REG - Imperial Brands PLC - Final Results <Origin Href="QuoteRef">IMB.L</Origin> - Part 2
08/11/2016 07:05
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costs were £1,350 million (2015: £261 million),
incorporating the impact of the net fair value and exchange losses on
financial instruments of £807 million (2015: gains of £226 million) and
post-employment benefits net financing costs of £19 million (2015: costs of
£20 million).
After tax at an effective adjusted rate of 20.0 per cent (2015: 20.7 per
cent), adjusted earnings per share grew by 17.5 per cent to 249.6 pence. The
effective reported tax rate is 26.2 per cent (FY15: 1.9 per cent). The
effective reported tax rate for 2015 was unusually low, largely due to the
recognition of previously unrecognised tax losses as a deferred tax asset, on
the basis that taxable profits would arise in the relevant entities following
the acquisition of assets in the USA.
The tax rate is sensitive to the geographic mix of profits, reflecting a
combination of higher rates in certain markets, such as the USA, and lower
rates in other markets, such as the UK. The rate is also sensitive to future
legislative changes affecting international businesses, such as changes
arising from the OECD's (Organisation for Economic Co-operation and
Development) Base Erosion Profit Shifting (BEPS) work.
Reported earnings per share were 66.1 pence (2015: 177.4 pence) reflecting
non-cash amortisation of £1,005 million (2015: £697 million) and restructuring
costs of £307 million (2015: £328 million), as well as the effects of fair
value and exchange losses in finance costs mentioned above. The difference
between reported (66.1p) and adjusted earnings per share (249.6p) is
materially due to the same three items.
The weakening of sterling versus the euro and US dollar positively impacted
reported and adjusted measures. On a constant currency basis, adjusted
earnings per share grew 12.0 per cent.
The restructuring charge for the year of £307 million (2015: £328 million)
relates mainly to our cost optimisation programme announced in 2013 (£188
million) and integration costs relating to the assets acquired in FY15 (£49
million).
The total restructuring cash flow in the year ended 30 September 2016 was £268
million (2015: £256 million).
Cost Optimisation
The first phase of our cost optimisation programme is still expected to
deliver savings of £300 million per annum from September 2018 and to have a
cash implementation cost of in the region of £600 million. £65 million was
realised in 2016 through a range of initiatives focused on reducing overheads
and product cost.
As we simplify the business, optimise our manufacturing footprint and leverage
our global scale through procurement we have been able to realise operational
efficiencies. The cumulative savings to date are £240 million. In 2016, the
cash cost of the programme was £80 million (2015: £169 million) bringing the
cumulative net cash cost of the programme to £420 million.
We have identified further opportunities to extend this programme and have
announced a second phase of cost optimisation that is expected to drive a
further £300 million of annual savings from September 2020, at a cash cost in
the region of £750 million.
Capital Discipline
Our continued focus on capital discipline is driving free cash flow that has
enabled a further £1 billion of debt reduction at constant currency. Our
dividend pay-out ratio of 62 per cent is among the lowest among our tobacco
peers, leaving significant headroom for future dividend growth.
Reported net debt increased by £1.4 billion, with adjusted net debt increasing
by £1.3 billion. The increase in adjusted net debt represents a £1.0 billion
debt reduction from our continued focus on capital discipline before taking
into account a £2.3 billion adverse impact of foreign exchange and fair value
of derivatives.
The denomination of our closing adjusted net debt was split approximately 56
per cent euro and 44 per cent US dollar. As at 30 September 2016, the Group
had committed financing in place of around £17.3 billion. Some 24 per cent
was bank facilities, 6 per cent was commercial paper and 70 per cent was
raised through capital markets.
Following targeted cancellation of certain bank facilities during the
financial year, enabled by free cash flow generation, the outstanding
syndicated acquisition facilities through which we funded our 2015 USA
acquisition have been reduced to $0.9 billion.
Our all-in cost of debt reduced 40 basis points to 3.9 per cent (2015: 4.3 per
cent) as older debt matured and was repaid. Our interest cover was 7.1 times
(2015: 6.3 times). We remain fully compliant with all our banking covenants
and remain committed to retaining our investment grade ratings.
All of our capital allocation decisions are subject to relevant commercial
analysis and hurdle rates to ensure they deliver appropriate levels of return,
and potential acquisitions are judged on strict financial and commercial
criteria including the ability to enhance the Group's return on invested
capital (ROIC). Typically, we seek an overall internal rate of return in
excess of 13 per cent across the investments we make in our existing business.
This disciplined approach is supporting our investment choices and underpins
returns for shareholders. Our ROIC measure increased this year to 13.9 per
cent (2015: 11.0 per cent) as a result of continued discipline and the full
year effect of the US acquisition.
During the financial year, we further enhanced our investment appraisal
framework to even more closely align the risks and expected returns from
capital allocation decisions, to ensure that investment is focused on
delivering our strategic objectives whilst generating attractive returns.
Taxation Policy
Our global tax contribution through both indirect and direct taxation exceeds
£17 billion annually (excluding Logistics).
Our policy is to ensure compliance with tobacco taxation and product supply
legislation and to engage constructively with revenue authorities worldwide to
help combat illicit trade. We also engage with revenue authorities and
governments more widely on policy issues to voice opposition to aspects of
regulation and excessively high tobacco taxation that are likely to increase
illicit trade to the detriment of consumers, governments and the Group.
In the field of direct taxation, it is our policy to maintain a sustainably
low effective tax rate in order to enhance shareholder value whilst having due
regard to financial and reputational risk.
In pursuing this policy it is of paramount importance that our actions comply
with all national and international laws on corporate and tobacco taxation and
that there is full disclosure and transparency in our dealings with all
revenue authorities.
The Board is kept informed of all material developments relating to our
taxation position with updates on tax matters regularly provided to the Audit
Committee.
Further Strong Dividend Growth
We have delivered another year of 10 per cent growth in our dividend,
demonstrating our commitment to growing shareholder returns. This is our
eighth consecutive year of double digit dividend growth.
The Group has paid two interim dividends of 23.5 pence per share each in June
2016 and September 2016, in line with our quarterly dividend payment policy to
give shareholders a more regular cash return.
The Board has approved a further interim dividend of 54.1 pence per share and
will propose a final dividend of 54.1 pence per share, bringing the total
dividend for the year to 155.2 pence per share, up 10 per cent and in line
with our policy of growing dividends by at least 10 per cent per year over the
medium term.
The third interim dividend will be paid on 30 December 2016 with an
ex-dividend date of 17 November 2016. Subject to AGM approval, the proposed
final dividend will be paid on 31 March 2017, with an ex-dividend date of 16
February 2017.
Liquidity and Going Concern
The Group's policy is to ensure that we always have sufficient capital markets
funding and committed bank facilities in place to meet foreseeable peak
borrowing requirements.
In reviewing the Group's committed funding and liquidity positions, the Board
considered various sensitivity analyses when assessing the forecast funding
and headroom requirements of the Group in the context of the maturity profile
of the Group's facilities. The Group plans its financing in a structured and
proactive manner and remains confident that sources of financing will be
available when required.
Based on its review, and having assessed the principal risks facing the Group,
the Board is of the opinion that the Group as a whole and Imperial Brands PLC
have adequate resources to meet operational needs for a period of at least 12
months from the date of this report and conclude that it is appropriate to
prepare the financial statements on a going concern basis.
Oliver Tant
Chief Financial Officer
SUMMARY OF KEY FOOTPRINT FINANCIALS & METRICS
Full Year Result Change
FOOTPRINT 2016 2015 Actual ConstantCurrency Constant Currencyexcl. Iraq & Syria
Volume
Growth Markets bn SE 76.3 86.5 -11.8% -6.7%
US Market bn SE 24.9 13.2 +89.5%*
Returns Markets North bn SE 94.4 102.8 -8.2%
Returns Markets South bn SE 80.9 82.6 -2.1%
Returns Markets Total bn SE 175.3 185.4 -5.5%
Total Group bn SE 276.5 285.1 -3.0% -1.5%
Tobacco Net Revenue
Growth Markets £m 1,568 1,449 +8.2% +4.3% +8.0%
US Market £m 1,477 707 +108.9% +92.9%*
Returns Markets North £m 2,645 2,649 -0.2% -2.6%
Returns Markets South £m 1,477 1,446 +2.1% -2.9%
Returns Markets Total £m 4,122 4,095 +0.7% -2.7%
Total Group £m 7,167 6,251 +14.7% +9.7% +10.6%
Net Revenue per '000 SE
Growth Markets £ 20.56 16.75 +22.7% +18.3%
US Market £ 59.23 53.73 +10.2% +1.8%
Returns Markets North £ 28.01 25.76 +8.7% +6.1%
Returns Markets South £ 18.27 17.51 +4.3% -0.8%
Returns Markets Total £ 23.51 22.08 +6.5% +2.9%
Total Group £ 25.92 21.93 +18.2% +13.1%
Price/Mix
Growth Markets % +20.0% +16.1% +14.7%
US Market % +19.4%* +3.4%
Returns Markets North % +8.0% +5.6%
Returns Markets South % +4.2% -0.8%
Returns Markets Total % +6.2% +2.8%
Total Group % +17.7% +12.7% +12.1%
Adjusted Tobacco Operating Profit
Growth Markets £m 443 409 +8.3% +2.2%
US Market £m 823 375 +119.5% +102.4%
Returns Markets North £m 1,439 1,475 -2.4% -5.1%
Returns Markets South £m 655 636 +3.0% -2.5%
Returns Markets Total £m 2,094 2,111 -0.8% -4.3%
Total Group £m 3,360 2,895 +16.1% +10.4%
Logistics
Logistics Distribution Fees £m 809 749 +8.0% +2.8%
Logistics Operating Profit £m 176 154 +14.3% +9.1%
Logistics Operating Margin % 21.8 20.6 +120 bps +120 bps
US acquisition* 2016 2015
Volume (bn) 17.5 5.4
Net Revenue (£m) 961.4 279.7
*cigarette brands only
SUMMARY OF KEY PORTFOLIO FINANCIALS & METRICS
Full Year Result Change
PORTFOLIO 2016 2015 Actual ConstantCurrency Constant Currencyexcl. Iraq & Syria
Growth Brand Volume
Growth Markets bn SE 46.0 46.4 -0.8% +10.1%
US Market bn SE 6.1 3.1 +99.4%
Returns Markets North bn SE 55.7 54.4 +2.3%
Returns Markets South bn SE 43.5 41.2 +5.5%
Returns Markets Total bn SE 99.2 95.6 +3.7%
Total Group bn SE 151.3 145.1 +4.3% +7.8%
Growth Brands as % of Volume
Growth Markets % 60.4 53.6 +680 bps +1,030 bps
US Market % 24.5 23.3 +120 bps
Returns Markets North % 58.9 52.9 +600 bps
Returns Markets South % 53.8 49.9 +390 bps
Returns Markets Total % 56.6 51.6 +500 bps
Total Group % 54.7 50.9 +380 bps +480 bps
Growth Brand Tobacco Net Revenue
Growth Markets £m 741 681 +8.8% +7.2% +11.5%
US Market £m 274 97 +183.0% +160.9%
Returns Markets North £m 1,512 1,420 +6.5% +3.4%
Returns Markets South £m 738 665 +11.1% +5.6%
Returns Markets Total £m 2,250 2,085 +7.9% +4.1%
Total Group £m 3,265 2,862 +14.1% +10.1% +11.2%
Growth Brands as % of Tobacco Net Revenue
Growth Markets % 47.2 47.0 +20 bps
US Market % 18.6 13.7 +490 bps
Returns Markets North % 57.2 53.6 +360 bps
Returns Markets South % 50.0 46.0 +400 bps
Returns Markets Total % 54.6 50.9 +370 bps
Total Group % 45.6 45.8 -20 bps
Specialist Brand Net Revenue
Total Group £m 1,042 693 +50.2% +43.6% +46.1%
Specialist Brands as % of Tobacco Net Revenue
Total Group % 14.5 11.1 +340 bps
Growth & Specialist Brands as a percentage of Group net revenue 60.1 56.9 +320 bps
FINANCIAL STATEMENTS
The figures and financial information for year ended 30 September 2016 do not
constitute the statutory financial statements for that year. Those financial
statements have not yet been delivered to the Registrar, nor have the Auditors
yet reported on them. The financial statements have been prepared in
accordance with our accounting policies published in our financial statements
available on our website www.imperialbrandsplc.com.
Consolidated Income Statementfor the year ended 30 September
£ million unless otherwise indicated Notes 2016 2015
Revenue 3 27,634 25,289
Duty and similar items (13,535) (12,585)
Other cost of sales (8,143) (7,533)
Cost of sales (21,678) (20,118)
Gross profit 5,956 5,171
Distribution, advertising and selling costs (2,070) (1,857)
Acquisition costs - (40)
Amortisation of acquired intangibles (1,005) (697)
Restructuring costs 4 (307) (328)
Other expenses (345) (261)
Administrative and other expenses (1,657) (1,326)
Operating profit 3 2,229 1,988
Investment income 634 948
Finance costs (1,984) (1,209)
Net finance costs 5 (1,350) (261)
Share of profit of investments accounted for using the equity method 28 29
Profit before tax 907 1,756
Tax 6 (238) (33)
Profit for the year 669 1,723
Attributable to:
Owners of the parent 631 1,691
Non-controlling interests 38 32
Earnings per ordinary share (pence)
- Basic 8 66.1 177.4
- Diluted 8 66.0 176.9
Consolidated Statement of Comprehensive Incomefor the year ended 30 September
£ million 2016 2015
Profit for the year 669 1,723
Other comprehensive income
Exchange movements 1,260 (198)
Items that may be reclassified to profit and loss 1,260 (198)
Net actuarial losses on retirement benefits (604) (28)
Deferred tax relating to net actuarial losses on retirement benefits 115 5
Items that will not be reclassified to profit and loss (489) (23)
Other comprehensive income/(expense) for the year, net of tax 771 (221)
Total comprehensive income for the year 1,440 1,502
Attributable to:
Owners of the parent 1,336 1,489
Non-controlling interests 104 13
Total comprehensive income for the year 1,440 1,502
Reconciliation from Operating Profit to Adjusted Operating Profit
£ million Notes 2016 2015
Operating profit 2,229 1,988
Acquisition costs - 40
Amortisation of acquired intangibles 1,005 697
Restructuring costs 4 307 328
Adjusted operating profit 3,541 3,053
Reconciliation from Net Finance Costs to Adjusted Net Finance Costs
£ million Notes 2016 2015
Net finance costs (1,350) (261)
Net fair value and exchange losses/(gains) on financial instruments 5 807 (226)
Post-employment benefits net financing cost 5 19 20
Adjusted net finance costs 5 (524) (467)
Consolidated Balance Sheetat 30 September
£ million Notes 2016 2015
Non-current assets
Intangible assets 20,704 18,690
Property, plant and equipment 1,959 1,768
Investments accounted for using the equity method 744 598
Retirement benefit assets 5 92
Trade and other receivables 89 84
Derivative financial instruments 10 1,063 901
Deferred tax assets 631 533
25,195 22,666
Current assets
Inventories 3,498 2,842
Trade and other receivables 2,671 2,454
Current tax assets 45 56
Cash and cash equivalents 9 1,274 2,042
Derivative financial instruments 10 46 74
7,534 7,468
Total assets 32,729 30,134
Current liabilities
Borrowings 9 (1,544) (1,957)
Derivative financial instruments 10 (118) (25)
Trade and other payables (7,991) (6,795)
Current tax liabilities (284) (167)
Provisions 4 (188) (197)
(10,125) (9,141)
Non-current liabilities
Borrowings 9 (12,394) (12,250)
Derivative financial instruments 10 (1,646) (735)
Trade and other payables (17) (13)
Deferred tax liabilities (1,034) (1,170)
Retirement benefit liabilities (1,484) (909)
Provisions 4 (287) (220)
(16,862) (15,297)
Total liabilities (26,987) (24,438)
Net assets 5,742 5,696
Equity
Share capital 104 104
Share premium and capital redemption 5,836 5,836
Retained earnings (1,525) (315)
Exchange translation reserve 896 (298)
Equity attributable to owners of the parent 5,311 5,327
Non-controlling interests 431 369
Total equity 5,742 5,696
Consolidated Statement of Changes in Equityfor the year ended 30 September
£ million Sharecapital Sharepremiumand capitalredemption Retainedearnings Exchangetranslationreserve Equityattributableto ownersof the parent Non-controllinginterests Totalequity
At 1 October 2015 104 5,836 (315) (298) 5,327 369 5,696
Profit for the year - - 631 - 631 38 669
Other comprehensive income - - (489) 1,194 705 66 771
Total comprehensive income - - 142 1,194 1,336 104 1,440
Transactions with owners
Cash from employees on maturity/exercise of share schemes - - 9 - 9 - 9
Purchase of shares by Employee Share Ownership Trusts - - (7) - (7) - (7)
Costs of employees' services compensated by share schemes - - 26 - 26 - 26
Current tax on share-based payments - - 6 - 6 - 6
Dividends paid - - (1,386) - (1,386) (42) (1,428)
At 30 September 2016 104 5,836 (1,525) 896 5,311 431 5,742
At 1 October 2014 104 5,836 (756) (119) 5,065 398 5,463
Profit for the year - - 1,691 - 1,691 32 1,723
Other comprehensive income - - (23) (179) (202) (19) (221)
Total comprehensive income - - 1,668 (179) 1,489 13 1,502
Transactions with owners
Cash from employees on maturity/exercise of share schemes - - 7 - 7 - 7
Costs of employees' services compensated by share schemes - - 22 - 22 - 22
Current tax on share-based payments - - 3 - 3 - 3
Dividends paid - - (1,259) - (1,259) (42) (1,301)
At 30 September 2015 104 5,836 (315) (298) 5,327 369 5,696
Consolidated Cash Flow Statementfor the year ended 30 September
£ million 2016 2015
Cash flows from operating activities
Operating profit 2,229 1,988
Dividends received from investments accounted for under the equity method 19 24
Depreciation, amortisation and impairment 1,244 940
Loss/(profit) on disposal of property, plant and equipment and software 6 (2)
Profit on disposal of intellectual property - (31)
Post-employment benefits (111) (50)
Costs of employees' services compensated by share schemes 29 25
Movement in provisions 4 (67)
Operating cash flows before movement in working capital 3,420 2,827
(Increase)/decrease in inventories (149) 21
Decrease in trade and other receivables 171 218
Increase in trade and other payables 116 89
Movement in working capital 138 328
Tax paid (401) (408)
Net cash flows generated from operating activities 3,157 2,747
Cash flows from investing activities
Interest received 7 10
Purchase of property, plant and equipment (164) (194)
Proceeds from sale of property, plant and equipment 42 39
Proceeds from the sale of intellectual property - 31
Purchase of intangible assets - software (51) (44)
Purchase of intellectual property rights (14) -
Internally generated intellectual property rights (2) (16)
Purchase of brands and operations - (4,613)
Net cash used in investing activities (182) (4,787)
Cash flows from financing activities
Interest paid (547) (459)
Cash from employees on maturity/exercise of share schemes 9 7
Purchase of shares by Employee Share Ownership Trusts (7) -
Increase in borrowings 897 4,720
Repayment of borrowings (2,637) (380)
Loan to joint ventures (9) -
Cash flows relating to derivative financial instruments (209) 139
Dividends paid to non-controlling interests (42) (42)
Dividends paid to owners of the parent (1,386) (1,259)
Net cash (used in)/generated from financing activities (3,931) 2,726
Net (decrease)/increase in cash and cash equivalents (956) 686
Cash and cash equivalents at the start of year 2,042 1,413
Effect of foreign exchange rates on cash and cash equivalents 188 (57)
Cash and cash equivalents at the end of year 1,274 2,042
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
New Accounting Standards and Interpretations
There have been no new standards which became effective for the current
reporting period, that have had a material effect on the Group.
Certain changes to IFRS will be applicable to the consolidated financial
statements in future years. IFRS 15 Revenue from Contracts with Customers
which is effective for the Group for its 2019 financial statements will result
in some items currently classified as costs being netted against revenue. It
is not expected to have material effect on the Group's net asset or results.
Management has yet to fully assess the impact of IFRS 9 Financial Instruments
which is also effective for the Group for its 2019 financial statements. Our
initial assessment of IFRS 16 Leases, effective for the Group for its 2020
financial statements, is that it will not have a material effect on the
Group's net assets or results. There are no other standards or interpretations
that are expected to have a material effect on the Group's net assets or
results.
2. Critical Accounting Estimates and Judgements
The Group makes estimates and assumptions regarding the future. Estimates and
judgements are continually evaluated based on historical experience, and other
factors, including expectations of future events that are believed to be
reasonable under the circumstances.
In the future, actual experience may deviate from these estimates and
assumptions. The estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the current financial year are discussed in the financial
statements for the year ended 30 September 2016, which will be available on
our website www.imperialbrandsplc.com in due course.
3. Segment Information
Imperial Brands comprises two distinct businesses - Tobacco and Logistics.
The Tobacco business comprises the manufacture, marketing and sale of tobacco
and tobacco-related products, including sales to (but not by) the Logistics
business. The Logistics business comprises the distribution of tobacco
products for tobacco product manufacturers, including Imperial Brands, as well
as a wide range of non-tobacco products and services. The Logistics business
is run on an operationally neutral basis ensuring all customers are treated
equally, and consequently transactions between the Tobacco and Logistics
businesses are undertaken on an arm's length basis reflecting market prices
for comparable goods and services.
The Tobacco business is managed based on the strategic role of groups of
markets rather than their geographic proximity, with divisions focused on
prioritising growth or returns. Returns Markets are typically mature markets
where we have relatively large market shares and our objective is to maximise
returns over the long term by growing profits while actively managing market
share. Growth Markets are mainly large profit or volume pools where we
typically have market shares below 15 per cent and where our total tobacco
approach provides many opportunities for share and profit growth both now and
in the future. Following the 2015 acquisition, the USA has become a
significant market and is therefore disclosed separately.
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 Growth Markets (which includes premium cigar and
Fontem Ventures), USA, Returns Markets North, Returns Markets South and
Logistics. Prevailing market characteristics such as maturity, excise
structure and the breadth of the distribution networks determine the
allocation of Returns Markets between Returns Markets North and Returns
Markets South.
Operating segments are considered to be business markets. The main tobacco
business markets within the Growth, Returns Market North and Returns Market
South reportable segments are:
- Growth Markets - Iraq, Norway, Russia, Saudi Arabia, Taiwan (also
includes premium cigar and Fontem Ventures);
- Returns Markets North - Australia, Belgium, Germany, Netherlands,
Poland, United Kingdom; and
- Returns Markets South - France, Spain and our African markets
including Algeria, Ivory Coast, Morocco.
Tobacco
£ million unless otherwise indicated 2016 2015
Revenue 20,890 19,011
Net revenue 7,167 6,251
Operating profit 2,126 1,910
Adjusted operating profit 3,360 2,895
Adjusted operating margin % 46.9 46.3
Logistics
£ million unless otherwise indicated 2016 2015
Revenue 7,505 7,025
Distribution fees 809 749
Operating profit 98 74
Adjusted operating profit 176 154
Adjusted operating margin % 21.8 20.6
Revenue
2016 2015
£ million Totalrevenue Externalrevenue Total Revenue External revenue
Tobacco
Growth Markets 3,137 3,085 3,019 2,970
USA 2,942 2,942 1,415 1,415
Returns Markets North 12,537 12,504 12,332 12,303
Returns Markets South 2,274 1,598 2,245 1,576
Total Tobacco 20,890 20,129 19,011 18,264
Logistics 7,505 7,505 7,025 7,025
Eliminations (761) - (747) -
Total Group 27,634 27,634 25,289 25,289
Tobacco net revenue
£ million 2016 2015
Growth Markets 1,568 1,449
USA 1,477 707
Returns Markets North 2,645 2,649
Returns Markets South 1,477 1,446
Total Tobacco 7,167 6,251
Tobacco net revenue excludes revenue from the sale of peripheral products of
£190 million (2015: £175 million).
Adjusted operating profit and reconciliation to profit before tax
£ million 2016 2015
Tobacco
Growth Markets 443 409
USA 823 375
Returns Markets North 1,439 1,475
Returns Markets South 655 636
Total Tobacco 3,360 2,895
Logistics 176 154
Eliminations 5 4
Adjusted operating profit 3,541 3,053
Acquisition costs - Tobacco - (40)
Amortisation of acquired intangibles - Tobacco (927) (617)
Amortisation of acquired intangibles - Logistics (78) (80)
Restructuring costs - Tobacco (307) (328)
Operating profit 2,229 1,988
Net finance costs (1,350) (261)
Share of profit of investments accounted for using the equity method 28 29
Profit before tax 907 1,756
4. Restructuring Costs and Provisions
Restructuring costs
£ million 2016 2015
Employment related 144 100
Asset impairments 51 113
Other charges 112 115
307 328
The charge for the year ending 30 September 2016 was £307 million (2015: £328
million) and relates mainly to our cost optimisation programme announced in
2013 (£188 million); this includes the closure of the Logrono (£108 million)
and Mullingar (£21 million) factories, which were communicated earlier in the
year. An additional £49 million was charged for integration costs relating to
the assets acquired from Lorillard in 2015. The balance of £70 million covers
all other restructuring activities across the Group.
The cost optimisation programme is expected to have a cash implementation cost
in the region of £600 million and generate savings of £300 million by 2018.
In 2016 the cash cost of the programme was £80 million (2015: £169 million),
bringing the cumulative net cash cost of the programme to £420 million.
Provisions
2016
£ million Restructuring Other Total
At 1 October 2015 278 139 417
Additional provisions charged to the consolidated income statement 128 67 195
Amounts used (137) (19) (156)
Unused amounts reversed (2) (39) (41)
Exchange movements 37 23 60
At 30 September 2016 304 171 475
Analysed as:
£ million 2016 2015
Current 188 197
Non-current 287 220
475 417
5. Net Finance Costs and Reconciliation to Adjusted Net Finance Costs
£ million 2016 2015
Reported net finance costs 1,350 261
Fair value gains on derivative financial instruments 484 691
Fair value losses on derivative financial instruments (825) (578)
Exchange (losses)/gains on financing activities (466) 113
Net fair value and exchange (losses)/gains on financial instruments (807) 226
Interest income on net defined benefit assets 143 138
Interest cost on net defined benefit liabilities (162) (157)
Unwind of discount on redundancy and other long-term provisions - (1)
Post-employment benefits net financing cost (19) (20)
Adjusted net finance costs 524 467
Comprising
Interest on bank deposits (7) (6)
Interest on bank loans and other loans 531 473
Adjusted net finance costs 524 467
6. Taxation and Reconciliation to Adjusted Tax Charge
Analysis of charge in the year
£ million 2016 2015
Current tax
UK Corporation tax 33 36
Overseas tax 467 449
Total current tax 500 485
Deferred tax movement (262) (452)
Total tax charged to the consolidated income statement 238 33
Reconciliation from reported tax to adjusted tax
The table below shows the taxation impact of the adjustments made to reported
profit before tax in order to arrive at the adjusted measure of earnings
disclosed in note 8.
£ million 2016 2015
Reported tax charge 238 33
Deferred tax on amortisation of acquired intangibles 261 149
Tax on net fair value and exchange movements on financial instruments 80 (11)
Tax on post-employment benefits net financing cost 7 6
Tax on restructuring costs 79 91
Tax on unrecognised losses (56) 273
Adjusted tax charge 609 541
Factors affecting the tax charge for the year
The tax on the Group's profit before tax differs from the theoretical amount
that would arise using the average of the enacted UK corporation tax rates for
the year of 20.0 per cent (2015: 20.5 per cent) as follows:
£ million 2016 2015
Profit before tax 907 1,756
Tax at the UK Corporation tax rate 181 360
Tax effects of:
Differences in effective tax rates on overseas earnings (90) (110)
Movement in provision for uncertain tax positions 43 44
Remeasurement of deferred tax balances (101) (310)
Remeasurement of deferred tax balances arising from changes in tax rates - (13)
Permanent differences 170 68
Adjustments in respect of prior years 35 (6)
Total tax charged to the consolidated income statement 238 33
Differences in effective tax rates on overseas earnings represents the impact
of worldwide profits being taxed at rates different from 20 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. The movement
between 2015 and 2016 is largely driven by increased earnings in the USA and
other jurisdictions where the tax rate is higher than 20 per cent.
Remeasurement of deferred tax balances mainly represents the recognition of
deferred tax assets previously not recognised. Of the £101 million (2015:
£310 million) remeasurement, most of which relates to the Group's Spanish
business, £89 million (2015: nil) relates to tax deductible amortisation and
the balance of £12 million (2015: £310 million) relates to losses and other
deferred tax assets. The 2015 remeasurement related to the recognition of
deferred tax assets following the USA acquisition. 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.
Permanent differences include £79 million in respect of non-deductible
exchange losses (2015: £33 million gains) and £31 million (2015: £18 million)
in respect of non-deductible interest expenses.
Movement on current tax account
£ million 2016 2015
At 1 October (111) (32)
Charged to the consolidated income statement (500) (485)
Charged to equity (6) (3)
Cash paid 401 408
Exchange movements (24) -
Other movements 1 1
At 30 September (239) (111)
The cash tax paid in the
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