TIDMIMB
RNS Number : 2771S
Imperial Brands PLC
05 November 2019
IMPERIAL BRANDS PLC
preliminary results for the YEAR
ED 30 SEPTEMBER 2019
5 November 2019
RESILIENCE IN TOBACCO AND ADDITIVE REVENUE GROWTH FROM NGP
"2019 has been a challenging year with results below our
expectations due to tough trading in Next Generation Products
(NGP). We are implementing actions to drive a stronger performance
in the coming year.
"Our resilient tobacco value creation model continues to produce
high margin sales growth and is well-placed to deliver sustained
profitable growth in the years ahead.
"Although we grew NGP revenues by around 50 per cent, this was
below the level we expected to deliver. Our delivery was also
impacted by an increasingly competitive environment and regulatory
uncertainty in the USA. Growth in Europe was also slower, despite
achieving leading retail shares in several markets. We have taken
the learnings from this year to reset our NGP investment plans for
2020, prioritising the markets and categories with the highest
potential for sustainable, profitable growth. We will scale up
investment as the visibility on returns and regulatory
uncertainties improves.
"Our priority going forward is to optimise the profit and cash
generation from our tobacco assets, while improving growth in NGP
with greater discipline and a more tightly focused business model
that will create long-term value for shareholders."
Alison Cooper
Chief Executive
Financial Overview
Overview - Adjusted Basis Full Year Result Change
================== ====================
Constant
2019 2018 Actual Currency(1)
======================================== ======== ======== ====== ============
Total tobacco volume bn SE 244.2 255.5 -4.4% -4.4%
================================ ====== ======== ======== ====== ============
Tobacco net revenue(2) GBPm 7,713 7,510 +2.7% +1.1%
================================ ====== ======== ======== ====== ============
NGP net revenue(2) GBPm 285 187 +52.4% +48.1%
================================ ====== ======== ======== ====== ============
Tobacco & NGP net revenue(2) GBPm 7,998 7,697 +3.9% +2.2%
================================ ====== ======== ======== ====== ============
Asset Brand net revenue(2) GBPm 5,269 4,977 +5.9% +4.4%
================================ ====== ======== ======== ====== ============
Tobacco & NGP adjusted
operating profit GBPm 3,531 3,557 -0.7% -2.8%
================================ ====== ======== ======== ====== ============
Distribution adjusted operating
profit GBPm 232 212 +9.4% +9.9%
================================ ====== ======== ======== ====== ============
Total adjusted operating
profit GBPm 3,749 3,766 -0.5% -2.4%
================================ ====== ======== ======== ====== ============
Adjusted earnings per share pence 273.3 272.2 +0.4% -1.6%
================================ ====== ======== ======== ====== ============
Adjusted net debt GBPm (11,376) (11,474)
================================ ====== ======== ======== ====== ============
Overview - Reported Basis Full Year Result Change
================== ========
2019 2018 Actual
============================= ======== ======== ======
Revenue(2) GBPm 31,594 30,066 +5.1%
===================== ====== ======== ======== ======
Operating profit GBPm 2,197 2,407 -8.7%
===================== ====== ======== ======== ======
Basic earnings per
share pence 106.0 143.6 -26.2%
===================== ====== ======== ======== ======
Dividend per share pence 206.6 187.8 +10.0%
===================== ====== ======== ======== ======
Reported net debt GBPm (11,970) (11,899)
===================== ====== ======== ======== ======
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) 2018 revenue restated following adoption of IFRS 15.
Results Overview
-- Net revenue up +2.2% driven by growth in tobacco and NGP
-- Adjusted EPS down -1.6% with the following changes since the
pre-close trading update: crystallisation of NGP supply contract
termination costs and lower than expected 'other income' partially
offset by a lower adjusted tax rate
-- Resilient tobacco value creation model with growth in revenue, profit and cash
-- Good tobacco growth from Americas and Europe more than
offsetting Africa, Asia & Australasia (AAA) challenges
-- NGP revenues of GBP285m up +48% with growth in Europe, the US and Japan
-- Quality growth from Asset Brands with net revenue up +4.4%;
+140bps to 66.1% of Group net revenue
-- Adjusted operating profit reflects higher net NGP
investment/costs (GBP112m) and reduction in other income
(GBP70m)
-- Reported operating profit down 8.7% with a goodwill
impairment and associated costs of disposal of the Premium Cigar
Division (GBP525m); provisions for Russian excise tax liabilities
(GBP139m), a fair value adjustment of acquisition consideration for
Von Erl (GBP129m), partly offset by reduced restructuring costs
(GBP144m) and prior year impact of distributor administration
(GBP110m)
-- Premium Cigar impairment will be partly offset on completion
by GBP300m-GBP400m of FX gains from reserves
-- Commitment to evolve non-GAAP financial disclosure with
changes to adjusted performance measures in FY20
Operational Overview
Tobacco revenue and margin supported by strong price/mix
-- Tobacco delivering good net revenue and adjusted operating
profit growth driven by Europe and Americas
-- Tobacco price mix +5.5%; more than offsetting volumes declines of -4.4%
-- Strong US financial performance supported by market share growth in cigarettes and cigars
-- European results reflect a balance between financial delivery
and a focus on quality share growth
-- Tougher trading conditions in Russia, Middle East and Australia impacted AAA results
-- Tobacco profit up +1.8%; margins improved by 60bps
NGP below expectations, but providing additive growth
opportunities
-- NGP revenue up +48% in a fast-evolving vapour category, albeit lower than our expectations
-- US results affected by regulatory uncertainty and increased
consumer churn with greater competitor discounting
-- Good progress in AAA, while Europe growth slowed in H2
following market roll-out in H1 and category slowdown
-- Leading retail market positions for blu established in
markets including Germany, Spain, Italy and Japan
-- Profit impacted by increased NGP investment; inventory
provisions and termination of a supply contract (GBP54m)
-- Learnings from 2019 informing a revised investment model
focused on sustainable, profitable growth
-- Reduction in FY20 investment, given the uncertainties;
regulatory framework needs to enforce product standards
-- Pulze, our heated tobacco offer, rolling out nationally in
Japan; with more market launches planned in FY20
-- Successful market pilots of oral nicotine add to our NGP category offering through FY20
Cost and capital discipline
-- Divestment programme focused on sale of premium cigars
-- Cost optimisation savings of GBP55m delivered; GBP60m to be
delivered in FY20 to conclude the GBP300m programme
-- Cash conversion of 95%
-- Adjusted and reported net debt reduced by GBP0.3bn pre-FX
& derivative fair values due to working capital timing
-- Annual dividend of 206.58p up +10%; revised capital
allocation and shareholder distribution policy in place
Outlook
Outlook
Tobacco will continue to be resilient, delivering modest revenue
growth, high margins and strong cash flows, while our NGP business
provides opportunities for additional revenue growth, with its
strong growth prospects contributing to margins and cash returns
over the medium term.
We remain focused on managing the operational and regulatory
challenges associated with a rapidly evolving NGP category,
including active regulatory engagement for higher product and
marketing standards for vapour.
Given the increased uncertainties in NGP, we have reduced and
reprioritised our NGP investment behind the markets and categories
with the best prospects for sustainable and scalable growth and
will focus on delivering a stronger performance in the coming
year.
We have taken a more cautious approach to our outlook for 2020,
with low single digit revenue and earnings per share growth
expected, excluding any impact from the divestment programme.
Performance is expected to be weighted to the second half as the
benefit of our NGP reset takes effect through the year.
Our revised capital allocation policy supports a progressive
dividend, which will grow annually taking into account underlying
business performance.
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
Webcast
Imperial Brands PLC will be hosting a live webcast for investors
and investment analysts with senior management following the
publication of our Preliminary Results on 5 November 2019. The
webcast will be hosted by Alison Cooper, Chief Executive, and
available on www.imperialbrandsplc.com from 9.00am (GMT). An
archive of the webcast and the presentation script and slides will
also be available.
The webcast audio can also be accessed on a listen only basis
using the following telephone details. Please join the event
conference 5-10 minutes prior to the start time. You will be asked
to provide the conference ID number below.
United Kingdom: 44 (0) 20 7192 8000 or 0800 376 7922
USA: +1 631 510 7495 or +1 866 966 1396
Conference ID No: 4470517
Basis of Presentation
-- To aid understanding of our results, we use 'adjusted'
(non-GAAP) measures in accordance with our usual practice.
Reconciliations between adjusted and reported (GAAP) measures are
also included in the relevant notes. Further definitions of
adjusted measures are provided in the 2019 Annual Report and
Accounts.
-- Stick Equivalent (SE) volumes reflect our combined cigarette,
fine cut tobacco, cigar and snus volumes.
-- 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.
-- 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.
-- 2018 and 2019 revenue reflects new geographic segmentation
and restatement following adoption of IFRS 15.
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 EXECUTIVE'S STATEMENT
We have remained focused on driving the performance of our
tobacco business, while expanding our Next Generation Products
(NGP) operations. We achieved success in a number of areas,
including further revenue and profit growth in tobacco and
year-on-year NGP net revenue growth.
However, our overall Group results have fallen short of our
expectations, impacted by two main factors: a challenging vapour
market, particularly in the USA, and lower than anticipated profit
delivery in our Africa, Asia and Australasia (AAA) division.
We are taking action to drive a better performance in 2020,
which will strengthen our ability to create long-term value for our
stakeholders.
Resilient Tobacco Results
We have a robust tobacco value creation model with a long track
record of financial delivery, with pricing more than offsetting
cigarette volume declines to deliver growing revenues. We expect
this to continue in the years ahead and remain focused on
maximising opportunities for our Asset Brands in our priority
markets.
Our Market Repeatable Model provides a structured framework for
driving quality tobacco growth and is consistently applied across
our footprint.
The resilience of our tobacco business was demonstrated with the
good performances we delivered in Europe and the Americas, which
more than offset tough trading conditions in the AAA division.
We achieved share growth in six of our 10 priority markets,
including in the USA where our focused portfolio strategy delivered
gains in cigarette and mass market cigars and strong financial
results.
In our Europe division we continue to balance market share
progression with financial delivery, generating good financial
contributions from a number of our priority markets including
Germany, the UK and Italy.
Our share performance was good in the AAA division, with gains
in our priority markets of Australia, Japan and Russia, although
our revenue and profit were lower.
Asset Brands accounted for 66.1 per cent of our tobacco &
NGP net revenue, up 140 basis points on last year.
Next Generation Products
Our focus on transitioning adult smokers to potentially less
harmful alternatives to cigarettes is aligned to our purpose: to
create something better for the world's smokers.
We want to see more smokers choosing products with lower health
risks and encourage them to make that change by providing a
portfolio of high-quality vapour, heated tobacco and oral nicotine
products, all underpinned by leading-edge science.
Overall net revenue of our NGP business grew by 48 per cent this
year, led by the growth of our vapour brand blu in Europe, where we
have established leading retail positions, and Japan. We also made
good progress with the roll-out of other NGPs, including a
successful city pilot of our heated tobacco product Pulze in Japan
and the launch of oral nicotine products in several European
markets.
However, we did not make as much progress with blu in the USA
and Europe as we anticipated. Our own performance fell below
expectations and was also impacted by deteriorating trading
conditions, increasing competitor activity and the slower than
anticipated growth of the vapour category.
The situation was compounded in the USA, where an increasingly
volatile regulatory environment coincided with a significant
step-up in our retail engagement programmes, brand investment and
consumer promotions. Although this activity delivered share gains,
overall blu growth was below the level we had planned for.
The volatility in the USA and the broader learnings we have
gained have led to a reprioritisation of our investment plans. In
2020, we are instilling a sharper focus on the category and market
combinations that offer the greatest opportunities for sustainable,
profitable growth. We have clear plans to deliver a more
differentiated blu consumer experience in the coming year, coupled
with a fresh brand approach that builds a stronger emotional
connection with adult smokers.
We are also stepping up our regulatory engagement activities to
encourage higher product and marketing standards, which are
critical for creating a stable and orderly vapour market that we
can invest behind.
In addition, in the USA we are focused on finalising our
premarket tobacco product (PMTA) application for blu, which will be
submitted to the Food and Drug Association before the May 2020
deadline.
We still view NGP as a significant additive growth opportunity
for Imperial and the actions we are taking are strengthening the
foundations of our NGP business, which in the coming year will see
a brand refresh for blu and expanding availability of our heated
tobacco and oral nicotine products.
Auxly Cannabis Group Inc.
In July we announced we were diversifying our NGP portfolio
through a research and development partnership with Auxly Cannabis
Group Inc., a listed Canadian cannabis company. This provides
further options for future growth and builds on the investment we
made in Oxford Cannabinoid Technologies last year.
The transaction was completed in September, ahead of the further
liberalisation of cannabis regulation in Canada in October 2019. At
this time, the sale of derivative products, such as cannabis
edibles, extracts and topicals will be legally permitted.
As part of the deal we have granted Auxly global licences to our
vaping technology and access to our innovation business,
Nerudia.
Cost and Cash Management
Optimising cost and cash opportunities is a core element of our
strategy, enabling us to improve efficiencies and release funds for
investment.
Our commitment to capital discipline underpins our focus on cash
generation and the effective management of our working capital.
We increased NGP investment considerably during the year but
given the current state of the vapour market we are now refining
our approach for 2020. We will invest selectively to support
growth, prioritising blu sales in key markets and widening
distribution of Pulze and our oral nicotine offerings.
We made good progress with our cost optimisation programme,
realising GBP55 million of annualised savings in the year. The
programme will deliver GBP300 million of savings a year from our
2020 financial year.
Cash conversion remained strong at 95 per cent and we grew the
dividend per share by 10 per cent.
Following a revision of our dividend policy announced by the
Board in July, dividend growth will be progressive, increasing
annually from its current level, taking into account underlying
business performance.
Creating Additional Value
In sharpening our focus on the brands, products and markets that
are essential to our long-term success, we have identified assets
that are less central to our growth ambitions.
We are exiting or divesting these assets, including our premium
cigar business, to create further value for our shareholders and to
simplifying the structure of the business, creating a leaner, more
agile organisation.
Over the past two years we have advanced other divestment
opportunities but chose not to conclude them, largely due to a
deterioration in tobacco valuations. These opportunities will be
kept under review but further divestments will only be progressed
if they will realise appropriate value.
Outlook
Tobacco will continue to be resilient, delivering modest revenue
growth, high margins and strong cash flows, while our NGP business
provides opportunities for additional revenue growth, with its
strong growth prospects contributing to margins and cash returns
over the medium term.
We remain focused on managing the operational and regulatory
challenges associated with a rapidly evolving NGP category,
including active regulatory engagement for higher product and
marketing standards for vapour.
Given the increased uncertainties in NGP, we have reduced and
reprioritised our NGP investment behind the markets and categories
with the best prospects for sustainable and scalable growth and
will focus on delivering a stronger performance in the coming
year.
We have taken a more cautious approach to our outlook for 2020,
with low single digit revenue and earnings per share growth
expected, excluding any impact from the divestment programme.
Performance is expected to be weighted to the second half as the
benefit of our NGP investment reset takes effect through the
year.
Our revised capital allocation policy supports a progressive
dividend, which will grow annually taking into account underlying
business performance.
Towards the end of year, it was announced that I and the Board
had agreed that after nine years as Chief Executive, I would step
down once a suitable successor is found.
It has been a privilege to be CEO of this business and to have
worked with such great people. I remain committed to leading
Imperial during the succession process and would like to thank
employees around the world for all their hard work and support over
the years.
OPERATING REVIEW
We continue to reshape our brand portfolio, prioritising our
high-quality Asset Brands to drive growth. These brands consist of
tobacco and Next Generation Products (NGP) and account for 65.9 per
cent of our tobacco & NGP net revenue, up 120 basis points on
last year
Asset Brands
We continue to reshape our portfolio to meet evolving consumer
preferences for a broader repertoire of nicotine products,
prioritising our Asset Brands and focusing resources behind these
brands to drive quality, profitable growth.
We have strong brand positions in cigarettes, fine-cut tobacco,
papers and cigars. Our NGP focus has been primarily on our blu
vapour brand but has expanded in the year to include other nicotine
assets in heated tobacco and oral nicotine.
Earlier in the year we launched our first heated tobacco
product, Pulze. To date, the brand is only available in Japan and
is not currently included in Asset Brands. We also rolled out
trials of modern oral products in several European markets.
Full Year Result Change
================== ===========================
2019 2018 Actual Constant Currency
============================ ======== ======== ======== =================
Net revenue GBPm 5,269 4,977 +5.9% +4.4%
====================== ==== ======== ======== ======== =================
Percentage of tobacco
& NGP
net revenue % 65.9 64.7 +120 bps + 140 bps
====================== ==== ======== ======== ======== =================
(2018 net revenue restated for the adoption of IFRS 15 and brand
reclassifications outlined below)
Our Asset Brands now represent two thirds of our revenues.
Net revenue from Asset Brands grew by 4.4 per cent at constant
currency, supported primarily by strong growth in Davidoff, blu,
Backwoods and Kool. Our Skruf, Rizla and Premium Cigar brands also
performed well, contributing to revenue growth. Asset Brand
performance was adversely impacted by the decision in Spain to
reverse the migration of Ducados to JPS, following consumer
feedback which continued to stress the equity value of the Ducados
brand.
Tobacco Asset Brand investment was prioritised behind equity
building campaigns and key consumer growth segments, such as queen
size, low tar and crushball.
NGP Asset Brand investment was focused behind the myblu brand in
both equity building campaigns and activations. This investment has
supported the creation of the closed system pod category and
secured market-leading retail positions in many markets.
Tobacco Brands
JPS
JPS performance has benefited from the roll out of the Blue
Stream variant to meet consumer demand in the low tar range.
However, price differentials between value and other segments, in
JPS's largest markets of the UK, Germany and Australia have
negatively impacted results.
West
West's performance has been driven by growth in value formats,
such as super king size, fine cut tobacco and big box, resulting in
share growth in Spain, Germany, Russia and Japan. In addition to
the strong performance of value formats across a number of markets,
the introduction of a fresh seal variant in the Middle East has
partly offset the impact of the decline in West's traditional
range.
Winston
Winston's share performance has been relatively resilient,
despite the premium segment in the USA remaining under pressure
from the growth in deep discount. We are managing price promotions
and targeted direct marketing activities to support the share
performance.
Davidoff
Two new Davidoff ranges are driving the overall positive
performance of the brand, offsetting declines in the core premium
line range. Davidoff Reach, a queen size variant, has been launched
in 25 markets, achieving sizeable share gains in its main markets
of Russia, Ukraine and Slovakia. The new king size range, Davidoff
Evolve, has been launched in nine markets, achieving strong share
gains in the Middle East.
Parker & Simpson
The performance of Parker & Simpson has benefitted from the
growth of crush-ball and modern filter variants, which have partly
offset declines in traditional formats. To address demand in other
key segments, Parker & Simpson has been launched in Australia,
where it has delivered significant share growth.
Vapour
Continued growth from our blu brand, driven by the myblu closed
system pod format, has contributed to constant currency net revenue
gains from NGP of 48 per cent this year to GBP285 million.
In the year we have been building out blu sales across our
markets, within a challenging regulatory and competitive
environment. We have created the pod category in several countries
and achieved market-leading retail positions in many European
markets and Japan. Investment levels were substantially increased
to build brand equity and drive consumer off-take in a rapidly
evolving vapour category.
We did not make as much progress with blu in the USA as we
anticipated. Our performance was also impacted by increased
competitor discounting and regulatory uncertainty, including
individual state actions, leading to the market deteriorating
considerably in the second half of the year. The uncertainty
resulted in an increasing number of wholesalers and retailers not
ordering or not allowing promotion of vaping products. We continue
to actively engage with regulators for a clear regulatory framework
in the USA that supports high product standards and responsible
sales and marketing behaviours.
In Europe and Japan, we have delivered good year-on-year growth,
consolidating strong vaping share positions, following the
successful build out of myblu. The vaping category in Europe did
not grow as fast as we originally anticipated, although we have
established market leading retail positions in Germany, Spain and
Italy. The UK and France are largely open system markets, providing
an opportunity to promote closed systems and higher product
standards. In Japan our zero-nicotine variant of myblu is now
available nationally and has created the pod category.
Revenue delivery from the vapour category was below our
expectations in 2019, while profitability was affected by increased
investment, provisions for slow-moving inventory and supply chain
termination costs.
Learnings from 2019 have enabled us to evaluate the success of
different markets and channels in the context of a changing
environment and to inform our future investment choices. We have
reset our vapour investment plans for 2020, prioritising the
markets with the highest potential for sustainable, profitable
growth.
Investment will be focused around markets with the best closed
system opportunities and towards activities that build the
profitability of the category. Continuing to enhance our innovation
and leading-edge science will enable us to further differentiate
blu to meet consumer needs. Increased profitability of the category
will also be driven by investment behind more consumer loyalty
activities targeted at building consumer connections, supported by
improving our online channel focus. Our regulatory engagement
activities encourage the adoption of higher product and marketing
standards to create the right operating environment.
We continue to view our blu brand and vapour as a significant
opportunity to deliver additive growth and remain focused on
managing the operational and regulatory challenges associated with
a rapidly evolving category.
Heated Tobacco
In 2019 we launched our Pulze heated tobacco product and iD heat
sticks in the Japanese city of Fukuoka. The product and brand
received positive consumer feedback and we have started to roll-out
Pulze nationally via convenience store key accounts. In addition to
focusing on distribution, investment will be channelled towards new
experience touch points, embedding learnings from other NGP
categories and supporting adult smokers with using the Pulze
product. In 2020 production capacity will be increased, with plans
for further geographical expansion.
Modern Oral Nicotine
Building on our traditional oral nicotine credentials in
Scandinavia, in 2019 we launched modern formats in multiple
markets, building our presence in Europe. Modern white formats were
launched under the Skruf brand name in cities in Germany and
Austria and under the brand name Zone X in the UK. Sales have grown
strongly from a low base and we will continue to expand our
national distribution in 2020.
Portfolio Brands
The rest of our portfolio consists of Portfolio Brands; some of
these are strong local brands that support our volume and revenue
development, while others are delisted or migrated into Asset
Brands.
Reflecting our focus on Asset Brands, Portfolio volumes were
down 4.1 per cent. On a constant currency basis net revenue fell
1.9 per cent, with Portfolio Brands now representing only 34.1 per
cent of our overall revenue at actual rates.
Europe
Full Year Result Change
======================== ==================================
2019 2018 Actual Constant Currency
====================== ================= ===== =============== =================
bn
Tobacco volume SE 135.0 141.3 -4.4%
===================== ================== ===== ===== ======== =================
NGP net revenue GBPm 131 32 >100% >100%
===================== ================== ===== ===== ======== =================
Tobacco net revenue GBPm 3,505 3,491 +0.4% +0.8%
===================== ================== ===== ===== ======== =================
Total net revenue GBPm 3,636 3,523 +3.2% +3.6%
===================== ================== ===== ===== ======== =================
Adjusted operating
profit GBPm 1,699 1,701 -0.1% -0.3%
===================== ================== ===== ===== ======== =================
Asset Brand % of net
revenue % 74.7 72.4 +230 bps +210 bps
===================== ================== ===== ===== ======== =================
2018 revenue restated following adoption of IFRS 15.
Our performance demonstrates the resilience of our tobacco
business across European markets, with financials driven by strong
pricing and cost efficiency savings. In NGP, we have delivered good
year-on-year growth, creating strong vaping retail share positions,
following the successful build out of myblu.
We have continued to balance financial returns with optimising
our share positions in our priority markets, ensuring that we
continue to deliver quality growth in the right markets, with the
right brands.
Overall volumes decreased by 4.4 per cent, reflecting tobacco
market trends in Western Europe and volume pressure in the Ukraine.
Ukraine volumes impacted the region by c150bps, although this had a
limited impact on profitability.
Net revenue was up 3.6 per cent, benefiting from strong pricing
in our tobacco business particularly in Germany, the UK and Italy.
In NGP we grew revenues to GBP131 million (FY18 GBP32 million),
with higher growth in the first half as we built national
distribution for myblu in the UK, Germany, France, Spain and
Italy.
The European vapour category did not grow as fast as we
originally anticipated in the year with a slowdown in the second
half. In the UK and France, the evolution of the vapour category
towards closed system devices has been slower than we initially
expected, with open system devices and price promotions impacting
the development of the category. We have factored this into our
plans for 2020 and continue to engage with stakeholders to raise
regulatory standards for vapour products.
In NGP we have also been active with our modern oral nicotine
products, generating growth across the division including in
Austria, Germany, the UK, Slovakia, Denmark and Switzerland.
Our focus on Asset Brands, supported by our Market Repeatable
Model, continues to improve the quality of our revenue, with 74.7
per cent now coming from Asset Brands.
Adjusted operating profit was down 0.3 per cent at constant
currency, with pricing in tobacco offset by the additional
investment to support myblu market launches, as well as provisions
for slow-moving inventory and the termination of an NGP supply
contract in the second half.
While driving the performance of the business, we continue to
focus on ensuring our products are only ever sold to adult smokers
and vapers. Our retailer engagement programmes have a strong focus
on responsible selling, including e-learning tools that reinforce
the importance of prohibiting NGP and tobacco sales to minors. We
have robust age-verification mechanisms for online sales and the
stringent way we market our brands avoids any association with
other products that are popular with youth.
We also continue to partner with governments, law enforcement
agencies and customs and excise authorities to combat the smuggling
and counterfeiting of tobacco products. Our security intelligence
led to raids on significant production sites in Poland that were
counterfeiting Imperial tobacco brands for the German, UK and
Polish markets. In all, 120 million illegal cigarettes were seized
and 81 arrests were made.
Priority Markets Performance
Tobacco Share
================ ==============================================================
UK Strong price/mix supported net revenue growth. Overall
40.6% (-140bps) tobacco share was down following our price increase in
February, which led to a period of price disadvantage
against competitors. Share trajectory improved in the
second half, supported by cigarette and fine cut tobacco
growth in the sub-economy segment. Following its launch
last year, myblu has continued to achieve good growth
in the closed system category with 6.0 per cent share
of traditional retail in September, although the category
growth is slower than anticipated. A city trial launch
of modern oral nicotine brand Zone X received positive
reviews with plans to expand distribution further.
================ ==============================================================
Germany Financial delivery remained strong, with pricing and
21.6% (-70bps) second half trade promotions driving growth. Share declines
are being addressed through reshaping our brand portfolio,
including migrating some Portfolio Brands, and larger
format pricing strategies. myblu has strengthened its
market leadership in retail, with advertising and promotional
activities supporting category leading performance and
high brand awareness. myblu spot share in September was
35.4 per cent of the traditional retail channel. We made
good progress with the modern oral nicotine launch of
Skruf, leading the establishment of the category.
================ ==============================================================
Spain The successful launch of Horizon in the fine cut tobacco
28.9% (-10bps), natural segment and investment in West and Fortuna cigarettes
with blonde resulted in positive fine cut tobacco and blonde cigarette
share +10bps share delivery. myblu gained a market leading share of
the tobacconist channel, following its national launch
in January, holding a 75.0 per cent spot value share
in September. Market leadership was supported by distribution
expansion and retailer advocacy programmes.
================ ==============================================================
France We have continued to prioritise financial returns and
18.1% (-160bps) quality share, following significant excise increases.
The price repositioning of JPS and News has supported
an improved share trajectory and fine cut tobacco share
is growing. myblu sell out and market share are stable,
but revenue performance has been impacted by slower category
development and competitor price promotions. myblu in
September was the number two vapour brand with 12.7 per
cent value share of offtake data in tobacconists.
================ ==============================================================
Italy Continued market share growth has been driven by investment
5.4% (+30bps) behind JPS, retailer advocacy and multi-channel consumer
activations. myblu continues to maintain a market leading
retail share with a September spot value share of 51.5
per cent, supported by increased distribution and a targeted
city advertising campaign.
================ ==============================================================
Americas
Full Year Result Change
======================== ==================================
2019 2018 Actual Constant Currency
---------------------- ----------------- ----- --------------- -----------------
bn
Tobacco Volume SE 21.7 22.1 -2.0%
===================== ================== ===== ===== ======== =================
NGP net revenue GBPm 111 151 -26.5% -30.5%
===================== ================== ===== ===== ======== =================
Tobacco net revenue GBPm 2,361 2,097 +12.6% +6.8%
===================== ================== ===== ===== ======== =================
Total net revenue GBPm 2,472 2,248 +10.0% +4.3%
===================== ================== ===== ===== ======== =================
Adjusted operating
profit GBPm 1,068 1,036 +3.1% -2.6%
===================== ================== ===== ===== ======== =================
Asset Brand % of net
revenue % 54.1 54.4 (30) bps (20) bps
===================== ================== ===== ===== ======== =================
2018 revenue restated following adoption of IFRS 15.
We delivered a strong tobacco performance, with our overall USA
cigarette share now in growth for the first time since the US asset
acquisition in 2015. Cigarette share was 8.8 per cent, up 10bps,
benefiting from our portfolio strategy and share gains from our
Sonoma brand as demand for brands in the deep discount segment
grows. Demand in the deep discount segment marginally impacted
Winston's share performance, which was down by 8bps, with the share
of Kool and Maverick stable.
We also delivered share growth in mass market cigars, with
Backwoods up 81 basis points and our total share of the category
now 15.1 per cent, 79 basis points higher than last year.
Volumes were down 2.0 per cent with a second half benefit from
an increase in wholesaler inventory towards the end of the period
as wholesalers bought ahead of an expected October price increase.
Excluding the impact of shipment timings, volumes were down by 5.3
per cent, slightly better than the industry decline of 5.5 per
cent.
On a constant currency basis, we grew tobacco net revenue by 6.8
per cent, reflecting strong pricing and a mix benefit from mass
market cigars led by growth from Backwoods and Dutch Masters.
NGP revenues of GBP111 million were GBP46m lower than last year
at constant currencies (FY18: GBP151 million includes IP revenue of
c. GBP51 million). We increased brand investment and enhanced
consumer promotions in the second half to address the increasingly
competitive environment and declining myblu share. This increase
led to an improvement in value share trajectory to 6.2 per cent at
the end of the year, although second half gains were less than
expected, reflecting the recent slowdown in the US vapour category
and increased competitor discounting. Rising regulatory uncertainty
reduced consumer off-take and shipments to wholesalers and
retailers.
We continue to monitor developments in the USA vapour market. We
have factored flexibility into our future plans and investment
levels and remain focused on building blu consumer loyalty and
managing the operational and regulatory challenges associated with
a rapidly evolving category. The environment is expected to improve
following action by the Food and Drug Administration (FDA).
We are engaging with the FDA and other key stakeholders to
create a regulatory framework that raises standards and supports
the development of the legal vapour category. This is critically
important given the growing number of US reports of ill-health
being linked to the use of illicit vapour products.
We share the FDA's concerns about young people using vapour
products and are committed to enforcing stringent youth access
prevention measures. In September we reinforced this view in a
keynote speech at the annual Global Tobacco & Nicotine Forum
held in Washington.
Adjusted operating profit was 2.6 per cent lower, with strong
growth in tobacco profit offset by losses in NGP, last year's IP
profit apportioned to Americas of GBP50m and the GBP40 million
profit on the sale of our other tobacco products business.
Excluding these gains, adjusted operating profit would have
increased by 6.7 per cent at constant currency despite the step-up
in NGP investment.
Africa, Asia and Australasia
Full Year Result Change
======================== ==================================
2019 2018 Actual Constant Currency
---------------------- ----------------- ----- --------------- -----------------
bn
Tobacco Volume SE 87.5 92.1 -5.0%
===================== ================== ===== ===== ======== =================
NGP net revenue GBPm 43 4 >100% >100%
===================== ================== ===== ===== ======== =================
Tobacco net revenue GBPm 1,847 1,922 -3.9% -4.8%
===================== ================== ===== ===== ======== =================
Total net revenue GBPm 1,890 1,926 -1.9% -2.9%
===================== ================== ===== ===== ======== =================
Adjusted operating
profit GBPm 764 820 -6.8% -8.1%
===================== ================== ===== ===== ======== =================
Asset Brand % of net
revenue % 64.2 62.5 +170 bps +210 bps
===================== ================== ===== ===== ======== =================
2018 revenue restated following adoption of IFRS 15.
Full year tobacco volumes were 5.0 per cent lower, although
ameliorating declines in the Middle East and South East Asia
contributed to a stronger second half performance.
We grew our share position in Australia, Japan and Russia with a
second half improvement in Saudi Arabia.
Tobacco net revenue was down 4.8 per cent at constant currency.
This was largely driven by tobacco declines in Russia, Australia
and the Middle East, which more than offset growth in Ivory Coast,
Turkey and New Zealand.
Lower revenue in Russia was primarily due to channel mix with an
increased proportion of market volumes discounted in key accounts
with lower price/mix in Australia driven by lower margin volumes in
the growing fifth price tier.
In Saudi Arabia, performance was affected by an increase in
lower priced cross border duty-free volumes. Despite this impact on
the profitability of the market, the launch of Davidoff Evolve and
the rejuvenation of West with a fresh seal pack supported share
growth.
Total net revenue was supported by a continued strong NGP
performance in Japan following a national rollout of myblu zero
nicotine, which led the creation of the closed system pod category.
NGP revenues contributed an additional GBP39 million to GBP43
million.
We also launched our Pulze heated tobacco product and iD sticks
in Japan with a national roll-out underway via convenience store
key accounts following positive consumer feedback.
Our Asset brands now make up 64.2 per cent of our total net
revenue, up 210 bps at constant currency.
Adjusted operating profit at 8.1 per cent down was impacted by
tobacco performance in Australia, Russia and Saudi Arabia. Reported
operating profit was lower due to a provision for historic Russian
excise liabilities and a goodwill impairment of the Premium Cigar
Division.
Priority Markets Performance
Tobacco Share
================ ==============================================================
Australia Investment behind Parker & Simpson resulted in share
32.6% (+70bps) gains in the growing economy segment. Revenue and profit
were impacted by negative mix from growth in lower margin
product. Profit was also affected by a lower FY19 benefit
from duty paid inventory around the September excise
increase.
================ ==============================================================
Japan West is continuing to grow, benefiting from continued
1.3% (+30bps) downtrading following excise driven price increases.
Expanded national distribution of myblu supported accelerated
sales growth in H2. myblu held an 85.4 per cent spot
share of convenience stores in September.
================ ==============================================================
Russia Market declines were driven by increases in illicit
7.9% (+10bps) volumes. Positive share progression was supported by
growth in Davidoff Evolve and Parker & Simpson crush-ball
variant, which more than offset declines in Maxim. Financial
performance was impacted by increased competitor discounting
and ongoing volume shift into the key accounts channel.
================ ==============================================================
Saudi Arabia Share performance benefited from the launch of Davidoff
14.3% (+1bps) Evolve in April which performed strongly in the second
half. The introduction of West fresh seal, supported
by optimisation of field coverage, also led to an improvement
in second half volumes. Financial performance was impacted
by increased cross border duty free flow.
================ ==============================================================
FINANCE REVIEW
Resilient tobacco performance and additive NGP revenue
growth
-- Net revenue up 2.2% at constant currency comprising +1.0% from tobacco and +1.2% from NGP
-- Europe and Americas delivering net revenue growth >3.5%;
AAA revenue down 2.9% with tougher trading
-- NGP revenue of GBP285m, up 48% at constant currency
NET REVENUE BRIDGE: +2.2% (CC); +3.9% (Reported)
FY18 net revenue GBP7,697m
========== ======
Tobacco volume -4.4%
========== ======
Tobacco price/mix +5.5%
========== ======
NGP net revenue +1.2%
========== ======
FY19 constant currency net revenue GBP7,866m +2.2%
========== ======
Translation FX +1.7%
========== ======
FY19 net revenue GBP7,998m +3.9%
========== ======
Tobacco profit growth offset by higher NGP investment
-- Adjusted operating profit down 0.5% at actual rates and 2.4% at constant currency
-- Tobacco adjusted operating profit up 1.8% at constant currency and adjusted margins up 60bps
-- NGP profitability affected by lower NGP IP royalty income;
higher investment levels; provisions for slow-moving inventory and
supply chain termination costs
-- Reported operating profit down 8.7% due to a goodwill
impairment for Premium Cigar Division (GBP525m); provisions for
Russian excise tax liabilities (GBP139m), fair value adjustment of
acquisition consideration for Von Erl (GBP129m), partly offset by
reduced restructuring costs (GBP144m) and the prior year impact of
distributor administration (GBP110m)
-- Premium Cigar impairment will be partly offset on completion
by GBP300m-GBP400m of FX gains from reserves
ADJUSTED OPERATING PROFIT BRIDGE: -2.4% (CC); -0.5%
(Reported)
FY18 adjusted operating profit GBP3,766m
============= ======
Other gains -GBP70m
============= ======
Tobacco operating income +GBP145m
============= ======
NGP IP -GBP62m
============= ======
Net NGP investment & costs -GBP112m
============= ======
Distribution +GBP8m
============= ======
FY19 constant currency AOP GBP3,675m -2.4%
============= ======
Translation FX +GBP74m
============= ======
FY19 adjusted operating profit GBP3,749m -0.5%
============= ======
Adjusted earnings per share of 273.3p down 1.6% at constant
currency
-- Lower adjusted tax rate and interest costs benefited EPS by
5.2p with change in the mix of debt with more favourable rates
-- Reported EPS of 106.0p, down 26.2% due to lower reported
operating profit and losses in the fair value of derivatives
EPS BRIDGE: -1.6% (CC); +0.4% (Reported)
FY18 adjusted EPS 272.2p
================= ======
Operating profit -7.5p
================= ======
Interest & Tax +5.2p
================= ======
Minorities & JV -1.9p
================= ======
Share buyback -0.2p
================= ======
FY19 constant currency EPS 267.8p -1.6%
================= ======
Translation FX +5.5p
================= ======
FY19 adjusted EPS 273.3p +0.4%
================= ======
Group Results - Constant Currency Analysis
======================================================================================================================
Constant
GBP million Year ended Foreign Constant Year ended currency
(unless otherwise indicated) 30 September 2018 exchange currency movement 30 September 2019 Change change
============================ ================== ========= ================== ================== ====== =========
Tobacco & NGP Net Revenue
============================ ================== ========= ================== ================== ====== =========
Europe 3,523 (15) 128 3,636 +3.2% +3.6%
============================ ================== ========= ================== ================== ====== =========
Americas 2,248 128 96 2,472 +10.0% +4.3%
============================ ================== ========= ================== ================== ====== =========
Africa, Asia and Australasia 1,926 19 (55) 1,890 -1.9% -2.9%
============================ ================== ========= ================== ================== ====== =========
Total Group 7,697 132 169 7,998 +3.9% +2.2%
---------------------------- ------------------ --------- ------------------ ------------------ ------ ---------
Tobacco & NGP Adjusted
Operating Profit
============================ ================== ========= ================== ================== ====== =========
Europe 1,701 4 (6) 1,699 -0.1% -0.3%
============================ ================== ========= ================== ================== ====== =========
Americas 1,036 59 (27) 1,068 3.1% -2.6%
============================ ================== ========= ================== ================== ====== =========
Africa, Asia and Australasia 820 11 (67) 764 -6.8% -8.1%
============================ ================== ========= ================== ================== ====== =========
Total Group 3,557 74 (100) 3,531 -0.7% -2.8%
---------------------------- ------------------ --------- ------------------ ------------------ ------ ---------
Distribution
============================ ================== ========= ================== ================== ====== =========
Distribution fees 989 (1) 27 1,015 +2.6% +2.7%
============================ ================== ========= ================== ================== ====== =========
Adjusted operating profit 212 (1) 21 232 +9.4% +9.9%
---------------------------- ------------------ --------- ------------------ ------------------ ------ ---------
Group Adjusted Results
============================ ================== ========= ================== ================== ====== =========
Adjusted operating profit 3,766 73 (91) 3,749 -0.5% -2.4%
============================ ================== ========= ================== ================== ====== =========
Adjusted net finance costs (487) (8) 46 (450) -7.8% -9.4%
============================ ================== ========= ================== ================== ====== =========
Adjusted EPS (pence) 272.2 5.5 (4.4) 273.3 +0.4% -1.6%
============================ ================== ========= ================== ================== ====== =========
2018 revenue restated following adoption of IFRS 15.
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.
We have committed to change our financial disclosure with a view
to further simplifying the adjusted performance measures. Details
of these plans are set out later in this statement.
Group Earnings Performance
Adjusted Reported
----------------------------------------- ------------ ------------
GBP million unless otherwise indicated 2019 2018 2019 2018
----------------------------------------- ----- ----- ----- -----
Operating profit
Tobacco & NGP 3,531 3,557 2,074 2,282
Distribution 232 212 137 128
Eliminations (14) (3) (14) (3)
----------------------------------------- ----- ----- ----- -----
Group operating profit 3,749 3,766 2,197 2,407
Net finance costs (450) (487) (562) (626)
Share of profit of investments accounted
for using the equity method 55 42 55 42
----------------------------------------- ----- ----- ----- -----
Profit before tax 3,354 3,321 1,690 1,823
Tax (642) (648) (609) (396)
Profit for the year 2,712 2,673 1,081 1,427
----------------------------------------- ----- ----- ----- -----
Earnings per ordinary share (pence) 273.3 272.2 106.0 143.6
----------------------------------------- ----- ----- ----- -----
Reconciliation of Adjusted Performance Measures
Earnings per
Operating profit Net finance costs share (pence)
------------------------------------- ------------------ ------------------- ----------------
GBP million unless otherwise
indicated 2019 2018 2019 2018 2019 2018
------------------------------------- -------- -------- --------- -------- ------- -------
Reported 2,197 2,407 (562) (626) 106.0 143.6
Acquisition and disposal costs 22 - - - 2.3 -
Amortisation & impairment of
acquired intangibles 1,118 1,053 - - 116.4 90.0
Excise tax provision 139 - - - 13.0 -
Administration of UK distributor - 110 - - - 9.3
Fair value adjustment of acquisition
consideration 129 - - - 13.5 -
Fair value and exchange movements
on derivative financial instruments - - 107 126 8.0 10.9
Post-employment benefits net
financing costs - - 5 13 0.1 0.8
Restructuring costs 144 196 - - 11.4 14.9
Tax on unrecognised losses - - - - - (3.0)
Deferred tax impact of US tax
reforms - - - - 6.4 8.0
Items above attributable to
non-controlling interests - - - - (3.8) (2.3)
------------------------------------- -------- -------- --------- -------- ------- -------
Adjusted 3,749 3,766 (450) (487) 273.3 272.2
------------------------------------- -------- -------- --------- -------- ------- -------
Performance Overview
Our tobacco business produced a resilient performance in the USA
and Europe, offsetting difficult environments in our Africa, Asia
and Australasia (AAA) division. We continue to prioritise Asset
Brand performance in our priority markets, which has delivered
further growth in tobacco net revenue and adjusted operating
profit.
Our vapour brand blu has now been launched in 16 markets,
establishing leading positions in some of the key European
territories. We also successfully launched our first heated tobacco
product Pulze in Japan and made good progress in expanding
availability of our oral nicotine offerings.
Increasing competition and regulatory uncertainty over vapour in
the USA and a slowdown in Europe in the second half impacted on our
overall Next Generation Products (NGP) delivery. We decided to step
up investment to build blu brand awareness and address an increased
level of consumer promotion in certain markets, which delivered
improved share towards the end of the year but did not translate
into the increased sales we had expected.
We diversified our NGP portfolio with an investment in Auxly
Cannabis Group Inc. which will accelerate the delivery of Auxly's
business plan and the launch of derivative products after
regulatory change to the Canadian cannabis market in October
2019.
Active Capital Discipline
Our focus on cost and capital discipline saw adjusted operating
cash conversion at 95 per cent. In July we began a share buyback
programme that will purchase GBP200 million shares by the end of
the 2019 calendar year, of which GBP108 million had been completed
in the financial year.
We continued to progress divestments of assets that are not
central to our growth plans and announced that our premium cigar
business would be sold as part of the programme.
2019 will be the eleventh year of 10 per cent dividend growth.
Our revised capital allocation and shareholder distributions policy
is effective from our 2020 financial year and will grow the
dividend progressively, considering the underlying performance of
the business to provide greater flexibility in our capital
allocation.
Resilient Tobacco and Additive NGP Growth
Tobacco volumes fell 4.4 per cent, broadly in line with market
dynamics and we delivered share growth in 6 of our ten priority
markets.
Tobacco price/mix was 5.5 per cent, with gains in several
priority markets driving tobacco net revenue growth of 1.1 per cent
at constant currency. NGP revenue grew 48 per cent at constant
currency, supporting Group net revenue up 2.2 per cent at constant
currency.
Group adjusted operating profit fell by 2.4 per cent at constant
currency. This decline was driven primarily by increased NGP
investment including higher advertising and promotion spend and
overheads as well as the impact of provisions for slow-moving NGP
inventory of GBP34 million and NGP supply chain contract
termination costs of GBP20 million. This more than offset growth in
tobacco adjusted operating profit. Other gains of GBP10 million
from Auxly were also lower (2018: GBP80 million). Further inventory
provisions may occur if regulatory changes, such as a potential US
flavour ban were to come into force that limit the ability to sell
product.
On a reported basis, Group operating profit declined 8.7 per
cent driven by a goodwill impairment and associated costs of
disposal of the Premium Cigar Division of GBP525 million, a
provision for Russian excise taxes of GBP139 million, a fair value
adjustment of acquisition consideration for Von Erl of GBP129
million, which has subsequently been settled in October, partly
offset by reduced restructuring costs of GBP144 million (2018:
GBP196 million) and the prior year impact from the administration
of Palmer & Harvey of GBP110 million. For further details see
notes 3, 8 and 11 to the financial statements.
The increase in the amortisation and impairment of acquired
intangibles is driven primarily by a goodwill impairment and
associated costs of disposal of GBP525 million relating to the
Premium Cigar Division, which is now treated as an asset held for
sale with net assets of GBP1.1 billion. It is expected that on
completion of the divestment cumulative foreign exchange gains of
approximately GBP300 million to GBP400 million that have been
recognised in reserves will be recycled to the income
statement.
The restructuring charge for the year of GBP144 million (2018:
GBP196 million) relates mainly to our cost optimisation programmes
announced in 2013 and 2016. The total restructuring cash flow in
the year ended 30 September 2019 was GBP146 million (2018: GBP241
million).
Adjusted net finance costs were lower at GBP450 million (2018:
GBP487 million). This is primarily due to our active management of
the debt portfolio to align with our strategic disposal
initiatives. Reported net finance costs were GBP562 million (2018:
GBP626 million), incorporating the impact of the net fair value and
exchange losses on financial instruments of GBP107 million (2018:
losses of GBP126 million) and post-employment benefits net
financing costs of GBP5 million (2018: GBP13 million).
Our all-in cost of debt decreased to 3.6 per cent (2018: 3.7 per
cent) as we continue to optimise our debt portfolio. Our interest
cover increased to 8.8 times (2018: 8.2 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 19.1 per cent (2018: 19.5
per cent) and the effective reported tax rate is 36.1 per cent
(2018: 21.7 per cent). The slight reduction in the effective
adjusted tax rate was due to a more favourable profit mix. The
adjusted tax rate is lower than the reported rate due to a number
of adjusting items having no or limited associated tax, with a
larger quantum of such items in the current year causing the
increase in the reported tax rate compared with 2018.
We expect our effective adjusted tax rate for the year ended 30
September 2020 to be around 21 per cent. The increase in rate is
due to legislative changes in several jurisdictions and the expiry
of certain tax agreements.
The effective tax rate is sensitive to the geographic mix of
profits, reflecting a combination of higher rates in certain
markets such as the USA 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 273.3 pence (2018: 272.2
pence), down 1.6 per cent at constant currency (up 0.4 per cent at
actual rates), reflecting continued operating profit growth from
tobacco, more than offset by increased investment in our NGP
business, the impact of NGP inventory provisions of GBP34 million
and NGP supply chain contract termination costs of GBP20 million,
following the slowdown in sales growth in the second half and lower
non-operating income compared to 2018.
Reported earnings per share was 106.0 pence (2018: 143.6 pence)
down 26.2 per cent, mainly impacted by reported operating profit.
The weakening of sterling versus the US dollar positively impacted
our revenue and earnings by around 2 per cent.
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 around 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
realised cost savings of GBP55 million in 2019, all arising from
the second programme. This brings the cumulative cost savings from
both programmes to GBP545 million (GBP305 million from the first
and GBP240 million from the second).
Cash restructuring costs in the year from the first programme
were GBP24 million (2018: GBP43 million) and GBP108 million (2018:
GBP173 million) for the second, bringing the cumulative net cash
cost of the two programmes to GBP958 million (GBP545 million for
the first and GBP413 million for the second).
Capital Allocation
Capital discipline is a key objective, with commercial analysis
and hurdle rates underpinning returns. However, it is clear from
these results that we did not deliver the expected returns from our
significant step-up in NGP investment. As a result, we are now
focusing investment more tightly around the brand and market
combinations that will build a sustainable, profitable NGP
business. We are also implementing a more dynamic investment model
for NGP with clear finance guardrails that allows us to actively
manage investment levels to support returns.
Potential acquisitions are judged on strict financial and
commercial criteria including the ability to enhance the Group's
return on invested capital (ROIC) over time. We may also make
measured investments in growth adjacencies, such as cannabis, to
support longer term growth and return opportunities,
notwithstanding they may have lower return characteristics in the
short term.
We typically seek an overall internal rate of return in excess
of 13 per cent across the investments we make in order to support
our investment choices and underpin returns for shareholders. Our
ROIC measure is slightly ahead of last year at 14.4 per cent (2018:
14.2 per cent) despite our increased investments.
Cash Flow and Net Debt
The conversion of adjusted operating profit to operating cash
flow remained strong at 95 per cent (2018: 97 per cent). Movements
in working capital were broadly flat compared to the prior year,
supported by a c.GBP200 million working capital benefit (+5 per
cent at constant currency) from a duty legislation change in
Australia, which saw higher stocks more than offset by higher duty
payable, a position that will unwind in 2020. This benefit was
partly offset by higher working capital as a consequence of the
step-up in NGP, the timing of tobacco stock builds across the Group
and increasing debtors as global tobacco prices and duty rates
increase. Capital expenditure increased as we stepped up investment
in our NGP capabilities. Restructuring cash costs decreased due to
the first cost optimisation programme ending in 2018.
Reported net debt increased by GBP0.1 billion to GBP12.0 billion
and adjusted net debt decreased by GBP0.1 billion at actual rates,
driven by a GBP0.2 billion movement in foreign exchange rates and
the fair value of interest rate derivatives. The denomination of
our closing adjusted net debt was split approximately 74 per cent
euro and 26 per cent US dollar. As at 30 September 2019, the Group
had committed financing in place of around GBP16.9 billion, which
comprised 20 per cent bank facilities and 80 per cent raised from
capital markets. Following the capital markets issuance during the
year, approximately GBP780 million bilateral revolving credit
facilities were no longer required and subsequently cancelled.
Dividend Growth
The Group has paid two interim dividends totalling 62.56 pence
per share in June 2019 and September 2019, in line with our
quarterly dividend payment policy to give shareholders a more
regular cash return.
The Board approved a further interim dividend of 72.00 pence per
share and will propose a final dividend of 72.01 pence per share,
bringing the total dividend for the year to 206.57 pence per share.
The third interim dividend will be paid on 31 December 2019 with an
ex-dividend date of 22 November 2019. Subject to AGM approval, the
proposed final dividend will be paid on 31 March 2020, with an
ex-dividend date of 21 February 2020.
Brexit
The Group has looked into potential Brexit impacts under a
number of different scenarios: soft, hard and no deal. The key
risks that have been identified include 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 treaties. In the event of a no deal Brexit, we estimate there
could be additional costs of around GBP100 million relating to the
restructuring of the Group for tax purposes.
New Segments and Accounting Standards
On 1 October 2018 we re-organised the tobacco and NGP business
to manage our footprint based on geographic proximity changing from
the previous approach to grouping markets based on their growth and
returns profiles.
Our financial reporting was split into four areas: Europe,
Americas and Africa, Asia & Australasia plus Distribution.
Similarly, our tobacco business was re-named Tobacco & NGP.
We also adopted two new accounting standards, IFRS 9 "Financial
Instruments" and IFRS 15 "Revenue from Contracts with Customers" on
the same date. Implementation of IFRS 15 has resulted in changes to
the treatment of customer discounts in revenue and to Master
Settlement Agreement (MSA) payments, which were previously netted
off against revenue. MSA payments are now taken to other cost of
sales. On 1 October 2019 we will adopt the new accounting standard
IFRS 16 "Leases". The impacts of adopting these standards are
disclosed in Note 1 of the Accounting Policies.
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.
Although we remain comfortable that our adjusted performance
measures remain appropriate for the current year, we have decided
to refine our approach by focusing more tightly on the performance
drivers of our core activities of the manufacture, sales and
marketing of tobacco and NGP. The changes will be implemented in
2020 to ensure the 2019 results are reported in line with previous
external guidance. The key changes will be to exclude one-off gains
from asset disposals and other non-recurring activities that do not
relate directly to the core activities. In 2019, these gains
related to our investment in Auxly and amounted to GBP10 million.
We will continue to treat restructuring costs as an adjusting item
through to the conclusion of the second cost optimisation programme
in 2020. Thereafter we will review treatment in the light of any
further restructuring requirement.
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. In reviewing the
Group's committed funding and liquidity positions, the Board
considered various sensitivity analyses when assessing the forecast
funding and headroom requirements of the Group in the context of
the maturity profile of the Group's funding arrangements. The Group
plans its financing in a structured and proactive manner and
remains confident that sources of financing will be available when
required. Based on its 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.
Should the Group's planned disposal of its premium cigar
division not materialise during the next financial year, the Group
would look to finance its medium-term working capital and
investment requirements through new debt issuances in accordance
with its usual practice of managing its medium and long-term
financing requirements.
Oliver Tant
Chief Financial Officer
SUMMARY OF KEY FOOTPRINT FINANCIALS & METRICS
Full Year Result Change
================== ===================
FOOTPRINT Constant
2019 2018 Actual Currency
============================= ========= ======= ======== =========
Volume
====================== ===== ========= ======= ======== =========
bn
Europe SE 135.0 141.3 -4.4%
====================== ===== ========= ======= ======== =========
bn
Americas SE 21.7 22.1 -2.0%
====================== ===== ========= ======= ======== =========
Africa, Asia and bn
Australasia SE 87.5 92.1 -5.0%
====================== ===== ========= ======= ======== =========
bn
Total Group SE 244.2 255.5 -4.4%
====================== ===== ========= ======= ======== =========
NGP Net Revenue
====================== ===== ========= ======= ======== =========
Europe GBPm 131 32 >100% >100%
====================== ===== ========= ======= ======== =========
Americas GBPm 111 151 -26.5% -30.5%
====================== ===== ========= ======= ======== =========
Africa, Asia and
Australasia GBPm 43 4 >100% >100%
====================== ===== ========= ======= ======== =========
Total Group GBPm 285 187 +52.3% +48.0%
====================== ===== ========= ======= ======== =========
Tobacco Net Revenue
====================== ===== ========= ======= ======== =========
Europe GBPm 3,505 3,491 +0.4% +0.8%
====================== ===== ========= ======= ======== =========
Americas GBPm 2,361 2,097 +12.6% +6.8%
====================== ===== ========= ======= ======== =========
Africa, Asia and
Australasia GBPm 1,847 1,922 -3.9% -4.8%
====================== ===== ========= ======= ======== =========
Total Group GBPm 7,713 7,510 +2.7% +1.1%
====================== ===== ========= ======= ======== =========
Tobacco Net Revenue
per '000 SE
====================== ===== ========= ======= ======== =========
Europe GBP 25.96 24.71 +5.0% +5.5%
====================== ===== ========= ======= ======== =========
Americas GBP 108.90 94.80 +14.9% +8.9%
====================== ===== ========= ======= ======== =========
Africa, Asia and
Australasia GBP 21.11 20.87 +1.2% +0.2%
====================== ===== ========= ======= ======== =========
Total Group GBP 31.58 29.39 +7.5% +5.7%
====================== ===== ========= ======= ======== =========
Tobacco Price/Mix
====================== ===== ========= ======= ======== =========
Europe % +4.8% +5.2%
====================== ===== ========= ======= ======== =========
Americas % +14.6% +8.8%
====================== ===== ========= ======= ======== =========
Africa, Asia and
Australasia % +1.1% +0.2%
====================== ===== ========= ======= ======== =========
Total Group % +7.1% +5.5%
====================== ===== ========= ======= ======== =========
Adjusted Tobacco & NGP Operating
Profit
======================================== ======= ======== =========
Europe GBPm 1,699 1,701 -0.1% -0.4%
====================== ===== ========= ======= ======== =========
Americas GBPm 1,068 1,036 +3.1% -2.6%
====================== ===== ========= ======= ======== =========
Africa, Asia and
Australasia GBPm 764 820 -6.8% -8.2%
====================== ===== ========= ======= ======== =========
Total Group GBPm 3,531 3,557 -0.7% -2.8%
====================== ===== ========= ======= ======== =========
Distribution
====================== ===== ========= ======= ======== =========
Distribution Fees GBPm 1,015 989 +2.6% +2.7%
====================== ===== ========= ======= ======== =========
Operating Profit GBPm 232 212 +9.4% +9.9%
====================== ===== ========= ======= ======== =========
Operating Margin % 22.9 21.4 +150 bps
====================== ===== ========= ======= ======== =========
SUMMARY OF KEY PORTFOLIO FINANCIALS & METRICS
Full Year Result Change
================== ===================
PORTFOLIO Constant
2019 2018 Actual Currency
============================== ======== ======== ======== =========
Asset Brand Net Revenue
=======================================================================
Europe GBPm 2,717 2,552 +6.5% +6.5%
======================== ==== ======== ======== ======== =========
Americas GBPm 1,339 1,222 +9.5% +3.9%
======================== ==== ======== ======== ======== =========
Africa, Asia and
Australasia GBPm 1,214 1,203 +0.9% +0.5%
======================== ==== ======== ======== ======== =========
Total Group GBPm 5,269 4,977 +5.9% +4.4%
======================== ==== ======== ======== ======== =========
Asset Brands as % of Net Revenue
======================================== ======== ======== =========
Europe % 74.7 72.4 +230 bps
======================== ==== ======== ======== ======== =========
Americas % 54.1 54.4 -30 bps
======================== ==== ======== ======== ======== =========
Africa, Asia and
Australasia % 64.2 62.5 +170 bps
======================== ==== ======== ======== ======== =========
Total Group % 65.9 64.7 +120 bps
======================== ==== ======== ======== ======== =========
Portfolio Brands Net Revenue
=======================================================================
Total Group GBPm 2,729 2,720 +0.3% -1.9%
======================== ==== ======== ======== ======== =========
% of Total Net Revenue % 34.1 35.3 -120 bps -140 bps
======================== ==== ======== ======== ======== =========
FINANCIAL STATEMENTS
The figures and financial information for year ended 30
September 2019 do not constitute the statutory financial statements
for that year. Those financial statements have not yet been
delivered to the Registrar, nor have the Auditors yet reported on
them. The financial statements have been prepared in accordance
with our accounting policies published in our financial statements
available on our website www.imperialbrandsplc.com.
Consolidated Income Statement
for the year ended 30 September Restated
GBP million unless otherwise indicated Notes 2019 2018
===================================================================== ===== ======== ========
Revenue 3 31,594 30,066
===================================================================== ===== ========
Duty and similar items (15,394) (14,700)
Other cost of sales (9,960) (9,356)
===================================================================== ===== ======== ========
Cost of sales (25,354) (24,056)
===================================================================== ===== ======== ========
Gross profit 6,240 6,010
Distribution, advertising and selling costs (2,295) (2,001)
===================================================================== ===== ======== ========
Acquisition and disposal costs 11 (22) -
Amortisation and impairment of acquired intangibles 11 (1,118) (1,053)
Excise tax provision 6 (139) -
Administration of UK distributor - (110)
Fair value adjustment of acquisition consideration (129) -
Restructuring costs 4 (144) (196)
Other expenses (196) (243)
===================================================================== ===== ======== ========
Administrative and other expenses (1,748) (1,602)
===================================================================== ===== ======== ========
Operating profit 2,197 2,407
===================================================================== ===== ========
Investment income 890 631
Finance costs (1,452) (1,257)
===================================================================== ===== ======== ========
Net finance costs 5 (562) (626)
Share of profit of investments accounted for using the equity method 55 42
===================================================================== ===== ======== ========
Profit before tax 1,690 1,823
Tax 6 (609) (396)
===================================================================== ===== ======== ========
Profit for the year 1,081 1,427
===================================================================== ===== ======== ========
Attributable to:
Owners of the parent 1,010 1,368
Non-controlling interests 71 59
===================================================================== ===== ======== ========
Earnings per ordinary share (pence)
- Basic 8 106.0 143.6
- Diluted 8 105.8 143.2
===================================================================== ===== ======== ========
See Note 1 Accounting Policies for details of the restatement in
respect of the year ending 30 September 2018.
Consolidated Statement of Comprehensive Income
for the year ended 30 September
GBP million 2019 2018
============================================================================================ ====== ===== =====
Profit for the year 1,081 1,427
Other comprehensive income
============================================================================================ ====== =====
Exchange movements 270 176
============================================================================================ ====== ===== =====
Items that may be reclassified to profit and loss 270 176
============================================================================================ ====== =====
Net actuarial (losses)/gains on retirement benefits (248) 196
Deferred tax relating to net actuarial (losses)/gains on retirement benefits 52 (54)
============================================================================================ ====== ===== =====
Items that will not be reclassified to profit and loss (196) 142
============================================================================================ ====== ===== =====
Other comprehensive income for the year, net of tax 74 318
============================================================================================ ====== ===== =====
Total comprehensive income for the year 1,155 1,745
============================================================================================ ====== ===== =====
Attributable to:
Owners of the parent 1,086 1,683
Non-controlling interests 69 62
============================================================================================ ====== ===== =====
Total comprehensive income for the year 1,155 1,745
============================================================================================ ====== ===== -----
Reconciliation from Operating Profit to Adjusted Operating Profit
GBP million Notes 2019 2018
============================================================================================ ====== ===== =====
Operating profit 2,197 2,407
Acquisition and disposal costs 11 22 -
Amortisation and impairment of acquired intangibles 11 1,118 1,053
Excise tax provision 6 139 -
Administration of UK distributor - 110
Fair value adjustment of acquisition consideration 129 -
Restructuring costs 4 144 196
============================================================================================ ====== ===== =====
Adjusted operating profit 3,749 3,766
-------------------------------------------------------------------------------------------- ------ ----- -----
Following greater definition around the enforceability of the Von Erl contract and greater
confidence in the sales forecast for myblu products an agreement has been made with the previous
owners to settle at EUR140m for the remaining equity. As a result an incremental provision
of GBP129 million has been recognised during the year.
A provision has been raised in respect of excise tax. See note 6 for further details.
On 28 November 2017 Palmer & Harvey (P&H) announced that they had entered administration.
As a result of P&H entering administration, a provision was made of GBP160 million in the
period ending 31 March 2018 in respect of monies considered irrecoverable. This was revised
to GBP110 million at 30 September 2018 following receipt of monies in respect of a loan issued
to P&H.
Amortisation and impairment of acquired intangibles, acquisition and disposal costs and restructuring
costs are discussed in further detail in the above referenced notes.
Reconciliation from Net Finance Costs to Adjusted Net Finance Costs
GBP million Notes 2019 2018
============================================================================================ ====== ===== =====
Net finance costs (562) (626)
Net fair value and exchange losses on financial instruments 7 107 126
Post-employment benefits net financing cost 7 5 13
============================================================================================ ====== ===== =====
Adjusted net finance costs (450) (487)
============================================================================================ ====== ===== =====
Consolidated Balance Sheet
at 30 September
GBP million Notes 2019 2018
================================================== ===== ======== ========
Non-current assets
Intangible assets 18,596 19,117
Property, plant and equipment 1,979 1,891
Investments accounted for using the equity method 81 845
Retirement benefit assets 595 598
Trade and other receivables 119 82
Derivative financial instruments 10 677 462
Deferred tax assets 595 600
================================================== ===== ======== ========
22,642 23,595
================================================== ===== ======== ========
Current assets
Inventories 4,082 3,692
Trade and other receivables 2,993 2,585
Current tax assets 303 164
Cash and cash equivalents 9 2,286 775
Derivative financial instruments 10 137 37
Current assets held for disposal 11 1,287 -
================================================== ===== ======== ========
11,088 7,253
================================================== ===== ======== ========
Total assets 33,730 30,848
================================================== ===== ======== ========
Current liabilities
Borrowings 9 (1,937) (2,397)
Derivative financial instruments 10 (28) (105)
Trade and other payables (9,536) (8,270)
Current tax liabilities (421) (286)
Provisions 4 (284) (179)
Current liabilities held for disposal 11 (176) -
================================================== ===== ======== ========
(12,382) (11,237)
================================================== ===== ======== ========
Non-current liabilities
Borrowings 9 (11,697) (9,598)
Derivative financial instruments 10 (1,408) (1,073)
Trade and other payables (7) (47)
Deferred tax liabilities (1,156) (1,113)
Retirement benefit liabilities (1,249) (1,061)
Provisions 4 (247) (274)
================================================== ===== ======== ========
(15,764) (13,166)
================================================== ===== ======== ========
Total liabilities (28,146) (24,403)
================================================== ===== ======== ========
Net assets 5,584 6,445
================================================== ===== ======== ========
Equity
Share capital 103 103
Share premium and capital redemption 5,837 5,837
Retained earnings (2,255) (1,150)
Exchange translation reserve 1,252 980
================================================== ===== ======== ========
Equity attributable to owners of the parent 4,937 5,770
Non-controlling interests 647 675
================================================== ===== ======== ========
Total equity 5,584 6,445
================================================== ===== ======== ========
Consolidated Statement of Changes in Equity
for the year ended 30 September
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 30 September 2018 103 5,837 (1,150) 980 5,770 675 6,445
============================== ======== ============ ========= ============ ============== ============ =======
IFRS 9 Transition - - (5) - (5) - (5)
============================== ======== ============ ========= ============ ============== ============ =======
At 1 October 2018 103 5,837 (1,155) 980 5,765 675 6,440
------------------------------
Profit for the year - - 1,010 - 1,010 71 1,081
============================== ======== ============ ========= ============ ============== ============ =======
Exchange movements on overseas
net assets - - - 232 232 (2) 230
Exchange movements on net
investment hedges - - - (228) (228) - (228)
Exchange movements on
quasi-equity loans - - - 268 268 - 268
Net actuarial losses on
retirement benefits - - (248) - (248) - (248)
Deferred tax relating to net
actuarial losses on
retirement benefits - - 52 - 52 - 52
============================== ======== ============ ========= ============ ============== ============ =======
Other comprehensive income - - (196) 272 76 (2) 74
============================== ======== ============ ========= ============ ============== ============ =======
Total comprehensive income - - 814 272 1,086 69 1,155
Transactions with owners
Cash from employees on
maturity/exercise of share
schemes - - 1 - 1 - 1
Costs of employees' services
compensated by share schemes - - 23 - 23 - 23
Current tax on share-based
payments - - 1 - 1 - 1
Cancellation of share capital - - (108) - (108) - (108)
Change in non-controlling
interests - - 13 - 13 (13) -
Dividends paid - - (1,844) - (1,844) (84) (1,928)
============================== ======== ============ ========= ============ ============== ============ =======
At 30 September 2019 103 5,837 (2,255) 1,252 4,937 647 5,584
============================== ======== ============ ========= ============ ============== ============ =======
At 1 October 2017 103 5,837 (1,084) 828 5,684 542 6,226
------------------------------
Profit for the year - - 1,368 - 1,368 59 1,427
============================== ======== ============ ========= ============ ============== ============ =======
Exchange movements on overseas
net assets - - - 326 326 3 329
Exchange movements on net
investment hedges - - - 115 115 - 115
Exchange movements on
quasi-equity loans - - - (268) (268) - (268)
Net actuarial gains on
retirement benefits - - 196 - 196 - 196
Deferred tax relating to net
actuarial gains on retirement
benefits - - (54) - (54) - (54)
============================== ======== ============ ========= ============ ============== ============ =======
Other comprehensive income - - 142 173 315 3 318
============================== ======== ============ ========= ============ ============== ============ =======
Total comprehensive income 1,510 173 1,683 62 1,745
Transactions with owners
Cash from employees on
maturity/exercise of share
schemes - - 2 - 2 - 2
Costs of employees' services
compensated by share schemes - - 25 - 25 - 25
Current tax on share-based
payments - - 1 - 1 - 1
Cancellation of share capital - - (41) - (41) - (41)
Change in non-controlling
interests - - (121) (21) (142) 142 -
Proceeds, net of fees, from
disposal of Logista shares - - 234 - 234 - 234
Dividends paid - - (1,676) - (1,676) (71) (1,747)
============================== ======== ============ ========= ============ ============== ============ =======
At 30 September 2018 103 5,837 (1,150) 980 5,770 675 6,445
============================== ======== ============ ========= ============ ============== ============ =======
Consolidated Cash Flow Statement
for the year ended 30 September
GBP million 2019 2018
========================================================================== ======= =======
Cash flows from operating activities
Operating profit 2,197 2,407
Dividends received from investments accounted for under the equity method 54 25
Depreciation, amortisation and impairment 1,316 1,266
Profit on disposal of non-current assets (19) (76)
Post-employment benefits (72) (60)
Costs of employees' services compensated by share schemes 23 26
Provision in respect of loan to third parties - 4
Fair value adjustment of acquisition consideration 129 -
Movement in provisions 80 (87)
==========================================================================
Operating cash flows before movement in working capital 3,708 3,505
========================================================================== ======= =======
Increase in inventories (560) (112)
Increase in trade and other receivables (267) (35)
Increase in trade and other payables 877 136
==========================================================================
Movement in working capital 50 (11)
Tax paid (522) (407)
========================================================================== ======= =======
Net cash generated from operating activities 3,236 3,087
========================================================================== ======= =======
Cash flows from investing activities
Interest received 15 10
Loan to joint ventures 4 -
Loan to third parties (75) 28
Proceeds from sale of non-current assets 57 134
Purchase of non-current assets (409) (327)
Purchase of businesses (net of cash acquired) - (8)
Purchase of brands and operations (17) (67)
==========================================================================
Net cash used in investing activities (425) (230)
========================================================================== ======= =======
Cash flows from financing activities
Interest paid (488) (501)
Cash from employees on maturity/exercise of share schemes 1 2
Increase in borrowings 3,699 1,619
Repayment of borrowings (2,330) (2,261)
Cash flows relating to derivative financial instruments (117) 41
Repurchase of shares (108) (41)
Proceeds from sale of shares in subsidiary to non-controlling interests - 234
Dividends paid to non-controlling interests (84) (71)
Dividends paid to owners of the parent (1,844) (1,676)
==========================================================================
Net cash used in financing activities (1,271) (2,654)
========================================================================== ======= =======
Net increase in cash and cash equivalents 1,540 203
Cash and cash equivalents at the start of year 775 624
Effect of foreign exchange rates on cash and cash equivalents (15) (52)
Transferred to held for disposal (14) -
========================================================================== ======= =======
Cash and cash equivalents at the end of year 2,286 775
========================================================================== ======= =======
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
New Accounting Standards and Interpretations
The Group has adopted IFRS 9 'Financial Instruments' and IFRS 15
'Revenue from Contracts with Customers' with effect from 1 October
2018. The detail of adoption is provided below. There have been no
other new standards or amendments which became effective for the
current reporting period that have had a material effect on the
Group.
On 1 October 2018 the Group adopted IFRS 9 'Financial
Instruments', with no revision of prior periods as permitted by the
standard. IFRS 9 has replaced IAS 39 'Financial Instruments:
Recognition and Measurement' and includes revised guidance on:
Classification and measurement: Financial assets are now
classified as either being accounted for as amortised cost, fair
value through other comprehensive income, or fair value through
profit or loss. There are no changes to the classification or
accounting for financial liabilities. Other than trade receivables
and derivative financial instruments, the Group does not currently
hold any significant financial assets.
The Group has revised the classification of certain trade
receivables which are subject to a non-recourse factoring
arrangement. This arrangement covers various markets and customer
accounts. Prior to the adoption of IFRS 9 all trade receivables
were recognised at amortised cost. Where trade receivables may be
sold in the future under a factoring arrangement that involves
realising cash flows through the sale of assets in order to manage
customer credit risk, they are now classified as fair value through
other comprehensive income (OCI). Under this classification,
valuation changes are recognised in the OCI. The level of trade
receivables that were sold to a financial institution under a
non-recourse factoring arrangement totaled GBP724 million at 1
October 2018 and GBP827 million at 30 September 2019. The total
value of trade receivables reclassified as fair value through OCI
was GBP37 million at 1 October 2018 and GBP23 million at 30
September 2019. On adoption of the standard there was no valuation
difference and therefore the OCI has not been impacted. Trade
receivables managed under a hold to collect business model continue
to be measured at amortised cost.
The Group does not undertake any supply chain financing
activity.
Impairment of financial assets: Impairment provisions are
calculated using a forward looking expected credit loss approach
for financial assets, rather than the incurred loss approach
applicable under IAS 39. The expected credit loss model requires
the recognition of a provision which reflects future impairment
risk. Provision levels are calculated on the residual credit risk
after consideration of any credit protection which is used by the
Group.
Under the revised Trade Receivables provisioning policy,
expected future credit loss provisions are now recognised in
addition to doubtful debt provisions on receivables which have
already become overdue. With the exception of the Palmer and Harvey
debt write-off in 2018, the Group has historically experienced low
levels of credit default. On adoption of the standard the Group has
recognised an additional expected credit loss provision of GBP5
million, with the costs being recognised directly in equity within
the retained earnings reserve at 1 October 2018.
Hedge Accounting: IFRS 9 aligns the accounting approach with an
entity's risk management strategies and risk management objectives.
The Group has adopted the hedge accounting aspects of IFRS 9
prospectively from 1 October 2018. The Group continues to apply net
investment hedging as part of its risk management approach. All
hedging relationships that existed at 30 September 2018 continue to
apply under IFRS 9. The adoption of this area of IFRS 9 has not had
any significant impact on the financial statements.
On 1 October 2018 the Group adopted IFRS 15 'Revenue from
Contracts with Customers', the Group has restated prior periods as
permitted by the standard. IFRS 15 has introduced an amended
framework for revenue recognition and has replaced the prior
guidance in IAS 18 'Revenue'. The accounting policies have been
revised and applied to both the current and prior period. The
standard provides revised guidance on revenue accounting, matching
income recognition to the delivery of performance obligations in
contractual arrangements for the provision of goods or services. It
also provides different guidance on the measurement of revenue
contracts involving discounts, rebates and payments to
customers.
Following the adoption of the standard, revenue continues to be
recognised in line with the completion of performance obligations
constituting the delivery of goods or services to customers. The
performance obligation is met when the customer has accepted
products and the collectability of the related receivables is
reasonably assured. We have reclassified certain distribution,
advertising and selling costs arising from payments to customers,
from overheads / other costs of sales to discounts from revenue.
These costs are judged as not distinct from the related sales to
the customer. This has reduced revenue, but has had no net impact
on gross profit. This has reduced the level of revenue recorded in
the year ended 30 September 2018 by GBP458 million.
Following a review of the presentation of duties, levies and
similar payments against the guidance given by IFRS 15, levy
payments made in the United States under the Master Settlement
Agreement (MSA) are now being recognised in other cost of sales.
This has increased the level of net revenue recorded in the year
ended 30 September 2018 by GBP425 million. The Group has taken the
option to restate the comparative figures on adoption of the
standard. The adoption of the standard has not had any other impact
on the Group's results.
IFRS 16 'Leases' will be effective for the period beginning 1
October 2019. The new standard requires operating leases to be
accounted for through the recognition of a 'right of use asset' and
a corresponding lease liability. Interest-bearing borrowings and
non-current assets will increase on implementation of this
standard. Operating lease costs will no longer be classified within
the income statement based on amounts paid, but via a 'right of use
asset' depreciation charge recognised within operating profit and a
lease interest expense within finance costs. The Group will take
advantage of the practical expedients under the standard by not
applying IFRS16 to short terms leases (Leases of less than 12
months maximum term) and to leases of low-value assets.
As permitted by the standard, the Group will apply the modified
retrospective approach with no restatement of prior year. On
adoption of IFRS 16 the expected impact is approximately GBP333
million increase in non-current assets and GBP333 million increase
in liabilities.
IFRIC 23 'Uncertainty over income tax treatments' will be
effective, subject to EU endorsement, for the period beginning 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 is not expected to have a material effect on the
Group's net assets or results.
Prior period restatements required following accounting standard
adoption
Year ended 30 September 2018
===================================
Previously IFRS 15
GBP million unless otherwise indicated reported adjustment Restated
============================================== === =========== =========== =========
Revenue 30,524 (458) 30,066
Duty and similar items (15,125) 425 (14,700)
===================================================== =========== =========== =========
Net revenue 15,399 (33) 15,366
===================================================== =========== =========== =========
Europe 3,812 (289) 3,523
Americas 1,823 425 2,248
Africa, Asia & Australasia 2,095 (169) 1,926
Distribution 8,383 - 8,383
Eliminations (714) - (714)
===================================================== =========== =========== =========
Other cost of sales (8,949) (407) (9,356)
===================================================== =========== =========== =========
Gross profit 6,450 (440) 6,010
Distribution, advertising and selling costs (2,441) 440 (2,001)
Administrative and other expenses (1,602) - (1,602)
============================================== === =========== =========== =========
Operating profit 2,407 - 2,407
----------------------------------------------------- ----------- ----------- ---------
2. Critical Accounting Estimates and Judgements
The Group makes estimates and judgements associated with
accounting entries which will be affected by future events.
Estimates and judgements are continually evaluated based on
historical experience, and other factors, including current
information that helps form a forward-looking view of expected
future outcomes.
Estimates involve the determination of the quantum of accounting
balances to be recognised. Judgements typically involve decisions
such as whether to recognise an asset or liability. The actual
amounts recognised in the future may deviate from these estimates
and judgements. The estimates and judgements that have a
significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year
are discussed in the financial statements for the year ended 30
September 2019, which will be available on our website
www.imperialbrandsplc.com in due course.
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.
On 1 October 2018 we reorganised the Tobacco & NGP business
to manage our footprint based on geographic proximity changing from
the previous approach of grouping markets based on their growth and
returns profiles. The managerial and internal reporting structures
of the business have been revised to reflect the new structure.
Following the introduction of these changes we have revised our
segmental reporting as required under IFRS 8.
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 Chief Executive, 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 Chief
Executive is adjusted operating profit. Segment balance sheet
information is not provided to the Board or the Chief
Executive.
Our reportable 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 reportable 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).
Tobacco & NGP Restated
GBP million unless otherwise indicated 2019 2018
======================================== ======= ===========
Revenue 23,418 22,427
Net revenue 7,998 7,697
Operating profit 2,074 2,282
Adjusted operating profit 3,531 3,557
Adjusted operating margin % 44.1 46.2
======================================== ======= ===========
Distribution Restated
GBP million unless otherwise indicated 2019 2018
======================================== ======= ===========
Revenue 8,969 8,383
Distribution fees 1,015 989
Operating profit 137 128
Adjusted operating profit 232 212
Adjusted operating margin % 22.9 21.4
======================================== ======= ===========
Revenue Restated
==================== =================================
2019 2018
==================== =================================
Total External Total
GBP million revenue revenue Revenue External revenue
============================ ========= ========= ========= ======================
Tobacco & NGP
Europe 14,152 13,359 14,183 13,439
Americas 3,358 3,358 3,123 3,123
Africa, Asia & Australasia 5,908 5,908 5,121 5,121
========= =========
Total Tobacco & NGP 23,418 22,625 22,427 21,683
Distribution 8,969 8,969 8,383 8,383
Eliminations (793) - (744) -
============================ ========= ========= ========= ======================
Total Group 31,594 31,594 30,066 30,066
---------------------------- --------- --------- --------- ----------------------
Reconciliation from Tobacco & NGP revenue to Tobacco &
NGP net revenue
Restated
GBP million 2019 2018
============================= ========= =========
Revenue 23,418 22,427
Duty and similar items (15,394) (14,700)
Sale of peripheral products (26) (30)
============================= ========= =========
Net revenue 7,998 7,697
============================= ========= =========
Tobacco & NGP net revenue
Restated
GBP million 2019 2018
============================ ====== =========
Europe 3,636 3,523
Americas 2,472 2,248
Africa, Asia & Australasia 1,890 1,926
============================ ====== =========
Total Tobacco & NGP 7,998 7,697
============================ ====== =========
Adjusted operating profit and reconciliation to profit before tax
Restated
GBP million 2019 2018
====================================================================== ======== =========
Tobacco & NGP
Europe 1,699 1,701
Americas 1,068 1,036
Africa, Asia & Australasia 764 820
======== =========
Total Tobacco 3,531 3,557
Distribution 232 212
Eliminations (14) (3)
====================================================================== ======== =========
Adjusted operating profit 3,749 3,766
Acquisition and disposal costs (22) -
Amortisation of acquired intangibles - Tobacco & NGP (1,033) (970)
Amortisation of acquired intangibles - Distribution (85) (83)
Excise tax provision (139)
Administration of UK distributor - (110)
Fair value adjustment of acquisition consideration (129) -
Restructuring costs (144) (196)
====================================================================== ======== =========
Operating profit 2,197 2,407
Net finance costs (562) (626)
Share of profit of investments accounted for using the equity method 55 42
====================================================================== ======== =========
Profit before tax 1,690 1,823
====================================================================== ======== =========
See Statement of Other Comprehensive Income for details of fair
value adjustment of acquisition consideration and administration of
UK distributor. See note 6 for details of excise tax provision,
note 11 for amortisation and impairment, and acquisition and
disposal costs, and note 4 for details of restructuring costs.
4. Restructuring Costs and Provisions
Restructuring costs
GBP million 2019 2018
===================== ===== =====
Employment related 96 170
Asset impairments 29 3
Other charges 19 23
===================== ===== =====
144 196
===================== ===== =====
Restructuring costs analysed by workstream:
GBP million 2019 2018
=============================== ===== =====
Cost optimisation programme 144 181
Acquisition integration costs - 15
=============================== ===== =====
144 196
=============================== ===== =====
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 year of GBP144 million (2018: GBP181 million)
relates to our two cost optimisation programmes announced in 2013
and 2016.
In 2019 the cash cost of Phase I of the programme was GBP24
million (2018: GBP43 million) and GBP108 million (2018: GBP173
million) for Phase II, bringing the cumulative net cash cost of the
programme to GBP958 million (Phase I GBP545 million, Phase II
GBP413 million).
Cost optimisation programme Phase I is expected to have a cash
implementation cost in the region of GBP600 million in respect of
the savings of GBP300 million per annum that the programme has
generated by 2018 (the last year of the programme), and 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.
The total restructuring cash spend in the year was GBP146
million (2018: GBP241 million).
Restructuring costs are included within administrative and other
expenses in the consolidated income statement.
Provisions
2019
==============================
GBP million Restructuring Other Total
==================================================================== ============== ====== ======
At 1 October 2018 297 156 453
Additional provisions charged to the consolidated income statement 46 191 237
Amounts used (95) (37) (132)
Unused amounts reversed (4) (22) (26)
Transferred to held for disposal - (4) (4)
Exchange movements 1 2 3
==================================================================== ============== ====== ======
At 30 September 2019 245 286 531
==================================================================== ============== ====== ======
Analysed as:
GBP million 2019 2018
============== ===== =====
Current 284 179
Non-current 247 274
============== ===== =====
531 453
============== ===== =====
Restructuring provisions relate mainly to our cost optimisation
programme (as noted above), and other provisions principally
relates to excise tax of GBP139 million with the remainder
comprised of holiday pay, local tax and Logista provisions. See
note 6 for further details on the excise tax provision. It is
expected that the majority of provisions will be utilised within a
period of 10 years.
5. Net Finance Costs and Reconciliation to Adjusted Net Finance
Costs
GBP million 2019 2018
============================================================= ====== ======
Reported net finance costs 562 626
============================================================= ======
Fair value gains on derivative financial instruments 665 492
Fair value losses on derivative financial instruments (839) (567)
Exchange gains/(losses) on financing activities 67 (51)
============================================================= ====== ======
Net fair value and exchange losses on financial instruments (107) (126)
============================================================= ======
Interest income on net defined benefit assets 142 129
Interest cost on net defined benefit liabilities (147) (142)
Post-employment benefits net financing cost (5) (13)
============================================================= ====== ======
Adjusted net finance costs 450 487
============================================================= ====== ======
Comprising
Interest on bank deposits (16) (10)
Interest on bank loans and other loans 466 497
============================================================= ====== ======
Adjusted net finance costs 450 487
============================================================= ====== ======
6. Tax and Reconciliation to Adjusted Tax Charge
Analysis of charge in the year
GBP million 2019 2018
======================================================== ===== =====
Current tax
UK Corporation tax 101 55
Overseas tax 420 367
======================================================== ===== =====
Total current tax 521 422
Deferred tax movement 88 (26)
======================================================== ===== =====
Total tax charged to the consolidated income statement 609 396
======================================================== ===== =====
Reconciliation from reported tax to adjusted tax
The table below shows the taxation impact of the adjustments
made to reported profit before tax in order to arrive at the
adjusted measure of earnings disclosed in note 8.
GBP million 2019 2018
======================================================================= ===== =====
Reported tax charge 609 396
Deferred tax on amortisation of acquired intangibles 9 196
Excise tax provision 15 -
Administration of UK distributor - 21
Tax on net fair value and exchange movements on financial instruments 31 22
Tax on post-employment benefits net financing cost 4 5
Tax on restructuring costs 35 55
Deferred tax impact of US tax reforms - 29
Tax on unrecognised losses (61) (76)
======================================================================= ===== =====
Adjusted tax charge 642 648
======================================================================= ===== =====
Factors affecting the tax charge for the year
The tax on the Group's profit before tax differs from the
theoretical amount that would arise using the average of the
enacted UK corporation tax rates for the year of 19.0 per cent
(2018: 19.0 per cent) as follows:
GBP million 2018 2018
========================================================================== ====== ======
Profit before tax 1,690 1,823
========================================================================== ====== ======
Tax at the UK Corporation tax rate 321 346
Tax effects of:
Differences in effective tax rates on overseas earnings (66) (44)
Movement in provision for uncertain tax positions 16 10
Remeasurement of deferred tax balances 87 51
Remeasurement of deferred tax balances arising from changes in tax rates - (68)
Deferred tax on unremitted earnings 15 26
Permanent differences 243 66
Adjustments in respect of prior years (7) 9
========================================================================== ====== ======
Total tax charged to the consolidated income statement 609 396
========================================================================== ====== ======
Differences in effective tax rates on overseas earnings
represents the impact of worldwide profits being taxed at rates
different from 19.0 per cent. The effective tax rate benefits from
internal financing arrangements between group subsidiaries in
different countries which are subject to differing tax rates and
legislation and the application of double taxation treaties.
Remeasurement of deferred tax balances includes GBP35 million
(2018: GBP35 million) in relation to the de-recognition of deferred
tax assets for tax losses in the Group's Dutch business. The
Group's assessment of the recoverability of deferred tax assets is
based on a review of underlying performance of subsidiaries,
changes in tax legislation and the interpretation thereof and
changes in the group structure.
The remeasurement of deferred tax balances arising from changes
in tax rates for the year is nil (2018: GBP68 million). In respect
of the previous year this included GBP29 million in relation to the
remeasurement of deferred tax assets and liabilities on US
liabilities and assets following the enactment of tax rate
reductions and GBP39 million in relation to the remeasurement of
deferred tax liabilities on French assets following the enactment
of future tax rate reductions which were effective for the Group
from 1 October 2019.
During the year the Group has provided for deferred tax on
unremitted earnings of GBP15 million (2018: GBP26 million). The tax
will arise on the distribution of profits through the group and on
planned group simplification.
Permanent differences include GBP4 million (2018: GBP5 million)
in respect of non-deductible exchange losses and GBP21 million
(2018: GBP26 million) in respect of non-deductible interest
expense, GBP32 million (2018: nil) in respect of non-deductible
contingent consideration and GBP147 million (2018: nil) in respect
of an impairment of goodwill and equity investments in the Premium
Cigar Division.
Movement on current tax account
GBP million 2019 2018
============================================== ====== ======
At 1 October (122) (123)
Charged to the consolidated income statement (521) (422)
Credited to equity 1 1
Cash paid 522 407
Exchange movements 3 3
Other movements (1) 12
============================================== ====== ======
At 30 September (118) (122)
============================================== ====== ======
The cash tax paid in the year is GBP1 million higher than the
current tax charge (2018: GBP15 million lower). This arises as a
result of timing differences between the accrual of income taxes
and the actual payment of cash and the movement in the provision
for uncertain tax positions.
Uncertain tax positions
As an international business the Group is exposed to uncertain
tax positions and changes in legislation in the jurisdictions in
which it operates. The Group's uncertain tax positions principally
include cross border transfer pricing, interpretation of new or
complex tax legislation and tax arising on the valuation of
assets.
Provisions arising from uncertain tax positions taken in the
calculation of tax assets and liabilities are included within
current tax liabilities. At 30 September 2019 the total value of
these provisions, including foreign exchange movements, was GBP204
million (2018: GBP202 million). It is possible that amounts paid
will be different from the amounts provided.
Management have assessed the Group's provision for uncertain tax
positions and have concluded that apart from the French matter
referred to below, the provisions in place are not material
individually or in aggregate, and that a reasonably possible change
in the next financial year would not have a material impact to the
results of the Group.
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. The Group awaits the response of the French tax
authorities. At this time it is appropriate to maintain the GBP42
million (2018: 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, is making 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 remains between nil and GBP300 million depending on the
basis of calculation. This does not include interest which would be
chargeable on any recovery sought. 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.
In 2017 new legislation was introduced in Russia, prospectively
limiting the amount of production that could take place prior to
new excise tax increases without being subject to a higher excise
tax rate. On 28 September 2018, the Russian tax authorities issued
a preliminary tax audit report for the calendar years 2014-2016
seeking to assess retrospectively additional excise and VAT with
associated interest and penalties of approximately GBP132 million
in respect of pre-production prior to new excise duty increases. In
the event that the Russian tax authorities were to apply the same
ruling to 2017, the Group estimates further excise and VAT with
associated interest and penalties of GBP74 million could be
assessed. The Group filed objections to the preliminary report
which were discussed with the Russian tax authorities in November
2018. Subsequent to these discussions, additional audit measures
were commenced by the tax authorities. A final report was received
on 26 August 2019, which assessed GBP119 million for the audit
period, and an implied liability for 2017 estimated at GBP74
million. We appealed against the final report and are currently in
discussion with the tax authorities on our appeal.
The Group has complied with the Russian legislation since it
became effective.
Based on the current state of discussions with the Russian tax
authorities a provision of GBP139 million has been made. Tax relief
associated with this provision is estimated at GBP15 million
resulting in a net of tax provision of GBP124 million.
7. Dividends
Distributions to ordinary equity holders
GBP million 2019 2018 2017
========================================================================================= ====== ====== ======
Paid interim of 62.56 pence per share (2018: 122.33p, 2017: 111.21p)
- Paid June 2017 - - 247
- Paid September 2017 - - 247
- Paid December 2017 - - 567
- Paid June 2018 - 271 -
- Paid September 2018 - 271 -
- Paid December 2018 - 624 -
- Paid June 2019 298 - -
- Paid September 2019 298 - -
========================================================================================= ====== ====== ======
Interim dividend paid 596 1,166 1,061
========================================================================================= ====== ====== ======
Proposed interim of 72.00 pence per share (2018: nil, 2017: nil)
- To be paid December 2019 683 - -
========================================================================================= ====== ====== ======
Interim dividend proposed 683 - -
========================================================================================= ====== ====== ======
Proposed final of 72.01 pence per share (2018: 65.46p, 2017: 59.51p)
- Paid March 2018 - - 567
- Paid March 2019 - 624 -
- To be paid March 2020 683 - -
========================================================================================= ====== ====== ======
Final dividend 683 624 567
========================================================================================= ====== ====== ======
Total ordinary share dividends of 206.57 pence per share (2018: 187.79p, 2017: 170.72p) 1,962 1,790 1,628
========================================================================================= ====== ====== ======
The third interim dividend for the year ended 30 September 2019
of 72.00 pence per share amounts to a proposed dividend of GBP683
million, which will be paid in December 2019.
The proposed final dividend for the year ended 30 September 2019
of 72.01 pence per share amounts to a proposed dividend payment of
GBP683 million in March 2020 based on the number of shares ranking
for dividend at 30 September 2019, and is subject to shareholder
approval. If approved, the total dividend paid in respect of 2019
will be GBP1,962 million (2018: GBP1,790 million). The dividend
paid during 2019 is GBP1,844 million (2018: GBP1,676 million).
8. Earnings per Share
Basic earnings per share is based on the profit for the year
attributable to the owners of the parent and the weighted average
number of ordinary shares in issue during the year 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.
GBP million 2019 2018
============================================================================ ====== ======
Earnings: basic and diluted - attributable to owners of the Parent Company 1,010 1,368
============================================================================ ====== ======
Millions of shares
============================================================================ ====== ======
Weighted average number of shares:
Shares for basic earnings per share 953.0 952.4
Potentially dilutive share options 1.9 3.0
============================================================================ ====== ======
Shares for diluted earnings per share 954.9 955.4
============================================================================ ====== ======
Pence
============================================================================ ====== ======
Basic earnings per share 106.0 143.6
Diluted earnings per share 105.8 143.2
============================================================================ ====== ======
Reconciliation from reported to adjusted earnings and earnings per share
2019 2018
====================================== ========================================
GBP million unless otherwise
indicated Earnings per share (pence) Earnings Earnings per share (pence) Earnings
==================================== =========================== ========= =========================== ===========
Reported basic 106.0 1,010 143.6 1,368
Acquisition and disposal costs 2.3 22 - -
Amortisation and impairment of
acquired intangibles 116.4 1,109 90.0 857
Excise tax provision 13.0 124
Administration of UK distributor - - 9.3 89
Fair value adjustment of
acquisition consideration 13.5 129 - -
Net fair value and exchange
movements on financial instruments 8.0 76 10.9 104
Post-employment benefits net
financing cost 0.1 1 0.8 8
Restructuring costs 11.4 109 14.9 141
Deferred tax impact of US tax
reforms - - (3.0) (29)
Tax on unrecognised losses 6.4 61 8.0 76
Adjustments attributable to
non-controlling interests (3.8) (36) (2.3) (22)
==================================== =========================== ========= =========================== ===========
Adjusted 273.3 2,605 272.2 2,592
==================================== =========================== ========= =========================== ===========
Adjusted diluted 272.8 2,605 271.3 2,592
==================================== =========================== ========= =========================== ===========
9. Net Debt
The movements in cash and cash equivalents, borrowings, and
derivative financial instruments in the year were as follows:
Derivative
Cash and cash Current Non-current financial
GBP million equivalents borrowings borrowings instruments Total
================================================ ============== ============ ============ ============= =========
At 1 October 2018 775 (2,397) (9,598) (679) (11,899)
Reallocation of current borrowings from
non-current borrowings - (1,656) 1,656 - -
Cash flow 1,540 2,159 (3,528) 117 288
Accretion of interest - 20 (26) 39 33
Change in fair values - - - (174) (174)
Transferred to held for disposal (14) - - - (14)
Exchange movements (15) (63) (201) 75 (204)
================================================ ============== ============ ============ ============= =========
As at 30 September 2019 2,286 (1,937) (11,697) (622) (11,970)
================================================ ============== ============ ============ ============= =========
Adjusted net debt
Management monitors the Group's borrowing levels using adjusted
net debt which excludes interest accruals and the fair value of
derivative financial instruments providing commercial cash flow
hedges.
GBP million 2019 2018
======================================================= ========= =========
Reported net debt (11,970) (11,899)
Accrued interest 162 197
Fair value of derivatives providing commercial hedges 432 228
======================================================= ========= =========
Adjusted net debt (11,376) (11,474)
======================================================= ========= =========
10. Derivative Financial Instruments
2019 2018
====================================== ======================================
GBP million Assets Liabilities Net Fair Value Assets Liabilities Net Fair Value
====================================== ======= ============ =============== ======= ============ ===============
Current derivative financial
instruments
Interest rate swaps 24 (26) (2) 28 (24) 4
Foreign exchange contracts 104 (2) 102 6 (7) 1
Cross-currency swaps 9 - 9 3 (127) (124)
====================================== ======= ============ =============== ======= ============ ===============
Total current derivatives 137 (28) 109 37 (158) (121)
Collateral - - - - 53 53
====================================== ======= ============ =============== ======= ============ ===============
137 (28) 109 37 (105) (68)
====================================== ======= ============ =============== ======= ============ ===============
Non-current derivative financial
instruments
Interest rate swaps 645 (1,079) (434) 462 (700) (238)
Cross-currency swaps 32 (367) (335) - (402) (402)
====================================== ======= ============ =============== ======= ============ ===============
Total non-current derivatives 677 (1,446) (769) 462 (1,102) (640)
Collateral - 38 38 - 29 29
====================================== ======= ============ =============== ======= ============ ===============
677 (1,408) (731) 462 (1,073) (611)
====================================== ======= ============ =============== ======= ============ ===============
Total carrying value of derivative
financial instruments 814 (1,436) (622) 499 (1,178) (679)
====================================== ======= ============ =============== ======= ============ ===============
Analysed as:
Interest rate swaps 669 (1,105) (436) 490 (724) (234)
Foreign exchange contracts 104 (2) 102 6 (7) (1)
Cross-currency swaps 41 (367) (326) 3 (529) (526)
Collateral - 38 38 - 82 82
====================================== ======= ============ =============== ======= ============ ===============
Total carrying value of derivative
financial instruments 814 (1,436) (622) 499 (1,178) (679)
====================================== ======= ============ =============== ======= ============ ===============
The Groups' derivative financial instruments are held at fair
value. Fair values are determined based on observable market data
(Level 2 classification hierarchy) and are consistent with those
applied during the year ended 30 September 2018.
11. 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 has
assessed the IFRS 5 criteria for presentation of the business as
held for disposal. Given the Group's stated commitment to complete
the disposal; the significant work performed to separate the
business; and significant progress made on delivery of a new,
alternative ownership, the Group has reconfirmed that the IFRS 5
criteria have been met and therefore it is highly probable that a
disposal transaction will be completed. The Group has therefore
presented the net assets of the Premium Cigar Division business as
current assets and liabilities held for disposal.
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 30 September 2019 to be in the
region of GBP300 million - GBP400 million.
Impairment Testing
The Premium Cigar Division has been presented as held for
disposal at 30 September 2019 and as a consequence of this an
impairment test has been undertaken to assess the carrying value of
the associated assets on a fair value less cost of sale basis. This
test involves 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.
The negotiations for the sale of the business are ongoing and
although a range of bids have been received, there is uncertainty
as to the level of disposal proceeds that will actually be
achieved. A range of the current bids has been assessed in order to
determine an expected level for the disposal proceeds. We do not
expect that the actual 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.
The test indicated an impairment and associated cost of disposal
charge of GBP525 million. This has been primarily adjusted against
the carrying value of goodwill and equity investments held by the
Premium Cigar Division. The impairment amount is sensitive to the
level of the estimated disposal proceeds, any reduction in the
expected amount of these proceeds would result in a higher
impairment and vice-versa. The goodwill and equity investment
values included in the current assets held for disposal have been
adjusted accordingly.
The assets and liabilities classified as held for disposal are
as follows:
GBP million 2019
================================================== =====
Non-current assets
Intangible assets 138
Property, plant and equipment 26
Investments accounted for using the equity method 574
Trade and other receivables 52
Deferred tax assets 11
==================================================== =====
801
================================================== =====
Current assets
Inventories 228
Trade and other receivables 244
Cash and cash equivalents 14
====================================================
486
================================================== =====
Total assets 1,287
==================================================== =====
Current liabilities
Trade and other payables 172
Provisions 4
====================================================
176
================================================== =====
Total liabilities 176
==================================================== =====
Net assets 1,111
==================================================== =====
12. Contingent Liabilities
Legal Proceedings
The Group is currently involved in a number of legal cases in
which claimants are seeking damages for alleged smoking and health
related effects. In the opinion of the Group's lawyers, the Group
has meritorious defenses to these actions, all of which are being
vigorously contested. Although it is not possible to predict the
outcome of the pending litigation, the Directors believe that the
pending actions will not have a material adverse effect upon the
results of the operations, cash flow or financial condition of the
Group. Consequently, the Group has not provided for any amounts in
respect of these cases in the financial statements.
Competition Authority Investigations
The Group is currently co-operating with relevant national
competition authorities in relation to a number of ongoing
competition law investigations, none of which have resulted in
findings of infringement.
13. Post Balance Sheet Events
Share Buyback Programme
Since 30 September 2019 the Group has repurchased and
immediately cancelled 2,734,638 shares at a total cost of GBP50
million, increasing the Capital Redemption reserve. At 5 November
2019, 1,023,061,108 ordinary shares of 10 pence each were
authorised, issued and fully paid up.
14. Brexit
The Group has looked into the potential Brexit impacts under a
number of different scenarios: soft, hard and no deal. The key
risks that have been identified include 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 treaties. In the event of a no deal Brexit, we estimate there
could be additional costs of around GBP100 million relating to the
restructuring of the Group for tax purposes.
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
FR CKPDQABDKQDK
(END) Dow Jones Newswires
November 05, 2019 02:01 ET (07:01 GMT)
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