TIDMIMB
RNS Number : 5505F
Imperial Brands PLC
17 November 2020
IMPERIAL BRANDS PLC
Legal Entity Identifier (LEI) No. 549300DFVPOB67JL3A42
FULL YEAR RESULTS STATEMENT
17 NOVEMBER 2020
Taking Action To Strengthen Performance
Report for the year ended 30 September 2020
Business Highlights Financial Performance
* Business overcame the challenges posed by COVID-19; * Group net revenue up +0.8%
securing the safety and wellbeing of employees and
responding to changes in consumer behaviour
* Tobacco volume decline of -2.1% reflecting better
market size and share trends in several markets
* Tobacco volumes strong but sub-optimal product and
market mix result in weak gross profit contribution
* Tobacco net revenue +1.8% but weaker mix impacting
gross profit contribution
* A more disciplined approach in NGP reduced H2 losses
after a disappointing H1
* Moderation of NGP net revenue decline; H1: -43%, H2:
-9% with FY down 27%
* Strengthened Executive Team with key external
leadership appointments providing fresh skills and
perspectives to complement existing experience * Adjusted EPS down -5.6% reflecting reduced tobacco
profit with COVID-19 and regulatory costs; and losses
in NGP
* Comprehensive strategic review underway with a
capital markets update scheduled for 27 January
* Reported EPS up 49.4% at 158.3p reflecting prior year
impairment charge for Premium Cigar sale
* Completed sale of Premium Cigars business on 29
October 2020; proceeds used to reduce debt
* Strong cash conversion 127%; 107% excluding timing
benefit on duty payments
* Annual dividend of 137.7 pence per share reflecting
rebased payment announced in May
Financial Summary
Year ended 30 September Reported(1) Adjusted(1)
2020
=========================== ========================================
Constant
2020 2019 Change 2020 2019 Actual currency(2)
=========================== ======== ======== ======= ======== ======== ====== ============
Revenue/Net
revenue GBPm 32,562 31,594 +3.1% 7,985 7,991 -0.1% +0.8%
=================== ====== ======== ======== ======= ======== ======== ====== ============
Operating profit GBPm 2,731 2,197 +24.3% 3,527 3,739 -5.7% -4.8%
=================== ====== ======== ======== ======= ======== ======== ====== ============
Earnings per
share pence 158.3 106.0 +49.4% 254.4 272.3 -6.6% -5.6%
=================== ====== ======== ======== ======= ======== ======== ====== ============
Net debt GBPm (11,141) (11,970) (10,299) (11,376)
=================== ====== ======== ======== ======= ======== ======== ====== ============
Dividend per
share pence 137.7 206.6 -33.3% 137.7 206.6 -33.3% -33.3%
=================== ====== ======== ======== ======= ======== ======== ====== ============
See page 3 for basis of preparation and page 17 for the
reconciliation between reported and adjusted measures.
(1) 2019 revenue, operating profit and earnings per share have
been restated for change in Auxly treatment
(2) Constant currency removes effect of exchange rate movements
on the translation of the results of our overseas operations.
Stefan Bomhard Chief Executive
"Although this has been a difficult year, the resilience of our
tobacco business and the measures we have taken to improve our NGP
operations reinforce my confidence in the future potential of the
business. With a more disciplined focus and better execution we can
realise significant value for our stakeholders over time.
"My first months have been focused on engaging with employees,
consumers and customers and leading the strategic review of the
business. What I have seen to date confirms my view of the Group's
solid foundations. I believe there is scope to enhance returns from
our tobacco business and opportunities to strengthen our NGP
delivery over time. I firmly believe we can make a meaningful
contribution to harm reduction within a more disciplined,
returns-focused framework and we have already taken steps to stem
the NGP losses.
"I look forward to providing further details of our renewed
focus on value creation at a capital markets event in January and I
would like to conclude by recognising the tremendous efforts of our
employees in these unprecedented times. The commitment of our
people across the business and their willingness to embrace change
has been inspiring to see; my thanks to them all."
Results Overview
-- Group net revenue growth supported by reduced tobacco volume
declines, share gains and stronger H2 price mix
-- Tobacco volumes were stronger principally in lower value
markets and products impacting overall profit delivery
-- Disappointing NGP performance although with significant reduction losses in H2
-- Lower adjusted earnings driven by NGP write-downs and reduced
tobacco profitability impacted by adverse mix, a cautious
assessment of the ongoing impact from COVID-19 and increased
regulation costs
-- Strong underlying cash performance with some additional
benefit from timing of excise payments
-- Net debt reduction reinforced by post balance sheet completion of Premium Cigar disposal
Volume and net revenue
-- Tobacco volumes down 2.1% with better market size trends in
several markets; share growth of +50bps
-- Market share gains driven primarily by lower value markets;
we grew share in 3 of our top 5 markets
-- Net revenue up +0.8% driven by tobacco growth of +1.8%
offsetting a decline in NGP net revenue of 27.0%
-- Tobacco price mix +3.9% reflecting gross pricing of 6.7%
(e.g. US, Australia, Germany, UK) offset by adverse product mix of
1.9% (e.g. UK, Australia, Germany) and adverse market mix of 0.9%
(e.g. Australia, Middle East, German private label)
-- Improved second half price mix (H1: +1.4%, H2: +6.1%) driven
by sustained pricing benefit and improved mix
-- Moderation of NGP revenue decline (H1: -43%, H2: -9%) with sequential growth in H2 versus H1
Profit
-- Adjusted operating profit down 4.8% with Europe down 5.9%; Americas down 3.4%; AAA down 8.7%
-- Reported operating profit of GBP2,731 million increased 24.3%
driven primarily by the prior year goodwill impairment charge for
the Premium Cigar Division
-- Tobacco profitability lower by 3.1% and NGP down 34.4%
-- Tobacco performance impacted by weak additional gross profit
contribution, additional COVID-19 related costs (GBP90m) including
stock and debtor provisions and higher manufacturing costs; higher
regulatory compliance costs (GBP50m) for EUTPD II implementation
and payment of fines (which are being appealed) imposed by the
competition authorities on the tobacco industry in the Netherlands
and Ukraine and increased overheads (GBP26m)
-- NGP adjusted operating loss of GBP323m (H1: GBP224m) includes
GBP124m write-downs in inventory and IP with an additional GBP29m
write-down in H2 (H1: GBP95m; H2: GBP29m)
-- Reduction in H2 NGP operating loss reflects more disciplined,
returns focused approach to investment and improved trading margins
in key markets
-- Adjusted EPS down 5.6% at constant currency reflecting
decline in operating profit, lower income from joint ventures and
an increase in the tax rate, partially offset by lower finance
costs and the benefit of last year's share buyback
-- Reported EPS up 49.4% at 158.3p reflecting prior year
goodwill impairment charge for Premium Cigar sale
Cash and debt
-- Strong underlying cash conversion of 107% driven by strong
working capital improvements and lower capex; with an additional
temporary benefit (+20%) from the timing of duty payments in
Logista and UK bringing overall cash conversion to 127%
-- Adjusted net debt reduced by GBP1.1bn reflecting strong cash
flows and GBP1bn of working capital inflow, of which GBP0.7bn was
related to temporary working capital benefits on duty and VAT
payments; adjusted net debt to EBITDA was 2.7x (2019: 2.9x)
-- Reported net debt declined by GBP0.8bn after including
GBP0.3bn of lease liabilities due to the adoption of IFRS16,
excluding the impact from IFRS16, reported net debt reduced by
GBP1.1bn in line with adjusted net debt
Capital allocation and dividend
-- Annual dividend of 137.7 pence per share (FY19: 206.6 pence)
-- Dividend rebased by one third, following May announcement of
revised dividend policy, which prioritises reduction of net debt to
lower end of 2-2.5x target range
-- Progressive dividend policy, taking into account underlying business performance
-- Policy recognises the Group's continued strong cash
generation and the importance of growing dividends for
shareholders, while strengthening the business for the future
Outlook
Following a difficult 2020, we expect to deliver a stronger
financial performance in 2021. Despite the ongoing uncertainties
from the global pandemic, we currently expect to deliver low to
mid-single digit growth in organic adjusted operating profit at
constant currency, excluding the impact of the Premium Cigar
sale.
Tobacco pricing is expected to remain strong although with some
ongoing mix headwinds and with lower stock profits. The temporary
COVID-19 benefit to duty paid market size is expected to unwind
with sector volumes reverting to more normal decline rates. The
duty free channel is likely to remain depressed for much of the
year. Operating costs will continue to reflect somewhat higher
regulatory costs and further manufacturing inefficiencies caused by
COVID-19 related disruption to our working practices.
In NGP we have taken disciplined action to reduce operating
losses in the second half of the year. We expect this moderated
level of loss to continue in 2021.
A higher tax rate will have a c. 2% impact on earnings with
constant currency earnings per share expected to be slightly ahead
of the prior year.
Basis of Presentation
-- To aid understanding of our results, we use 'adjusted'
(non-GAAP) measures as we believe they provide a better comparison
of performance from one period to the next. Reconciliations between
adjusted and reported (GAAP) measures are also included in the
relevant notes. Further definitions of adjusted measures are
provided in Note 1 of these accounts. Change at constant currency
removes the effect of exchange rate movements on the translation of
the results of our overseas operations. References in this document
to percentage growth and increases or decreases in our adjusted
results are on a constant currency basis unless stated otherwise.
These are calculated by translating current year results at prior
year exchange rates.
-- 2019 revenue, operating profit and earnings per share have
been restated for change in Auxly treatment, which is now treated
as an adjusting item.
-- Stick Equivalent (SE) volumes reflect our combined cigarette,
fine cut tobacco, cigar and snus volumes.
-- Market share is presented as a 12-month average (MAT), unless
otherwise stated. Aggregate market share is a weighted average
across markets within our footprint.
-- Asset Brand volumes and net revenue for 2019 have been
restated to reflect the inclusion of fine cut tobacco brand,
Riverstone, and NGP brands, Pulze, iD and Zone X and the
reclassification of our premium cigar brands, Cohiba, Montecristo
and Romeo y Julietta and our cigarette brands, Bastos and Style as
Portfolio Brands.
-- 2019 volumes have been restated for some minor changes to
reflect transfer of Canadian and Latin American volumes from Europe
to the Americas division and French cigar volumes from Premium
Cigar Division in AAA to Europe
OTHER INFORMATION
Investor Contacts Media Contacts
Peter Durman +44 (0)7970 328 093 Alex Parsons +44 (0)7967 467 241
Matt Sharff +44 (0)7964 110 921 Simon Evans +44 (0)7967 467 684
James King +44 (0)7581 052 880
Analyst Presentation Webcast
Stefan Bomhard, Chief Executive, and Oliver Tant, Chief
Financial Officer will present the results at 09:00 (GMT) on 17
November 2020. It will be followed by a live question and answer
session. The presentation slides, script and recording will be
available on www.imperialbrandsplc.com from 9.00am (GMT).
You can join the webcast via
https://edge.media-server.com/mmc/p/x6n6pgce. Please copy and paste
the link into your browser.
Please either listen to the Q&A session via the webcast
link: https://edge.media-server.com/mmc/p/x6n6pgce or to ask a
question, please use the dial-in details below. Please dial-in at
least 10 minutes prior to the start time to provide sufficient time
to access the event. You will be asked to provide the conference ID
number below.
Conference ID No: 4299171
United Kingdom: 44 (0) 20 7192 8338 or toll free: 0800 279
6619
USA: +1 646 741 3167 or toll free: +1 877 870 9135
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
I was delighted to be appointed Chief Executive Officer on 1
July. My first few months in the business have reinforced my belief
that Imperial is a great consumer business and that over time, we
can drive a stronger and more consistent performance.
Results in recent times have clearly been disappointing, despite
the best efforts of employees. This has been another challenging
year, with performance again falling short of original
expectations, although there were some encouraging signs.
Consumer demand for tobacco has proved relatively resilient and
we grew net revenue as the business adapted well to a rapidly
changing environment. We also delivered tobacco market share gains
for the Group overall, although much of the improvement was in
lower value markets and products, leading to a weaker gross profit
contribution. Profit delivery has also been affected by some
additional COVID-related costs in manufacturing and as we increased
provisions following a cautious assessment of further risks.
Our NGP results have been delivered in line with our revised
expectations, with losses significantly reduced in the second half
through a sharper focus on investment returns and cost cutting.
Initial Priorities
I have focused on a number of priorities since joining Imperial.
First, I have ensured that we have continued the great work the
business has been doing to protect the health, safety and
well-being of our people during the coronavirus. Imperial has shown
resilience and the employees have done an exceptional job in
keeping the business going. Many of our people have worked from
home for prolonged periods of time and we've ensured they have
received all the support they need to create the right working
environment.
Most of our factories stayed open and operational, which is
another tremendous achievement, although the layout of the
facilities and shift patterns changed to enable us to adhere to
local government health and safety guidelines. Also, I'm pleased to
say that we didn't furlough any employees, implement any pay cuts
or make any redundancies as a result of COVID-19.
My second priority was to start to address the strategy and
performance issues. As I've said, despite best efforts, the
strategy and business model are clearly not delivering what our
stakeholders expect and we need to tackle this. I have started by
instilling greater discipline in the way the business operates,
stemming the losses in NGP and embedding a more rigorous approach
to tracking performance. The work we are doing on reviewing the
strategy and business model is progressing well and I expect to be
able to share the results in January 2021.
Stakeholder engagement was a priority, especially with our
people. In my first 100 days I hosted 300 internal meetings,
connecting with thousands of employees around the world. This has
enabled me to get authentic insights into the issues we need to
work together on to address.
I have listened to the views of consumers and customers, and
also spoken with some of our largest shareholders. Opportunities
for actual market visits have been limited due to COVID-19 but I
have managed to meet customers and consumers on the ground, which
again has helped build my knowledge and understanding of Imperial
and the industry.
Finally, I have expanded the Executive Committee with a number
of external appointments who are all also new to tobacco and NGP.
This is important because we need new skills and fresh thinking for
a changing industry. We have tremendous tobacco expertise in the
management team and we're now adding to that by bringing in
additional skills and capabilities, which is proving really
valuable in terms of shaping the new strategy.
Assessing the business
My assessment of Imperial is that it is a company with great
potential. The tobacco business is resilient and has some good
brands, so there is definitely the opportunity to deliver better
results over time. This will require addressing our share
performance in certain markets where we've suffered declines for a
number of years, although we have started to see some improvements
in recent months.
NGP has obviously underperformed and investment has not
delivered the expected returns. NGP has a role to play for Imperial
going forward in meeting consumer needs for reduced risk products.
I also want us to be able to make a meaningful contribution to harm
reduction, but we will take a much more prudent approach, built
around a tightly focused business model.
Although there is a lot we need to change, there are also areas
of real excellence in the business that we must make sure we
preserve. Our manufacturing and supply chain operations, for
example, are truly competitive within our industry, and we have
experienced relatively limited disruption across our factory
footprint during the coronavirus.
Our approach to customer engagement is also impressive. We have
strong retail partnerships, which is critical given the role
retailers can play in influencing consumer brand and product
choices.
Finally, there's our people. I have been truly excited to see
their energy, passion and overall willingness to embrace change. I
appreciate all their support so far and the honesty they have
shown. I feel confident that by working together we will deliver
stronger and more consistent results over time.
Environmental, social and governance responsibilities
The way we manage our ESG responsibilities is crucial. I believe
we have a compelling and credible sustainability strategy, with
clearly defined ESG priorities. This is important, given the
controversial nature of our products and the level of stakeholder
scrutiny we quite rightly receive.
We need to do better in NGP to be able to deliver against our
consumer health and harm reduction ambitions but if I look at the
progress we're making in other areas, there's much to be pleased
with.
On climate and energy, for instance, we have stretching
long-term goals, with our carbon reduction targets validated and
approved by the Science Based Targets initiative. We have also been
awarded an A rating by CDP for our commitment to addressing climate
change and supplier engagement.
One area that has required attention is transparency around the
way we measure performance. For some ESG issues, we have robust key
performance indicators (KPIs) that we publicly report against, for
others we have none. That will be changing this fiscal year. The
ESG Steering Committee has been working with the business to
identify and agree appropriate KPIs for all our main ESG issues.
That work is complete and once these additional KPIs have been
validated against the new strategy we will make them publicly
available.
Looking to the future
Imperial has many attractive qualities, including its people,
brands and market positions. These are the foundations of a
successful business and I believe that over time, we can leverage
these assets to drive profitable growth.
We are very focused on making the right strategic choices to
strengthen results and the work we are doing on reviewing our
strategy, business model and culture is progressing well.
It takes time to change a large organisation but I am excited
about the future and convinced that with a clearer focus and better
execution, we will deliver a new era of success that will create
long-term value for stakeholders.
OPERATING REVIEW
COVID-19 has had a significant impact on all our lives with the
temporary restrictions and lockdowns across many countries leading
to changes in consumer behaviour and in our operating
environments.
However, the business has been relatively well positioned to
navigate these challenges. Throughout, we have prioritised the
health and safety of our people and have always strictly adhered to
guidance from governments and public health authorities. It is a
credit to our manufacturing and supply chain colleagues that they
managed to keep the vast majority of our factories operating
throughout the crisis, ensuring that our customers and consumers
around the world were able to continue to enjoy their favourite
brands.
Lockdowns, the restrictions on travel and the benefit of fiscal
stimulus measures in several markets have resulted in some changes
in consumer behaviour. These have resulted in slightly better
market size trends for the Group overall as a result of several
factors.
-- It would appear smokers have chosen to allocate more of their
discretionary spend towards tobacco. More time spent at home has
resulted in consumers reducing expenditure in certain areas, such
as holidays or going out;
-- Fiscal stimulus measures in several markets have increased consumer discretionary spend;
-- Border and other restrictions have reduced the level of
illicit trade in certain markets such as the UK, resulting in
better volumes in the duty paid market;
-- Markets in areas such as Northern Europe have benefited from
consumers having to stay at home, leading to a temporary switch in
volumes from traditional holiday destinations in Southern Europe;
and
-- It would also appear COVID-19 has resulted in consumers going
to the stores less often with increases in bulk buying and greater
demand for big box formats.
These positive drivers have offset the negative consumption
impacts from COVID-19, which include:
-- The temporary closure of certain retail channels, such as
duty free and hospitality outlets; and
-- Travel restrictions which have led to significantly lower
demand in traditional holiday destinations, such as Spain and the
Canary Islands.
COVID-19-related restrictions in some of our manufacturing
facilities have disrupted production capacity and affected
operating efficiencies. We expect that changes in consumer
behaviour and our manufacturing operations will be temporary and
will reverse once COVID-19 restrictions are relaxed. However, given
the rising number of COVID-19 cases in many markets and the greater
uncertainty, we have increased provisions, mainly in respect of
stock and debtor positions, which has impacted profit delivery.
Performance review
Imperial Brands comprises of two distinct businesses: Tobacco
& NGP and Distribution. The Tobacco & NGP business is
responsible for the manufacture, marketing and sale of tobacco and
NGP products, which are managed primarily through three geographic
sales and marketing divisions: Europe, Americas and Africa, Asia
and Australasia. It is through these three divisions, we manage
performance and prioritise the allocation of resources and
investment.
Tobacco & NGP
Tobacco
We delivered +50bps of tobacco share growth but this was largely
in markets representing lower value to the Group both in terms of
net revenue and profit. As a result, the gross profit contribution
from the tobacco category did not grow in line with the growth in
net revenue. The top five priority markets by net revenue account
for 70% of the operating profit. Whilst we grew tobacco market
share in three of these top five markets the growth was principally
in brand families with lower net revenue per stick and accordingly
less profitable. We achieve optimum growth in profitability where
we are able to grow in the higher value markets and in those brands
with the higher price points.
JPS
JPS tobacco sales volumes declined as price segments have
compressed in many of its markets, squeezing its position as a
value brand. However, net brand contribution benefited from
increased pricing on fine cut tobacco variants in the UK and
Australia. Product innovation remains focused on creating new
formats to appeal to adult smokers.
West
We have grown share of West this year, with strong performances
across all its ranges. The king size core range performed
particularly well in the Middle East following the introduction of
plain packaging, aided by low tar and fresh seal variants. West's
make your own range has met consumer demand in Central Europe for
value, with volumes strengthened by the migration of Fairwind by
Players to West in Germany.
Winston
Winston's performance has benefited from a new marketing
campaign, centred on the product and lifestyles of its adult
consumers. The campaign's message focused around Winston's key
ingredients of "tobacco, water and attitude", supported by
specialised print media and brand events. This enabled Winston to
maintain share within the declining US premium segment.
Davidoff
The brand continues to expand its geographic presence with the
more progressive Davidoff Evolve and Reach ranges. The king size
variant, Evolve, has now been launched in a total of 22 markets,
doubling its volume. The new range has been particularly well
received by consumers in the Middle East. Davidoff Reach, the queen
size range, has been successful in Eastern Europe, with innovative
crushball flavour extensions helping to maintain growth. The
premium range has been affected by border closures in the duty free
channel as a result of COVID-19.
Parker & Simpson
Parker & Simpson has benefited from sales growth in
Australia and Poland, and improving margins in Russia. The brand
continues to focus on meeting consumer demand for a more modern
range of tobacco product, including sales of a crushball variant, a
new flavour launch in Russia and a super-slim product for central
Europe.
Next Generation Products (NGP)
During 2020, we pulled back significantly on our investment in
the NGP category as we sought to improve returns and reflect on how
to prioritise future investments in this segment. Towards the end
of 2019, it became clear our investments were significantly
underperforming against our plans and that severe corrective
measures were necessary. A combination of factors, including US
regulatory intervention in the vapour market, competitor behaviour,
uncertainty on the part of retailers and a lower than expected
take-up of our products by consumers all contributed to our lack of
success.
As a consequence, we have taken disciplined action to stabilise
performance by curtailing investment, which significantly reduced
the run-rate of operating losses in the second half. We have also
assessed the balance sheet implications and have taken write-offs
for slow-moving stock and against some intellectual property
assets. These, and the reduction in sales, have significantly
impacted this year's results.
Our focus has been on improving the performance, returns and
capabilities of our NGP activities, while maintaining a range of
options across the vapour, heated tobacco and modern oral
categories. There are a number of areas where we can improve future
performance. For example, by seeking to develop products that are
sufficiently differentiated and that are thoroughly tested and
qualified with consumers in our launch markets. We can also be more
disciplined in how we invest to scale the business over time. These
will be a key focus for the future.
Vapour
While the vapour category has been disrupted by regulation and
adverse news-flow, our performance has been below expectations. As
a result, we have reset investment levels and reduced costs, taking
a more disciplined approach in order to improve returns. Despite
our reduced investment in several markets, share of blu has held up
relatively well and we have renegotiated trade terms to benefit
margins.
Regulation and public perception of vaping in the US market has
continued to evolve, with the FDA having banned flavoured pods in
January and emerging health concerns with vaping products. This
reinforces our view that the industry needs a clear regulatory
framework that enforces high product standards and responsible
sales and marketing. To support this, we submitted our Premarket
Tobacco Product Application (PMTA) in the US, seeking authority to
continue marketing a range of blu vapour products with various
nicotine strengths and flavours.
Heated Tobacco
At the beginning of the year, we expanded distribution of our
Pulze heated tobacco product and iD heat sticks in Japan, through
two national key accounts. However, the roll-out has fallen short
of our expectations so we limited investment and paused further
expansion within Japan and to other geographies pending the outcome
of the strategic review. Our roll-out in Japan has provided useful
consumer feedback on the functionality of the Pulze device, the
robustness of the iD stick and preferences for levels of nicotine
and menthol in the products. We have also improved our
understanding of the category, enhancing our in-house production
and product development capabilities.
Modern Oral Nicotine
Modern oral nicotine has a relatively small presence within
Europe and we have continued to explore opportunities for its
development in a prudent manner while developing our capabilities.
We have achieved good initial growth from our new product offerings
in the first half in several European markets including Austria,
Germany, Norway and Sweden. Although the business is still small,
our experience in these markets has enabled us to gain valuable
consumer insight and refine our approach to meet consumer needs. We
have recently delayed our plans to launch new product variants in
Germany, pending clarity around the regulatory landscape for modern
oral nicotine following the Bavarian court ruling classifying chew
bags as snus.
Distribution
Full Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
--------------------------- ----------- ---------- ---------- -----------------
Distribution fees GBPm 1,015 1,015 0.0% +0.7%
==================== ====== ========== ========== ========== =================
Adjusted operating
profit GBPm 226 232 -2.6% -1.9%
==================== ====== ========== ========== ========== =================
Adjusted operating
margin % 22.7 22.9 -20 bps -20 bps
==================== ====== ========== ========== ========== =================
Eliminations GBPm 13 (14) >100% >100%
==================== ====== ========== ========== ========== =================
Adjusted op profit
contribution GBPm 239 218 +9.6% +10.6%
==================== ====== ========== ========== ========== =================
Despite the challenges of COVID-19, Logista has continued to
distribute products to clients across its footprint with almost all
the points of sale, products and services classified as essential
by governments adopting lockdown measures.
Distribution fee income increased 0.7 per cent reflecting
positive performances in Italy and Spain, offsetting some declines
in France. Italy benefited from growth in NGP and a relatively
resilient tobacco performance. Good performances in the
convenience, pharmaceutical and courier transport segments helped
to offset tobacco declines in Spain. The trading environment in
France was more challenging, with weaker tobacco volumes and a poor
performance in the convenience channel.
Adjusted operating profit was down 1.9 per cent at constant
currency with ongoing cost management offset by additional cost
pressures caused by COVID-19 and the impact from an asset disposal.
The adjusted operating profit contribution to the Group increased
10.6 per cent at constant currency, reflecting the reduction in
eliminations compared to the 2019 NGP inventory build in support of
market launch activity.
In line with other Imperial owned entities, we continue to
benefit from an intercompany cash pooling arrangement with Logista.
In 2020, the daily average cash balance loaned to the Group by
Logista was GBP1.9 billion, with movements in the cash position
during the year varying from a high of GBP3.9 billion to a low of
GBP0.5 billion. At the year end the loan position was GBP2.4
billion. The cash benefit was higher than normal due to favourable
changes in the timing of excise duty payments.
Europe
Full Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
============================= =========== ========== ========== =================
bn
Tobacco volume SE 130.1 134.9 -3.5%
====================== ====== ========== ========== ========== =================
Total net revenue GBPm 3,569 3,633 -1.8% -0.8%
====================== ====== ========== ========== ========== =================
Tobacco net revenue GBPm 3,471 3,505 -1.0% -0.0%
====================== ====== ========== ========== ========== =================
NGP net revenue GBPm 98 128 -23.4% -21.9%
====================== ====== ========== ========== ========== =================
Adjusted operating
profit GBPm 1,582 1,694 -6.6% -5.9%
====================== ====== ========== ========== ========== =================
Asset Brand % of net
revenue % 75.2 74.4 +80 bps +80 bps
====================== ====== ========== ========== ========== =================
2019 restated to reflect volume movements of Canada and Latin
America volumes to Americas (-0.3bn SE) and the inclusion of France
cigar sales from AAA divisions (+0.1bn SE); Auxly adjustments of
GBP(3)m net revenue and GBP(5)m operating profit; and Asset Brand
net revenue restated for reclassification of brands.
Positives Negatives
* Strong financial performance in UK and Germany with * Despite strong financial performance, we lost mark
better than expected market size et
share in the UK and Germany
* Share gains in Spain and France for the first time in
several years * Price/mix has been affected by adverse product mix
with increased demand for value formats
* blu share holding relatively well, despite lower
investment * Travel bans reduced sales in global duty free and
traditional summer holiday destinations
* Profit reduced by provisions for COVID-19 related
risks and manufacturing and regulatory costs
While our performance in Europe was disappointing with lower NGP
net revenues and the associated write-downs and our overall tobacco
performance was also lower, there were a number of achievements.
Most notably we grew tobacco market share in France and Spain for
the first time in several years and the share of myblu held up
relatively well despite reduced investment.
Overall divisional market share declined 10 basis points with
share declines in Germany and the UK, although we achieved
improvements in the second half in both markets.
Our tobacco volumes declined by 3.5 per cent. This reflects
several different factors with better than expected market size
trends, particularly in Northern Europe such as the UK, Germany,
Scandinavia and France, as consumers stayed at home and appeared to
allocate more spend towards tobacco. In addition, border closures
helped to reduce the flow of illicit tobacco, also benefiting the
duty paid market size in markets such as the UK. Travel
restrictions caused weaker volumes in global duty free and
traditional summer holiday destinations, such as Spain.
Tobacco net revenue was flat on last year at constant currency,
with favourable price/mix of 3.5%. Price/mix was driven by
relatively strong pricing in UK and Germany and partially offset by
negative product mix in those markets with increased demand for
value brands and formats. Some of this increased demand has been
driven by switches from illicit trade to the duty paid market.
However, mix was adversely affected by the growth in private label
product to customers in Germany.
The European ban on characterising flavours, introduced in May,
has so far had a limited impact with the majority of consumers
remaining within the cigarette category, but switching to
traditional tobacco flavoured variants, and with a limited number
moving to next generation products.
Our NGP performance for the year was below our original
expectations. Following a write-down of inventory and destocking of
the supply chain during the first half we have focused on improving
trade margins and moderating investment in order to improve
category returns. Despite lower activation spend the share
performance of blu has remained relatively stable, with operating
losses significantly reduced in the second half of the year.
Profitability was also affected by lower duty free and travel
retail sales and by increased costs relating to the implementation
of EUTPD II regulations for track and trace and some write-offs
following the introduction of the characterising flavours ban in
May. In addition, we increased provisions in respect of stock and
debtor positions, given the ongoing COVID-19 uncertainties, and
incurred some additional manufacturing costs arising from COVID-19
restrictions on our supply chain operations.
Adjusted operating profit was down 5.9 per cent at constant
currency.
Priority Markets Performance
Tobacco Share
================ ===============================================================
Germany Duty paid market size benefited from border closures
-90 bps (20.4%) and the repatriation of volumes from neighbouring markets
such as the Czech Republic and Poland. The premium cigarette
segment held up well and there was increased demand for
larger formats. Our market share declined although the
sequential trend improved in the second half with Gauloises,
12% of Group the launch of a JPS 50s box and new larger fine cut formats.
net revenue Industry revenues benefited from temporary VAT changes
as part of fiscal stimulus measures. Sales of myblu declined
as we destocked trade inventories. Our performance in
modern oral nicotine was limited by the recent chewing
tobacco ban, with the need for clearer category regulation.
================ ===============================================================
UK Financial delivery was strong as industry volumes grew
-10 bps (40.5%) as a result of lower illicit volumes and consumers staying
at home. It also benefited from a temporary change in
UK anti-forestalling arrangements, allowing for greater
stock profits ahead of the excise increase in March.
8% of Group While overall share was down, we achieved improving share
net revenue trends in the second half driven by Lambert & Butler
and Golden Virginia. The share momentum was partly limited
by some share loss following the characterising flavours
ban. In vapour, consumer demand for blu PLUS and liquids
remains stable and we successfully re-negotiated trade
terms to the benefit of margins.
================ ===============================================================
Spain Market size deteriorated with COVID-related border closures
+10 bps (29.0%) affecting our travel retail business with reduced tourist
numbers. The domestic market was also negatively affected
by lockdown restrictions and reduced occasions for social
4% of Group smoking. We grew our total tobacco market share in both
net revenue cigarettes and fine cut tobacco, supported by continued
investment behind larger value formats in West, Ducados
and Fortuna. In NGP myblu retained its market leading
share position, despite lower sales as we reduced investment.
================ ===============================================================
France The domestic duty paid market grew in the second half
+10 bps (18.2%) of the year due to border closures, reducing the inflow
from neighbouring markets and the level of illicit product.
3% of Group We grew our overall share of market for the first time
net revenue driven by News fine cut tobacco formats which offset
a decline in Royale following the removal of menthol
variants in May. Our blu market share remains resilient
despite lower investment levels and a successful renegotiation
of trade terms.
================ ===============================================================
Italy Our tobacco market share declined as we increased on-shelf
-10 bps (5.4%) prices earlier than competitors and our brand activation
activities were limited by COVID. Market size was impacted
by lockdown restrictions impacting travel retail and
the domestic market. To capitalise on consumer demand
1% of Group shifts to economy cigarettes and fine cut, we implemented
net revenue a range of price repositioning and portfolio initiatives
for JPS and West. We remain the market leader in vapour
although the category has been impacted by adverse news-flow
from the US market and reduced activation activities
limited consumer trial.
================ ===============================================================
Americas
Full Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
----------------------------- ----------- ---------- ---------- -----------------
bn
Tobacco volume SE 21.3 22.0 -3.3%
====================== ====== ========== ========== ========== =================
Total net revenue GBPm 2,480 2,469 +0.4% +0.4%
====================== ====== ========== ========== ========== =================
Tobacco net revenue GBPm 2,409 2,361 +2.0% +1.9%
====================== ====== ========== ========== ========== =================
NGP net revenue GBPm 71 108 -34.3% -34.3%
====================== ====== ========== ========== ========== =================
Adjusted operating
profit GBPm 1,032 1,064 -3.0% -3.4%
====================== ====== ========== ========== ========== =================
Asset Brand % of net
revenue % 53.7 54.2 -50 bps -60 bps
====================== ====== ========== ========== ========== =================
2019 restated to include Canada & Latin America volumes from
Europe (+0.3bn SE); Auxly adjustments of GBP(3)m net revenue and
GBP(4)m operating profit; and Asset Brand net revenue restated for
reclassification of brands.
Positives Negatives
* Cigarette share growth for second year running * Cigarette share growth driven primarily by discount
segment
* Tobacco net revenue driven by strong cigarette
pricing * Tobacco profitability reduced with increased
provisions for COVID-19-related risks and higher
manufacturing costs reflecting COVID-19 restrictions
* Mass market cigars driven by Backwoods with improved
supply and extended distribution
* Disappointing NGP performance with lower vapour sales
and inventory write-downs affecting profitability
The USA is our largest single market representing 31 per cent of
Group net revenue. Despite tobacco net revenue growth, our overall
performance was affected by lower NGP sales and stock write-downs,
while our tobacco profitability was reduced by weaker price mix and
various COVID-19 related costs.
Our tobacco volume performance declined 3.3 per cent, with US
volumes down 2.5 per cent against market size declines of 1.0 per
cent. However, this was impacted by year-on-year trade inventory
movements of 700 million sticks, which if adjusted for meant our
volumes were slightly up, outperforming the market volume decline
through share gains. The relatively slower rate of market size
decline was driven by increased home working presenting smokers
with more occasions to consume, reduced switching to NGP and fiscal
support packages supporting consumer expenditure.
We delivered cigarette share growth for the second consecutive
year, up 10 basis points to 8.9 per cent. This was driven by good
performances from Sonoma and Montclair in the growing deep discount
segment and investment in Winston and Kool to maintain their shares
in the declining premium segment.
We have benefited from continued strong demand in the mass
market cigar segment during the year with market volumes up by
around 9 per cent. We grew share by 70 basis points having regained
momentum in Backwoods during the second half with improved leaf
sourcing and expanded on-shelf availability through a wider network
of outlets.
At constant currency, tobacco net revenue was up 1.9 per cent
with price/mix of 5.2 per cent driven by continued strong cigarette
pricing, partially offset by some adverse product mix from growth
in deep discount brands.
Our NGP results were disappointing, with net revenues 34.3 per
cent lower at constant currency driven by a destock of trade
inventories and reduced promotional activities. We submitted our
Premarket Tobacco Product Applications (PMTA) to the Food and Drug
Administration, seeking authority to continue the marketing of a
range of blu vapour products including myblu, blu PLUS and blu
Disposable, with various nicotine strengths and flavours.
Adjusted operating profit was 3.4 per cent lower at constant
currency, reflecting NGP losses and lower tobacco profit. The NGP
losses were driven by a GBP48 million write-down of flavoured
inventory following the FDA ban and lower NGP sales. Tobacco
profitability was impacted by increased provisions for
COVID-related risks, mainly in respect of stock and debtor
positions as we took a more cautious view in light of ongoing
uncertainties, and higher overheads as we invested in the tobacco
sales force to drive share growth.
Africa, Asia and Australasia
Full Year Result Change
======================= =============================
2020 2019 Actual Constant Currency
----------------------------- ----------- ---------- ---------- -----------------
bn
Tobacco volume SE 87.7 87.3 +0.4%
====================== ====== ========== ========== ========== =================
Total net revenue GBPm 1,936 1,889 +2.5% +4.3%
====================== ====== ========== ========== ========== =================
Tobacco net revenue GBPm 1,904 1,847 +3.1% +5.0%
====================== ====== ========== ========== ========== =================
NGP net revenue GBPm 32 42 -23.8% -23.8%
====================== ====== ========== ========== ========== =================
Adjusted operating
profit GBPm 674 763 -11.7% -8.7%
====================== ====== ========== ========== ========== =================
Asset Brand % of net
revenue % 59.9 58.9 +100 bps +90 bps
====================== ====== ========== ========== ========== =================
2019 volumes restated for transfer of France cigar sales to
Europe from AAA division (-0.1bn SE); Auxly adjustments of GBP(1)m
net revenue and GBP(1)m operating profit; and Asset Brand net
revenue restated for reclassification of brands.
Positives Negatives
* Continued share gains across all priority markets * Adverse mix caused by negative market and product mix
* Price gains driven by Australia and further supported * Lower NGP revenues
by Australia stock profits
* Profit reduced with higher NGP losses and increased
tobacco provisions for COVID-related risks and higher
manufacturing costs
Although revenues benefited from volume growth and price/mix
gains, overall profit delivery was impacted by further NGP losses
as a result of increased investment to support the launch of our
heated tobacco product and higher provisions following a cautious
assessment of balance sheet exposure for COVID-19 related
risks.
Tobacco volumes were 0.4 per cent up, reflecting a strong
performance in lower margin markets in the Middle East, Turkey and
Ivory Coast, which more than offset the impact of ongoing market
size declines in the higher value market, Australia. These dynamics
adversely affected market mix for the Group.
Tobacco net revenue was up 5.0 per cent at constant currency
reflecting the volume gains and price mix benefit from the
sell-through of inventory in Australia accumulated ahead of the
September 2019 excise increase, of which around GBP50 million will
not repeat next year. Otherwise, product and market mix was
negative.
NGP performance was disappointing with net revenue down 23.8 per
cent at constant currency reflecting lower vapour sales in Japan.
In Russia myblu has achieved good retail sell out, supported by a
launch of coloured devices.
Adjusted operating profit was down 8.7 per cent at constant
currency driven primarily by NGP losses. Tobacco profits also
declined as we took a cautious approach to the COVID-19 related
risks associated with the longer supply chains and the relatively
higher customer credit risk in the region. We increased our
provisions for stock and debtor positions accordingly.
Priority Markets Performance
Tobacco Share
================= =======================================================================
Australia Industry volumes declined by 8.6 per cent with increased illicit
+20 bps (32.7%) trade. Parker & Simpson continues to gain share in the growing
'fifth price tier'. Price increases and the sell-through of duty
5% of Group net paid inventory accumulated last year benefited revenue and profit,
revenue more than offsetting the negative product mix impact from the growth
in the discount segment.
================= =======================================================================
Russia Financial performance benefited from improved market pricing and
+50 bps (8.4%) a reduction in discounting in the key account channel. Market share
gains benefited from the launch of new crushball variants of Davidoff
2% of Group net and Parker & Simpson meeting consumer demand for modern formats.
revenue
================= =======================================================================
Japan Following excise related price increases, West continues to benefit
from demand for the value segment. Net revenue from vapour was
impacted by a reduction in trade inventories, although myblu continues
to retain market leadership of the relatively small vapour category.
Distribution of Pulze was extended through national key accounts,
although any further roll-out was paused.
+10 bps (1.3%)
1% of Group net
revenue
================= =======================================================================
Saudi Arabia Sales of Davidoff and West supported market share growth, driven
+450 bps (18.8%) by better field coverage and on-shelf availability following the
introduction of plain packaging in November 2019. COVID-19 related
1% of Group net border closures led to an increase in domestic duty paid market
revenue size, which improved our financial delivery.
================= =======================================================================
FINANCE REVIEW
Net revenue affected by adverse tobacco product and market mix
and lower NGP sales
-- Net revenue up 0.8% at constant currency comprising 1.8% from tobacco and -1.0% from NGP
-- Relatively strong tobacco volume performance (-2.1%) driven
by better market size trends in several markets, volume growth in
AAA division and overall share gains of +50 basis points
-- Price mix of 3.9% reflects tobacco pricing of 6.7% (e.g. US,
Australia, Germany, UK), partly offset by adverse product mix of
-1.9% (e.g. UK, Australia, Germany) and market mix of -0.9% (e.g.
Middle East, Australia, German private label)
-- NGP revenue declined 27.0% at constant currency reflecting
the destocking of trade inventories and reduced investment
NET REVENUE BRIDGE: +0.8% (CC); -0.1% (Reported)
FY19 net revenue GBP7,991m
========== ======
Tobacco volume -2.1%
========== ======
Tobacco price/mix +3.9%
========== ======
NGP net revenue -1.0%
========== ======
FY20 constant currency net revenue GBP8,053m +0.8%
========== ======
Translation FX -0.9%
========== ======
FY20 net revenue GBP7,985m -0.1%
========== ======
Adjusted operating profit down 4.8% at constant currency
-- Adjusted operating profit down 5.7% at actual rates
-- Tobacco adjusted operating income down GBP118m (-3.1%) at constant currency driven by:
o adverse price/mix leading to a weaker operating profit
contribution of +GBP48m;
o COVID-19 related costs of GBP90m, including increased
manufacturing costs and higher stock and debtor provisions
reflecting a cautious assessment of ongoing COVID-19
uncertainties;
o increased regulatory costs of GBP50m for EUTPD II
implementation and payment of fines (which are being appealed)
imposed by the competition authorities on the tobacco industry in
the Netherlands and Ukraine; and
o higher overheads of GBP26m, mainly relating to increased
tobacco sales force investment in the USA
-- NGP profitability impacted by GBP124m of non-recurring
write-downs and lower sales; significant reduction in H2 losses as
investment and costs were reduced
-- Distribution adjusted operating profit increased, reflecting
lower eliminations following NGP destock this year
-- Reported operating profit of GBP2,731 million increased 24.3%
driven primarily by the prior year goodwill impairment charge
relating to the Premium Cigar Division divestment
ADJUSTED OPERATING PROFIT BRIDGE: -4.8% (CC); -5.7%
(Reported)
FY19 adjusted operating profit* GBP3,739m
============= ======
Tobacco operating income -GBP118m
============= ======
NGP write downs -GBP124m
============= ======
NGP operating income +GBP40m
============= ======
Distribution +GBP23m
============= ======
FY20 constant currency AOP GBP3,560m -4.8%
============= ======
Translation FX -GBP33m
============= ======
FY20 adjusted operating profit GBP3,527m -5.7%
============= ======
*FY19 AOP restated for adjusting income of GBP10m
Adjusted earnings per share of 257.0p down 5.6% at constant
currency
-- FY19 adjusted EPS of 273.3p is restated to exclude net 'other
income' of GBP10 million from the FY19 Auxly revaluation resulting
in adjusted EPS of 272.3p
-- Lower operating income contributed a 18.8p decline in EPS,
with a 1.4p saving from lower interest costs
-- The share buyback benefited adjusted EPS by 2.3p
-- Reported EPS increased 49.4% to 158.3p driven primarily by
the prior year goodwill impairment charge relating to the Premium
Cigar Division divestment
EPS BRIDGE: -5.6% (CC); -6.6% (Reported)
FY19 adjusted EPS 272.3p
======= ======
Operating income -18.8p
======= ======
Interest & Tax +1.4p
======= ======
Minorities & JV -0.2p
======= ======
Share buyback +2.3p
======= ======
FY20 constant currency EPS 257.0p -5.6%
======= ======
Translation FX -2.6p
======= ======
FY20 adjusted EPS 254.4p -6.6%
======= ======
*FY19 Adj. EPS restated for adjusting income with -1.0p
impact
Group Results - Constant Currency Analysis
======================================================================================================================
Constant
GBP million Year ended Foreign Constant Year ended currency
(unless otherwise indicated) 30 September 2019 exchange currency movement 30 September 2020 Change change
============================ ================== ========= ================== ================== ====== =========
Tobacco & NGP Net Revenue
============================ ================== ========= ================== ================== ====== =========
Europe 3,633 (35) (29) 3,569 -1.8% -0.8%
============================ ================== ========= ================== ================== ====== =========
Americas 2,469 2 9 2,480 +0.4% +0.4%
============================ ================== ========= ================== ================== ====== =========
Africa, Asia and
Australasia 1,889 (35) 82 1,936 +2.5% +4.3%
============================ ================== ========= ================== ================== ====== =========
Total Group 7,991 (68) 62 7,985 -0.1% +0.8%
---------------------------- ------------------ --------- ------------------ ------------------ ------ ---------
Tobacco & NGP Adjusted
Operating Profit
============================ ================== ========= ================== ================== ====== =========
Europe 1,694 (12) (100) 1,582 -6.6% -5.9%
============================ ================== ========= ================== ================== ====== =========
Americas 1,064 4 (36) 1,032 -3.0% -3.4%
============================ ================== ========= ================== ================== ====== =========
Africa, Asia and
Australasia 763 (23) (66) 674 -11.7% -8.7%
============================ ================== ========= ================== ================== ====== =========
Total Group 3,521 (31) (202) 3,288 -6.6% -5.7%
---------------------------- ------------------ --------- ------------------ ------------------ ------ ---------
Distribution
============================ ================== ========= ================== ================== ====== =========
Distribution fees 1,015 (7) 7 1,015 +0.0% +0.7%
============================ ================== ========= ================== ================== ====== =========
Adjusted operating profit 232 (2) (4) 226 -2.6% -1.9%
---------------------------- ------------------ --------- ------------------ ------------------ ------ ---------
Group Adjusted Results
============================ ================== ========= ================== ================== ====== =========
Adjusted operating profit 3,739 (33) (179) 3,527 -5.7% -4.8%
============================ ================== ========= ================== ================== ====== =========
Adjusted net finance costs (450) 2 19 (429) +4.7% +4.2%
============================ ================== ========= ================== ================== ====== =========
Adjusted EPS (pence) 272.3 (2.6) (15.3) 254.4 -6.6% -5.6%
============================ ================== ========= ================== ================== ====== =========
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 underlying performance
from one period to the next as GAAP measures can include one-off,
non-recurring items and recurring items that relate to earlier
acquisitions. 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.
During 2019 we reviewed the basis for our adjusted measures and
committed to making a number of changes around the treatment of
certain one-off items in 2020. In the 2020 accounts this impacted
the treatment of fair value gains and losses on our investment in
Auxly and this is detailed later in the review
We also committed to reviewing our use of restructuring as an
adjusted measure by the end of 2020 in line with the completion of
the Cost Optimisation Programmes which were due to conclude this
year. However, the COVID-19 pandemic has meant some of these
programme's projects have been delayed into 2021 and so we are
deferring the review of the use of restructuring as an adjusted
measure until the end of that year. In 2020 therefore we have
continued to treat restructuring costs as an adjusting item.
Group Earnings Performance
Adjusted Reported
----------------------------------------- ------------ ------------
GBP million unless otherwise indicated 2020 2019 2020 2019
----------------------------------------- ----- ----- ----- -----
Operating profit
Tobacco & NGP 3,288 3,521 2,587 2,074
Distribution 226 232 135 137
Eliminations 13 (14) 9 (14)
----------------------------------------- ----- ----- ----- -----
Group operating profit 3,527 3,739 2,731 2,197
Net finance costs (429) (450) (610) (562)
Share of profit of investments accounted
for using the equity method 45 55 45 55
----------------------------------------- ----- ----- ----- -----
Profit before tax 3,143 3,344 2,166 1,690
Tax (642) (642) (608) (609)
Minority interest (98) (107) (63) (71)
Earnings 2,403 2,595 1,495 1,010
----------------------------------------- ----- ----- ----- -----
Earnings per ordinary share (pence) 254.4 272.3 158.3 106.0
----------------------------------------- ----- ----- ----- -----
Reconciliation of Adjusted Performance Measures
Earnings per
Operating profit Net finance costs share (pence)
------------------------------------ ------------------ ------------------- ----------------
GBP million unless otherwise
indicated 2020 2019 2020 2019 2020 2019
------------------------------------ -------- -------- --------- -------- ------- -------
Reported 2,731 2,197 (610) (562) 158.3 106.0
Acquisition and disposal costs 26 22 - - 2.8 2.3
Amortisation & impairment of
acquired intangibles 523 1,118 - - 49.2 116.4
Excise tax provision (20) 139 - - (1.7) 13.0
Fair value of loan receivable 62 (3) - - 6.6 (0.3)
Sale of intellectual property - (7) - - - (0.7)
Fair value adjustment of acquisition
consideration - 129 - - - 13.5
Fair value and exchange movements
on derivative financial instruments - - 176 107 25.3 8.0
Post-employment benefits net
financing costs - - 5 5 0.4 0.1
Restructuring costs 205 144 - - 18.4 11.4
Tax on disposal of Premium
Cigar business - - - - 2.0 -
Previously unrecognised tax
credits - - - - (7.1) -
Uncertain tax positions - - - - 8.2 -
- - - - - (4.3) 6.4
Items above attributable to
non-controlling interest - - - - (3.7) (3.8)
------------------------------------ -------- -------- --------- -------- ------- -------
Adjusted 3,527 3,739 (429) (450) 254.4 272.3
------------------------------------ -------- -------- --------- -------- ------- -------
Performance Overview
2020 proved to be a challenging year with some disruption from
the COVID-19 pandemic and a poor NGP performance.
Our overall financial delivery was disappointing, with adjusted
earnings per share down 5.6 per cent at constant currency, with
both NGP and tobacco profits down on last year. However, the
tobacco performance needs to be seen in context of COVID-19, which
has had a small net benefit to the top-line but has impacted
profitability as a result of additional costs. For example, we have
taken a cautious position in relation to a number of the exposures
in our balance sheet at a point of time when the future is
uncertain, for example through the increase in inventory and bad
debt provisions. These include additional provisioning in respect
of our debtor book, reflecting increased credit risks and in
respect of finished goods stock where we have seen changing
patterns of demand, which have altered stock durations.
Our tobacco business remained resilient with volumes down 2.1
per cent declining at a slower rate than expected given recent
history and revenue up 1.8 per cent at constant currency against
last year. The revenue performance was driven by stronger market
size and share albeit this was delivered in some of our lower value
markets which led to a weaker than usual price/mix up 3.9 per cent
versus last year (2019: up 5.5 per cent). Consequently, the revenue
performance was not as high as may have been expected given the
headline market size and share positions.
Tobacco operating profit was down 3.1 per cent at constant
currency having been impacted by the additional costs relating to
COVID-19, regulatory compliance and overheads.
The NGP performance was impacted by new regulation and weaker
than expected trading which has led to lower revenue as well as
provisions for slow moving stock and asset impairments in the
year.
Active Capital Discipline
We continue to focus on capital discipline and this year's
strong cash performance will be supplemented by the disposal of our
Premium Cigar Division which completed in October 2020 and the
decision at the interim results to rebase the dividend.
Our headline adjusted operating cash conversion of 127 per cent
benefited from VAT and duty payment date changes in Western Europe
as a result of COVID-19, which amounted to c. GBP0.7 billion or 20
per cent cash conversion, which we expect to reverse next year.
Whilst we completed the disposal of our Premium Cigar business
after our year end, with the receipt of the majority of the
proceeds, we did receive a GBP83 million non-refundable cash
payment in 2020 and have deferred EUR407 million into 2021. These
proceeds will predominantly be used to pay down debt.
At the interim results in May 2020 we announced a rebasing of
our 2020 dividend policy by one third. We have adopted a
progressive dividend policy, growing annually from the revised
level, taking into account underlying business performance.
Effective capital allocation remains at the core of our decision
making and we aim to use continued strong cash generation, the
shareholder dividend savings and proceeds from the disposal of
Premium Cigars to reduce our gearing to the lower end of our 2-2.5
times target range by the end of 2022. As of 30 September 2020, our
adjusted net debt to EBITDA was 2.7 times (2019: 2.9 times).
Cash Flow and Net Debt
Our 2020 cash delivery of GBP1.3 billion was supported by a
GBP1.0 billion working capital inflow driven by c. GBP0.7 billion
of COVID-19 related timing benefits. Excluding these COVID-19
related timing benefits our 2020 underlying cash conversion was c.
107 per cent with an underlying net cash inflow of GBP0.6 billion.
The COVID-19 working capital benefits were materially in our
Logistics business due to changes in duty payments dates in Italy
offsetting accelerated payments in France. In the UK we have also
seen a GBP220 million deferment of VAT due to COVID-19. We expect
these to unwind next year, providing a c. GBP0.7 billion or 20 per
cent cash conversion headwind in 2021.
Excluding COVID-19, this year's underlying working capital
inflow was strong at c. GBP300 million, which included a c. GBP200
million higher working capital position in Australia as the benefit
seen last year reversed in line with guidance in last year's
results. This cash outflow was offset by improvements in a number
of markets, including the US.
Capital expenditure saw a year on year reduction of c. GBP80
million as we saw a reduction in NGP-related spend and continued
tight control of tobacco investments. Restructuring cash costs were
in line with last year.
After including GBP0.3 billion of lease liabilities on the
adoption of IFRS16, reported net debt decreased by GBP0.8 billion
to GBP11.1 billion and adjusted net debt decreased by GBP1.1
billion to GBP10.3 billion at actual rates.
During the year we repaid two bonds totalling GBP1.6 billion
equivalent. The denomination of our closing adjusted net debt was
split approximately 68 per cent euro and 32 per cent US dollar.
As at 30 September 2020, the Group had committed financing in
place of around GBP16.2 billion, which comprised 29 per cent bank
facilities and 71 per cent raised from capital markets. During the
year a new revolving credit facility of EUR3.5 billion replaced the
existing revolving facilities of GBP3 billion equivalent and
bilateral facilities totalling EUR1.7 billion were arranged whilst
one bilateral facility of EUR300 million was cancelled.
Tobacco Revenue Improves, NGP Disappoints
Tobacco volumes fell 2.1 per cent, a significant improvement on
last year (2019: 4.4 per cent reduction) as we saw better than
expected market size across a number of our larger markets as
consumers appeared to change behaviours and reprioritise disposable
income during the COVID-19 pandemic, combined with a decrease in
illicit trade. Whilst we delivered share growth in seven of our 10
priority markets, two of our more valuable markets showed share
declines. We experienced a drag on our overall price/mix as a
result of the fact that much of our growth was experienced in lower
value markets with downtrading also evident. Consequently, the full
benefit of good size and share performance did not flow through to
the bottom line.
As a result of the impact of market and product mix tobacco
price/mix was 3.9 per cent, slightly below the 5.5 per cent
delivered in 2019. Overall tobacco net revenue grew by 1.8 per cent
at constant currency.
The impacts of a sub-optimal market and product mix dynamic led
to a lower tobacco gross profit when compared with 2019. In
addition, there were a number of other factors this year which have
depressed tobacco performance with operating profit down 3.1 per
cent in constant currency.
As a result of COVID-19 and its disruption to our ability to
operate as planned in certain locations, we experienced some
manufacturing inefficiencies. In addition, we have seen a number of
changes in the risks to working capital balances, particularly in
stock and debtors reflecting changes in customer and consumer
behaviours and we have made some additional provisions to protect
against these increased risks. The impact of these COVID-19 related
additional costs amount to GBP90 million. We have also seen an
increase in costs associated with the implementation of EUTPD Track
& Trace, payment of fines (which are being appealed) imposed by
the competition authorities on the tobacco industry in the
Netherlands and Ukraine, and a tax liability in Spain, which
together contributed an additional GBP50 million of cost this year.
We do not expect the majority of these costs to reoccur.
NGP revenues were down by 27 per cent at constant currency,
which offset the growth in tobacco revenues reducing Group net
revenue growth to 0.8 per cent at constant currency.
NGP operating loss was down 34 per cent at constant currency.
The impact of the flavour ban in the US not only disrupted NGP
sales in that market but also had a contagion effect into European
and Asian markets. Consequently, the vapour category did not
develop as we had forecast and sell out was below expectations.
This resulted in us making an additional GBP97 million NGP slow
moving stock provision in the year and a GBP27 million impairment
of certain NGP intangible assets.
On a reported basis, Group operating profit increased by 24.3
per cent, materially driven by the lapping of the impairment charge
taken last year relating to the disposal of the Premium Cigar
business.
Last year's impairment charge was partially reversed by GBP35
million in year due to the finalisation of the agreed sales price
for the business and the revaluation of assets for foreign exchange
differences. It is expected that on completion of the divestment
cumulative foreign exchange gains of approximately GBP250 million
to GBP350 million, that have historically been recognised in
reserves, will be recycled to the income statement.
The restructuring charge for the year of GBP205 million (2019:
GBP144 million) relates mainly to our 2nd cost optimisation program
announced in 2016. The total restructuring cash flow in the year
ended 30 September 2020 was GBP145 million (2019: GBP146
million).
Adjusted net finance costs were lower at GBP429 million (2019:
GBP450 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 GBP610 million (2019:
GBP562 million), incorporating the impact of the net fair value and
exchange losses on financial instruments of GBP176 million (2019:
losses of GBP107 million) and post-employment benefits net
financing costs of GBP5 million (2019: GBP5 million).
Our all-in cost of debt decreased to 3.4 per cent (2019: 3.6 per
cent) as we continue to optimise our debt portfolio and our
interest cover increased to 8.9 times (2019: 8.8 times). We remain
fully compliant with all our banking covenants and remain committed
to retaining our investment grade ratings.
Our effective adjusted tax rate was 20.7 per cent (2019: 19.1
per cent) and the effective reported tax rate is 28.1 per cent
(2019: 36.0 per cent). The increase in the effective adjusted tax
rate was due to a less favourable profit mix. The adjusted tax rate
is lower than the reported rate due to limited tax relief on
adjusting items.
We expect our effective adjusted tax rate for the year ended 30
September 2021 to be around 23 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 254.4 pence (2019: 272.3
pence), down 5.6 per cent at constant currency and down 6.6 per
cent at actual rates, reflecting operating profit weakness as well
as a higher effective tax rate.
Reported earnings per share were up 49.4 per cent at 158.3 pence
(2019: 106.0 pence), mainly impacted by the one-off accounting
adjustments made last year relating to the disposal of Premium
Cigars. The strengthening of Sterling against the Euro, Australian
Dollar, which delivers lower revenue/profit, and Polish Zloty which
increases manufacturing costs, has led to lower Sterling equivalent
profits by around 1 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 now
expected to deliver c. GBP320 million of annual savings with GBP303
million of annual savings still expected from September 2020 and a
further c. GBP16 million of savings from September 2021 as some of
the original programme will now be initiated in 2021 due to the
impact of the COVID-19 pandemic. The programme is expected to be
completed at a cash restructuring cost of c. GBP650 million, a
GBP100 million reduction against our original estimates.
The second programme continued to focus on reducing product cost
and overheads and realised cost savings of GBP63 million in 2020
which brings the cumulative cost savings from both programmes to
GBP608 million, with GBP305 million coming from the first and
GBP303 million from the second.
Cash restructuring costs in the year from the first programme
were GBP16 million (2019: GBP24 million) and GBP109 million (2019:
GBP108 million) for the second, bringing the cumulative net cash
cost of the two programmes to GBP1,066 million, with a cash cost of
GBP559 million for the first and GBP507 million for the second.
Capital Allocation
Capital discipline is a key objective, with commercial analysis
and hurdle rates underpinning returns. It is again clear that our
investments in NGP have not returned at the levels expected.
Consequently, in the year we significantly reduced investment in
NGP with underlying operating profit performance in the second half
improved. Despite reduced investments, we have maintained a range
of options across different markets and NGP categories to allow
future strategic choices.
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.
Despite the drag from NGP, our in year ROIC measure is slightly
ahead of this internal rate of return at 13.2 per cent but lower
than last year (2019: 14.4 per cent) due to the profit
reduction.
Dividend Payments
The Group has paid two interim dividends totalling 41.70 pence
per share in June 2020 and September 2020, in line with our
quarterly dividend payment policy to give shareholders a more
regular cash return.
The Board approved a further interim dividend of 48.00 pence per
share and will propose a final dividend of 48.01 pence per share,
bringing the total dividend for the year to 137.71 pence per share.
The third interim dividend will be paid on 31 December 2020 with an
ex-dividend date of 26 November 2020. Subject to AGM approval, the
proposed final dividend will be paid on 31 March 2021, with an
ex-dividend date of 20 February 2021.
Brexit
The Group has assessed the potential impacts of the UK not
concluding a trade deal with the EU prior to 1 January 2021. The
key risks identified include: the 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
arrangements. In the event of a no trade deal, we estimate there
could be additional costs of around GBP75 million relating
principally to import duties and the impact on existing tax
arrangements.
New Accounting Standards
We adopted the new accounting standard IFRS 16 "Leases" on 1
October 2019. Implementation of IFRS 16 has resulted in the
recognition of 'right of use assets' which are depreciated over the
period that they are leased and a corresponding interest bearing
lease liabilities creditor, which are paid down over the life of
each lease. The impact associated with the adoption of this
standard is 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. As announced last year, we
refined our approach to the use of adjusted performance measures by
focusing more on the performance drivers of our core activities of
the manufacture, sales and marketing of tobacco and NGP
products.
The changes we have made to our adjusted performance measures
include the exclusion of one-off gains and losses from asset
disposals and other non-recurring activities that do not relate
directly to the core activities. In 2020 valuation losses related
to our investment in Auxly of GBP62 million were excluded from
adjusted profit as a result of this change. Income from the sale of
intellectual property and a valuation gain of GBP10 million on
Auxly were included in adjusted profit in 2019 and as a consequence
of this the 2019 results have been restated to provide more
understandable like for like comparisons.
The write-down of the convertible debt owed by Auxly reflects
the challenges faced by the business due to the slower than
anticipated evolution of the Canadian cannabis sector, in part the
result of the economic impact of COVID-19, putting into doubt
Auxly's ability to repay the debt in full on its due date.
Last year we said that we would undertake a review of the
treatment of restructuring costs as an adjusting item, considering
whether or not the exclusion of these costs from adjusted profit
was appropriate. In the light of certain COVID-19 related delays to
the conclusion of the second cost optimisation programme, that was
previously due to end in the 2020 this review has been deferred
into the next year.
Liquidity and Going Concern
The Group's policy is to ensure that we always have sufficient
capital markets funding and committed bank facilities in place to
meet foreseeable peak borrowing requirements.
The Group's resilience to different potential scenarios has been
strengthened by the signing of the Group's new EUR3.5 billion
multi-currency revolving credit facility, the sale of our Premium
Cigar business, where the EUR1.1 billion of proceeds will be used
for debt reduction, and the signing of EUR1.7 billion committed 18
month bank facilities.
The Directors have assessed the principal risks of the business,
including stress testing a range of different scenarios on how
COVID-19 and some possible consequences arising from the pandemic
may affect the business. These included scenarios which examined
the implications of:
-- The impact of governments accelerating duty payments as seen in FY20 c. GBP800 million
-- The permanent removal of 15% and 30% of EBITDA from 1 October
2020 because markets become closed to tobacco products or there are
sustained closures to our tobacco manufacturing and supply
chains
-- The loss of 10% of current trade receivable c. GBP0.2 billion
due to the inability of customers to pay
-- The loss of factoring facilities c. GBP0.6 billion due to
banks re-prioritising uses of cash
-- Various scenarios involving the closure of the entire factory
network over a one, two and three-month period from 1 October 2020,
with a gradual scaling back to full capacity over the subsequent
three months. It also considered factory network shutdowns over
longer time periods.
The scenario testing also considered mitigating actions
including reductions to capital expenditure and dividend payments.
There are additional actions that were not modelled but could be
taken including other cost mitigations such as staff redundancies,
retrenchment of leases, and discussions with lenders about capital
structure.
Under a worst-case scenario, where the largest envisaged
downside scenarios all take place at the same time and taking full
use of the capital expenditure and dividend payment reduction
mitigating actions as described above, the Group would have
sufficient headroom until March 2022. The Group believes this
worst-case scenario to be highly unlikely.
Based on the review of future cashflows covering the period
through to March 2022, and having assessed the principal risks
facing the Group, including the current and forecast future impacts
of the COVID-19 pandemic, the Board is of the opinion that the
Group as a whole and Imperial Brands PLC have adequate resources to
meet operational needs from the date of this Report through to
March 2022 and concludes that it is appropriate to prepare the
financial statements on a going concern basis.
Oliver Tant
Chief Financial Officer
SUMMARY OF KEY FOOTPRINT FINANCIALS & METRICS
Full Year Result Change
================== ==================
FOOTPRINT Constant
2020 2019 Actual Currency
============================= ======== ======== ======= =========
Volume
====================== ===== ======== ======== ======= =========
bn
Europe SE 130.1 134.9 -3.5%
====================== ===== ======== ======== ======= =========
bn
Americas SE 21.3 22.0 -3.3%
====================== ===== ======== ======== ======= =========
Africa, Asia and bn
Australasia SE 87.7 87.3 +0.4%
====================== ===== ======== ======== ======= =========
bn
Total Group SE 239.1 244.2 -2.1%
====================== ===== ======== ======== ======= =========
Tobacco Net Revenue
====================== ===== ======== ======== ======= =========
Europe GBPm 3,471 3,505 -1.0% -0.0%
====================== ===== ======== ======== ======= =========
Americas GBPm 2,409 2,361 +2.0% +1.9%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBPm 1,904 1,847 +3.1% +5.0%
====================== ===== ======== ======== ======= =========
Total Group GBPm 7,784 7,713 +0.9% +1.8%
====================== ===== ======== ======== ======= =========
Tobacco Net Revenue
per '000 SE
====================== ===== ======== ======== ======= =========
Europe GBP 26.68 25.98 +2.7% +3.6%
====================== ===== ======== ======== ======= =========
Americas GBP 113.23 107.32 +5.5% +5.4%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBP 21.71 21.15 +2.7% +4.6%
====================== ===== ======== ======== ======= =========
Total Group GBP 32.56 31.58 +3.1% +4.0%
====================== ===== ======== ======== ======= =========
Tobacco Price/Mix
====================== ===== ======== ======== ======= =========
Europe % +2.5% +3.5%
====================== ===== ======== ======== ======= =========
Americas % +5.3% +5.2%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia % +2.7% +4.6%
====================== ===== ======== ======== ======= =========
Total Group % +3.0% +3.9%
====================== ===== ======== ======== ======= =========
NGP Net Revenue
====================== ===== ======== ======== ======= =========
Europe GBPm 98 128 -23.4% -21.9%
====================== ===== ======== ======== ======= =========
Americas GBPm 71 108 -34.3% -34.3%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBPm 32 42 -23.8% -23.8%
====================== ===== ======== ======== ======= =========
Total Group GBPm 201 278 -27.7% -27.0%
====================== ===== ======== ======== ======= =========
Adjusted Tobacco & NGP Operating
Profit
======================================= ======== ======= =========
Europe GBPm 1,582 1,694 -6.6% -5.9%
====================== ===== ======== ======== ======= =========
Americas GBPm 1,032 1,064 -3.0% -3.4%
====================== ===== ======== ======== ======= =========
Africa, Asia and
Australasia GBPm 674 763 -11.7% -8.7%
====================== ===== ======== ======== ======= =========
Total Group GBPm 3,288 3,521 -6.6% -5.7%
====================== ===== ======== ======== ======= =========
Distribution
====================== ===== ======== ======== ======= =========
Distribution Fees GBPm 1,015 1,015 0.0% +0.7%
====================== ===== ======== ======== ======= =========
Operating Profit GBPm 226 232 -2.6% -1.9%
====================== ===== ======== ======== ======= =========
Operating Margin % 22.7 22.9 -20 bps -20 bps
====================== ===== ======== ======== ======= =========
2019 restated to reflect segmental volume movements of Canada
and Latin America volumes to Americas from Europe (0.3bn SE) and
the inclusion of France cigar sales from AAA division into Europe
(0.1bn SE); Auxly other income adjustments of GBP(3)m net revenue
and GBP(5)m operating profit to Europe, . GBP(3)m net revenue and
GBP(4)m operating profit to Americas and GBP(1)m net revenue and
GBP(1)m operating profit to AAA.
SUMMARY OF KEY PORTFOLIO FINANCIALS & METRICS
Full Year Result Change
================== ===================
PORTFOLIO Constant
2020 2019 Actual Currency
============================== ======== ======== ======== =========
Asset Brand Net Revenue
=======================================================================
Europe GBPm 2,682 2,705 -0.8% +0.2%
======================== ==== ======== ======== ======== =========
Americas GBPm 1,331 1,338 -0.6% -0.7%
======================== ==== ======== ======== ======== =========
Africa, Asia and
Australasia GBPm 1,160 1,112 +4.4% +6.0%
======================== ==== ======== ======== ======== =========
Total Group GBPm 5,175 5,168 +0.1% +1.0%
======================== ==== ======== ======== ======== =========
Asset Brands as % of Net Revenue
======================================== ======== ======== =========
Europe % 75.2 74.4 +80 bps +80 bps
======================== ==== ======== ======== ======== =========
Americas % 53.7 54.2 -50 bps -60 bps
======================== ==== ======== ======== ======== =========
Africa, Asia and
Australasia % 59.9 58.9 +100 bps +90 bps
======================== ==== ======== ======== ======== =========
Total Group % 64.8 64.7 +10 bps +10 bps
======================== ==== ======== ======== ======== =========
Portfolio Brands Net Revenue
=======================================================================
Total Group GBPm 2,810 2,823 -0.5% +0.4%
======================== ==== ======== ======== ======== =========
% of Total Net Revenue % 35.2 35.3 -10 bps -10 bps
======================== ==== ======== ======== ======== =========
2019 Asset Brand net revenue has been restated for
reclassification of brands. See Basis of Presentation on page
3.
FINANCIAL STATEMENTS
The figures and financial information for year ended 30
September 2020 do not constitute the statutory financial statements
for that year. Those financial statements have not yet been
delivered to the Registrar.
The auditors have reported on those accounts and their report
was (i) unqualified, (ii) did not include references to any matters
to which the auditors drew attention by way of emphasis without
qualifying their reports and (iii) did not contain a statement
under section 498(2) or (3) of the Companies Act 2006 in respect of
the accounts. 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
GBP million unless otherwise indicated Notes 2020 2019
===================================================================== ===== ======== ========
Revenue 3 32,562 31,594
===================================================================== ===== ========
Duty and similar items (15,962) (15,394)
Other cost of sales (10,420) (9,960)
===================================================================== ===== ======== ========
Cost of sales (26,382) (25,354)
===================================================================== ===== ======== ========
Gross profit 6,180 6,240
Distribution, advertising and selling costs (2,329) (2,295)
===================================================================== ===== ======== ========
Acquisition and disposal costs 12 (26) (22)
Amortisation and impairment of acquired intangibles (523) (1,118)
Excise tax provision 20 (139)
Fair value adjustment of loan receivable (62) 3
Fair value adjustment of acquisition consideration - (129)
Restructuring costs 4 (205) (144)
Other expenses (324) (199)
===================================================================== ===== ======== ========
Administrative and other expenses (1,120) (1,748)
===================================================================== ===== ======== ========
Operating profit 2,731 2,197
===================================================================== ===== ========
Investment income 770 890
Finance costs (1,380) (1,452)
===================================================================== ===== ======== ========
Net finance costs 5 (610) (562)
Share of profit of investments accounted for using the equity method 45 55
===================================================================== ===== ======== ========
Profit before tax 2,166 1,690
Tax 6 (608) (609)
===================================================================== ===== ======== ========
Profit for the year 1,558 1,081
===================================================================== ===== ======== ========
Attributable to:
Owners of the parent 1,495 1,010
Non-controlling interests 63 71
===================================================================== ===== ======== ========
Earnings per ordinary share (pence)
- Basic 9 158.3 106.0
- Diluted 9 158.1 105.8
===================================================================== ===== ======== ========
Consolidated Statement of Comprehensive Income
for the year ended 30 September
GBP million 2020 2019
============================================================================= === =========== =========
Profit for the year 1,558 1,081
Other comprehensive income
============================================================================= === =========
Exchange movements 151 270
Current tax on hedge of net investments (10) -
Deferred tax on hedge of net investments (80) -
============================================================================= === =========== =========
Items that may be reclassified to profit and loss 61 270
============================================================================= === =========
Net actuarial gains/(losses) on retirement benefits 15 277 (248)
Deferred tax relating to net actuarial (losses)/gains on retirement benefits 15 (53) 52
============================================================================= === =========== =========
Items that will not be reclassified to profit and loss 224 (196)
============================================================================= === =========== =========
Other comprehensive income for the year, net of tax 285 74
============================================================================= === =========== =========
Total comprehensive income for the year 1,843 1,155
============================================================================= === =========== =========
Attributable to:
Owners of the parent 1,762 1,086
Non-controlling interests 81 69
============================================================================= === =========== =========
Total comprehensive income for the year 1,843 1,155
============================================================================= === =========== ---------
Consolidated Balance Sheet
at 30 September Reclassified
GBP million Notes 2020 2019
================================================== ===== ======== ============
Non-current assets
Intangible assets 18,160 18,596
Property, plant and equipment 1,899 1,979
Right of use assets 293 -
Investments accounted for using the equity method 117 81
Retirement benefit assets 15 940 595
Trade and other receivables 13 57 119
Derivative financial instruments 11 813 677
Deferred tax assets 7 381 370
================================================== ===== ======== ============
22,660 22,417
================================================== ===== ======== ============
Current assets
Inventories 4,065 4,082
Trade and other receivables 13 2,638 2,854
Current tax assets 6 206 195
Cash and cash equivalents 1,626 2,286
Derivative financial instruments 11 53 137
Current assets held for disposal 12 1,062 1,103
================================================== ===== ======== ============
9,650 10,657
================================================== ===== ======== ============
Total assets 32,310 33,074
================================================== ===== ======== ============
Current liabilities
Borrowings (1,442) (1,937)
Derivative financial instruments 11 (41) (28)
Lease liabilities (64) -
Trade and other payables 14 (10,170) (9,352)
Current tax liabilities 6 (350) (313)
Provisions 4 (220) (284)
Current liabilities held for disposal 12 (38) (37)
================================================== ===== ======== ============
(12,325) (11,951)
================================================== ===== ======== ============
Non-current liabilities
Borrowings (10,210) (11,697)
Derivative financial instruments 11 (1,641) (1,408)
Lease liabilities (235) -
Trade and other payables 14 (5) (7)
Deferred tax liabilities 6 (924) (931)
Retirement benefit liabilities 15 (1,256) (1,249)
Provisions 4 (196) (247)
================================================== ===== ======== ============
(14,467) (15,539)
================================================== ===== ======== ============
Total liabilities (26,792) (27,490)
================================================== ===== ======== ============
Net assets 5,518 5,584
================================================== ===== ======== ============
Equity
Share capital 103 103
Share premium and capital redemption 5,837 5,837
Retained earnings (2,364) (2,255)
Exchange translation reserve 1,295 1,252
================================================== ===== ======== ============
Equity attributable to owners of the parent 4,871 4,937
Non-controlling interests 647 647
================================================== ===== ======== ============
Total equity 5,518 5,584
================================================== ===== ======== ============
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 2019 103 5,837 (2,255) 1,252 4,937 647 5,584
Profit for the year - - 1,495 - 1,495 63 1,558
============================== ======== ============ ========= ============ ============== ============ =======
Exchange movements on overseas
net assets - - - (130) (130) 18 (112)
Exchange movements on net
investment hedges - - - 12 12 - 12
Exchange movements on
quasi-equity loans - - - 251 251 - 251
Current tax on quasi-equity
loans - - - (10) (10) - (10)
Deferred tax on quasi-equity
loans - - - (80) (80) - (80)
Net actuarial gains on
retirement benefits - - 277 - 277 - 277
Deferred tax relating to net
actuarial losses on
retirement benefits - - (53) - (53) - (53)
============================== ======== ============ ========= ============ ============== ============ =======
Other comprehensive income - - 224 43 267 18 285
============================== ======== ============ ========= ============ ============== ============ =======
Total comprehensive income - - 1,719 43 1,762 81 1,843
Transactions with owners
Costs of employees' services
compensated by share schemes - - 20 - 20 - 20
Current tax on share-based
payments - - 1 - 1 - 1
Cancellation of share capital - - (92) - (92) - (92)
Change in non-controlling
interests - - (4) - (4) 4 -
Dividends paid - - (1,753) - (1,753) (85) (1,838)
============================== ======== ============ ========= ============ ============== ============ =======
At 30 September 2020 103 5,837 (2,364) 1,295 4,871 647 5,518
============================== ======== ============ ========= ============ ============== ============ =======
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 1,115
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
Repurchase of shares - - (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
============================== ======== ============ ========= ============ ============== ============ =======
Consolidated Cash Flow Statement
for the year ended 30 September
GBP million 2020 2019
========================================================================== ======= =======
Cash flows from operating activities
Operating profit 2,731 2,197
Dividends received from investments accounted for under the equity method 43 54
Depreciation, amortisation and impairment 910 1,316
Profit on disposal of non-current assets (2) (19)
Post-employment benefits (88) (72)
Costs of employees' services compensated by share schemes 20 23
Fair value adjustment of acquisition consideration - 129
Fair value adjustment of loan receivable 63 -
Movement in provisions (121) 80
==========================================================================
Operating cash flows before movement in working capital 3,556 3,708
========================================================================== ======= =======
Increase in inventories 67 (560)
Increase in trade and other receivables 241 (267)
Increase in trade and other payables 734 877
==========================================================================
Movement in working capital 1,042 50
Tax paid (568) (522)
========================================================================== ======= =======
Net cash generated from operating activities 4,030 3,236
========================================================================== ======= =======
Cash flows from investing activities
Interest received 9 15
Loan to joint ventures - 4
Loan to third parties (3) (75)
Proceeds from sale of non-current assets 28 57
Deposit received from sale of asset held for sale 83 -
Purchase of non-current assets (302) (409)
Purchase of brands and operations (146) (17)
==========================================================================
Net cash used in investing activities (331) (425)
========================================================================== ======= =======
Cash flows from financing activities
Interest paid (429) (488)
Cash from employees on maturity/exercise of share schemes - 1
Lease liabilities paid (72) -
Increase in borrowings 1,240 3,699
Repayment of borrowings (3,096) (2,330)
Cash flows relating to derivative financial instruments (23) (117)
Repurchase of shares (92) (108)
Dividends paid to non-controlling interests (85) (84)
Dividends paid to owners of the parent (1,753) (1,844)
==========================================================================
Net cash used in financing activities (4,310) (1,271
========================================================================== ======= =======
Net decrease/(increase) in cash and cash equivalents (611) 1,540
Cash and cash equivalents at the start of year 2,286 775
Effect of foreign exchange rates on cash and cash equivalents 13 (15)
Transferred to held for disposal (62) (14
========================================================================== ======= =======
Cash and cash equivalents at the end of year 1,626 2,286
========================================================================== ======= =======
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
In the current year, certain items related to 2019 have been
reclassified in the balance sheet as follows:
i. Taxes - See Notes 6 and 7 for details;
ii. Pensions - See Note 15 for details; and
iii. Assets Held for Sale - Due to better information regarding
the structure of the sale of the Premium Cigar business being
available, intercompany debt has been netted off in the normal way
on consolidation, which has required a restatement of 2019 where
the grossing up of intercompany balances in trade receivables and
payables with an offsetting entry in Assets Held for Sales was
disclosed.
These changes had no impact on previously reported financial
performance.
Use of adjusted measures
Intangible Assets
Acquired intangibles are amortised over their estimated useful
economic lives where these are considered to be finite. Acquired
intangibles considered to have an indefinite life are not
amortised. Any negative goodwill arising is recognised immediately
in the income statement. We exclude from our adjusted measures the
amortisation and impairment of acquired intangibles, other than
software and internally generated intangibles, and the deferred tax
associated with amortisation of acquired intangibles.
It is recognised that there may be some correlation between the
amortisation charges derived from the acquisition value of acquired
intangibles, and the subsequent future profit streams arising from
sales of associated branded products. However, the amortisation of
intangibles is not directly related to the operating performance of
the business. Conversely, the level of profitability of branded
products is directly influenced by day to day commercial actions,
with variations in the level of profit derived from branded product
sales acting as a clear indicator of performance. Given this, the
Group's view is that amortisation and impairment charges do not
clearly correlate to the ongoing variations in the commercial
results of the business and are therefore excluded to allow a
clearer view of the underlying performance of the organisation. The
deferred tax is excluded on the basis that it will only crystallise
upon disposal of the intangibles and goodwill. The related current
cash tax benefit is retained in the adjusted measure to reflect the
ongoing tax benefit to the Group. Following a decision made during
the current financial year, gains and losses on the sale of
intellectual property are now adjusted out of adjusted operating
profit. The prior year comparatives figures have been restated.
Presentation of Auxly
In view of the increasing significance of the movement in the
fair value of loan receivables associated with the Auxly
investment, from 1 October 2020 the Group has disclosed a fair
value loss of GBP62 million separately on the face of the income
statement. Comparative amounts have been restated accordingly, with
the gain of GBP3 million in 2019 being reclassified.
New Accounting Standards and Interpretations
With effect from 1 October 2019, the Group has adopted IFRS 16
Leases to contracts which are, or contain, leases of assets. 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.
IFRS 16 'Leases'
IFRS 16 replaced IAS 17 'Leases'. IFRS 16 sets out the
principles for the recognition, measurement, presentation and
disclosure of leases and requires lessees to account for most
leases on their balance sheets as lease liabilities with
corresponding right of use assets. Lease costs are recognised in
the income statement as depreciation and interest, rather than
entirely as an operating cost.
IFRS 16 was applied using the modified retrospective method, to
contracts that were previously identified as operating leases in
accordance with IAS 17 and IFRIC 4. There was no restatement of
prior periods.
Impact of IFRS 16 'Leases'
The impact on adoption of IFRS 16 to the Group's balance sheet
at 1 October 2019 was the recognition of GBP327 million right of
use assets, a reduction in lease prepayments of GBP1 million, and
lease liabilities included within borrowings of GBP326 million.
There was no impact on retained earnings.
As reported IFRS 16 On adoption
At 30 September adjustment At 1 October
GBP million 2019 2019
============================== ================ =========== =============
Right of use assets - 327 327
Current assets
Trade and other receivables 2,993 (1) 2,992
==================================== ================ =========== =============
Current Liabilities
============================= ================ =========== =============
Borrowings (1,937) (65) (2,002)
==================================== ================ =========== =============
Non-current Liabilities
============================= ================ =========== =============
Borrowings (11,697) (261) (11,958)
Other net assets 16,225 - 16,225
==================================== ================ =========== =============
Net assets 5,584 - 5,584
------------------------------------ ---------------- ----------- -------------
The Group has lease contracts relating to property and other
(which predominantly relates to motor vehicles). Before the
adoption of IFRS 16, the Group, as lessee, classified each of its
leases at the inception date as either a finance lease or an
operating lease. All leases within the Group were previously
classified as operating leases; no finance leases were held. In
prior periods, for the operating leases, the leased assets were not
capitalised and the lease payments were recognised either in the
cost of sales or distribution, advertising and selling costs line
items of the consolidated income statement on a straight-line basis
over the lease term. Upon adoption of IFRS 16, the Group, as a
lessee, applied a single recognition and measurement approach for
all leases, except for short term leases, low value assets and
other elections mentioned below in the practical expedients
section. The Group recognised lease liabilities for future lease
payments and right of use assets which represented the right of use
the underlying leased assets.
The impact of IFRS 16 to the Group results for the year ending
30 September 2020 increased depreciation by GBP72 million relating
to the depreciation on the new right of use assets & increased
finance costs by GBP7 million relating to the interest expense on
the lease liabilities recognised. Lease expense recognised in the
cost of sales and distribution, advertising and selling costs
expenses line items in the consolidated income statement reduced by
approximately GBP72 million. There was no overall impact to Cash
outflows from operating activities and cash outflows from financing
activities increased by GBP7 million.
The Group's new accounting policies upon adoption of IFRS 16 are
detailed below. The weighted average incremental borrowing rate
applied in discounting lease commitments was 2.1%.
Right of Use Assets
The Group recognises right of use assets, within property, plant
and equipment, at the commencement date of the lease (i.e. the date
the underlying asset is available for use). Right of use assets are
measured at cost, less any accumulated depreciation and impairment
losses, and adjusted for any remeasurement of lease liabilities.
The cost of right of use assets includes the amount of lease
liabilities recognised, initial direct costs incurred, and lease
payments made at or before the commencement date less any lease
incentives received. Unless the Group is reasonably certain to
obtain ownership of the leased asset at the end of the lease term,
the recognised right of use assets are depreciated on a
straight-line basis over the shorter of its estimated useful life
and the lease term. Right of use assets are subject to
impairment.
Lease Liabilities
At the commencement date of the lease, the Group recognises
lease liabilities measured at the present value of lease payments
to be made over the lease term. The lease payments include fixed
payments less any lease incentives receivable, variable lease
payments which depend on an index or a rate, and amounts expected
to be paid under residual value guarantees. Lease payments include
the exercise of purchase options if determined reasonably certain
to be exercised and termination payments if the lease term reflects
the exercise of an option to terminate.
In calculating the present value of lease payments, the Group
uses the incremental borrowing rate, defined as the rate of
interest that a lessee would have to pay to borrow over a similar
term, and with a similar security, the funds necessary to obtain an
asset of a similar value to the right of use asset in a similar
economic environment, at the lease commencement date if the
interest rate implicit in the lease is not readily determinable.
After the commencement date, the amount of lease liabilities is
increased to reflect the accumulation of interest and reduced for
the lease payments made. In addition, the carrying amount of lease
liabilities is remeasured if there is a modification, a change in
the lease term, a change in the in-substance fixed lease payments
or a change in the assessment to purchase the underlying asset.
Lease payments on short-term leases and leases of low value
assets are recognised as expense on a straight-line basis over the
lease term in cost of sales or distribution, advertising and
selling costs.
Short Term Leases, Leases of Low Value Assets and Practical
Expedients Applied
The Group has applied a number of practical expedients permitted
by IFRS 16. These include;
-- the exclusion of leases where the lease term ends within 12
months of the commencement of the lease or date of initial
application; and
-- the exclusion of leases of low value assets, defined as those
of less than US$5,000.
In addition, on initial application, the Group has elected
to;
-- apply hindsight in determining the lease term if the contract
contains options to extend or terminate the lease;
-- exclude initial direct costs from the measurement of the
right of use asset; and
-- use a single discount rate to a portfolio of leases with
reasonably similar characteristics
Lease payments on short-term leases and leases of low value
assets are recognised as expense on a straight-line basis over the
lease term in cost of sales or distribution, advertising and
selling costs.
Reconciliation between Minimum Lease commitments as at 30
September 2019:
GBP million unless otherwise indicated
====================================================== ======
Minimum lease commitments at 30 September 2019 (351)
Additional commitments on the exercise of options (40)
Low value leases and short-term leases excluded 20
Discounted to present value 45
Capitalised as lease liabilities at 1 October 2019 (326)
Prepaid leases reclassified from receivables (1)
====================================================== ======
Capitalised as right of use assets at 1 October 2019 327
====================================================== ======
IFRIC 23 Uncertainty over Income Tax Treatments
IFRIC 23 'Uncertainty over income tax treatments' was adopted on
1 October 2019. The interpretation clarifies how to apply the
recognition and measurement requirements in IAS 12 when there is
uncertainty over income tax treatments. The adoption of this
interpretation has not had a material effect on the Group's net
assets or results.
New Accounting Standards and Interpretations not yet in
issue
A number of the current net investment hedges held by the group
are potentially impacted by the impending reforms to the
calculation of the Interbank Offered Rates (IBOR). The amendments
to IFRS 9, IAS 39 and IAS 7 - Interest Rate Benchmark Reform,
effective for the year commencing 1 October 2020, give relief which
will allow these hedges to continue to be treated as effective,
with no changes to the hedged positions.
Following the announcement of the potential discontinuation of
LIBOR after the end of 2021, the Company has commenced an
evaluation of the valuation of its floating rate debt and
derivative positions maturing after that date. The evaluation
project is ongoing and has not yet concluded. The Company currently
expects that an appropriate alternative basis for the calculation
of interest will be available in the event LIBOR is no longer
used.
There are no other standards or interpretations, issued not
effective, that are expected to have a material effect on the
Group's net assets or results.
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 2020, 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.
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 2020 2019
============================================ ========== ===========
Revenue 23,973 23,418
Net revenue 7,985 7,991
Operating profit 2,587 2,074
Adjusted operating profit 3,288 3,521
Adjusted operating margin % 41.2 44.1
============================================ ========== ===========
Distribution
GBP million unless otherwise indicated 2019 2019
============================================ ========== ===========
Revenue 9,268 8,969
Distribution fees 1,015 1,015
Operating profit 131 137
Adjusted operating profit 226 232
Adjusted operating margin % 22.3 22.9
============================================ ========== ===========
Revenue
2020 2019
==================== =================================
Total External Total
GBP million revenue revenue Revenue External revenue
============================ ========= ========= ========= ======================
Tobacco & NGP
Europe 14,395 13,716 14,152 13,359
Americas 3,371 3,371 3,358 3,358
Africa, Asia & Australasia 6,207 6,207 5,908 5,908
========= =========
Total Tobacco & NGP 23,973 23,294 23,418 22,625
Distribution 9,268 9,268 8,969 8,969
Eliminations (679) - (793)
============================ ========= ========= ========= ======================
Total Group 32,562 32,562 31,594 31,594
---------------------------- --------- --------- --------- ----------------------
Reconciliation from Tobacco & NGP revenue to Tobacco &
NGP net revenue
Restated
GBP million 2020 2019
====================================== ========= =========
Revenue 23,973 23,418
Duty and similar items (15,962) (15,394)
Sale of peripheral products (26) (26)
Sale of intellectual property income - (7)
====================================== ========= =========
Net Revenue 7,985 7,991
====================================== ========= =========
Tobacco & NGP net revenue
Restated
GBP million 2020 2019
============================ ====== =========
Europe 3,569 3,633
Americas 2,480 2,469
Africa, Asia & Australasia 1,936 1,889
============================ ====== =========
Total Tobacco & NGP 7,985 7,991
============================ ====== =========
Adjusted operating profit and reconciliation to profit before tax
Restated
GBP million 2020 2019
====================================================================== ====== =========
Tobacco & NGP
Europe 1,582 1,694
Americas 1,032 1,064
Africa, Asia & Australasia 674 763
====== =========
Total Tobacco 3,288 3,521
Distribution 226 232
Eliminations 13 (14)
====================================================================== ====== =========
Adjusted operating profit 3,527 3,739
Acquisition and disposal costs- Tobacco & NGP (26) (22)
Amortisation and impairment of acquired intangibles - Tobacco & NGP (438) (1,033)
Amortisation of acquired intangibles - Distribution (85) (85)
Excise tax provision- Tobacco & NGP 20 (139)
Fair value adjustment of acquisition consideration- Tobacco & NGP - (129)
Fair value adjustment of loan receivable (62) 3
Sale of intellectual property income - 7
Restructuring costs (205) (144)
====================================================================== ====== =========
Operating profit 2,731 2,197
Net finance costs (610) (562)
Share of profit of investments accounted for using the equity method 45 55
====================================================================== ====== =========
Profit before tax 2,166 1,690
====================================================================== ====== =========
See note 6 for details of the Excise tax provision and note 5
for the fair value adjustment of acquisition consideration. See
note 12 for details of acquisition and disposal costs, and note 4
for details of restructuring costs.
The Group has adopted a new treatment of adjusted performance
measures which has had the impact of removing a fair value
adjustment on loan receivables and sale of intellectual property
income as an adjusting item. To create a more understandable year
on year comparison the change has been made with effect from 1
October 2019 and therefore the fair value gain on the same
instrument has been restated in the 2019 comparative.
4. Restructuring Costs and Provisions
Restructuring costs
GBP million 2020 2019
===================== ===== =====
Employment related 103 96
Asset impairments 58 29
Other charges 44 19
===================== ===== =====
205 144
===================== ===== =====
Restructuring costs analysed by workstream:
GBP million 2020 2019
=============================== ===== =====
Cost optimisation programme 187 144
Acquisition integration costs 18 -
=============================== ===== =====
205 144
=============================== ===== =====
The cost optimisation programme (Phase I announced in 2013 and
Phase II announced in November 2016) is part of the Group's change
in the current 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 due to complete in 2021.
Costs of implementing cost savings that do not arise from the
change in the current strategic direction are excluded from
restructuring costs.
The charge for the year of GBP205 million (2019: GBP144 million)
predominantly relates to our two cost optimisation programmes
announced in 2013 and 2016.
In 2020 the cash cost of Phase I of the programme was GBP16
million (2019: GBP24 million) and GBP107 million (2019: GBP108
million) for Phase II, bringing the cumulative net cash cost of the
programme to GBP1,066 million (Phase I GBP559 million, Phase II
GBP507 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, and Phase II is expected to have a cash
implementation cost in the region of GBP650 million, generating
savings of a further GBP305 million per annum by 2021.
The total restructuring cash spend in the year was GBP145
million (2019: GBP146 million).
Restructuring costs are included within administrative and other
expenses in the consolidated income statement.
These projects differ from everyday initiatives that are
undertaken to improve the efficiency and effectiveness of the
ongoing operations business. These costs are required in order to
address structural issues involved within operating within the
Tobacco sector that require action to both modernise and right-size
the organisation, ultimately delivering an operating model suitable
for the future of the business. Cost optimisation programme Phase 1
completed in 2018 and Phase 2 is due to complete in 2021.
Provisions
2020
==============================
GBP million Restructuring Other Total
==================================================================== ============== ====== ======
At 1 October 2019 245 286 531
Additional provisions charged to the consolidated income statement 114 61 175
Amounts used (101) (148) (249)
Unused amounts reversed (6) (40) (46)
Transferred (to)/from held for disposal (3) 4 1
Exchange movements 4 - 4
==================================================================== ============== ====== ======
At 30 September 2020 253 163 416
==================================================================== ============== ====== ======
Analysed as:
GBP million 2020 2019
============== ===== =====
Current 220 284
Non-current 196 247
============== ===== =====
416 531
============== ===== =====
Restructuring provisions relate mainly to our cost optimisation
programme (see note 4). The restructuring provision is split
between Cost Optimisation Programme 2 of GBP157 million, Cost
Optimisation Programme 1 of GBP79 million and other restructuring
programmes of GBP17 million. Within the Cost Optimisation Programme
provisions there is GBP124 million related to costs of
consolidating the manufacturing capacity within the Group and GBP26
million relating to site specific factory closures. It is expected
that the restructuring provisions will be predominantly utilised
over the next 2 years.
Other provisions include GBP46 million relating to local
employment requirements including holiday pay and GBP28 million to
various local tax or duty requirements. The provisions are spread
throughout the Group and payment will be dependent on local
statutory requirements. Most provisions will be utilised within the
next two years, though certain employee related provisions may be
required to be held for a period of up to 10 years.
5. Alternative Performance Measures
Reconciliation from Operating Profit to Adjusted Operating Profit
Restated
GBP million Notes 2020 2019
============================================================================= ====== ===== =========
Operating profit 2,731 2,197
Acquisition and disposal costs 12 26 22
Amortisation and impairment of acquired intangibles 523 1,118
Excise tax provision (20) 139
Fair value adjustment of loan receivable 62 (3)
Sale of intellectual property income - (7)
Fair value adjustment of acquisition consideration - 129
Restructuring costs 4 205 144
============================================================================= ====== ===== =========
Adjusted operating profit 3,527 3,739
----------------------------------------------------------------------------- ------ ----- ---------
Acquisition and disposal costs and restructuring costs are discussed in further detail in
the above referenced notes.
The Group has adopted a new treatment of adjusted performance measures which has had the impact
of removing a fair value adjustment on loan receivables and sale of intellectual property
income as an adjusting item. To create a more understandable year on year comparison the change
has been made with effect from 1 October 2019 and therefore the fair value gain on the same
instrument has been restated in the 2019 comparative.
Reconciliation from Net Finance Costs to Adjusted Net Finance
Costs
GBP million 2020 2019
============================================================= ====== ======
Reported net finance costs 610 562
============================================================= ======
Fair value gains on derivative financial instruments 661 665
Fair value losses on derivative financial instruments (581) (839)
Exchange gains/(losses) on financing activities (256) 67
============================================================= ====== ======
Net fair value and exchange losses on financial instruments (176) (107)
============================================================= ======
Interest income on net defined benefit assets 99 142
Interest cost on net defined benefit liabilities (104) (147)
Post-employment benefits net financing cost (5) (5)
============================================================= ====== ======
Adjusted net finance costs 429 450
============================================================= ====== ======
Comprising
Interest on bank deposits (10) (16)
Interest on lease liabilities 7 -
Interest on bank and other loans 432 466
============================================================= ====== ======
Adjusted net finance costs 429 450
============================================================= ====== ======
Cash Conversion Calculation
GBP million 2020 2019
======================================================== ===== =====
Net cash flow from operating activities 4,030 3,236
======================================================== ===== =====
Tax 568 522
Net capital expenditure (274) (352)
Restructuring spend 145 146
======================================================== ===== =====
Cash flow post capital expenditure pre interest and tax 4,469 3,552
======================================================== ===== =====
Adjusted operating profit 3,527 3,739
======================================================== ===== =====
Cash Conversion 127% 95%
-------------------------------------------------------- ----- -----
6. Tax and Reconciliation to Adjusted Tax Charge
The Group has reclassified certain current tax assets and
liabilities on the balance sheet which were previously stated
gross, but which in line with IAS 12 'Income Taxes' shall be stated
net where there is a legally enforceable right of offset .
Analysis of charge in the year
GBP million 2020 2019
=============================================================== ===== =====
UK Current tax
Current year 97 79
Adjustments in respect of prior years 26 22
=============================================================== ===== =====
Overseas current tax
Current year 458 454
Adjustments in respect of prior years 12 (34)
=============================================================== ===== =====
Total current tax 593 521
--------------------------------------------------------------- ----- -----
Deferred tax
Relating to origination and reversal of temporary differences 15 88
=============================================================== ===== =====
Total tax charged to the consolidated income statement 608 609
--------------------------------------------------------------- ----- -----
GBP million 2020 2019
============================================================================================== ===== =====
Tax related to items recognised Consolidated Other Comprehensive Income OCI during the year:
Current tax on hedge of net investment (10) -
Deferred tax on hedge of net investment (80) -
Deferred tax on actuarial gains and losses 53 (52)
============================================================================================== ===== =====
Total tax charged to consolidated other comprehensive income (37) (52)
---------------------------------------------------------------------------------------------- ----- -----
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 9.
GBP million 2020 2019
================================================================= ===== =====
Reported tax 608 609
Deferred tax on amortisation of acquired intangibles 57 9
Current tax on excise tax provision (4) 15
Tax on net fair value gains and losses on financial instruments (63) 31
Tax on post-employment benefits net financing cost 1 4
Tax on restructuring costs 31 35
Tax on disposal of premium cigar division (19) -
Previously unrecognised tax credits 67 -
Uncertain tax positions (77) -
Tax on unrecognised losses 41 (61)
================================================================= ===== =====
Adjusted tax charge 642 642
================================================================= ===== =====
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 UK
corporation tax rate of 19.0 per cent (2019: 19.0 per cent) as
follows:
Restated
GBP million 2020 2019
========================================================================== ====== =========
Profit before tax 2,166 1,690
========================================================================== ====== =========
Tax at the UK corporation tax rate of 19.0% (2019: 19.0%) 411 321
Tax effects of:
Differences in effective tax rates on overseas earnings 100 (45)
Movement in provision for uncertain tax positions 61 16
Remeasurement of deferred tax balances arising from changes in tax rates 9 -
Remeasurement of deferred tax assets - derecognition/(recognition) (81) 38
Increase in previously unrecognised deferred tax assets 30 49
Deferred tax on unremitted earnings (19) 15
Share of profit of investments accounted for using the equity method (8) (10)
Permanent differences 76 232
Adjustments in respect of prior years 29 (7)
========================================================================== ====== =========
Total tax charged to the consolidated income statement 608 609
========================================================================== ====== =========
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 assets includes GBP18 million
recognition (2019: GBP35 million de-recognition) in relation to
deferred tax assets for tax losses in the Group's Dutch business,
GBP15 million recognition (2019:nil) in relation to deferred tax
assets for tax credits and losses in the Group's Spanish business
and GBP45 million recognition (2019: nil) in relation to deferred
tax assets for tax losses in the Group's US 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 GBP9 million (2019: nil).
During the year the Group has decreased the provision for
deferred tax on unremitted earnings by GBP19 million (2019: GBP15
million increase). The tax will arise on the distribution of
profits through the group and on planned group simplification.
Permanent differences include GBP80 million (2019: GBP4 million)
in respect of non-deductible exchange losses/(non-taxable exchange
gains), GBPnil (2019: GBP32 million) in respect of non-deductible
contingent consideration and GBPnil (2019: GBP147 million) in
respect of an impairment of goodwill and equity investments in the
Premium Cigar Division.
Movement on current tax account
GBP million 2020 2019
============================================== ====== ======
At 1 October (118) (122)
Charged to the consolidated income statement (593) (521)
Credited to other comprehensive income 10 -
Credited to equity 1 1
Cash paid 568 522
Exchange movements (13) 3
Other movements 1 (1)
============================================== ====== ======
At 30 September (144) (118)
============================================== ====== ======
The cash tax paid in the year is GBP25 million lower than the
current tax charge (2019: GBP1 million higher). 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.
Analysis of current tax account Reclassified
GBP million 2020 2019
================================= ====== =============
Current tax assets 206 195
Current tax liabilities (350) (313)
================================= ====== =============
(144) (118)
--------------------------------- ------ -------------
The Group has reclassified certain current tax assets and
liabilities on the balance sheet which were previously stated
gross, but which in line with IAS 12 'Income Taxes' shall be stated
net where there is a legally enforceable right of offset.
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 2020 the total value of
these provisions, including foreign exchange movements, was GBP273
million (2019: GBP204 million). 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. Until
matters are finally concluded it is possible that amounts
ultimately 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 matters 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.
French Tax Litigation
In November 2015 the Group received a challenge from the French
tax authorities that could lead to additional tax liabilities of up
to GBP248 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 October 2018 the
Commission Nationale, an independent adjudication body, whose
decision is advisory only, issued a report supportive of the
Group's arguments for no adjustment. In December 2018 the French
tax authorities issued their final assessments seeking the full
amount of additional tax assessed (GBP248 million). In January 2019
the Group appealed against the assessment. In August 2020, the
French tax authorities rejected the Group's appeal and the matter
will now proceed to litigation. Given there are no substantive
developments in the case it is appropriate to maintain the GBP44
million (2019: GBP42 million) provision for uncertain tax positions
in respect of this matter.
State Aid UK CFC
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, along with a
number of UK corporates, has made a similar application to the
European Court. The UK Government is obliged to collect any State
Aid granted pending the outcome of the European Court process.
Although the Group believes that it has no liability in respect
this issue, under a range of different interpretations of the EU
Commission's decision the Group has previously disclosed that
preliminary calculations indicated a range of potential liabilities
depending on the basis of calculation of up to GBP300 million.
In December 2019 HMRC issued guidance on the quantification of
any potential State Aid, and subsequently requested the Group, in
line with other corporates, submit an assessment of potential State
Aid. Whilst the Group's position remains that no State Aid has been
received, based on its submission to HMRC a potential liability of
c. GBP100 million was reported. Based on HMRC accepting our
assessment, it is expected they will seek recovery of the GBP100
million. On the basis the Group believes no State Aid arises, no
provision has been made at this time. If payment is required, based
on current advice a receivable in the same amount would be
recorded. Interest would be chargeable on any recovery.
Based upon current advice the Group does not consider any
provision is required in relation to any other EU State Aid
investigation.
Transfer Pricing
The Group has tax audits in progress, relating to transfer
pricing matters in a number of jurisdictions, principally UK,
France and Germany. The Group estimates the potential gross level
of exposure relating to transfer pricing issues is approximately
GBP800 million (2019: GBP530 million). The Group holds a provision
of GBP207 million (2019: GBP155 million) in respect of these
items.
In August 2020 the Group notified HMRC of a potential Diverted
Profits Tax (DPT) issue relating to brand rewards. On 25 September
2020, HMRC issued a preliminary notice under the DPT regime in
respect of the year ended 30 September 2016 indicating a potential
liability of c. GBP6 million. Collaborative discussions on the
issue continue and it is the Group's belief the issue is a transfer
pricing one, and will be resolved as such. If the transfer pricing
discussions are not concluded by end of December 2020, HMRC will
issue a final DPT notice, which the Group will be required to pay
within 30 days. On conclusion of the transfer pricing discussions,
an appropriate refund would be anticipated. Whilst the issues
discussed affects all subsequent periods, no further DPT notices
are anticipated.
The Group believe the transfer pricing provision held above
appropriately provides for this and other transfer pricing
issues.
7. Deferred Tax Assets and Liabilities
Reclassified
============================ ================================
Consolidated Consolidated
Income Income Consolidated Consolidated
Statement Statement Balance Sheet Balance Sheet
GBP million 2020 2019 2020 2019
=========================================== ============= ============= =============== ===============
Accelerated depreciation and amortisation 34 (9) (871) (914)
Retirement benefits (17) (19) 88 154
Other temporary differences (32) (60) 240 199
=========================================== ============= ============= =============== ===============
Deferred tax (expense)/benefit (15) (88)
=========================================== ============= ============= =============== ===============
Net deferred tax liabilities (543) (561)
------------------------------------------- ------------- ------------- --------------- ---------------
Reclassified
GBP million 2020 2019
========================== ====== =============
Deferred tax assets 381 370
Deferred tax liabilities (924) (931)
========================== ====== =============
(543) (561)
-------------------------- ------ -------------
The Group has reclassified certain deferred tax assets and
liabilities on the balance sheet which were previously stated
gross, but which in line with IAS 12 'Income Taxes' shall be stated
net where there is a legally enforceable right of offset. The Group
has also reclassified certain deferred tax assets and liabilities
to more closely align temporary difference classifications with the
related accounting classifications.
8. Dividends
Distributions to ordinary equity holders
GBP million 2020 2019 2018
============================================================================================ ====== ====== ======
Paid interim of 41.70 pence per share (2019: 62.56 pence, 2018: 122.33 pence)
- Paid June 2018 - - 271
- Paid September 2018 - - 271
- Paid December 2018 - - 624
- Paid June 2019 - 298 -
- Paid September 2019 - 298 -
- Paid December 2019 - 679
- Paid June 2020 197 - -
- Paid September 2020 197 - -
============================================================================================ ====== ====== ======
Interim dividend paid 394 1,275 1,166
============================================================================================ ====== ====== ======
Proposed interim of 48.00 pence per share (2019: 72.00 pence , 2018: nil)
- To be paid December 2020 453 - -
============================================================================================ ====== ====== ======
Interim dividend proposed 453 - -
============================================================================================ ====== ====== ======
Proposed final of 48.01 pence per share (2019: 72.01 pence, 2018: 65.46 pence)
- Paid March 2019 - - 624
- Paid March 2020 - 680 -
- To be paid March 2021 454 - -
============================================================================================ ====== ====== ======
Final dividend 454 680 624
============================================================================================ ====== ====== ======
Total ordinary share dividends of 137.71 pence per share (2019: 206.57 pence, 2018: 187.79
pence) 1,301 1,955 1,790
============================================================================================ ====== ====== ======
The third interim dividend for the year ended 30 September 2020
of 48.00 pence per share amounts to a proposed dividend of GBP453
million, which will be paid in December 2020
The proposed final dividend for the year ended 30 September 2020
of 48.01 pence per share amounts to a proposed dividend payment of
GBP454 million in March 2021 based on the number of shares ranking
for dividend at 30 September 2020, and is subject to shareholder
approval. If approved, the total dividend paid in respect of 2020
will be GBP1,301 million (2019: GBP1,955 million). The dividend
paid during 2020 is GBP1,753 million (2019: GBP1,844 million).
9. Earnings per Share
Basic earnings per share is based on the profit for the period
attributable to the owners of the parent and the weighted average
number of ordinary shares in issue during the period excluding
shares held to satisfy the Group's employee share schemes and
shares purchased by the Company and held as treasury shares.
Diluted earnings per share have been calculated by taking into
account the weighted average number of shares that would be issued
if rights held under the employee share schemes were exercised. No
instruments have been excluded from the calculation for any period
on the grounds that they are anti-dilutive.
GBP million 2020 2019
============================================================================ ====== ======
Earnings: basic and diluted - attributable to owners of the Parent Company 1,495 1,010
============================================================================ ====== ======
Millions of shares
============================================================================ ====== ======
Weighted average number of shares:
Shares for basic earnings per share 944.4 953.0
Potentially dilutive share options 1.4 1.9
============================================================================ ====== ======
Shares for diluted earnings per share 945.8 954.9
============================================================================ ====== ======
Pence
============================================================================ ====== ======
Basic earnings per share 158.3 106.0
Diluted earnings per share 158.1 105.8
============================================================================ ====== ======
Reconciliation from reported to adjusted earnings and earnings per share
Restated
2020 2019
====================================== ========================================
GBP million unless otherwise
indicated Earnings per share (pence) Earnings Earnings per share (pence) Earnings
==================================== =========================== ========= =========================== ===========
Reported basic 158.3 1,495 106.0 1,010
Acquisition and disposal costs 2.8 26 2.3 22
Amortisation and impairment of
acquired intangibles 49.2 466 116.4 1,109
Excise tax provision (1.7) (16) 13.0 124
Fair value adjustment of loan
receivable 6.6 62 (0.3) (3)
Sale of intellectual property
income - - (0.7) (7)
Fair value adjustment of
acquisition consideration - - 13.5 129
Net fair value and exchange
movements on financial instruments 25.3 239 8.0 76
Post-employment benefits net
financing cost 0.4 4 0.1 1
Restructuring costs 18.4 174 11.4 109
Tax on disposal of premium cigar
division 2.0 19 - -
Previously unrecognised tax credits (7.1) (67) - -
Uncertain tax positions 8.2 77 - -
Tax on unrecognised losses (4.3) (41) 6.4 61
Adjustments above attributable to
non-controlling interests (3.7) (35) (3.8) (36)
==================================== =========================== ========= =========================== ===========
Adjusted 254.4 2,403 272.3 2,595
==================================== =========================== ========= =========================== ===========
Adjusted diluted 254.1 2,403 271.8 2,595
==================================== =========================== ========= =========================== ===========
From the 1 October 2020 the Group has adopted a new treatment of
adjusted performance measures which has had the impact of removing
a fair value loss on loan receivables as an adjusting item. To
create a more understandable year on year comparison the fair value
gain on the same instrument has been restated in the 2019
comparative.
10. Net Debt
The movements in cash and cash equivalents, borrowings, and
derivative financial instruments in the year were as follows:
Liabilities
Derivative from Cash and
Current Lease Non-current financial financing cash
GBP million borrowings liabilities Borrowings instruments activities equivalents Total
=============== ============== ============== ============= ============= ============= ============= =========
At 1 October
2019 (1,937) - (11,697) (622) (14,256) (2,286) (11,970)
On adoption of
IFRS 16 - (326) - - (326) - (326)
Reallocation
of current
borrowings
from
non-current
borrowings (1,340) - 1,340 - - - -
Cash flow 1,857 72 (1) 23 1,951 (611) 1,340
Accretion of
interest 32 (7) - (28) (3) - (3)
Change in fair
values - - - 80 80 - 80
New leases and
modifications - (32) - - (32) - (32)
Exchange
movements (54) (6) 148 (269) (181) 13 (168)
Transferred to
held for
disposal - - - - - (62) (62)
=============== ============== ============== ============= ============= ============= ============= =========
At 30
September
2020 (1,442) (299) (10,210) (816) (12,767) 1,626 (11,141)
=============== ============== ============== ============= ============= ============= ============= =========
Derivative Liabilities
Current Non-current financial from financing Cash and cash
GBP million borrowings Borrowings instruments activities equivalents Total
================ ================ ================ =============== =============== ================ =========
At 1 October
2019 (2,397) (9,598) (679) (12,674) 775 (11,899)
On adoption of
IFRS 16 (1,656) 1,656 - - - -
Reallocation of
current
borrowings from
non-current
borrowings
Cash flow
Accretion of
interest 2,159 (3,528) 117 (1,252) 1,540 288
Change in fair
values 20 (26) 39 33 - 33
New leases and
modifications - - (174) (174) - (174)
Exchange
movements (63) (201) 75 (189) (15) (204)
Transferred to
held for
disposal - - - - (14) (14)
================= ================ ================ =============== =============== ================ =========
At 30 September
2020 (1,937) (11,697) (622) (14,256) 2,286 (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 2020 2019
========================================= ========= =========
Reported net debt (11,141) (11,970)
Accrued interest 156 162
Lease liabilities 299 -
Fair value of interest rate derivatives 387 432
========================================= ========= =========
Adjusted net debt (10,299) (11,376)
========================================= ========= =========
11. Derivative Financial Instruments
2020 2019
====================================== ==================================================
GBP million Assets Liabilities Net Fair Value Assets Liabilities Net Fair Value
========================== ======= ============ =============== =================== ============ ===============
Current derivative
financial instruments
Interest rate swaps 41 (31) 10 24 (26) (2)
Foreign exchange
contracts 9 (10) (1) 104 (2) 102
Cross-currency swaps 3 - 3 9 - 9
========================== ======= ============ =============== =================== ============ ===============
Total current derivatives 53 (41) 12 137 (28) 109
Collateral(1) - - - - - -
========================== ======= ============ =============== =================== ============ ===============
53 (41) 12 137 (28) 109
========================== ======= ============ =============== =================== ============ ===============
Non-current derivative
financial instruments
Interest rate swaps 813 (1,204) (391) 645 (1,079) (434)
Cross-currency swaps - (484) (484) 32 (367) (335)
========================== ======= ============ =============== =================== ============ ===============
Total non-current
derivatives 813 (1,688) (875) 677 (1,446) (769)
Collateral(1) - 47 47 - 38 38
========================== ======= ============ =============== =================== ============ ===============
813 (1,641) (828) 677 (1,408) (731)
========================== ======= ============ =============== =================== ============ ===============
Total carrying value of
derivative financial
instruments 866 (1,682) (816) 814 (1,436) (622)
========================== ======= ============ =============== =================== ============ ===============
Analysed as:
Interest rate swaps 854 (1,235) (381) 669 (1,105) (436)
Foreign exchange
contracts 9 (10) (1) 104 (2) 102
Cross-currency swaps 3 (484) (481) 41 (367) (326)
Collateral(1) - 47 47 - 38 38
========================== ======= ============ =============== =================== ============ ===============
Total carrying value of
derivative financial
instruments 866 (1,682) (816) 814 (1,436) (622)
========================== ======= ============ =============== =================== ============ ===============
(1) Collateral deposited against derivative financial
liabilities under the terms and conditions of collateral
appendices.
Fair values are determined based on observable market data such
as yield curves, foreign exchange rates and credit default swap
prices to calculate the present value of future cash flows
associated with each derivative at the balance sheet date. Market
data is sourced through Bloomberg and valuations are validated by
reference to counterparty valuations where appropriate. Some of the
Group's derivative financial instruments contain early termination
options and these have been considered when assessing the element
of the fair value related to credit risk. On this basis the
reduction in reported net derivative liabilities due to credit risk
is GBP27 million and would have been a GBP75 million reduction
without considering the early termination options.
12. Assets held for sale
On 30 April 2019 the Group announced its intention to sell the
Premium Cigar Division ("the Division") and at 30 September 2019
the Group presented the assets and liabilities of the business as
held for sale. On 27 April 2020 the Group announced that it had
agreed the sale of the Division. The total actual cash flows
received and currently expected to be received total EUR1,198
million, a slight reduction from the EUR1,225 million previously
announced due to the true up of cross perimeter intercompany loans
and other small customary closing adjustments. A non-refundable
deposit of EUR92 million was received on 28 September 2020 and a
further non-refundable deposit of EUR86 million was received on 6
October 2020. The share sale element of the sale of the Division
completed on 29 October 2020 and EUR607 million was received on
that date including the impact of a true up in respect of cross
perimeter intercompany loan balances. An additional EUR256 million
is due to be received on 29 April 2021 and a further EUR88 million
is due to be received on 29 0ctober 2021. The sale of the La Romana
factory in the Dominican Republic is due to complete in the first
half of our 2022 financial year when it is expected that EUR69
million will be received subject to a true up in respect of
inventory values.
Although the period which the Group has classified these assets
as 'held for sale' exceeded 1 year, the Group completed the sale on
29 October 2020 and therefore the IFRS 5 criteria for an asset held
for sale presentation continue to be met as at 30 September
2020.
CARRYING VALUE OF ASSET HELD FOR SALE
When the Premium Cigar Division was reclassified as held for
disposal at 30 September 2019 an impairment test was undertaken,
and an impairment was identified with net assets being written down
to their estimated recoverable amount on a fair value less costs of
sale basis. The test involved an assessment of the level of
proceeds expected to be achieved on completion of the disposal,
less transaction tax and costs with a comparison of this figure to
the carrying value of the net assets. Since bid offers are an
observable input not based on a quoted price the fair value is
based on a level 2 valuation under IFRS 13.
At 27 April 2020, the sale was agreed giving certainty as to the
actual level of sale proceeds expected to be achieved and this
amount was a decrease on the previous estimate. For the year ended
30 September 2020 foreign exchange losses arising on the
retranslation of the carrying value associated assets, net of
impairment provisions of GBP23 million were recognised within the
foreign change reserve account and a net profit of GBP11 million
was recognised in the income statement as a result of impairment
provision reversals due to changes in the estimated amount of the
sale consideration offset by foreign exchange gains. (2019: GBP500
million impairment charge).
The cumulative impairments recognised have been used to fully
write down the carrying value of goodwill and have then been
allocated pro-rata against other non-current assets, within the
current assets held for disposal category on the balance sheet. The
net assets relating to the La Romana site were transferred from
assets held for sale at 31 March 2020 and recognised elsewhere
within the balance sheet due to the deferral of its sale completion
date. This comprised assets of GBP43 million being GBP38 million of
inventory, GBP3 million of property, plant and equipment, and GBP2
million of other assets. In addition GBP10 million of payables
related to La Romana were also transferred out of assets held for
sale. Total net assets held for disposal are now GBP1,024 million,
comprised of GBP979 million for the purchase consideration and
GBP45 million for the repayment of net amounts due to Imperial
group undertakings.
2019 comparatives have been restated due to the sale of the
Premium Cigar business. Please see Note 1 for more detail.
PROFITS ARISING ON DISPOSAL
As the disposal completed after the balance sheet date it is
treated as a non-adjusting post balance sheet event. The profit on
disposal will be recognised in the 2021 financial year. The profit
arising on disposal will be calculated factoring in the recycling
of foreign exchange gains previously recorded in reserves and any
variation between the asset held for sale carrying value and sale
proceeds, net of tax and disposal costs. We currently estimate the
cumulative foreign exchange gains at 30 September 2020 to be in the
region of GBP250 million - GBP350 million.
The assets and liabilities classified as held for disposal are
as follows:
GBP million 2020 2019
================================================== ===== =====
Non-current assets
Intangible assets 101 138
Property, plant and equipment 17 26
Investments accounted for using the equity method 584 574
Trade and other receivables 35 52
Right of use leased assets 7 -
Deferred tax assets 10 11
==================================================== ===== =====
754 801
================================================== ===== =====
Current assets
Inventories 166 228
Trade and other receivables 67 60
Cash and cash equivalents 75 14
====================================================
308 302
================================================== ===== =====
Total assets 1,062 1,103
==================================================== ===== =====
Current liabilities
Trade and other payables (35) (33)
Provisions (3) (4)
====================================================
(38) (37)
================================================== ===== =====
Total liabilities (38) (37)
==================================================== ===== =====
Net assets 1,024 1,066
==================================================== ===== =====
13. Trade and other receivables
2020 2019
======== ============ ======== ============
GBP million Current Non-Current Current Non-current
======================= ======== ============ ======== ============
Trade receivables 2,410 4 2,599 5
Less: loss allowance (112) (4) (72) (5)
======================= ======== ============ ======== ============
Net trade receivables 2,298 - 2,527 -
Other receivables 178 48 176 108
Prepayments 162 9 151 11
======================= ======== ============ ======== ============
2,638 57 2,854 119
======================= ======== ============ ======== ============
2019 comparatives have been restated due to the sale of the
Premium Cigar business. Please see Note 1 for more detail.
14. Trade and other payables
2020 2019
======== ============ ======== ============
GBP million Current Non-Current Current Non-current
=============================================== ======== ============ ======== ============
Trade payables 1,191 - 1,775 -
Duties payable 6,129 - 4,919 -
Other taxes and social security contributions 1,603 - 1,358 -
Other payables 464 - 400 -
Accruals 783 5 900 7
=============================================== ======== ============ ======== ============
10,170 5 9,352 7
=============================================== ======== ============ ======== ============
2019 comparatives have been restated due to the sale of the
Premium Cigar business. Please see Note 1 for more detail.
15. Retirement Benefit Schemes
Restated
2020 2019
=================================================================== ======= ====== ===== ======= ====== ========
GBP million DBO Assets Total DBO Assets Total
=================================================================== ======= ====== ===== ======= ====== ========
At 30 September 2019 (5,877) 5,223 (645) (5,413) 4,680 (463)
Consolidated income statement expense
Current service cost (49) - (49) (44) - (44)
Settlement gains/(losses) - - - 3 (3) -
Past service (losses) - - - (1) - (1)
Cost of termination benefits (2) - (2) (19) - (19)
Net interest (expense)/income on net defined benefit
(liability)/asset (104) 99 (5) (147) 142 (5)
Administration costs paid from plan assets - (6) (6) - (6) (6)
=================================================================== ======= ====== ===== ======= ====== ========
Cost recognized in the income statement (62) (75)
=================================================================== ======= ====== ===== ======= ====== ========
Remeasurements
Actuarial gains due to liability experience 36 - 36 73 - 73
Actuarial gain/(loss) due to financial assumption changes 22 - 22 (814) - (814)
Actuarial gain/(loss) due to demographic assumption changes 228 - 228 (14) - (14)
Return on plan assets excluding amounts included in net interest
(expense)/income above - (9) (9) - 507 507
Remeasurement effects recognised in other comprehensive income 277 (248)
=================================================================== ======= ====== ===== ======= ====== ========
Cash
Employer contributions - 145 145 - 142 142
Employee contributions (1) 1 - (1) 1 -
Benefits paid directly by the company 266 (266) - 218 (218) -
Benefits paid from plan assets - - - 48 (48) -
=================================================================== ======= ====== ===== ======= ====== ========
Net cash 145 142
=================================================================== ======= ====== ===== ======= ====== ========
Other
Exchange movements (17) (5) (22) (36) 26 (10)
=================================================================== ======= ====== ===== ======= ====== ========
Total other (22) (10)
=================================================================== ======= ====== ===== ======= ====== ========
At 30 September (5,498) 5,182 (316) (5,877) 5,223 (654)
=================================================================== ======= ====== ===== ======= ====== ========
The cost of termination benefits in the year ended 30 September
2020 and 30 September 2019 mainly relate to restructuring activity
in Germany.
The 2019 pension scheme assets and liabilities, actuarial
gain/(loss) due to financial assumption and return on plan assets
excluding amounts included in net interest income (expense) have
been restated and reduced by GBP199 million (2018: GBP168 million)
following the closure of the Netherlands scheme in 2017.
16. Contingent Liabilities
Where contingent liabilities are disclosed and not quantified
this is because it is not practicable to do so.
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 defences 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. This assessment of the probability of economic outflows at
the year-end is a judgement which has been taken by management.
Consequently, the Group has not provided for any amounts in respect
of these cases in the financial statements.
Master Settlement Agreement
In the mid 1990s, the Attorneys General of most of the US States
filed litigation against the major tobacco manufacturers seeking to
recover the costs of treating tobacco related illnesses. In
November, 1998, the States and the companies entered into a
comprehensive settlement of these actions known as the Master
Settlement Agreement ("MSA"). The parties to the MSA included the
major US cigarette manufacturers, including Reynolds Tobacco Co,
and Lorillard, and 46 US states, the District of Columbia and
certain US territories and possessions.
Prior to November 1998, these same cigarette manufacturers had
settled four other cases which had arisen in Mississippi, Florida,
Texas and Minnesota (the "Previously Settled States"), by separate
agreements with each state. The Previously Settled States
agreements are referred to as the "State Settlement Agreements".
ITG Brands is currently a party to the MSA and the Mississippi
State Settlement Agreement only.
By entering into the MSA and State Settlement Agreements the
company has the benefit of a release from liability from the
States' various historic tobacco product liability claims. The
requirements of the tobacco companies as a party to the MSA and
Mississippi State Settlement Agreement, involves making annual
payments which are based on the volume of US tobacco sales, and an
agreement to abide by certain marketing restrictions. The
associated charge under the MSA for the US Group companies in the
year was GBP432 million (2019: GBP425 million). This is recognised
within other cost of sales. In addition, the amount paid under the
Mississippi State Settlement Agreement was GBP7 million (2019: GBP7
million) and was also recognised in other cost of sales.
Competition Authority Investigations
The Group is currently co-operating with the Belgian national
competition authority in relation to an ongoing competition law
investigation and is engaged in appealing fines imposed on Group
companies by competition authorities through the national courts in
other relevant countries.
17. Post Balance Sheet Events
Sale of Premium Cigar Division
On 29 October 2020 the group completed the sale of the Premium
Cigar Division for a consideration of EUR1,198 million. This
business, excluding La Romana, was classified as an asset held for
sale at 30 September 2020. For more details see note 12.
USA
On 13 October 2020 a new Product Liability Litigation (PLL) case
was filed against Fontem US and ITG Brands in the US in relation to
the usage of e-cigarettes and other vaping devices. The case has
not been served on either Fontem US or ITG Brands by the 17
November 2020 but this action is expected.
18. Brexit
Following the UK's exit from the European Union on 31 January
2020, the Group has looked at the potential impacts of the UK
leaving the transition period on the 31 December 2020 without a
substantive trade agreement in place. The key risks remain a
potential increase in import duties and impact on UK customers;
additional risk of tobacco smuggling, inventory requirements to
ensure supply, impact on consumer confidence, and implications on
existing international tax legislation. In the event that these are
not addressed prior to 31 December 2020, we estimate there could be
additional costs of around GBP75 million annually primarily
relating to import duties.
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END
FR KKOBNABDKDDD
(END) Dow Jones Newswires
November 17, 2020 02:00 ET (07:00 GMT)
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