<<
First Quarter Report
Three Months Ended
June 30, 2006
>>
Trading: TSX: ROC
TORONTO, July 25 /CNW/ -Rothmans Inc. today announced its results for the
first quarter of fiscal 2007, which ended June 30, 2006.
Rothmans' earnings for the first quarter were $29.3 million, or $0.43
basic earnings per share, compared with $29.7 million or $0.44 basic earnings
per share in the same quarter of fiscal 2006.
Sales at 60%-owned subsidiary Rothmans, Benson & Hedges Inc., net of
excise duty and taxes, decreased to $162.9(1) million in the most recent
quarter compared with $164.6(1) million in the first quarter of fiscal 2006.
During the three months ended June 30, 2006, total reported industry
domestic sales volumes for all tobacco products decreased 9.8% from a year
earlier. It is believed that the increased presence of contraband product
contributed to this decline, which continues to exceed the historical average
rate experienced by the industry. Total reported industry domestic sales
volumes of 8.8 billion equivalent sticks in the most recent quarter were 16.0%
higher than in the prior quarter, reflecting normal industry seasonality.
RBH's EBITDA margin for the first quarter was 52.6%(1) compared with
52.3%(1) in the first quarter a year ago, primarily as a result of price
increases across all product categories and lower sales and marketing costs.
This was partially offset by the effect of lower shipment volumes, higher
product input costs and volume shifts from the mid-tier to the lower-priced
tier of the cigarette price category. In the quarter ended March 31, 2006,
RBH's EBITDA margin was 36.9%(1).
<<
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(1) The above financial results reflect the adoption of EIC156
"Accounting By A Vendor For Consideration Given To A Customer" and
results for prior periods have been restated accordingly. For more
information see "New Accounting Pronouncement" in the accompanying
MD&A.
>>
RBH's share of the total domestic composite market was 31.8% for the
quarter ended June 30, 2006, unchanged from the previous quarter but higher
than the 31.1% reported for the same quarter of 2006. Premium cigarette share
was 15.5%, up slightly from 15.3% in the prior quarter but the same as a year
earlier. RBH's share of the domestic price cigarette category of 45.0%
compared with 45.8% in the previous quarter and 44.4% in the quarter ended
June 30, 2005. In the fine cut market, RBH's share was 58.2%, up from 57.9% in
the prior quarter but lower than the 60.3% share in the year-earlier quarter.
RBH's share of the total domestic price category was 47.2%, compared with
48.2% in the prior quarter and 47.8% in the quarter ended June 30, 2005.
"Results for the first quarter of fiscal 2007 continue to be affected by
the influx of contraband product. RBH, our employees and suppliers, as well as
those of other industry participants - and ultimately, governments - are
feeling the effects of unchecked illegal products in the market," said John
Barnett, President and Chief Executive Officer of Rothmans Inc. and RBH. "RBH
delivered strong results this quarter despite a significant decline in
industry volumes compared with the first quarter of last year" commented Mr.
Barnett.
Subsequent to the end of the quarter, Rothmans, Benson & Hedges Inc.
(RBH) and Philip Morris Products S.A. (PMPSA) entered into an exclusive
licensing agreement to manufacture and sell a new cigarette brand in Canada
under PMPSA's world famous ROOFTOP packaging design.
This new brand of cigarettes will be unique in that no brand name will
appear on the packages sold to consumers. Instead, the product will be
identified by its package design, which contains the world famous ROOFTOP
design, as well as the trade-mark COME TO WHERE THE FLAVOR IS, both of which
are used by PMSPSA and its affiliates outside of Canada on the MARLBORO brand.
However, because the MARLBORO trade-mark registration in Canada is not owned
by PMPSA, RBH cannot use MARLBORO on its new brand in Canada. The ROOFTOP
design, and COME TO WHERE THE FLAVOR IS are registered Canadian trade-marks of
PMPSA.
The new cigarette brand will be a U.S. style American blend cigarette,
using premium international tobaccos similar to that used by PMPSA outside of
Canada in its MARLBORO brand. The new brand will be available in Ontario as of
today and elsewhere in Canada in the coming weeks.
Dividend declared
The Board of Directors of Rothmans Inc. declared a quarterly dividend of
$0.30 per share payable on September 17, 2006 to shareholders of record at the
close of business on September 1, 2006.
Analyst Conference Call and Webcast
Rothmans Inc. management will hold a conference call with analysts to
discuss the first quarter results at 3:00 p.m. Toronto time on Tuesday,
July 25, 2006. 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 through the Company's investor website,
www.rothmansinc.ca. At the completion of the conference call, a recording will
be available until August 1st by calling 1-800-408-3053 and entering
reservation number 3192214. 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 741 people at its head office in Toronto, its sales offices across
Canada and its manufacturing facilities in Brampton, Ontario and QuDebec City,
QuDebec 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 three months ended June 30, 2006
----------------------------------------
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
ended June 30, 2006 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 consolidated financial statements for the period
ended June 30, 2006, the annual MD&A contained in the 2006 Annual Report and
the audited annual consolidated financial statements of the Company for the
year ended March 31, 2006. 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 July 24, 2006.
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 consolidated financial statements.
Forward Looking Statements
Certain statements contained in this MD&A and other sections of this
release (in particular the section entitled "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 July 24, 2006.
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; product liability
claims; increases in the levels of contraband and counterfeit products in the
market; competition; price category pressure on overall cigarette margins and
changes in market share for RBH's products; declining consumer consumption and
dependence on price increases; fluctuating wholesaler and consumer purchasing
patterns; changes in government taxation policy; changes in legislation and
regulation; 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 the RBH'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 June 30, 2007, and "prior quarter"
refers to the three months ended March 31, 2006. "Fiscal 2006" or "recent
fiscal year" refers to the fiscal year ended March 31, 2007 and other similar
references to a fiscal year (e.g., fiscal 2006) refer to the fiscal year then
ended on March 31 (e.g., March 31, 2006).
"The three major manufacturers" or "three majors" refers to RBH, Imperial
Tobacco Canada Limited (ITL) and JTI-MacDonald Corp. (JTI). "BAT" refers to
British American Tobacco p.l.c., the parent company of ITL. "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-proportioned tobacco
sticks). "Reported industry" is based on information reported by Statistics
Canada and RBH estimates and includes, in addition to the information reported
by the three major manufacturers, information reported by smaller regional
manufacturers. "Domestic composite market" refers to all fully tax-paid
cigarettes and fine cut tobacco products sold into the Canadian market.
New Accounting Pronouncements
In September 2005, the Emerging Issues Committee of the Canadian
Institute of Chartered Accountants issued Abstract 156 "Accounting By A Vendor
For Consideration Given To A Customer (Including a Reseller of the Vendor's
Products)". This abstract applies to fiscal years beginning on or after
January 1, 2006. The abstract addresses the issue of whether consideration
provided by a vendor to a customer is an adjustment to the selling prices of
the vendor's products and therefore a reduction of revenue or is a cost
incurred by the vendor and therefore classified as cost or expense. The
implementation of this pronouncement has resulted in a Consolidated Statement
of Earnings reclassification which reduces operating costs excluding
amortization and sales, net of excise duty and taxes, by $10.9 million and
$11.4 million in quarters ended June 30, 2006 and June 30, 2005, respectively.
This reclassification impacts EBITDA margin but has no impact on the earnings
or cash flows of either period. Comparative prior period amounts have been
reclassified to reflect the adoption of this pronouncement. Additional
information regarding this change can be found in Note 2 "Change in Accounting
Policy" in the June 30, 2006 Notes to the Interim Consolidated Financial
Statements which accompany this MD&A.
Industry Overview
Total reported industry domestic sales volumes for all tobacco products
decreased 9.8% in the three months ended June 30, 2006 versus the comparable
period in the prior fiscal year. The presence of contraband product, along
with historical declines in consumer incidence and consumption, are believed
to have contributed to this decline which continues to exceed the historical
average rate experienced by the industry. Recent quarter total reported
industry domestic sales volumes of 8.8 billion equivalent sticks were 16.0%
higher than in the prior quarter reflecting normal industry seasonality.
A number of other factors have been affecting overall industry shipments
including:
<<
- High taxes and the potential for future taxation increases - 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 - 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 manufacturer price increases, manufacturer sales programs and
trade terms - Swings in wholesaler purchasing patterns motivated by
the timing of tax increases, price increases, manufacturer sales
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.
>>
Total reported domestic premium cigarette volumes declined by 15.5% in
the recent quarter compared with the same period of the prior year. Total
reported domestic price category volumes declined 3.7% compared with the same
period of the prior year, as lower fine cut volumes were only partially offset
by higher price category cigarette volumes.
RBH estimates that premium cigarettes represented 48.4% of the reported
Canadian domestic tobacco market in the recent quarter versus 50.0% in the
quarter ended March 31, 2006 and 51.7% in the quarter ended June 30, 2005. The
price category is estimated to have represented 51.6% of the reported Canadian
domestic tobacco market in the recent quarter, versus 50.0% in the quarter
ended March 31, 2006 and 48.3% in the quarter ended June 30, 2005. Fine cut
products are estimated to have represented 8.8% of the total reported domestic
tobacco market in the recent quarter versus 9.9% in the prior quarter and
10.5% in the first quarter of last year. Price category cigarettes are
estimated to have represented 42.8% of the total reported domestic composite
tobacco market in the recent quarter versus 40.1% in the prior quarter and
37.8% in the first quarter of last year. The high tax environment continues to
influence the relative contribution of the premium cigarette, price category
cigarette and fine cut components of total industry volumes.
The federal government has announced that effective July 1, 2006 it would
be raising the federal excise duty applicable to cigarettes, tobacco sticks
and fine cut products by $0.56, $0.50 and $0.38 on a per carton or equivalent
stick basis, in order to offset the effect of the 1% GST reduction.
Shown below is a comparative summary of domestic shipments of tobacco
products for the three months ended June 30, 2006 and June 30, 2005.
<<
Canadian Domestic Tobacco Shipments
(in billions of sticks and equivalents)
-------------------------------------------------------------------------
For the three months Ended June 30
-------------------------------------------------------------------------
2006 2005
Three Reported Three Reported
RBH Majors Industry RBH Majors Industry
-------------------------------------------------------------------------
Premium cigarettes 0.7 4.3 4.3 0.8 5.1 5.1
Price category
Cigarettes 1.7 3.4 3.7 1.6 3.1 3.7
Fine cut 0.4 0.8 0.8 0.6 1.0 1.0
-------------------------------------------------
Total Price Category 2.1 4.2 4.5 2.2 4.1 4.7
-------------------------------------------------------------------------
Total 2.8 8.5 8.8 3.0 9.2 9.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RBH Market Share
Premium cigarettes 15.5% 15.5% 15.5% 15.5%
Price category 51.4% 47.2% 54.5% 47.8%
Composite markets 33.2% 31.8% 33.1% 31.1%
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 three month period were:
premium cigarettes - 0.1 billion sticks in fiscal 2007 and in fiscal
2006; price category cigarettes - 0.6 billion sticks in fiscal 2007
and 0.7 billion sticks in fiscal 2006.
>>
Results at Rothmans, Benson & Hedges Inc.
In the quarter ended June 30, 2006, RBH shipped a total of 2.8 billion
equivalent sticks into the domestic market, a 7.8% decrease from the
comparable period of the prior year, with increases in price category
cigarette volumes only partially offsetting declines in premium and fine cut
volumes. An increase in shipment volumes of 16.2% over the prior quarter is
consistent with the normal seasonality experienced by the domestic industry.
RBH's share of the total domestic composite market was 31.8% for the quarter
ended June 30, 2006 compared with 31.8% and 31.1% for the three months ended
March 31, 2006 and June 30, 2005, respectively.
RBH's premium cigarette volumes declined 16.0% in the recent quarter
compared to the same period in the prior year. RBH's domestic market share of
premium cigarettes was 15.5% in the recent quarter compared with 15.3% and
15.5% in the prior quarter and three months ended June 30, 2005, respectively.
RBH sold 1.7 billion price category cigarettes in the recent quarter
representing an increase of 3.5% compared with the same period in the prior
year. The recent quarter share of the domestic cigarette price category was
45.0% versus 45.8% in the prior quarter, and 44.4% in the quarter ended June
30, 2005. RBH continues to experience solid performance in the cigarette price
category. 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 and the availability and price of contraband products.
Shipments of RBH fine cut products declined 27.4% in the recent quarter
compared with the same period in the prior fiscal year. This decline was a
result of consumers switching to cigarettes from both pre-portioned stick
products and high-yield products. RBH's share of the domestic fine cut market
was 58.2% in the recent quarter, up from 57.9% in the quarter ended March 31,
2006, but down from 60.3% in the quarter ended June 30, 2005. Combining the
cigarette price category with the fine cut segment, RBH's share of the total
price category was 47.2% in the recent quarter, down from 48.2% and 47.8% in
the quarters ended March 31, 2006 and June 30, 2005, respectively.
Reflecting the adoption of EIC156, RBH's recent quarter EBITDA margin was
52.6% compared with 52.3% in the quarter ended June 30, 2005 and 36.9% in the
quarter ended March 31, 2006. 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 and lower sales and marketing costs,
partially offset by the impacts of lower shipment volumes, higher product
input costs and volume shifts from the mid-tier to the lower priced tier of
the cigarette price category.
Rothmans Inc. Financial Results
Basic earnings per share were $0.43 in the recent quarter versus $0.44 in
the comparable period of the prior year. Reflecting the adoption of EIC156,
RBH's sales, net of excise duty and taxes, of $162.9 million in the recent
quarter were $1.7 million lower than in the comparable period of the prior
year. Increased volumes of RBH price category cigarettes together with price
increases, partially compensated for volume declines in premium cigarettes and
fine cut products during the quarter.
Investment income declined to $1.0 million in the recent quarter from
$1.1 million in the comparable period of the prior year mainly due to the
higher average cash balance held during the quarter ended June 30, 2005.
Reflecting the adoption of EIC156, operating costs declined to $78.1
million in the recent quarter versus $79.6 million in the comparable period of
the prior year reflecting lower shipment volumes and lower sales and marketing
costs partially offset by higher product input costs.
Income tax expense was $32.9 million in the recent quarter, resulting in
an effective tax rate for the fiscal year to date of 40.3%. The Company
expects its effective tax rate for fiscal 2007 to be 40.2%.
Capability to Deliver Results
Cash Flow
RBH's operations generate significant cash resources. These 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
$49.4 million in the recent quarter compared with $49.6 million in the
comparable period of the prior 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 $135.0 million at June 30, 2006
represented the consolidated cash resources of the Company versus $130.2
million at March 31, 2006. 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 $112.0 million at June 30,
2006, an increase from $85.0 million at March 31, 2006. This increase results
from dividends paid by RBH partially offset by the payment of dividends 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 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 were not
adjusted in the recent quarter. Therefore, the discount rate, or the expected
return on plan assets remain as described in the annual MD&A for the year
ended March 31, 2006.
Litigation Contingent Liabilities
As discussed in the annual MD&A for the year ended March 31, 2006, the
Company and RBH have been the subjects of various legal actions, proceedings
and claims. Based on the stage of those proceedings, management is unable to
meaningfully estimate the liability, if any, that might result from those
claims and neither the Company nor RBH has accrued for potential liabilities.
However, the outcome of any litigation is uncertain. If successful, these
claims, 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 12 to the audited annual consolidated
financial statements of the Company for the year ended March 31, 2006. Other
than as described below there have been no developments of a material nature
during the fiscal year to date concerning these matters.
On June 13, 2006 Manitoba passed the Tobacco Damages and Health Care
Costs Recovery Act. The legislation, which is modeled on the British Columbia
legislation, 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. No action has been commenced under this
legislation.
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 2006 Annual Report and 2006 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
The following contains forward-looking statements about the Company's
outlook. Reference should be made to "Forward Looking Statements" set out at
the beginning of this MD&A.
Looking ahead, Rothmans expects that a number of factors could affect its
financial performance including:
<<
- the success of efforts by RBH and the industry to defend themselves
against product liability, government and other claims, and to
operate within the regulatory environment;
- increased levels of counterfeit and other contraband product that may
occur due to the increasingly onerous tax environment;
- 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;
- the impact of RBH's efforts to stabilize its cigarette market share
in the declining 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;
- 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; and
- RBH's continued success at maintaining or reducing costs, especially
in view of the potential for regulated changes to product
specifications.
>>
During the third quarter of fiscal 2006, ITL announced the move of their
Canadian production facilities to Mexico resulting in the planned closure of
their Canadian production facilities. This move appears consistent with BAT's
stated strategy of rationalizing its worldwide production facilities to
improve efficiencies. ITL has also announced that beginning in late August
2006, it will be changing its distribution process to permit direct sales and
distribution of its products to retail outlets. Although it is currently too
early to determine the impact of these initiatives, should these initiatives
provide ITL with even greater financial resources than RBH to aggressively
compete in the market, RBH's competitive position may be adversely affected.
It is believed that the 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 further in the future resulting in a negative impact on RBH's sales
volumes.
Continued launches into the cigarette price category and price
competition by each of the three major manufacturers have led to significant
growth of that category over the past three 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.
<<
Interim Consolidated Statements of Earnings and Retained Earnings
Three months ended June 30
(In thousands of dollars,
except per share amounts) 2006 2005
-------------------------------------------------------------------------
(restated
- note 2)
EARNINGS
Revenues:
Sales, net of excise duty and taxes (note 2) 162,886 164,615
Investment income 960 1,124
---------------------
Total revenues 163,846 165,739
Costs:
Operating costs excluding amortization 78,121 79,571
---------------------
Earnings before interest, taxes, amortization
and minority interest (note 2) 85,725 86,168
Amortization 2,865 2,517
Interest expense (income)
- Long-term debt 2,080 2,082
- Other (990) (337)
---------------------
Earnings before income taxes and minority interest 81,770 81,906
Income taxes
- Current 32,192 31,914
- Future 775 602
---------------------
Total income taxes 32,967 32,516
---------------------
Earnings before minority interest 48,803 49,390
Minority interest 19,532 19,737
---------------------
Earnings for the period 29,271 29,653
---------------------
---------------------
Earnings per common share (note 3)
- Basic 0.43 0.44
---------------------
---------------------
- Diluted 0.43 0.43
---------------------
---------------------
RETAINED EARNINGS
Balance at beginning of period 68,513 151,734
Earnings for the period 29,271 29,653
---------------------
97,784 181,387
Dividends paid:
Common Shares(x) - (20,405) (121,630)
(Q1 2007 - $0.30 per share)
(Q1 2006 - $1.80 per share)
---------------------
Balance at end of period 77,379 59,757
---------------------
---------------------
(x) Includes special dividend of $1.50 per share paid on June 17, 2005.
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Balance Sheets
As at As at
June 30 March 31
(In thousands of dollars) 2006 2006
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 134,982 48,364
Short-term investments - 81,867
Accounts receivable 12,401 11,795
Inventories 210,538 206,433
Prepaid expenses 3,695 1,835
---------------------
Total current assets 361,616 350,294
Property, plant and equipment 74,828 76,298
Future income taxes 5,526 6,301
Prepaid pension benefit cost 16,595 13,295
Other assets 2,783 2,887
---------------------
461,348 449,075
---------------------
---------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities 30,805 42,618
Excise and other taxes payable 98,521 67,680
Dividend payable to minority shareholder
of subsidiary company - 10,761
Income taxes payable 12,535 20,437
---------------------
Total current liabilities 141,861 141,496
Other long-term liabilities 2,471 2,399
Other employee future benefits 33,796 33,444
Long-term debt 149,762 149,751
Minority interest in subsidiary company 8,777 8,125
---------------------
336,667 335,215
---------------------
SHAREHOLDERS' EQUITY
Capital stock (note 4) 47,302 45,347
Retained earnings 77,379 68,513
---------------------
Total shareholders' equity 124,681 113,860
---------------------
---------------------
461,348 449,075
---------------------
---------------------
Rothmans Inc. and subsidiary companies (unaudited)
Interim Consolidated Statements of Cash Flows
Three months ended June 30 (In thousands of dollars) 2006 2005
-------------------------------------------------------------------------
Cash provided by (used in):
OPERATING ACTIVITIES
Earnings for the period 29,271 29,653
Adjusted for non-cash items:
Amortization 2,865 2,517
Minority interest 19,532 19,737
Future income taxes 775 602
Loss on sale of property, plant & equipment 2 0
Defined & other employee future benefits expense 1,272 1,753
Defined & other employee future benefits funding (4,220) (4,894)
---------------------
49,497 49,368
Changes in non-cash operating working capital 4,601 (11,068)
---------------------
54,098 38,300
---------------------
INVESTING ACTIVITIES
Additions to property, plant & equipment, net (1,328) (4,303)
Sale of short-term investments 81,867 168,740
---------------------
80,539 164,437
---------------------
FINANCING ACTIVITIES
Dividends paid -
By the Company (20,405) (121,630)
By a subsidiary company to minority shareholder (29,641) (18,960)
Proceeds on issuance of common shares 1,955 -
Proceeds on issue of commercial paper - 13,500
Proceeds on other long-term liabilities 72 216
---------------------
(48,019) (126,874)
---------------------
Increase in cash and cash equivalents 86,618 75,863
Cash and cash equivalents at beginning of period 48,364 23,255
---------------------
Cash and cash equivalents at end of period 134,982 99,118
---------------------
---------------------
SUPPLEMENTARY DISCLOSURES
Income taxes paid 40,095 39,024
Interest paid
- Long-term debt 4,164 4,164
- Other 20 28
Rothmans Inc. and subsidiary companies (unaudited)
Notes to the Interim Consolidated Financial Statements
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. 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, 2006. 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, except as
described in note 2.
2. Change in Accounting Policies
Effective April 1, 2006, the Company adopted the Abstract 156
"Accounting By A Vendor For Consideration Given To A Customer
(Including a Reseller of the Vendor's Products)" issued by the
Emerging Issues Committee of the Canadian Institute of Chartered
Accountants. The abstract addresses the issue of whether
consideration provided by a vendor to a customer is an adjustment to
the selling prices of the products and therefore a reduction of
revenue, or is a cost incurred by the vendor and thus classified as
cost or expense. The Company evaluated its selling costs and
retroactively reclassified cash consideration given to customers or
resellers of products as an adjustment to the selling prices to
reduce net sales revenue. For the quarter ended June 30, 2006, a
total of $10.9 million (2005 - $11.4 million) in selling costs was
reclassified to reduce net sales revenue. There was no change in the
net earnings for the period as a result of this reclassification.
3. 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
---------------------------------------------------------------------
Three months ended:
June 30, 2006 67,927,283 68,335,926
June 30, 2005 67,572,008 68,306,279
4. Capital Stock
Authorized: An unlimited number of common shares
Issued: 68,015,608 (March 31, 2006 - 67,855,608) common shares
June 30 March 31
(in thousands of dollars) 2006 2006
---------------------------------------------------------------------
Balance at beginning of period, April 1 $ 45,347 $ 41,974
Issuance of shares 1,955 3,373
---------------------------------------------------------------------
Balance at end of period $ 47,302 $ 45,347
---------------------------------------------------------------------
---------------------------------------------------------------------
In the first quarter of fiscal 2007, a total of 160,000 (2006 - nil)
shares were issued due to the exercise of stock options.
5. Share Option Plan
The annual grant of options was discontinued effective fiscal year
2006.
A summary of the status of the Company's employee stock option plan
as at the periods ended June 30, 2006 and June 30, 2005 and changes
during the periods ending on those dates are presented below:
June 2006 June 2005
---------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
price price
Options Shares ($) Shares ($)
---------------------------------------------------------------------
Outstanding at
beginning of
period 1,490,800 14.325 1,774,400 14.325
Exercised 160,000 14.561 - -
Outstanding at
end of period 1,330,800 14.270 1,774,400 14.325
---------------------------------------------------------------------
Options exercisable
at period end 1,330,800 14.270 1,774,400 14.325
---------------------------------------------------------------------
Under the current share option plan as at June 30, 2006, a total of
181,800 (2005 - 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 June 30, 2006:
Weighted
average
Range of remaining
exercise Number contractual Number
price outstanding life exercisable
------------------------------------------------------------------
$8.825 (1) 18,000 4.3 18,000
$11.500 (1) 154,000 5.1 154,000
$12.320 (2) 327,800 7.1 327,800
$14.080 (1) 261,400 5.5 261,400
$16.125 (1) 252,000 6.1 252,000
$16.620 (2) 317,600 8.1 317,600
------------------------------------------------------------------
1,330,800 1,330,800
------------------------------------------------------------------
(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).
6. Employee Future Benefit Expenses
The company's defined benefit pension plan and other benefits
expenses are as follows:
Three months ended
June 30
(in thousands of dollars) 2006 2005
---------------------------------------------------------------------
Defined benefit plan expenses
Pension benefit plans 433 561
Other benefits 839 1,192
---------------------------------------------------------------------
1,272 1,753
---------------------------------------------------------------------
---------------------------------------------------------------------
The company's defined contribution pension plan expenses in the
quarter ended June 30, 2006 were $1.0 million (2005 - $0.9 million).
7. Seasonality
Over the past two fiscal years, 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.
8. Litigation, Claims and Contingencies
The Company and Rothman, Benson & Hedges Inc. ("RBH") are subject to
a number of claims and potential claims. The nature and extent of
these claims has been described in Note 12 of the annual consolidated
financial statements of the Company for the year ended March 31,
2006. Other than as described below, there have been no developments
of a material nature during the fiscal year to date concerning these
matters.
On June 13, 2006 Manitoba passed the Tobacco Damages and Health Care
Costs Recovery Act. The legislation, which is modeled on the British
Columbia legislation, purports to allow the provincial government to
bring 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. No
action has been commenced under this legislation.
9. Comparative Figures
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current period.
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