TIDMIMB
RNS Number : 3186N
Imperial Brands PLC
19 May 2020
IMPERIAL BRANDS PLC
Legal Entity Identifier (LEI) No. 549300DFVPOB67JL3A42
Interim results for the six monthsED 31 March 2020
19 May 2020
FOCUSED ON STRENGTHENING PERFORMANCE
Financial Overview
Overview - Adjusted Basis Half Year Result Change
================== ====================
Constant
2020 2019 Actual Currency(1)
======================================== ======== ======== ====== ============
Total tobacco volume bn SE 114.6 115.2 -0.5% -0.5%
================================ ====== ======== ======== ====== ============
Tobacco net revenue GBPm 3,509 3,508 0.0% +0.9%
================================ ====== ======== ======== ====== ============
NGP net revenue GBPm 83 148 -43.9% -43.2%
================================ ====== ======== ======== ====== ============
Tobacco & NGP net revenue GBPm 3,592 3,656 -1.7% -0.9%
================================ ====== ======== ======== ====== ============
Asset Brand net revenue GBPm 2,290 2,355 -2.8% -1.7%
================================ ====== ======== ======== ====== ============
Tobacco & NGP adjusted
operating profit GBPm 1,383 1,538 -10.1% -8.5%
================================ ====== ======== ======== ====== ============
Distribution adjusted operating
profit GBPm 95 102 -6.9% -4.9%
================================ ====== ======== ======== ====== ============
Total adjusted operating
profit GBPm 1,469 1,620 -9.3% -7.7%
================================ ====== ======== ======== ====== ============
Adjusted earnings per share pence 103.0 115.6 -10.9% -9.2%
================================ ====== ======== ======== ====== ============
Adjusted net debt GBPm (13,476) (12,958)
================================ ====== ======== ======== ====== ============
Overview - Reported Basis Half Year Result Change
================== ========
2020 2019 Actual
============================= ======== ======== ======
Revenue GBPm 14,672 14,390 2.0%
===================== ====== ======== ======== ======
Operating profit GBPm 925 1,150 -19.6%
===================== ====== ======== ======== ======
Basic earnings per
share pence 55.6 71.2 -21.9%
===================== ====== ======== ======== ======
Dividend per share pence 41.70 62.56 -33.3%
===================== ====== ======== ======== ======
Reported net debt GBPm (14,144) (13,381)
===================== ====== ======== ======== ======
See page 3 for basis of preparation and page 13 for the
reconciliation between reported and adjusted measures.
(1) Constant currency removes effect of exchange rate movements
on the translation of the results of our overseas operations.
(2) 2019 Asset Brand net revenue restated for reclassification
of brands. See Basis of Presentation on page 3.
"While we delivered against our revised expectations, we are
disappointed with these results, and we remain fully focused on all
opportunities to strengthen performance.
"We would like to thank our employees for their hard work and
commitment in these challenging times. Their support has been
outstanding and we continue to prioritise their health, safety and
well-being.
"Our enhanced focus on tobacco has driven stronger in-market
execution and an improved share performance, with gains in most of
our priority markets. We have reduced our NGP spend following the
poor returns on investment last year and this, together with recent
weaknesses in the vapour category, has resulted in lower NGP
revenue.
"Overall, COVID-19 has so far had only a small impact on trading
but we expect this to be more pronounced in the second half due to
continued pressures on our duty free and travel retail business,
changes in consumption patterns including downtrading and a
reversal of some first half inventory build.
"Agreeing the sale of our premium cigar business for EUR1.2
billion in the current climate was a major achievement and will
further simplify the business and reduce debt. Deleveraging remains
a key priority, such that the Board has decided to rebase the
dividend by one-third to accelerate debt repayment, while retaining
a progressive dividend policy, growing annually from the rebased
level. This will strengthen the balance sheet and support a more
flexible approach to capital allocation in the future."
Dominic Brisby and Joerg Biebernick
Joint Interim Chief Executives
Highlights
-- Protecting our people in uncertain times: we have taken all
necessary steps to ensure our hard-working employees remain safe
and well
-- Delivered share growth in tobacco: market share gains for the
overall Group and in 7/10 priority markets
-- Right-sized our NGP investment: disciplined approach to
improve returns and build sustainability
-- Submitted PMTAs to FDA for myblu products: myblu plays an
important role in our NGP portfolio and we look forward to working
with the FDA to help develop an evidence-based regulatory
policy
-- Challenged the cost base and strengthened the balance sheet:
drove a further cost saving initiative and secured additional
credit facilities
-- Agreed sale of Premium Cigars for EUR1.2 billion: reinforces
our focus on simplifying the business and realising value for
shareholders, with proceeds to be used to reduce debt
Results Overview
-- Results in line with revised expectations in AGM update
-- Overall results affected by lower NGP sales, write-downs and impairments totalling GBP95m
-- A temporary COVID-19-related trade inventory build caused c.
1% net increase to net revenue and profit
Volume and net revenue
-- Tobacco market share up 40 basis points to 13.6% on YTD
basis; share gains in 7/10 priority markets
-- Net revenue down -0.9% driven by declines in NGP offset by tobacco net revenue growth of 0.9%
-- Tobacco price mix +1.4% reflects pricing of 6.7% offset by
adverse market mix of 2.6% (e.g. Middle East, Australia) and
adverse product mix of 2.7% (e.g. Backwoods USA and downtrading in
UK, Germany, Australia)
-- NGP investment has been reduced to improve returns
-- Asset Brand net revenue declined 1.7% reflecting lower sales of blu and Backwoods
Profit
-- Adjusted operating profit down -7.7% reflecting US NGP
flavour write-down (GBP48m); increased provisions for slow-moving
inventory (GBP28m), an additional impairment to NGP intellectual
property assets (GBP19m) and lower NGP sales partially offset by
cost savings; excluding the GBP95m of write-downs adjusted
operating profit fell 1.8%
-- Tobacco adjusted operating profit down -0.7% reflecting an
increase in A&P in Europe driven by the timing of promotional
activities and the phasing of overheads; tobacco gross profit up
1.3%
-- Reported operating profit down -19.6% reflecting lower
adjusted operating profit and a goodwill impairment and associated
disposal costs of the Premium Cigar Division (GBP147m) and higher
restructuring costs (GBP40m), more than offsetting the prior year
increase in contingent consideration for Von Erl (2019: GBP119m)
not repeated this year
-- Adjusted EPS down -9.2% principally due to the phasing of the
NGP write-downs and an increased tax rate, partially offset by
lower interest costs and share buyback benefit
Cash and debt
-- Cash conversion of 103% (12-month basis) driven by the
GBP445m working capital inflow in the period
-- Adjusted net debt increased GBP518m (12-month basis) due to
adverse FX, payments for share buybacks, the Von Erl acquisition, a
Russian excise settlement, and lower profit partly offset by lower
working capital
-- Reported net debt up GBP763m (12-month) driven additionally
by inclusion of lease liabilities of GBP302m for the first time
under IFRS 16
Capital allocation and dividend
-- Modified our capital allocation policy to accelerate debt reduction
-- Dividend to be rebased by one third; implying an annual
dividend for 2020 of 137.7 pence per share
-- Progressive dividend policy growing annually from the revised
level thereafter, taking into account underlying business
performance consistent with the policy outlined in July 2019
-- All dividend savings will be used to reduce gearing to the
lower end of our 2-2.5x target range by the end of 2022
-- The policy recognises the Group's continued strong cash
generation and the importance of growing dividends for
shareholders, while strengthening the business for the future
Basis of Presentation
-- To aid understanding of our results, we use 'adjusted'
(non-GAAP) measures as we believe they provide a better comparison
of performance from one period to the next. Reconciliations between
adjusted and reported (GAAP) measures are also included in the
relevant notes. Further definitions of adjusted measures are
provided in Note 1 of these accounts. Change at constant currency
removes the effect of exchange rate movements on the translation of
the results of our overseas operations. References in this document
to percentage growth and increases or decreases in our adjusted
results are on a constant currency basis unless stated otherwise.
These are calculated by translating current year results at prior
year exchange rates.
-- Stick Equivalent (SE) volumes reflect our combined cigarette,
fine cut tobacco, cigar and snus volumes.
-- Market share is presented as a 12-month average (MAT), unless
otherwise stated. Aggregate market share is a weighted average
across markets within our footprint.
-- Asset Brand volumes and net revenue for 2019 have been
restated to reflect the inclusion of fine cut tobacco brand,
Riverstone, and NGP brands, Pulze, iD and Zone X and the
reclassification of our premium cigar brands, Cohiba, Montecristo
and Romeo y Julietta and our cigarette brands, Bastos and Style as
Portfolio Brands.
Outlook
We have responded rapidly to an evolving situation and are
taking every necessary action to protect the interests of all our
stakeholders. The impact of COVID-19 on the Group was relatively
small in the first half with widespread lockdowns in our footprint
only being enforced during March. We have assumed the first half
inventory build by customers will fully unwind in the second
half.
The business is well-placed to navigate the challenges arising
from COVID-19, which is reinforced by the defensive qualities of
tobacco and our financial stability. However, we also recognise no
company is immune and there are external factors outside our
control at this time, such as the severity and duration of the
pandemic and how lockdown measures might affect our supply chain,
retail channels and consumer behaviour. These are expected to have
a more significant impact on our second half, although at this
early stage it is difficult to assess their extent.
We currently estimate COVID-19 related factors will have a low
single digit impact on earnings per share, in addition to current
market expectations (constant currency EPS down 2%), which reflect
the full year guidance given in our February AGM update.
Although there are different trends across different markets, we
see three main drivers of the COVID impact that will influence the
outcome:
-- Market size declines have deteriorated due to significant
restrictions on certain sales channels. This principally relates to
a material decline in demand in our global duty free/travel retail
operations with the cessation of international and cross border
travel. Given the outlook for international travel, we are
currently assuming no recovery in this business during the second
half. The Horeca channel has also experienced declines in
demand.
-- There is evidence of changes to consumption and buying
patterns, including increased downtrading across certain markets.
We expect these trends will continue and potentially deteriorate
further with recessionary pressures. However, we believe we are
relatively well placed with a lower exposure to premium products
within our portfolio.
-- The current COVID-related restrictions on some of our
manufacturing facilities have reduced their production capacity and
affected their operating efficiencies. We have assumed these will
be back to full capacity by the end of June. We have also assumed
there is no second spike that will further disrupt other areas of
our manufacturing and supply chain.
In addition, our full year results will now also reflect the
impact of the intellectual property asset impairment of GBP19
million (c. 0.6% impact to EPS), which has been recognised in the
first half but was not included in our previous guidance in
February. We now also expect the Premium Cigar disposal will
complete in July resulting in earnings dilution of c. 0.3% in the
current year.
We expect the impact of translation foreign exchange to be
neutral on full year earnings per share based on latest exchange
rates.
OTHER INFORMATION
Investor Contacts Media Contacts
Peter Durman +44 (0)7970 328 093 Alex Parsons +44 (0)7967 467 241
Matt Sharff +44 (0)7964 110 921 Simon Evans +44 (0)7967 467 684
James King +44 (0)7581 052 880
Analyst Presentation Webcast
Imperial Brands PLC will be hosting a live webcast for investors
and investment analysts with senior management following the
publication of our Interim Results on 19 May 2020. The webcast will
be hosted by Joerg Biebernick and Dominic Brisby, Joint Interim
Chief Executives and Oliver Tant, Chief Financial Officer, and be
available on www.imperialbrandsplc.com from 9.00am (GMT). It will
be followed by a live question and answer session. An archive of
the webcast and the presentation script and slides will also be
available.
You can join the webcast via:
https://edge.media-server.com/mmc/p/eg3y55i9
Please copy and paste the link into your browser.
If you also want to be able to ask questions in the Q&A
session, please dial-in using the numbers below at least 10 minutes
prior to the start time to provide sufficient time to access the
event. You will be asked to provide the conference ID number
below.
Conference ID No: 2866396
United Kingdom: 44 (0) 20 7192 8000 or 0800 376 7922
USA: +1 631 510 7495 or +1 866 966 1396
Cautionary Statement
Certain statements in this announcement constitute or may
constitute forward-looking statements. Any statement in this
announcement that is not a statement of historical fact including,
without limitation, those regarding the Company's future
expectations, operations, financial performance, financial
condition and business is or may be a forward-looking statement.
Such forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially
from those projected or implied in any forward-looking statement.
These risks and uncertainties include, among other factors,
changing economic, financial, business or other market conditions.
These and other factors could adversely affect the outcome and
financial effects of the plans and events described in this
announcement. As a result, you are cautioned not to place any
reliance on such forward-looking statements. The forward-looking
statements reflect knowledge and information available at the date
of this announcement and the Company undertakes no obligation to
update its view of such risks and uncertainties or to update the
forward-looking statements contained herein. Nothing in this
announcement should be construed as a profit forecast or profit
estimate and no statement in this announcement should be
interpreted to mean that the future earnings per share of the
Company for current or future financial years will necessarily
match or exceed the historical or published earnings per share of
the Company. This announcement has been prepared for, and only for
the members of the Company, as a body, and no other persons. The
Company, its Directors, employees, agents or advisers do not accept
or assume responsibility to any other person to whom this
announcement is shown or into whose hands it may come, and any such
responsibility or liability is expressly disclaimed.
CHIEF EXECUTIVES' STATEMENT
COVID-19 has had a profound impact on all our lives and sadly
with tragic consequences for too many families. The implications of
the necessary restrictions imposed by governments and public health
authorities continue to affect the daily movements of millions of
people and the trading activities of all businesses. As a large
multi-national organisation, we are very much aware of our
responsibilities to a wide range of stakeholders and we are
committed to meeting those responsibilities as fully as we can.
We estimate our first half net revenue and adjusted operating
profit both increased by about 1% from the net effect of increased
buying by retailers and wholesalers in March and the declines in
duty free and travel retail.
In navigating the business through the significant uncertainties
created by the coronavirus, we have focused on five key areas:
-- Protecting the health, safety and well-being of our people
-- Maintaining supply to customers
-- Enhancing our focus on tobacco performance
-- Right sizing investment behind our Next Generation Products
-- Strengthening the balance sheet
Protecting the health, safety and well-being of our people
Our first priority is the health, safety and well-being of our
32,000 people around the world. They are doing a tremendous job in
dealing with the challenges posed by COVID-19 and we would like to
thank them all for their exceptional efforts. We have strengthened
our IT infrastructure and accelerated the roll-out of software to
facilitate team-working to support employees working from home. Our
sales teams have done an outstanding job in maintaining
relationships with retailers and in some markets, employees have
started to slowly, and safely, return to the field. We advocate
flexible working and have encouraged our people to find a routine
that works best for them and their families. We communicate
regularly with employees and have initiated a number of surveys to
check-in on their well-being. Feedback tells us that overall,
employees continue to feel positive despite the challenging
circumstances. We also recognise the impact COVID-19 is having on
the wider communities in which we operate and we have stepped up
our support through a number of local initiatives.
Maintaining supply to customers
We are grateful for the hard work of our manufacturing and
supply chain colleagues, which has helped to keep the majority of
our operations running during this period. Our operations benefit
from a diversified supply chain and factory footprint, which has
had to respond to rapid changes in demand and operating conditions.
We have 38 factories and it is a credit to our manufacturing teams
that they have kept the vast majority operating throughout the
crisis. This has been achieved with reconfigured factory layouts
and changing shift patterns to ensure infection controls and social
distancing measures are in place to protect the safety of our
people. We have experienced some temporary government-enforced
closures of certain smaller facilities and, although these have now
reopened, it is with reduced capacity. We have prioritised the
manufacture of major product lines to build contingency stocks with
our finished goods inventories averaging around 8-10 weeks.
Enhancing our focus on tobacco performance
Our tobacco business delivered a strong volume performance,
driven by 40 basis points of share gains across the Group in the
year to date and with the benefit of improved volumes in Africa,
Asia and Australasia (AAA), following a weak performance in the
comparator period.
We achieved share growth in seven of our 10 priority markets,
reflecting stronger in-market execution and a greater focus on our
tobacco range from our sales teams, following the reduction in NGP
investment.
Despite the challenges of COVID-19 across our markets, tobacco
products have largely been available through our usual retailer
network, although there have been some store closures in Europe. We
also experienced an increase in demand for tobacco products during
March as many governments stepped up restrictions. Retailers and
wholesalers increased orders to meet consumer demand and avoid out
of stocks in the event of potential supply disruptions. The travel
restrictions put immediate pressure on our duty free and travel
retail operations and their customers. The duty free channel
accounted for around 2% of Group net revenue in 2019.
Right sizing investment behind our Next Generation Products
Following last year's disappointing performance, we have taken
action to improve returns and improve the sustainability of our NGP
business, while maintaining a range of options for future growth.
Investment in vapour has been significantly scaled back and we have
increased our provisions for slow-moving blu inventory and
destocked trade inventories against a backdrop of a weakening
vapour category. Despite the reduced investment, our blu market
shares have held up well in several markets. However, overall net
revenue of our NGP business fell by 43 per cent reflecting
destocking of the supply chain. Elsewhere, we continue to test
pilot the opportunities for heated tobacco in Japan and have
achieved good growth with our oral nicotine products in several
European markets including Germany, Austria, Norway and Sweden.
Strengthening the balance sheet
In addition to reducing NGP investment, we have initiated an
even greater attention to cost reduction initiatives as well as
delivering improved cash conversion of 103%, on a 12-month
basis.
Although we expect the impact on the business from COVID-19 to
be relatively limited, we have stress tested our liquidity needs
and financial resources against a range of different scenarios.
We have improved liquidity through the agreed sale of our
Premium Cigar business to realise proceeds of c. GBP960 million in
the second half for deleverage, the signing of EUR1.1 billion
committed 18-month bank facilities, and our participation in the
Bank of England's Covid Corporate Financing Facility. The actions
have strengthened the resilience of the Group to deal with the
likely challenges in the months ahead. Further details are provided
in the Finance Review.
Capital allocation and dividend policy
The Board has also revisited the Group's capital allocation
policy with a view to de-risking the business and further
strengthening the balance sheet. While our combustibles business
model remains strongly cash generative, the pace of debt reduction
has not been as fast as we would have liked in recent years. The
Board believes a stronger balance sheet will provide the business
with greater flexibility for the future. This has not been driven
by COVID-19, although, the current uncertainties caused by
COVID-19, as well as the ongoing regulatory focus on tobacco,
further reinforces the importance of a strong balance sheet to
underscore the defensive characteristics of our business.
Accordingly we have decided to rebase the dividend by a third to
provide increased financial flexibility, with the priority of
accelerating debt reduction to the lower end of our existing 2-2.5
times target range, which we expect to achieve by the end of
2022.
The Board recognises the importance of the dividend to
shareholders and considers that the rebase provides an appropriate
balance between debt reduction and retaining a progressive
dividend, which will grow annually from the rebased level, taking
into account underlying business performance.
Once our target leverage has been achieved, the revised policy
will support a more flexible approach to capital allocation,
enabling the business to consider additional shareholder returns
from surplus capital alongside investing to strengthen the
business.
Our sustainability agenda
Our sustainability strategy is integral to the long-term growth
of the business and frames the way we manage our environmental,
social and governance (ESG) responsibilities.
COVID-19 has so far had no impact on the delivery of our
non-financial KPIs, although some ESG initiatives planned for this
financial year have been affected. We are keen to improve
transparency around our ESG performance and are currently in the
process of developing additional KPIs for our priority issues.
OPERATING REVIEW
Europe
Half Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
============================ =========== ========== ========== =================
bn
Tobacco volume SE 62.7 64.6 -3.0%
===================== ====== ========== ========== ========== =================
Total net revenue GBPm 1,618 1,680 -3.7% -2.0%
===================== ====== ========== ========== ========== =================
Tobacco net revenue GBPm 1,588 1,607 -1.2% +0.5%
===================== ====== ========== ========== ========== =================
NGP net revenue GBPm 30 73 -58.9% -56.2%
===================== ====== ========== ========== ========== =================
Adjusted operating
profit GBPm 706 771 -8.4% -6.7%
===================== ====== ========== ========== ========== =================
Asset Brand % of net
revenue % 73.3 74.5 -120 bps -140 bps
===================== ====== ========== ========== ========== =================
(2019 Asset Brand net revenue restated for the reclassification
of brands.)
Our Europe division results were affected by lower NGP revenues
and associated write-downs, more than offsetting the tobacco
revenue growth which benefited from continued positive pricing.
We have continued to balance our priority market share positions
with optimising financial returns, ensuring that we deliver quality
growth in the right markets, with the right brands. We achieved
share gains in Spain and Italy and improving sequential share
trends in the UK and France driven by our tobacco portfolio work,
particularly around brand extensions to meet consumer demand
shifts.
Tobacco volumes decreased by 3.0 per cent, reflecting tobacco
market trends in Western Europe, and some benefit from a short
period of increased demand caused by the COVID-19 related lockdowns
and strong private label sales.
Net revenue was down 2.0 per cent driven by a 56 per cent
decline in NGP sales to GBP30 million reflecting destocking of the
supply chain and our decision to reduce NGP investment to improve
returns against a declining vapour category. This more than offset
a 0.5 per cent growth in tobacco net revenue, which benefited from
further positive pricing (+3.5 per cent) from several markets
including a carry-over of pricing in Germany and UK from last year.
Tobacco revenue was also affected by lower global duty free and
travel retail sales as a result of virus-related travel
restrictions.
However, despite the significantly reduced NGP investment,
encouragingly our blu share in several markets such as UK, France
and Italy proved to be relatively stable. In NGP we have also
continued to extend the distribution of our modern oral nicotine
products following initial launches in 2019, with good growth in
Germany and Austria.
We remain focused on improving the quality of our revenue, with
73.3 per cent of our revenues coming from Asset Brands. Our Asset
Brand net revenue declined, reflecting lower sales of blu and our
decision last year in Spain to reverse the migration of Ducados to
JPS following consumer feedback.
Adjusted operating profit was down 6.7 per cent at constant
currency, driven primarily by the lower NGP sales and an increased
provision for slow-moving NGP inventory (GBP22 million). Tobacco
profitability was also slightly lower due to an increase in
advertising & promotion and overhead spend reflecting the
timing of promotional activities.
Priority Markets Performance
Tobacco Share
================ ===========================================================
UK Net revenue growth was driven by continued strong pricing.
40.0% (-160 Although tobacco share was down, our sequential share
bps) trend is improving, benefiting from larger format value
offerings, the launch of L&B branded fine cut and reduced
price differentials after a period of price disadvantage
last year. Our blu share has remained stable despite
lower investment.
================ ===========================================================
Germany The share performance was disappointing and we have taken
20.8% (-100 further action to reshape our brand portfolio to address
bps) the share declines, focusing on the share performance
of our core brands West, Gauloises and JPS. Cigarette
larger value formats and targeted fine cut activation
activities are enabling us to capitalise on increased
consumer demand for value offerings.
================ ===========================================================
Spain We continue to gain tobacco share in both the blonde
28.9% (+10 cigarette market and fine cut, benefiting from last year's
bps) successful launch of Horizon and investment behind larger
value formats in West, Ducados and Fortuna. These have
helped deliver the first overall share gains in Spain
for several years.
================ ===========================================================
France Although our MAT cigarette share is down, the trajectory
18.0% (-50 continues to improve, benefiting from the relative price
bps) repositioning of News and Gauloises after recent excise
increases. We have focused on improving the sales distribution
of our Asset Brands. Our blu market share remains stable
following a successful renegotiation of trade terms.
=========== ===============================================================
Italy JPS continues to drive market share growth, with a wide
5.4% (+10 product range meeting different consumer needs in the
bps) value segment. Our investment remains focused behind
the retailer channel, ensuring on-shelf visibility and
retailer advocacy of the brand. Although we have reduced
investment in blu, it has remained competitive with stable
share.
=========== ===============================================================
Americas
Half Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
---------------------------- ----------- ---------- ---------- -----------------
bn
Tobacco volume SE 9.8 10.0 -2.5%
===================== ====== ========== ========== ========== =================
Total net revenue GBPm 1,092 1,114 -2.0% -2.8%
===================== ====== ========== ========== ========== =================
Tobacco net revenue GBPm 1,062 1,053 +0.9% 0.0%
===================== ====== ========== ========== ========== =================
NGP net revenue GBPm 30 61 -50.8% -50.8%
===================== ====== ========== ========== ========== =================
Adjusted operating
profit GBPm 390 439 -11.2% -11.8%
===================== ====== ========== ========== ========== =================
Asset Brand % of net
revenue % 51.3 54.5 -320 bps -320 bps
===================== ====== ========== ========== ========== =================
(2019 Asset Brand net revenue restated for the reclassification
of brands.)
Positive progress with our tobacco portfolio was more than
offset by a disappointing performance from NGP. In tobacco, we
delivered further cigarette market share gains and achieved good
pricing improvements across our tobacco portfolio. However, the
performance of our NGP portfolio was affected by several different
factors: the write-down of flavoured product stocks following the
FDA ban; our decision to reduce investment and trade inventories,
and an increase in our provision for slow moving inventory against
a declining vapour category.
In tobacco, volumes were down 2.5 per cent reflecting lower
first quarter volume shipments which were affected by higher
wholesaler inventories at the end of last financial year ahead of
an anticipated October price increase. This was partially offset by
the benefit of a trade promotion as well as a temporary increase in
wholesaler inventories to meet accelerated consumer demand in March
as lockdown conditions were enforced.
We grew our share of the USA cigarette market by 10 basis
points, to 8.8 per cent. This has been achieved through our
portfolio strategy with a brand offering in each of the key price
points. Winston and Kool's share of their respective premium
categories remained stable, as did Maverick's share of the discount
segment. Sonoma performed well in meeting growing consumer demand
in the rapidly growing deep discount segment.
Our share performance in mass market cigars was stable, as lower
sales of Backwoods in the premium natural leaf segment were partly
offset by strong growth in the value brand Dutch.
On a constant currency basis, tobacco net revenue was flat,
primarily reflecting adverse mix arising from lower sales of higher
margin mass market cigar, Backwoods, which was offset by continued
strong cigarette price/mix, up 5.3 per cent.
NGP revenues of GBP30 million were 51 per cent lower than last
year at constant currency (2019: GBP61 million) driven by a destock
of trade inventories, and reduced promotional activities in a
declining vapour category following US health concerns and adverse
news flow. In April, we submitted our Premarket Tobacco Product
Application (PMTA) seeking authority to continue the marketing of a
range of myblu vapour products with various nicotine strengths and
flavours.
Adjusted operating profit was 11.8 per cent lower at constant
currency, driven by increased losses in NGP with a GBP48 million
write-down of flavoured inventory following the FDA ban and lower
NGP sales, which more than offset investment savings and the
increase in tobacco profit.
Africa, Asia and Australasia
Half Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
---------------------------- ----------- ---------- ---------- -----------------
bn
Tobacco volume SE 42.2 40.6 +4.0%
===================== ====== ========== ========== ========== =================
Total net revenue GBPm 882 862 +2.3% +3.8%
===================== ====== ========== ========== ========== =================
Tobacco net revenue GBPm 859 848 +1.3% +2.9%
===================== ====== ========== ========== ========== =================
NGP net revenue GBPm 23 14 +64.3% +57.1%
===================== ====== ========== ========== ========== =================
Adjusted operating
profit GBPm 287 328 -12.5% -7.9%
===================== ====== ========== ========== ========== =================
Asset Brand % of net
revenue % 61.6 57.5 +410 bps +440 bps
===================== ====== ========== ========== ========== =================
(2019 Asset Brand net revenue restated for the reclassification
of brands.)
Tobacco volumes were 4.0 per cent higher, largely reflecting a
normalisation of shipment timings in the Middle East, against a
weak comparator period where volumes declined 10 per cent due to
the impact of excise increases and other regulatory changes. Our
volume performance also benefited from share gains across the
region, most notably in all our priority markets of Australia,
Japan, Russia and Saudi Arabia.
Tobacco net revenue was up 2.9 per cent at constant currency
with much of the volume improvement driven by lower margin markets
in the Middle East, generating a negative market mix against last
year.
The positive performance in Saudi Arabia driven by strong sales
of Davidoff and West was partly offset by higher illicit cross
border volumes following the introduction of plain packaging. In
Russia growth was driven by pricing which offset the impact from
lower volumes as a result of market size declines.
Australia's results benefited as expected from the sell-through
of duty paid inventory accumulated ahead of the September excise
increase although this was partly mitigated by downtrading and the
associated adverse mix following the establishment of the 'fifth
price tier' last year.
Total net revenue, up 3.8 per cent at constant currency, was
also supported by NGP revenue growth in Japan with myblu and with
our heated tobacco product Pulze. NGP revenues grew 57 per cent, or
GBP9 million, to GBP23 million.
Our Asset Brands now make up 61.6 per cent of our total net
revenue, up 440 bps at constant currency.
Adjusted operating profit declined 7.9 per cent at constant
currency reflecting increased investment behind our heated tobacco
product offering Pulze in Japan following its pilot launch in May
last year, which more than offset tobacco profit growth.
Priority Markets Performance
Tobacco Share
================ ========================================================================
Australia Industry volumes declined 8.6% with increased illicit trade. Our
32.8% (+40 bps) share gains continue to be driven by Parker & Simpson in the growing
economy segment. Revenue and profit benefited from the expected
upside from higher first half duty paid inventory and price increases.
These benefits more than offset the impact from negative mix as
a result of growth in the economy segment.
================ ========================================================================
Japan Industry cigarette volumes declined 9.2%. West continues to benefit
1.3% (+20 bps) from demand for the value segment, following excise related price
increases. In vapour, local flavour launches have increased trialists
of myblu with increased activation activities. In heated tobacco,
the next phase of the test pilot of Pulze is underway with extended
distribution.
================ ========================================================================
Russia Market share growth benefited from a strong performance of Davidoff
8.0% (+30 bps) and West, driven by supporting key account activity. Financial
performance was impacted by a decline in tobacco market size and
adverse mix. We have launched new crushball formats for Davidoff
Reach and Parker & Simpson. Offtake of myblu continues to grow,
supported by trade initiatives.
================ ========================================================================
Saudi Arabia Share performance benefited from strong in market sales of West
16.5% (+470 and Davidoff Evolve supported by better field coverage. We successfully
bps) managed the introduction of plain packaging in November 2019, although
the financial performance has been affected by increased cross-border
flow.
================ ========================================================================
Distribution
Half Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
--------------------------- ----------- ---------- ---------- -----------------
Distribution fees GBPm 488 499 -2.2% -0.2%
==================== ====== ========== ========== ========== =================
Operating profit GBPm 95 102 -6.9% -4.9%
==================== ====== ========== ========== ========== =================
Operating margin % 19.5 20.4 -90 bps -90 bps
==================== ====== ========== ========== ========== =================
Eliminations GBPm (9) (20) -55.0% -55.0%
==================== ====== ========== ========== ========== =================
Adjusted op profit
contribution GBPm 86 82 +4.9% +7.3%
==================== ====== ========== ========== ========== =================
Although Distribution fee income was broadly flat overall at
constant currency, operating profit declined by 4.9 per cent driven
by an inability to pass on all tax/excise increases to customers,
the impact of COVID-19 and year-on-year movements in inventory
revaluation.
The growth of the Logista operating profit contribution to the
Group, up 7.3 per cent at constant currency, reflects the reduction
in eliminations as a result of cycling the NGP inventory build in
the first half of 2019 in support of market launch activity.
In line with other Imperial owned entities, we continue to
benefit from an intercompany cash pooling arrangement with Logista,
which further enhances the Group's liquidity.
FINANCE REVIEW
Positive pricing in tobacco offset by lower NGP sales
-- Net revenue down 0.9% at constant currency comprising +0.9% from tobacco and -1.8% from NGP
-- Strong tobacco volume performance (-0.5%) against an overall
market decline of -4.3% driven by share gains, shipment timings in
AAA, the benefit of trade promotions and COVID-19 inventory
build
-- Price mix of 1.4% reflects tobacco pricing of 6.7% offset by
adverse market mix (-2.6% mainly shipment timing related in AAA)
and product mix (-2.7% largely lower sales of Backwoods and
downtrading in Australia & UK)
-- NGP revenue declined 43.2% at constant currency reflecting
destocking of trade inventories as we right-sized our investment to
improve returns as well as category declines
NET REVENUE BRIDGE: -0.9% (CC); -1.7% (Reported)
HY19 net revenue GBP3,656m
========== ======
Tobacco volume -0.5%
========== ======
Tobacco price/mix +1.4%
========== ======
NGP net revenue -1.8%
========== ======
HY20 constant currency net revenue GBP3,625m -0.9%
========== ======
Translation FX -0.8%
========== ======
HY20 net revenue GBP3,592m -1.7%
========== ======
Adjusted operating profit affected by NGP one-off charges and
weaker NGP trading
-- Adjusted operating profit down 9.3% at actual rates and 7.7% at constant currency
-- Tobacco adjusted operating profit down 0.7% at constant currency
-- NGP profitability affected by lower NGP net revenue;
inventory write-offs and impairment of intangible assets
-- Reported operating profit down 19.6% due to lower adjusted
operating profit; a goodwill impairment on assets held for disposal
of the Premium Cigar Division (GBP138m) and higher restructuring
costs (GBP40m), more than offsetting the prior year increase in
contingent consideration for Von Erl (2019: GBP119m) not repeated
this year
-- Premium Cigar impairment will be partly offset on completion
by GBP300m to GBP400m of FX gains from reserves
ADJUSTED OPERATING PROFIT BRIDGE: -7.7% (CC); -9.3%
(Reported)
HY19 adjusted operating profit GBP1,620m
============ ======
Tobacco operating income -GBP12m
============ ======
NGP write-downs -GBP95m
============ ======
NGP operating income -GBP23m
============ ======
Distribution +GBP6m
============ ======
HY20 constant currency AOP GBP1,496m -7.7%
============ ======
Translation FX -GBP27m
============ ======
HY20 adjusted operating profit GBP1,469m -9.3%
============ ======
Adjusted earnings per share of 105.0p down 9.2% at constant
currency
-- Lower interest costs more than offset a higher tax rate
benefiting EPS by 1.7p with change in the mix of debt with more
favourable rates
-- Reported EPS of 55.6p, down 21.9% due to lower reported
operating profit as outlined on the previous page
EPS BRIDGE: -9.2% (CC); -10.9% (Reported)
HY19 adjusted EPS 115.6p
================== =======
Operating profit -13.0p
================== =======
Interest & Tax +1.7p
================== =======
Minorities & JV -0.2p
================== =======
Share buyback +0.9p
================== =======
HY20 constant currency EPS 105.0p -9.2%
================== =======
Translation FX -2.0p
================== =======
HY20 adjusted EPS 103.0p -10.9%
================== =======
Group Results - Constant Currency Analysis
======================================================================================================================
Constant
GBP million Half Year ended Foreign Constant Half Year ended currency
(unless otherwise indicated) 31 March 2019 exchange currency movement 31 March 2020 Change change
================================== =============== ========= ================== =============== ====== =========
Tobacco & NGP Net Revenue
================================== =============== ========= ================== =============== ====== =========
Europe 1,680 (29) (33) 1,618 -3.7% -2.0%
================================== =============== ========= ================== =============== ====== =========
Americas 1,114 9 (31) 1,092 -2.0% -2.8%
================================== =============== ========= ================== =============== ====== =========
Africa, Asia and Australasia 862 (13) 33 882 +2.3% +3.8%
================================== =============== ========= ================== =============== ====== =========
Total Group 3,656 (33) (31) 3,592 -1.7% -0.9%
---------------------------------- --------------- --------- ------------------ --------------- ------ ---------
Tobacco & NGP Adjusted Operating
Profit
================================== =============== ========= ================== =============== ====== =========
Europe 771 (13) (52) 706 -8.4% -6.7%
================================== =============== ========= ================== =============== ====== =========
Americas 439 3 (52) 390 -11.2% -11.8%
================================== =============== ========= ================== =============== ====== =========
Africa, Asia and Australasia 328 (15) (26) 287 -12.5% -7.9%
================================== =============== ========= ================== =============== ====== =========
Total Group 1,538 (25) (130) 1,383 -10.1% -8.5%
---------------------------------- --------------- --------- ------------------ --------------- ------ ---------
Distribution
================================== =============== ========= ================== =============== ====== =========
Distribution fees 499 (10) (1) 488 -2.2% -0.2%
================================== =============== ========= ================== =============== ====== =========
Adjusted operating profit 102 (2) (5) 95 -6.9% -4.9%
---------------------------------- --------------- --------- ------------------ --------------- ------ ---------
Group Adjusted Results
================================== =============== ========= ================== =============== ====== =========
Adjusted operating profit 1,620 (27) (124) 1,469 -9.3% -7.7%
================================== =============== ========= ================== =============== ====== =========
Adjusted net finance costs (220) 3 7 (210) -4.5% -3.2%
================================== =============== ========= ================== =============== ====== =========
Adjusted EPS (pence) 115.6 (2.0) (10.6) 103.0 -10.9% -9.2%
================================== =============== ========= ================== =============== ====== =========
When managing the performance of our business we focus on
non-GAAP measures, which we refer to as adjusted measures. We
believe they provide a better comparison of performance from one
period to the next. These adjusted measures are supplementary to,
and should not be regarded as a substitute for, GAAP measures,
which we refer to as reported measures. The basis of our adjusted
measures is explained in our accounting policies accompanying our
financial statements.
Reconciliations between reported and adjusted measures are
included in the appropriate notes to our financial statements.
Percentage growth figures for adjusted results are given on a
constant currency basis, where the effects of exchange rate
movements on the translation of the results of our overseas
operations are removed.
Group Earnings Performance
Adjusted Reported
----------------------------------------- ------------ ------------
GBP million unless otherwise indicated 2020 2019 2020 2019
----------------------------------------- ----- ----- ----- -----
Operating profit
Tobacco & NGP 1,383 1,538 880 1,110
Distribution 95 102 54 60
Eliminations (9) (20) (9) (20)
----------------------------------------- ----- ----- ----- -----
Group operating profit 1,469 1,620 925 1,150
Net finance costs (210) (220) (160) (156)
Share of profit of investments accounted
for using the equity method 20 24 20 24
----------------------------------------- ----- ----- ----- -----
Profit before tax 1,279 1,424 785 1,018
Tax (265) (278) (235) (310)
Minority interest (41) (44) (25) (29)
Profit for the period 973 1,102 525 679
----------------------------------------- ----- ----- ----- -----
Earnings per ordinary share (pence) 103.0 115.6 55.6 71.2
----------------------------------------- ----- ----- ----- -----
Reconciliation of Adjusted Performance Measures
Earnings per
Operating profit Net finance costs share (pence)
------------------------------------- ------------------ ------------------- ----------------
GBP million unless otherwise
indicated 2020 2019 2020 2019 2020 2019
------------------------------------- -------- -------- --------- -------- ------- -------
Reported 925 1,150 (160) (156) 55.6 71.2
Acquisition and disposal costs 14 - - - 1.5 -
Amortisation & impairment of
acquired intangibles 436 297 - - 44.1 31.8
Excise tax provision (23) - - - (2.4) -
Fair value adjustment of acquisition
consideration 119 - - - 12.5
Fair value adjustment loan
receivable 23 - - - 1.7 -
Net fair value and exchange
movements on derivative financial
instruments - - (53) (67) (0.5) (6.9)
Post-employment benefits net
financing costs - - 3 3 0.1 0.1
Restructuring costs 94 54 - - 7.4 4.4
Tax on unrecognised losses - - - - (2.8) 4.1
Items above attributable to
non-controlling interests - - - - (1.7) (1.6)
------------------------------------- -------- -------- --------- -------- ------- -------
Adjusted 1,469 1,620 (210) (220) 103.0 115.6
------------------------------------- -------- -------- --------- -------- ------- -------
A challenging trading environment
Our tobacco business grew market share for the Group overall and
in seven of our 10 priority markets. We experienced an increase in
demand in March from wholesaler and retailer customers as they
responded to some degree of consumer stock piling and as they built
contingency stocks in the event of a supply interruption. We
estimate our first half net revenue and adjusted operating profit
both increased by about 1% from the net effect of increased buying
by retailers and wholesalers in March and the declines in our duty
free and travel retail operations due to travel restrictions.
Tobacco volumes fell 0.5 per cent, against an overall market
size decline of 4.3 per cent. This is against a weak comparator
period, which was affected by three key events: the timing of
shipments in the Middle East due to excise and other regulatory
changes, the impact of illicit trade in the Ukraine and partner
disruption in Algeria. None of these events have re-materialised in
the period.
Group net revenue declined 0.9 per cent at constant currency
with tobacco net revenue growth contributing 90 percentage points,
which has been more than offset by 180 percentage points of decline
in NGP net revenue.
Tobacco price/mix was 1.4 per cent, reflecting pricing of 6.7%
offset by adverse market mix of 2.6% (e.g. Middle East, Australia)
and adverse product mix of 2.7% (e.g. Backwoods USA and downtrading
in UK, Germany, Australia).
NGP revenue fell 43 per cent at constant currency reflecting a
reduction in inventories in the supply chain, the impact of the US
FDA announcement banning flavoured pods and category declines as
health concerns with vaping products in the US and the contagion of
these announcements on key European markets.
Group adjusted operating profit fell by 7.7 per cent at constant
currency. This decline was driven primarily by an increase in
inventory provisions for NGP of GBP76 million reflecting the impact
of lower revenues signalled above; of this GBP48 million relates to
our write-down of US flavoured vapour pods. Given the uncertainties
in the vapour category and our right-sized investment plans, we
have also evaluated our intellectual property assets alongside our
revised product launch plans as part of our half year impairment
testing. This has led to an impairment of GBP19m of intangible
assets relating to technology which the Group has decided to no
longer pursue. Excluding these write-downs underlying adjusted
operating profit fell by 1.8 per cent.
On a reported basis, Group operating profit declined 19.6 per
cent with the lower adjusted operating profit as well as a goodwill
impairment and associated costs of disposal of the Premium Cigar
Division (GBP147m), higher restructuring costs (GBP40m), more than
offsetting the prior year increase in contingent consideration for
Von Erl (2019: GBP119m) not repeated this year.
The recent announcement of the sale of our Premium Cigars
business has required a further impairment on goodwill for the
business of GBP138 million on top of the impairment taken in 2019
of GBP505 million. It is expected that on completion of the
divestment cumulative foreign exchange gains of GBP300 million to
GBP400 million that have been recognised in reserves will be
recycled to the income statement.
The restructuring charge for the period of GBP94 million (2019:
GBP54 million) relates mainly to our cost optimisation programmes
announced in 2013 and 2016. The total restructuring cash flow in
the period ended 31 March 2020 was GBP73 million (2019: GBP78
million).
Adjusted net finance costs were lower at GBP210m (2019: GBP220m)
driven by lower interest costs resulting from a higher proportion
of Euro denominated debt. Reported net finance costs have increased
slightly to GBP160 million (2019: GBP156 million).
Our all-in cost of debt decreased to 3.3 per cent (2019: 3.6 per
cent) as we continue to optimise our debt portfolio. Our interest
cover decreased to 8.7 times (2019: 8.8 times). We remain fully
compliant with all our banking covenants and remain committed to
retaining our investment grade ratings.
Our effective adjusted tax rate was 20.7 per cent (2019: 19.5
per cent) and the effective reported tax rate is 29.9 per cent
(2019: 30.5 per cent). The increase in the effective adjusted tax
rate was due to an increase in the provision for uncertain tax
positions. The reported tax rate is higher than the adjusted tax
rate due to limited tax relief on the amortisation of intangible
assets and loss utilisation, as well as limited tax relief on the
impairment of the Premium Cigars business.
We continue to expect our effective adjusted tax rate for the
year ended 30 September 2020 to be around 21.0 per cent. The
increase in rate is due to legislative changes in several
jurisdictions.
The effective tax rate is sensitive to the geographic mix of
profits, reflecting a combination of higher rates in certain
markets such as Germany and lower rates in other markets such as
the UK. The rate is also sensitive to future legislative changes
affecting international businesses such as changes arising from the
OECD's (Organisation for Economic Co-operation and Development)
Base Erosion Profit Shifting (BEPS) work. Whilst we seek to
mitigate the impact of these changes, we anticipate there will be
further upward pressure on the adjusted and reported tax rate in
the medium term. Our UK Tax Strategy is publicly available and can
be found in the Governance section of our corporate website.
Adjusted earnings per share were 103.0 pence (2019: 115.6
pence), down 9.2 per cent at constant currency (down 10.9 per cent
at actual rates), reflecting the fall in adjusted operating profit,
which has been impacted by the increased NGP inventory provision
and impairment in NGP intangible assets.
Reported earnings per share was 55.6 pence (2019: 71.2 pence)
down 21.9 per cent, mainly impacted by reported operating
profit.
In our total comprehensive income for the period we see a net
GBP398 million gain on actuarial valuations for our three main
defined benefit schemes in the UK, Germany and the US. These gains
stem mainly from inflation and discount rate assumption
changes.
Cost Optimisation
We optimise our cost base to realise operational efficiencies.
Our first optimisation programme announced in January 2013
delivered savings of GBP305 million per annum from September 2018,
at a cash restructuring cost of c. GBP600 million. This first
programme has now concluded although there remain some cash costs.
The second cost programme, announced in November 2016, is expected
to deliver a further GBP300 million of annual savings from
September 2020, at a cash restructuring cost of c. GBP750
million.
A continued focus on reducing product cost and overheads has
realised cost savings of GBP23 million in 2020, all arising from
the second programme. This brings the cumulative cost savings from
both programmes to GBP568 million (GBP305 million from the first
and GBP263 million from the second).
Cash restructuring costs in the half year from the first
programme were GBP9 million (FY2019: GBP24 million) and GBP55
million (FY2019: GBP108 million) for the second, bringing the
cumulative net cash cost of the two programmes to GBP1,021 million
(GBP553 million for the first and GBP468 million for the
second).
Cash Flow and Net Debt
The conversion of adjusted operating profit to operating cash
flow remained strong at 103 per cent on a rolling 12-month basis
(2019: 66 per cent). Compared with the same 12-month period last
year, cash conversion has improved by 37 per cent as the prior
period was adversely impacted by the timing of a series of working
capital outflows.
Adjusted operating cash conversion is calculated as cash flow
from operations pre-restructuring and before interest and tax
payments less net capital expenditure relating to property, plant
and equipment, software and intellectual property rights as a
percentage of adjusted operating profit. During the period we
concluded a share buyback programme with a further GBP92 million
shares purchased bringing the total programme to GBP200 million as
originally targeted.
Adjusted net debt increased by GBP518m on a 12-month basis;
GBP380 million of this increase was driven by foreign exchange,
with GBP345 million due to non-operating flows (payments for Von
Erl and share buybacks as well as a settlement with Russian tax
authorities), lower EBITDA (GBP112 million) and increased dividends
(GBP112 million), which were partially offset by a decrease of
GBP395 million in working capital. Reported net debt increased on a
12-month basis by GBP763 million with the additional increase
materially driven by the reporting of lease liabilities under
IFRS16 (GBP302 million) which has been included for the first
time.
The denomination of our closing adjusted net debt was split
approximately 73 per cent euro and 27 per cent US dollar. As at 31
March 2020, the Group had committed financing in place of around
GBP16.9 billion, which comprised 18 per cent bank facilities and 82
per cent raised from capital markets. A replacement Revolving
Credit Facility of EUR3.5 billion was arranged in the period and
was undrawn on 31 March 2020. We are also eligible to participate
in the Bank of England's Covid Corporate Financing Facility. Since
the beginning of April we have arranged new bilateral facilities
totalling EUR1.1 billion. This was in addition to EUR600 million of
bilateral facilities that were signed in the period, bringing the
total bilateral facilities available to EUR1.7 billion, further
enhancing the Group's liquidity.
In April, we announced the agreed sale of our Premium Cigar
business, which is expected to complete in the third quarter of the
2020 calendar year. The proceeds will be used for debt
reduction.
Dividends
The Group has paid two dividends of 72.00 and 72.01 pence per
share in December 2019 and March 2020 respectively, in line with
our quarterly dividend payment policy to give shareholders a more
regular cash return.
The Board has revisited the Group's capital allocation policy
with a view to de-risking the business and further strengthening
the balance sheet. It has decided to rebase the dividend by a third
to provide increased financial flexibility, with the priority of
accelerating debt reduction to the lower end of our existing 2-2.5
times target range, which we expect to achieve by the end of 2022.
This implies an annual dividend of 137.71 pence per share.
Accordingly, we have declared an interim dividend of 41.70 pence
per share. This dividend will be paid in two payments of 20.85
pence per share on 30 June 2020 and 30 September 2020, with an
ex-dividend date of 28 May and 20 August respectively.
New Accounting Standard
The group has adopted on a modified retrospective basis IFRS 16
"leases" on 1 October 2019 and the impact of this adoption can be
found in note 1 to the accounts.
Adjusted Performance Measures
In managing the business, we focus on adjusted performance
measures as we believe they provide a better comparison of
performance from one period to the next. In 2020 we have changed
our measures to exclude one off or non-recurring items and continue
to hold restructuring costs as adjusting until the end of the
second phase of our cost optimisation programme this year. At the
end of 2020 we will review the treatment of restructuring costs in
the light of any further business requirements.
Principal Risks and Uncertainties
The principal risks and uncertainties to which the Group is
exposed and our standard approach to managing those risks remains
unchanged from those identified on pages 33-40 of our 2019 Annual
Report and Accounts and cover the following areas:
* Capabilities
* Product regulatory change
* Changes in consumer trends * Health, safety, and well being
* Responsible behaviour
* Innovation
* Litigation
* Significant change in product sales taxes or charges
* Tax disputes
* Counterfeit or illicit products
* Product supply * Liquidity and capital adequacy
The Group's Risk Management approach enables ongoing
identification and assessment of risks and development and ongoing
assessment of related mitigations. We continue to consider risks
relating to the wider potential impacts arising from the result of
the exit of the United Kingdom from the European Union and any
associated regulatory, political, tax or foreign exchange risks. As
with all businesses, cyber risks remain an increasing threat to our
operations, and we continue to evolve our control frameworks to
adapt to the changing nature of such threats.
Coronavirus pandemic:
Additional to the "business as usual" risk landscape we, along
with the rest of the world, have been required to respond to, and
mitigate the unprecedented and continually evolving impacts of the
COVID-19 pandemic. In common with all businesses, the Group has had
to manage the potential for disruption in its operations and
marketplaces across the globe resulting from both the impacts of
the COVID-19 and the resultant actions taken by governments to
contain the spread of the virus. To date no material impact has
occurred.
The Group has taken, and continues to take, action to minimise
related consequences, and to date no short-term material impacts
have crystallised. While it is not possible for any organisation to
accurately predict the impacts and outcomes of this so far unique
situation, the Group continues to mitigate both short and
medium-term impacts of the situation.
Crisis management and mitigation of both short and medium-term
impacts:
During the crisis the Board has delegated oversight
responsibility for the continued mitigation of operational risks to
the Group's Coronavirus Steering Committee. The Committee has
ensured that senior representatives from across the Group report
regularly to ensure active management and positive outcomes in
relation to known issues, and to identify and assess emerging or
potential risks and impacts upon our control environment. The
members agree mitigations and seize opportunities to best ensure
the achievement of strategic objectives and the sustainability of
the business. A clear communication strategy during the crisis has
enabled sharing of support for our people and of ideas and actions
to better facilitate effective ways of working in the current
situation.
The Group continues to monitor the current material risks
developing from COVID-19. Scenario analysis and stress testing have
been completed on both current and future commercial and liquidity
measures, though the full impact on the Group's business and the
permanency of these impacts cannot be accurately calculated at this
time; see below. Uncertainties including the length of time for
which restrictions might persist, the severity of any further or
future required measures and longer-term macro-economic impacts of
the pandemic all impact the certainty of predictions and all could
result in changes in consumer behaviours to which the Group
adapts.
Risk and opportunities:
The outcomes of the COVID-19 pandemic creates both risk and
opportunities for the Group, with lessons learned from the current
crisis informing future strategy and business planning along with
the continued assessment of key commercial considerations
including:
Change in consumer trends
-- Identification and mitigation of potential further market
size decline, resulting from reduced consumption due to illness,
retail closures, travel restrictions or other restrictions
initiated to manage the pandemic.
-- The Group continues to monitor economic conditions and their
influence on consumer choices. A reduction in affordability caused
by a prolonged recession could increase consumer downtrading
(switching to a cheaper brand or category) and/or reduce personal
consumption in individual markets. We have seen examples of this
during the crisis and have responded quickly and positively to
manage changes in consumer preferences.
Product regulatory change, and significant change in product
sales taxes or charges
-- The likelihood and impact of additional pressure on both
market size and consumer preferences resulting from unexpected
increases in excise (and other product related taxes) and product
regulation post-pandemic.
-- A potential increase in illicit trade reducing legitimate
market size resulting from the widening cost differential between
legitimate duty paid, and illicit non-duty paid product. Increases
in product related taxes could drive increased consumption of
illicit product as consumers trade-off quality and
affordability.
-- The Group continues to act in accordance with both legal
requirements and the principles of being a responsible
manufacturer. Our regulatory affairs teams, supported by scientific
affairs, engage with stakeholders to support the argument for
rational regulation.
Product supply
-- The pandemic has placed pressures upon the Group's supply
chain. Raw material supply, manufacturing capacity through factory
closures, and distribution capabilities have all been subject to
disruption with impacts thus far having been mitigated. Future
impacts including the potential reduction in available supply
options could result in increased costs.
-- In response to the outcomes of the pandemic the Group may
seek to re-evaluate its supply chain strategy to further ensure the
ongoing suitability of its supply chain to maintain the required
insights and agility to maintain success.
Liquidity and capital adequacy
-- The socio-economic impacts on economies around the world may cause an increased risk of customer/counter-party failure.
-- In response the Group has further increased its focus on
customer credit controls, and the financial stability of suppliers,
and this will continue to be closely monitored.
-- There are increased risks on cashflow arising from the
potential change in timing of material payments, such as duty. This
could affect the Group's liquidity, which may also be affected by
the availability and cost of continued financing within the global
markets. The potential exists for recession within individual
countries, the failure of businesses and austerity measures all of
which might impact the confidence of, and in, financial
institutions and other lenders. The Group manages its liquidity
requirements in line with Treasury Committee and Board
requirements, including minimum criteria for lender ratings.
IT security, cyber and phishing risks
-- The Group has proactively managed its technology
infrastructure to support our people across the business, with home
working better enabled through the roll-out of new software along
with user guidance and training.
-- There are increased risks associated with home-working,
notably in a crisis situation as criminals seek to take advantage
of the speed of change and potential pressures within economies and
new working practices.
-- In response the Group continues to monitor and mitigate these
threats and has introduced additional communications to educate
employees around phishing and security risks, and further increased
key financial controls related to phishing attacks to ensure
end-to-end preparedness.
Failure to appropriately consider and mitigate these potential
outcomes could result in material adverse effects on the Group,
both from the crystallisation of risks, and the failure to seize
opportunities in an increasingly dynamic marketplace.
Liquidity and Going Concern
The Group's policy is to ensure that we always have sufficient
capital markets funding and committed bank facilities in place to
meet foreseeable peak borrowing requirements. The Directors have
assessed the principal risks set out above, including stress
testing a range of different scenarios on how COVID-19 and some
possible consequences arising from the pandemic may affect the
business. These included the scenarios which examined the
implications of:
-- A rapid and lasting deterioration to the Group's
profitability because markets become closed to tobacco products or
there are sustained failures to our tobacco manufacturing and
supply chains. These assumed a permanent reduction in profitability
of 15 per cent and another by 30 per cent from 1 June 2020.
-- The additional impact of potential bad debt risks arising from a recession.
-- The withdrawal of facilities that provide receivables factoring.
-- Various scenarios involving the closure of the entire factory
network over a one, two and three-month period from 1 May 2020,
with a gradual scaling back to full capacity over the subsequent
three months. It also considered factory network shutdowns over
longer time periods.
The scenario planning also considered mitigation actions
including reductions to capital expenditure and dividend payments.
There are additional actions that were not modelled but could be
taken including other cost mitigations such as staff redundancies,
retrenchment of leases, and discussions lenders about capital
structure.
Further to the signing of the Group's new EUR3.5 billion
multi-currency revolving credit facility in March, we have taken
further steps to strengthen the Group's resilience to different
potential scenarios through: the agreement to sell our Premium
Cigar business, where the proceeds will be used for debt reduction;
the signing of EUR1.7 billion committed 18 month bank facilities,
and our ability to participate in the Bank of England's Covid
Corporate Financing Facility.
Based on this review, and having assessed the principal risks
facing the Group, the Board is of the opinion that the Group as a
whole and Imperial Brands PLC have adequate resources to meet
operational needs for a period of at least 12 months from the date
of this report and concludes that it is appropriate to prepare the
financial statements on a going concern basis.
Statement of Directors' Responsibilities
The Directors confirm that this condensed consolidated interim
financial information has been prepared in accordance with IAS 34
as adopted by the European Union and that the interim management
report includes a fair review of the information required by DTR
4.2.7 and DTR 4.2.8, namely: an indication of important events that
have occurred during the first six months of the financial year and
their impact on the condensed set of financial statements, and a
description of the principal risks and uncertainties for the
remaining six months of the financial year; and material related
party transactions in the first six months of the current financial
year and any material changes in the related-party transactions
described in the last annual report.
A list of current directors is maintained on the Imperial Brands
PLC website: www.imperialbrandsplc.com.
The Directors are responsible for the maintenance and integrity
of the Company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Oliver Tant
Chief Financial Officer
SUMMARY OF KEY FOOTPRINT FINANCIALS & METRICS
Half Year Result Change
================== ==================
FOOTPRINT Constant
2020 2019 Actual Currency
============================= ======== ======== ======= =========
Volume
====================== ===== ======== ======== ======= =========
bn
Europe SE 62.7 64.6 -3.0%
====================== ===== ======== ======== ======= =========
bn
Americas SE 9.8 10.0 -2.5%
====================== ===== ======== ======== ======= =========
Africa, Asia and bn
Australasia SE 42.2 40.6 +4.0%
====================== ===== ======== ======== ======= =========
bn
Total Group SE 114.6 115.2 -0.5%
====================== ===== ======== ======== ======= =========
Tobacco Net Revenue
====================== ===== ======== ======== ======= =========
Europe GBPm 1,588 1,607 -1.2% +0.5%
====================== ===== ======== ======== ======= =========
Americas GBPm 1,062 1,053 +0.9% 0.0%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBPm 859 848 +1.3% +2.9%
====================== ===== ======== ======== ======= =========
Total Group GBPm 3,509 3,508 0.0% +0.9%
====================== ===== ======== ======== ======= =========
Tobacco Net Revenue
per '000 SE
====================== ===== ======== ======== ======= =========
Europe GBP 25.34 24.88 +1.9% +3.6%
====================== ===== ======== ======== ======= =========
Americas GBP 108.70 105.09 +3.4% +2.6%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBP 20.36 20.91 -2.6% -1.1%
====================== ===== ======== ======== ======= =========
Total Group GBP 30.62 30.45 +0.6% +1.5%
====================== ===== ======== ======== ======= =========
Tobacco Price/Mix
====================== ===== ======== ======== ======= =========
Europe % +1.8% +3.5%
====================== ===== ======== ======== ======= =========
Americas % +3.4% +2.5%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia % -2.7% -1.1%
====================== ===== ======== ======== ======= =========
Total Group % +0.5% +1.4%
====================== ===== ======== ======== ======= =========
NGP Net Revenue
====================== ===== ======== ======== ======= =========
Europe GBPm 30 73 -58.9% -56.2%
====================== ===== ======== ======== ======= =========
Americas GBPm 30 61 -50.8% -50.8%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBPm 23 14 +64.3% +57.1%
====================== ===== ======== ======== ======= =========
Total Group GBPm 83 148 -43.9% -43.2%
====================== ===== ======== ======== ======= =========
Adjusted Tobacco & NGP Operating
Profit
======================================= ======== ======= =========
Europe GBPm 706 771 -8.4% -6.7%
====================== ===== ======== ======== ======= =========
Americas GBPm 390 439 -11.2% -11.8%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBPm 287 328 -12.5% -7.9%
====================== ===== ======== ======== ======= =========
Total Group GBPm 1,383 1,538 -10.1% -8.5%
====================== ===== ======== ======== ======= =========
Distribution
====================== ===== ======== ======== ======= =========
Distribution Fees GBPm 488 499 -2.2% -0.2%
====================== ===== ======== ======== ======= =========
Operating Profit GBPm 95 102 -6.9% -4.9%
====================== ===== ======== ======== ======= =========
Operating Margin % 19.5 20.4 -90 bps -90 bps
====================== ===== ======== ======== ======= =========
SUMMARY OF KEY PORTFOLIO FINANCIALS & METRICS
Half Year Result Change
================== ===================
PORTFOLIO Constant
2020 2019 Actual Currency
============================== ======== ======== ======== =========
Asset Brand Net Revenue
=======================================================================
Europe GBPm 1,186 1,251 -5.2% -3.7%
======================== ==== ======== ======== ======== =========
Americas GBPm 560 607 -7.7% -8.5%
======================== ==== ======== ======== ======== =========
Africa, Asia and
Australasia GBPm 544 496 +9.6% +11.7%
======================== ==== ======== ======== ======== =========
Total Group GBPm 2,290 2,354 -2.8% -1.7%
======================== ==== ======== ======== ======== =========
Asset Brands as % of Net Revenue
======================================== ======== ======== =========
Europe % 73.3 74.5 -120 bps -140 bps
======================== ==== ======== ======== ======== =========
Americas % 51.3 54.5 -320 bps -320 bps
======================== ==== ======== ======== ======== =========
Africa, Asia and
Australasia % 61.6 57.5 +410 bps +440 bps
======================== ==== ======== ======== ======== =========
Total Group % 63.7 64.4 -70 bps -50 bps
======================== ==== ======== ======== ======== =========
Portfolio Brands Net Revenue
=======================================================================
Total Group GBPm 1,302 1,302 +0.1% 0.7%
======================== ==== ======== ======== ======== =========
% of Total Net Revenue % 36.3 35.6 70 bps 50 bps
======================== ==== ======== ======== ======== =========
2019 Asset Brand net revenue has been restated for
reclassification of brands. See Basis of Presentation on page
2.
INDEPENT REVIEW REPORT TO IMPERIAL BRANDS PLC
Introduction
We have been engaged by the Company to review the condensed
consolidated set of financial statements in the Interim Results of
Imperial Brands PLC for the six months ended 31 March 2020 which
comprises the consolidated income statement, consolidated statement
of comprehensive income, consolidated balance sheet, consolidated
statement of changes in equity, consolidated cash flow statement
and the related explanatory notes. We have read the other
information contained in the Interim Results and considered whether
it contains any apparent misstatements or material inconsistencies
with the information in the condensed set of financial
statements.
This report is made solely to the company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The Interim Results are the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the half-yearly financial report in accordance with the
Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in the Interim Results has been prepared in accordance with
International Accounting Standard 34, "Interim Financial
Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the Interim Results
based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed consolidated set of
financial statements in the half-yearly financial report for the
six months ended 31 March 2020 is not prepared, in all material
respects, in accordance with International Accounting Standard 34
as adopted by the European Union and the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
Ernst & Young LLP
London
19 May 2020
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
Unaudited Unaudited Audited
============================ ============================ ===============
GBP million unless otherwise Year ended 30
indicated Notes 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
================================== ===== ============================ ============================ ===============
Revenue 3 14,672 14,390 31,594
================================== =====
Duty and similar items (7,107) (6,961) (15,394)
Other cost of sales (4,797) (4,613) (9,960)
================================== ===== ============================ ============================ ===============
Cost of sales (11,904) (11,574) (25,354)
================================== ===== ============================ ============================ ===============
Gross profit 2,768 2,816 6,240
Distribution, advertising and
selling costs (1,152) (1,092) (2,295)
================================== ===== ============================ ============================ ===============
Acquisition and disposal costs (14) - (22)
Amortisation and impairment of
acquired intangibles 11 (436) (297) (1,118)
Excise tax provision 23 - -
Fair value adjustment of
acquisition consideration - (119) (129)
Fair value adjustment of loan
receivable 13 (23) - -
Restructuring costs 4 (94) (54) (144)
Other expenses (147) (104) (196)
================================== ===== ============================ ============================ ===============
Administrative and other expenses (691) (574) (1,748)
================================== ===== ============================ ============================ ===============
Operating profit 3/5 925 1,150 2,197
================================== =====
Investment income 624 490 890
Finance costs (784) (646) (1,452)
================================== ===== ============================ ============================ ===============
Net finance costs 5 (160) (156) (562)
Share of profit of investments
accounted for using the equity
method 20 24 55
================================== ===== ============================ ============================ ===============
Profit before tax 785 1,018 1,690
Tax 7 (235) (310) (609)
================================== ===== ============================ ============================ ===============
Profit for the period 550 708 1,081
================================== ===== ============================ ============================ ===============
Attributable to:
Owners of the parent 525 679 1,010
Non-controlling interests 25 29 71
================================== ===== ---------------------------- ============================ ===============
Earnings per ordinary share
(pence)
- Basic 9 55.6 71.2 106.0
- Diluted 9 55.5 71.0 105.8
================================== ===== ============================ ============================ ===============
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited Unaudited Audited
============================ ============================ ===============
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
====================================== ============================ ============================ ===============
Profit for the period 550 708 1,081
Other comprehensive income
======================================
Exchange movements (140) (223) 270
====================================== ============================ ============================
Items that may be reclassified to
profit and loss (140) (223) 270
======================================
Net actuarial gains/(losses) on
retirement benefits 6 533 (118) (248)
Deferred tax relating to net actuarial
gains/(losses) on retirement benefits (135) 11 52
====================================== ============================ ============================ ===============
Items that will not be reclassified to
profit and loss 398 (107) (196)
====================================== ============================ ============================ ===============
Other comprehensive income/(expense)
for the period, net of tax 258 (330) 74
====================================== ============================ ============================ ===============
Total comprehensive income for the
period 808 378 1,155
====================================== ============================ ============================ ===============
Attributable to:
Owners of the parent 784 372 1,086
Non-controlling interests 24 6 69
====================================== ============================ ============================ ===============
Total comprehensive income for the
period 808 378 1,155
====================================== ============================ ============================ ===============
CONSOLIDATED BALANCE SHEET
Unaudited Unaudited Audited
============= ============= =================
GBP million Notes 31 March 2020 31 March 2019 30 September 2019
================================================== ===== ============= ============= =================
Non-current assets
Intangible assets 11 18,246 18,428 18,596
Property, plant and equipment 1,937 1,871 1,979
Right of use assets 300 - -
Investments accounted for using the equity method 85 850 81
Retirement benefit assets 6 1,065 566 595
Trade and other receivables 101 73 119
Derivative financial instruments 12/13 816 473 677
Deferred tax assets 607 527 595
================================================== ===== ============= ============= =================
23,157 22,788 22,642
================================================== ===== ============= ============= =================
Current assets
Inventories 5,101 4,071 4,082
Trade and other receivables 2,697 2,949 2,993
Current tax assets 203 158 303
Cash and cash equivalents 12 773 539 2,286
Derivative financial instruments 12/13 186 57 137
Current assets held for disposal 10 1,125 - 1,287
================================================== ===== ============= ============= =================
10,085 7,774 11,088
================================================== ===== ============= ============= =================
Total assets 33,242 30,562 33,730
================================================== ===== ============= ============= =================
Current liabilities
Borrowings 12 (3,418) (3,307) (1,937)
Derivative financial instruments 12/13 (51) (82) (28)
Trade and other payables (9,131) (7,634) (9,536)
Lease liabilities 1/12 (61) - -
Current tax liabilities (358) (269) (421)
Provisions 4 (156) (141) (284)
Current liabilities held for disposal 10 (189) - (176)
================================================== ===== ============= ============= =================
(13,364) (11,433) (12,382)
================================================== ===== ============= ============= =================
Non-current liabilities
Borrowings 12 (10,719) (10,039) (11,697)
Derivative financial instruments 12/13 (1,429) (1,022) (1,408)
Trade and other payables (7) (121) (7)
Finance lease creditors 1/12 (241) - -
Deferred tax liabilities (1,245) (1,104) (1,156)
Retirement benefit liabilities 6 (1,103) (1,066) (1,249)
Provisions 4 (242) (251) (247)
================================================== ===== ============= ============= =================
(14,986) (13,603) (15,764)
================================================== ===== ============= ============= =================
Total liabilities (28,350) (25,036) (28,146)
================================================== ===== ============= ============= =================
Net assets 4,892 5,526 5,584
================================================== ===== ============= ============= =================
Equity
Share capital 103 103 103
Share premium and capital redemption 5,837 5,837 5,837
Retained earnings (2,779) (1,804) (2,255)
Exchange translation reserve 1,113 780 1,252
================================================== ===== ============= ============= =================
Equity attributable to owners of the parent 4,274 4,916 4,937
Non-controlling interests 618 610 647
================================================== ===== ============= ============= =================
Total equity 4,892 5,526 5,584
================================================== ===== ============= ============= =================
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
======================================================================================
Share Equity
premium Exchange attributable Non-
Share and capital Retained translation to owners controlling Total
GBP million capital redemption earnings reserve of the parent interests equity
============================== ======== ============ ========= ============ ============== ============ =======
At 01 October 2019 103 5,837 (2,255) 1,252 4,937 647 5,584
Profit for the period - - 525 - 525 25 550
======== ============ ========= ============ ============== ============ =======
Exchange movements - - - (139) (139) (1) (140)
Net actuarial gains on
retirement benefits - - 533 - 533 - 533
Deferred tax relating to net
actuarial gains on retirement
benefits - - (135) - (135) - (135)
============================== ======== ============ ========= ============ ============== ============ =======
Other comprehensive
income/(expense) - - 398 (139) 259 (1) 258
============================== ======== ============ ========= ============ ============== ============ =======
Total comprehensive
income/(expense) - - 923 (139) 784 24 808
Transactions with owners
Cost of employees' services - - 9 - 9 - 9
Changes in non-controlling
interests - - (5) - (5) 5 -
Deferred tax on share-based
payments - - 1 - 1 - 1
Cancellation of share capital - - (92) - (92) - (92)
Dividends paid - - (1,360) - (1,360) (58) (1,418)
============================== ======== ============ ========= ============ ============== ============ =======
At 31 March 2020 103 5,837 (2,779) 1,113 4,274 618 4,892
------------------------------ -------- ------------ --------- ------------ -------------- ------------ -------
At 01 October 2018 103 5,837 (1,155) 980 5,765 675 6,440
Profit for the period - - 679 - 679 29 708
============================== ======== ============ ========= ============ ============== ============ =======
Exchange movements - - - (200) (200) (23) (223)
Net actuarial losses on
retirement benefits - - (118) - (118) - (118)
Deferred tax relating to net
actuarial losses on
retirement benefits - - 11 - 11 - 11
============================== ======== ============ ========= ============ ============== ============ =======
Other comprehensive expense - - (107) (200) (307) (23) (330)
============================== ======== ============ ========= ============ ============== ============ =======
Total comprehensive
income/(expense) - - 572 (200) 372 6 378
Transactions with owners
Costs of employees' services
compensated by share schemes - - 14 - 14 - 14
Changes in non-controlling
interests - - 13 - 13 (13) -
Dividends paid - - (1,248) - (1,248) (58) (1,306)
============================== ======== ============ ========= ============ ============== ============ =======
At 31 March 2019 103 5,837 (1,804) 780 4,916 610 5,526
------------------------------ -------- ------------ --------- ------------ -------------- ------------ -------
CONSOLIDATED CASHFLOW STATEMENT
Unaudited Unaudited Audited
============================ ============================ ===============
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
========================================= ============================ ============================ ===============
Cash flows from operating activities
Operating profit 925 1,150 2,197
Dividends received from investments
accounted for under the equity method 23 27 54
Depreciation, amortisation and impairment 592 413 1,316
Profit on disposal of non-current assets - (16) (19)
Post-employment benefits (88) (86) (72)
Costs of employees' services compensated
by share schemes 9 14 23
Fair value adjustment of acquisition
consideration - 119 129
Fair value adjustment of loan receivable 23 - -
Movement in provisions (129) (56) 80
========================================= ============================ ===============
Operating cash flows before movement in
working capital 1,355 1,565 3,708
========================================= ============================
Increase in inventories (1,108) (478) (560)
Decrease/(increase) in trade and other
receivables 264 (439) (267)
(Decrease)/Increase in trade and other
payables (130) (452) 877
========================================= ============================ ===============
Movement in working capital (974) (1,369) 50
Tax paid (254) (248) (522)
========================================= ============================ ============================ ===============
Net cash flows generated/(used in) from
operating activities 127 (52) 3,236
========================================= ============================ ============================ ===============
Cash flows from investing activities
Interest received 6 5 15
Loan to joint ventures - 4 4
Loan to third parties - - (75)
Proceeds from the sale of non-current
assets 6 45 57
Purchase of non-current assets (171) (190) (409)
Purchases of shares (3) - -
Purchase of brands and operations (143) - (17)
========================================= ============================ ===============
Net cash used in investing activities (305) (136) (425)
========================================= ============================ ============================ ===============
Cash flows from financing activities
Interest paid (318) (309) (488)
Cash from employees on maturity/exercise
of share schemes - - 1
Lease liabilities paid (37) - -
Increase in borrowings 1,239 2,539 3,699
Repayment of borrowings (639) (912) (2,330)
Cash flows relating to derivative
financial instruments 38 (19) (117)
Repurchase of shares (92) - (108)
Dividends paid to non-controlling
interests (58) (58) (84)
Dividends paid to owners of the parent (1,360) (1,248) (1,844)
========================================= ============================ ===============
Net cash used in financing activities (1,227) (7) (1,271)
========================================= ============================ ============================ ===============
Net (decrease)/increase in cash and cash
equivalents (1,405) (195) 1,540
Cash and cash equivalents at the start of
period 2,286 775 775
Effect of foreign exchange rates on cash
and cash equivalents (75) (41) (15)
Transferred to held for disposal (33) - (14)
========================================= ============================ ============================ ===============
Cash and cash equivalents at the end of
period 773 539 2,286
========================================= ============================ ============================ ===============
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PREPARATION
The financial information comprises the unaudited results for
the six months ended 31 March 2020 and 31 March 2019, together with
the audited results for the year ended 30 September 2019.
The comparative information shown for the year ended 30
September 2019 does not constitute statutory accounts within the
meaning of section 434 of the Companies Act 2006, and does not
reflect all of the information contained in the Group's published
financial statements for that year. The Auditors' Report on those
statements was unqualified and did not contain any statements under
section 498 of the Companies Act 2006. The financial statements for
the year ended 30 September 2019 were approved by the Board of
Directors on 5 November 2019 and have been filed with the Registrar
of Companies.
This condensed set of financial statements for the six months
ended 31 March 2020 has been prepared in accordance with the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority and with IAS 34 Interim Financial Reporting as adopted by
the European Union. The condensed set of financial statements for
the six months ended 31 March 2020 should be read in conjunction
with the annual financial statements for the year ended 30
September 2019 which have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union.
After making enquiries, the directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this reason
they continue to adopt the going concern basis in preparing the
condensed consolidated interim financial statements. Further
details of this assessment are set out in the Liquidity and Going
Concern section of the Finance Review.
The Group's principal accounting policies and methods of
computation used in preparing this information are, with the
exception of those detailed below, the same as those applied in the
financial statements for the year ended 30 September 2019, which
are available on our website www.imperialbrandsplc.com.
NEW ACCOUNTING STANDARDS AND INTERPRETATIONS
IFRS 16 'LEASES'
With effect from 1 October 2019, the Group has adopted IFRS 16
Leases to contracts which are, or contain, leases of assets.
IFRS 16 replaced IAS 17 'Leases'. IFRS 16 sets out the
principles for the recognition, measurement, presentation and
disclosure of leases and requires lessees to account for most
leases on their balance sheets as lease liabilities with
corresponding right of use assets. Lease costs are recognised in
the income statement as depreciation and interest, rather than
entirely as an operating cost.
IFRS 16 was applied using the modified retrospective method, to
contracts that were previously identified as operating leases in
accordance with IAS 17 and IFRIC 4. There was no restatement of
prior periods.
IMPACT OF IFRS 16 'LEASES'
The impact on adoption of IFRS 16 to the Group's balance sheet
at 1 October 2019 was the recognition of GBP327 million right of
use assets (within property, plant and equipment), a reduction in
lease prepayments of GBP1 million, and lease liabilities included
within borrowings of GBP326 million. There was no impact on
retained earnings.
As reported at 30 September
GBP million 2019 IFRS 16 Adjustment On adoption at 1 October 2019
================================ =============================== =================== ==============================
Property, plant and equipment 1,979 327 2,306
Current assets
Trade and other receivables 2,993 (1) 2,992
================================ =============================== =================== ==============================
Current liabilities
================================ =============================== =================== ==============================
Borrowings (1,937) (65) (2,002)
================================ =============================== =================== ==============================
Non-current liabilities
================================ =============================== =================== ==============================
Borrowings (11,697) (261) (11,958)
Other net assets/(liabilities) 14,246 - 14,246
================================ =============================== =================== ==============================
Net assets 5,584 - 5,584
================================ =============================== =================== ==============================
The Group has lease contracts predominantly relating to property
and other (which predominantly relates to motor vehicles). Before
the adoption of IFRS 16, the Group, as lessee, classified each of
its leases at the inception date as either a finance lease or an
operating lease. All leases within the Group were previously
classified as operating leases; no finance leases were held. In
prior periods, for the operating leases, the leased assets were not
capitalised and the lease payments were recognised either in the
cost of sales or distribution, advertising and selling costs line
items of the consolidated income statement on a straight-line basis
over the lease term. Upon adoption of IFRS 16, the Group, as a
lessee, applied a single recognition and measurement approach for
all leases, except for short term leases, low value assets and
other elections mentioned below in the practical expedients
section. The Group recognised lease liabilities for future lease
payments and right of use assets which represented the right of use
of the underlying leased assets.
The impact of IFRS 16 to the Group results for the six months
ended 31 March 2020 increased depreciation by GBP34 million
relating to the depreciation on the new right of use assets and
increased Finance costs by GBP5 million relating to the interest
expense on the lease liabilities recognised. Lease expense
recognised in the cost of sales and distribution, advertising and
selling costs expenses line items in the interim consolidated
income statement reduced by approximately GBP35 million. Cash
outflows from operating activities decreased by approximately GBP1
million and cash outflows from financing activities increased by
GBP5 million.
The Group's new accounting policies upon adoption of IFRS 16 are
detailed below:
RIGHT OF USE ASSETS
The Group recognises right of use assets, within property, plant
and equipment, at the commencement date of the lease (i.e. the date
the underlying asset is available for use). Right of use assets are
measured at cost, less any accumulated depreciation and impairment
losses, and adjusted for any remeasurement of lease liabilities.
The cost of right of use assets includes the amount of lease
liabilities recognised, initial direct costs incurred, and lease
payments made at or before the commencement date less any lease
incentives received. Unless the Group is reasonably certain to
obtain ownership of the leased asset at the end of the lease term,
the recognised right of use assets are depreciated on a
straight-line basis over the shorter of its estimated useful life
and the lease term. Right of use assets are subject to
impairment.
LEASE LIABILITIES
At the commencement date of the lease, the Group recognises
lease liabilities measured at the present value of lease payments
to be made over the lease term. The lease payments include fixed
payments less any lease incentives receivable, variable lease
payments which depend on an index or a rate, and amounts expected
to be paid under residual value guarantees. Lease payments include
the exercise of purchase options if determined reasonably certain
to be exercised and termination payments if the lease term reflects
the exercise of an option to terminate.
In calculating the present value of lease payments, the Group
uses the incremental borrowing rate, defined as the rate of
interest that a lessee would have to pay to borrow over a similar
term, and with a similar security, the funds necessary to obtain an
asset of a similar value to the right of use asset in a similar
economic environment, at the lease commencement date if the
interest rate implicit in the lease is not readily determinable.
After the commencement date, the amount of lease liabilities is
increased to reflect the accumulation of interest and reduced for
the lease payments made. In addition, the carrying amount of lease
liabilities is remeasured if there is a modification, a change in
the lease term, a change in the in-substance fixed lease payments
or a change in the assessment to purchase the underlying asset.
The weighted average incremental borrowing rate applied in
discounting lease commitments was 3%.
SHORT TERM LEASES, LEASES OF LOW VALUE ASSETS AND PRACTICAL
EXPEDIENTS APPLIED
The Group has applied a number of practical expedients permitted
by IFRS 16. These include:
-- the exclusion of leases where the lease term ends within 12
months of the commencement of the lease or date of initial
application.
-- the exclusion of leases of low value assets, defined as those
of less than US$5,000.
In addition, on initial application, the Group has elected
to:
-- apply hindsight in determining the lease term if the contract
contains options to extend or terminate the lease
-- exclude initial direct costs from the measurement of the
right of use asset
-- use a single discount rate to a portfolio of leases with
reasonably similar characteristics
Lease payments on short-term leases and leases of low value
assets are recognised as expense on a straight-line basis over the
lease term in cost of sales or distribution, advertising and
selling costs.
Reconciliation between Minimum Lease commitments as at 30
September 2019:
GBP million unless otherwise indicated
=================================================== =====
Minimum lease commitments at 30 September 2019 (351)
Additional commitments on the exercise of options (40)
Low value leases and short-term leases excluded 20
Discounted to present value 45
==================================================== =====
Capitalised as lease liabilities at 1 October 2019 (326)
Prepaid leases reclassified from receivables (1)
==================================================== =====
Capitalised as right of use assets at 1 October 327
==================================================== =====
IFRIC 23 'Uncertainty over income tax treatments'
IFRIC 23 'Uncertainty over income tax treatments' was adopted on
1 October 2019. The Interpretation clarifies how to apply the
recognition and measurement requirements in IAS 12 when there is
uncertainty over income tax treatments. The adoption of this
interpretation has not had a material effect on the Group's net
assets or results.
USE OF ADJUSTED MEASURES
Management believes that non-GAAP or adjusted measures provide
an important comparison of business performance and reflect the way
in which the business is controlled. The adjusted measures seek to
remove the distorting effects of a number of significant gains or
losses arising from transactions which are not directly related to
the ongoing underlying performance of the business and may be
non-recurring events or not directly within the control of
management.
Accordingly, adjusted measures of operating profit, net finance
costs, profit before tax, tax, attributable earnings and earnings
per share exclude, where applicable, acquisition and disposal
costs, amortisation and impairment of acquired intangibles,
restructuring costs, post-employment benefits net financing cost,
fair value and exchange gains and losses on financial instruments,
and related tax effects and tax matters. Reconciliations between
adjusted and reported operating profit are included within note 3
to the financial statements, adjusted and reported net finance
costs in note 5, adjusted and reported tax in note 7, and adjusted
and reported earnings per share in note 9.
The adjusted measures in this report are not defined terms under
IFRS and may not be comparable with similarly titled measures
reported by other companies.
The items excluded from adjusted results are those which are
one-off in nature or items which arose due to acquisitions and are
not influenced by the day to day operations of the Group, and the
movements in the fair value of financial instruments which are
marked to market and not naturally offset. Adjusted net finance
costs also excludes all post-employment benefit net finance cost
since pension assets and liabilities and redundancy and social plan
provisions do not form part of adjusted net debt. This allows
comparison of the Group's cost of debt with adjusted net debt. The
adjusted measures are used by management to assess the Group's
financial performance and aid comparability of results year on
year.
The principal adjustments made to reported profits are as
follows:
ACQUISITION AND DISPOSAL COSTS
Adjusted measures exclude costs associated with major
acquisitions and disposals as they do not relate to the day to day
operational performance of the Group. Acquisition costs can be
significant in size and are one-off in nature. Exclusion of these
costs allows a clearer presentation of the day to day underlying
costs of the business. Where applicable and not reported
separately, this includes changes in contingent or deferred
consideration.
AMORTISATION AND IMPAIRMENT OF ACQUIRED INTANGIBLES
Acquired intangibles are amortised over their estimated useful
economic lives where these are considered to be finite. Acquired
intangibles considered to have an indefinite life are not
amortised. Any negative goodwill arising is recognised immediately
in the income statement. We exclude from our adjusted measures the
amortisation and impairment of acquired intangibles, other than
software and internally generated intangibles, and the deferred tax
associated with amortisation of acquired intangibles.
It is recognised that there may be some correlation between the
amortisation charges derived from the acquisition value of acquired
intangibles, and the subsequent future profit streams arising from
sales of associated branded products. However, the amortisation of
intangibles is not directly related to the operating performance of
the business. Conversely, the level of profitability of branded
products is directly influenced by day to day commercial actions,
with variations in the level of profit derived from branded product
sales acting as a clear indicator of performance. Given this, the
Group's view is that amortisation and impairment charges do not
clearly correlate to the ongoing variations in the commercial
results of the business and are therefore excluded to allow a
clearer view of the underlying performance of the organisation. The
deferred tax is excluded on the basis that it will only crystallise
upon disposal of the intangibles and goodwill. The related current
cash tax benefit is retained in the adjusted measure to reflect the
ongoing tax benefit to the Group.
FAIR VALUE GAINS AND LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS
AND EXCHANGE GAINS AND LOSSES ON BORRROWINGS
IFRS 9 requires that all derivative financial instruments are
recognised in the consolidated balance sheet at fair value, with
changes in the fair value being recognised in the consolidated
income statement unless the instrument satisfies the hedge
accounting rules under IFRS and the Group chooses to designate the
derivative financial instrument as a hedge.
The Group hedges underlying exposures in an efficient,
commercial and structured manner. However, the strict hedging
requirements of IFRS 9 may lead to some commercially effective
hedge positions not qualifying for hedge accounting. As a result,
and as permitted under IFRS 9, the Group has decided not to apply
cash flow or fair value hedge accounting for its derivative
financial instruments. However, the Group does apply net investment
hedging, designating certain borrowings and derivatives as hedges
of the net investment in the Group's foreign operations, as
permitted by IFRS 9, in order to reduce income statement
volatility.
We exclude fair value gains and losses on derivative financial
instruments and exchange gains and losses on borrowings from
adjusted net finance costs. Fair value gains and losses on the
interest element of derivative financial instruments are excluded
as there is no direct natural offset between the movements on
derivatives and the interest charge on debt in any one period, as
the derivatives and debt instruments may be contracted over
different periods, although they will reverse over time or are
matched in future periods by interest charges. The fair value gains
on derivatives are excluded as they can introduce volatility in the
finance charge for any given period.
Fair value gains and losses on the currency element of
derivative financial instruments and exchange gains and losses on
borrowings are excluded as the relevant foreign exchange gains and
losses on the instruments in a net investment hedging relationship
are accumulated as a separate component of other comprehensive
income in accordance with the Group's policy on foreign
currency.
Fair value movements arising from the revaluation of contingent
consideration liabilities are adjusted out where they represent
one-off acquisition costs that are not linked to the current period
underlying performance of the business. Fair value adjustments on
loans receivable measured at fair value are excluded as they arise
due to counterparty credit risk changes that are not directly
related to the underlying commercial performance of the
business.
RESTRUCTURING COSTS
Significant one-off costs incurred in integrating acquired
businesses and in major rationalisation and optimisation
initiatives together with their related tax effects are excluded
from our adjusted earnings measures. These include restructuring
costs incurred as part of fundamental multi-year transformational
change projects but do not include costs related to ongoing cost
reduction activity. These costs are all Board approved, and include
impairment of property, plant and equipment which are surplus to
requirements due to restructuring activity. These costs are
required in order to address structural issues associated within
operating within the Tobacco sector that have required action to
both modernise and right-size the organisation, ultimately
delivering an operating model suitable for the future of the
business. The Group's view is that as these costs are both
significant and one-off in nature, excluding them allows a clearer
presentation of the underlying costs of the business.
POST-EMPLOYMENT BENEFITS NET FINANCE COST
The net interest on defined benefit assets or liabilities,
together with the unwind of discount on redundancy, social plans
and other long-term provisions are reported within net finance
costs. These items together with their related tax effects are
excluded from our adjusted earnings measures, as they primarily
represent charges associated with historic employee benefit
commitments, rather than the ongoing current period costs of
operating the business.
TAX MATTERS
Tax matters are significant one-off tax charges or credits
arising from:
--prior period tax items (including re-measurement of deferred
tax balances on a change in tax rates); or
--a provision for uncertain tax items not arising in the normal
course of business; or
--newly enacted taxes in the year; or
--tax items that are closely related to previously recognised
tax matters, and are excluded from our adjusted tax charge to aid
comparability and understanding of the Group's performance.
The recognition and utilisation of deferred tax assets relating
to losses not historically generated in the normal course of
business are excluded on the same basis.
OTHER NON-GAAP MEASURES USED BY MANAGEMENT
NET REVENUE
Tobacco and NGP net revenue comprises associated revenue less
duty and similar items, excluding peripheral products. Management
considers this an important measure in assessing the performance of
Tobacco and NGP operations.
The Group recognises revenue on sales to Logista, a Group
company, within its Tobacco and NGP Net Revenue as disclosed in the
segment information per Note 3. As the revenue calculation includes
sales made to Logista from other Group companies but excludes
Logista's external sales, this metric differs from revenue
calculated under IFRS accounting standards. For the purposes of
Adjusted Performance Measures on Net Revenue we treat Logista as an
arms length distributor on the basis that contractual rights are in
line with other Third Party suppliers to Logista. Variations in the
amount of inventory held by Logista results in a different level of
revenue compared to that which is included within the income
statement. For tobacco product sales, inventory level variations
are normally not significant. Where appropriate, to avoid
distortions in the reported Tobacco and Net revenue figure, the
calculation has been adjusted to reflect sales to Logista based on
normalised levels of inventory.
DISTRIBUTION FEES
Distribution fees comprises the Distribution segment revenue
less the cost of distributed products. Management considers this an
important measure in assessing the performance of Distribution
operations. The eliminations in note 3 all relate to sales to
Distribution.
ADJUSTED OPERATING CASH
Adjusted operating cash conversion is calculated as cash flow
from operations pre-restructuring and before interest and tax
payments less net capital expenditure relating to property, plant
and equipment, software and intellectual property rights as a
percentage of adjusted operating profit.
ADJUSTED NET DEBT
Management monitors the Group's borrowing levels using adjusted
net debt which excludes interest accruals, lease commitments and
the fair value of derivative financial instruments providing
commercial hedges of interest rate risk. The adjusted net debt
metric is used in monitoring performance against various debt
management obligations including covenant compliance.
2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group makes estimates and assumptions regarding the future.
Estimates and judgements are continually evaluated based on
historical experience, and other factors, including expectations of
future events that are based on Management's best assessment using
all available information.
In the future, actual experience may deviate from these
estimates and assumptions.
Actuarial valuations for the Group's retirement benefit plans
are updated annually as at 30 September. An interim update is
carried out at 31 March for the main plans. As part of this interim
update, the most material plan assets are revalued based on market
data at the period end and the liabilities for the most significant
schemes are recalculated to reflect key changes in membership data
and revised actuarial assumptions.
The Group has various obligations to potentially pay
consideration in the future, related to past acquisitions. The
amount of consideration payable is contingent on the level of the
Group's future financial performance and certain other targets
being met. The calculation of contingent consideration liabilities
requires the use of forecasts and other forward looking
information, which may vary over time. Forecasts always contain an
inherent level of uncertainty and therefore there will be judgement
involved in valuing contingent consideration liabilities. The
liabilities are reassessed at each reporting date, based on the
latest available information, and therefore may change in value
over time.
The estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the current financial year are discussed in note
2 of the financial statements for the year ended 30 September
2019.
Those risks particularly relevant to the current period and the
remaining 6 months of the year include:
-- Determination of the useful life of intangible assets
-- Amortisation and impairment of intangible assets
-- Income taxes
-- Legal proceedings and disputes
-- Retirement benefits
-- Provisions
-- Inventory provisions in NGP
-- Assets held for sale
CONTROL OF LOGISTA
The Group continues to determine that it has effective control
of Logista, principally by virtue of its holding 50.01% of the
voting shares and the powers set out in the Relationship Framework
Agreement; and that it is appropriate to consolidate this entity in
line with the requirements of IFRS 10 Consolidated Financial
Statements.
3. SEGMENT INFORMATION
Imperial Brands comprises two distinct businesses - Tobacco
& NGP and Distribution. The Tobacco & NGP business
comprises the manufacture, marketing and sale of Tobacco & NGP
and Tobacco & NGP-related products, including sales to (but not
by) the Distribution business. The Distribution business comprises
the distribution of Tobacco & NGP products for Tobacco &
NGP product manufacturers, including Imperial Brands, as well as a
wide range of non-Tobacco & NGP products and services. The
Distribution business is run on an operationally neutral basis
ensuring all customers are treated equally, and consequently
transactions between the Tobacco & NGP and Distribution
businesses are undertaken on an arm's length basis reflecting
market prices for comparable goods and services.
The function of Chief Operating Decision Maker (defined in IFRS
8), which is to review performance and allocate resources, is
performed by the Board and the Interim Joint Chief Executives, who
are regularly provided with information on our segments. This
information is used as the basis of the segment revenue and profit
disclosures provided below. The main profit measure used by the
Board and the Interim Joint Chief Executives is adjusted operating
profit. Segment balance sheet information is not provided to the
Board or the Joint Interim Chief Executives.
Our operating segments are Europe, Americas, Africa, Asia &
Australasia (AAA) and Distribution. Operating segments are
comprised of geographical groupings of business markets. The main
Tobacco & NGP business markets within the Europe, Americas and
AAA operating segments are:
Europe - United Kingdom, Germany, Spain, France, Italy, Greece,
Sweden, Norway, Belgium, Netherlands, Ukraine and Poland.
Americas - United States and Canada.
AAA - Australia, Japan, Russia, Saudi Arabia, Taiwan and our
African markets including Algeria and Morocco (also includes
premium cigar, which is run as a separate business within AAA.
Premium cigar primarily manufacturers within the AAA geography but
does make sales in countries outside of this area).
REVENUE
Unaudited Unaudited Audited
====================== ====================== =====================================
6 months ended 6 months ended Year ended
31 March 2020 31 March 2019 30 September 2019
====================== ====================== =====================================
Total External Total External Total
GBP million revenue revenue revenue revenue Revenue External revenue
=============================== ========= =========== ========= =========== =========== ========================
Tobacco & NGP
Europe 6,390 6,044 6,553 6,122 14,152 13,359
Americas 1,486 1,486 1,517 1,517 3,358 3,358
Africa, Asia & Australasia 2,836 2,836 2,560 2,560 5,908 5,908
=============================== ========= =========== ========= =========== =========== ========================
Total Tobacco & NGP 10,712 10,366 10,630 10,199 23,418 22,625
Distribution 4,306 4,306 4,191 4,191 8,969 8,969
Eliminations (346) - (431) - (793) -
=============================== ========= =========== ========= =========== =========== ========================
Total Group 14,672 14,672 14,390 14,390 31,594 31,594
=============================== ========= =========== ========= =========== =========== ========================
TOBACCO & NGP
Unaudited Unaudited Audited
============================= ============================= ================
GBP million unless otherwise Year ended 30
indicated 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
====================================== ============================= ============================= ================
Revenue 10,712 10,630 23,418
Net revenue 3,592 3,656 7,998
Operating profit 880 1,110 2,074
Adjusted operating profit 1,383 1,538 3,531
Adjusted operating margin % 38.5 42.1 44.1
====================================== ============================= ============================= ================
DISTRIBUTION
Unaudited Unaudited Audited
============================= ============================= ================
GBP million unless otherwise Year ended 30
indicated 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
====================================== ============================= ============================= ================
Revenue 4,306 4,191 8,969
Distribution fees 488 499 1,015
Operating profit 54 60 137
Adjusted operating profit 95 102 232
Adjusted distribution margin % 19.5 20.4 22.9
====================================== ============================= ============================= ================
RECONCILIATION FROM TOBACCO & NGP REVENUE TO TOBACCO & NGP NET REVENUE
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
============================= ============================= ============================= ================
Revenue 10,712 10,630 23,418
Duty and similar items (7,107) (6,961) (15,394)
Sale of peripheral products (13) (13) (26)
============================= ============================= ============================= ================
Net revenue 3,592 3,656 7,998
============================= ============================= ============================= ================
TOBACCO & NGP NET REVENUE
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
============================ ============================= ============================= ================
Europe 1,619 1,680 3,636
Americas 1,091 1,114 2,472
Africa, Asia & Australasia 882 862 1,890
============================ ============================= ============================= ================
Total Tobacco & NGP 3,592 3,656 7,998
============================ ============================= ============================= ================
ADJUSTED OPERATING PROFIT AND RECONCILIATION TO PROFIT BEFORE TAX
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
====================================== ============================= ============================= ================
Tobacco & NGP
Europe 706 771 1,699
Americas 390 439 1,068
Africa, Asia & Australasia 287 328 764
====================================== ============================= ============================= ================
Total Tobacco & NGP 1,383 1,538 3,531
Distribution 95 102 232
Eliminations (9) (20) (14)
====================================== ============================= ============================= ================
Adjusted operating profit 1,469 1,620 3,749
Acquisition and disposal costs (14) - (22)
Amortisation and impairment of
acquired intangibles - Tobacco & NGP (395) (255) (1,033)
Amortisation of acquired intangibles
- Distribution (41) (42) (85)
Administration of UK distributor -
Tobacco & NGP 23 - -
Excise tax provision - Tobacco & NGP - - (139)
Fair value adjustment of acquisition
consideration (23) (119) (129)
Restructuring costs (94) (54) (144)
============================= ============================= ================
Operating profit 925 1,150 2,197
Net finance costs (160) (156) (562)
Share of profit of investments
accounted for using the equity
method 20 24 55
====================================== ============================= ============================= ================
Profit before tax 785 1,018 1,690
====================================== ============================= ============================= ================
4. RESTRUCTURING COSTS AND PROVISIONS
RESTRUCTURING COSTS
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
===================== ============================= ============================= ================
Employment related 70 27 96
Asset impairments 7 17 29
Other charges 17 10 19
===================== ============================= ============================= ================
94 54 144
===================== ============================= ============================= ================
Restructuring costs analysed by workstream:
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
============================= ============================= ============================= ================
Cost optimisation programme 87 54 144
Other restructuring costs 7 - -
================
94 54 144
============================= ============================= ============================= ================
The cost optimisation programme (Phase I announced in 2013 and
Phase II announced in November 2016) is part of the Group's change
in strategic direction to achieve a unique, non-recurring and
fundamental transformation of the business. The costs of factory
closures and implementation of a standardised operating model are
considered to be one off as they are a permanent scaling down of
capacity and a once in a generation transformational change
respectively. The cost optimisation programme is a discrete, time
bound project which, given its scale, will be delivered over a
number of years and once delivered the associated restructuring
costs will cease.
Costs of implementing cost savings that do not arise from the
change in strategic direction are excluded from restructuring
costs.
The charge for the period of GBP94 million (6 months to 2019:
GBP54 million) relates to our Phase II cost implementation process
as well as Other restructuring activities.
In the 6 months to 31 March 2020 the cash cost of the cost
optimisation programmes was GBP64 million (6 months 2019: GBP71
million) bringing the cumulative cash costs of Phase I to GBP553
million and Phase II to GBP468 million. Non-cost optimisation in
the 6 months to 31 March 2020 totalled GBP10 million.
Phase II is expected to have a cash implementation cost in the
region of GBP750 million, generating savings of a further GBP300
million per annum by 2020. Phase I was concluded at the end of
2018.
Restructuring costs are included within administrative and other
expenses in the consolidated income statement.
These projects differ from everyday initiatives that are
undertaken to improve the efficiency and effectiveness of the
ongoing operations business. These costs are required in order to
address structural issues involved within operating within the
Tobacco sector that require action to both modernise and right-size
the organisation, ultimately delivering an operating model suitable
for the future of the business. Cost optimisation programme Phase 1
completed in 2018 and Phase 2 is due to complete in 2020.
PROVISIONS
Unaudited
==============================================================================
6 months ended 31 March 2020
==============================================================================
GBP million Restructuring Other Total
====================================== ============================= ============================= ================
At 1 October 2019 245 286 531
Additional provisions charged to the
consolidated income statement 61 13 74
Amounts used (44) (130) (174)
Unused amounts reversed (4) (25) (29)
Transfer to asset held for disposal
(note 10) - (4) (4)
Exchange movements 1 (1) -
============================= ============================= ================
At 31 March 2020 259 139 398
====================================== ============================= ============================= ================
Current 134 22 156
Non-current 125 117 242
====================================== ============================= ============================= ================
259 139 398
====================================== ============================= ============================= ================
Analysed as:
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
============================= ================
Current 156 141 284
Non-current 242 251 247
====================================== ============================= ============================= ================
398 392 531
====================================== ============================= ============================= ================
Restructuring provisions relate mainly to our cost optimisation
programme, and other provisions relate to local taxes and Logista
provisions. It is expected that the majority of both restructuring
and other provisions will be utilised in a period of 10 years.
5. ALTERNATIVE PERFORMANCE MEASURES
RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
Unaudited Unaudited Audited
============================ ============================ ===============
Year ended 30
GBP million Notes 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
================================== ===== ============================ ============================ ===============
Operating profit 925 1,150 2,197
Acquisition and disposal costs 14 - 22
Amortisation and impairment of
acquired intangibles 436 297 1,118
Excise tax provision (23) - 139
Fair value adjustment of
acquisition consideration - 119 129
Fair value adjustment of loan
receivable 23 - -
Restructuring costs 4 94 54 144
================================== ===== ============================ ============================ ===============
Adjusted operating profit 1,469 1,620 3,749
---------------------------------- ----- ---------------------------- ---------------------------- ---------------
RECONCILIATION FROM REPORTED NET FINANCE COSTS TO ADJUSTED NET FINANCE COSTS
Unaudited Unaudited Audited
============================ ============================ ===============
Year ended 30
GBP million Notes 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
================================= ====== ============================ ============================ ===============
Reported net finance costs (160) (156) (562)
========================================= ============================ ============================ ===============
Fair value gains on derivative financial
instruments (569) (240) (665)
Fair value losses on derivative financial
instruments 438 347 839
Exchange losses/(gains) on financing
activities 78 (174) (67)
========================================= ============================ ============================ ===============
Net fair value and exchange
(gains)/losses on financial instruments (53) (67) 107
========================================= ============================ ============================ ===============
Interest income on net defined benefit
assets (49) (70) (142)
Interest cost on net defined benefit
liabilities 52 73 147
========================================= ============================ ============================ ===============
Post-employment benefits net financing
cost 3 3 5
========================================= ============================ ============================ ===============
Adjusted net finance costs (210) (220) (450)
----------------------------------------- ---------------------------- ---------------------------- ---------------
Comprising
Interest on bank deposits 6 6 16
Interest on bank and other loans (216) (226) (466)
========================================= ============================ ============================ ===============
Adjusted net finance costs (210) (220) (450)
----------------------------------------- ---------------------------- ---------------------------- ---------------
6. PENSION COSTS
The Group operates a number of retirement benefit schemes for
its employees, including both defined benefit and defined
contribution schemes. The Group's three principal schemes are
defined benefit schemes and are operated by Imperial Tobacco
Limited (ITL) in the UK, Reemtsma Cigarettenfabriken GmbH in
Germany and ITG Brands in the USA.
DEFINED BENEFIT PLAN ASSETS AND LIABILITIES RECOGNISED IN THE
CONSOLIDATED BALANCE SHEET
Unaudited Unaudited Audited
============================ ============================ ===============
Year ended 30
Notes 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
================================= ====== ============================ ============================ ===============
Retirement benefit assets 1,065 566 595
Retirement benefit liabilities (1,103) (1,066) (1,249)
========================================= ============================ ============================ ===============
Net retirement benefit liabilities (38) (500) (654)
----------------------------------------- ---------------------------- ---------------------------- ---------------
The movement in the net retirement benefit is mainly from
actuarial gains and losses on the Group's pension assets and
liabilities. The actuarial gains and losses were from the changes
in principal actuarial assumptions on the Group schemes.
KEY FIGURES AND ASSUMPTIONS USED FOR MAJOR PLANS
Unaudited Unaudited
======================== =========================
6 months ended 6 months ended
31 March 2020 31 March 2019
======================== =========================
GBPmillion unless otherwise stated ITPF RCPP ITGBH ITPF RCPP ITGBH
==================================================== ======== ===== ======= ======== ======= ======
Defined benefit obligation (DBO) 3,135 618 439 3,643 603 404
Fair value of scheme assets (4,142) - (397) (4,136) - 378
==================================================== ======== ===== ======= ======== ======= ======
Net defined benefit (asset)/liability (1,007) 618 42 (493) 603 26
Principal actuarial assumptions used (% per annum)
Discount rate 2.5 1.8 3.3 2.9 1.5 3.9
Future salary increases 2.5 2.3 n/a 3.7 2.9 n/a
Future pension increases 2.5 1.2 n/a 3.2 1.8 n/a
Inflation 2.5 1.2 2.5 3.2 1.8 2.5
---------------------------------------------------- -------- ----- ------- -------- ------- ------
Audited
======== ===== ================
Year ended 30
September 2019
GBPmillion unless otherwise stated ITPF RCPP ITGBH
==================================================== ======== ===== ================
Defined benefit obligation (DBO) 3,880 758 453
Fair value of scheme assets (4,416) - (418)
==================================================== ======== ===== ================
Net defined benefit (asset)/liability (536) 758 35
Principal actuarial assumptions used (% per annum)
Discount rate 1.8 0.9 3.2
Future salary increases 3.1 2.6 n/a
Future pension increases 3.1 1.5 n/a
Inflation 3.1 1.5 2.5
---------------------------------------------------- -------- ----- ----------------
7. TAX
RECONCILIATION FROM REPORTED TAX TO ADJUSTED TAX
Reported tax for the six months ended 31 March 2020 has been
calculated on the basis of a forecast effective rate for the year
ended 30 September 2020.
Unaudited Unaudited Audited
============================= =============== ================
6 months ended Year ended 30
GBP million 6 months ended 31 March 2019 31 March 2019 September 2019
==================================================== ============================= =============== ================
Reported tax 235 310 609
Deferred tax on amortisation and impairment of
acquired intangibles 19 (6) 9
Current tax on excise tax provision - - 15
Tax on net fair value and exchange movements on
financial instruments (48) (1) 31
Tax on post-employment benefits net financing cost 2 2 4
Tax on restructuring costs 24 12 35
Tax on revaluation of investment 7 - -
Tax on unrecognised losses 26 (39) (61)
==================================================== ============================= =============== ================
Adjusted tax charge 265 278 642
==================================================== ============================= =============== ================
UNCERTAIN TAX POSITIONS
In November 2015 the Group received a challenge from the French
tax authorities that could lead to additional tax liabilities of up
to GBP240 million. The challenge concerns the valuation placed on
the shares of Altadis Distribution France (now known as Logista
France) following an intra-group transfer of shares in October 2012
and the tax consequences flowing from a potentially higher value
that is argued for by the tax authorities. In September 2018 the
dispute was heard before the Commission Nationale, an independent
adjudication body, whose decision is advisory only. In October 2018
the Commission issued its report which was favourable to the
Group's position. In November 2018 a meeting was held with the
French tax authorities to discuss the Commission's decision. In
December 2018 the French tax authorities issued their final
assessments seeking the full amount of additional tax assessed
(GBP240 million). In January 2019 the Group appealed against the
assessment. At this time it is appropriate to maintain the GBP42
million (2019: GBP42 million) held in the provision for uncertain
tax positions in respect of this matter.
The Group continues to monitor developments in relation to EU
State Aid investigations. On 25 April 2019, the EU Commission's
final decision regarding its investigation into the UK's Controlled
Foreign Company regime was published. It concludes that the
legislation up until December 2018 does partially represent State
Aid. The UK Government has appealed to the European Court seeking
annulment of the EU Commission's decision the Group, in line with a
number of UK corporates, has made a similar application to the
European Court. The UK Government is obliged to collect any State
Aid granted pending the outcome of the European Court process. The
Group has not received any indication from the UK Government as to
the quantum of State Aid that it believes the Group has received,
if any. The Group considers that the potential amount of additional
tax payable, together with interest is between nil and GBP300
million depending on the basis of calculation. Based upon current
advice the Group does not consider any provision is required in
relation to this investigation or any other EU State Aid
investigation.
The assessment of uncertain tax positions is subjective and
significant management judgement is required. This judgement is
based on current interpretation of legislation, management
experience and professional advice.
8. DIVIDS
DISTRIBUTIONS TO ORDINARY EQUITY HOLDERS
Unaudited Audited Audited
========== ======== ========
GBP million 2020 2019 2018
====================================================================================== ========== ======== ========
Paid interim of nil pence per share (2019: 134.56 pence, 2018: 122.33 pence)
- Paid June 2018 - - 271
- Paid September 2018 - - 271
- Paid December 2018 - - 624
- Paid June 2019 - 298 -
- Paid September 2019 - 298 -
- Paid December 2019 - 680 -
======================================================================================
Interim dividend paid - 1,276 1,166
====================================================================================== ======== ========
Proposed interim of 41.70 pence per share (2019: nil, 2018: nil)
- To be paid June 2020 197 - -
- To be paid September 2020 197 - -
====================================================================================== ======== ========
Interim dividend proposed 394 - -
====================================================================================== ========== ======== ========
Paid final of nil pence per share (2019: 72.01 pence, 2018: 65.46 pence)
- Paid March 2019 - - 624
- Paid March 2020 - 680 -
======================================================================================
Final dividend - 680 624
====================================================================================== ======== ========
Total ordinary share dividends of 41.70 pence per share (2019: 206.57 pence, 2018:
187.79
pence) 394 1,956 1,790
====================================================================================== ========== ======== ========
The declared interim dividend for 2020 amounts to a total
dividend of GBP394 million based on the number of shares ranking
for dividend at 31 March 2020. This will be paid in two stages, one
in June 2020 and one in September 2020.
The dividend paid during the half year to 31 March 2020 is
GBP1,360 million (2019: GBP1,248 million).
9. EARNINGS PER SHARE
Basic earnings per share is based on the profit for the period
attributable to the owners of the parent and the weighted average
number of ordinary shares in issue during the period excluding
shares held to satisfy the Group's employee share schemes and
shares purchased by the Company and held as treasury shares.
Diluted earnings per share have been calculated by taking into
account the weighted average number of shares that would be issued
if rights held under the employee share schemes were exercised. No
instruments have been excluded from the calculation for any period
on the grounds that they are anti-dilutive.
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
====================================== ============================= ============================= ================
Earnings: basic and diluted -
attributable to owners of the
Parent Company 525 679 1,101
====================================== ============================= ============================= ================
Millions of shares
====================================== ============================= ============================= ================
Weighted average number of shares:
Shares for basic earnings per share 944.6 953.3 953.0
Potentially dilutive share options 1.8 3.2 1.9
====================================== ============================= ============================= ================
Shares for diluted earnings per share 946.4 956.5 954.9
====================================== ============================= ============================= ================
Pence
====================================== ============================= ============================= ================
Basic earnings per share 55.6 71.2 106.0
Diluted earnings per share 55.5 71.0 105.8
====================================== ============================= ============================= ================
RECONCILIATION FROM REPORTED TO ADJUSTED EARNINGS AND EARNINGS PER SHARE
Unaudited Unaudited Audited
=========================== =========================== ===========================
6 months ended 6 months ended Year ended
31 March 2020 31 March 2019 30 September 2019
=========================== =========================== ===========================
Earnings Earnings
GBP million unless otherwise Earnings per net of Earnings per Earnings per share Earnings net
indicated share (pence) tax share (pence) net of tax (pence) of tax
============================= =============== ========== ============== =========== ========== ===============
Reported basic 55.6 525 71.2 679 106.0 1,010
Acquisition and disposal
costs 1.5 14 - - 2.3 22
Amortisation and impairment
of acquired intangibles 44.1 417 31.8 303 116.4 1,109
Excise tax provision (2.4) (23) - - 13 124
Fair value adjustment of
acquisition consideration - - 12.5 119 13.5 129
Fair value adjustment loan
receivable 1.7 16 - - - -
Net fair value and exchange
gains
on financial instruments (0.5) (5) (6.9) (66) 8.0 76
Post-employment benefits
net financing cost 0.1 1 0.1 1 0.1 1
Restructuring costs 7.4 70 4.4 42 11.4 109
Tax on unrecognised losses (2.8) (26) 4.1 39 6.4 61
Adjustments above
attributable to
non-controlling interests (1.7) (16) (1.6) (15) (3.8) (36)
=============== ========== ============== =========== ========== ===============
Adjusted 103.0 973 115.6 1,102 273.3 2,605
============================= =============== ========== ============== =========== ========== ===============
Adjusted diluted 102.8 973 115.2 1,102 272.8 2,605
============================= =============== ========== ============== =========== ========== ===============
10. ASSETS HELD FOR SALE
On 30 April 2019 the Group announced its intention to sell the
Premium Cigar Division. At 30 September 2019, the Group presented
the assets and liabilities of the business as held for sale. On 27
April 2020 the Group announced that it had agreed the sale of the
division for a consideration of EUR1,225 million and therefore, the
IFRS 5 criteria for an asset held for sale presentation continues
to have been met as at 31 March 2020.
When the sale of the Premium Cigar Division completes a gain or
loss will arise. There are currently cumulative foreign exchange
gains recognised in the foreign exchange translation reserve
relating to prior retranslations of non-sterling assets held by the
Division. On completion, these gains will be recycled from the
foreign exchange translation reserve to the income statement and
included in the profit or loss on disposal. The amount of the gains
that will be recycled is uncertain as that amount will be affected
by movements in foreign exchange rates up to the date of
completion. We currently estimate the associated cumulate foreign
exchange gains at 31 March 2020 to be in the region of
GBP300-GBP400 million.
IMPAIRMENT TESTING
When the Premium Cigar Division was reclassified as held for
sale at 30 September 2019 an impairment test was undertaken, and an
impairment was identified with net assets being written down to
their estimated recoverable amount on a fair value less costs of
sale basis. The test involved an assessment of the level of
proceeds expected to be achieved on completion of the disposal,
less transaction tax and costs with a comparison of this figure to
the carrying value of the net assets. Since bid offers are an
observable input not based on a quoted price the fair value is
based on a level 2 valuation under IFRS 13.
As the sale has been agreed there is now certainty as to the
actual level of sale proceeds expected to be achieved and this
amount is a decrease on the previous estimate. Therefore, a further
impairment of GBP138 million has been recognised against the
carrying value of the assets of this business. The cumulative
impairments recognised have been used to fully write down the
carrying value of goodwill and have then been allocated pro-rata
against other non-current assets, within the current assets held
for sale category on the balance sheet. In addition, GBP45 million
of assets relating to the La Romana factory in the Dominican
Republic have now been derecognised as assets held for sale and
restated within their original asset categories in the balance
sheet as a result of a deferral of their sale completion date.
Total net assets held for disposal are now GBP936 million.
We do not expect that the final proceeds will vary significantly
to the amount used to determine the fair value and therefore no
further disclosure of sensitivities has been given. However, given
that disposal price is an estimate it is possible that a gain or
loss will still arise on completion. Any reduction in the expected
amount of these proceeds would result in a higher impairment and
vice-versa. The impairment recognised to date has been used to
fully write down the carrying value of goodwill and then allocated
pro-rata against other non-current assets, that fall within the
current assets held for sale category in the balance sheet.
The assets and liabilities classified as held for sale are as
follows:
Unaudited Audited
============== ==================
GBP million 31 March 2020 30 September 2019
=================================================== ============== ==================
Non-current assets
Intangible assets 89 138
Property, plant and equipment 15 26
Investments accounted for using the equity method 533 574
Trade and other receivables 29 52
Right of use leased assets 7 -
Deferred tax assets 7 11
===================================================
680 801
=================================================== ==================
Current assets
Inventories 194 228
Trade and other receivables 204 244
Cash and cash equivalents 47 14
=================================================== ==================
445 486
=================================================== ============== ==================
Total Assets 1,125 1,287
=================================================== ============== ==================
Current liabilities
Trade and other payables (174) (172)
Provisions (4) (4)
Lease liabilities (11) -
=================================================== ============== ==================
(189) (176)
=================================================== ============== ==================
Total liabilities (189) (176)
=================================================== ============== ==================
Net assets 936 1,111
--------------------------------------------------- -------------- ------------------
11. IMPAIRMENT OF INTANGIBLE ASSETS AND INVENTORIES
The Group tests goodwill and intangible assets with indefinite
lives for impairment annually, or more frequently if there are any
indicators that impairment may have arisen. Goodwill is allocated
to groups of cash-generating units (CGUs) and is monitored at a
Cash Generating Unit Grouping (CGUG) level. The last goodwill
impairment test was conducted as at 30 September 2019. We have
reviewed goodwill and indefinite life intangible assets for
indicators of impairment as required by IAS 36. Following a review
of the recoverable values of other intangible assets not currently
subject to amortisation, certain development assets with a carrying
value of GBP19m were identified as not being recoverable. An
impairment charge for their full carrying value was therefore
recognised. We have not identified any other indicators and
therefore there is no requirement to undertake a full impairment
test at this stage. At present there is a significant level of
headroom for the recoverability of goodwill within each CGUG. The
next goodwill impairment review will take place on or before the 30
September 2020.
Following a review of the carrying value of inventory, NGP
flavour inventory was written down by GBP48 million and the
provision for slow moving inventory was increased by GBP28
million.
12. NET DEBT
The movements in cash and cash equivalents, borrowings, and
derivative financial instruments in the period were as follows:
Unaudited
========== =========== =========== =========== ============== =========== =========
Derivative Liabilities Cash
Current Lease Non-Current Financial from financing and cash
GBP million Borrowings Commitments borrowings Instruments activities Equivalents Total
=========================== ========== =========== =========== =========== ============== =========== =========
At 01 October 2019 (1,937) - (11,697) (622) (14,256) 2,286 (11,970)
Reallocation of current
borrowings from
non-current borrowings (897) - 897 - - - -
Cash flow (598) - (2) (38) (638) (1,405) (2,043)
Accretion of interest 37 - 58 14 109 - 109
Change in fair values - - - 131 131 - 131
Exchange movements (23) - 25 37 39 (75) (36)
Transferred to held for
disposal - - - - - (33) (33)
Lease liabilities - (302) - - (302) - (302)
=========================== ========== =========== =========== =========== ============== =========== =========
At 31 March 2020 (3,418) (302) (10,719) (478) (14,917) 773 (14,144)
=========================== ========== =========== =========== =========== ============== =========== =========
ADJUSTED NET DEBT
Management monitors the Group's borrowing levels using adjusted
net debt which excludes lease liabilities, interest accruals and
the fair value of derivative financial instruments. Adjusted net
debt is used for the purpose of debt monitoring as it excludes
non-cash accounting adjustments and therefore better tracks
operational debt management performance.
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
====================================== ============================= ============================= ================
Reported net debt (14,144) (13,381) (11,970)
Accrued interest 53 99 162
Lease commitments 302 - -
Fair value of interest rate
derivatives 313 324 432
====================================== ============================= ============================= ================
Adjusted net debt (13,476) (12,958) (11,376)
====================================== ============================= ============================= ================
The fair value of bonds is estimated to be GBP12,701 million
(2019 6 months: GBP11,915 million) and has been determined by
reference to market prices at the balance sheet date. The carrying
value of bonds is GBP12,621 million (2019 6 months: GBP11,223
million). The fair value of all other borrowings is considered to
be equal to their carrying amount.
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Group's derivative financial instruments which are held at
fair value, are as follows:
Unaudited Unaudited Audited
============================= ============================= ================
Year ended 30
GBP million 6 months ended 31 March 2020 6 months ended 31 March 2019 September 2019
====================================== ============================= ============================= ================
Assets
Interest rate swaps 833 475 669
Forward foreign currency contracts 150 52 104
Cross-currency swaps 19 3 41
====================================== ============================= ============================= ================
Total carrying value of derivative
financial assets 1,002 530 814
====================================== ============================= ============================= ================
Liabilities
Interest rate swaps (1,151) (804) (1,105)
Forward foreign currency contracts (25) (9) (2)
Cross-currency swaps (341) (319) (367)
====================================== ============================= ============================= ================
Carrying value of derivative
financial liabilities before
collateral (1,517) (1,132) (1,474)
Collateral (1) 37 28 38
====================================== ============================= ============================= ================
Total carrying value of derivative
financial liabilities (1,480) (1,104) (1,436)
====================================== ============================= ============================= ================
Total carrying value of derivative
financial instruments (478) (574) (622)
====================================== ============================= ============================= ================
Analysed as:
Interest rate swaps (318) (329) (436)
Forward foreign currency contracts 125 43 102
Cross-currency swaps (322) (316) (326)
Collateral (1) 37 28 38
====================================== ============================= ============================= ================
Total carrying value of derivative
financial instruments (478) (574) (622)
====================================== ============================= ============================= ================
(1) Collateral deposited against derivative financial
liabilities under the terms and conditions of an ISDA Credit
Support Annex
Fair values are determined based on observable market data such
as yield curves and foreign exchange rates to calculate the present
value of future cash flows associated with each derivative at the
balance sheet date, and are consistent with those applied during
the year ended 30 September 2019.
All financial assets and liabilities are carried on the balance
sheet at amortised cost, other than derivative financial
instruments which are carried at fair value. Derivative financial
instruments are valued using techniques based significantly on
observable market data such as yield curves and foreign exchange
rates as at the balance sheet date (Level 2 classification
hierarchy per IFRS 7). There were no changes to the valuation
methods or transfers between hierarchies during the period. With
the exception of capital market issuance, the fair value of all
financial assets and financial liabilities is considered
approximate to their carrying amount.
On 25 July 2019 the Company announced that it would invest CAD
123 million by way of a debenture convertible into 19.9 per cent
ownership of Auxly at a conversion price of $0.81 per share. The
transaction was completed on 25 September 2019. This investment was
classified a financial asset at fair value through profit and loss
and sits in Level 3 on the fair value hierarchy using inputs not
based upon observable market data. As at 31 March 2020 the fair
value was estimated to be GBP58 million. The fair value loss of
GBP23 million relates to the remeasurement of expected cash flows
from the loan receivable discounted at a rate of 14%.
On 16 December 2019 the Group made a further investment in the
Auxly cannabis business, purchasing 6 million equity shares for a
consideration of GBP3 million. As at 31 March 2020 this equity
investment has been revalued to GBP1 million, based on the open
market price for the shares.
14. SHARE BUY-BACKS
Shares purchased under the Group's buyback programme represent a
deduction from equity shareholders' funds, and are only cancelled
if the number of treasury shares approaches 10 percent of issued
share capital. During the period the Group purchased 5,098,508
shares at a cost of GBP92 million (6 months 2019: nil) which were
immediately cancelled, increasing the capital redemption
reserve.
15. COMPETITION AUTHORITY INVESTIGATIONS AND OTHER LEGAL
DEVELOPMENTS
SPAIN
On 12 April 2019 the Spanish National Commission on Markets and
Competition (CNMC) announced penalties against Philip Morris Spain,
Altadis, JT International Iberia and Logista. Altadis and Logista
received fines of EUR11.4 million and EUR20.9 million,
respectively, from the CNMC. According to the decision, Altadis and
Logista are alleged to have infringed competition law by
participating in an exchange of sales volume data between 2008 and
February 2017. CNMC considers that this conduct had the effect of
restricting competition in the Spanish tobacco market. Both
companies believe that the arguments made by CNMC that define this
conduct as anti-competitive are flawed. In June 2019, both Altadis
and Logista commenced appeals to the CNMC's Decision and the fines
imposed, in the Spanish High Court where they believe they will be
successful, a decision supported by external legal counsel. In
September 2019 Altadis and, separately, Logista arranged bank
guarantees for the full amount of the fines with the result that
payment of the fines have been suspended pending the outcome of the
appeals. Therefore, provision for these amounts is not considered
appropriate. All procedural deadlines with the Spanish High Court
have been suspended indefinitely due to the COVID-19 health crisis
and therefore the cases are not expected to progress in the short
term.
BELGIUM
On 29 May 2017, the National Competition Authority in Belgium
(the BCA) conducted raids at the premises of several manufacturers
and wholesalers of tobacco products. The Group's subsidiary in
Belgium received a visit from the BCA and is assisting with
enquiries including responding to a request for information.
UKRAINE
In February 2017, the Anti-Monopoly Committee in Ukraine (AMCU)
initiated an investigation considering alleged concerted actions
between manufacturers, including Imperial Tobacco Ukraine (ITU),
and the distributor TEDIS. On 10 October 2019, the AMCU announced
its Decision to make a finding of anti-competitive conduct against
the industry (Imperial, JTI, BAT, PM - both factories and trading
companies - and the distributor TEDIS). ITU has been fined
approximately GBP8.4 million and Imperial Tobacco Production
Ukraine (ITPU) has been fined approximately GBP4.8 million,
totalling GBP13.2 million. ITU and ITPU believe they have
meritorious defence arguments and appealed the Decision and fines
in December 2019. Procedural hearings have already taken place and
pleading documents exchanged. This matter will progress when the
restrictions placed in response to the COVID-19 health crisis are
lifted. Payment of the fines is suspended pending resolution of the
appeal. Therefore, provision for these amounts is not considered
appropriate.
GERMANY
In late March 2020, a trademark infringement claim was filed
against Reemtsma Cigarettenfabriken GmbH ("Reemtsma") in the
Hamburg Court by an e-cigarette company. The claim relates to the
DAVIDOFF EVOLVED product which was launched in Germany in March
2019. The claimant has requested that the court grant an injunction
to prevent Reemtsma using "EVOLVED" and also determine that
Reemtsma provide compensation regarding its use of EVOLVED. A first
instance decision is not expected this year.
USA PLL - E-VAPOUR
A case has been filed in the USA with the California state court
against Fontem U.S. (Fontem). The original complaint named 17
defendants in addition to Fontem. This case seeks the recovery of
unquantified monetary damages, including punitive damages, against
all defendants based on the claim that the principal plaintiff was
injured as a result of the use of e-cigarettes and vaping devices,
including e-cigarettes manufactured by Fontem. Fontem has
successfully moved to dismiss three of the purported causes of
action asserted against it. Fontem's answer to the remainder of the
second amended complaint was filed in October 2019. At a case
management conference in November 2019, the Court set a trial date
of 1 February 2021.
16. BREXIT
Following the UK's exit from the European Union on 31 January
2020, the Group has looked at the potential impacts of the UK
leaving the transition period on the 31 December 2020 without a
substantive trade agreement in place. The key risks remain a
potential increase in import duties and impact on UK customers;
additional risk of tobacco smuggling, inventory requirements to
ensure supply, impact on consumer confidence, and implications on
existing international tax legislation. In the event that these are
not addressed prior to 31 December 2020, we estimate there could be
additional costs of around GBP100 million primarily relating to the
restructuring of the Group for tax purposes.
17. POST BALANCE SHEET EVENTS
CORONAVIRUS PANDEMIC
In March 2020 the business was impacted by the global
Coronavirus (Covid-19) pandemic, which resulted in unprecedented
government restrictions on the normal operations of the business
across many countries. The restrictions put in place initially
resulted in a number of office and factory closures. Although the
impact of these restrictions has continued in the period since the
balance sheet date, the business has responded by adapting working
practices through activities such as strengthening our IT
infrastructure and accelerating the roll-out of software to
facilitate remote team-working, as well as encouraged a more
flexible approach. There have been modifications to working
practices including changing shift patterns to ensure appropriate
infection controls and social distancing for employees in
manufacturing facilities. As a result of this manufacturing plants
have continued to operate and the Group is able to both produce and
distribute product to customers to meet demand, while complying
with all necessary safety precautions to protect staff and business
partners from the risks arising from the pandemic.
While the business has been able to adapt its working practices
there have been certain limited impacts upon the business including
a significant reduction in sales in the duty free (representing 2%
of net revenue in 2019) and travel retail operations, although with
some level of compensating sales pick-up in domestic demand, and
with changes to consumption and buying patterns from consumers,
retailers and wholesalers. For example, there is evidence of
increased downtrading across certain markets, which we expect to
continue and potentially deteriorate further, with recessionary
pressures.
As manufacturing plants have continued to operate, following
modifications to working practices, and because the Group carries
8-10 weeks of finished goods inventories, we do not expect to face
restrictions in our ability to supply product to customers. The
Group has also continued to operate a regime of strong cost control
and cash discipline, recently has renewed a EUR3.5 billion
Revolving Credit Facility and has bilateral bank facilities of
EUR1.7 billion. The Group has undertaken extensive stress testing
of our liquidity needs and financial resources against a range of
different challenging scenarios.
The Group has undertaken a full review of the possible
accounting implications arising from the current situation and has
considered whether there is any need to adjust asset values or
recognise additional liabilities. The Group has not identified any
asset impairments specifically associated with the impact of the
Covid-19 pandemic. To date, the observable impacts have been
limited to low level changes in credit risk in the duty free and
travel retail operations area.
Review of the key financial assumptions relating to the Group's
defined benefit pension schemes subsequent to the balance sheet
date indicates that fluctuations in obligations fall within the
range of sensitivities. The fair value of plan assets is expected
to be volatile in the short term due to uncertain market
conditions.
SALE OF THE PREMIUM CIGAR DIVISION
On 27 April 2020 the Group announced that it had agreed the sale
of the Premium Cigar Division for a consideration of EUR1,225
million. This business was classified as an asset held for sale at
31 March 2020. For more details please see note 10.
18. RELATED PARTY TRANSACTIONS
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
disclosed in this note. No related party transactions have taken
place in the 6 months ended 31 March 2020 (6 months 2019: none)
that have materially affected the financial position or performance
of the group during that period.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR EKLBFBELFBBL
(END) Dow Jones Newswires
May 19, 2020 02:00 ET (06:00 GMT)
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