respond to a challenging environment."
During the quarter, the Supreme Court of Canada released a ruling
upholding the constitutional validity of the Tobacco Damages and Health Care
Costs Recovery Act (British Columbia). Although disappointed in the results of
the Supreme Court decision, RBH believes that it continues to have good
defenses to the Province's claim. To date, no substantive court hearings have
been held regarding the merits of the Province's claim as the action had been
stayed pending the outcome of the constitutional challenge. The Supreme Court
decision lifted the stay of the Province's action. In its decision, the
Supreme Court expressly stated that "tobacco manufacturers sued pursuant to
the Act will receive a fair civil trial, in the sense that the concept is
traditionally understood; they are entitled to a public hearing, before an
independent and impartial court, in which they may contest the claims of the
plaintiff and adduce evidence in their defense." The Supreme Court decision
also left open novel and complex legal issues which all but ensure many years
of complex litigation.
Shortly after the end of the second quarter, Rothmans was rated as one of
the top 10 most respected Corporate Cultures in a survey of 107 senior
Canadian executives conducted by Canadian Business magazine. "We appreciate
this endorsement of the efforts of all our people to build and maintain a
truly effective company," said Mr. Barnett. "Our culture and values are built
upon priorities that reflect teamwork, leadership and a commitment to win. We
have long believed that these values are key components driving how our
organization functions and are critical to our success."
Rothmans Inc. was once again highly ranked in The Globe and Mail's annual
report on corporate governance practices. Rothmans received the third highest
rating awarded, improving on its 2004 ranking.
Outlook
"We expect continued quarter-to-quarter volatility in the market because
of variations in consumer consumption and wholesale buying patterns. Those
variations are due to seasonal influences, competitive brand positioning, high
taxes, and the presence of contraband product in the Canadian tobacco market,"
said Mr. Barnett. "We also expect that the contraband market will continue to
adversely affect legitimate industry stakeholders including RBH. Despite these
market forces, we have demonstrated our ability to deliver solid results in a
challenging environment and RBH remains well positioned to capitalize on the
shift toward the price category of cigarettes."
Dividend declared
The Board of Directors of Rothmans Inc. declared a quarterly dividend of
$0.30 per share payable on December 17, 2005 to shareholders of record at the
close of business on December 2, 2005.
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 on Friday,
October 28, 2005. 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 through the Company's investor website,
www.rothmansinc.ca. At the completion of the conference call, a recording will
be available until November 4, 2005 by calling 1-800-408-3053 and entering
reservation number 3164719. The recording can also be accessed through the
investor website.
Media are invited to listen to the call and to contact John McDonald 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 approximately 780 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
of Financial Results for September 30, 2005
-------------------------------------------
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, 2005, compared with the prior year. It also
discusses factors that could affect future performance. This MD&A should be
read in conjunction with the attached unaudited financial statements for the
period ended September 30, 2005, the annual MD&A contained in the 2005 Annual
Report, and the audited annual consolidated financial statements of the
Company for the year ended March 31, 2005.
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 financial statements.
Forward Looking Statements
Certain statements contained herein, including MD&A, constitute "forward-
looking statements". Words such as "plans", "intends", "outlook", "expects",
"anticipates", "estimates", "believes", "should" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
are based on current expectations and entail various risks and uncertainties
as more fully described in the "Risks and Uncertainties" and the "Outlook"
sections of this MD&A when read in conjunction with the annual MD&A. These
risks and uncertainties could cause or contribute to actual results that are
materially different from those expressed or implied. 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 regarding the Company and RBH is contained in the
Company's filings with security regulatory authorities including the Company's
2005 Annual Report and 2005 Annual Information Form, which can be accessed at
www.sedar.com or on the Company's website 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 the Company's operating
performance, refers to "earnings before interest, taxes, depreciation and
amortization" as a percentage of "sales, net of 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, taxes
and capital spending. 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, 2005, and "prior
quarter" refers to the three months ended June 30, 2005. "Fiscal 2006" refers
to the fiscal year ending March 31, 2006 and other similar references to a
fiscal year (e.g., fiscal 2005) refers to the fiscal year then ended on
March 31 (e.g., March 31, 2005).
"The three major manufacturers" or "three majors" refer to RBH, Imperial
Tobacco Canada Limited (ITL), and JTI-MacDonald Corp. (JTI). "Premium
cigarettes" refers to tailor-made cigarettes sold at premium retail price,
"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-proportioned tobacco
sticks). "Reported industry" is based on information reported by Statistics
Canada and Company estimates and includes, in addition to the information
reported by the three major manufacturers, information supplied by smaller
regional manufacturers.
Industry Overview
Total reported domestic sales volumes for all tobacco products decreased
8.1% and 6.2% in the quarter and six months ended September 30, 2005 versus
the comparable periods in the prior fiscal year. Total reported domestic
premium cigarette volumes declined by 14.7% and 15.4% in the quarter and six
months ended September 30, 2005 versus the same periods of the prior year. In
the recent quarter, total reported domestic price category volumes remained
essentially unchanged compared with the same period of the prior year, as
lower fine cut volumes offset higher price category cigarette volumes. For the
six months ended September 30, 2005, the total domestic price category volumes
were 5.9% higher versus the same period of the prior year.
RBH estimates that premium cigarettes represented 50.6% of total domestic
industry shipments in the recent quarter versus 51.7% in the quarter ended
June 30, 2005 and 54.5% in the quarter ended September 30, 2004. The price
category is estimated to have represented 49.4% of the Canadian domestic
tobacco market in the recent quarter, versus 48.3% in the quarter ended
June 30, 2005 and 45.5% in the quarter ended September 30, 2004. Fine cut
products are estimated to have represented 9.5% of the total domestic tobacco
market in the recent quarter versus 10.6% in the prior quarter and 11.5% in
the second quarter of last year. Price category cigarettes are estimated to
have represented 39.9% of the total domestic tobacco market in the recent
quarter versus 37.8% in the prior quarter and 33.9% in the second quarter of
last year.
Shown below is a comparative summary of domestic shipments of tobacco
products for the six months ended September 30, 2005.
<<
Canadian Domestic Tobacco Shipments
(in billions of sticks and equivalents)
-------------------------------------------------------------------------
For the six months ended September 30
-------------------------------------------------------------------------
2005 2004
Three Reported Three Reported
RBH Majors Industry RBH Majors Industry
-------------------------------------------------------------------------
Premium
cigarettes 1.5 10.0 10.0 1.8 11.8 11.8
Price category
cigarettes 3.3 6.4 7.6 2.6 5.3 6.5
Fine cut 1.2 1.9 1.9 1.5 2.4 2.5
Total Price
Category 4.5 8.3 9.5 4.1 7.7 9.0
-------------------------------------------------------------------------
Total 6.0 18.3 19.5 5.9 19.5 20.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RBH Market
Share
Premium
cigarettes 15.6% 15.6% 15.5% 15.5%
Price category 53.9% 47.3% 53.0% 45.6%
Composite markets 33.0% 31.1% 30.4% 28.5%
Note:
1. This table includes information relating to domestic shipments only
(i.e., excluding duty-free and export sales). Reported industry
export and duty free shipments for the six month period were: premium
cigarettes - 0.2 billion sticks in fiscal 2006, and 0.3 billion
sticks in fiscal 2005; price category cigarettes - 1.5 billion sticks
in fiscal 2006 and 1.2 billion sticks in fiscal 2005.
Reported industry volumes continue to be influenced by the evolution of
the cigarette price category which is affecting the relative contributions of
premium versus price category cigarettes and fine cut products. Other factors
affecting industry shipments include:
- continued declines in consumer incidence and consumption of tobacco
products;
- the presence of contraband and counterfeit products. High taxes and
the potential for future taxation increases contribute to probable
increases in the presence of contraband product in the domestic
market;
- seasonal trends in consumer purchasing patterns. Over the past two
fiscal years, the period between April and September has demonstrated
stronger industry 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 as a result of anticipated
tax and wholesale price increases. Swings in wholesaler purchasing
patterns motivated by the timing of tax and price increases, and
other factors are anticipated to have a significant effect on
quarter-to-quarter comparisons in the future; and
- continuing changes in the cigarette price category particularly as a
result of changes in brands and pricing within the category.
Results at Rothmans, Benson & Hedges Inc.
In the quarter ended September 30, 2005, RBH shipped a total of
3.0 billion equivalent sticks into the domestic market, a 2.1% decrease from
the comparable period of the prior year. For the six months ended
September 30, 2005, RBH shipped a total of 6.0 billion equivalent sticks, a
2.1% increase from the comparable period of the prior year. The impact of
increased shipments of RBH price category cigarettes essentially offset volume
declines in both premium cigarette and fine cut shipments, in both the quarter
and six months ended September 30, 2005. RBH's share of the total domestic
composite market of 31.0% for the quarter ended September 30, 2005 was
comparable with the 31.1% for the three months ended June 30, 2005 and was up
from 29.1% for the three months ended September 30, 2004.
RBH's premium cigarette volumes declined 14.6% in the recent quarter and
15.3% in the fiscal year to date as compared to the same periods in the prior
year. RBH's domestic market share of premium cigarettes was 15.6% in the
recent quarter ended September 30, 2005, essentially unchanged from 15.5% in
the quarter ended June 30, 2005, and 15.6% in the quarter ended September 30,
2004.
Sales of RBH's price category cigarettes totaled 1.7 billion sticks in
the recent quarter and 3.3 billion sticks for the year to date, which
represented increases of 17.4% and 27.7% as compared with shipments in the
comparable periods of fiscal 2005. The recent quarter share of the domestic
cigarette price category was 43.8% versus 44.4% in the prior quarter, and
40.4% in the quarter ended September 30, 2004. RBH continues to experience
solid performance from its Number 7, Canadian Classics and Mark Ten
trade-marks. A number of factors continue to influence the overall growth of
this product category including the brands being offered to consumers, their
availability and price.
Shipments of RBH fine cut products declined 25.5% in the recent quarter
and 21.3% in the fiscal year to date compared to the same periods in the prior
year. This decline primarily resulted from consumers switching from high yield
tobacco and Presto Pak pre-portioned stick products to price category
cigarettes. RBH's share of the domestic fine cut market was 59.2% in the
recent quarter, down from 60.3% in the quarter ended June 30, 2005, and 59.9%
in the quarter ended September 30, 2004. Combining the cigarette price
category with the fine cut segment, RBH's share of the total price category
was 46.8% in the recent quarter, down from 47.8% in the quarter ended June 30,
2005, but up from 45.4% in the quarter ended September 30, 2004.
RBH's recent quarter EBITDA margin was 50.1% compared with 48.7% in the
prior quarter and 46.3% in the quarter ended September 30, 2004. The EBITDA
margin increase was principally due to increased volumes of price category
cigarettes, higher prices across all product categories and reduced materials
costs, which more than offset reduced premium cigarette and fine cut volumes.
Rothmans Inc. Financial Results
Basic earnings per share were $0.44 in the recent quarter and $0.88 for
the six months ended September 30, 2005 compared with $0.39 and $0.75 in the
comparable period of the prior year. Sales, net of excise duty and taxes, were
$8.1 million higher for the quarter ended September 30, 2005 and $22.3 million
higher for the six months ended September 30, 2005 versus the comparable
periods in the prior year. Increased prices across all product categories and
increased volumes of price category cigarettes shipments in the recent quarter
versus the comparable period of the prior year more than offset decreases in
sales resulting from declines in both premium cigarette and fine cut volumes.
Investment income declined to $0.7 million in the recent quarter from
$0.9 million in the comparable period of the prior year. A special dividend of
$1.50 per share paid during the first quarter of fiscal 2006 reduced the
average cash balance held by the Company during the recent quarter versus the
comparable period of the prior year.
Operating costs were $2.4 million and $1.7 million lower in the recent
quarter and six months ended September 30, 2005 versus the comparable periods
of the prior year. Product variable costs were lower in the recent quarter but
higher during the six months ended September 30, 2005 than in the comparable
periods of the prior year, reflecting the comparative change in shipment
volumes in these periods. Total component costs of materials used to
manufacture finished goods were lower in both the recent quarter and six
months ended September 30, 2005 than in the comparable periods of the prior
year.
Income tax expense was $33.0 million in the quarter and $65.6 million in
the fiscal year to date, resulting in an effective tax rate for the fiscal
year to date of 39.7%. The Company expects its effective tax rate for the
fiscal year to approximate 39.7%.
Liquidity and Capital Resources
Cash flow
RBH's operations generate significant cash resources. These are
sufficient to fund interest payments on RBH's long-term debt, capital
expenditures and dividends to shareholders. The dividends received by Rothmans
Inc. are 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
$54.7 million in the recent quarter and $104.4 million in the fiscal year to
date versus $47.9 million and $90.2 million in the comparable periods of the
prior year. The Company expects that cash generated from RBH's operations will
continue to be sufficient to meet the financing needs of RBH's business.
During the quarter, the Company paid dividends of $20.3 million,
representing a dividend of $0.30 per share.
Cash resources
Cash and short-term investments of $121.3 million represented the
consolidated cash resources of the Company versus $192.0 million at March 31,
2005. This decrease in cash and short-term investments is predominantly due to
the payment of a $1.50 per share special dividend made during the first
quarter of fiscal 2006, and normal quarterly fluctuations in RBH's working
capital requirements, partially offset by earnings from RBH's operations. On a
non-consolidated basis, Rothmans Inc. held cash and short-term investments of
$84.2 million at September 30, 2005, a decrease from $ 192.0 million at
March 31, 2005. This decrease is due to the payment of dividends by the
Company and the timing of dividends paid by RBH.
Critical Accounting Estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the 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 post
employment benefits were not adjusted in the recent quarter. Therefore, the
impact of changes in either the discount rate, or the expected return on plan
assets continue as described in the annual MD&A for the year ended March 31,
2005.
Litigation Contingent Liabilities
As discussed in the annual MD&A for the year ended March 31, 2005, based
on management's best estimates, neither the Company nor RBH has accrued for
potential losses regarding the various legal actions, proceedings and claims
to which they are subject. If successful, these claims, either individually or
in aggregate, could involve significant damages which could exceed the
resources of the Company and RBH.
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 13 to the audited annual consolidated
financial statements of the Company for the year ended March 31, 2005. Except
as described below, there have been no developments of a material nature
during the fiscal year to date concerning these matters.
In September 2005, the Supreme Court of Canada dismissed the
constitutional challenge of the Tobacco Damages and Health Care Costs Recovery
Act (British Columbia) brought by RBH and other Canadian and foreign tobacco
product manufacturers. To date, no substantive court hearings have been held
regarding the merits of the Province's claim as the action had been stayed
pending the outcome of the constitutional challenge. The Supreme Court
decision lifted the stay of the Province's action. While the rules that will
be applicable to the B.C. action will, as a result of the Province's
legislation, be unlike any rules ever applied in any Canadian court, RBH
believes that it continues to have good defenses to the Province's claim and
intends to bring before the court hearing the action, all evidence that
supports its position. In the decision, the Supreme Court left open novel and
complex legal issues which all but ensure many years of complex litigation.
In September 2005, two claims were filed in the Province of Quebec
against RBH, Imperial Tobacco Limited and JTI-Macdonald Corp. As previously
disclosed, the Quebec Superior Court had authorized these two claims to
proceed as class actions in February 2005. The first claim, filed on behalf of
a class of persons residing in Quebec who allegedly are or have been addicted
to the nicotine contained in cigarettes manufactured by the respondents, seeks
$17.8 billion in damages. The other claim, filed on behalf of a class of
persons residing in Quebec who have allegedly suffered certain diseases as a
result of smoking cigarettes manufactured by the respondents as well as the
legal heirs of deceased persons in the group, seeks $5 billion in damages. RBH
intends to vigorously defend itself and denies the allegations contained in
the claims, which include allegations of failure to warn, addiction, nicotine
manipulation, advertising directed at young people, false advertising and
inadequate warnings.
In October 2005 the Nova Scotia government introduced Bill 222 - Tobacco
Damages and Health-care Costs Recovery Act. The Bill purports to allow the
provincial government to bring an action against tobacco product manufacturers
for the recovery of health care costs that allegedly have been or will be
incurred by the province in respect of alleged tobacco related diseases. The
Bill received second reading on October 17, 2005.
The outcome of any litigation is uncertain and, if successful, these
claims 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.
In a decision released in August 2005, the Quebec Court of Appeal, in a
2-1 ruling, upheld the constitutional validity of substantially all of the
provisions of the Tobacco Act (Canada). The federal government is seeking
leave to appeal the decision to the Supreme Court of Canada even though the
ruling was in their favour.
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 2005 Annual Report and 2005 Annual
Information Form, which can be accessed at www.sedar.com or on the Company's
website at www.rothmansinc.ca.
Outlook
Looking ahead, Rothmans expects that a number of factors will affect its
financial performance including:
- the success of efforts by RBH and the industry to defend themselves
against product liability and other claims, and to operate within the
regulatory environment;
- the lower rate of growth of 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;
- increased levels of counterfeit and other contraband product that may
occur due to the increasingly onerous tax environment;
- continued declines in the consumption of tobacco products;
- the continued volatility in the cigarette market as a result of a
number of factors including changes in brands and pricing in the
Canadian cigarette price category, varying wholesaler purchasing
patterns and seasonal trends in adult smoking consumption;
- the impact of RBH's efforts to stabilize its cigarette market share
in the declining premium cigarette category;
- RBH's ability to maintain its leading position in the fine cut
segment;
- RBH's ability to continue to implement price increases for its
products;
- government tax policy regarding the differentiation in tax rates
applicable to fine cut products in comparison to tailor-made
cigarettes; and
- RBH's continued success at maintaining or reducing costs, especially
in view of the potential for regulated changes to product
specifications.
It is believed that the increasing presence of contraband is a key factor
in the increased decline rate in the total reported industry sales volumes
which continues to exceed historical levels. Continued growth in the
availability of contraband products in the domestic market as a result of high
tobacco tax rates across the country may increase the decline rate in reported
industry volumes in the future which would have a negative impact on RBH's
sales volumes.
Continued launches into the cigarette price category by each of the three
major manufacturers have led to significant growth of that category over the
past two fiscal 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.
RBH domestic price cigarette category volumes grew by 17.4% and 27.7% in
the quarter and six months ended September 30, 2005 compared with the same
periods in the prior fiscal year. Price category cigarettes are estimated to
have represented 44.1% and 43.2% in the quarter and six months ended
September 30, 2005 of total reported industry domestic cigarette sales volumes
compared with 38.3% and 35.6% in the quarter and six months ended September
2004. While it is expected that the cigarette price category will continue to
grow, it is expected that the rate of growth will be less than seen in recent
years as the category approaches maturity.
On October 1, 2005, federal regulations came into effect requiring that
all cigarettes manufactured or imported into Canada comply with standards
designed for reduced ignition propensity. RBH has contracted for the supply of
cigarette paper designed to meet the standard and now expects that this new
paper, together with testing, will increase costs by approximately $7 million
in the current fiscal year ending March 31, 2006. On an annualized basis,
costs are estimated to increase by $10 million per year.
It is also anticipated that seasonal fluctuations in adult smoker
consumption patterns may become more pronounced as indoor and workplace
smoking bans and restrictions become more widespread, leading to seasonal
variations in wholesale purchases.
Rothmans has a strong balance sheet with more than sufficient cash flow
and resources to service its long-term debt and meet its capital expenditure
requirements. The Company has demonstrated its commitment to increasing
shareholder returns, and is committed to exploring other potential investment
opportunities, in conjunction with RBH's continuing attention to its core
brand strategy.
Interim Consolidated Statements of Earnings and Retained Earnings
(In thousands of Three months ended Six months ended
dollars, except per September 30 September 30
share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
EARNINGS
Revenues:
Sales, net of excise
duty and taxes $ 174,759 $ 166,669 $ 350,750 $ 328,474
Investment income 651 912 1,775 1,796
--------------------------------------------------
Total revenues 175,410 167,581 352,525 330,270
Costs:
Operating costs
excluding
amortization 87,838 90,245 179,116 180,858
--------------------------------------------------
Earnings before
interest, taxes,
amortization and
minority interest 87,572 77,336 173,409 149,412
Amortization 2,623 2,195 4,809 4,322
Interest expense
(income)
- Long-term debt 2,093 1,954 4,175 3,891
- Other (384) (418) (721) (752)
--------------------------------------------------
Earnings before income
taxes and minority
interest 83,240 73,605 165,146 141,951
Income taxes
- Current 32,536 29,002 64,450 56,482
- Future 512 656 1,114 1,132
--------------------------------------------------
Total income taxes 33,048 29,658 65,564 57,614
--------------------------------------------------
Earnings before
minority interest 50,192 43,947 99,582 84,337
Minority interest 20,087 17,540 39,824 34,088
--------------------------------------------------
Earnings for the
period $ 30,105 $ 26,407 $ 59,758 $ 50,249
--------------------------------------------------
--------------------------------------------------
Earnings per common
share (note 2)
- Basic $ 0.44 $ 0.39 $ 0.88 $ 0.75
--------------------------------------------------
--------------------------------------------------
- Diluted $ 0.44 $ 0.39 $ 0.87 $ 0.74
--------------------------------------------------
--------------------------------------------------
RETAINED EARNINGS
Balance at beginning
of period $ 59,757 $ 136,622 $ 151,734 $ 129,628
Earnings for the
period 30,105 26,407 59,758 50,249
--------------------------------------------------
89,862 163,029 211,492 179,877
Dividends paid:
Common Shares - (20,344) (16,886) (141,974) (33,734)
(Q2 2005 - $0.30
per share)
(Q2 2004 - $0.25
per share)
--------------------------------------------------
Balance at end of
period $ 69,518 $ 146,143 $ 69,518 $ 146,143
--------------------------------------------------
--------------------------------------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Balance Sheets
As at As at
September 30 March 31
(In thousands of dollars) 2005 2005
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 121,323 $ 23,255
Short-term investments - 168,740
Accounts receivable 39,135 32,119
Inventories 197,927 209,819
Prepaid expenses 2,319 1,322
------------------------
Total current assets 360,704 435,255
Property, plant and equipment 72,846 69,149
Future income taxes 7,717 8,831
Prepaid pension benefit cost 14,951 12,003
Other assets 3,081 3,290
------------------------
$ 459,299 $ 528,528
------------------------
------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 52,131 $ 47,445
Excise and other taxes payable 82,185 79,578
Income taxes payable 23,130 21,475
------------------------
Total current liabilities 157,446 148,498
Other long-term liabilities 2,306 2,167
Other employee future benefits 34,791 33,497
Long-term debt 149,729 149,708
Minority interest in subsidiary company 292 950
------------------------
344,564 334,820
------------------------
SHAREHOLDERS' EQUITY
Capital stock (note 3) 45,217 41,974
Retained earnings 69,518 151,734
------------------------
Total shareholders' equity 114,735 193,708
------------------------
$ 459,299 $ 528,528
------------------------
------------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Statements of Cash Flows
Three months ended Six months ended
(In thousands of September 30 September 30
dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash provided by (used in):
OPERATING ACTIVITIES
Earnings for the
period $ 30,105 $ 26,407 $ 59,758 $ 50,249
Adjusted for non-cash
items:
Amortization 2,623 2,195 4,809 4,322
Minority interest 20,087 17,540 39,824 34,088
Future income taxes 512 656 1,114 1,132
Loss on sale of
property, plant
& equipment 14 9 345 11
Defined & other
employee future
benefits expense 1,949 1,865 3,702 3,516
Defined & other
employee future
benefits funding (462) (561) (5,356) (3,959)
Share option
compensation cost - - - 1,030
--------------------------------------------------
54,828 48,111 104,196 90,389
Changes in non-cash
operating working
capital 3,902 35,919 (7,166) 20,868
--------------------------------------------------
58,730 84,030 97,030 111,257
--------------------------------------------------
INVESTING ACTIVITIES
Proceeds on sale of
property, plant
& equipment - 3 1 3
Additions to property,
plant & equipment (4,412) (3,066) (8,716) (7,054)
Sale of short-term
investments - 4,974 168,740 137,929
--------------------------------------------------
(4,412) 1,911 160,025 130,878
--------------------------------------------------
FINANCING ACTIVITIES
Dividends paid -
By the Company (20,344) (16,886) (141,974) (33,734)
By a subsidiary
company to minority
shareholder (1,435) (18,440) (20,395) (35,315)
Proceeds on issuance
of common shares 3,243 964 3,243 1,823
Repayment of notes
payable (13,500) - - -
Proceeds (repayment)
on other long-term
liabilities (77) (144) 139 (92)
--------------------------------------------------
(32,113) (34,506) (158,987) (67,318)
--------------------------------------------------
Increase in cash and
cash equivalents 22,205 51,435 98,068 174,817
Cash and cash
equivalents at
beginning of period 99,118 170,360 23,255 46,978
--------------------------------------------------
Cash and cash
equivalents at end
of period $ 121,323 $ 221,795 $ 121,323 $ 221,795
--------------------------------------------------
--------------------------------------------------
SUPPLEMENTARY
DISCLOSURES
Income taxes paid $ 23,283 $ 20,617 $ 62,307 $ 69,440
Interest paid
- Long-term debt - 1,995 4,164 3,914
- Other 47 49 75 72
Rothmans Inc. and subsidiary companies (unaudited)
Notes to the Interim Consolidated Financial Statements (unaudited)
1. Summary of Significant Accounting Policies
The interim consolidated financial statements of Rothmans Inc. (the
"Company") have been prepared in accordance with Canadian generally
accepted accounting principles. These interim consolidated financial
statements do not contain all of the note disclosures found in the
Company's annual consolidated financial statements for the year ended
March 31, 2005. Therefore, these interim 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.
2. Earnings per Share
Earnings per common share is 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, 2005 67,641,898 68,355,294
September 30, 2004 67,434,576 67,732,444
Three months ended:
September 30, 2005 67,711,028 68,403,860
September 30, 2004 67,497,768 67,807,496
---------------------------------------------------------------------
3. Capital Stock
Authorized: An unlimited number of common shares
Issued: 67,842,608 (March 31, 2005 - 67,572,008) common shares
September 30 March 31
(in thousands of dollars) 2005 2005
---------------------------------------------------------------------
Balance at beginning of period, April 1 $ 41,974 $ 38,869
Issuance of shares 3,243 2,075
Contributed surplus (note 4) - 1,030
---------------------------------------------------------------------
Balance at end of period 45,217 $ 41,974
---------------------------------------------------------------------
---------------------------------------------------------------------
4. Stock-based Compensation Plan
The details of the Company's share option plan are as follows:
Share Option Plan
The annual grant of options was discontinued effective fiscal year
2006. In fiscal year 2005, the Company recognized $1.0 million of
stock-based compensation costs for options granted after March 31,
2004 based on the fair value method. The fair value of each option
grant was estimated on the date of grant using the Binomial option
pricing model with the following assumptions:
September 30 September 30
2005 2004
---------------------------------------------------------------------
Risk-free interest rate (%)(x) NA 4.25
Expected dividend yield NA 5.20
Option term (years) NA 6
Expected volatility (%) NA 22.0
---------------------------------------------------------------------
(x) The Risk-free interest rate is the yield for a 6-year
Government of Canada bond on the date of grant.
A summary of the status of the Company's employee stock option plan
as at the periods ended September 30, 2005 and September 30, 2004 and
changes during the periods ending on those dates are presented below:
-------------------------------------------------------------------------
Three months ended September 30
-------------------------------------------------------------------------
2005 2004(x)
-------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Options Shares price ($) Shares price ($)
-------------------------------------------------------------------------
Outstanding at
beginning of period 1,774,400 $14.325 1,921,400 $14.054
Granted - - - -
Exercised 270,600 14.470 119,000 10.607
-------------------------------------------------------------------------
Outstanding at end of
period 1,503,800 $14.299 1,802,400 $14.281
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable
at period end 1,503,800 $14.299 1,235,668 $13.260
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average fair
value of options
granted during the
period N/A 4.70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended September 30
-------------------------------------------------------------------------
2005 2004(x)
-------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Options Shares price ($) Shares price ($)
-------------------------------------------------------------------------
Outstanding at
beginning of period 1,774,400 14.325 1,556,800 $13.281
Granted - - 438,400 16.620
Exercised 270,600 14.470 192,800 11.521
-------------------------------------------------------------------------
Outstanding at end of
period 1,503,800 $14.299 1,802,400 $14.281
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable
at period end 1,503,800 $14.299 1,235,668 $13.260
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average fair
value of options
granted during the
period N/A 4.70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) Adjusted for the two-for-one stock split effective March 4, 2005
Under the current share option plan as at September 30, 2005, a total
of 181,800 (2004 - 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, 2005:
Weighted
average
remaining
Number contractual Number
Exercise price outstanding life exercisable
---------------------------------------------------------------------
$8.825 18,000 5.3 18,000
$11.500 160,000 6.1 160,000
$12.320 398,200 8.1 398,200
$14.080 261,400 6.5 261,400
$16.125 313,000 7.1 313,000
$16.620 353,200 9.1 353,200
---------------------------------------------------------------------
1,503,800 1,503,800
---------------------------------------------------------------------
5. Litigation, Claims and Contingencies
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 13 to the audited annual consolidated financial statements of
the Company for the year ended March 31, 2005. Except as described
below, there have been no developments of a material nature during
the fiscal year to date concerning these matters.
In September 2005, the Supreme Court of Canada dismissed the
constitutional challenge of the Tobacco Damages and Health Care Costs
Recovery Act (British Columbia) brought by RBH and other Canadian and
foreign tobacco product manufacturers. To date, no substantive court
hearings have been held regarding the merits of the Province's claim
as the action had been stayed pending the outcome of the
constitutional challenge. The Supreme Court decision lifted the stay
of the Province's action. While the rules that will be applicable to
the B.C. action will, as a result of the Province's legislation, be
unlike any rules ever applied in any Canadian court, RBH believes
that it continues to have good defenses to the Province's claim and
intends to bring before the court hearing the action, all evidence
that supports its position. In the decision, the Supreme Court left
open novel and complex legal issues which all but ensure many years
of complex litigation.
In September 2005, two claims were filed in the Province of Quebec
against RBH, Imperial Tobacco Limited and JTI-Macdonald Corp. As
previously disclosed, the Quebec Superior Court had authorized these
two claims to proceed as class actions in February 2005. The first
claim, filed on behalf of a class of persons residing in Quebec who
allegedly are or have been addicted to the nicotine contained in
cigarettes manufactured by the respondents, seeks $17.8 billion in
damages. The other claim, filed on behalf of a class of persons
residing in Quebec who have allegedly suffered certain diseases as a
result of smoking cigarettes manufactured by the respondents as well
as the legal heirs of deceased persons in the group, seeks $5 billion
in damages. RBH denies intends to vigorously defend itself and the
allegations contained in the claims, which include allegations of
failure to warn, addiction, nicotine manipulation, advertising
directed at young people, false advertising and inadequate warnings.
In October 2005, the Nova Scotia government introduced Bill 222 -
Tobacco Damages and Health-care Costs Recovery Act. The Bill purports
to allow the provincial government to bring an action against tobacco
product manufacturers for the recovery of health care costs that
allegedly have been or will be incurred by the province in respect of
alleged tobacco related diseases. The Bill received second reading on
October 17, 2005.
All of these claims and potential claims remain at an early stage and
an estimate of the loss which might be suffered, if any, cannot be
determined.
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 2005 Annual Report and
2005 Annual Information Form, which can be accessed at www.sedar.com
or on the Company's website at www.rothmansinc.ca.
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