Final Results
16/11/2021 07:00
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RNS Number : 5078S Imperial Brands PLC 16 November 2021
IMPERIAL BRANDS PLC
Legal Entity Identifier (LEI) No. 549300DFVPOB67JL3A42
Full year results Statement
16 NOVEMBER 2021
A YEAR OF GOOD RESULTS WHILE BUILDING FOUNDATIONS FOR FUTURE GROWTH
Report for the year ended 30 September 2021
Business Highlights
· Transformation programme underway to create more
consumer-focused, efficient and performance-driven organisation
· Operational improvements supporting growth in net revenue, profit
and free cash flow
· Sharper focus on top-five priority markets beginning to arrest
long-term share declines
· NGP pilots in heated tobacco and vapour on track
· Strong cash flows enabling deleverage progress in line with our
plans
Financial Summary
Year ended 30 September 2021 Reported Organic adjusted(2)
2021 2020 Change 2021 2020 Actual Constant currency(3)
Revenue/Net revenue(1) £m 32,791 32,562 +0.7% 7,589 7,738 -1.9% +1.4%
Operating profit £m 3,146 2,731 +15.2% 3,570 3,496 +2.1% +4.8%
Basic earnings per share pence 299.9 158.3 +89.5% 246.5 247.2 -0.3% +2.8%
Free cash flow £m 1,524 3,248 -53.1% 1,524 3,248 -53.1%
Net debt £m (9,373) (11,141) (8,615) (10,299)
Dividend per share pence 139.08 137.7 +1.0% 139.08 137.7 +1.0% +1.0%
(1 )Reported revenue includes duty, similar items, distribution and sale of
peripheral products which are excluded from net revenue; net revenue comprises
reported revenue less duty and similar items, excluding sale of peripheral
products and distribution revenue.
(2 )See page 3 for basis of presentation, page 28 and notes 3, 6 and 10 of the
financial statements for the reconciliation between reported and adjusted
measures. For comparison purposes, the Group uses the term "organic" to
exclude the contribution of the Premium Cigar Division, which was divested on
29 October 2020.
(3) Constant currency removes effect of exchange rate movements on the
translation of the results of our overseas operations.
Stefan Bomhard Chief Executive
"This has been a year of important progress and significant change, as we
begin to deliver on the new, focused strategy we announced in January 2021. We
have substantially refreshed our leadership team, making new hires to
strengthen our consumer-facing capabilities, while building on our existing
deep tobacco experience. We have changed the way we work, placing the consumer
at the centre of our decision making. We have simplified the organisation,
creating efficiencies for reinvestment. And we have introduced more rigorous
performance management, enabling better prioritisation of resources.
"This approach is already delivering improved operational and financial
outcomes. In tobacco, our sharper focus and increased investment in the
top-five priority markets have begun to stabilise the aggregate market share
performance. This is encouraging early progress in addressing the long-term
historical declines. We will build on this foundation in the coming year, with
further investment in brand building and sales execution.
"Through our focused, consumer-led next generation products strategy, we are
committed to making a meaningful contribution to harm reduction over time by
offering adult smokers potentially reduced risk products. In line with our
plans, we launched market trials for our heated tobacco proposition, Pulze and
iD sticks in the Czech Republic and Greece, as well as a trial of an improved
consumer marketing proposition for our US vapour product, blu. We will track
the consumer data over the coming months to inform our next steps.
"Our five-year plan to transform Imperial is divided into two distinct
periods. The year ahead will complete the two-year strengthening phase, with
further investment in our five priority markets and NGP pilots, the embedding
of new ways of working and cost-saving initiatives. This period builds the
foundations for the subsequent three-year phase, which focuses on the
acceleration of returns and sustainable growth in shareholder value."
Delivering Against our Strategic Priorities
Focus on Priority Combustible Markets
· Stabilising aggregate priority market share performances: down 2 bps
(MAT) vs 17 bps decline last year
· Share gains in US, UK, and Spain broadly offsetting declines in
Germany and Australia
· Investing behind clear operational levers in line with our plans for
our priority markets, for example:
· Expanding our sales force and enhancing sales execution, e.g. adding
200 new sales people in US
· Leveraging our regional sales coverage, e.g. expanding coverage in
south of UK and in eastern Germany
· Building brand equity and increasing participation in subpremium,
e.g. JPS in Germany, Winston in US
· Optimising our approach to the value segment, e.g. Parker &
Simpson in Australia
· Rejuvenating our local jewel brands, e.g. growing Embassy in the UK,
Nobel and Fortuna in Spain
· Maximising the potential of fine-cut category, e.g. leveraging
Riverstone in Australia
Drive Value from our Broader Market Portfolio
· Strong Africa performance: net revenue up 8%; adjusted operating
profit up 20%; share gains in several markets
· Group tobacco share growth of 20 bps (MAT) with share gains in all
regions
Build a Targeted NGP Business
· Building foundations for a sustainable NGP business to underpin our
commitment to harm reduction
· Heated tobacco trials of Pulze and iD in Greece and the Czech
Republic progressing well
· Trial of a new consumer marketing proposition for our vapour product,
blu, in Charlotte, North Carolina
· Resources prioritised behind the markets and categories with best
sustainable growth prospects
Adopting New Ways of Working
· Leadership team strengthened with new hires bringing strong
consumer goods experience
· New Group Consumer Office created to place consumer at centre of
our thinking
· Restructured sales and marketing organisation to align with
strategy and drive effectiveness
· Reshaped our divisions and reduced our market clusters from 13 to
10 to support market prioritisation
· Culture change underway with a reset of our purpose, vision and
behaviours to support strategic delivery
Results Overview
Net revenue growth driven by resilient tobacco pricing
· Organic net revenue up 1.4% driven by tobacco growth of 1.5%; NGP net
revenue down 3.9% reflecting market exits
· Tobacco price mix up 4.4% more than offset tobacco volume declines of
2.9%
· Excluding Australia stock profit effects, tobacco price mix up 5.6%
and tobacco net revenue up 2.7%
· Reported revenue grew 0.7%, due to increases in excise duty
Delivering improved profitability
· Organic adjusted Group operating profit up 4.8% driven by reduced NGP
losses and higher Distribution profit
· Reported operating profit of £3,146m is higher by £415m, driven
primarily by gains on disposal of the Premium Cigar Division (£281m) and a
reduction in amortisation and impairment of acquired intangibles (£73m)
· Delivering against profit expectations despite absorbing headwinds
of:
o lower stock profit in Australia (£88m) as previously guided
o a charge to meet US state litigation costs (£52m), which removes
uncertainty
· Excluding these factors, underlying adjusted organic tobacco profit
grew 2.7% or £98m
· Including these factors, adjusted organic tobacco profit was lower by
1.2% (£42m)
· NGP losses reduced by 56.7% to £138m as we optimise investment and
begin our market trials
· Distribution adjusted operating profit (including eliminations) up
11.3% driven by growth in pharmaceuticals
· Organic adjusted EPS up 2.8% at constant currency driven by growth in
operating profit, partially offset by an increase in the tax rate to 22.6%
· Reported basic EPS up 89.5% at 299.9p reflecting marked to market
foreign exchange accounting gains on financial instruments and the impact of
the Premium Cigar disposal, with intangible write downs in the prior period
and the profit on sale of assets booked this year
Strong free cash flow supporting investment, deleverage and progressive
dividend
· Strong cash conversion of 83% in line with expectations reflecting
unwind of prior year Logista working capital
· Adjusted net debt reduced by £1.7bn due to strong free cash flow of
£1.5bn, a reduced dividend, proceeds from the sale of the Premium Cigar
Division and FX translation
· Net debt to EBITDA reduced to 2.2x (2020: 2.7x) or 2.3x at constant
exchange rates
· Reported net debt reduced by £1.8bn, broadly in line with reduction
in adjusted net debt
· Annual dividend per share up 1.0% to 139.08 pence per share, in line
with our progressive dividend policy
Outlook
We are making good progress with the implementation of our new strategy and we
remain on track to deliver the five-year plan we set out in January 2021.
2022 is the second year of our two year strengthening phase, where we will
step up investment behind our growth initiatives in our priority combustible
markets, in our NGP trials and in our new ways of working. It will be a year
of further reorganisation and change as we strengthen our foundations for the
future.
At constant exchange rates, we expect to deliver net revenue growth at a
similar rate to FY21, while adjusted operating profit is expected to grow
slightly slower than net revenue, reflecting the step up in investment in line
with our five-year strategic plan and after taking into account the non-repeat
of the US state litigation settlement costs (net benefit of c. £40m in
FY22).
We expect performance will be weighted to the second half reflecting the
phasing of investment and the prior year comparator.
Some uncertainties remain about how the further lifting of COVID-19
restrictions will affect consumer buying patterns and the unwind of the small
mix benefit in the past year. There is also risk of inflationary pressures
although we are well placed to manage them through our purchasing strategy,
high margins and pricing.
A higher effective tax rate of around 24 per cent is expected to be partly
offset by lower interest costs. At current exchange rates, foreign exchange
translation is expected to be broadly neutral on revenue and earnings per
share.
Basis of Presentation
· To aid understanding of our results, we use 'adjusted' (non-GAAP)
measures to provide a consistent 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.
· In these results, we also use the term organic to remove the
impact of the divestment of our Premium Cigar Division to show a like-for-like
performance, which is the basis of the performance commentary. The impact of
the divestment is analysed in notes 3, 6 and 10 of the financial statements on
adjusted performance measures.
· 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 - moving
annual trend), unless otherwise stated. Aggregate market share is a weighted
average across markets within our footprint.
Other Information
Investor Contacts Media Contacts
Peter Durman +44 (0)7970 328 093 Jonathan Oliver +44 (0)7740 096 018
James King +44 (0)7581 052 880 Simon Evans +44 (0)7967 467 684
Jennifer Ramsey +44 (0)7974 615 739
Analyst Presentation Webcast
Imperial Brands PLC will be hosting a live webcast at 09:00 (GMT) for
investors and investment analysts following the publication of our preliminary
results on 16 November 2021. The webcast will be hosted by Stefan Bomhard,
Chief Executive, and Lukas Paravicini, Chief Financial Officer. The
presentation will be followed by a question and answer session. The
presentation slides will be available on www.imperialbrandsplc.com
(http://www.imperialbrandsplc.com) from 07.00 (GMT). An archive of the webcast
and the presentation script and slides will also be available.
Please either listen to the Q&A session via the webcast link:
https://edge.media-server.com/mmc/p/uha45788
(https://edge.media-server.com/mmc/p/uha45788) 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: 5084104
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
The right strategy, purpose and mindset
The strategy of Imperial Brands has three simple priorities. The first is to
create sustained value in the combustible market through a focus on our
priority markets where we can leverage our strengths. The second is to build a
distinctive presence in next generation products (NGP), which, over time,
delivers a material contribution both to harm reduction, through offering
potentially reduced harm products to consumers, and investor returns. The
third is to drive value from our broader global portfolio.
These priorities are mutually supportive. Scalable success in NGP requires
both consumer focus and the full mobilisation of Imperial's core strengths in
marketing, manufacturing and strong retail partnerships. At the same time, I
believe our responsible, long-term commitment to improving the wellbeing of
consumers provides a defining mission that energises the entire organisation.
Delivering on this strategy requires us to put the consumer at the centre of
everything we do, to simplify our operations and to develop a rigorous
performance culture.
As we build the foundations of this new culture, over the past year we have
conducted a range of listening exercises with our 27,700 colleagues. Through
this process, we developed a new statement of purpose: "Forging a path to a
healthier future for moments of relaxation and pleasure".
Alongside the new strategy we have developed a vision statement which is "To
build a strong challenger business powered by responsibility, focus and
choice".
Our challenger mindset is an important and distinctive attribute. Although
our brands have deep heritage, Imperial is, in important ways, a young
company. This year marks our 25th anniversary as an independent public company
and the key acquisitions that completed our global footprint occurred only in
the past decade. In our recent history, we have been at our best when we have
acted as an ambitious challenger, providing genuine choice for our customers
and consumers, and an additional responsible industry player for regulators
and policymakers.
After just over a year as CEO and having met many hundreds of colleagues, both
virtually and face-to-face, I can confirm that this business retains that
challenger spirit in abundance. However, as I said at the launch of our new
strategy in January 2021, in order to make a reality of our ambition to put
the consumer at the centre, we need to supplement our core strengths with
additional capabilities in insights, innovation and product development.
I'd like to take this opportunity to thank our colleagues for their
significant contribution, particularly with the challenges of a global
pandemic.
Over the past 12 months we have assembled a diverse, new senior team and
refreshed the way we work. This approach, bringing together our traditional
strengths and future-facing capabilities, has led to improved operational and
financial outcomes in line with our expectations.
The right team
Driving this new culture is the newly formed Executive Leadership Team (ELT).
During the year, Andy Dasgupta joined in the newly created role of Chief
Consumer Officer and a re-organisation of our reporting regions led to the
appointment of Kim Reed as President and CEO of our Americas Region and Paola
Pocci as President of Africa, Asia and Australasia (AAA). This new regional
structure enables a sharper focus both on our largest market, the United
States, and the portfolio of emerging markets that have the potential to
become an important future growth engine. Javier Huerta joined as Chief Supply
Chain Officer and Lukas Paravicini as Chief Financial Officer. A strengthened
ELT team, collaborating closely with our experienced functional and market
leaders, means Imperial now has the right blend of deep expertise of the
tobacco industry and fresh ideas and perspectives from blue chip consumer
goods companies, such as Nestlé, Unilever, P&G and Pepsi.
Placing the consumer at the centre of all our decisions
As Chief Consumer Officer, Andy Dasgupta is leading our focus on the consumer.
Under him, we have adopted a more co-ordinated approach to how we collect and
use consumer and competitor insights and data, which is leading to
better-informed and faster decision-making. We are now building the right
marketing, brand and portfolio management capabilities to support growth. In
addition, Andy is leading a newly defined innovation programme that sits
across tobacco and NGP to ensure we can meet consumer needs for new products,
formats and experiences.
Embedding a high performance culture
We have taken action to embed a performance-based culture; one that holds our
teams to account and rewards teamwork. For our top-five priority combustible
markets this involved detailed monthly executive reviews of each market. We
have revised incentive metrics for the Annual Bonus and Long-Term Incentive
Plans (LTIP) to support our strategic objectives. We also have defined the new
behaviours which will support the challenger-minded, consumer-centric and
responsible culture we are creating at Imperial. In the coming year we will be
rolling out a global programme to help our colleagues understand and embrace
how they can best play a practical role in driving our transformation.
Simplifying our operations
To simplify our operations, we are restructuring the organisation to
reallocate resources to the customer and consumer-facing areas in our priority
markets while simplifying other aspects of operations. This is realising
savings to fund our investment plans. For example, we have already
restructured our sales and marketing organisation, reducing the number of
market clusters from 13 to 10. In addition, our business services are
implementing modern operating models, which will embed more effective ways of
working.
The right performance
Our results reflect the actions taken to focus our investment tightly behind
our priority markets and to drive a more rigorous approach to managing
performance in tobacco and NGP. In tobacco, we have begun to stabilise the
long-term aggregate market share declines in our five priority markets through
a greater focus on performance management, brand refreshes and enhancing our
sales footprint in select areas. On a constant currency basis, Group net
revenues grew 1.4 per cent year-on-year reflecting continued strong pricing
dynamics. Reported revenue grew 0.7 per cent at actual exchange rates. As
anticipated, we grew our Group adjusted operating profit by 4.8 per cent in
the year on a constant currency basis driven by a reduction in our NGP losses
and higher Distribution profit from Logista. Reported operating profit grew
15.2 per cent at actual exchange rates. We delivered solid cash flow
performance, generating £1.5 billion of free cash flow.
Focus on priority combustible market portfolio
Aggregate market share in our five priority combustible markets declined by
just two basis points, compared to a 17 basis point decline last year. Share
gains in the US, UK and Spain partially offset declines in Germany and
Australia. This relative improvement reflects the benefit of the changes we
are making to focus greater resource and more detailed performance management
on these priority markets. We have begun to increase investment in these
markets behind some clear operational levers, such as increased sales force
and key account management, areas which were identified by the local teams. We
are making good progress, although the main investment increase begins in the
coming year. Further details are provided in the Operating Review.
Build a targeted NGP business
The NGP category remains relatively nascent in the majority of markets. We
have an exciting opportunity to make a meaningful contribution to harm
reduction by building a targeted and sustainable business in this market,
offering potentially reduced risk products. Our new approach offers consumers
greater choice in markets where they already express a preference for a
particular proposition.
In heated tobacco, two trials in the Czech Republic and Greece with our Pulze
and iD propositions have received a positive response from our trade partners
and consumers. These are attractive markets because heated tobacco is already
a well-established NGP category and we can leverage our existing route to
market for combustible tobacco products. The valuable consumer insights we
gain from these pilot initiatives will inform the scale and pace of further
market rollouts.
In the United States we have also started trials for a revised proposition for
our vapour product, blu, including more innovative consumer communication and
customer support. We have chosen to do this in a focused geographic area to
best assess the impact of our new approach.
Modern oral nicotine continues to perform well in Norway and Austria, markets
where consumers have a preference for this type of proposition.
Deliver value from broader market portfolio
Our detailed strategic review created a clear role for each of Imperial's
markets. The structured approach to market segmentation will drive our
allocation of resources in terms of management time and investment. Our more
focused approach has supported market share gains across the Group with
overall tobacco share up 20 basis points year-on-year. Highlights include a
strong performance from the African market cluster, which has grown share, net
revenue and profit.
Environmental, social & governance (ESG)
Our approach to ESG supports our new business strategy and defines our
responsibilities as a business. It is aligned with those UN Sustainable
Development Goals which are most relevant to our Company strategy, namely
consumer health, climate and energy, farmer livelihoods and welfare, human
rights, and waste.
Furthermore, we have recently made a commitment to be net zero by 2040. We
already have targets which are consistent with reductions required to limit
climate warming to 2°C, which have been approved by the Science Based Targets
initiative (SBTi). We intend to re-engage with SBTi to approve revised and
more ambitious goals consistent with climate warming of 1.5°C and our net
zero ambition.
We have strengthened our ESG team with the hiring of Tony Dunnage as global
lead on ESG. Tony brings more than 30 years' experience in Unilever, directing
end-to-end supply chain and manufacturing sustainability for 250-plus
factories and reports directly to the ELT.
Capital allocation priorities
We have a clear capital allocation framework linked to our strategy to
maximise returns for shareholders, with four clear capital priorities:
· Invest behind the new strategy to deliver the growth initiatives.
· Deleverage to support a strong and efficient balance sheet with a
target leverage towards the lower end of our net debt to EBITDA range of 2-2.5
times.
· A progressive dividend policy with dividend growing annually
taking into account underlying business performance.
· Surplus capital returns to shareholders to be considered once
target leverage has been achieved.
This year we reduced adjusted net debt by £1.7 billion, on a constant
currency basis, with net debt to EBITDA gearing reduced by 0.5 times to 2.2
times, at constant currency. At actual exchange rates, reported net debt
reduced by £1.8 billion.
In line with our progressive dividend policy, the Board has decided to
increase the dividend by 1.0 per cent, and we remain committed to providing a
reliable, consistent cash return to shareholders.
Outlook
We remain on track to deliver against our strategy with our expectations for
the coming year in line with the guidance we provided at our Capital Markets
Day in January this year. At constant exchange rates, we expect to deliver net
revenue growth at a similar rate to the 2021 financial year, while adjusted
operating profit is expected to grow slightly slower than net revenue,
reflecting the increased investment in line with our strategic plan.
Our five-year strategy to strengthen performance and deliver growing
shareholder returns is divided into two distinct phases. The year ahead will
complete the two-year 'strengthening' phase with further investment in our
five priority markets and NGP pilots, the embedding of new ways of working and
cost-saving initiatives in line with our plans. This builds the foundations
for the subsequent three-year phase of our plan, in which we will accelerate
returns and deliver sustainable growth in shareholder value.
Stefan Bomhard
Chief Executive Officer
OPERATING REVIEW
EUROPE REGION
Full year result Change
2021 2020 Actual Constant
currency
Tobacco volume bn SE 126.7 130.1 -2.6%
Total net revenue £m 3,551 3,569 -0.5% +0.2%
Tobacco net revenue £m 3,425 3,471 -1.3% -0.6%
NGP net revenue £m 126 98 28.8% 28.8%
Adjusted operating profit £m 1,670 1,582 5.6% 5.6%
Positives Negatives
· Germany and UK continue to deliver strong financial performances, with · Reduced travel impacts sales in global duty free and traditional holiday
market size benefiting from destinations
reduced travel
· German share still declining although with an improving trend
· Local jewel brand focus benefits market share gains
in Spain and the UK · Travel recovery continues to remain difficult to predict
· Heated tobacco market trials underway and targeted investment behind blu due to varying COVID-19 restrictions across Europe
holding share
Europe delivered gains in regional market share and a 5.6 per cent increase in
adjusted operating profit. These results have been achieved despite COVID-19
restrictions reducing travel and affecting market and channel trends,
particularly the global duty free channel. Stronger market size trends in
Northern Europe, together with share growth in the UK and Spain and improved
NGP performance, were partly offset by lower sales in our global duty free
business, despite a small second-half recovery, and in traditional holiday
destination markets in Southern Europe.
Share gains in the UK and Spain were driven by our tobacco portfolio work and
a new strategic focus on local jewel brands, such as Embassy and Nobel. In
Germany, investments in enhancing the effectiveness and coverage of our sales
force and distribution have driven an encouraging improvement in market share
trend in recent months. It will take time though for our brand initiatives and
portfolio investments to rejuvenate our overall share performance.
Tobacco volumes decreased by 2.6 per cent, driven by relative market size
improvements in the Northern Europe markets of UK, Germany and Norway from
consumers staying at home. A gradual recovery from COVID-19 led to a modest
increase in travel numbers in the second half and a small improvement to our
global duty free sales and southern European markets. Volume trends in Spain,
Italy and Greece were still down relative to historic levels.
Total net revenue grew 0.2 per cent at constant currency, with tobacco net
revenue down 0.6 per cent at constant currency. This reflects a price mix
increase of 2.0 per cent, which is lower than recent years, as a result of
temporary one-off benefits last year related to VAT changes in Germany and UK
anti-forestalling arrangements. Excluding these temporary changes, price mix
would have been 3.0 per cent, impacted by lower global duty free and travel
retail sales. NGP revenues were up 28.8 per cent, with sales growth across a
number of markets.
Our blu share in several markets such as the UK, France and Italy remains
relatively stable. In heated tobacco we are on track with our pilot launches
in the Czech Republic and Greece, although it is too early to draw conclusions
until we review repurchase rates.
Adjusted operating profit was up 5.6 per cent at constant currency, benefiting
from reduced losses in our NGP business and lower regulatory related costs.
Priority Markets in Europe
GERMANY
13% of Group net revenue
Duty paid sales in Germany continued to remain strong, with fewer travel and
border restrictions benefiting market size. We increased investment to improve
sales coverage and strengthen our sales execution to address the share
declines. We have also begun to implement the planned brand investments to
reposition certain brands over time. This includes innovation targeted at
meeting consumer preferences for larger pack formats. In NGP, blu vapour brand
share has been maintained with increased pricing and lower levels of
investment improving returns. The modern oral nicotine category continues to
wait for a clear legal definition, resulting in delays in category
development.
UK
9% of Group net revenue
Reduced travel, lower levels of illicit trade and the absence of a
manufacturing price increase benefited duty-paid tobacco market size, with an
improved trend against historic norms. Our tobacco share performance benefited
from an enhanced regional and key account focus, with growth driven from the
launch of Embassy Signature. Market share was partly impacted by pressure
following the characterising flavours ban in May 2020. Our blu vapour brand
share remains stable, with refinements in our investment levels supporting
improved profitability.
SPAIN
4% of Group net revenue
Reduced tourist numbers as a result of the global pandemic continue to
negatively impact market size in Spain. Despite this, our domestic performance
has benefited from a renewed focus on leveraging the strong heritage of our
local brand portfolio. Increased investment behind our local brands, Fortuna
and Nobel, combined with limited edition formats have supported market share
growth. We also had success with a super-king variant of our West brand. blu
remains market leader of the vapour category, with market share holding up
well despite lower levels of investment.
AMERICAS REGION
Full year result Change
2021 2020 Actual Constant
currency
Tobacco volume bn SE 21.5 21.3 1.1%
Total net revenue £m 2,534 2,480 2.2% 9.6%
Tobacco net revenue £m 2,478 2,409 2.9% 10.4%
NGP net revenue £m 56 71 -21.2% -15.5%
Adjusted operating profit £m 1,037 1,032 0.4% 8.0%
Positives Negatives
· Cigarette share growth up 20 basis points to · Results affected by US state litigation settlement charges
9.1 per cent
· PMTA outcome still pending, creating lack of clarity for vapour category
· Cigarette pricing remains strong development
· Backwoods and Dutch Masters continue to perform strongly in the mass
market cigar segment
We delivered a strong combustible tobacco performance in the US, which is our
largest single market, contributing 33 per cent of Group net revenue. Market
fundamentals remain attractive, with strong cigarette pricing continuing to
offset relatively reduced rates of tobacco market size decline as well as
further growth in the mass market cigars segment.
We have increased investment behind our strategic priorities, including the
recruitment and training of 200 additional sales people to enhance our
coverage and distribution. We have also invested in brand initiatives for
Winston, which we are trialling in Texas.
The investment and additional focus on performance management delivered a
third consecutive year of share gains in the US cigarette market, up 20 basis
points, to 9.1 per cent. Share growth has been driven by Sonoma and Crowns in
the deep discount segment, while we have maintained Winston and Kool's share
of their sub-premium categories and managed the ongoing decline in our
non-focus brands.
Tobacco volumes were up 1.1 per cent, driven by strong mass market cigar
growth, which more than offset the more moderate cigarette volume declines.
Our mass market cigar portfolio performed well with volumes up 45 per cent and
share growth of 500 basis points driven by Backwoods and the launch of a Dutch
Leaf variant in the value segment. We are now established as the second
largest manufacturer in the US market, having been number four a year ago.
Sales in the premium natural leaf segment have benefited from increased
activations and limited edition launches of Backwoods. Overall mass market
cigar performance also benefited from manufacturing and investments in
improved leaf supply.
On a constant currency basis, tobacco net revenue increased by 10.4 per cent,
benefiting from strong cigarette pricing and the success of our mass market
cigar sales in a growing category.
Our NGP revenues were down 15.5 per cent on a constant currency basis, with
second half revenues affected by the increasingly competitive environment with
greater discounting in the category. In the second half, we launched a pilot
to test a new consumer marketing proposition for blu, with a new packaging
and consumer communication approach.
Adjusted operating profit was 8.0 per cent higher at constant currency, driven
by the strong growth in mass market cigar sales, tobacco pricing and lower NGP
write-offs. Profitability was also impacted by a £52 million charge for
litigation settlement costs in Minnesota and Texas, which removes uncertainty
at a reasonable cost. Excluding these settlement costs, adjusted operating
profit grew by 13.1 per cent at constant currency.
AFRICA, ASIA AND AUSTRALASIA REGION
Full year result Change
2021 2020 Actual *Organic constant
currency
Organic tobacco volume bn SE 83.7 87.4 -4.2%
Total organic net revenue £m 1,504 1,689 -11.0% -8.2%
Organic tobacco net revenue £m 1,498 1,657 -9.6% -6.8%
NGP net revenue £m 6 32 -81.1% -78.3%
Organic adjusted operating profit £m 598 643 -7.0% -4.7%
* Organic performance excludes the contribution of the Premium Cigar
Division from both financial reporting periods following its divestment in
October 2020. The Premium Cigar Division contributed £21m to net revenue in
2021 (2020: £247m) and £3m to adjusted operating profit (2020: £31m).
Further details are provided in notes 3, 6 and 10 of the financial statements.
Positives Negatives
· Australia share performance improved during the second half in response · Financial results affected by changes to Australia excise duty regime
to investment (£88m)
· Africa market share and financial performance · NGP revenues lower due to strategic exits in Japan and Russia
benefits from focus on local jewel brands
Our results were affected by two events: the sale of the Premium Cigar
Division in October 2020 and changes to the Australian excise regime.
Notwithstanding these impacts, our Africa, Middle East and Asia regions
reported solid performances and supported a 30 basis point improvement in
overall regional share.
The results presented here are on an organic basis, excluding the contribution
from the Premium Cigar Division in both periods to aid comparison of
performance on a like-for-like basis. The impact of the divestment is analysed
in notes 3, 6 and 10 of the financial statements on adjusted performance
measures.
Our performance was also affected by changes in the Australian excise regime,
which resulted in an impact on net revenue and adjusted operating profit of
£88 million. This has been driven by the Australian Government's decision to
step away from the 12.5 per cent annual excise duty accelerator and the
associated reduction in inventory levels and the phasing of stock profit.
Looking ahead, there will be a further net headwind of c. £10 million to net
revenue and adjusted operating profit in the first half of FY22 as the lower
stock profit is partially offset by favourable inventory movements.
The Africa region continues to be an attractive portfolio of markets with
opportunities for further value growth. Gauloises gained share in Morocco by
leveraging its international brand equity, while our focus on local jewel
brands delivered share gains in Burkina Faso and the Côte d'Ivoire.
Our results in the Middle East were driven primarily by Saudi Arabia, where
travel restrictions benefited our domestic sales, driving a good performance
of Davidoff and West with strong demand for fresh seal formats.
In Asia, we delivered a stable performance in Taiwan driven by share growth of
the Davidoff Absolute range supported by its strong equity and by West, which
has benefited from value seeking consumers.
Organic tobacco volumes were 4.2 per cent lower, with volume declines in
Turkey and Australia, partially offset by market share-driven volume gains in
Morocco, the Côte d'Ivoire and Saudi Arabia.
Our organic financial results were affected primarily by the excise duty
changes in Australia. Organic tobacco price mix of -2.6 per cent contributed
to the tobacco net revenue decline of 6.8 per cent at constant currency,
primarily reflecting the Australian excise duty changes. Excluding this
impact, organic tobacco price mix was up 2.7 per cent and tobacco net revenue
was down 1.5 per cent.
NGP net revenues declined 78.3 per cent at constant currency, reflecting our
strategic decision to exit the vapour market in Russia and Japan and the
heated tobacco market in Japan, as we prioritise investment in other market
category combinations in line with our strategy.
Organic adjusted operating profit was down 4.7 per cent at constant currency,
primarily reflecting the excise duty changes in Australia.
Priority Market in Africa, Asia and Australasia
AUSTRALIA
4% of Group net revenue
Our share performance has been affected by the timing of our price increase
and competitor discounting, particularly in the first half of the year. We
made changes to our sales force execution and enhanced our key account
management, which delivered a much improved share trend in the second half.
Our results were also affected by a market size decline of 9% and continued
downtrading to the fifth price tier, which now accounts for more than a third
of the market. Our Parker & Simpson brand continues to perform well within
the 'fifth price tier'.
DISTRIBUTION
Full Year Result Change
2021 2020 Actual Constant Currency
Net revenue £m 1,069 1,015 +5.3% +5.8%
Adjusted operating profit £m 258 226 +14.2% + 14.8%
Adjusted operating profit margin % 24.1 22.3 +180 bps +180 bps
Eliminations £m 7 13 -50.3% -50.0%
Adjusted operating profit (inc. eliminations) £m 265 239 +10.7% +11.3%
Positives Negatives
· Continued distribution through COVID-19 as products and services · Unwind of FY20 COVID-19 duty deferral impacted cash flow in the year
classified as essential
· Strong performance in courier and long-distance transportation businesses
· New contracts in pharmaceutical distribution
· Efficiency improvement initiatives effective
Logista has continued to distribute products to customers with almost all the
points of sale, products and services classified as essential by governments,
even during the periods when COVID-19 still restricted movements in many of
its end markets.
Net revenue grew 5.8 per cent at constant currency driven by growth in all
markets and activities except tobacco distribution in France and Portugal.
Pharmaceutical distribution, parcel transport (Nacex) and the distribution of
convenience products in Spain and Italy recorded double-digit growth. Adjusted
operating profit increased 14.8 per cent at constant currency due to
efficiency improvement initiatives.
The adjusted operating profit contribution to the Group, after eliminations,
increased by 11.3 per cent. This reflects the positive performance of
Logista's adjusted operating profit delivery as outlined above, the benefit
of inventory valuations following tax and price movements in tobacco products
and the recovery from negative COVID-19 impacts last year.
In line with other Imperial-owned entities, we continue to benefit from an
intercompany cash pooling arrangement with Logista, which further enhances the
Group's liquidity. On a 12-month basis, the daily average cash balance loaned
to the Group by Logista was £2.0 billion, with movements in the cash position
during the 12-month period varying from a high of £4.0 billion to a low of
£1.3 billion, primarily due to the timing of excise duty payments. At the
period end, the loan position was £1.8 billion compared to £2.4 billion at
30 September 2020.
FINANCIAL REVIEW
This year's financial results reflect the good start we have made in
implementing our new strategy. Excluding the divestment of our Premium Cigar
Division, net revenues grew 1.4 per cent and organic Group adjusted operating
profit rose 4.8 per cent, both on an organic constant currency basis.
Reported operating profit rose 15 per cent, mainly due to a profit of £281
million related to the disposal of the Premium Cigar Division.
Our business remains cash generative, delivering £1.5 billion of free cash
flow, and this, together with other actions taken, has enabled us to reduce
reported net debt by £1.8 billion to £9.4 billion.
Capital discipline remains a key focus and our objective to delever continues,
with net debt/EBITDA reducing from 2.7x in 2020 to 2.2x in 2021. We remain
committed to delivering leverage at the lower end of 2.0x to 2.5x.
In line with our strategic ambition, 2021 was a key transitional year in our
two year strengthening phase during which we are building the foundations for
future growth, underpinned by investments behind our operational and strategic
levers and significant organisational and cultural change.
SUMMARY INCOME STATEMENT
Reported Adjusted Organic Adjusted
£ million (unless otherwise indicated) 2021 2020 2021 2020 2021 2020
Operating profit
Total Tobacco & NGP 2,991 2,587 3,308 3,288 3,305 3,257
Distribution 148 131 258 226 258 226
Eliminations 7 13 7 13 7 13
Group operating profit 3,146 2,731 3,573 3,527 3,570 3,496
Net finance costs 81 (610) (417) (429) (417) (429)
Share of profit of investments accounted for using the equity method 11 45 11 45 7 1
Profit before tax 3,238 2,166 3,167 3,143 3,160 3,068
Tax (331) (608) (716) (642) (714) (635)
Profit for the year 2,907 1,558 2,451 2,501 2,446 2,433
Earnings per ordinary share (pence) 299.9 158.3 247.1 254.4 246.5 247.2
Dividend per share (pence) 139.08 137.71 139.08 137.71 139.08 137.71
Adjusted performance measures
When managing the performance of our business we focus on non-GAAP measures,
which we refer to as adjusted measures. Management believes that adjusted
measures provide an important comparison of business performance and reflect
the way in which the business is controlled. 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 note, which is detailed
within our financial statements.
Reconciliations between reported and adjusted measures are included in the
appropriate notes to our financial statements and within this financial
review. 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.
This year we also show organic numbers which exclude the disposed operations
of our Premium Cigar Division from both years to show a like-for-like
performance; these measures are termed "organic adjusted" and are considered
the relevant headline measures for performance commentary. The impact of these
changes can be seen in our adjusted performance measures note.
SUMMARY CASH FLOW STATEMENT - STATUTORY RECONCILIATION
Reported Adjusted
£ million (unless otherwise indicated) 2021 2020 2021 2020
Group Operating Profit 3,146 2,731 3,573 3,527
Depreciation, amortisation and impairments 815 910 269 311
EBITDA 3,961 3,641 3,842 3,838
Profit on disposal of subsidiary (281) - - -
Other non-cash movements (29) (85) (79) (137)
Operating Cash Flows before movement in Working Capital 3,651 3,556 3,763 3,701
Working capital (664) 1,042 (664) 1,042
Tax cash flow (820) (568) (820) (568)
Cash Flows from Operating Activities 2,167 4,030 2,279 4,175
Net capex (150) (274) (150) (274)
Restructuring - - (112) (145)
Cash interest (400) (420) (400) (420)
Loan to third parties - (3) - (3)
MI dividends (93) (85) (93) (85)
Free Cash Flow 1,524 3,248 1,524 3,248
Acquisitions / disposals 845 (155) 845 (155)
Shareholder dividends (1,305) (1,753) (1,305) (1,753)
Net Cash Flow 1,064 1,340 1,064 1,340
Cash Flows from Operating Activities (as above) 2,279 4,175
Tax cash flow 820 568
Net capex (150) (274)
Net Cash Flow from Operating Activities post Capital Expenditure pre Interest 2,949 4,469
and Tax
Cash Conversion 83% 127%
GROUP RESULTS - ORGANIC ADJUSTED CONSTANT CURRENCY ANALYSIS
£ million Full year ended 30 September 2020 Foreign Constant Full year ended Change Organic constant
(unless otherwise indicated)
exchange
currency movement
30 September 2021
currency
change
Organic Tobacco & NGP Net Revenue
Europe 3,569 (27) 9 3,551 -0.5% 0.2%
Americas 2,480 (184) 238 2,534 2.2% 9.6%
Africa, Asia and Australasia 1,689 (47) (138) 1,504 -11.0% -8.2%
Total Group 7,738 (258) 109 7,589 -1.9% 1.4%
Organic Tobacco & NGP Adjusted Operating Profit
Europe 1,582 (1) 89 1,670 5.6% 5.6%
Americas 1,032 (78) 83 1,037 0.4% 8.0%
Africa, Asia and Australasia 643 (15) (30) 598 -7.0% -4.7%
Total Group 3,257 (94) 142 3,305 1.5% 4.3%
Distribution
Net revenue 1,015 (5) 59 1,069 5.3% 5.8%
Adjusted operating profit including eliminations 239 0 26 265 10.7% 11.3%
Group Organic Adjusted Results
Organic adjusted operating profit 3,496 (94) 168 3,570 2.1% 4.8%
Adjusted net finance costs (429) (1) 13 (417) 2.7% 3.1%
Organic adjusted EPS (pence) 247.2 (7.7) 7.0 246.5 -0.3% 2.8%
Financials are Organic and adjusted for the impact the Premium Cigar Divisions
disposal, all of which is in the Africa, Asia and Australasia segment.
Net Revenue has been deducted £247m in 2020 and £21m in 2021. Adjusted
Operating Profit has been deducted £31m in 2020 and £3m in 2021.
Volumes bn SE Organic net revenue (actual rate), £m Organic adjusted operating profit, £m
Europe 126.7 3,551 1,670
Americas 21.5 2,534 1,037
Africa, Asia, Australasia 83.7 1,504 598
Distribution - - 265
SALES PERFORMANCE
Reported revenue Organic adjusted net revenue
+0.7% +1.4%
• Reported revenue grew 0.7% due to increases in duty and
similar items.
• Organic net revenue grew 1.4% at constant currency
comprising +1.5% from tobacco and -0.1% from NGP.
• Organic tobacco volumes were down 2.9%, in line with the
market decline reflecting weaker duty free and travel retail volumes. This was
partly offset by stronger market size in domestic markets such as the UK,
Germany and the Nordics.
• Weighted share in our priority markets declined marginally
by 2bps, compared to a 17bps decline in the prior year.
• Tobacco price mix of 4.4% was below historic levels, as a
result of changes to the Australian excise regime. Excluding this impact price
mix was 5.6% driven by pricing and positive market mix as a result of
significant growth in US mass market cigars and repatriation of volumes due to
travel restrictions.
• NGP revenue decreased 3.9% at constant currency as we
exited a number of markets and refocused the category in line with the revised
strategy.
• Translation FX was adverse due to sterling strengthening
against the US dollar.
NET REVENUE BRIDGE: +1.4% (CC); -1.9% (Actual Exchange Rate)
FY20 net revenue £7,985m
Premium Cigar Division -£247m
FY20 net revenue excl. divestment £7,738m
Tobacco volume -2.9%
Tobacco price/mix +4.4%
NGP net revenue -0.1%
FY21 organic constant currency net revenue £7,847m +1.4%
Translation FX -3.3%
FY21 organic net revenue £7,589m -1.9%
OPERATING PROFIT
Reported operating profit Organic adjusted operating profit
+15.2% +4.8%
• Reported Group operating profit of £3,146 million grew
15.2%, driven by gains on disposal of the Premium Cigar Division.
• Organic adjusted Group operating profit increased 4.8% at
constant currency.
• Tobacco and NGP adjusted operating profit grew £142m or
4.3% at constant currency.
• Tobacco organic adjusted operating profit was down £42
million (-1.2%) at constant currency. Strong underlying performance, led by
mass market cigar volumes and pricing, was more than offset by lower stock
profit in Australia (£88 million) and a charge to meet US state litigation
(PSS) costs (£52 million)
• NGP losses reduced by £184 million or 57% as we optimised
investment and as prior year write-downs (£124 million) were not repeated to
the same extent.
• Distribution profit grew 11.3% reflecting good performance
in pharmaceutical, parcel and convenience distribution.
• Translation FX was adverse due to sterling strengthening
against the US dollar.
ADJUSTED OPERATING PROFIT BRIDGE: +4.8% (CC); +2.1% (Actual Exchange Rate)
FY20 adjusted operating profit £3,527m
Premium Cigar Division -£31m
FY20 adjusted operating profit excl. divestment £3,496m
Europe +£89m
Americas +£83m
Africa, Asia and Australasia -£30m
Distribution adjusted operating profit (including eliminations) +£26m
FY21 organic constant currency AOP £3,664m +4.8%
Translation FX -£94m
FY21 organic adjusted operating profit £3,570m +2.1%
EARNINGS PER SHARE
Reported EPS Organic adjusted EPS
+89.5% +2.8%
• Reported EPS increased 89.5% to 299.9 pence driven by
marked to market foreign exchange accounting gains on financial instruments
caused by a 6.0% weakening in the euro against sterling and the year-on-year
impact of the Premium Cigar Division disposal.
• Organic adjusted EPS was 246.5 pence, up 2.8% at constant
currency due to lower NGP losses, partially offset by an increase in the
effective tax rate to 22.6%.
• Adjusted net finance costs are impacted by the buyback of
a $1.25 billion US bond, with corresponding savings expected in 2022.
EARNINGS PER SHARE BRIDGE: +2.8% (CC); -0.3% (Actual Exchange Rate)
FY20 adjusted EPS 254.4p
Premium Cigar Division -7.2p
FY20 adjusted EPS excl. divestment 247.2p
Operating profit +17.8p
Interest +1.4p
Minorities & JV -1.6p
Tax -10.6p
FY21 organic adjusted constant currency EPS 254.2p +2.8%
Translation FX -7.7p
FY21 organic adjusted EPS 246.5p -0.3%
CASH FLOW
Cash flows from operating activities were £2,167 million (2020: £4,030
million), impacted primarily by an expected working capital outflow driven by
changes to duty payment dates that we announced in 2020.
This also impacted free cash flow, with a £1.7 billion movement in working
capital coming largely from our Logista markets in Western Europe, where
governments changed the dates of excise collection linked to the COVID-19
pandemic.
Net cash flow of £1,064 million (2020: £1,340 million) benefited from the
proceeds from the sale of the Premium Cigar Division and the planned rebase of
shareholder dividends that partly offset the working capital outflow.
Capital expenditure was £0.2 billion, a reduction of £0.1 billion on the
prior year. The reduction was due to the suspension of some projects whilst
the strategic review was undertaken together with COVID-19 related delays on
other projects.
Cash conversion was 83%, in line with expectations (2020: 127% headline / 107%
underlying) driven by the previously signalled working capital outflow.
Active capital discipline remains a key focus for 2021 and beyond and this
year's strong cash flows along with proceeds from the Premium Cigar Division
disposal have supported our reduction in gearing to 2.2 times (2020: 2.7
times).
Cash conversion (%)
Cash conversion (%)
FY2021 83
FY2020 127
FY2019 95
FY2018 97
£ million (unless otherwise indicated) 2021 2020
Reported Cash Flows from Operating Activities 2,167 4,030
Reported Free Cash Flow 1,524 3,248
Reported Net Cash Flow 1,064 1,340
Cash Conversion 83% 127%
RETURN ON INVESTED CAPITAL
Return on invested capital (ROIC) increased by 130 basis points, driven
primarily by a reduction in annual average capital.
As part of our FY21-23 LTIP we redefined our return on invested capital metric
to better reflect management influence which resulted in a new, tightly
defined and transparent ROIC calculation, which can be directly calculated
from information contained within the Annual Report and Accounts.
Based on this new measure, 2021 average annual ROIC was 16.5% (2020: 15.2%, on
equivalent basis).
A strong cash focus led to a £1.7 billion reduction in our annual average
capital, driving an improvement in returns, with the benefit of increased
adjusted operating profit offset by a higher effective tax rate of 22.6%
(2020: 20.7%).
Our FY21 invested capital was lower than 2020, benefiting from the disposal of
c. £1.0 billion of assets held for sale from the Premium Cigar Division and a
c. £1.5 billion reduction in intangible assets due to a combination of the
amortisation of historic acquisitions and beneficial foreign exchange
movements. This was partly offset by an increase in working capital.
£m 2021 2020* 2019
Reported Operating Profit 3,146 2,731
Adjusting Items (see note 6) 427 796
Adjusted Operating Profit 3,573 3,527
Implied Tax (at adjusted effective tax rate) (807) (730)
Net Adjusted Operating Profit after tax 2,766 2,797
Working capital (2,523) (3,467) (2,461)
Intangible assets 16,674 18,160 18,596
Property, plant & equipment 1,723 1,899 1,979
Assets/(Liabilities) held for disposal (3) 1,024 1,111
Invested Capital 15,871 17,616 19,225
Average Annual Invested Capital 16,744 18,421
Average Annual ROIC 16.5% 15.2%
* 2020 calculated on the same basis as 2021.
ADJUSTED NET DEBT/EBITDA
Adjusted net debt/EBITDA reduced to 2.2x in 2021 from 2.7x in 2020. This was
driven by a reduction in net debt from our cash flow generation and proceeeds
from the Premium Cigar Division disposal. The Group also benefited from
foreign exchange movements on our net debt position through the strengthening
of sterling against the euro and US dollar. This lowered the Group's adjusted
net debt based on the year-end balance sheet FX rates when compared to the
prior year.
We remain committed to delivering leverage to the lower end of 2.0x to 2.5x.
Reported net debt reduced by £1,768 million to £9,373 million (2020:
£11,141 million). Excluding accrued interest, lease liabilities and the fair
value of derivative financial instruments providing commercial hedges of
interest risk, Group adjusted net debt was £8,615 million (2020: £10,299
million).
Adjusted net debt/EBITDA
Net debt/EBITDA
FY2021 2.2x
FY2020 2.7x
FY2019 2.9x
FY2018 2.9x
£ million 2021 2020
Reported net debt (9,373) (11,141)
Accrued interest 140 156
Lease liabilities 251 299
Fair value of interest rate derivatives 367 387
Adjusted net debt (8,615) (10,299)
RECONCILIATION BETWEEN REPORTED AND ADJUSTED PERFORMANCE MEASURES
£ million unless otherwise indicated Operating profit Net finance costs Earnings per share (pence)
2021 2020 2021 2020 2021 2020
Reported 3,146 2,731 81 (610) 299.9 158.3
Acquisition and disposal costs 17 26 - - 1.8 2.8
Amortisation & impairment of acquired intangibles 450 523 - - 44.3 49.2
Excise tax provision (1) (20) - - (0.1) (1.7)
Fair value adjustment of loan receivable (15) 62 - - (1.6) 6.6
Profit on disposal of subsidiaries (281) - - - (29.7) -
Restructuring costs 257 205 - - 19.6 18.4
Fair value and exchange movements on derivative financial instruments - - (496) 176 (60.7) 25.3
Post-employment benefits net financing costs - - (2) 5 (0.3) 0.4
Tax on disposal of premium cigar division - - (1.2) 2.0
Previously unrecognised tax credits - - - - (25.3) (7.1)
Uncertain tax positions - - - - - 8.2
Tax on unrecognised losses - - - 5.0 (4.3)
Adjustments above attributable to non-controlling interests - - - - (4.6) (3.7)
Adjusted 3,573 3,527 (417) (429) 247.1 254.4
Premium Cigar Divestment impact (3) (31) - - (0.6) (7.2)
Adjusted Organic 3,570 3,496 (417) (429) 246.5 247.2
Adjusting items
In the 2020 Annual Report and Accounts we committed to reviewing our treatment
of restructuring costs as an adjusted measure by the end of 2020 in line with
the completion of the Cost Optimisation Programmes, which were due to
conclude that year. However, as previously announced, the COVID-19 pandemic
meant some of these programmes' projects were delayed into 2021, therefore we
deferred the review of the treatment of restructuring costs as an adjusted
item until the end of this year.
In January, we announced the outcome of our initial strategic review,
including an associated and specific time-bound restructuring programme to
deliver new ways of working and efficiencies, which we refer to as the 2021
Strategic Review Programme. This resulted in one-off costs to reshape the
business to support delivery of the new strategy. The programme excludes any
costs associated with factory footprint rationalisation. The restructuring
costs for the 2021 Strategic Review Programme will be treated as an adjusting
item in 2021 and 2022, by which time the activities are expected to have been
actioned. No further costs outside of approved restructuring programmes will
be charged to restructuring in 2022.
A reconciliation of the Group's adjusted to reported operating profit is shown
above.
The profit on disposal of £281 million relates to the profit arising on the
divestment of our Premium Cigar business that was recognised at half year
2021.
As part of the strategic review, a charge of £118 million was made in
relation to the impairment of NGP intangible assets. Of this, £45 million was
recognised as amortisation & impairment of acquired intangibles, these
having previously been acquired as part of the Nerudia acquisition. The
further amount of £73 million relates to internally generated intangibles and
was recognised as restructuring costs.
The Auxly loan receivable was revalued as at 30 September 2021, with a £15
million gain recorded due to a positive credit risk reassessment.
Adjusting items also includes restructuring costs of £257 million, with
further details available in the restructuring section below.
Following the announcement of the completion of the Premium Cigar Division
divestment in September 2020, proceeds of €1,041 million were received as
expected in FY21, with a further €88 million received in October 2021.
A further €69 million is expected to be received in 2022 in relation to the
transfer of the La Romana factory in the Dominican Republic.
The 2021 charges in relation to these restructuring programmes are shown
below.
2021
£m Income Statement Cash
COP I 7 12
COP II 16 41
2021 Strategic Review Programme 226 48
Other 8 11
Total 257 112
An overview of the three programmes' cumulative charges, cash spend and
annualised savings is shown below.
Restructuring charge & cash spend
Income Statement Charges Cash Costs Savings
£m Cumulative Anticipated Cumulative Anticipated Annualised Savings
to date
Total
to date
Total
COP I (2013) 945 945 571 634 305
COP II (2018) 848 848 548 650 320
2021 Strategic Review Programme 226 375-425 48 275 100-150
Restructuring
There are three restructuring programmes reflected in our 2021 results.
Cost Optimisation I Programme (COP I) announced in 2013 is now complete with
small residual charges around the factory footprint activity.
Cost Optimisation Programme II (COP II), announced in 2018, is also now
largely complete but did see a small carry over from activities scheduled for
2020 that were delayed due to the COVID-19 pandemic.
During the course of 2021, the Group announced a third programme as an output
from the strategic review. This restructuring programme aims to reorganise and
simplify the business, unlocking efficiency savings to enable increased
investment in our core capabilities such as sales and marketing to support the
five-year strategic plan. The majority of activity under this programme is
expected in 2022 and will be treated as an adjusting item.
Since the strategy announcement, we have been working on detailed plans across
a number of different initiatives. Following our detailed work we expect cash
costs to be around £275 million, that will extend into 2023 and beyond with
the associated restructuring costs expected to be in the range of £375 -
£425 million.
The £257 million restructuring charge in 2021 comprised £226 million for the
2021 Strategic Review Programme, £23 million for COP I and II and £8 million
of other costs that mainly related to Logista.
Finance costs
Adjusted net finance costs were lower at £417 million (2020: £429 million),
reflecting lower adjusted net debt balances during the year. Reported net
finance income was £81 million (2020: costs of £610 million), incorporating
the impact of net fair value and exchange gains on financial instruments of
£496 million (2020: losses of £176 million) and post-employment benefits net
financing income of £2 million (2020: costs of £5 million). The gains on
financial instruments primarily stem from foreign exchange accounting gains of
£445 million as the value of euro financial instruments increased after
sterling strengthened 6.0 per cent against the euro during the year.
Our all-in cost of debt increased to 4.0 per cent (2020: 3.4 per cent) as
lower cost debt instruments matured in the year.
Our interest cover increased to 9.2 times (2020: 8.9 times) reflecting the
lower adjusted finance costs.
Taxation
Our adjusted effective tax rate is 22.6 per cent (2020: 20.7 per cent) and
the reported effective tax rate is 10.2 per cent (2020: 28.1 per cent). The
increase in the adjusted effective tax rate was due to a less favourable
profit mix and remeasurement of UK deferred tax balances. The adjusted tax
rate is higher than the reported rate due to recognition of tax credits
arising on an internal reorganisation of the Group's Spanish business and
limited tax arising on both foreign exchange gains that arise on consolidation
and on the disposal gain on the Premium Cigar Division disposal.
During the year a payment of £101 million was made to HMRC in respect of an
on-going EU State Aid enquiry. A recoverable of the same value has also been
recorded, as based on advice, we believe the Group has not received any State
Aid. Further details are provided in Note 8.
We expect our adjusted effective tax rate for the year ended 30 September 2022
to be around 24 per cent. The increase in the rate in 2022 is due to
legislative changes and certain historic tax losses being fully utilised in
2021.
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 and Profits 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 Group Tax Strategy is publicly available and can be found in the
governance section of our corporate website.
Exchange rates
Foreign exchange had an adverse impact on Group adjusted operating profit and
earnings per share at average exchange rates (2.7 per cent and 3.1 per cent,
respectively) as sterling strengthened against the US dollar (7.3 per cent).
Other major currencies remained broadly flat compared to the prior year.
Dividend payments
The Group paid two interim dividends of 21.06 pence per share in June and
September 2021.
The Board has approved a further interim dividend of 48.48 pence per share and
will propose a final dividend of 48.48 pence per share, bringing the total
dividend for the year to 139.08 pence.
The third interim dividend will be paid on 31 December 2021 to shareholders
registered on 26 November 2021. Subject to AGM approval, the proposed final
dividend will be paid on 31 March 2022 to shareholders registered on 18
February 2022.
In the year there were £1,305 million of shareholder dividend payments (2020:
£1,753 million). The 25 per cent reduction represents the FY21 impact of the
one-third rebasing of the dividend announced in May 2020 as part of the
revised capital allocation policy to accelerate debt reduction.
Funding/Liquidity
During the year we repaid three bonds totalling £2.3 billion equivalent
including the early repayment of a bond with a maturity date of July 2022.
This was repaid from excess cash, which has the benefit of reducing gross debt
as well as counterparty exposures. One bond of €1 billion was issued in the
year with a maturity date in 2033. The denomination of our closing adjusted
net debt was split approximately 77 per cent euro and 23 per cent US
dollar. As at 30 September 2021, the Group had committed financing in place
of around £12.7 billion, which comprised 24 per cent bank facilities and
76 per cent raised from capital markets. During the year the maturity date
of our existing revolving credit facility of €3.5 billion was extended to
September 2024 and bilateral facilities totalling €1.7 billion were
cancelled.
The Group remains fully compliant with all our banking covenants and remains
committed to retaining our investment grade ratings.
Liquidity and going concern statement
The Group's policy is to ensure that we always have sufficient capital markets
funding and committed bank facilities in place to meet foreseeable peak
borrowing requirements.
The Directors recognise that the current environment brings uncertainty due to
the COVID-19 pandemic; however, over the last 18 months, the Group has
effectively managed operations across the world, and has proved it has an
established mechanism to operate efficiently despite the uncertainty. The
Directors consider that a one-off discrete event with immediate cash outflow
is of greater concern to short-term liquidity than any effect from the
on-going COVID-19 pandemic.
The Directors have assessed the principal risks of the business, including
stress testing a range of different scenarios that may affect the business.
These included scenarios which examined the implications of:
· A one-off discrete event resulting in immediate cash outflow such
as unexpected duty and tax payments of c£900m or non-receipt of the Premium
Cigar Division deferred consideration of c£60m.
· A rapid and lasting deterioration to the Group's profitability
because markets become closed to tobacco products or there are sustained
failures to our tobacco manufacturing and supply chains. These assumed a
permanent reduction in profitability of 15 per cent from 1 January 2022.
· The additional impact of potential bad debt risks arising from a
recession of c£170m.
· The withdrawal of facilities that provide receivables factoring
of c£670m.
The scenario planning also considered mitigation actions including reductions
to capital expenditure and dividend payments. There are additional actions
that were not modelled but could be taken including other cost mitigations
such as staff redundancies, retrenchment of leases, and discussions with
lenders about capital structure.
Under the worst-case scenario, where the largest envisaged downside scenarios
all take place at the same time, the Group would have sufficient headroom
until February 2022. The Group believes this worst-case scenario to be highly
unlikely given the relatively small impact on our trading performance and bad
debt levels during the Covid-19 pandemic. In addition, the Group has a number
of mitigating actions available, as described above, that could be implemented
should such a scenario arise.
Based on its review of future cash flows covering the period through to March
2023, and having assessed the principal risks facing the Group, the Board is
of the opinion that the Group as a whole and Imperial Brands PLC have adequate
resources to meet their operational needs from the date of this Report through
to 31 March 2023 and concludes that it is appropriate to prepare the financial
statements on a going concern basis.
LUKAS PARAVICINI
Chief Financial Officer
FINANCIAL STATEMENTS
The figures and financial information for year ended 30 September 2021 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
(https://eur02.safelinks.protection.outlook.com/?url=http%3A%2F%2Fwww.imperialbrandsplc.com%2F&data=04%7C01%7Cjames.king%40impbrands.com%7Cf6ae264339e54b39eae908d88a8258a6%7Cd14c9c9a6bb5430f99ff6c2815b3a95e%7C0%7C0%7C637411639751422893%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=x4m4Jv%2BE81x%2BsRJze5QRg%2B3SrS15G%2FCEeVRUMB%2FZa1E%3D&reserved=0)
.
CONSOLIDATED INCOME STATEMENT
for the year ended 30 September 2021
£ million unless otherwise indicated Notes 2021 2020
Revenue 3 32,791 32,562
Duty and similar items (16,229) (15,962)
Other cost of sales (10,535) (10,420)
Cost of sales (26,764) (26,382)
Gross profit 6,027 6,180
Distribution, advertising and selling costs (2,118) (2,329)
Acquisition and disposal costs (17) (26)
Profit on disposal of subsidiaries 11 281 -
Amortisation and impairment of acquired intangibles 12/15 (450) (523)
Excise tax provision 8 1 20
Fair value adjustment of loan receivable 15 (62)
Restructuring costs 5 (257) (205)
Other expenses (336) (324)
Administrative and other expenses (763) (1,120)
Operating profit 4 3,146 2,731
Investment income 1,060 770
Finance costs (979) (1,380)
Net finance income/(costs) 6 81 (610)
Share of profit of investments accounted for using the equity method 15 11 45
Profit before tax 4 3,238 2,166
Tax 8 (331) (608)
Profit for the year 2,907 1,558
Attributable to:
Owners of the parent 2,834 1,495
Non-controlling interests 73 63
Earnings per ordinary share (pence)
- Basic 10 299.9 158.3
- Diluted 10 299.1 158.1
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2021
£ million Notes 2021 2020
Profit for the year 2,907 1,558
Other comprehensive income
Exchange movements (680) 151
Exchange movements recycled to profit and loss upon disposal of subsidiaries 11 (337) -
Current tax on hedge of net investments and quasi-equity loans (105) (10)
Deferred tax on hedge of net investments and quasi-equity loans (12) (80)
Items that may be reclassified to profit and loss (1,134) 61
Net actuarial gains on retirement benefits 24 41 277
Current tax relating to net actuarial gains on retirement benefits 2 -
Deferred tax relating to net actuarial gains on retirement benefits (21) (53)
Items that will not be reclassified to profit and loss 22 224
Other comprehensive (loss)/income for the year, net of tax (1,112) 285
Total comprehensive income for the year 1,795 1,843
Attributable to:
Owners of the parent 1,761 1,762
Non-controlling interests 34 81
Total comprehensive income for the year 1,795 1,843
CONSOLIDATED BALANCE SHEET
at 30 September
£ million Notes 2021 2020
Non-current assets
Intangible assets 12 16,674 18,160
Property, plant and equipment 13 1,715 1,899
Right of use assets 14 242 293
Investments accounted for using the equity method 15 88 117
Retirement benefit assets 24 1,046 940
Trade and other receivables 17 62 57
Derivative financial instruments 21/22 391 813
Deferred tax assets 23 564 381
State aid tax recoverable 8 101 -
20,883 22,660
Current assets
Inventories 16 3,834 4,065
Trade and other receivables 17 2,749 2,638
Current tax assets 8 234 206
Cash and cash equivalents 18 1,287 1,626
Derivative financial instruments 21/22 68 53
Current assets held for disposal 11 35 1,062
8,207 9,650
Total assets 29,090 32,310
Current liabilities
Borrowings 20 (1,107) (1,442)
Derivative financial instruments 21/22 (62) (41)
Lease liabilities 21 (57) (64)
Trade and other payables 19 (9,106) (10,170)
Current tax liabilities 8 (253) (350)
Provisions 25 (188) (220)
Current liabilities held for disposal 11 (35) (38)
(10,808) (12,325)
Non-current liabilities
Borrowings 20 (8,715) (10,210)
Derivative financial instruments 21/22 (984) (1,641)
Lease liabilities 20/21 (194) (235)
Trade and other payables 19 (7) (5)
Deferred tax liabilities 23 (1,037) (924)
Retirement benefit liabilities 24 (1,199) (1,256)
Provisions 25 (206) (196)
(12,342) (14,467)
Total liabilities (23,150) (26,792)
Net assets 5,940 5,518
Equity
Share capital 26 103 103
Share premium and capital redemption 5,837 5,837
Retained earnings (788) (2,364)
Exchange translation reserve 200 1,295
Equity attributable to owners of the parent 5,352 4,871
Non-controlling interests 588 647
Total equity 5,940 5,518
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2021
£ million Share Share premium Retained earnings Exchange translation reserve Equity attributable to owners of the parent Non- controlling interests Total
capital
and capital redemption
equity
At 1 October 2020 103 5,837 (2,364) 1,295 4,871 647 5,518
Profit for the year - - 2,834 - 2,834 73 2,907
Exchange movements on retranslation of net - - - (1,034) (1,034) (39) (1,073)
assets
Exchange movements on net investment - - - 476 476 - 476
hedges
Exchange movements on quasi-equity loans - - - (83) (83) - (83)
Exchange movements recycled to profit and - - - (337) (337) - (337)
loss upon disposal of subsidiaries
Current tax on hedge of net investments and - - - (105) (105) - (105)
quasi-equity loans
Deferred tax hedge of net investments and - - - (12) (12) - (12)
quasi-equity loans
Net actuarial gains on retirement benefits - - 41 - 41 - 41
Current tax relating to net actuarial gains on - - 2 - 2 - 2
retirement benefits
Deferred tax relating to net actuarial gains on - - (21) - (21) - (21)
retirement benefits
Other comprehensive income - - 22 (1,095) (1,073) (39) (1,112)
Total comprehensive income - - 2,856 (1,095) 1,761 34 1,795
Transactions with owners
Costs of employees' services compensated by share schemes - - 25 - 25 - 25
Dividends paid - - (1,305) - (1,305) (93) (1,398)
At 30 September 2021 103 5,837 (788) 200 5,352 588 5,940
At 1 October 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 retranslation of net - - - (130) (130) 18 (112)
assets
Exchange movements on net investment - - - 12 12 - 12
hedges
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 - - (53) - (53) - (53)
retirement benefits
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
Repurchase of shares - - (92) - (92) - (92)
Changes in non-controlling interests (note 12) - - (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
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 30 September 2021
£ million 2021 2020
Cash flows from operating activities
Operating profit 3,146 2,731
Dividends received from investments accounted for under the equity method 4 43
Depreciation, amortisation and impairment 815 910
Profit on disposal of non-current assets 2 (2)
Profit on disposal of subsidiary (281) -
Post-employment benefits (63) (88)
Costs of employees' services compensated by share schemes 25 20
Fair value adjustment of loan receivable (15) 63
Movement in provisions 18 (121)
Operating cash flows before movement in working capital 3,651 3,556
Decrease in inventories 70 67
(Increase)/decrease in trade and other receivables (201) 241
(Decrease)/increase in trade and other payables (533) 734
Movement in working capital (664) 1,042
Tax paid (820) (568)
Net cash flows generated from operating activities 2,167 4,030
Cash flows from investing activities
Interest received 15 9
Loan to third parties - (3)
Proceeds from the sale of non-current assets 50 28
Net proceeds from sale of subsidiaries (note 11) 845 -
Deposit received from sale of asset held for sale - 83
Purchase of non-current assets (200) (302)
Purchase of brands and operations (note 12) - (146)
Net cash used in investing activities 710 (331)
Cash flows from financing activities
Interest paid (415) (429)
Lease liabilities paid (69) (72)
Increase in borrowings 858 1,240
Repayment of borrowings (2,224) (3,096)
Cash flows relating to derivative financial instruments 41 (23)
Repurchase of shares - (92)
Dividends paid to non-controlling interests (93) (85)
Dividends paid to owners of the parent (1,305) (1,753)
Net cash used in financing activities (3,207) (4,310)
Net decrease in cash and cash equivalents (330) (611)
Cash and cash equivalents at start of year 1,626 2,286
Effect of foreign exchange rates on cash and cash equivalents (9) 13
Transferred to held for disposal (note 11) - (62)
Cash and cash equivalents at end of year 1,287 1,626
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PREPARATION
The consolidated financial statements have been prepared in accordance with
International Accounting Standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards adopted
pursuant to Regulation (EC) No.1606/2002 as it applies in the European Union.
The financial statements have been prepared under the historical cost
convention except where fair value measurement is required under IFRS as
described below in the accounting policies on financial instruments, and on a
going concern basis.
BASIS FOR GOING CONCERN
The financial statements have been prepared under the historical cost
convention except where fair value measurement is required under IFRS as
described below in the accounting policies on financial instruments, and on a
going concern basis. The Group's policy is to ensure that we always have
sufficient capital markets funding and committed bank facilities in place to
meet foreseeable peak borrowing requirements.
The Directors recognise that the current environment brings uncertainty due to
the COVID-19 pandemic; however, over the last 18 months, the Group has
effectively managed operations across the world, and has proved it has an
established mechanism to operate efficiently despite the uncertainty. The
Directors consider that a one-off discrete event with immediate cash outflow
is of greater concern to short term liquidity than any effect from the
on-going COVID-19 pandemic.
The Directors have assessed the principal risks of the business, including
stress testing a range of different scenarios that may affect the business.
These included scenarios which examined the implications of:
• A one-off discrete event resulting in immediate cash outflow such as
accelerated duty and tax payments of circa £900 million or non-receipt of the
Premium Cigar Division (PCD) deferred consideration of circa £60 million.
• A rapid and lasting deterioration to the Group's profitability because
markets become closed to tobacco products or there are sustained failures to
our tobacco manufacturing and supply chains. These assumed a permanent
reduction in profitability of 15 per cent from 1 January 2022.
• The additional impact of potential bad debt risks arising from a
recession of circa £170 million.
• The withdrawal of facilities that provide receivables factoring of
circa £670 million.
The scenario planning 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 the Group would have sufficient headroom until
February 2022. The Group believes this worst-case scenario to be highly
unlikely given the relatively small impact on our trading performance and bad
debt levels during the Covid-19 pandemic. In addition, the group has a number
of additional mitigating actions available that could be implemented should
such a scenario arise.
Based on the review of future cash flows covering the period through to March
2023, and having assessed the principal risks facing the Group, the Board is
of the opinion that the Group as a whole and Imperial Brands PLC have adequate
resources to meet their operational needs from the date of this Report through
to 31 March 2023 and concludes that it is appropriate to prepare the financial
statements on a going concern basis.
The preparation of the consolidated financial statements requires management
to make estimates and assumptions that affect the reported amounts of revenues
and expenses during the period and of assets, liabilities and contingent
liabilities at the balance sheet date. The key estimates and assumptions are
set out in note 2 Critical Accounting Estimates and Judgements. Such estimates
and assumptions are based on historical experience and various other factors
that are believed to be reasonable in the circumstances and constitute
management's best judgement at the date of the financial statements. In the
future, actual experience may deviate from these estimates and judgements.
This could affect future financial statements as the original estimates and
judgements are modified, as appropriate, in the year in which the
circumstances change.
Imperial Brands PLC (the Company) provides guarantees to a number of
subsidiaries under section 479A of the Companies Act 2006, whereby the
subsidiaries, incorporated in the UK and Ireland, are exempt from the
requirements of the Act relating to the audit of individual accounts for the
financial year ending 30 September 2021. See note VII Guarantees of the
Imperial Brands Plc financial statements for further details.
The principal accounting policies, which have been applied consistently other
than where new policies (detailed below) have been adopted, are set out below.
BASIS OF CONSOLIDATION
The consolidated financial statements comprise the results of the Company, a
public company limited by shares, incorporated in England and Wales, and its
subsidiary undertakings, together with the Group's share of the results of its
associates and joint arrangements. The Company's registered number is 3236483
and its registered address is 121 Winterstoke Road, Bristol, BS3 2LL.
Subsidiaries are those entities controlled by the Group. Control exists when
the Group is exposed to, or has the rights to, variable returns from its
involvement with the entity and has the ability to affect those returns
through its power over the entity. The financial statements of subsidiaries
are included in the consolidated financial statements from the date that
control commences until the date that control ceases. Where necessary,
accounting policies of subsidiaries are changed to ensure consistency with the
policies adopted by the Group.
The acquisition method of accounting is used to account for the purchase of
subsidiaries. The excess of the value transferred to the seller in return for
control of the acquired business together with the fair value of any
previously held equity interest in that business over the Group's share of the
fair value of the identifiable net assets is recorded as goodwill.
Intragroup transactions, balances and unrealised gains on transactions between
Group companies are eliminated. Unrealised losses are also eliminated unless
costs cannot be recovered.
JOINT VENTURES
The Group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments
in joint arrangements are classified as either joint operations or joint
ventures depending on the contractual rights and obligations of each investor.
The Group has assessed the nature of its joint arrangements and determined
them to be joint ventures. The financial statements of joint ventures are
included in the Group financial statements using the equity accounting method,
with the Group's share of net assets included as a single line item entitled
'Investments accounted for using the equity method'. In the same way, the
Group's share of earnings is presented in the consolidated income statement
below operating profit entitled 'Share of profit of investments accounted for
using the equity method'.
FOREIGN CURRENCY
Items included in the financial statements of each Group company are measured
using the currency of the primary economic environment in which the company
operates (the functional currency).
The income and cash flow statements of Group companies using non-sterling
functional currencies are translated to sterling (the Group's presentational
currency) at average rates of exchange in each period. Assets and liabilities
of these companies are translated at rates of exchange ruling at the balance
sheet date. The differences between retained profits and losses translated at
average and closing rates are taken to reserves, as are differences arising on
the retranslation of the net assets at the beginning of the year.
Transactions in currencies other than a company's functional currency are
initially recorded at the exchange rate ruling at the date of the transaction.
Foreign exchange gains and losses resulting from the settlement of such
transactions and from the translation at exchange rates ruling at the balance
sheet date of monetary assets and liabilities denominated in foreign
currencies are recognised in the consolidated income statement with exchange
differences arising on trading transactions being reported in operating
profit, and those arising on financing transactions being reported in net
finance costs unless as a result of net investment hedging they are reported
in other comprehensive income.
The Group designates as net investment hedges certain external borrowings and
derivatives up to the value of the net assets of Group companies that use
non-sterling functional currencies after deducting permanent intercompany
loans. Gains or losses on these hedges that are regarded as highly effective
are transferred to other comprehensive income, where they offset gains or
losses on translation of the net investments that are recorded in equity, in
the exchange translation reserve.
The Group's financial results are principally exposed to euro and US dollar
exchange rates, which are detailed in the table below.
2021 2020
Foreign exchange rate versus GBP Closing rate Average rate Closing rate Average
rate
Euro 1.1621 1.1451 1.0960 1.1393
US Dollar 1.3456 1.3690 1.2832 1.2753
REVENUE RECOGNITION
For the Tobacco & Next Generation Products (Tobacco & NGP) business,
Revenue comprises the invoiced value for the sale of goods net of sales taxes,
rebates and discounts. Revenue is based on the completion of performance
obligations that constitute the delivery of goods. The performance obligation
is recognised as complete at the point in time when a Group company has
delivered products to the customer, the customer has accepted the products and
collectability of the related receivables is reasonably assured. The
distribution business also recognises revenue associated with logistics
services, recognised on the basis of the invoiced value for the provision of
these services net of sales taxes, rebates and discounts. The performance
obligations associated with distribution services, which include fees for
distributing certain third party products, are linked to the successful
distribution of products for customers.
The Group recognises income arising from the licensing of intellectual
property, occurring in the ordinary course of business, which is treated as
revenue. Licensing revenue will be recognised over the period of the licence.
The licences granted are distinct from other promises in the contract.
For the Distribution business, revenue comprises the invoiced value for the
sale of goods and services net of sales taxes, rebates and discounts when
goods have been delivered or distribution services have been provided. The
Distribution business only recognises commission revenue on purchase and sale
transactions in which it acts as a commission agent. Distribution and
marketing commissions are included in revenue. Revenue is recognised on
products on consignment when these are sold by the consignee.
Payments are made to both direct and indirect customers for rebates, discounts
and other promotional activities. Direct customers are those to which the
Group supplies goods or services. Indirect customers are other entities within
the supply chain to the end consumer. Rebates and discounts are deducted from
Revenue. Where the contract with customers has an entitlement to variable
consideration due to the existence of retrospective rebates and discounts,
revenue is estimated based on the amount of consideration expected to be
received. This estimation is a determination of the most likely amount to be
received using all known factors including historic experience. Typically
there is a high degree of certainty over the amount of retrospective
rebates/discounts paid due to relatively low year on year variations in the
volume and pattern of product sales. As the provision of distribution services
typically involves product delivery tasks undertaken in a short period of
time, revenue and any associated rebates and discounts relating to these
services do not normally span an accounting year end.
Payments for promotional activities will also be deducted from Revenue where
the payments relate to goods or service that are closely related to or
indistinct from associated sales of goods or services to that customer. The
calculated costs are accrued and accounted for as incurred and matched as a
deduction from the associated revenues (i.e. excluded from revenues reported
in the Group's consolidated income statement).
DUTY AND SIMILAR ITEMS
Duty and similar items includes duty and levies having the characteristics of
duty. In countries where duty is a production tax, duty is included in Revenue
and in Cost of sales in the consolidated income statement. Duty is regarded as
a sales tax and excluded from revenue where:
• duty becomes payable to the tax authority when the goods are sold;
• there is an obligation to change the sales price when a change in the
rate of duty is imposed; and
• there is a requirement to identify the duty separately on sales
information such as invoices.
Payments made in the USA under the Master Settlement Agreement are recognised
in other cost of sales, for further disclosure see note 30 contingent
liabilities.
TAXES
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the balance sheet date,
and any adjustments to tax payable in respect of previous years.
Uncertain tax positions are assessed and measured on an issue by issue basis
within the jurisdictions that we operate using management's estimate of the
most likely outcome. Where management determines that a greater than 50%
probability exists that the tax authorities would accept the position taken in
the tax return, amounts are recognised in the consolidated financial
statements on that basis. Where the amount of tax payable or recoverable is
uncertain, the Group recognises a liability or asset based on either:
management's judgement of the most likely outcome; or, when there is a wide
range of possible outcomes, a probability weighted average approach. The Group
recognises interest on late paid taxes as part of financing costs. The Group
recognises penalties, if applicable, as part of administrative and other
expenses.
Deferred tax is provided in full on temporary differences between the carrying
amount of assets and liabilities in the financial statements and the tax base,
except if it arises from the initial recognition of an asset or liability in a
transaction, other than a business combination, that at the time of the
transaction affects neither accounting nor taxable profit or loss. Deferred
tax is provided on temporary differences arising on investments in
subsidiaries, except where the timing of the reversal of the temporary
difference is controlled by the Group and it is probable that the temporary
difference will not reverse in the foreseeable future. Deferred tax assets are
recognised only to the extent that it is probable that future taxable profits
will be available against which the assets can be realised. Deferred tax is
determined using the tax rates that have been enacted or substantively enacted
at the balance sheet date, and are expected to apply when the deferred tax
liability is settled or the deferred tax asset is realised.
DIVIDENDS
Final dividends are recognised as a liability in the period in which the
dividends are approved by shareholders, whereas interim dividends are
recognised in the period in which the dividends are paid.
INTANGIBLE ASSETS - GOODWILL
Goodwill represents the excess of value transferred to the seller in return
for control of the acquired business together with the fair value of any
previously held equity interest in that business over the Group's share of the
fair value of the identifiable net assets.
Goodwill is tested at least annually for impairment and carried at cost less
accumulated impairment losses. Any impairment is recognised immediately in the
consolidated income statement and cannot be subsequently reversed. If any
negative goodwill arises this is recognised immediately in the income
statement. For the purpose of impairment testing, goodwill is allocated to
groups of cash-generating units that are expected to benefit from the business
combination in which the goodwill arose.
INTANGIBLE ASSETS - OTHER
Other intangible assets are initially recognised in the consolidated balance
sheet at historical cost unless they are acquired as part of a business
combination, in which case they are initially recognised at fair value. They
are shown in the balance sheet at historical cost less accumulated
amortisation and impairment. The Group does not operate a revaluation model
and therefore assets are not subject to ongoing revaluations.
These assets consist mainly of acquired trademarks, intellectual property,
product development, concessions and rights, acquired customer relationships
and computer software. The Davidoff cigarette trademark and some premium cigar
trademarks are considered by the Directors to have indefinite lives based on
the fact that they are established international brands with global potential.
Trademarks with indefinite lives are not amortised but are reviewed annually
for impairment. The carrying value of Davidoff is subject to an annual
impairment review under the requirements of IAS 36 as the Group does not
currently foresee a limit to the period over which the asset is expected to
generate net cash inflows. The most recent assessment indicates that the
carrying value is not impaired.
Intellectual property (including trademarks), product development, supply
agreements (including customer relationships) and computer software are
amortised over their estimated useful lives as follows:
Intellectual property 5 - 30 years straight line
Supply agreements 3 - 15 years straight line
Software 3 - 10 years straight line
Product development 3 - 10 years straight line
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recognised in the consolidated balance sheet
at historical cost or at their initial fair value where they are acquired as
part of an acquisition, subject to depreciation or impairment. The Group does
not operate a revaluation model and therefore assets are not subject to
ongoing revaluations.
Land is not depreciated. Depreciation is provided on other property, plant and
equipment so as to write down the initial cost of each asset to its residual
value over its estimated useful life as follows:
Property up to 50 years straight line
Plant and equipment 2 - 20 years straight line/reducing balance
Fixtures and motor vehicles 2 - 15 years straight line
The assets' residual values and useful lives are reviewed and, if appropriate,
adjusted at each balance sheet date.
FINANCIAL INSTRUMENTS AND HEDGING
Receivables held under a hold to collect business model are stated at
amortised cost. Receivables held under a hold to sell business model, which
are expected to be sold via a non-recourse factoring arrangement are
separately classified as fair value through profit or loss, within trade and
other receivables.
The calculation of impairment provisions is subject to an expected credit loss
model, involving a prediction of future credit losses based on past loss
patterns. The revised approach involves the recognition of provisions relating
to potential future impairments, in addition to impairments that have already
occurred. The expected credit loss approach involves modelling of historic
loss rates, and consideration of the level of future credit risk. Expected
loss rates are then applied to the gross receivables balance to calculate the
impairment provision.
Cash and cash equivalents include cash in hand and deposits held on call,
together with other short-term highly liquid investments.
The Group transacts derivative financial instruments to manage the underlying
exposure to foreign exchange and interest rate risks. The Group does not
transact derivative financial instruments for trading purposes. Derivative
financial instruments are initially recorded at fair value plus any directly
attributable transaction costs. Derivative financial assets and liabilities
are included in the consolidated balance sheet at fair value, and include
accrued interest receivable and payable where relevant. However, as the Group
has decided (as permitted under IFRS 9) not to cash flow or fair value hedge
account for its derivative financial instruments, changes in fair values are
recognised in the consolidated income statement in the period in which they
arise unless the derivative qualifies and has been designated as a net
investment hedging instrument in which case the changes in fair values,
attributable to foreign exchange, are recognised in other comprehensive
income.
Collateral transferred under the terms and conditions of collateral appendix
documents in respect of certain derivatives are netted off the carrying value
of those derivatives in the consolidated balance sheet.
RIGHT OF USE ASSETS
The Group has lease contracts relating to property and other assets (which
predominantly relates to motor vehicles).
The Group recognises right of use assets, 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.
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. 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
These elections were only applied on transition to IFRS 16 and have not been
applied to new leases following adoption of the standard.
INVENTORIES
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first in first out (FIFO) method. The cost of finished
goods and work in progress comprises raw materials, direct labour, other
direct costs and related production overheads (based on normal operating
capacity). Net realisable value is the estimated selling price in the ordinary
course of business, less the estimated costs of completion and selling
expenses. Inventory is considered for obsolescence or other impairment issues
and an associated provision is booked where necessary.
Leaf tobacco inventory which has an operating cycle that exceeds 12 months is
classified as a current asset, consistent with recognised industry practice.
PROVISIONS
A provision is recognised in the consolidated balance sheet when the Group has
a legal or constructive obligation as a result of a past event, it is more
likely than not that an outflow of resources will be required to settle that
obligation, and a reliable estimate of the amount can be made.
A provision for restructuring is recognised when the Group has approved a
detailed formal restructuring plan, and the restructuring has either commenced
or has been publicly announced, and it is more likely than not that the plan
will be implemented, and the amount required to settle any obligations arising
can be reliably estimated. Future operating losses are not provided for.
Where there are a number of similar obligations, the likelihood that an
outflow will be required in settlement is determined by considering the class
of obligations as a whole. A provision is recognised even if the likelihood of
an outflow with respect to any one item included in the same class of
obligations may be small.
ASSETS HELD FOR SALE
Assets held for sale arise once a disposal process has advanced sufficiently
to meet the requirements of IFRS 5. Assets identified as held for sale are
considered for impairment of their carrying value against expected proceeds.
The assets and liabilities are presented separately on the balance sheet as
assets held for disposal and liabilities held for disposal.
CONTINGENT LIABILITIES
Contingent liabilities are possible obligations that arise from past events
and whose existence will be confirmed only by the occurrence or non-occurrence
of one or more uncertain future events, not wholly within the control of the
Group. Contingent liabilities are not recognised, only disclosed, unless the
possibility of a future outflow of resources is considered remote, or where a
disclosure would seriously prejudice the position of the Group.
RETIREMENT BENEFIT SCHEMES
For defined benefit schemes, the amount recognised in the consolidated balance
sheet is the difference between the present value of the defined benefit
obligation at the balance sheet date and the fair value of the scheme assets
to the extent that they are demonstrably recoverable either by refund or a
reduction in future contributions. The defined benefit obligation is
calculated annually by independent actuaries using the projected unit credit
method. The present value of the defined benefit obligation is determined by
discounting the estimated future cash flows using interest rates of high
quality corporate bonds that are denominated in the currency in which the
benefits will be paid, and that have terms to maturity approximating to the
terms of the related pension obligation.
The service cost of providing retirement benefits to employees during the year
is charged to operating profit. Past service costs are recognised immediately
in operating profit, unless the changes to the pension plan are conditional on
the employees remaining in service for a specified period of time.
All actuarial gains and losses, including differences between actual and
expected returns on assets and differences that arise as a result of changes
in actuarial assumptions, are recognised immediately in full in the statement
of comprehensive income for the period in which they arise. An interest charge
is made in the income statement by applying the rate used to discount the
defined benefit obligations to the net defined benefit liability of the
schemes.
For defined contribution schemes, contributions are recognised as an employee
benefit expense when they are due.
SHARE-BASED PAYMENTS
The Group applies the requirements of IFRS 2 Share-Based Payment Transactions
to both equity-settled and cash-settled share-based employee compensation
schemes. The majority of the Group's schemes are equity-settled.
Equity-settled share-based payments are measured at fair value at the date of
grant and are expensed over the vesting period, based on the number of
instruments that are expected to vest. For plans where vesting conditions are
based on total shareholder returns, the fair value at the date of grant
reflects these conditions. Earnings per share and net revenue vesting
conditions are reflected in the estimate of awards that will eventually vest.
For cash-settled share-based payments, a liability equal to the portion of the
services received is recognised at its current fair value at each balance
sheet date. Where applicable the Group recognises the impact of revisions to
original estimates in the consolidated income statement, with a corresponding
adjustment to equity for equity-settled schemes and current liabilities for
cash-settled schemes. Fair values are measured using appropriate valuation
models, taking into account the terms and conditions of the awards.
The Group funds the purchase of shares to satisfy rights to shares arising
under share-based employee compensation schemes. Shares acquired to satisfy
those rights are held in Employee Share Ownership Trusts. On consolidation,
these shares are accounted for as a deduction from equity attributable to
owners of the parent. When the rights are exercised, equity is increased by
the amount of any proceeds received by the Employee Share Ownership Trusts.
TREASURY SHARES
When the Company purchases its own equity share capital (treasury shares), the
consideration paid, including any directly attributable incremental costs (net
of income taxes), is deducted on consolidation from equity attributable to
owners of the parent until the shares are reissued or disposed of. When such
shares are subsequently sold or reissued, any consideration received, net of
any directly attributable incremental transaction costs and the related income
tax effects, increases equity attributable to owners of the parent. When such
shares are cancelled they are transferred to the capital redemption reserve.
Where the group enters into a contract with a third party that contains an
obligation to re-purchase its own shares for cash or another financial asset;
a financial liability is recognised for the present value of the redemption
amount. One example is an obligation under a forward contract to re-purchase
shares in Imperial Brands PLC for cash. The financial liability is recognised
initially at the present value of the redemption amount, and is reclassified
from equity. Subsequently, the financial liability is measured in accordance
with IFRS 9, and is revalued at subsequent reporting points as appropriate. If
the contract expires without delivery, the carrying amount of the financial
liability is reclassified to equity.
USE OF ADJUSTED PERFORMANCE MEASURES
Management believes that non-GAAP or adjusted performance measures provide an
important comparison of business performance and reflect the way in which the
business is controlled. The adjusted performance measures seek to remove the
distorting effects of a number of significant gains or losses arising from
transactions which are not directly related to the ongoing underlying
performance of the business and may be non-recurring events or not directly
within the control of management.
Accordingly, adjusted performance measures of operating profit, net finance
costs, profit before tax, tax, attributable earnings and earnings per share
exclude, where applicable, acquisition and disposal costs, amortisation and
impairment of acquired intangibles, restructuring costs, post-employment
benefits net financing cost, fair value and exchange gains and losses on
financial instruments, and related tax effects and tax matters.
Reconciliations between adjusted and reported operating profit are included
within note 6 to the financial statements, adjusted and reported net finance
costs in note 6, adjusted and reported tax in note 8, and adjusted and
reported earnings per share in note 10. There are also other adjusted reported
measures which are defined below.
The adjusted performance measures in this report are not defined terms under
IFRS and may not be comparable with similarly titled measures reported by
other companies.
The items excluded from adjusted performance results are those which are
one-off in nature or items which arose due to acquisitions and are not
influenced by the day to day operations of the Group, and the movements in the
fair value of financial instruments which are marked to market and not
naturally offset. Adjusted net finance costs also excludes all post-employment
benefit net finance cost since pension assets and liabilities and redundancy
and social plan provisions do not form part of adjusted net debt. This allows
comparison of the Group's cost of debt with adjusted net debt. The adjusted
performance measures are used by management to assess the Group's financial
performance and aid comparability of results year on year.
ADJUSTED OPERATING PROFIT
Adjusted operating profit is calculated as operating profit amended for a
number of adjustments, the principal changes are detailed below. This measure
is separately calculated and disclosed for Tobacco, NGP and Distribution where
appropriate. In addition, adjustments have been made to present this measure
on an organic basis to allow year on year comparability (see organic
adjustments below). A reconciliation can be found in note 6.
Acquisition AND DISPOSAL COSTS / PROFIT ON DISPOSAL OF SUBSIDIARIES
Adjusted performance measures exclude costs and profits or losses associated
with major acquisitions and disposals as they do not relate to the day to day
operational performance of the Group. Acquisition costs and profits or losses
on disposal can be significant in size and are one-off in nature. Exclusion of
these items allows a clearer presentation of the day to day underlying income
and costs of the business. Where applicable and not reported separately, this
includes changes in contingent or deferred consideration.
AMORTISATION AND IMPAIRMENT OF ACQUIRED INTANGIBLES
Acquired intangibles are amortised over their estimated useful economic lives
where these are considered to be finite. Acquired intangibles considered to
have an indefinite life are not amortised. Any negative goodwill arising is
recognised immediately in the income statement. We exclude from our adjusted
performance 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. Gains and losses on the
sale of intellectual property are removed from adjusted operating profit.
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.
PRESENTATION OF AUXLY CANNABIS GROUP INC.
As the movement in the fair value of loan receivables associated with the
Auxly Cannabis Group Inc. investment has the potential to be significant the
Group has disclosed a fair value movement separately on the face of the income
statement.
RESTRUCTURING COSTS
Significant one-off costs incurred in integrating acquired businesses and in
major rationalisation and optimisation initiatives together with their related
tax effects are excluded from our adjusted earnings measures. These include
restructuring costs incurred as part of fundamental multi-year
transformational change projects but do not include costs related to ongoing
cost reduction activity. These costs are all Board approved, and include
impairment of property, plant and equipment which are surplus to requirements
due to restructuring activity. These costs are required in order to address
structural issues associated with operating within the Tobacco sector that
have required action to both modernise and right-size the organisation,
ultimately delivering an operating model suitable for the future of the
business. The Group's view is that as these costs are both significant and
one-off in nature, excluding them allows a clearer presentation of the
underlying costs of the business.
Adjusted net Finance COSTS
Adjusted net finance costs excludes the movements in the fair value of
financial instruments which are marked to market and not naturally offset.
This measure also excludes all post-employment benefit net finance costs since
pension assets and liabilities and redundancy and social plan provisions do
not form part of adjusted net debt. This allows comparison of the Group's cost
of debt with adjusted net debt. A reconciliation can be found in note 6. The
detail of these adjustments is given below.
FAIR VALUE GAINS AND LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS AND EXCHANGE
GAINS AND LOSSES ON BORROWINGS
IFRS 9 requires that all derivative financial instruments are recognised in
the consolidated balance sheet at fair value, with changes in the fair value
being recognised in the consolidated income statement unless the instrument
satisfies the hedge accounting rules under IFRS and the Group chooses to
designate the derivative financial instrument as a hedge.
The Group hedges underlying exposures in an efficient, commercial and
structured manner. However, the strict hedging requirements of IFRS 9 may lead
to some commercially effective hedge positions not qualifying for hedge
accounting. As a result, and as permitted under IFRS 9, the Group has decided
not to apply cash flow or fair value hedge accounting for its
derivative financial instruments. However, the Group does apply net
investment hedging, designating certain borrowings and derivatives as hedges
of the net investment in the Group's foreign operations, as permitted by IFRS
9, in order to reduce income statement volatility.
We exclude fair value gains and losses on derivative financial instruments and
exchange gains and losses on borrowings from adjusted net finance costs. Fair
value gains and losses on the interest element of derivative financial
instruments are excluded as there is no direct natural offset between the
movements on derivatives and the interest charge on debt in any one period, as
the derivatives and debt instruments may be contracted over different periods,
although they will reverse over time or are matched in future periods by
interest charges. The fair value gains on derivatives are excluded as they can
introduce volatility in the finance charge for any given period.
Fair value gains and losses on the currency element of derivative financial
instruments and exchange gains and losses on borrowings are excluded as the
relevant foreign exchange gains and losses on the instruments in a net
investment hedging relationship are accumulated as a separate component of
other comprehensive income in accordance with the Group's policy on foreign
currency.
Fair value movements arising from the revaluation of contingent consideration
liabilities are adjusted out where they represent one-off acquisition costs
that are not linked to the current period underlying performance of the
business. Fair value adjustments on loans receivable measured at fair value
are excluded as they arise due to counterparty credit risk changes that are
not directly related to the underlying commercial performance of the
business..
POST-EMPLOYMENT BENEFITS NET FINANCING COST
The net interest on defined benefit assets or liabilities, together with the
unwind of discount on redundancy, social plans and other long-term provisions
are reported within net finance costs. These items together with their related
tax effects are excluded from our adjusted earnings measures, as they
primarily represent charges associated with historic employee benefit
commitments, rather than the ongoing current period costs of operating the
business.
ADJUSTED TAX CHARGE
The adjusted tax charge is calculated by amending the reported tax charge for
significant one-off tax charges or credits arising from:
• prior period tax items (including re-measurement of deferred tax
balances on a change in tax rates); or
• a provision for uncertain tax items not arising in the normal course
of business; or
• newly enacted taxes in the year; or
• tax items that are closely related to previously recognised tax
matters, and are excluded from our adjusted tax charge to aid comparability
and understanding of the Group's performance.
The recognition and utilisation of deferred tax assets relating to losses not
historically generated in the normal course of business are excluded on the
same basis.
A reconciliation can be found in note 8.
The adjusted tax rate is calculated as the adjusted tax charge divided by the
adjusted profit before tax.
ADJUSTED EARNINGS
Adjusted earnings is calculated by amending the reported basic earnings for
all of the adjustments recognised in the calculation of the adjusted operating
profit, adjusted finance costs and adjusted tax charge metrics as detailed
above. In addition, adjustments have been made to present this measure on an
organic basis to allow year on year comparability (see organic adjustments).
Adjusted earnings per share and organic earnings per share are calculated by
providing adjusted earnings and organic earnings by the weighted average
number of shares. A reconciliation is provided in note 10.
OTHER NON-GAAP MEASURES USED BY MANAGEMENT
NET REVENUE
Tobacco & Next Generation Products (NGP) net revenue comprises associated
revenue less duty and similar items, excluding peripheral products. Management
considers this an important measure in assessing the performance of Tobacco
& NGP operations.
The Group recognises revenue on sales to Logista, a Group company, within its
reported Tobacco & NGP revenue figure. As the revenue calculation includes
sales made to Logista from other Group companies but excludes Logista's
external sales, this metric differs from revenue calculated under IFRS
accounting standards. For the purposes of Adjusted Performance Measures on Net
Revenue we treat Logista as an arms length distributor on the basis that
contractual rights are in line with other Third Party suppliers to Logista.
Variations in the amount of inventory held by Logista results in a different
level of revenue compared to that which is included within the income
statement. For tobacco product sales, inventory level variations are normally
not significant. A reconciliation can be found in note 3.
DISTRIBUTION NET REVENUE
Distribution net revenue comprises the Distribution segment revenue less the
cost of distributed products. Management considers this an important measure
in assessing the performance of Distribution operations. The eliminations in
note 3 all relate to sales to Distribution. A reconciliation can be found in
note 3.
ADJUSTED OPERATING CASH
Adjusted operating cash conversion is calculated as cash flow from operations
pre-restructuring and before interest and tax payments less net capital
expenditure relating to property, plant and equipment, software and
intellectual property rights as a percentage of adjusted operating profit.
ADJUSTED NET DEBT
Management monitors the Group's borrowing levels using adjusted net debt which
excludes interest accruals, lease commitments and the fair value of derivative
financial instruments providing commercial hedges of interest rate risk. The
adjusted net debt metric is used in monitoring performance against various
debt management obligations including covenant compliance. A reconciliation
can be found in note 31.
ORGANIC
To aid comparison of performance between years, the Group uses the term
'organic' in all years reported to exclude the impact of the Premium Cigar
divestment, which completed on 29 October 2020. The organic performance
comparison excludes the contribution of the Premium Cigar divestment in all
years reported.
CASH CONVERSION
The Group uses cash conversion as a key metric for assessing underlying cash
performance. Cash Conversion is calculated as cash flow from operations
pre-restructuring and before interest and tax payments, less net capital
expenditure relating to property, plant and equipment, software and
intellectual property rights as a percentage of adjusted operating profit. A
reconciliation can be found in note 6.
ADJUSTED OPERATING PROFIT MARGIN
Adjusted operating profit margin is adjusted operating profit divided by net
revenue expressed as a percentage. This measure is separately calculated and
disclosed for Tobacco, NGP and Distribution where appropriate. In addition,
adjustments have been made to present this measure on an organic basis to
allow year on year comparability (see organic adjustments). A reconciliation
of adjusted operating profit can be found in note 6 and a reconciliation of
net revenue can be found in note 3.
FREE CASH FLOW
Free cash flow is adjusted operating profit (as defined above) adjusted for
certain cash and non cash items. The principal adjustments are depreciation,
working capital movements, net capex, restructuring cash flows, tax cash
flows, cash interest and minority interest dividends.
RETURN ON INVESTED CAPITAL
Return on invested capital measures the effectiveness of capital allocation
and is calculated by dividing adjusted operating profit after tax by the
annual average of: intangible assets, property, plant and equipment, net
assets held for sale, inventories, trade and other receivables and trade
payables and other current liabilities.
The annual average is defined as the average of the opening and closing
balance sheet values.
NET DEBT TO EBITDA (MULTIPLE)
This is defined as adjusted net debt divided by adjusted EBITDA. Adjusted net
debt is measured at balance sheet foreign exchange rates, with a full
reconciliation shown in note 30. Adjusted EBITDA is calculated as adjusted
operating profit plus amortisation, depreciation and impairments. A
reconciliation of adjusted net debt can be found in note 31.
ALL IN COST OF DEBT
This is defined as adjusted net finance costs (defined above) divided by the
average net debt in the year (note 31). A reconciliation of adjusted net
finance costs can be found in note 6.
CONSTANT CURRENCY
Constant currency removes the effect of exchange rate movements on the
translation of the results of our overseas operations. We translate current
year results at prior year foreign exchange rates.
NEW ACCOUNTING STANDARDS
For the year ended 30 September 2021 the Group continued to apply
international accounting standards in conformity with the requirements of the
Companies Act 2006 and IFRS, issued by the International Accounting Standards
Board (IASB) and adopted pursuant to Regulation (EC) No. 1606/2002 as it
applies in the European Union. From 1 October 2021, as a result of the UK
leaving the European Union, the Group will prepare the consolidated financial
statements in accordance with applicable international accounting standards,
issued by the IASB or International Financial Reporting Interpretations
Committee (IFRIC) and endorsed for use in the UK, referred to as 'UK-adopted
IFRS'.
The following amendments to the accounting standards, issued by the IASB or
IFRIC, have been adopted by the Group from 1 October 2020 with no impact on
the group's consolidated results, financial position or disclosures:
• Amendments to References to the Conceptual Framework in IFRS
• Amendments to IFRS 3 - Definition of a Business
• Amendments to IAS 1 and IAS 8 - Definition of Material
• Amendments to IFRS 16 - Covid-19 - Related Rent Concessions
• Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark
reform (phase 1)
Derivatives with a notional value of €3,233 million designated in net
investment hedges will be impacted by the impending reforms to the calculation
of the Interbank Offered Rates (IBOR). However, as discussed in Note 21
Financial Risk Management, only the undiscounted foreign currency spot
exposures of these instruments are designated in the hedging relationship and
therefore there will be no change to the effectiveness of the hedges due to
the reform. Changes in the fair value of these derivatives attributable to
changes in interest rates and the effect of discounting are recognised
directly in profit or loss within the Finance costs line.
NEW ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET IN ISSUE
The following standard and amendment, issued by the IASB has not been adopted
by the Group:
• Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark
reform (phase 2) (effective in the year ending 30 September 2022)
Following the announcement of the discontinuation of GBP LIBOR at the end of
2021 and USD LIBOR discontinuation in 2023, the Company has amended its bank
facility agreement to stop referencing GBP and USD LIBOR and instead reference
the daily risk free rates of SONIA and SOFR respectively. All current GBP
LIBOR derivatives will be changed to reference SONIA instead of GBP LIBOR by
the end of 2021, then all USD LIBOR derivatives will be changed to reference
SOFR instead of USD LIBOR during the remainder of fiscal year 2022. There are
no changes pending for EUR derivatives.
There are also a number of other amendments and clarifications to IFRS,
effective in future years. None of which are expected to significantly impact
the group's consolidated results or financial position.
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 below.
DETERMINATION OF USEFUL ECONOMIC LIFE OF INTANGIBLE ASSETS
For non-goodwill intangible assets, there are critical judgements required in
determining whether the asset has an indefinite useful economic life, or not.
The Davidoff trademark has a significant market share and positive cash flow
growth expectations. There are no regulatory or contractual restrictions on
the use of this trademark, and there are no plans to significantly redirect
resources elsewhere which would reduce the value of this asset. Consequently,
in the view of management, the Davidoff trademark does not have a foreseeable
and definite end to its ability to generate future cash flows and hence it is
not amortised. The carrying value of Davidoff is subject to an annual
impairment review under the requirements of IAS 36 as Group does not currently
foresee a limit to the period over which the asset is expected to generate net
cash inflows. The most recent assessment indicates that the carrying value is
not impaired.
AMORTISATION AND IMPAIRMENT OF INTANGIBLE ASSETS
For non-indefinite life assets, which are amortised, the useful economic life
and recoverable amounts are estimated based upon the expectation of the amount
and time period during which an intangible asset will support future cash
flows. Due to estimation uncertainties the useful economic lives and
associated amortisation rates have to be reviewed and revised where necessary.
In addition, where there are indications that the current carrying value of an
intangible asset is greater than its recoverable amount, impairment in the
carrying value of the asset may be required. Factors considered important that
could trigger an impairment review of intangible assets include the following:
• significant underperformance relative to historical or projected
future operating results;
• significant changes in the manner of the use of the acquired assets or
the strategy for the overall business; and
• significant negative industry or economic trends.
The complexity of the estimation process and issues related to the
assumptions, risks and uncertainties inherent in the application of the
Group's accounting estimates in relation to intangible assets affect the
amounts reported in the financial statements, especially the estimates of the
expected useful economic lives and the carrying values of those assets. If
business conditions materially change it is likely that materially different
amounts could be reported in the Group's financial statements. Indefinite life
intangible assets, including goodwill, are subject to annual impairment
testing where an assessment of the carrying value of the asset against its
recoverable amount is undertaken. There are long term uncertainties associated
with estimating the valuation of the recoverable amount, particularly with
regard to long term cash flow growth rates which are influenced by the future
size and shape of the tobacco sector. While long term growth rates currently
used in impairment assessments are based on current best estimates of future
performance, there may be changes in these assumptions when conducting
impairment tests in subsequent years. Details of goodwill and intangible asset
impairment assessments are included in note 12.
INCOME TAXES
Judgement is involved in determining whether the Group is subject to a tax
liability or not in line with tax law. Where liabilities exist, estimation is
often required to determine the potential future tax payments. The Group is
subject to income tax in numerous jurisdictions and significant judgement is
required in determining the provision for tax. There are many transactions and
calculations for which the ultimate tax determination is uncertain. The Group
recognises provisions for tax based on estimates of the taxes that are likely
to become due. Where the final tax outcome is different from the amounts that
were initially recorded, such differences will impact the current income tax
and deferred tax provisions in the period in which such determination is made.
Consideration of the judgements surrounding certain tax positions are
applicable to the Group and consideration of the valuation estimates related
to tax provisions are given in note 8 to these financial statements.
LEGAL PROCEEDINGS AND DISPUTES
The Group reviews outstanding legal cases following developments in the legal
proceedings at each balance sheet date, considering the nature of the
litigation, claim or assessment; the legal processes and potential level of
damages in the jurisdiction in which the litigation, claim or assessment has
been brought; the progress of the case (including progress after the date of
the financial statements but before those statements are issued); the opinions
or views of legal counsel and other advisers; experience of similar cases; and
any decision of the Group's management as to how it will respond to the
litigation, claim or assessment. Judgement is required as to whether a
liability exists. Where a liability is determined there can be a degree of
estimation of the potential level of damages expected. Key areas of judgement
include consideration as to whether certain claims associated with the
acquisition of certain brands and the likely outcome of a number of product
liability claims. More detail as to the considered position on these claims is
given in both note 30 of the financial statements and within the Directors'
Report - update on Tobacco and e-vapour related litigation. To the extent that
the Group's assessments at any time do not reflect subsequent developments or
the eventual outcome of any claim, its future financial statements may be
materially affected, with a favourable or adverse impact upon the Group's
operating profit, financial position and liquidity.
PROVISIONS
Provision accounting involves judgement as to whether a liability should be
recognised and requires estimates of the quantum of any such liability. The
Group holds provisions where appropriate in respect of estimated future
economic outflows, principally for restructuring activity and excise tax,
which arise due to past events. Estimates are based on management judgement
and information available at the balance sheet date. Actual outflows may not
occur as anticipated, and estimates may prove to be incorrect, leading to
further charges or releases of provisions as circumstances dictate. The main
area of estimation risk relates to the estimation of restructuring provisions
associated with various plans to transform the business. These include the
cost of factory closures, scaling down of capacity and other structural
changes to the business. These programmes are run as discrete projects with
controls over the expected costs and the associated accounting impacts. The
calculation of restructuring provisions includes estimation challenges
relating to asset remediation costs, the valuation of disposals and
termination costs. More details relating to the estimates associated with
these restructuring programmes can be found in notes 5 and 25.
CONTROL OF LOGISTA
A key judgement relates to whether the Group has effective control of Logista
sufficient that the Group can consolidate this entity within its Group
accounts in line with the requirements of IFRS 10 Consolidated Financial
Statements. The Group holds 50.01 per cent of the voting shares. The Group has
reviewed its control of Logista and that it is appropriate to consolidate this
entity in line with the requirements of IFRS 10 Consolidated Financial
Statements. The Group continues to have Director presence on the Board of
Logista, representing 4 out of 10 Directors. The Group has powers to control
as set out in the Relationship Framework Agreement which specifies certain
areas of operation reserved for shareholder approval and through these
measures the Group is able to exercise control of Logista. The Group has
therefore concluded that it continues to be appropriate to recognise Logista
as a fully consolidated subsidiary.
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
AAA - Australia, Japan, Russia, Saudi Arabia, Taiwan and our African markets
including Algeria and Morocco.
TOBACCO & NGP
£ million unless otherwise indicated 2021 2020
Revenue 23,863 23,973
Net revenue 7,610 7,985
Operating profit 2,991 2,587
Adjusted operating profit 3,308 3,288
Adjusted operating margin % 43.5 41.2
RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
£ million 2021 2020
Adjusted operating profit 3,308 3,288
Acquisition and disposal costs - (26)
Profit on disposal of subsidiaries 281 -
Amortisation of acquired intangibles (365) (438)
Excise tax provision 1 20
Fair value adjustment of loan receivable 15 (62)
Restructuring costs (249) (195)
Operating profit 2,991 2,587
DISTRIBUTION
£ million unless otherwise indicated 2021 2020
Revenue 9,589 9,268
Distribution net revenue 1,069 1,015
Operating profit 148 131
Adjusted operating profit 258 226
Adjusted operating margin % 24.1 22.3
RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
£ million 2021 2020
Adjusted operating profit 258 226
Acquisition and disposal costs (17) -
Amortisation of acquired intangibles (85) (85)
Restructuring costs (8) (10)
Operating profit 148 131
REVENUE
2021 2020
£ million Total External revenue Total External
revenue
revenue
revenue
Tobacco & NGP
Europe 14,720 14,059 14,395 13,716
Americas 3,393 3,393 3,371 3,371
Africa, Asia & Australasia 5,750 5,750 6,207 6,207
Total Tobacco & NGP 23,863 23,202 23,973 23,294
Distribution 9,589 9,589 9,268 9,268
Eliminations (661) - (679) -
Total Group 32,791 32,791 32,562 32,562
RECONCILIATION FROM TOBACCO & NGP REVENUE TO TOBACCO & NGP NET REVENUE
2021 2020
£ million Tobacco NGP Total Tobacco NGP Total
Revenue 23,664 199 23,863 23,757 216 23,973
Duty and similar items (16,218) (11) (16,229) (15,947) (15) (15,962)
Sale of peripheral products (24) - (24) (26) - (26)
Net Revenue 7,422 188 7,610 7,784 201 7,985
TOBACCO & NGP NET REVENUE
2021 2020
£ million Tobacco NGP Total Tobacco NGP Total
Europe 3,425 126 3,551 3,471 98 3,569
Americas 2,478 56 2,534 2,409 71 2,480
Africa, Asia & Australasia 1,519 6 1,525 1,904 32 1,936
Total Tobacco & NGP 7,422 188 7,610 7,784 201 7,985
PREMIUM CIGAR DIVESTMENT & ORGANIC NET REVENUE
£ million 2021 2020
Organic Net Revenue 7,589 7,738
Premium Cigar Divestment Net Revenue 21 247
Total Tobacco & NGP 7,610 7,985
RECONCILIATION FROM DISTRIBUTION REVENUE TO DISTRIBUTION NET REVENUE
£ million 2021 2020
Revenue 9,589 9,268
Cost of sales - Distribution (8,520) (8,253)
Distribution Net Revenue 1,069 1,015
ADJUSTED OPERATING PROFIT AND RECONCILIATION TO PROFIT BEFORE TAX
£ million 2021 2020
Tobacco & NGP
Europe 1,670 1,582
Americas 1,037 1,032
Africa, Asia & Australasia 601 674
Total Tobacco & NGP 3,308 3,288
Distribution ( ) ( ) 258 226
Eliminations ( ) ( ) 7 13
Adjusted operating profit 3,573 3,527
Acquisition and disposal costs - Tobacco & NGP - (26)
Acquisition and disposal costs - Distribution (17) -
Profit on disposal of subsidiaries - Tobacco & NGP 281 -
Amortisation and impairment of acquired intangibles - Tobacco & NGP (365) (438)
Amortisation of acquired intangibles - Distribution (85) (85)
Excise tax provision - Tobacco & NGP 1 20
Fair value adjustment of loan receivable - Tobacco & NGP 15 (62)
Restructuring costs - Tobacco & NGP ( ) ( ) (249) (195)
Restructuring costs - Distribution ( ) ( ) (8) (10)
Operating profit 3,146 2,731
Net finance income/(costs) 81 (610)
Share of profit of investments accounted for using the equity method 11 45
Profit before tax 3,238 2,166
See note 8 for details of the Excise tax provision. See note 12 for details on
amortisation and impairment, note 11 for details of acquisition and disposal
costs, and note 5 for details of restructuring costs.
OTHER INFORMATION
2021 2020
£ million Additions to property, plant and equipment Depreciation and software amortisation Additions to property, plant and equipment Depreciation and software amortisation
Tobacco & NGP
Europe 87 99 77 101
Americas 26 28 30 31
Africa, Asia & Australasia 20 27 46 34
Total Tobacco & NGP 133 154 153 166
Distribution 32 40 21 36
Total Group 165 194 174 202
ADDITONAL GEOGRAPHIC ANALYSIS
External revenue and non-current assets are presented for the UK and for
individually significant countries. The geographical analysis is based on
country of origin. The Group's products are sold in over 120 countries.
2021 2020
£ million External revenue Non-current assets External Non-current assets
revenue
UK 4,558 102 4,498 104
Germany 4,566 3,246 4,637 3,465
France 3,537 2,336 3,772 2,564
USA 3,405 5,486 3,575 6,143
Other 16,725 7,307 16,080 7,900
Total Group 32,791 18,477 32,562 20,176
Non-current assets comprise intangible assets, property, plant and equipment
and investments accounted for using the equity method.
4. PROFIT BEFORE TAX
Profit before tax is stated after charging/(crediting):
£ million 2021 2020
Raw materials and consumables used 947 947
Changes in inventories of finished goods - Tobacco & NGP 2,700 2,781
Changes in inventories of finished goods - Distribution 7,009 6,798
Depreciation and impairment of fixed assets 170 205
Amortisation and impairment of intangible assets 575 628
Acquisition and disposal costs 17 26
Expenses relating to short-term leases 4 4
Expenses relating to low value asset leases 2 2
Depreciation of Right of use assets 66 72
Net foreign exchange (gains)/losses (442) 258
Write down of inventories 117 126
Loss/(profit) on disposal of non-current assets 2 (2)
(Write back)/impairment of trade receivables (10) 44
ANALYSIS OF FEES PAYABLES TO ERNST AND YOUNG LLP AND ITS ASSOCIATES
£ million 2021 2020
Parent Company and consolidated financial statements 2.0 1.9
The Company's subsidiaries 5.1 4.7
Audit related assurance services 0.4 0.4
Total audit related fees 7.5 7.0
Other assurance services 0.4 0.2
Total non-audit fees 0.4 0.2
Total auditor's remuneration 7.9 7.2
Ernst & Young LLP was appointed the Group's auditor for the year ended 30
September 2020.
PwC (the Group's previous auditor) provided services to Logista relating to
preparation of their consolidation financial statements amounting to £nil
(2020: £0.2m).
5. RESTRUCTURING COSTS
£ million 2021 2020
Employment related 145 103
Asset impairments 92 58
Other charges 20 44
257 205
Restructuring costs analysed by workstream:
£ million 2021 2020
2021 Strategic review programme 226 -
Cost optimisation programmes 23 187
Other 8 18
257 205
The charge for the year of £257 million (2020: £205 million) predominantly
relates to our 2021 Strategic review programme and Cost optimisation
programmes.
Restructuring costs are included within administrative and other expenses in
the consolidated income statement. All restructuring costs are treated as
adjusting items.
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 in 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.
2021 strategic review programme
In January 2021, the Group announced the results of a Strategic Review
Programme including an associated and specific time-bound restructuring
programme. The Group expects the majority of the associated restructuring
costs to have been incurred by September 2022. Total restructuring costs in
respect of the programme are expected to be in the range of £375 million -
£425 million.
Restructuring costs of £226 million (2020: £nil) related to the 2021
Strategic Review Programme have been incurred in the year, representing £153
million costs in respect of the change programme itself and £73 million of
impairments associated with NGP assets.
2021 Strategic Review Programme cash spend for the year was £48 million (2020
£nil).
Cost optimisation programmes
The cost optimisation programmes (Phase I announced in 2013 and Phase II
announced in November 2016) was part of the Group strategy to optimise costs
and drive operational efficiencies. The programmes were time bound projects
which, given their scale, were delivered over a number of years. Phase I was
concluded at the end of 2018 and Phase II was concluded at the end of 2021.
Whilst both programmes are concluded there remain some ongoing cash costs.
Phase II of the programme focused on reducing product costs and overheads.
Phase II cash spend for the year was £41 million (2020: £107 million),
bringing the cumulative cash cost of the programme to £548 million as at
September 2021. Phase II is currently delivering savings of c. £320 million
per annum as at September 2021.
Phase I cash spend for the year was £12 million (2020: £16 million),
bringing the cumulative cash cost of the programme to £571 million as at
September 2021. Phase I has delivered savings of c. £305 million per annum
from September 2018.
Restructuring costs of £23 million (2020: £187 million) related to the Cost
optimisation programmes includes £19 million of impairments associated with
tangible assets.
Other restructuring activities
In the year £8 million (2020: £10 million) of restructuring costs related to
Logista.
There are £nil (2020: £8 million) Other restructuring costs that do not
relate to Logista.
In the year other restructuring cash spend was £11 million.
6. ALTERNATIVE PERFORMANCE MEASURES
RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
£ million Notes 2021 2020
Operating profit 3,146 2,731
Acquisition and disposal costs 11 17 26
Amortisation and impairment of acquired intangibles 12/15 450 523
Excise tax provision (1) (20)
Fair value adjustment of loan receivable 21 (15) 62
Profit on disposal of subsidiaries (281) -
Restructuring costs 5 257 205
Adjusted operating profit 3,573 3,527
Organic adjusted operating profit 3,570 3,496
Premium cigar divestment adjusted operating profit 3 31
Adjusted operating profit 3,573 3,527
Amortisation and impairment of acquired intangibles, acquisition and disposal
costs and restructuring costs are discussed in further detail in the above
referenced notes.
RECONCILIATION FROM REPORTED NET FINANCE COSTS TO ADJUSTED NET FINANCE COSTS
£ million 2021 2020
Reported net finance (income)/costs (81) 610
Fair value gains on derivative financial instruments 508 661
Fair value losses on derivative financial instruments (457) (581)
Exchange (gains)/losses on financing activities 445 (256)
Net fair value and exchange losses on financial instruments 496 (176)
Interest income on net defined benefit assets 89 99
Interest cost on net defined benefit liabilities (87) (104)
Post-employment benefits net financing cost 2 (5)
Adjusted net finance costs 417 429
Comprising
Interest income on bank deposits (18) (10)
Interest cost on lease liabilities 7 7
Interest cost on bank and other loans 428 432
Adjusted net finance costs 417 429
CASH CONVERSION CALCULATION
£ million unless otherwise indicated 2021 2020
Net cash flow from operating activities 2,167 4,030
Tax 820 568
Net capital expenditure (150) (274)
Restructuring spend 112 145
Cash flow post capital expenditure pre interest and tax 2,949 4,469
Adjusted operating profit 3,573 3,527
Cash Conversion % 83% 127%
7. DIRECTORS AND EMPLOYEES
EMPLOYMENT COSTS
£ million 2021 2020
Wages and salaries 775 812
Social security costs 177 184
Other pension costs (note 24) 75 68
Share-based payments (note 27) 25 20
1,052 1,084
OPERATING EXECUTIVE (EXCLUDING EXECUTIVE DIRECTORS)
£ million 2021 2020
Base salary 3.0 2.0
Benefits 0.7 -
Pension salary supplement 0.3 -
Bonus 2.9 1.6
Termination payments - -
LTIP annual vesting(1) 0.8 -
SMS annual vesting(1) - 0.1
7.7 3.7
1. Share plans vesting represent the value of SMS and LTIP awards where the
performance periods ends in the year. The SMS has no performance conditions
and is valued at the time of vesting being 15 February at a share price of
£15.0657
Note: aggregate remuneration paid to or receivable by Executive directors,
Non-Executive Directors and members of the Operating Executive for qualifying
services in accordance with IAS 24, which includes National Insurance and
similar charges was £16,422,230 (2020: £9,239,049).
KEY MANAGEMENT COMPENSATION (1)
£ million 2021 2020
Short term employee benefits 12.7 9.2
Post-employment benefits 0.5 2.0
Other long-term benefits - -
Termination payments - -
Share based payments (in accordance with IAS 24) 0.9 0.2
14.1 11.4
1. Key management includes Directors, members of the Executive Committee and
the Company Secretary
Details of Directors' emoluments and interests, and of key management
compensation which represent related party transactions requiring disclosure
under IAS 24, are provided within the Directors' Remuneration Report.
NUMBER OF PEOPLE EMPLOYED BY THE GROUP DURING THE YEAR
2021 2020
At 30 Average At 30 Average
September
September
Tobacco & NGP 24,100 24,000 26,300 25,900
Distribution 6,200 6,200 6,200 6,200
30,300 30,200 32,500 32,100
NUMBER OF PEOPLE EMPLOYED BY THE GROUP BY LOCATION DURING THE YEAR
2021 2020
At 30 Average At 30 Average
September
September
UK and European Union 14,600 14,700 14,900 15,100
Americas 8,300 8,000 8,900 8,400
Rest of the World 7,400 7,500 8,700 8,600
30,300 30,200 32,500 32,100
The average number of employees includes 2,500 La Romana employees that are
expected to leave the Group in 2022 as part of the final part of the Premium
Cigar Division disposal. Excluding these employees, the average number of
employees was 27,700 on a pro-forma basis.
8. TAX
The major components of income tax expense for the years ended 30 September
2021 and 2020 are:
£ million 2021 2020
UK Current tax
Current year charged to the consolidated income statement 21 97
Current year charged to consolidated other comprehensive income 105 10
Total current year UK current tax 126 107
Adjustments in respect of prior years charged to the consolidated income (38) 26
statement
Total UK current tax 88 133
Overseas current tax
Current year charged to the consolidated income statement 458 458
Current year charged to consolidated other comprehensive income (2) -
Total current year overseas current tax 456 458
Adjustments in respect of prior years charged to the consolidated income 46 12
statement
Total overseas current tax 502 470
Total current tax charged to the consolidated statement of other comprehensive 590 603
income
£ million 2021 2020
UK Current tax
Current year 21 97
Adjustments in respect of prior years (38) 26
Overseas current tax
Current year 458 458
Adjustments in respect of prior years 46 12
Total current tax 487 593
Deferred tax
Relating to origination and reversal of temporary differences (156) 15
Total tax charged to the consolidated income statement 331 608
£ million 2021 2020
Tax related to items recognised in consolidated other comprehensive income
during the year:
Current tax on hedge of net investment 105 10
Current tax on actuarial gains and losses (2) -
Total current tax 103 10
Deferred tax on hedge of net investment 12 80
Deferred tax on actuarial gains and losses 21 53
Total deferred tax 33 133
Total tax charged to consolidated other comprehensive income 136 143
RECONCILIATION FROM REPORTED TAX TO ADJUSTED TAX
The table below shows the tax impact of the adjustments made to reported
profit before tax in order to arrive at the adjusted measure of earnings
disclosed in note 10.
£ million 2021 2020
Reported tax 331 608
Deferred tax on amortisation of acquired intangibles 31 57
Current tax on excise tax provision - (4)
Tax on net foreign exchange and fair value gains and losses on financial 78 (63)
instruments
Tax on post-employment benefits net financing cost 1 1
Tax on restructuring costs 72 31
Tax on disposal of premium cigar division 11 (19)
Recognition of tax credits 239 67
Uncertain tax positions - (77)
Tax on unrecognised losses (47) 41
Adjusted tax charge 716 642
The use of adjusted performance measures is explained in note 1, Accounting
Policies (Use of Adjusted Performance Measures).
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
(2020: 19.0 per cent) as follows:
£ million 2021 2020
Profit before tax 3,238 2,166
Tax at the UK corporation tax rate of 19.0% (2020: 19.0%) 615 411
Tax effects of:
Differences in effective tax rates on overseas earnings 107 100
Movement in provision for uncertain tax positions 49 61
Remeasurement of deferred tax balances arising from changes in tax rates 15 9
Recognition of deferred tax assets for tax credits (239) -
Remeasurement of previously recognised deferred tax assets (5) (81)
Increase in unrecognised deferred tax assets 12 30
Deferred tax on unremitted earnings (4) (19)
Share of profit of investments accounted for using the equity method (2) (8)
Non-deductible expenses/(non-taxable income) 35 (4)
(Non-taxable gains)/non-deductible losses on net foreign exchange on financial (169) 80
instruments
Non-taxable gain on Premium Cigar Division disposal (81) -
Adjustments in respect of prior years (2) 29
Total tax charged to the consolidated income statement 331 608
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.
Recognition of deferred tax assets for credits includes £239 million (2020:
£nil) in the Group's Spanish business arising from an internal reorganisation
during the year.
Remeasurement of previously recognised deferred tax assets includes £8
million recognition (2020: £18 million) in relation to deferred tax assets
for tax losses in the Group's Dutch business, £nil recognition (2020:£15
million) in relation to deferred tax assets for tax credits and losses in the
Group's Spanish business and £nil recognition (2020: £45 million) 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 £15 million (2020: £9 million).
During the year the Group has decreased the provision for deferred tax on
unremitted earnings by £4 million (2020: £19 million decrease). The tax will
arise on the distribution of profits through the group and on planned group
simplification.
MOVEMENT ON THE CURRENT TAX ACCOUNT
£ million 2021 2020
At 1 October (144) (118)
Charged to the consolidated income statement (487) (593)
(Charged)/credited to other comprehensive income (103) 10
Credited to equity - 1
Cash paid 820 568
Exchange movements 3 (13)
Other movements (7) 1
At 30 September 82 (144)
The cash tax paid in the year is £333 million higher than the current tax
charge (2020: £25 million lower). This arises as a result of timing
differences between the accrual of income taxes and the actual payment of cash
and the movement in the provision for uncertain tax positions.
Analysis of current tax account
£ million 2021 2020
State aid tax recoverable 101 -
Current tax assets 234 206
Current tax liabilities (253) (350)
82 (144)
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 2021 the total value of these provisions, including foreign exchange
movements, was £306 million (2020: £273 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 £234
million. The challenge concerns the valuation placed on the shares of Altadis
Distribution France (now known as Logista France) following an intragroup
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 of £234
million (2020: £248 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. As of September 2021,
all submissions have been made to the court and we await a hearing date. The
Group believes it is appropriate to maintain a £41 million (2020: £44
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.
Based on advice, the Group's position remains that no State Aid has been
received, but following HMRC guidance an assessment of potential State Aid was
submitted to HMRC in July 2020. In February 2021 a charging notice for £101
million, in line with the Group's assessment, was issued to the Group by HMRC
and has since been paid. Advice to date is that our appeal and that of the UK
government against the Commission's decision should ultimately be successful
so a current tax receivable of £101 million has been recognised as a
non-current asset.
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 £900 million (2020: £800 million). The Group holds
a provision of £260 million (2020: £207 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. In 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. £6 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. In November
2020, HMRC issued a final DPT notice, which has now been paid. In September
2021, further preliminary DPT notices were received in respect of the year
ended 30 September 2017 indicating a potential liability of c. £4 million.
Based on advice, the Group continues to believe this is a transfer pricing
matter, but if a settlement is not reached before December 2021 the c. £4
million DPT notice will be payable. On conclusion of the transfer pricing
discussions, an appropriate refund is anticipated for all DPT payments.
The Group believe the transfer pricing provision held above appropriately
provides for this and other transfer pricing issues.
9. DIVIDENDS
DISTRIBUTIONS TO ORDINARY EQUITY HOLDERS
£ million 2021 2020 2019
Paid interim of 42.12 pence per share (2020: 41.70 pence, 2019: 62.56 pence)
- Paid June 2019 - - 298
- Paid September 2019 - - 298
- Paid December 2019 - - 679
- Paid June 2020 - 197 -
- Paid September 2020 - 197 -
- Paid December 2020 - 453 -
- Paid June 2021 199 - -
- Paid September 2021 199 - -
Interim dividend paid 398 847 1,275
Proposed interim of 48.48 pence per share (2020: 48.00 pence, 2019: 72.00
pence)
- To be paid December 2021 458 - -
Interim dividend proposed 458 - -
Proposed final of 48.48 pence per share (2020: 48.01 pence, 2019: 72.01 pence)
- Paid March 2020 - - 680
- Paid March 2021 - 454 -
- To be paid March 2022 458 - -
Final dividend 458 454 680
Total ordinary share dividends of 139.08 pence per share (2020: 137.71 pence, 1,314 1,301 1,955
2019: 206.57 pence)
The third interim dividend for the year ended 30 September 2021 of 48.48 pence
per share amounts to a proposed dividend of £458 million, which will be paid
in December 2021.
The proposed final dividend for the year ended 30 September 2021 of 48.48
pence per share amounts to a proposed dividend payment of £458 million in
March 2022 based on the number of shares ranking for dividend at 30 September
2021, and is subject to shareholder approval. If approved, the total dividend
paid in respect of 2021 will be £1,314 million (2020: £1,301 million). The
dividend paid during 2021 is £1,305 million (2020: £1,753 million).
10. EARNINGS PER ORDINARY 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.
£ million 2021 2020
Earnings: basic and diluted - attributable to owners of the Parent Company 2,834 1,495
Millions of shares 2021 2020
Weighted average number of shares:
Shares for basic earnings per share 945.0 944.4
Potentially dilutive share options 2.5 1.4
Shares for diluted earnings per share 947.5 945.8
Pence 2021 2020
Basic earnings per share 299.9 158.3
Diluted earnings per share 299.1 158.1
RECONCILIATION FROM REPORTED TO ADJUSTED EARNINGS AND EARNINGS PER SHARE
2021 2020
£ million unless otherwise indicated Earnings Earnings Earnings Earnings
per share (pence)
per share (pence)
Reported basic 299.9 2,834 158.3 1,495
Acquisition and disposal costs 1.8 17 2.8 26
Amortisation and impairment of acquired intangibles 44.3 419 49.2 466
Profit on disposal of subsidiaries (29.7) (281) - -
Excise tax provision (0.1) (1) (1.7) (16)
Fair value adjustment of loan receivable (1.6) (15) 6.6 62
Net fair value and exchange movements on financial instruments (60.7) (574) 25.3 239
Post-employment benefits net financing cost (0.3) (3) 0.4 4
Restructuring costs 19.6 185 18.4 174
Tax on disposal of premium cigar division (1.2) (11) 2.0 19
Recognition of tax credits (25.3) (239) (7.1) (67)
Uncertain tax positions - - 8.2 77
Tax on unrecognised losses 5.0 47 (4.3) (41)
Adjustments above attributable to non-controlling interests (4.6) (43) (3.7) (35)
Adjusted 247.1 2,335 254.4 2,403
Adjusted diluted 246.4 2,335 254.1 2,403
Organic adjusted 246.5 2,330 247.2 2,335
Premium Cigar divestment adjusted 0.6 5 7.2 68
Adjusted 247.1 2,335 254.4 2,403
Organic adjusted diluted 245.8 2,330 246.9 2,335
Premium Cigar divestment adjusted diluted 0.6 5 7.2 68
Adjusted diluted 246.4 2,335 254.1 2,403
11. DISPOSAL OF SUBSIDIARIES
On 27 April 2020 the Group announced that it had agreed the sale of the
Premium Cigar Division ("the Division"). The total cash receipts expected for
the transaction are €1,198 million (including the La Romana disposal - see
below). The share sale element of the sale of the Division completed on 29
October 2020 and to date €1,041 million (£845 million) of consideration has
been received. A further €88 million of deferred consideration relating to
the share sale was received on 26 October 2021.
The profit arising on disposal of the Division was £281 million and includes
£337 million of foreign exchange gains that had previously been recognised in
the foreign exchange reserve and that were recycled to the income statement on
completion of the transaction.
The sale of the La Romana factory in the Dominican Republic is due to complete
during the Group's 2022 financial year when it is expected that €69 million
of sales consideration will be received subject to a true up in respect of
inventory values. The carrying value of the net assets of the La Romana
factory total $64 million. This sale of the La Romana factory does not meet
the recognition criteria for an asset held for sale as there is ongoing work
to separate the factory for disposal.
On 18 June 2021 a letter of intent to sell Supergroup S.A.S. was agreed. At 30
September 2021, the Group has assessed the IFRS 5 criteria for presentation of
the business as held for disposal. Given the progress made on the sale the
Group considers the IFRS 5 criteria to have been met and therefore it is
highly probable that a disposal will be completed. The Group has therefore
presented the net assets of Supergroup S.A.S. as current assets and
liabilities held for sale. A fair value adjustment of £3 million and a
reclassification of an associated provision of £9 million has resulted in the
non-current assets being written down to nil.
In addition to the above, certain assets within the Distribution business have
also been reclassified to assets held for sale due to the existence of
purchase offers from third parties. The value of these assets on 30
September 2021 was £8 million.
The assets and liabilities classified as held for disposal are as follows:
£ million 2021 2020
Non-current assets
Intangible assets - 101
Property, plant and equipment 8 17
Investments accounted for using the equity method - 584
Trade and other receivables - 35
Right of use leased assets - 7
Deferred tax assets - 10
8 754
Current assets
Inventories 9 166
Trade and other receivables 18 67
Cash and cash equivalents - 75
27 308
Total assets 35 1,062
Current liabilities
Trade and other payables (13) (35)
Tax liabilities (4) -
Provisions (18) (3)
(35) (38)
Total liabilities (35) (38)
Net assets - 1,024
12. INTANGIBLE ASSETS
2021
£ million Goodwill Intellectual property and product development Supply agreements Software Total
Cost
At 1 October 2020 14,435 12,994 1,463 465 29,357
Additions - 9 - 28 37
Disposals (260) 5 (2) (22) (279)
Exchange movements (758) (649) (74) (20) (1,501)
At 30 September 2021 13,417 12,359 1,387 451 27,614
Amortisation and impairment
At 1 October 2020 1,895 7,663 1,341 298 11,197
Amortisation charge for the year - 333 85 37 455
Impairment - 118 - 2 120
Disposals (260) - (1) (15) (276)
Exchange movements (93) (379) (70) (14) (556)
Accumulated amortisation - 7,196 1,355 304 8,855
Accumulated impairment 1,542 539 - 4 2,085
At 30 September 2021 1,542 7,735 1,355 308 10,940
Net book value
At 30 September 2021 11,875 4,624 32 143 16,674
2020
£ million Goodwill Intellectual property and product development Supply agreements Software Total
Cost
At 1 October 2019 14,232 13,021 1,423 421 29,097
Additions - 74 - 38 112
Disposals - (1) - (7) (8)
Reclassifications (1) - - 7 6
Transferred to held for disposal (note 11) - 7 2 - 9
Exchange movements 204 (107) 38 6 141
At 30 September 2020 14,435 12,994 1,463 465 29,357
Amortisation and impairment
At 1 October 2019 1,847 7,169 1,220 265 10,501
Amortisation charge for the year - 466 85 33 584
Impairment 12 29 - 2 43
Disposals - - - (6) (6)
Reclassifications (1) - - - (1)
Exchange movements 37 (1) 36 4 76
Accumulated amortisation - 7,242 1,341 296 8,879
Accumulated impairment 1,895 421 - 2 2,318
At 30 September 2020 1,895 7,663 1,341 298 11,197
Net book value
At 30 September 2020 12,540 5,331 122 167 18,160
Amortisation and impairment of acquired intangibles excluded from adjusted
operating profit amounted to £450 million (2020: £523 million), this
comprises amortisation on intellectual property of £320 million (2020: £466
million), impairment on intellectual property of £45 million (2020: £14
million) and amortisation on supply agreements of £85 million (2020: £85
million).
A further £73 million (2020: £nil) impairment of intellectual property and
product development assets has also been recognised in restructuring costs and
therefore excluded from adjusted operating profits.
Intellectual property mainly comprises brands acquired in the USA in 2015 and
through the purchases of Altadis in 2008 and Commonwealth Brands in 2007.
Supply agreements include Distribution customer relationships. All were
acquired as part of the Altadis purchase.
Intangible amortisation and impairment are included within administrative and
other expenses in the consolidated income statement.
Amortisation and impairment in respect of intangible assets other than
software and internally generated intellectual property are treated as
reconciling items between reported operating profit and adjusted operating
profit, except to the extent these have been treated as restructuring costs.
ACQUISITIONS
NERUDIA
On 23 October 2017, the Group acquired 100 per cent of the share capital of
Nerudia Limited. As previously disclosed, a portion of the consideration
remained contingent and was tied to certain contractual pre-conditions. The
matter is expected to conclude in the near future.
GOODWILL AND INTANGIBLE ASSET IMPAIRMENT REVIEW
Goodwill is allocated to groups of cash-generating units (CGUs) that are
expected to benefit from the business combination in which the goodwill arose.
For the Tobacco & NGP business CGUs are based on the markets where the
business operates and are grouped in line with the divisional structure in
operation during the year. The groupings represent the lowest level at which
goodwill is monitored for internal management purposes. A summary of the
carrying value of goodwill and intangible assets with indefinite lives is set
out below.
2021 2020
£ million Goodwill Intangible assets with indefinite lives Goodwill Intangible assets with indefinite lives
Europe 4,402 334 4,645 353
Americas 4,042 - 4,265 -
Africa, Asia & Australasia 1,740 132 1,836 140
Tobacco & NGP 10,184 466 10,746 493
Distribution 1,691 - 1,794 -
11,875 466 12,540 493
Goodwill has arisen principally on the acquisitions of Reemtsma in 2002 (all
CGU groupings), Commonwealth Brands in 2007 (USA), Altadis in 2008 (all CGU
groupings) and ITG Brands in 2015 (USA). Intangible assets with indefinite
lives relate to the tobacco trademark, Davidoff, which was purchased as part
of the acquisition of Reemtsma in 2002.
The Group tests goodwill and intangible assets with indefinite lives for
impairment annually, or more frequently if there are any indications that
impairment may have arisen. The value of a Cash Generating Unit Grouping
(CGUG) is based on value-in-use calculations. These calculations use cash flow
projections derived from financial plans of our Tobacco business which are
based on detailed bottom-up market-by-market forecasts of projected sales
volumes for each product line. These forecasts reflect, on an individual
market basis, numerous assumptions and estimates regarding anticipated changes
in market size, prices and duty regimes, consumer uptrading and downtrading,
consumer preferences and other changes in product mix, based on long-term
market trends, market data, anticipated regulatory developments, and
management experience and expectations. We consider that pricing, market size,
market shares and cost inflation are the key assumptions used in our plans.
GROWTH RATES AND DISCOUNT RATES USED
The compound annual growth rates implicit in these value-in-use calculations
are shown below.
2021 2020
% Pre-tax discount rate Initial growth rate Long-term growth rate Pre-tax discount rate Initial growth rate Long-term growth rate
Europe 9.9 2.7 0.1 9.6 2.6 1.0
Americas 9.8 5.7 1.6 8.8 1.3 1.9
Africa, Asia & Australasia 12.1 1.7 0.3 12.9 0.4 2.1
Distribution 11.2 1.5 1.4 13.0 0.8 1.6
Cash flows from the business plan period are used for year one, two and three,
then extrapolated out to year five using the implicit growth rate, shown in
the table above as the initial growth rate. In certain markets, the
extrapolated growth rate can exceed the long term growth rate based on the
business plan being a better reflection of the anticipated initial growth.
Estimated long term weighted average compound growth rates are used beyond
year five.
Long term growth rates are determined as the lower of:
• the nominal GDP growth rates for the country of operation; and
• the extrapolation of the initial growth rates as estimated by
management for years one to five
Long-term growth rates are based on management's long-term expectations,
taking account of industry specific factors such as the nature of our
products, the role of excise in government fiscal policy, and relatively
stable and predictable long-term macro trends in the Tobacco industry. Year on
year variations in initial growth rates may result in consequential changes to
estimated long term rates.
Discount rates used are based on the Group's weighted average cost of capital
adjusted for the different risk profiles of the CGUs. Our impairment
projections are prepared under the basis set out in IAS 36 which can differ
from our internal plans.
Europe's initial growth rate is broadly consistent with the prior year, and
the long term growth rate has reduced reflecting the alignment of outer year
rates to reductions in initial growth rates for certain markets.
Americas shows an increased initial growth rate driven by the mass market
cigar growth (improved sales and benefits from manufacturing and investment in
leaf supply), reduced one-off costs for NGP & litigation settlements. The
reduction in the long term growth rates is based on changes in the
macroeconomic outlook.
Africa, Asia & Australasia (AAA) increases in the initial growth rates are
driven by improved medium term forecasts, which are heavily influenced by
changes in the Australian market. The long term growth rate reduction reflects
changes in certain assumptions associated with the extrapolation of the
initial growth rate for a number of individual markets.
The Distribution discount rate reflects reductions in the country risk premium
driven by macroeconomic factors. The initial growth rates reflects improved
medium term forecasts.
Our impairment testing confirms there are sufficient cash flows to support the
current carrying values of the goodwill held at 30 September 2021. Any
reasonable movement in the assumptions used in the impairment tests would not
result in an impairment. The complexity of the estimation process and issues
related to the assumptions, risks and uncertainties inherent in the
application of the Group's accounting estimates in relation to intangible
assets affect the amounts reported in the financial statements, especially the
estimates of the expected useful economic lives and the carrying values of
those assets. If business conditions materially change it is likely that
materially different amounts could be reported in the Group's financial
statements. There are uncertainties associated with estimating the valuation
of the recoverable amount.
At the present time the recoverable amount is significantly in excess of the
carrying value of goodwill and other intangible assets. However, given the
uncertainties mentioned above this could change in the future.
Consideration of the impact of climate change
In terms of the possible impacts of climate change, the two key metrics that
could be sensitive to this are the initial and the long-term growth rate. If
climate change has a negative impact on product sales revenues and/or the
operating costs of the Group there could be a potential impact on the
discounted cash flow growth rates used within the valuation model. Lower
future growth rates would reduce the level of the discounted cash flow
valuation and hence the amount of headroom available to the Group above an
impairment trigger. At present, the material short to medium term risks
presented by possible climate change impacts will be factored into the initial
growth rates where they are known and can be quantified. For example,
government regulatory changes which impact operating costs will be recognised
where they are known.
However, the current level of headroom for goodwill is substantial for the
Group. Using the current growth rate assumptions, on a CGUG basis, the total
value of assets will be recovered via the discounted cash flows within a
maximum of 9 years. Therefore, at present, changes in the long-term growth
rates beyond this period due to the impact of climate change would not be
expected to trigger an impairment.
OTHER INTANGIBLE ASSETS
Other intangible assets are considered for impairment risk. The carrying
values of brand intangibles are reviewed against expected future cash flows of
associated products. Impairment will only be recognised where there is
evidence that the carrying value of the brand cannot be recovered through
those cash flows. No impairments have been recognised for brand intangibles.
Intellectual property and product development intangible assets have also been
reviewed to identify potential impairment triggers. The impact of the 2021
strategic review programme, which was announced in the current financial year,
has been identified as an impairment trigger. The change in commercial plans
has resulted in the exit of NGP product offerings in certain markets and the
implementation of a different approach to future product development, which
focuses on achieving the best potential for sustainable growth and is being
led by consumer needs. The change in strategy has meant that certain
previously acquired intangible assets and internally generated development
assets are now no longer required to support the business. As a result of
this, these assets have been determined to have a nil residual value. This has
resulted in an impairment of £118 million relating to NGP intangible assets
(intellectual property and product development) in the year (2020: £29
million). Of this impairment charge £73 million related to internally
generated intangible assets and has been taken as a restructuring cost and the
remaining £45 million has been recognised as an impairment charge within
amortisation and impairment of acquired intangible assets, both of which are
excluded from adjusted operating profit. The impairment of £118 million is
split between Europe (£96 million) and Americas (£22 million) operating
segments.
A further £2 million (2020: £2 million) impairment charge was incurred in
the year relating to software.
13. PROPERTY, PLANT AND EQUIPMENT
2021
£ million Property Plant and equipment Fixtures Total
and motor vehicles
Cost
At 1 October 2020 905 2,216 438 3,559
Additions 13 99 53 165
Disposals (78) (114) (43) (235)
Reclassifications 4 1 (4) 1
Transfer to current assets held for disposal (8) - (12) (20)
Exchange movements (39) (116) (21) (176)
At 30 September 2021 797 2,086 411 3,294
Depreciation and impairment
At 1 October 2020 188 1,190 282 1,660
Depreciation charge for the year 20 104 33 157
Impairment 2 11 - 13
Disposals (40) (93) (30) (163)
Reclassifications 4 (6) (2) (4)
Exchange movements (12) (60) (12) (84)
At 30 September 2021 162 1,146 271 1,579
Net book value
At 30 September 2021 635 940 140 1,715
2020
£ million Property Plant and equipment Fixtures Total
and motor vehicles
Cost
At 1 October 2019 909 2,193 440 3,542
Additions 11 122 41 174
Disposals (16) (65) (30) (111)
Reclassifications 3 1 (13) (9)
Exchange movements (2) (35) - (37)
At 30 September 2020 905 2,216 438 3,559
Depreciation and impairment
At 1 October 2019 181 1,104 278 1,563
Depreciation charge for the year 18 117 34 169
(Impairment write back)/impairment (2) 38 - 36
Disposals (6) (49) (28) (83)
Reclassifications (1) (2) (2) (5)
Exchange movements (2) (18) - (20)
At 30 September 2020 188 1,190 282 1,660
Net book value
At 30 September 2020 717 1,026 156 1,899
14. RIGHT OF USE ASSETS AND LEASE LIABILITY
The movements in Right of Use Assets in the year were as follows:
2021
£ million Property Plant and equipment Fixtures Total
and motor vehicles
Net book value
At 1 October 2020 254 8 31 293
Additions 29 2 22 53
Terminations & modifications (21) (2) (3) (26)
Depreciation (49) (2) (15) (66)
Exchange movements (11) - (1) (12)
At 30 September 2021 202 6 34 242
The movements in lease liabilities in the year were as follows:
£ million Lease Liabilities
At 1 October 2020 299
Cash flow (69)
Accretion of interest 7
New leases, terminations & modifications 26
Exchange movements (12)
At 30 September 2021 251
The maturity profile of the carrying amount of the Group's lease liabilities
and the contractual cash flows as at 30 September 2021 is as follows:
2021
£ million Lease liabilities Effect of Contractual cash flows
discounting
Amounts maturing:
Within one year 57 7 64
Between one and five years 124 17 141
In five years or more 70 8 78
251 32 283
Future minimum lease payments liabilities are analysed as below:
2021
Property Plant and equipment Fixtures Total
and motor vehicles
Due in less than one year 47 2 15 64
Due between one and five years 116 3 22 141
Due in more than five years 78 - - 78
Total future minimum lease payments payable 241 5 37 283
Effect of discounting (32)
Lease liability 251
The following are the amounts recognised in the Consolidated Income statement:
2021 2020
Expenses relating to short-term leases 4 4
Expenses relating to low value asset leases 2 2
Depreciation expense of Right of Use Assets 66 72
Interest on lease liabilities 7 7
The movements in Right of Use Assets in the year ending 30 September 2020 were
as follows:
2020
£ million Property Plant and equipment Fixtures Total
and motor vehicles
Net book value
At 1 October 2019 279 7 41 327
Additions 24 4 11 39
Terminations & modifications (2) - (4) (6)
Depreciation (52) (3) (17) (72)
Exchange movements 5 - - 5
At 30 September 2020 254 8 31 293
The movements in lease liabilities in the year ending 30 September 2020 were
as follows:
£ million Lease
Liabilities
At 1 October 2019 326
Cash flow (72)
Accretion of interest 7
New leases, terminations & modifications 32
Exchange movements 6
At 30 September 2020 299
The maturity profile of the carrying amount of the Group's lease liabilities
and the contractual cash flows as at 30 September 2020 is as follows:
2020
£ million Lease Effect of discounting Contractual cash flows
liabilities
Amounts maturing:
Within one year 64 6 70
Between one and five years 160 15 175
In five years or more 75 12 87
299 33 332
Future minimum lease payments liabilities as at 30 September 2020 are analysed
as below:
2020
Property Plant and equipment Fixtures and motor vehicles Total
Due in less than one year 53 3 14 70
Due between one and five years 151 5 19 175
Due in more than five years 87 - - 87
Total future minimum lease payments payable 291 8 33 332
Effect of discounting (33)
Lease liability 299
15. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
The principal joint ventures during the year were Corporación Habanos SA,
Cuba, Altabana SL, Spain and Global Horizon Ventures Limited. Corporación
Habanos SA, Cuba and Altabana SL, Spain were disposed of on 29 October 2020 as
part of the Premium Cigar Division. Summarised financial information for the
Group's joint ventures, which are accounted for under the equity method, is
shown below:
2021
£ million Corporación Habanos Altabana Global Horizon Ventures Others Total
Revenue 15 30 18 27 90
Profit after tax 5 5 13 5 28
Non-current assets - - 24 3 27
Current assets - - 47 49 96
Total assets - - 71 52 123
Current liabilities - - (3) (43) (46)
Non-current liabilities - - - (9) (9)
Total liabilities - - (3) (52) (55)
Net assets - - 68 - 68
2020
£ million Corporación Habanos Altabana Global Horizon Ventures Others Total
Revenue 188 322 10 61 581
Profit after tax 43 52 1 10 106
Non-current assets 458 27 - 11 496
Current assets 99 233 41 82 455
Total assets 557 260 41 93 951
Current liabilities (147) (40) (2) (16) (205)
Non-current liabilities (28) (5) - (45) (78)
Total liabilities (175) (45) (2) (61) (283)
Net assets 382 215 39 32 668
TRANSACTIONS AND BALANCES WITH JOINT VENTURES
£ million 2021 2020
Sales to 6 163
Purchases from 19 111
Accounts receivable from - -
Accounts payable to (3) (24)
MOVEMENT ON INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
£ million 2021 2020
At 1 October 117 81
Share of profit for the year from joint ventures and associates 11 45
Increase in investment in associates 3 5
Impairment of investment in joint ventures - (1)
Dividends (9) (27)
Classification (to)/from held for disposal and disposals of business (32) 50
Foreign exchange losses (2) (36)
At 30 September 88 117
16. INVENTORIES
£ million 2021 2020
Raw materials 839 1,001
Work in progress 58 74
Finished inventories 2,765 2,781
Other inventories 172 209
3,834 4,065
Other inventories mainly comprise duty-paid tax stamps.
Within finished inventories of £2,765 million (2020: £2,781 million) there
is excise duty of £1,282 million (2020: £1,312 million).
It is generally recognised industry practice to classify leaf tobacco
inventory as a current asset, although part of such inventory, because of the
duration of the processing cycle ordinarily would not be consumed within one
year. We estimate that around £115 million (2020: £179 million) of leaf
tobacco held within raw materials will not be utilised within a year of the
balance sheet date.
17. TRADE AND OTHER RECEIVABLES
2021 2020
£ million Current Non-current Current Non-current
Trade receivables 2,431 3 2,410 4
Less: loss allowance (68) (3) (112) (4)
Net trade receivables 2,363 - 2,298 -
Other receivables 227 58 178 48
Prepayments 159 4 162 9
2,749 62 2,638 57
Trade receivables may be analysed as follows:
2021 2020
£ million Current Non-current Current Non-current
Within credit terms 2,271 - 2,138 -
Past due by less than 3 months 85 - 77 -
Past due by more than 3 months 7 - 83 -
Amounts that are impaired ( ) 68 3 112 4
2,431 3 2,410 4
The movements in the total loss allowance for receivables can analysed as
follows:
£ million 2021 2020
At 1 October 116 77
Net (decrease) / increase in provision (45) 39
At 30 September 71 116
Trade receivables are reviewed by their risk profiles and loss patterns to
assess credit risk. Historical and forward-looking information is considered
to determine the appropriate expected credit loss allowance. Provision levels
are calculated on the residual credit risk after consideration of any credit
protection which is used by the Group. Expected credit losses (ECLs) are
applied to net trade receivables which are measured reflecting lifetime ECLs
using the simplified approach. Trade receivables are all repayable within 12
months and therefore the ECL provision represents all expected losses within
this term.
18. CASH AND CASH EQUIVALENTS
£ million 2021 2020
Cash at bank and in hand 673 791
Short-term deposits and other liquid assets 614 835
1,287 1,626
£152 million (2020: £154 million) of total cash and cash equivalents is held
in countries in which prior approval is required to transfer the funds abroad.
Nevertheless, if the Group complies with these requirements, such liquid funds
are at its disposition within a reasonable period of time which in all cases
is 3 months or less from the date the transfer is requested.
19. TRADE AND OTHER PAYABLES
2021 2020
£ million Current Non-current Current Non-current
Trade payables 1,018 - 1,191 -
Duties payable 5,507 - 6,129 -
Other taxes and social security contributions 1,399 - 1,603 -
Other payables 449 - 464 -
Accruals 733 7 783 5
9,106 7 10,170 5
20. BORROWINGS
The Group's borrowings held at amortised cost, are as follows:
£ million 2021 2020
Current borrowings
Bank loans and overdrafts 51 61
Capital market issuance:
€1,000m 2.25% notes due February 2021 - 925
€500m 0.5% notes due July 2021 - 456
£1,000m 9.0% notes due February 2022 1,056 -
Total current borrowings 1,107 1,442
Non-current borrowings
Bank loans 1 1
Capital market issuance:
£1,000m 9.0% notes due February 2022 - 1,056
$1,250m 3.75% notes due July 2022 - 980
$1,000m 3.5% notes due February 2023 746 782
€750m 1.25% notes due August 2023 646 684
£600m 8.125% notes due March 2024 626 626
$1,000m 3.125% notes due July 2024 745 782
€500m 1.375% notes due January 2025 434 460
$1,500m 4.25% notes due July 2025 1,119 1,172
€650m 3.375% notes due February 2026 570 604
$750m 3.5% notes due July 2026 559 586
£500m 5.5% notes due September 2026 500 500
€750m 2.125% notes due February 2027 653 692
$1,000m 3.875% notes due July 2029 745 781
£500m 4.875% notes due June 2032 505 504
€1,000m 1.75% notes due March 2033 866 -
Total non-current borrowings 8,715 10,210
Total borrowings 9,822 11,652
Analysed as:
Capital market issuance 9,770 11,590
Bank loans and overdrafts 52 62
Current and non-current borrowings include interest payable of £56 million
(2020: £13 million) and £93 million (2020: £151 million) respectively as at
the balance sheet date.
Interest payable on capital market issuances are at fixed rates of interest
and interest payable on bank loans and overdrafts are at floating rates of
interest.
On 30 November 2020, €1,000 million 2.25 per cent notes were repaid. On 18
March 2021, €1,000 million 1.75 per cent notes due March 2033 were issued.
On 27 April 2021, €500 million 0.5 per cent notes were repaid. On 29
September 2021, $1,250 million 3.75 per cent notes were repaid.
All borrowings are unsecured and the Group has not defaulted on any borrowings
during the year (2020: no defaults).
NON-CURRENT FINANCIAL LIABILITIES
The maturity profile of the carrying amount of the Group's non-current
liabilities as at 30 September 2021 (including lease liabilities detailed in
note 14 and net derivative financial instruments detailed in note 22) is as
follows:
2021
£ million Borrowings Lease Net derivative Total
liabilities
financial
liabilities/
(assets)
Amounts maturing:
Between one and two years 1,393 49 (6) 1,436
Between two and five years 4,553 75 (9) 4,619
In five years or more 2,769 70 608 3,447
8,715 194 593 9,502
2020
£ million Borrowings Lease Net derivative Total
liabilities
financial
liabilities/
(assets)
Amounts maturing:
Between one and two years 2,037 54 17 2,108
Between two and five years 4,506 106 (37) 4,575
In five years or more 3,667 75 848 4,590
10,210 235 828 11,273
FAIR VALUE OF BORROWINGS
The fair value of borrowings as at 30 September 2021 is estimated to be
£10,386 million (2020: £12,496 million). £10,334 million (2020: £12,434
million) relates to capital market issuance and has been determined by
reference to market prices as at the balance sheet date. A comparison of the
carrying amount and fair value of capital market issuance by currency is
provided below. The fair value of all other borrowings is considered to equal
their carrying amount.
2021 2020
£ million Balance sheet amount Fair value Balance sheet amount Fair value
GBP 2,686 2,894 2,686 3,054
EUR 3,168 3,278 3,821 3,943
USD 3,916 4,162 5,083 5,437
Total capital market issuance 9,770 10,334 11,590 12,434
UNDRAWN REVOLVING CREDIT FACILITIES
At 30 September the Group had the following undrawn committed facilities:
£ million 2021 2020
Amounts maturing:
Between one and two years - 1,551
Between two and five years 3,012 3,193
3,012 4,744
During the year the maturity date of the Group's existing syndicated
multicurrency facility for €3,500 was extended to
30 September 2024.
During the year six bilateral facilities for a total of €1,700 million were
cancelled.
21. FINANCIAL RISK FACTORS
FINANCIAL RISK MANAGEMENT
OVERVIEW
In the normal course of business, the Group is exposed to financial risks
including, but not limited to, market, credit and liquidity risk. This note
explains the Group's exposure to these risks, how they are measured and
assessed, and summarises the policies and processes used to manage them,
including those related to the management of capital.
The Group operates a centralised treasury function which is responsible for
the management of the financial risks of the Group, together with its
financing and liquidity requirements. Financial risks comprise, but are not
limited to, exposures to funding and liquidity, interest rate, foreign
exchange and counterparty credit risk. The treasury function is also
responsible for the financial risk management of the Group's global defined
benefit pension schemes and management of Group wide insurance programs. The
treasury function does not operate as a profit centre, nor does it enter into
speculative transactions.
The Group's treasury activities are overseen by the Treasury Committee, which
meets when required and comprises the Chief Financial Officer, the Company
Secretary, and the Director of Treasury. The Treasury Committee operates in
accordance with the terms of reference set out by the Board and a framework
(the Treasury Committee framework) which sets out the expectations and
boundaries to assist in the effective oversight of treasury activities. The
Director of Treasury reports on a regular basis to the Treasury Committee.
The Board reviews and approves all major treasury decisions.
The Group's management of financial risks cover the following:
(A) MARKET RISK
PRICE RISK
The Group is not exposed to equity securities price risk other than assets
held by its pension funds disclosed in note 24 and the investment in
convertible debentures issued by Auxly Cannabis Group Inc. The Group is
exposed to commodity price risk in that there may be fluctuations in the price
of tobacco leaf. As with other agricultural commodities, the price of tobacco
leaf tends to be cyclical as supply and demand considerations influence
tobacco plantings in those countries where tobacco is grown. Also, different
regions may experience variations in weather patterns that may affect crop
quality or supply and so lead to changes in price. The Group seeks to reduce
this price risk by sourcing tobacco leaf from a number of different countries
and counterparties and by varying the levels of tobacco leaf held. Currently,
these techniques reduce the expected exposure to this risk over the short to
medium term to levels considered not material and accordingly, no sensitivity
analysis has been presented.
FOREIGN EXCHANGE RISK
The Group is exposed to movements in foreign exchange rates due to its
commercial trading transactions and profits denominated in foreign currencies,
as well as the translation of cash, borrowings and derivatives held in
non-functional currencies.
The Group's financial results are principally exposed to fluctuations in Euro
and US dollar exchange rates. Management of the Group's foreign exchange
transaction and translation risk is addressed below.
TRANSACTION RISK
The Group's material transaction exposures arise on costs denominated in
currencies other than the functional currencies of subsidiaries, including the
purchase of tobacco leaf, which is sourced from various countries but
purchased principally in US dollars, and packaging materials which are sourced
from various countries and purchased in a number of currencies. The Group is
also exposed to transaction foreign exchange risk on the conversion of foreign
subsidiary earnings into sterling to fund the external dividends to
shareholders. This is managed by selling Euros and US dollars monthly
throughout the year. Other foreign currency flows are matched where possible
and remaining foreign currency transaction exposures are not hedged.
TRANSLATION RISK
The Group seeks to broadly match the currency of borrowings to the currency of
its underlying investments in overseas subsidiaries, which are primarily Euros
and US dollars. The Group issues debt in the most appropriate market or
markets at the time of raising new finance and has a policy of using
derivative financial instruments, cross-currency swaps, to change the currency
of debt as required. Borrowings denominated in, or swapped into foreign
currencies to match the Group's investments in overseas subsidiaries are
treated as a hedge against the net investment where appropriate.
FOREIGN EXCHANGE SENSITIVITY ANALYSIS
The Group's sensitivity to foreign exchange rate movements, which impacts the
translation of monetary items held by subsidiary companies in currencies other
than their functional currencies, is illustrated on an indicative basis below.
The sensitivity analysis has been prepared on the basis that net debt and the
proportion of financial instruments in foreign currencies remain constant, and
that there is no change to the net investment hedge designations in place at
30 September 2021. The sensitivity analysis does not reflect any change to
revenue or non-finance costs that may result from changing exchange rates, and
ignores any taxation implications and offsetting effects of movements in the
fair value of derivative financial instruments.
2021 2020
£ million Increase in income Increase in income
Income statement impact of non-functional currency foreign exchange exposures:
10% appreciation of Sterling against Euro (2020: 10%) 378 544
10% appreciation of Sterling against US dollar (2020: 10%) 7 8
An equivalent depreciation of Sterling against the above currencies would
cause a decrease in income of £462 million and £9 million for Euro and US
dollar exchange rates respectively (2020: £665 million and £10 million).
Movements in equity in the table below relate to intercompany loans treated as
quasi-equity under IAS 21 and hedging instruments designated as net investment
hedges of the Group's Euro and US Dollar denominated assets.
2021 2020
£ million Change in equity Change in
equity
Equity impact of non-functional currency foreign exchange exposures:
10% appreciation of Sterling against Euro (2020: 10%) 264 405
10% appreciation of Sterling against US dollar (2020: 10%) 270 (134)
An equivalent depreciation of Sterling against the above currencies would
result in a change in equity of £(323) million and £(330) million for euro
and US dollar exchange rates respectively (2020: £(494) million and £163
million).
At 30 September 2021, after the effect of derivative financial instruments,
approximately 78 per cent of the Group's net debt was denominated in Euro and
non US Dollar currencies (2020: 70 per cent), 22 per cent in US dollars (2020:
30 per cent).
INTEREST RATE RISK
The Group's interest rate risk arises from its borrowings net of cash and cash
equivalents, with the primary exposures arising from fluctuations in Euro and
US dollar interest rates. Borrowings at variable rates expose the Group to
cash flow interest rate risk. Borrowings at fixed rates expose the Group to
fair value interest rate risk.
The Group manages its exposure to interest rate risk on its borrowings by
entering into derivative financial instruments, interest rate swaps, to
achieve an appropriate mix of fixed and floating interest rate debt in
accordance with the Treasury Committee framework and Treasury Committee
discussions.
As at 30 September 2021, after adjusting for the effect of derivative
financial instruments detailed in note 22, approximately 68 per cent (2020: 71
per cent) of net debt was at fixed rates of interest and 32 per cent (2020: 29
per cent) was at floating rates of interest.
INTEREST RATE SENSITIVITY ANALYSIS
The Group's sensitivity to interest rates on its Euro and US dollar monetary
items which are primarily external borrowings, cash and cash equivalents, is
illustrated on an indicative basis below. The impact in the Group's Income
Statement reflects the effect on net finance costs in respect of the Group's
net debt and the fixed to floating rate debt ratio prevailing at 30 September
2021, ignoring any taxation implications and offsetting effects of movements
in the fair value of derivative financial instruments.
The sensitivity analysis has been prepared on the basis that net debt and the
derivatives portfolio remain constant and that there is no net impact on other
comprehensive income (2020: £nil).
2021 2020
£ million Change in income Change in income
Income statement impact of interest rate movements:
+/- 1% increase in Euro interest rates (2020: 1%) 28 28
+/- 1% increase in US dollar interest rates (2020: 1%) 6 8
(B) CREDIT RISK
IFRS 9 requires an expected credit loss (ECL) model to be applied to financial
assets. The expected credit loss model requires the Group to account for
expected losses as a result of credit risk on initial recognition of financial
assets and to recognise changes in those expected credit losses at each
reporting date. Allowances are measured at an amount equal to the lifetime
expected credit losses where the credit risk on the receivables increases
significantly after initial recognition. The Group is primarily exposed to
credit risk arising from the extension of credit to its customers, on cash
deposits and derivatives. The maximum aggregate credit risk to these sources
was £4,177 million at 30 September 2021 (2020: £4,902 million).
TRADE AND OTHER RECEIVABLES
Policies are in place to manage the risk associated with the extension of
credit to third parties to ensure that commercial intent is balanced
effectively with credit risk management. Subsidiaries have policies in place
that require appropriate credit checks on customers and credit is extended
with consideration to financial risk and creditworthiness. If a customer
requires credit beyond an acceptable limit, security may be put in place to
minimise the financial impact in the event of a payment default. Instruments
that may typically be used as security include non-recourse receivables
factoring and bank guarantees. At 30 September 2021 the level of trade
receivables that were sold to a financial institution under a non-recourse
factoring arrangement totalled £627 million (2020: £686 million). The total
value of trade receivables reclassified as fair value was £69 million at 30
September 2021 (2020: £22 million). There was no valuation difference between
amortised cost and fair value. Analysis of trade and other receivables is
provided in note 17.
FINANCIAL INSTRUMENTS
In order to manage its credit risk to any one counterparty, the Group places
cash deposits and enters into derivative financial instruments with a
diversified group of financial institutions carrying suitable credit ratings
in line with the Treasury Committee framework. Utilisation of counterparty
credit limits is regularly monitored by treasury and ISDA agreements are in
place to permit the net settlement of assets and liabilities in certain
circumstances. In connection with one ISDA Credit Support Annex the Group had
placed £37 million as at 30 September 2021 (2020: £47 million) as collateral
with a third party in order to manage their counterparty risk on the Group
under derivative financial instruments.
The table below summarises the Group's largest exposures to financial
counterparties as at 30 September 2021. At the balance sheet date management
does not expect these counterparties to default on their current obligations.
2021 2020
Counterparty exposure S&P credit rating Maximum exposure to credit risk S&P credit Maximum
£ million
rating
exposure to
credit risk
£ million
Highest A+ 35 A+ 14
2nd highest - - A 11
3rd highest - - A+ 5
4th highest - - A+ 2
5th highest - - - -
(C) LIQUIDITY RISK
The Group is exposed to liquidity risk, which represents the risk of having
insufficient funds to meet its financing needs in any particular location when
needed. To manage this risk the Group has a policy of actively maintaining a
mixture of short, medium and long-term committed facilities that are
structured to ensure that the Group has sufficient available funds to meet the
forecast requirements of the Group over the short to medium term. To prevent
over-reliance on individual sources of liquidity, funding is provided across a
range of instruments including debt capital market issuance, bank term loans,
bank revolving credit facilities and European commercial paper.
The Group primarily borrows centrally in order to meet forecast funding
requirements, and the treasury function is in regular dialogue with subsidiary
companies to ensure their liquidity needs are met. Subsidiary companies are
funded by a combination of share capital and retained earnings, intercompany
loans, and in very limited cases through external local borrowings. Cash
pooling processes are used to centralise surplus cash held by subsidiaries
where possible in order to minimise external borrowing requirements and
interest costs. Treasury invests surplus cash in bank deposits and uses
foreign exchange contracts to manage short term liquidity requirements in line
with short term cash flow forecasts. As at 30 September 2021, the Group held
liquid assets of £1,287 million (2020: £1,626 million).
The table below summarises the Group's non derivative financial liabilities by
maturity based on their contractual cash flows as at 30 September 2021. The
amounts disclosed are undiscounted cash flows calculated using spot rates of
exchange prevailing at the relevant balance sheet date. Contractual cash flows
in respect of the Group's derivative financial instruments are detailed in
note 22.
2021
£ million Balance sheet amount Contractual cash flows total <1 year Between 1 and 2 years Between 2 and 5 years > 5 years
Non-derivative financial liabilities:
Bank loans 52 52 51 1 - -
Capital market issuance 9,770 11,158 1,341 1,678 5,068 3,071
Trade payables 1,018 1,018 1,018 - - -
Lease liabilities 251 283 64 55 86 78
Total non-derivative financial liabilities 11,091 12,511 2,474 1,734 5,154 3,149
2020
£ million Balance sheet amount Contractual cash flows <1 year Between 1 and 2 years Between 2 and 5 years > 5 years
total
Non-derivative financial liabilities:
Bank loans 62 62 61 1 - -
Capital market issuance 11,590 13,302 1,806 2,339 5,165 3,992
Trade payables 1,191 1,191 1,191 - - -
Lease liabilities 299 332 70 65 110 87
Total non-derivative financial liabilities 13,142 14,887 3,128 2,405 5,275 4,079
CAPITAL MANAGEMENT
The Group defines capital as adjusted net debt and equity and manages its
capital structure through an appropriate balance of debt and equity in order
to drive an efficient mix for the Group. Besides the minimum capitalisation
rules that may apply to subsidiaries in certain countries, the Group's only
externally imposed capital requirements are interest cover and gearing
covenants contained within its core external bank debt facilities, with which
the Group was fully compliant during the current and prior periods and expects
to be so going forward.
The Group continues to manage its capital structure to maintain investment
grade credit rating which it monitors by reference to a number of key
financial ratios, including ongoing consideration of the return of capital to
shareholders via regular dividend payments and in on-going discussions with
the relevant rating agencies.
As at 30 September 2021 the Group was rated Baa3/stable outlook by Moody's
Investor Service Ltd, BBB/A-2/stable outlook by Standard and Poor's Credit
Market Services Europe Limited and BBB/F3/stable outlook by Fitch Ratings
Limited.
The Group regards its total capital as follows:
£ million 2021 2020
Adjusted net debt (note 31) 8,615 10,299
Equity attributable to the owners of the parent 5,352 4,871
Total capital 13,967 15,170
HEDGE ACCOUNTING
The Group has investments in foreign operations which are consolidated in its
financial statements and whose functional currencies are Euros or US dollars.
Where it is practicable and cost effective to do so, the foreign exchange rate
exposures arising from these investments are hedged through the use of cross
currency swaps and foreign currency denominated debt.
The Group only designates the undiscounted spot element of the cross currency
swaps and foreign currency debt as hedging instruments. Changes in the fair
value of the cross currency swaps attributable to changes in interest rates
and the effect of discounting are recognised directly in profit or loss within
the "Finance Costs" line - These amounts are, therefore, not included in the
hedge effectiveness assessment.
Net investment gains and losses are reported in exchange movements within
other comprehensive income and the hedging instrument foreign currency gains
deferred to the foreign currency revaluation reserve are detailed in the
statement of changes in equity.
The Group establishes the hedging ratio by matching the notional balance of
the hedging instruments with an equal notional balance of the net assets of
the foreign operation. Given that only the undiscounted spot element of
hedging instruments is designated in the hedging relationship, no
ineffectiveness is expected unless the notional balance of the designated
hedging instruments exceeds the total balance of the foreign operation's net
assets during the reporting period. The foreign currency risk component is
determined as the change in the carrying amount of designated net assets of
the foreign operation arising solely from changes in spot foreign currency
exchange rates.
All net investment hedges were fully effective at 30 September 2021.
The following table sets out the maturity profile of the hedging instruments
used in the Group's net investment hedging strategies:
2021
Maturity
£ million Total notional balance <1 year Between 1 and 2 years Between 2 and 5 years > 5 years
Bonds (5,253) - (1,389) (3,219) (645)
Cross-currency swaps (2,782) (1,026) - (1,218) (538)
(8,035) (1,026) (1,389) (4,437) (1,183)
2020
Maturity
£ million Total notional balance <1 year Between 1 and 2 years Between 2 and 5 years > 5 years
Bonds (6,709) (1,369) (974) (3,089) (1,277)
Cross-currency swaps (2,950) - (1,088) (704) (1,158)
(9,659) (1,369) (2,062) (3,793) (2,435)
The following table contains details of the hedging instruments and hedged
items used in the Group's net investment hedging strategies:
2021
Notional balance Carrying amount Changes in fair value used for calculating hedge in effectiveness
£ million Assets Liabilities Balance sheet line item
Hedging instrument:
Bonds 5,253 - 5,286 Borrowings 308
Cross-currency swaps 2,782 - 214 Derivative financial instruments 168
Hedged item:
Investment in a foreign operation n/a 8,035 476
2020
Notional balance Carrying amount Changes in fair value used for calculating hedge in effectiveness
£ million Assets Liabilities Balance sheet line item
Hedging instrument:
Bonds 6,709 - 6,755 Borrowings 75
Cross-currency swaps 2,950 - 410 Derivative financial instruments (86)
Hedged item:
Investment in a foreign operation n/a 9,659 (11)
Reconciliation of changes in the value of net investment hedges:
2021
£ million At the beginning of the year Income Statement Other Comprehensive Income Repayments/ At the end of the year
(Borrowings)
Derivatives in net investment hedges of foreign operations (410) 28 168 - (214)
Bonds in net investment hedges of foreign operations (6,755) 13 308 1,148 (5,286)
Total (7,165) 41 476 1,148 (5,500)
2020
£ million At the Income Statement Other Comprehensive Income Repayments/ At the end of the year
beginning of
(Borrowings)
the year
Derivatives in net investment hedges of foreign operations (341) 17 (86) - (410)
Bonds in net investment hedges of foreign operations (8,482) 87 17 1,623 (6,755)
Total (8,823) 104 (69) 1,623 (7,165)
The Group also treats certain permanent intragroup loans that meet relevant
qualifying criteria under IAS 21 as part of its net investment in foreign
operations where appropriate. Intragroup loans with a notional value of
€2,506 million (2020 €2,506 million) and US dollar loans with a notional
value of $nil (2020: $5,636 million) were treated as part of the Group's net
investment in foreign operations at the balance sheet date.
FAIR VALUE ESTIMATION AND HIERARCHY
All financial assets and liabilities are carried on the balance sheet at
amortised cost, other than derivative financial instruments and the investment
in Auxly Cannabis Group Inc. which are carried at fair value. Derivative 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 (Level 2 classification hierarchy per IFRS 7). 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 £19 million (2020: £27 million) and would have been a £49
million (2020: £75 million) reduction without considering the early
termination options. There were no changes to the valuation methods or
transfers between hierarchies during the year. With the exception of capital
market issuance and the Auxly investment, the fair value of all financial
assets and financial liabilities is considered approximate to their carrying
amount as outlined in note 20.
AUXLY CANNABIS GROUP INC.
The Group has invested CAD 123 million into Auxly Cannabis Group Inc. by way
of a debenture convertible into 19.9 per cent ownership at a conversion price
of $0.81 per share. Repayment of the debenture was due on 25 September 2022,
but on 19 April 2021 the debenture agreement was varied and it is now
repayable on 25 September 2024. The debenture is valued as a loan receivable
measured on the basis of discounting future cash flows at a rate of 14 per
cent (2020: 14 per cent) plus the application of an expected credit loss
provision. At 30 September 2021 the loan was held at a fair value of £37
million (30 September 2020: £22 million), net of an expected credit loss
provision of £16 million (30 September 2020: £36 million).
NETTING ARRANGEMENTS OF FINANCIAL INSTRUMENTS
The following tables set out the Group's financial assets and financial
liabilities that are subject to netting and set-off arrangements. Financial
assets and liabilities that are subject to set-off arrangements and disclosed
on a net basis in the Group's Balance Sheet primarily relate to collateral in
respect of one derivative financial instrument under an ISDA Credit Support
Annex.
2021
£ million Gross financial assets/ liabilities Gross collateral assets/ Net financial assets/ Related amounts not set-off in the balance sheet Net
liabilities
liabilities per balance sheet
set-off
Assets
Derivative financial instruments 496 (37) 459 (435) 24
Liabilities
Derivative financial instruments (1,083) 37 (1,046) 435 (611)
2020
£ million Gross financial assets/ liabilities Gross collateral assets/ Net financial assets/ Related amounts not set-off in the balance sheet Net
liabilities
liabilities per balance sheet
set-off
Assets
Derivative financial instruments 913 (47) 866 (858) 8
Liabilities
Derivative financial instruments (1,729) 47 (1,682) 858 (824)
The table below sets out the Group's accounting classification of each class
of financial assets and liabilities:
2021
£ million Fair value through income statement Fair value through other comprehensive Assets and liabilities at amortised cost Total Current Non-Current
income
Trade and other receivables 37 - 2,611 2,648 2,590 58
Cash and cash equivalents - - 1,287 1,287 1,287 -
Derivatives 459 - - 459 68 391
Total financial assets 496 - 3,898 4,394 3,945 449
Borrowings - - (9,822) (9,822) (1,107) (8,715)
Trade and other payables - - (8,373) (8,373) (8,373) -
Derivatives (832) (214) - (1,046) (62) (984)
Lease liabilities - - (251) (251) (57) (194)
Total financial liabilities (832) (214) (18,446) (19,492) (9,599) (9,893)
Total net financial (liabilities) (336) (214) (14,548) (15,098) (5,654) (9,444)
2020
£ million Fair value through income statement Fair value through other comprehensive Assets and liabilities at amortised cost Total Current Non-Current
income
Trade and other receivables 22 - 2,502 2,524 2,476 48
Cash and cash equivalents - - 1,626 1,626 1,626 -
Derivatives 866 - - 866 53 813
Total financial assets 888 - 4,128 5,016 4,155 861
Borrowings - - (11,652) (11,652) (1,442) (10,210)
Trade and other payables - - (9,387) (9,387) (9,387) -
Derivatives (1,272) (410) - (1,682) (41) (1,641)
Lease liabilities - - (299) (299) (64) (235)
Total financial liabilities (1,272) (410) (21,338) (23,020) (10,934) (12,086)
Total net financial (liabilities) (384) (410) (17,210) (18,004) (6,779) (11,225)
Derivatives classified as fair value through other comprehensive income relate
to cross currency swaps designated as hedges of foreign currency denominated
net investments. The Group only designates the undiscounted foreign exchange
spot element of the cross currency swaps and the changes in fair value related
to this element are posted to other comprehensive income. Changes in the fair
value of the cross currency swaps attributable to changes in interest rates
and the effect of discounting are recognised in the income statement. The
Group also designates certain bonds as hedges of foreign currency denominated
net investments and the foreign exchange revaluation of those bonds is
recognised in other comprehensive income. The carrying value at 30 September
2021 of those bonds included in the above table is £5,286 million (2020:
£6,755 million). All of the Group's net investment hedges remain effective.
22. DERIVATIVE FINANCIAL INSTRUMENTS
The Group's derivative financial instruments held at fair value, are as
follows:
2021 2020
£ million Assets Liabilities Net Fair Value Assets Liabilities Net Fair Value
Current derivative financial instruments
Interest rate swaps 60 (33) 27 41 (31) 10
Foreign exchange contracts 4 (4) - 9 (10) (1)
Cross-currency swaps 4 (25) (21) 3 - 3
Total current derivatives 68 (62) 6 53 (41) 12
Collateral¹ - - - - - -
68 (62) 6 53 (41) 12
Non-current derivative financial instruments
Interest rate swaps 391 (780) (389) 813 (1,204) (391)
Cross-currency swaps - (241) (241) - (484) (484)
Total non-current derivatives 391 (1,021) (630) 813 (1,688) (875)
Collateral¹ - 37 37 - 47 47
391 (984) (593) 813 (1,641) (828)
Total carrying value of derivative financial instruments 459 (1,046) (587) 866 (1,682) (816)
Analysed as:
Interest rate swaps 451 (813) (362) 854 (1,235) (381)
Foreign exchange contracts 4 (4) - 9 (10) (1)
Cross-currency swaps 4 (266) (262) 3 (484) (481)
Collateral¹ - 37 37 - 47 47
Total carrying value of derivative financial instruments 459 (1,046) (587) 866 (1,682) (816)
2. 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 from a well known financial data
company 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
£19 million (2020: £27 million) and would have been a £49 million (2020:
£75 million) reduction without considering the early termination options. The
classification of these derivative assets and liabilities under the IFRS 7
fair value hierarchy is provided in note 21.
MATURITY OF OBLIGATIONS UNDER DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments have been classified in the balance sheet as
current or non-current on an undiscounted contractual basis based on spot
rates as at the balance sheet date. For the purposes of the above and
following analysis, maturity dates have been based on the likelihood of any
early termination options being exercised with consideration to counterparty
expectations and market conditions prevailing as at 30 September 2021. Any
collateral transferred to counterparties in respect of derivative financial
liabilities has been classified consistently with the related underlying
derivative.
The table below summarises the Group's derivative financial instruments by
maturity based on their remaining contractual cash flows as at 30 September
2021. The amounts disclosed are the undiscounted cash flows calculated using
spot rates of exchange prevailing at the relevant balance sheet date.
Contractual cash flows in respect of the Group's non derivative financial
instruments are detailed in note 21.
2021
£ million Balance sheet amount Contractual cash flows total <1 year Between 1 and 2 years Between 2 and 5 years >5 years
Net settled derivatives (325) (480) 16 (1) (157) (338)
Gross settled derivatives (262) - - - - -
- receipts - 5,667 2,516 66 2,522 563
- payments - (5,818) (2,521) (48) (2,661) (588)
(587) (631) 11 17 (296) (363)
2020
£ million Balance sheet amount Contractual cash flows <1 year Between 1 and Between 2 and 5 years >5 years
total
2 years
Net settled derivatives (335) (479) 62 19 (104) (456)
Gross settled derivatives (481) - - - - -
- receipts - 6,530 2,240 1,084 1,528 1,678
- payments - (6,858) (2,221) (1,153) (1,633) (1,851)
(816) (807) 81 (50) (209) (629)
DERIVATIVES AS HEDGING INSTRUMENTS
As outlined in note 21, the Group hedges its underlying interest rate exposure
and foreign currency translation exposures in an efficient, commercial and
structured manner, primarily using interest rate swaps and cross currency
swaps. Foreign exchange contracts are used to manage the Group's short term
liquidity requirements in line with short term cash flow forecasts as
appropriate.
The Group does not apply cash flow or fair value hedge accounting, as
permitted under IFRS9, which results in fair value gains and losses
attributable to derivative financial instruments being recognised in net
finance costs unless they are designated as hedges of a net investment in
foreign operations, in which case they are recognised in other comprehensive
income.
The group has considered the impending requirements to re-base LIBOR based
interest rates to new risk-free based rates. The group is currently
undertaking an exercise to re-base to risk-free rates all its affected
interest rate derivative contracts that mature after the end of September
2021. GBP LIBOR contracts will be rebased to SONIA in the last quarter of the
2021 calendar year with USD LIBOR contracts to be rebased later in the 2022
fiscal year. At present, it is not anticipated that these changes will impact
the Group's commercial hedging strategy, nor should they have a material
financial impact.
INTEREST RATE SWAPS
To manage interest rate risk on its borrowings, the Group issues debt in the
market or markets that are most appropriate at the time of raising new finance
with regard to currency, interest denomination or duration, and then uses
interest rate swaps to re-base the debt into the appropriate proportions of
fixed and floating interest rates. Interest rate swaps are also transacted to
manage and re-profile the Group's interest rate risk over the short, medium
and long term in accordance with the Treasury Committee framework and Treasury
Committee discussions. Fair value movements are recognised in net finance
costs in the relevant reporting period.
As at 30 September 2021, the notional amount of interest rate swaps
outstanding that were entered into to convert fixed rate borrowings into
floating rates of interest at the time of raising new finance were £10,775
million equivalent (2020: £11,656 million equivalent) with a fair value of
£425 million asset (2020: £854 million asset). The fixed interest rates vary
from 1.1 per cent to 8.7 per cent (2020: 0.5 per cent to 8.7 per cent), and
the floating rates are EURIBOR, GBP LIBOR and USD LIBOR.
As at 30 September 2021, the notional amount of interest rate swaps
outstanding that were entered into to convert the Group's debt into the
appropriate proportion of fixed and floating rates to manage and re-profile
the Group's interest rate risk were £8,806 million equivalent (2020: £10,311
million equivalent) with a fair value of £750 million liability (2020:
£1,189 million liability). The fixed interest rates vary from 0.5 per cent to
4.4 per cent (2020: 0.5 per cent to 4.4 per cent), and the floating rates are
EURIBOR, GBP LIBOR and USD LIBOR. This includes forward starting interest rate
swaps with a total notional amount of £1,531 million equivalent (2020:
£2,519 million equivalent) with tenors between 3.5 and 6 years, starting
between May 2022 and October 2024.
All of the Group's GBP and USD interest rate swaps will be impacted by the
changes to the use of LIBOR interest rates. However, the impact of the changes
is not expected to be material.
CROSS-CURRENCY SWAPS
The Group enters into cross currency swaps to convert the currency of debt
into the appropriate currency with consideration to the underlying assets of
the Group as appropriate. Fair value movements are recognised in net finance
costs in the relevant reporting period unless the swaps are designated as
hedges of a net investment in foreign operations, in which case the fair value
movement attributable to changes in foreign exchange rates are recognised in
other comprehensive income.
As at 30 September 2021, the notional amount of cross currency swaps entered
into to convert floating rate sterling debt into the desired currency at
floating rates of interest was £2,600 million (2020: £2,600 million) and the
fair value of these swaps was £214 million net liability (2020: £409 million
net liability); the notional amount of cross currency swaps entered into to
convert floating rate US dollar debt into the desired currency at floating
rates of interest was $1,750 million (2020: $1,750 million) and the fair value
of these swaps was £48 million net liability (2020: £71 million net
liability).
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
As at 30 September 2021, cross currency swaps with a notional amount of
€3,233 million (2020: €3,233 million) were designated as hedges of net
investments in foreign operations. During the year, foreign exchange
translation gains amounting to £168 million (2020: £87 million losses) were
recognised within exchange movements in other comprehensive income in respect
of cross currency swaps that had been designated as hedges of a net investment
in foreign operations. No hedging ineffectiveness occurred during the year
(2020: £nil).
The movements in Other Comprehensive Income due to net investment hedging in
the period were as follows:
£ million 2021 2020
Foreign exchange gains/(losses) on borrowings 308 (75)
Foreign exchange gains on derivative financial instruments 168 87
Reclassification to the Income Statement 117 -
593 12
All of the Group's cross currency swaps will be impacted by the changes to the
use of LIBOR interest rates. However, this will not impact the effectiveness
of the contracts in their net investment hedge relationship and the
calculation of the amounts recognised in other comprehensive income will be
unaffected.
FOREIGN EXCHANGE CONTRACTS
The Group enters into foreign exchange contracts to manage short term
liquidity requirements in line with cash flow forecasts. As at 30 September
2021, the notional amount of these contracts was £1,430 million equivalent
(2020: £2,126 million equivalent) and the fair value of these contracts was a
net liability of £0.6 million (2020: £0.7 million net liability).
23. DEFERRED TAX ASSETS AND LIABILITIES
DEFERRED TAX ASSETS
£ million Consolidated income statement 2021 Consolidated income statement Consolidated balance sheet Consolidated balance sheet 2020
2020
2021
Accelerated depreciation and amortisation (7) 34 (864) (871)
Retirement benefits (38) (17) (23) 88
Other temporary differences 201 (32) 414 240
Deferred tax expense 156 (15)
Net deferred tax liabilities (473) (543)
REFLECTED IN THE CONSOLIDATED BALANCE SHEET AS FOLLOWS
£ million 2021 2020
Deferred tax assets 564 381
Deferred tax liabilities (1,037) (924)
(473) (543)
RECONCILIATION OF NET DEFERRED TAX LIABILITIES
£ million 2021 2020
As at 1 October (543) (561)
Charged to the income statement 156 (15)
(Charged)/credited to other comprehensive income (33) 27
Transferred to held for disposal - 1
Exchange movements (55) 10
Other movements 2 (5)
As at 30 September (473) (543)
Included within net deferred tax liabilities are deferred tax assets
recognised of £267million (2020: £42 million) for tax credits arising in the
Group's Spanish business. The majority (£239 million) of these tax credits
were recognised in the current year following an internal reorganisation of
the Spanish business. These tax credits have no time expiry. Utilisation of
these tax credits is restricted to 50% of the Spanish business' taxable
profits arising in any given year; those tax law restrictions extend the
period over which the deferred tax assets would otherwise be recovered. The
Group considers there to be forecast future taxable profits which support the
recognition of these long term deferred tax assets. The period over which
these deferred tax assets are utilised is sensitive to forecasting assumptions
about future growth rates (which may be influenced by the future effects of
climate change) and regulatory changes. Any material effects of climate change
in the long term could extend the period over which the deferred tax asset
will be recovered but as the tax credits do not expire, the Group considers
there is positive evidence that sufficient future taxable profits would still
be available. Based on a range of forecast scenarios modelling sensitivities
these deferred tax assets are expected to be utilised over a period of 20-25
years. Deferred tax assets of £57 million (2020: £63 million) for tax
credits have not been recognised due to the potential uncertainty of the
utilisation of the credits. Of these unrecognised deferred tax assets £57
million (2020: £63 million) are expected to expire between 2022 and 2027.
Included within net deferred tax liabilities are deferred tax assets
recognised for retirement benefits of £157 million (2020: £176 million)
arising in the Group's German business. These deferred tax assets are expected
to be recovered both by way of utilisation against the reversal of deferred
tax liabilities of £33 million (2020: £7 million) arising in the Group's
German business and by way of utilisation against future taxable profits. The
Group considers there to be forecast future taxable profits which support the
recognition of these long term deferred tax assets. These deferred tax assets
are expected to be recovered over a period of 20-40 years corresponding to the
life of the pension scheme.
Within Other temporary differences, deferred tax assets of £25 million (2020:
£84 million) are recognised for tax losses carried forward to the extent that
the realisation of the related tax benefit through future taxable profits is
probable.
As at the balance sheet date, deferred tax assets of £130 million (2020:
£152 million) for tax losses, and £13 million (2020: £17 million) for other
temporary differences, have not been recognised due to the potential
uncertainty of the utilisation of the tax losses and other temporary
differences in certain jurisdictions. Of these unrecognised deferred tax
assets for tax losses £1 million (2020: £30 million) are expected to expire
within 1 year and £8 million (2020: £9 million) are expected to expire
within 5 years and the remaining £121 million (2020: £113 million) has no
time expiry. The deferred tax assets for other temporary differences of £13
million (2020: £17 million) have no time expiry.
We have reviewed the recoverability of deferred tax assets in overseas
territories in the light of forecast business performance. In 2021 we
recognised deferred tax assets of £8 million that were previously
unrecognised (2020: derecognised deferred tax assets of £51 million that were
previously recognised) on the basis that it is more likely than not that these
are recoverable (2020: irrecoverable).
A deferred tax liability of £101 million (2020: £111 million) is recognised
in respect of taxation expected to arise on the future distribution of
unremitted earnings totalling £5 billion (2020: £7 billion).
The temporary differences associated with investments in the Group's
subsidiaries, associates and joint ventures for which a deferred tax liability
has not been recognised in the periods presented, aggregate to £29 million
(2020: £16 million). No liability has been recognised because the Group is in
a position to control the timing of the reversal of those temporary
differences and it is probable that such differences will not reverse in the
foreseeable future.
The UK government announced in its budget on 3 March 2021 that it would
increase the main rate of corporation tax by 6% to 25% with effect from 1
April 2023. This change was substantively enacted on 24 May 2021 and, as a
result, the effect has been reflected in the closing deferred tax position
included in these financial statements.
24. RETIREMENT BENEFIT SCHEMES
The Group operates a number of retirement benefit schemes for its employees,
including both defined benefit and defined contribution schemes. The Group's
three principal schemes are defined benefit schemes and are operated by
Imperial Tobacco Limited (ITL) in the UK, Reemtsma Cigarettenfabriken GmbH in
Germany and ITG Brands in the USA; these schemes represent 64 per cent, 14
per cent and 8 per cent of the Group's total defined benefit obligations and
35 per cent, 33 per cent and 7 per cent of the current service cost
respectively.
IMPERIAL TOBACCO PENSION FUND
The UK scheme, the Imperial Tobacco Pension Fund (or 'ITPF' or 'Fund'), is a
voluntary final salary pension scheme with a normal retirement age of 60 for
most members. The ITPF was offered to employees who joined the company before
1 October 2010 and has a weighted average maturity of 17 years. Effective from
1 September 2017, members' pensionable pay was capped at the higher of
£75,000 or their pensionable pay at 1 September 2017. By number, the
population as at the most recent funding valuation comprises 72 per cent in
respect of pensioners and dependants, 26 per cent in respect of deferred
members and 2 per cent in respect of current employees. New employees in the
UK are now offered a defined contribution scheme. In certain circumstances,
surplus funds in the defined benefit section, may be used to finance defined
contribution section contributions on ITL's behalf with company contributions
reduced accordingly.
The ITPF operates under trust law and is managed and administered by the
Trustees on behalf of the members in accordance with the terms of the Trust
Deed and Rules and relevant legislation. The ITPF's assets are held by the
trust.
The main risk for the Group in respect of the ITPF is that additional
contributions are required if the assets are not expected to be sufficient to
pay for the benefits. The investment portfolio is subject to a range of risks
typical of the asset classes held, such as credit risk on bonds, and exposure
to the property market.
Annual increases in benefits in payment are dependent on inflation so the main
uncertainties affecting the level of benefits payable under the ITPF are
future inflation levels (including the impact of inflation on future salary
increases below the pensionable pay cap) and the actual longevity of the
membership.
The contributions paid to the ITPF are set by the ITPF Scheme Actuary every
three years. The Scheme Actuary is an external consultant, appointed by the
Trustees. Principal factors that the Scheme Actuary will have regard to
include the covenant offered by the Group, the level of risk in the ITPF, the
expected returns on the ITPF's assets, the results of the funding assessment
on an ongoing basis and the expected cost of securing benefits if the Fund
were to be wound up.
The latest valuation of the ITPF was carried out as at 31 March 2019 when the
market value of the invested assets was £4,137 million. Based on the ongoing
funding target the total assets were sufficient to cover 110 per cent of the
benefits that had accrued to members for past service, after allowing for
expected future pay increases. The total assets were sufficient to cover
106 per cent of the total benefits that had accrued to members for past
service and future service benefits for current members. In compliance with
the Pensions Act 2004, ITL and the Trustee agreed a scheme-specific funding
target, a statement of funding principles and a schedule of contributions
accordingly.
Following the valuation, a dynamic contribution schedule has been agreed such
that ITL's annual contributions will reduce or increase depending on the
Fund's valuation going forward. The level of the ITL's annual contribution to
the Fund is £65 million per year for the year to 31 March 2022. Further
contributions were agreed to be paid by ITL in the event of a downgrade of the
Group's credit rating to non-investment grade by either Standard & Poor's
or Moody's. In addition, surety guarantees that were provided with a total
value of £600 million have been reduced to £225 million following the latest
valuation and a parental guarantee from Imperial Brands PLC remains in place.
The IAS 19 liability measurement of the defined benefit obligation (DBO) and
the current service cost are sensitive to the assumptions made about future
inflation and salary growth levels, as well as the assumptions made about life
expectancy. They are also sensitive to the discount rate, which depends on
market yields on sterling denominated AA corporate bonds. The main differences
between the funding and IAS 19 assumptions are a more prudent longevity
assumption for funding and a different approach to setting the discount rate.
A consequence of the ITPF's investment strategy, with a proportion of the
assets invested in return-seeking assets, is that the difference between the
market value of the assets and the IAS 19 liabilities may be relatively
volatile.
The ITPF has a pension surplus on the IAS 19 measure, in line with IFRIC 14,
recognition of the net asset on the fund is only appropriate where it can be
recovered. The ITPF trust deed gives the Group an ability to receive a refund
of surplus assets assuming the full settlement of plan liabilities in the
event of a plan wind-up. Furthermore, in the ordinary course of business the
Trustee has no rights to unilaterally wind up the Fund or otherwise augment
the benefits due to the Fund's members. Based on these circumstances, any net
surplus in this scheme is recognised in full.
THE REEMTSMA CIGARETTENFABRIKEN PENSION PLAN
"The German scheme, the Reemtsma Cigarettenfabriken Pension Plan (RCPP), is
primarily a career average pension plan, though a small group of members has
final salary benefits. It has a weighted average maturity of 19 years. The
scheme population comprises 51 per cent in respect of pensioners, 19 per cent
in respect of deferred members and 30 per cent in respect of current
employees. It was closed to new members from 1 January 2020, but existing
active members at that date continue to accrue benefits in the plan.
The plan is unfunded and the company pays benefits as they arise. The plan's
obligations arise under a works council agreement and are subject to standard
German legal requirements around such matters as the benefits to be provided
to employees who leave service, and pension increases in payment. Over the
next year Reemtsma Cigarettenfabriken GmbH expects to pay £23 million in
respect of benefits.
Annual increases in benefits in payment are dependent on inflation so the main
uncertainties affecting the level of benefits payable under the plan are
future inflation levels and the actual longevity of the membership.
The IAS 19 liability measurement of the DBO and the current service cost are
sensitive to the assumptions made about the above variables, as well as the
discount rate, which depends on market yields on euro denominated AA corporate
bonds.
ITG SCHEME
The main USA pension scheme, held by ITG Brands is the ITG Scheme, is a
defined benefit pension plan that is closed to new entrants. It has a weighted
average maturity of 11 years. The population comprises 77 per cent in respect
of pensioners, 10 per cent in respect of deferred members and 13 per cent in
respect of current employees.
The plan is funded and benefits are paid from the plan assets. Contributions
to the plan are determined based on US regulatory requirements and ITG Brands
is not expected to make any contributions in the next year.
Annual benefits in payment are assumed not to increase from current levels.
The main uncertainty affecting the level of benefits payable under the plan is
the actual longevity of the membership. Other key uncertainties impacting the
plan include investment risk and potential past service benefit changes from
future negotiations.
The IAS 19 liability measurement of the DBO and the service cost are sensitive
to the assumptions made about the above variables, as well as the discount
rate, which depends on market yields on US dollar denominated AA corporate
bonds.
OTHER PLANS
Other plans of the Group include various pension plans, other post-employment
and long-term employee benefit plans in several countries of operation. Many
of the plans are funded, with assets backing the obligations held in separate
legal vehicles such as trusts, others are operated on an unfunded basis. The
benefits provided, the approach to funding and the legal basis of the plans
reflect their local territories. IAS 19 requires that the discount rate for
calculating the DBO and service cost is set according to the level of relevant
market yields on corporate bonds where the market is considered ""deep"", or
government bonds where it is not.
For the year ended 30 September 2021 the group included four new schemes
associated with operations in the Dominican Republic, Poland and Australia in
the IAS19 position following a review of the pension schemes in the group.
The results of the most recent available actuarial valuations for the various
plans have been updated to 30 September 2021 in order to determine the amounts
to be included in the Group's consolidated financial statements. The aggregate
IAS 19 position is as follows:
DEFINED BENEFIT PLANS
2021 2020
£ million DBO Assets Total DBO Assets Total
At 1 October (5,498) 5,182 (316) (5,877) 5,223 (654)
Consolidated income statement expense
Current service cost (47) - (47) (49) - (49)
Settlements gains/(losses) 13 (13) - - - -
Past service costs 9 - 9 - - -
Cost of termination benefits (18) - (18) (2) - (2)
Net interest (expense)/income on net defined benefit (liability)/asset (87) 89 2 (104) 99 (5)
Administration costs paid from plan assets - (5) (5) - (6) (6)
Cost recognised in the income statement (59) (62)
Remeasurements
Actuarial gain due to liability experience 64 - 64 36 - 36
Actuarial (loss)/gain due to financial assumption changes (114) - (114) 22 - 22
Actuarial gain/(loss) due to demographic assumption changes 4 - 4 228 - 228
Return on plan assets excluding amounts included in net interest - 87 87 - (9) (9)
income/(expense) above
Remeasurement effects recognised in other comprehensive income 41 277
Cash
Employer contributions - 126 126 - 145 145
Employee contributions (1) 1 - (1) 1 -
Benefits paid directly by the company 264 (264) - 266 (266) -
Net cash 126 145
Schemes brought into scope of IAS19 (13) - (13) - - -
Exchange movements 105 (37) 68 (17) (5) (22)
Total other 55 (22)
At 30 September (5,319) 5,166 (153) (5,498) 5,182 (316)
The cost of termination benefits in the year ended 30 September 2021 and 30
September 2020 mainly relate to restructuring activity in Germany.
RETIREMENT BENEFIT SCHEME COSTS CHARGED TO OPERATING PROFIT
£ million 2021 2020
Defined benefit expense in operating profit 61 57
Defined contribution expense in operating profit 19 17
Total retirement benefit scheme cost in operating profit 80 74
Split as follows in the consolidated income statement:
£ million 2021 2020
Cost of sales 26 24
Distribution, advertising and selling costs 33 31
Administrative and other expenses 21 19
Total retirement benefit scheme costs in operating profit 80 74
ASSETS AND LIABILITIES RECOGNISED IN THE CONSOLIDATED BALANCE SHEET
£ million 2021 2020
Retirement benefit assets 1,046 940
Retirement benefit liabilities (1,199) (1,256)
Net retirement benefit liability (153) (316)
KEY FIGURES AND ASSUMPTIONS USED FOR MAJOR PLANS
2021 2020
£ million unless otherwise indicated ITPF RCPP ITGBH ITPF RCPP ITGBH
Defined benefit obligation (DBO) 3,404 765 403 3,516 764 434
Fair value of scheme assets (4,386) - (396) (4,395) - (398)
Net defined benefit (asset)/liability (982) 765 7 (879) 764 36
Current service cost 17 15 3 18 16 4
Employer contributions 65 - - 85 - -
Principal actuarial assumptions used (% per annum)
Discount rate 2.1 1.1 2.7 1.7 0.9 2.8
Future salary increases 3.4 3.1 n/a 2.9 2.4 n/a
Future pension increases 3.4 2.0 n/a 2.9 1.3 n/a
Inflation 3.4 2.0 2.3 2.9 1.3 2.5
2021
ITPF RCPP ITGBH
Male Female Male Female Male Female
Life expectancy at age 65 years:
Member currently aged 65 21.1 22.7 20.5 23.9 19.7 21.7
Member currently aged 50 22.1 23.9 22.6 25.6 20.9 22.9
2020
ITPF RCPP ITGBH
Male Female Male Female Male Female
Life expectancy at age 65 years:
Member currently aged 65 21.1 22.7 20.3 23.8 19.7 21.7
Member currently aged 50 22.0 23.8 22.4 25.5 20.9 22.9
Assumptions regarding future mortality experience are set based on advice that
uses published statistics and experience in each territory. In particular for
the ITPF, SAPS S3 (2020: SAPS S3) tables are used with various adjustments for
different groups of members, reflecting observed experience. The largest group
of members uses the SAPS S3 All Pensioner Male Amounts table with a 101 per
cent multiplier. An allowance for improvements in longevity is made using the
2018 (2021: 2018) CMI improvement rates with a long-term trend of 1.25 per
cent per annum.
SENSITIVITY ANALYSIS FOR KEY ASSUMPTIONS AT THE END OF THE YEAR
Sensitivity analysis is illustrative only and is provided to demonstrate the
degree of sensitivity of results to key assumptions. Generally, estimates are
made by re-performing calculations with one assumption modified and all others
held constant.
2021 2020
% increase in DBO ITPF RCPP ITGBH ITPF RCPP ITGBH
Discount rate: 0.5% decrease 8.6 10.8 5.8 8.7 10.3 6.0
Rate of inflation: 0.5% decrease 6.9 7.0 n/a 7.0 6.7 n/a
One year increase in longevity for a member currently age 65, corresponding 5.1 5.1 5.1 4.9 4.8 5.0
changes at other ages
The sensitivity to the inflation assumption change includes corresponding
changes to the future salary increases and future pension increases
assumptions, but is assumed to be independent of any change to discount rate.
We estimate that a 0.5 per cent decrease in the discount rate at the start of
the year would have increased the consolidated income statement pension
expense by approximately £14 million.
An approximate split of the major categories of ITPF scheme assets is as
follows:
2021 2020
£ million unless otherwise indicated Fair value Percentage of ITPF scheme assets Fair value Percentage of ITPF scheme assets
Equities - - 1 -
Bonds - index linked government 2,115 48 2,344 53
Bonds - corporate and other 815 19 693 16
Property 592 14 533 12
Absolute return 849 19 809 18
Other - including derivatives, commodities and cash 15 - 15 1
4,386 100 4,395 100
The primary investment objective is to invest the ITPF's assets in an
appropriate and secure manner such that members' benefit entitlements can be
paid as they fall due. Specifically the ITPF targets an expected return in
excess of the growth in the liabilities, which in conjunction with the
contributions paid is consistent to achieve and maintain an ongoing funding
level of at least 100 per cent on a buy-out basis by 2028.
The majority of the assets are quoted. The ITPF holds £nil of self-invested
assets (2020: £nil). As in previous years, the value of ground leases have
been allocated to the property asset class.
An approximate split of the major categories of ITGBH scheme assets is as
follows:
2021 2020
£ million unless otherwise indicated Fair value Percentage of ITGBH scheme assets Fair value Percentage of ITGBH scheme assets
Investment funds 279 70 224 56
Bonds - fixed government 20 5 45 11
Bonds - corporate and other 63 16 121 31
Other - including derivatives, commodities and cash 34 9 8 2
396 100 398 100
The majority of the assets are non-quoted.
25. PROVISIONS
2021
£ million Restructuring Other Total
At 1 October 2020 253 163 416
Additional provisions charged to the consolidated income statement 141 50 191
Amounts used (63) (39) (102)
Unused amounts reversed (66) (24) (90)
Exchange movements (14) (7) (21)
At 30 September 2021 251 143 394
Analysed as:
£ million 2021 2020
Current 188 220
Non-current 206 196
394 416
Restructuring provisions relate mainly to our 2021 Strategic Review Programme
and Cost optimisation programmes (see note 5).
The restructuring provision is split between 2021 Strategic Review Programme
of £86 million, Cost Optimisation Programmes of £155 million and other
programmes of £10 million.
Within the Cost optimisation programme provisions there is £73 million
related to costs of consolidating the manufacturing capacity within the Group.
It is expected that the Cost optimisation programmes restructuring provisions
will be predominantly utilised over the next 2 years.
Other provisions include £41 million relating to local employment
requirements including holiday pay, £58 million relating to various local tax
or duty requirements and £23 million of employment and duty provisions
associated with distribution. The provisions are spread throughout the Group
and payment will be dependent on local statutory requirements.
26. SHARE CAPITAL
£ million 2021 2020
Authorised, issued and fully paid
1,020,697,238 ordinary shares of 10p each (2020: 1,020,697,238) 103 103
During the year nil shares (2020: 5,098,508 shares) were repurchased and
immediately cancelled, increasing the Capital Redemption reserve.
On 6 March 2014, 31,942,881 shares held in Treasury were cancelled creating
the Capital Redemption reserve, and between September 2017 and December 2017,
4,973,916 shares were cancelled increasing this reserve.
27. SHARE SCHEMES
The Group operates four types of share-based incentive programmes, designed to
incentivise staff and to encourage them to build a stake in the Group.
SHARE MATCHING SCHEME
Awards are made to eligible employees who are invited to invest a proportion
of their eligible bonus in shares for a period of three years, after which
matching shares are awarded on a 1:1 ratio, plus dividend equivalents.
LONG TERM INCENTIVE PLAN (LTIP)
Awards of shares under the LTIP are made to the Executive Directors and senior
executives at the discretion of the Remuneration Committee. They vest three
years after grant and are subject to performance criteria. Dividend
equivalents accrue on vested shares.
SHARESAVE PLAN
Options are granted to eligible employees who participate in a designated
savings scheme for a three year period. Historically they were also granted
for a five year period.
DISCRETIONARY SHARE AWARDS PLAN (DSAP)
Under the DSAP, one-off conditional awards are made to individuals to
recognise exceptional contributions within the business. Awards, which are not
subject to performance conditions and under which vested shares do not attract
dividend roll-up, will normally vest on the third anniversary of the date of
grant subject to the participant's continued employment. The limit of an award
under the DSAP is capped at 25 per cent of the participant's salary at the
date of grant. Shares used to settle awards under the DSAP will be market
purchased.
Further details of the schemes including additional criteria applying to
Directors and some senior executives are set out in the Directors'
Remuneration Report.
ANALYSIS OF CHARGE TO THE CONSOLIDATED INCOME STATEMENT
£ million 2021 2020
Share Matching Scheme 3 4
Long Term Incentive Plan 20 13
Sharesave Plan 1 2
Discretionary Share Awards Plan 1 1
25 20
The awards are predominantly equity settled. The balance sheet liability in
respect of cash settled schemes at 30 September 2021 was £1.8 million (2020
£1.2 million).
RECONCILIATION OF MOVEMENTS IN AWARDS/OPTIONS
2021
Thousands of shares unless otherwise indicated Share matching scheme awards LTIP Sharesave options DSAP awards Sharesave weighted average exercise price £
awards
Outstanding at 1 October 2020 461 6,595 2,006 70 15.31
Granted 253 3,763 371 17 13.09
Lapsed/cancelled (25) (2,003) (323) (3) 21.74
Exercised (207) (943) (1) (24) 5.45
Outstanding at 30 September 2021 482 7,412 2,053 60 13.89
Exercisable at 30 September 2021 - - 170 - 22.24
2020
Thousands of shares unless otherwise indicated Share matching scheme awards LTIP Sharesave options DSAP awards Sharesave weighted average exercise price £
awards
Outstanding at 1 October 2019 783 4,313 1,559 94 21.21
Granted 297 3,187 1,386 2 12.39
Lapsed/cancelled (19) (782) (939) (5) 20.81
Exercised (600) (123) - (21) 25.01
Outstanding at 30 September 2020 461 6,595 2,006 70 15.31
Exercisable at 30 September 2020 - - 147 - 29.62
The weighted average Imperial Brands PLC share price at the date of exercise
of awards and options was £14.96 (2020: £19.34). The weighted average fair
value of Sharesave options granted during the year was £2.35 (2020: £2.37).
SUMMARY OF AWARDS/OPTIONS OUTSTANDING AT 30 SEPTEMBER 2021
Thousands of shares unless otherwise indicated Number of awards/ Vesting period remaining in months Exercise price of options outstanding £
options outstanding
Share Matching Scheme
2019 114 5 n/a
2020 156 17 n/a
2021 212 29 n/a
Total awards outstanding 482
Long Term Incentive Plan
2019 1,512 5 n/a
2020 2,526 18 n/a
2021 3,374 30 n/a
Total awards outstanding 7,412
Sharesave Plan
2018 170 - 22.24
2019 231 11 17.45
2020 1,279 23 12.37
2021 373 35 13.09
Total options outstanding 2,053
Discretionary Share Awards Plan
2018 - - n/a
2019 42 5 n/a
2020 - - n/a
2021 18 29 n/a
Total options outstanding 60
The vesting period is the period between the grant of awards or options and
the earliest date on which they are exercisable. The vesting period remaining
and the exercise price of options outstanding are weighted averages.
Participants in the Sharesave Plan have six months from the maturity date to
exercise their option. Participants in the LTIP generally have seven years
from the end of the vesting period to exercise their option. The exercise
price of the options is fixed over the life of each option.
PRICING
For the purposes of valuing options to calculate the share-based payment
charge, the Black-Scholes option pricing model has been used for the Share
Matching Scheme, Sharesave Plan, Discretionary Shares Awards Plan and one Long
Term Incentive Plan with no market conditions. A summary of the assumptions
used in the Black-Scholes model for 2021 and 2020 is as follows:
2021
Share matching Sharesave DSAP
Risk-free interest rate % 0.7 0.2-(0.4) 0.7
Volatility (based on 3 or 5 year history) % 36.0 33.9-33.9 26.3
Expected lives of options granted years 3.00 3.00 3.00
Dividend yield % 8.85 8.86 6.7
Fair value £ 12.37 2.31-2.56 12.86
Share price used to determine exercise price £ 16.00 16 15.27
Exercise price £ n/a 13.09 n/a
2020
Share Sharesave
matching
Risk-free interest rate % 0.7 0.2-(0.4)
Volatility (based on 3 or 5 year history) % 29.0 33.8-33.9
Expected lives of options granted years 3.00 3.00
Dividend yield % 8.85 8.84
Fair value £ 14.00 2.39-2.45
Share price used to determine exercise price £ 18.25 15.20-15.26
Exercise price £ n/a 12.37
Market conditions were incorporated into the Monte Carlo method used in
determining the fair value of LTIP awards at grant date. Assumptions in 2021
and 2020 are given in the following table:
% 2021 2020
Future Imperial Brands share price volatility 31.2 20.0
Future Imperial Brands dividend yield - -
Share price volatility of the tobacco and alcohol comparator group 17.4-40.9 14.7-28.3
Correlation between Imperial Tobacco and the alcohol and tobacco comparator 26.7 22.1
group
EMPLOYEE SHARE OWNERSHIP TRUSTS
The Imperial Tobacco Group PLC Employee and Executive Benefit Trust and the
Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the Trusts) have been
established to acquire ordinary shares in the Company to satisfy rights to
shares arising on the exercise and vesting of options and awards. The purchase
of shares by the Trusts has been financed by a gift of £19.2 million and an
interest free loan of £147.5 million. In addition the Group has gifted
treasury shares to the Trusts. None of the Trusts' shares has been allocated
to employees or Executive Directors as at 30 September 2021. All finance costs
and administration expenses connected with the Trusts are charged to the
consolidated income statement as they accrue. The Trusts have waived their
rights to dividends and the shares held by the Trusts are excluded from the
calculation of basic earnings per share.
SHARES HELD BY EMPLOYEE SHARE OWNERSHIP TRUSTS
Millions of shares 2021 2020
At 1 October 2.1 2.8
Gift of shares from Treasury - -
Distribution of shares held by Employee Share Ownership Trusts (1.2) (0.7)
At 30 September 0.9 2.1
The shares in the Trusts are accounted for on a first in first out basis and
comprise nil shares acquired in the open market (2020: nil) and 0.9 million
(2020: 2.1 million) treasury shares gifted to the Trusts by the Group. There
were nil (2020: nil) shares gifted in the financial year 2021.
28. TREASURY SHARES
Shares purchased under the Group's buyback programme represent a deduction
from equity shareholders' funds, and are only cancelled if the number of
treasury shares approaches 10 percent of issued share capital. During the year
the Group purchased nil shares at a cost of £nil million (2020: 5,098,508
shares at a cost of £92 million) which were immediately cancelled. Shares
held in treasury do not qualify for dividends.
2021 2020
£ million unless otherwise indicated Millions of shares (number) Value Millions of shares Value
(number)
At 1 October 74.3 2,183 74.3 2,183
Purchase of shares - - 5.1 92
Cancellation of shares - - (5.1) (92)
Gifted to Employee Share Ownership Trusts - - - -
At 30 September 74.3 2,183 74.3 2,183
Percentage of issued share capital 7.3 n/a 7.3 n/a
29. COMMITMENTS
CAPITAL COMMITMENTS
£ million 2021 2020
Contracted but not provided for:
Property, plant and equipment and software 86 187
30. CONTINGENT LIABILITIES
Where contingent liabilities are disclosed and not quantified this is because
it is not practicable to do so.
USA STATE SETTLEMENT AGREEMENTS
In November 1998, the major US cigarette manufacturers, including Reynolds and
Philip Morris, entered into the Master Settlement Agreement (MSA) with 52 US
states and territories and possessions. These cigarette manufacturers
previously settled four other cases, brought by Mississippi, Florida, Texas
and Minnesota, by separate agreements with each state (collectively with the
MSA, the State Settlement Agreements). These State Settlement Agreements
settled all health care cost recovery actions brought by, or on behalf of, the
settling jurisdictions against the defendants (the major US cigarette
manufacturers); released the defendants from various additional present and
potential future claims; imposed future payment obligations based on market
share in the US; and significantly restricted their ability to market and sell
cigarettes.
ITG Brands (ITGB) and its affiliates were not defendants in the litigations
that led to the State Settlement Agreements. However, the MSA contained a
provision allowing manufacturers that were not defendants to become parties.
Under that provision ITGB and certain affiliates (including its US affiliate
Commonwealth Brands, Inc.) became parties to the MSA. They make substantial
annual MSA payments based on market share in the US and other factors, and are
subject to the MSA's restrictions on their ability to market and sell
cigarettes.
On 12 June 2015, ITGB acquired four cigarette brands (Winston, Salem, Kool and
Maverick, referred to as the Acquired Brands) from Reynolds and Lorillard
Tobacco, in connection with Reynolds' parent's acquisition of the stock of
Lorillard Tobacco's parent. Because the MSA requires a purchaser of a brand to
assume settlement liability, the Asset Purchase Agreement (APA) between
Reynolds and ITGB required ITGB to assume MSA settlement payments on the
Acquired Brands. There is no similar mechanism permitting companies that were
not defendants to join the settlements with the four states that are not
parties to the MSA (Florida, Minnesota, Mississippi, and Texas, collectively
called the Previously Settled States or PSS). For those settlements, the APA
required ITGB to use reasonable best efforts, with the assistance and
cooperation of Reynolds and Lorillard Tobacco, to reach agreement with the PSS
to make settlement payments on the Acquired Brands on certain terms and
conditions.
Effective 12 June 2015, the date of closing of the transaction, ITGB became a
party to the Mississippi settlement as to the Acquired Brands. ITGB had not
become a party to the settlements with Florida, Minnesota, or Texas by the
date of closing. Two of those states, Minnesota, and Texas, have statutes
imposing fees on distributors' sales of products manufactured by companies
that are not parties to the settlements, and post-closing fees were paid on
sales of ITGB and affiliates' products in those states under those statutes
from and after 12 June 2015.
Claims have been made against ITGB in connection with the acquisition of the
Acquired Brands:
FLORIDA
On 18 January 2017 Florida and Philip Morris filed motions with the Florida
court with jurisdiction over the settlement claiming that Reynolds and/or ITGB
must make payments on the Acquired Brands under the Florida settlement.
Florida and Philip Morris alleged that ITGB was a "successor" or "assign" to
Reynolds' settlement obligations. On 27 December 2017 the court ruled that
Reynolds was liable for settlement payments on the Acquired Brands, but ITGB
was not because it was not a "successor" or "assign" to Reynolds. On 29 July
2020 the intermediate Florida appellate court affirmed. Reynolds asked that
court for reconsideration and for permission to appeal to the Florida Supreme
Court. On 18 September 2020, the intermediate appellate court denied that
motion. On 18 October 2020, Reynolds asked the Florida Supreme Court directly
to permit it to appeal. On 18 December 2020, the Florida Supreme Court denied
Reynolds' petition for a further appeal.
Florida sought settlement payments on the Acquired Brands of approximately
$127 million plus interest, plus future annual payments based on market share
of approximately $26 million. The Florida court's decision that Reynolds, not
ITGB, must make these settlement payments to Florida is now final and
unappealable and Reynold is making the payments. Reynolds has asked the
Delaware court to order the Group to indemnify it for those obligations, in
the proceeding described below .
MINNESOTA
On 23 March 2018 Minnesota filed a complaint and motion and Philip Morris
filed a motion with the Minnesota state court with jurisdiction over the
settlement claiming that Reynolds and/or ITGB must make payments on the
Acquired Brands under the Minnesota settlement. Minnesota and Philip Morris
alleged that ITGB was a "successor" or "assign" to Reynolds' settlement
obligations. On 24 September 2019 the court ruled that Reynolds was liable for
settlement payments on the Acquired Brands. The court held that whether ITGB
was a "successor" or "assign" under the Minnesota settlement would be
determined by whether ITGB had breached its duty under the APA with Reynolds
to use reasonable best efforts to reach agreement with Minnesota to join that
settlement. On 19 February 2020 the Minnesota court denied ITGB's motion
seeking an immediate interlocutory appeal. The Minnesota court held a trial on
whether ITG used its reasonable best efforts to reach agreement with Minnesota
to join the settlement on 31 August and 1-2 and 9 September 2020. Post-trial
briefing and proposed findings of fact and conclusions of law were submitted
on 13 November 2020, but the case was resolved before any decision was
entered.
The parties have resolved the litigation in Minnesota, with the Court ordering
dismissal of the claims with prejudice on 17 March 2021. Minnesota sought
settlement payments on the Acquired Brands of approximately $58 million plus
interest from 12 June 2015 forward, plus future annual payments of
approximately $13 million, and Philip Morris sought additional amounts related
to a portion of the payment calculation affecting Philip Morris. In the
settlement, ITG paid $28 million (£22 million) with respect to the claims
from 12 June 2015 forward, and Reynolds paid $52 million. ITG will pay an
estimated $13 million on 31 December 2021 and each year thereafter.
TEXAS
On 28 January 2019 Texas and Philip Morris filed motions with the Texas court
with jurisdiction over the settlement claiming that Reynolds and/or ITGB must
make payments with respect to the Acquired Brands under the Texas settlement.
Texas and Philip Morris alleged that ITGB was a "successor" or "assign" to
Reynolds' obligations under the settlement. On 25 February 2020 the court
determined that Reynolds was liable for settlement payments on the Acquired
Brands. The court held that ITGB was as "assign" under the settlement but was
not directly liable for settlement payments as a successor or assign, and
referred further questions regarding ITGB's liability to Reynolds or Texas to
the Delaware litigation described below.
On 5 May 2020, the court entered a judgment. The judgment further held that
Reynolds' settlement payments on the Acquired Brands would be reduced by an
offset for statutory fees under TEX. HEALTH & SAFETY CODE § 161.601, et
seq. paid by or for ITGB. The statutory fee had been collected from ITGB's
distributors since June 2015 when ITGB acquired the Brands, with ITGB
reimbursing distributors for most of the fees paid. Effective 1 April 2019,
Texas increased the fee amount from the lower rate paid for brands sold by
Subsequent Participating Manufacturers to the MSA to the higher rate paid on
other brands. Texas further demanded payment of the fee at the higher rate for
the period between June 2015 and April 2019 plus penalties and interest, in
the total amount of $173 million.
Both Texas and ITGB asked the court to remove the portion of its judgment
reducing Reynolds' settlement payments by the statutory payments. The court
denied those motions on 14 August 2020. The court further held that the
judgment regarding Reynolds was final and appealable, but that the holding
regarding ITGB's liability was not yet final until further actions from the
Delaware and/or Texas courts. Reynolds appealed the judgment against it. ITGB
and Texas both also appealed, noting disagreement with the offset for
statutory fees. On 5 October 2020, Reynolds moved to dismiss ITGB's appeal
(but not Texas') on the basis that the judgment is not final as to ITGB and
does not injure it. ITGB opposed the motion on 15 October 2020. On 22 December
2020, the Court ordered the motion "carried with the case" to be decided along
with the merits. Initial briefs on the merits were filed on 2 November 2020.
The Texas case was resolved in May 2021 and the state and Philip Morris'
claims have been dismissed, while a separate claim brought by ITGB regarding
the equity tax rate is awaiting dismissal. Texas sought settlement payments on
the Acquired Brands from and after 12 June 2015 of approximately $167 million
plus interest, plus future annual payments based on market share of
approximately $36 million, and alternatively sought approximately $173 million
(including penalties and interest) in statutory fees. In the settlement, ITG
paid $13.5m in settlement payments (net of amounts accrued and statutory fees
already paid) for 12 June 2015 and thereafter and Reynolds paid $190m, and ITG
will pay about $3m in addition to amounts already accrued on 31 December 2021
and each year thereafter.
DELAWARE
ITGB and Reynolds are also engaged in litigation in the Delaware court with
respect to whether ITGB has satisfied its obligations to use "reasonable best
efforts" to join the settlements with Florida, Minnesota and Texas under the
APA through which ITGB purchased the Acquired Brands and whether ITGB is
required to indemnify Reynolds for amounts other courts may require Reynolds
to pay. On 30 November 2017, on cross-motions by Reynolds and ITGB, the
Delaware court held that the "reasonable best efforts" provision did not
automatically terminate due to the transaction closing, but determined further
that the duty of reasonable best efforts was not perpetual and that whether
ITGB complied with that obligation is a question of fact that the court has
not decided. On 23 September 2019, the Delaware court denied a motion by
Reynolds to hold ITGB liable under other indemnity provisions of the APA for
Reynolds' liability under the Florida decision irrespective of whether ITGB
breached a duty of reasonable best efforts, finding a fact question on that
argument, and granted Reynolds' motion that one of the conditions to reaching
agreement on joinder related to equity taxes did not apply in Florida. On 31
October 2019, the trial court denied ITGB's motion for immediate appeal, with
the Delaware Supreme Court denying the same motion on 7 November 2019. At
present the parties are engaged in discovery. On 1 October 2021, Reynolds
filed a motion to set a case schedule. On 15 October 2021, ITGB opposed the
motion and proposed an alternative schedule. No schedule has yet been entered.
Reynolds originally sought indemnification for all amounts it might be
required to pay in settlement for the Acquired Brands in the Florida,
Minnesota, and Texas litigations, described above. The portions of the
Delaware dispute that related to Minnesota and Texas have been settled and
dismissed, however, so Reynolds' claim for indemnification in Delaware is now
limited to the amounts it has been required to pay under the Florida
determination described above, plus interest and attorney's fees. ITGB denies
that indemnity is appropriate, and further contends that if Reynolds were to
be granted indemnity, any amounts due to it should be substantially reduced by
the amount by which Reynolds' settlement payments have been reduced through
operation of the "profit adjustment" by reason of ITG not becoming a party to
the Florida settlement.
MISSISSIPPI
Effective 12 June 2015, ITGB joined the Mississippi settlement with respect to
the Acquired Brands. On 18 June 2015, the Mississippi court administering the
settlement approved the joinder. On 2 July 2015, Philip Morris filed a motion
to vacate the joinder, but the trial court denied that motion on 4 December
2015. Philip Morris appealed, but then dismissed its appeal under a settlement
with Mississippi on 2 June 2017. On 26 December 2018, Philip Morris filed a
new motion in Mississippi, challenging the basis on which Reynolds and ITGB
had allocated the "base year" profit for the Acquired Brands between them on
the basis that it adversely affects Philip Morris. The base year affects a
calculation for a downward "profit adjustment" to payments under the
Mississippi (and other) State Settlements. Philip Morris claims that
adjustment of the base year should lower its payments under the profit
adjustment and increase Reynolds' payments. A trial was set for 3-6 May 2021.
ITGB is indemnified by Reynolds for profit adjustment payments to the extent
that its annual profits do not exceed a specified amount. In June 2021, the
parties resolved the Mississippi litigation with an agreement to set the base
year amount at $860 million (plus inflation), and the Court dismissed Philip
Morris' motion on 11 June 2021. ITG also received agreed-upon attorney's fees
from Reynolds as part of the settlement.
MSA PREVIOUSLY SETTLED STATES REDUCTION
The MSA contains a downward adjustment, called the Previously Settled States
Reduction, which reduces aggregate payments made by Philip Morris, Reynolds,
and ITGB by a specified percentage each year. The State of California, later
joined by the remainder of the MSA states and by Philip Morris, challenged the
application of that Reduction to ITGB for every year from 2016 forward,
claiming that it cannot apply to ITGB since it is not making settlement
payments to Florida, Minnesota, or Texas under their settlements. The
Independent Auditor to the MSA, which initially addresses disputes related to
payments, has rejected that challenge every year. It is possible that one of
the parties making the challenge may seek to arbitrate the claim under the
MSA. The PSS Reduction provides annual MSA payment reductions of about $65
million.
The parties have resolved Philip Morris' related claim under the MSA,
challenging ITG's right to receive a "Previously Settled States Reduction"
worth about $65 million a year, as such claim relates to Minnesota and Texas.
OVERALL SUMMARY OF LIABILITY POSITION ASSOCIATED WITH USA STATE SETTLEMENT
AGREEMENTS
The Group's legal advice is that it has a strong position on pending claims
related to the Acquired Brands and the Group therefore considers that no
provision is required for these matters.
PRODUCT LIABILITY INVESTIGATIONS
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. Details of these cases are given below.
ARGENTINA
Our subsidiary, Société Nationale d'Exploitation Industrielle des Tabacs et
Allumettes SAS (SEITA), has been notified of a claim filed in the Court of
Buenos Aires against Nobleza Piccardo, a subsidiary of British American
Tobacco (BAT) by an individual smoker. SEITA is not a party to the court
claim. BAT has denied liability. Historically, BAT manufactured and
distributed two brands of cigarettes owned by SEITA in Argentina under the
terms of a Licence Agreement. BAT has sought to invoke an indemnity contained
in the Licence Agreement, pursuant to which SEITA is responsible for any
product liability to third parties. The amount claimed is AR$8,980,200.
An adverse first instance judgment was received in December 2020. Both parties
appealed the first instance judgment and the Court of Appeal decision is
currently pending.
FRANCE
On 16 January 2018, the French National Committee against Tobacco (the CNCT)
filed a criminal complaint against the four main tobacco manufacturers,
including a French subsidiary of the Company named Imperial Brand Finance
France (the Subsidiary), on grounds of 'reckless life endangerment'. Neither
the Subsidiary nor any of its employees or managers have been charged or
placed under formal investigation in any ongoing proceedings, as a result of
such a complaint. The Group strongly denies the allegations made by the CNCT
and is monitoring developments.
UNITED STATES
ITG Brands
A number of smoking and health-related claims have been brought against ITGB
in the state courts of Massachusetts. ITGB has the benefit of an indemnity
from another manufacturer in respect of each of these claims. As a result,
ITGB either has been dismissed, or is expected to be dismissed, without
prejudice from each of the claims. To date, no action has been successful or
settled in favour of any individual claimant in any tobacco-related litigation
against the Company or any of its subsidiaries.
Fontem US
Fontem US is named as a defendant in a case filed in the Superior Court of the
State of California for the County of Los Angeles, Central District. The
original and amended complaints in this case name 17 defendants, in addition
to Fontem US. The claimants seek recovery of money damages, including punitive
damages, against all defendants based on the claim that the principal claimant
developed a lung condition as a result of her use of e-cigarette and other
vaping devices, including those manufactured by Fontem US. The original
complaint asserted claims against all defendants styled as eight causes of
action as follows: (1) negligence; (2) strict liability-failure to warn; (3)
strict liability-design defect; (4) fraudulent concealment; (5) intentional
misrepresentation; (6) negligent misrepresentation; (7) breach of implied
warranties; and (8) loss of consortium (asserted on behalf of the claimants
spouse).
Fontem US has agreed to provide representation and indemnity to defendant
Costco Wholesale Corporation ("Costco"), the retailer from which the claimant
allegedly purchased blu products. Costco has also filed an answer to the
second amended complaint. The Court set a trial date of 1 November 2021.
A mediation took place on 7 December, 2020 but did not resolve the matter.
Since the mediation, Fontem US and other defendants continued to conduct fact
discovery in anticipation of trial, while also continuing to negotiate with
the claimants to resolve the matter prior to trial. In August, these continued
negotiations resulted in an agreement by Fontem US and the claimants to settle
this matter (which will include dismissal of the claims against Costco). The
terms of the settlement agreement will be confidential. At a status conference
before the Court on 15 October 2021 the claimants informed the Court that all
remaining defendants have settled and later that day filed a conditional
Notice of Settlement of Entire Case contingent upon the final execution of the
pending settlement documents.
COMPETITION AUTHORITY INVESTIGATIONS
BELGIUM
On 29 May 2017, the National Competition Authority in Belgium (the BCA)
conducted raids at the premises of several manufacturers and wholesalers of
tobacco products. On 1 October 2021 the BCA announced that it had issued a
Proposal for Decision which alleges the existence of anticompetitive practices
in the tobacco industry that lasted for several years and consisted in
repeated indirect exchanges of information on manufacturers' prices through
wholesalers. The BCA states that such conduct may be contrary to Article IV.1
CEL and Article 101 TFEU. This case will now be examined by the Competition
College, before which the parties will have the opportunity to defend
themselves against these allegations. The parties will be able to submit
written comments to the Competition College and will be heard at a hearing.
The Competition College will either state that there exists an infringement of
competition or make a finding of no infringement.
SPAIN
On 12 April 2019 the Spanish National Commission on Markets and Competition
(CNMC) announced penalties against Philip Morris Spain, Altadis, JT
International Iberia and Logista. Altadis and Logista received fines of
€11.4 million and €20.9 million, respectively, from the CNMC. According to
the decision, Altadis and Logista are alleged to have infringed competition
law by participating in an exchange of sales volume data between 2008 and
February 2017. CNMC considers that this conduct had the effect of restricting
competition in the Spanish tobacco market. Both companies believe that the
arguments made by CNMC that define this conduct as anti-competitive are
flawed. In June 2019, both Altadis and Logista commenced appeals to the CNMC's
Decision and the fines imposed in the Spanish High Court where they believe
they will be successful, a decision supported by external legal counsel. In
September 2019 Altadis and, separately, Logista arranged bank guarantees for
the full amount of the fines with the result that payment of the fines had
been suspended pending the outcome of the appeals. Therefore, provision for
these amounts is not considered appropriate. In the Altadis appeal, both
parties have concluded their submissions to the Court and a judgment is
awaited. A judgment is unlikely to be received before the end of 2021.
In the Logista appeal, Logista submitted their pleadings before the High
Spanish Court in February 2021. A judgment is also unlikely to be received
before the end of 2021.
OTHER LITIGATION
US HELMS-BURTON LITIGATION
Imperial has been named as a defendant in a civil action in federal court in
Miami, Florida under Title III of the Cuban Liberty and Democratic Solidarity
Act of 1996 ("Helms-Burton") filed on 6 August 2020. Title III provides US
nationals with a cause of action and a claim for treble damages against
persons who have "trafficked" in property expropriated by the Cuban
government. Title III is largely untested because it did not come into effect
until May 2019. Treble damages are automatically available under Helms Burton.
Although the filed claim is for unquantified damages, we understand the claim
could potentially reach approximately $365 million, based on the claimants'
claim to own 90% of the property, which they value at $135 million (and then
treble). The claim is based on allegations that Imperial, through Corporación
Habanos S.A. (a joint venture between one of Imperial's now former
subsidiaries and the Cuban government), has "trafficked" in a factory in
Havana, Cuba that the Cuban government confiscated from the claimants'
ancestor in the early 1960s, by using the factory to manufacture, market,
sell, and distribute Habanos cigars.
At the time the claim was filed against Imperial and up until the conclusion
of the Brexit "transition period" on 31 December 2020, Imperial was subject to
an EU law known as the EU Blocking Statute (Regulation (EC) No. 2271/96),
which conflicts with Helms-Burton, protected Imperial against the impact of
Title III, and impacted how Imperial might respond to the threatened
litigation. On 23 September 2020 the US court granted Imperial's motion for a
stay of the action until 9 February 2021 or until further order of the court,
while Imperial awaited the European Commission's response to its request for
authorisation to defend the action or, at a minimum, to file and litigate a
motion to dismiss the action.
On 31 December 2020, the Brexit "transition period" concluded without action
from the European Commission on Imperial's request for authorization. As of 1
January 2021, the EU Blocking Statute has been transposed into domestic law
with only minimal changes. Accordingly, on 10 January 2021, Imperial submitted
an application to the UK Department for International Trade for authorisation
from the Secretary of State for International Trade to defend the action or,
at a minimum, to file and litigate a motion to dismiss the action. On 8
February 2021, the UK Secretary of State for International Trade authorized
Imperial to file and litigate a motion to dismiss the action.
On 26 February 2021, Imperial filed a motion to dismiss the action. In
response, on 22 March 2021, the claimants amended their claim. On 28 April
2021, Imperial filed a motion to dismiss the amended action. Briefing on the
motion to dismiss was completed on 20 July 2021. In August 2021, the parties
filed supplemental briefs addressing the impact of a decision in another
Helms-Burton case. A hearing on the motion to dismiss is scheduled for 15
December 2021.
Separately, two other groups of prospective claimants have indicated that they
intend to file a lawsuit against Imperial in federal court in Miami, Florida.
Neither claim has been filed. The threatened claims relate to other properties
in Cuba, which the prospective claimants claim were confiscated from their
ancestors by the Cuban government in the 1960s and which they claim are now
used by Corporación Habanos S.A for commercial activities. The prospective
claimants claim to be entitled to treble damages from Imperial.
No provision has been made for potential liabilities related to Helms-Burton
claims.
UK
In June 2020, the Group responded to a claimant law firm's allegations of
human rights issues in the Malawian tobacco supply chain, which included
allegations relating to child and forced labour. In December 2020, a claim was
filed in the UK High Court against Imperial Brands plc, Imperial Tobacco
Limited and four of its subsidiaries (the Imperial Defendants) and two
entities in the BAT group by a group of tobacco farm workers. The Imperial
Defendents have acknowledged service and confirmed to the claimants that they
intend to defend the claim in full. The Imperial Defendants have not yet been
required to file their Defence. A procedural hearing has been scheduled for
November/December 2021. The claim is unquantified, and given the early stage
of the litigation a provision would not be appropriate.
MOROCCO
A number of cases have been raised against Société Marocaine des Tabacs SA
(SMT) disputing a reduction to retirees' pensions. These cases have been in
the courts for several years and SMT has successfully defended many of them in
the lower courts. During the year 36 cases have been reviewed by the Cour de
Cassation (Supreme Court) in Morocco, and it is understood that they have been
decided against SMT and in favour of retirees.
The written reasoned judgment of the Cour de Cassation has not been received
by SMT at the time of signing these accounts. Furthermore, the judgments in
favour of the retirees reportedly relate to unquantified claims. Because of
this it is not possible to assess the impact of the decided cases on the
remaining cases within the Moroccan courts. SMT continues to rigorously defend
its position.
The Company has reassessed its previously disclosed estimate of exposure to
the potential liability following improved clarity of the legal position.
Considering the number of cases currently filed by retirees, and allowing for
the uncertainty in the calculation of the amount of any future payment, it now
considers any outflow, if required, to be significantly lower than that
previously disclosed.
31. NET DEBT
The movements in cash and cash equivalents, borrowings, and derivative
financial instruments in the year were as follows:
£ million Current borrowings Lease liabilities Non-current borrowings Derivative financial instruments Liabilities from financing activities Cash and cash equivalents Total
At 1 October 2020 (1,442) (299) (10,210) (816) (12,767) 1,626 (11,141)
Reallocation of current borrowings from non-current borrowings (1,055) - 1,055 - - - -
Cash flow 1,294 69 72 (41) 1,394 (330) 1,064
Accretion of interest 13 (7) 1 1 8 - 8
Change in fair values - - - 51 51 - 51
New leases, terminations & modifications - (26) - - (26) - (26)
Exchange movements 83 12 367 218 680 (9) 671
At 30 September 2021 (1,107) (251) (8,715) (587) (10,660) 1,287 (9,373)
£ million Current borrowings Lease liabilities Non-current borrowings Derivative financial instruments Liabilities Cash and Total
from
cash equivalents
financing activities
At 1 October 2019 (1,937) (326) (11,697) (622) (14,582) 2,286 (12,296)
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, terminations & modifications - (32) - - (32) - (32)
Exchange movements (54) (6) 148 (269) (181) 13 (168)
Transferred to held for disposal (note 11) - - - - - (62) (62)
At 30 September 2020 (1,442) (299) (10,210) (816) (12,767) 1,626 (11,141)
ANALYSIS BY DENOMINATION CURRENCY
2021
£ million GBP EUR USD Other Total
Cash and cash equivalents 190 188 505 404 1,287
Total borrowings (2,696) (3,179) (3,917) (30) (9,822)
(2,506) (2,991) (3,412) 374 (8,535)
Effect of cross currency swaps 2,580 (4,147) 1,305 - (262)
74 (7,138) (2,107) 374 (8,797)
Lease liabilities (37) (153) (23) (38) (251)
Derivative financial instruments (325)
Net debt (9,373)
Average reported net debt during the year was £11,148 million (2020: £13,564
million).
2020
£ million GBP EUR USD Other Total
Cash and cash equivalents 412 556 407 251 1,626
Total borrowings (2,694) (3,852) (5,083) (23) (11,652)
(2,282) (3,296) (4,676) 228 (10,026)
Effect of cross currency swaps 2,666 (4,515) 1,368 - (481)
384 (7,811) (3,308) 228 (10,507)
Lease liabilities (39) (190) (27) (43) (299)
Derivative financial instruments (335)
Net debt (11,141)
ADJUSTED NET DEBT
Management monitors the Group's borrowing levels using adjusted net debt which
excludes interest accruals, the fair value of derivative financial instruments
providing commercial cash flow hedges and lease liabilities.
£ million 2021 2020
Reported net debt (9,373) (11,141)
Accrued interest 140 156
Lease liabilities 251 299
Fair value of interest rate derivatives 367 387
Adjusted net debt (8,615) (10,299)
Average adjusted net debt during the year was £10,361 million (2020: £12,765
million).
32. RECONCILIATION OF CASH FLOW TO MOVEMENT IN NET DEBT
£ million 2021 2020
Decrease in cash and cash equivalents (330) (611)
Cash flows relating to derivative financial instruments (41) 23
Repayment of lease liabilities 69 72
Increase in borrowings (858) (1,240)
Repayment of borrowings 2,224 3,096
Change in net debt resulting from cash flows 1,064 1,340
Other non-cash movements including revaluation of derivative financial 59 77
instruments
Transferred to held for disposal (note 11) - (62)
Lease liabilities (26) (358)
Exchange movements 671 (168)
Movement in net debt during the year 1,768 829
Opening net debt (11,141) (11,970)
Closing net debt (9,373) (11,141)
The increase in borrowings and repayment of borrowings reflect the cash flow
movements relating to borrowings outstanding at the start and at the end of
each financial year; cash flows relating to short term borrowings drawn down
and repaid within the year are not included in this analysis.
33. NON-CONTROLLING INTERESTS
MATERIAL NON-CONTROLLING INTERESTS
Detailed below is the summarised financial information of Logista, being a
subsidiary where the non-controlling interest of 49.99 per cent is considered
material to the Group.
SUMMARISED BALANCE SHEET
at 30 September
Euro million 2021 2020
Current assets 5,958 6,106
Current liabilities (6,687) (6,909)
Current net assets (729) (803)
Non-current assets 1,630 1,740
Non-current liabilities (376) (421)
Non-current net assets 1,254 1,319
Net assets 525 516
SUMMARISED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September
Euro million 2021 2020
Revenue 10,817 10,559
Profit for the year 174 157
Other comprehensive income - 1
Total comprehensive income 174 158
SUMMARISED CASH FLOW STATEMENT
for the year ended 30 September
Euro million 2021 2020
Cash flows from operating activities (302) 830
Cash flows from investing activities 505 (640)
Cash flows from financing activities (194) (188)
Net increase in cash and cash equivalents 9 2
34. POST BALANCE SHEET EVENTS
Sale of the Premium Cigar Division
On 26 October 2021 deferred consideration of €88 million was received in
relation to the sale of the Premium Cigar Division.
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