REG - Imperial Brands PLC - Final Results <Origin Href="QuoteRef">IMB.L</Origin> - Part 2
07/11/2017 07:06
- Part 2: For the preceding part double click ID:nRSG7546Va
2.6 per
cent against industry volumes down 4.5 per cent. Market size declines were
affected by new regulations, including EUTPD II, and increased excise in
certain markets.
We achieved an improving price/mix during the year with second half price/mix
of 2.6 per cent to deliver a 1.5 per cent improvement for the year. Tobacco
net revenue was down 2.6 per cent at constant currency for the year reflecting
our decision to invest behind our portfolio but reported an improved second
half performance up 0.1 per cent on the previous year. We improved the quality
of our revenue with the proportion of Group net revenue from our Growth and
Specialist Brands increasing to now represent 62.7 per cent.
Tobacco adjusted operating profit decreased 2.4 per cent at constant currency
reflecting our increased investment to improve sales growth and the impact of
the tough trading environment. We mitigated these through increased cost
control initiatives, including our cost optimisation programme and other
non-operating income of £114 million. This includes £81 million from pension
restructuring and £18 million curtailment gain from US post-retirement
benefits.
Logista reported adjusted operating profit of £181 million compared with £176
million last year, reflecting the benefit of foreign exchange movements. On a
constant currency basis, adjusted operating profit fell 8.0 per cent as a
result of the excise increases in France and Italy not being passed on by the
tobacco manufacturers and a Spanish court ruling over pensioner free tobacco
rights. These were partially offset with the benefit from the sale of shares
in Banca ITB.
Adjusted net finance costs were higher at £537 million (2016: £524 million)
reflecting the foreign currency impact of a higher euro and US dollar against
the pound.
Reported net finance costs were £450 million (2016: £1,350 million),
incorporating the impact of the net fair value and exchange gains on financial
instruments of £112 million (2016: losses of £807 million) and post employment
benefits net financing costs of £25 million (2016: £19 million).
Our all in cost of debt remained at 3.9 per cent (2016: 3.9 per cent) as older
debt maturing at higher rates was offset by higher USD floating interest
rates. Our interest cover increased to 7.5 times (2016: 7.1 times). We remain
fully compliant with all our banking covenants and remain committed to
retaining our investment grade ratings.
After tax at an effective adjusted rate of 20.0 per cent (2016: 20.0 per
cent), adjusted earnings per share grew by 7.0 per cent to 267.0 pence, a
reduction of 2.2 per cent at constant currency. The effective reported tax
rate is 22.2 per cent (2016: 26.2 per cent).
The effective tax rate is sensitive to the geographic mix of profits,
reflecting a combination of higher rates in certain markets such as the USA
and lower rates in other markets such as the UK. The rate is also sensitive to
future legislative changes affecting international businesses such as changes
arising from the OECD's (Organisation for Economic Co-operation and
Development) Base Erosion Profit Shifting (BEPS) work.
Our Taxation Policy is publicly available and can be found in the Governance
section of our corporate website - www.imperialbrandsplc.com.
Reported earnings per share were 147.6 pence (2016: 66.1 pence) reflecting non
cash amortisation of £1,092 million (2016: £1,005 million) and restructuring
costs of £391 million (2016: £307 million), as well as the effects of fair
value and exchange losses in finance costs mentioned above. The difference
between reported (147.6p) and adjusted earnings per share (267.0p) 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 reduced by 2.2 per cent.
The restructuring charge for the year of £391 million (2016: £307 million)
relates mainly to our cost optimisation programme announced in 2013 and 2016.
The total restructuring cash flow in the year ended 30 September 2017 was £201
million (2016: £268 million).
Cost Optimisation
We continue to simplify the business and optimise our manufacturing footprint
and overhead base to realise operational efficiencies.
Phase 1 of our cost optimisation programme, announced in January 2013, is
expected to deliver savings of £300 million per annum from September 2018 at a
cash restructuring cost in the region of £600 million and Phase II, announced
in November 2016, is expected to deliver a further £300 million of annual
savings from September 2020, at a cash restructuring cost in the region of
£750 million.
Through our continued focus on reducing product cost and overheads we realised
cost savings of £130 million in 2017 (£50 million from Phase I and £80 million
from Phase II) bringing the cumulative cost savings to £370 million (£290m for
Phase I and £80 million for Phase II).
The cash restructuring cost of Phase I of the programme was £42 million (2016:
£123 million) and £132 million (£2016: nil) for Phase II, bringing the
cumulative net cash cost of the programme to £610 million (Phase I £478
million, Phase II £132 million).
Capital Discipline
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). Our investment appraisal framework aims to 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.
We typically seek an overall internal rate of return in excess of 13 per cent
across the investments we make in our existing business in order to support
our investment choices and underpin returns for shareholders. Our ROIC measure
increased this year to 14.3 per cent (2016: 13.9 per cent) assisted by our
continued focus on capital discipline.
During the year we took the opportunity to realise value via a further
sell-down of our Logista holding, and the proceeds have been used to
repurchase shares and reduce debt, redeploying capital in an efficient
manner.
Cash flow and Net Debt
The conversion of adjusted operating profit to operating cash flow remained
strong at 91 per cent (2016: 95 per cent), rising to 96 per cent when
restructuring cash flows are excluded. We achieved another year of working
capital reduction and neutrality of net capex and depreciation. Principal
financing cash flows in 2017 comprise the payment of the final dividend,
interest payments, the repayment of a £450 million bond and $900 million term
loans that were put in place to finance the US acquisition, the sale of
Logista shares which reduced our holding by 10 per cent of the share capital
and associated share buy-back.
Reported net debt and adjusted net debt have decreased by £0.8 billion and
£0.7 billion respectively. The decrease in reported net debt represents a £0.8
billion debt reduction from our continued focus on capital discipline after
reflecting the impact of the Group's share re-purchases of £0.1 billion.
Adjusted net debt decreases by £0.7 billion, reflecting reported net debt
movements plus an adverse movement of £0.1 billion relating to the fair value
of interest rate derivatives.
The denomination of our closing adjusted net debt was split approximately 57
per cent euro and 43 per cent US dollar. As at 30 September 2017, the Group
had committed financing in place of around £15.7 billion. Some 21 per cent was
bank facilities, and 79 per cent was raised through capital markets.
During the year the remaining bank facilities that were put in place
specifically for the USA acquisition were repaid from free cash flow
generation, and we issued a new capital markets bonds of E1 billion.
Strong Dividend Growth
Our continued strong cash flow generation has enabled a further £0.8 billion
of debt reduction at constant currency, and delivered another year of 10 per
cent growth in our dividend, demonstrating our commitment to growing
shareholder returns. This is our ninth consecutive year of double digit
dividend growth. Our dividend pay-out ratio of 64 per cent remains one of the
lowest among our tobacco peers.
The Group has paid two interim dividends of 25.85 pence per share each in June
2017 and September 2017, 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 59.51 pence per share and
will propose a final dividend of 59.51 pence per share, bringing the total
dividend for the year to 170.72 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 29 December 2017 with an
ex-dividend date of 16 November 2016. Subject to AGM approval, the proposed
final dividend will be paid on 29 March 2018, with an ex-dividend date of 22
February 2018.
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 concludes that it is appropriate to
prepare the financial statements on a going concern basis.
Oliver Tant
Chief Financial Officer
SUMMARY OF KEY FOOTPRINT FINANCIALS & METRICS
Full Year Result Change
FOOTPRINT 2017 2016 Actual ConstantCurrency
Volume
Growth Markets bn SE 74.8 76.3 -2.0%
US Market bn SE 23.3 24.9 -6.4%
Returns Markets North bn SE 89.8 94.4 -4.9%
Returns Markets South bn SE 77.3 80.9 -4.4%
Returns Markets Total bn SE 167.1 175.3 -4.7%
Total Group bn SE 265.2 276.5 -4.1%
Tobacco Net Revenue
Growth Markets £m 1,768 1,568 +12.8% -0.2%
US Market £m 1,665 1,477 +12.7% +0.3%
Returns Markets North £m 2,755 2,645 +4.2% -4.2%
Returns Markets South £m 1,569 1,477 +6.2% -5.1%
Returns Markets Total £m 4,324 4,122 +4.9% -4.5%
Total Group £m 7,757 7,167 +8.2% -2.6%
Net Revenue per '000 SE
Growth Markets £ 23.64 20.56 +15.0% +1.8%
US Market £ 71.47 59.23 +20.7% +7.3%
Returns Markets North £ 30.69 28.01 +9.6% +0.7%
Returns Markets South £ 20.29 18.27 +11.1% -0.7%
Returns Markets Total £ 25.88 23.51 +10.1% +0.2%
Total Group £ 29.25 25.92 +12.9% +1.6%
Price/Mix
Growth Markets % +14.8% +1.8%
US Market % +19.3% +6.9%
Returns Markets North % +9.1% +0.7%
Returns Markets South % +10.6% -0.7%
Returns Markets Total % +9.6% +0.2%
Total Group % +12.3% +1.5%
Adjusted Tobacco Operating Profit
Growth Markets £m 411 443 -7.2% -17.2%
US Market £m 1,013 823 +23.1% +10.1%
Returns Markets North £m 1,485 1,439 +3.2% -3.3%
Returns Markets South £m 686 655 +4.7% -6.0%
Returns Markets Total £m 2,171 2,094 +3.7% -4.2%
Total Group £m 3,595 3,360 +7.0% -2.4%
Logistics
Logistics Distribution Fees £m 914 809 +13.0% +1.2%
Logistics Operating Profit £m 181 176 +2.8% -8.0%
Logistics Operating Margin % 19.8 21.8 -200 bps
SUMMARY OF KEY PORTFOLIO FINANCIALS & METRICS
Full Year Result Change
PORTFOLIO 2017 2016 Actual ConstantCurrency
Growth Brand Volume
Growth Markets bn SE 49.9 46.0 +8.5%
US Market bn SE 6.2 6.1 +1.6%
Returns Markets North bn SE 58.3 55.7 +4.7%
Returns Markets South bn SE 45.3 43.5 +4.1%
Returns Markets Total bn SE 103.6 99.2 +4.5%
Total Group bn SE 159.6 151.3 +5.5%
Growth Brands as % of Volume
Growth Markets % 66.7 60.4 +630 bps
US Market % 26.4 24.5 +190 bps
Returns Markets North % 64.9 58.9 +600 bps
Returns Markets South % 58.6 53.8 +480 bps
Returns Markets Total % 62.0 56.6 +540 bps
Total Group % 60.2 54.7 +550 bps
Growth Brand Market Share
Growth Markets % 4.3% 3.7% +60 bps
US Market % 2.5% 2.3% +20 bps
Returns Markets North % 16.6% 15.0% +160 bps
Returns Markets South % 16.9% 16.2% +70 bps
Returns Markets Total % 16.7% 15.5% +120 bps
Total Group % 8.5% 7.7% +80 bps
Growth Brand Net Revenue
Growth Markets £m 868 741 +17.1% +2.7%
US Market £m 315 274 +15.0% +2.1%
Returns Markets North £m 1,658 1,512 +9.7% -0.6%
Returns Markets South £m 850 738 +15.2% +2.9%
Returns Markets Total £m 2,508 2,250 +11.5% +0.6%
Total Group £m 3,690 3,265 +13.0% +1.2%
Growth Brands as % of Net Revenue
Growth Markets % 49.1 47.2 +190 bps
US Market % 18.9 18.6 +30 bps
Returns Markets North % 60.2 57.2 +300 bps
Returns Markets South % 54.2 50.0 +420 bps
Returns Markets Total % 58.0 54.6 +340 bps
Total Group % 47.6 45.6 +200 bps
Specialist Brand Net Revenue
Total Group £m 1,172 1,042 +12.5% +2.2%
% of Total Net Revenue % 15.1 14.5 +60 bps
Growth & Specialist Brands as a percentage of Group Net Revenue 62.7 60.1 +260 bps
Portfolio Brands as % of Tobacco Net Revenue
Total Group £m 2,895 2,860 +1.2% -8.6%
% of Total Net Revenue % 37.3 39.9 -260 bps
FINANCIAL STATEMENTS
The figures and financial information for year ended 30 September 2017 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 2017 2016
Revenue 3 30,247 27,634
Duty and similar items (14,967) (13,535)
Other cost of sales (8,853) (8,143)
Cost of sales (23,820) (21,678)
Gross profit 6,427 5,956
Distribution, advertising and selling costs (2,434) (2,070)
Amortisation of acquired intangibles (1,092) (1,005)
Restructuring costs 4 (391) (307)
Other expenses (232) (345)
Administrative and other expenses (1,715) (1,657)
Operating profit 3 2,278 2,229
Investment income 910 634
Finance costs (1,360) (1,984)
Net finance costs 5 (450) (1,350)
Share of profit of investments accounted for using the equity method 33 28
Profit before tax 1,861 907
Tax 6 (414) (238)
Profit for the year 1,447 669
Attributable to:
Owners of the parent 1,409 631
Non-controlling interests 38 38
Earnings per ordinary share (pence)
- Basic 8 147.6 66.1
- Diluted 8 147.2 66.0
Consolidated Statement of Comprehensive Incomefor the year ended 30 September
£ million 2017 2016
Profit for the year 1,447 669
Other comprehensive (expense)/income
Exchange movements (57) 1,260
Items that may be reclassified to profit and loss (57) 1,260
Net actuarial gains/(losses) on retirement benefits 649 (604)
Deferred tax relating to net actuarial (gains)/losses on retirement benefits (120) 115
Items that will not be reclassified to profit and loss 529 (489)
Other comprehensive income for the year, net of tax 472 771
Total comprehensive income for the year 1,919 1,440
Attributable to:
Owners of the parent 1,870 1,336
Non-controlling interests 49 104
Total comprehensive income for the year 1,919 1,440
Reconciliation from Operating Profit to Adjusted Operating Profit
£ million Notes 2017 2016
Operating profit 2,278 2,229
Amortisation of acquired intangibles 1,092 1,005
Restructuring costs 4 391 307
Adjusted operating profit 3,761 3,541
Reconciliation from Net Finance Costs to Adjusted Net Finance Costs
£ million Notes 2017 2016
Net finance costs (450) (1,350)
Net fair value and exchange (gains)/losses on financial instruments 5 (112) 807
Post-employment benefits net financing cost 5 25 19
Adjusted net finance costs 5 (537) (524)
Consolidated Balance Sheetat 30 September
£ million Notes 2017 2016
Non-current assets
Intangible assets 19,763 20,704
Property, plant and equipment 1,865 1,959
Investments accounted for using the equity method 785 744
Retirement benefit assets 358 5
Trade and other receivables 123 89
Derivative financial instruments 10 583 1,063
Deferred tax assets 617 631
24,094 25,195
Current assets
Inventories 3,604 3,498
Trade and other receivables 2,539 2,671
Current tax assets 69 45
Cash and cash equivalents 9 624 1,274
Derivative financial instruments 10 60 46
6,896 7,534
Total assets 30,990 32,729
Current liabilities
Borrowings 9 (2,353) (1,544)
Derivative financial instruments 10 (42) (118)
Trade and other payables (8,104) (7,991)
Current tax liabilities (192) (284)
Provisions 4 (187) (188)
(10,878) (10,125)
Non-current liabilities
Borrowings 9 (10,196) (12,394)
Derivative financial instruments 10 (1,166) (1,646)
Trade and other payables (21) (17)
Deferred tax liabilities (1,091) (1,034)
Retirement benefit liabilities (1,074) (1,484)
Provisions 4 (338) (287)
(13,886) (16,862)
Total liabilities (24,764) (26,987)
Net assets 6,226 5,742
Equity
Share capital 104 104
Share premium and capital redemption 5,717 5,836
Retained earnings (965) (1,525)
Exchange translation reserve 828 896
Equity attributable to owners of the parent 5,684 5,311
Non-controlling interests 542 431
Total equity 6,226 5,742
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 2016 104 5,836 (1,525) 896 5,311 431 5,742
Profit for the year - - 1,409 - 1,409 38 1,447
Other comprehensive income - - 529 (68) 461 11 472
Total comprehensive income - - 1,938 (68) 1,870 49 1,919
Transactions with owners
Cash from employees on maturity/exercise of share schemes - - 12 - 12 - 12
Costs of employees' services compensated by share schemes - - 25 - 25 - 25
Current tax on share-based payments - - 3 - 3 - 3
Cancellation of share capital - (119) - - (119) - (119)
Change in non-controlling interests - - (111) - (111) 111 -
Proceeds, net of fees, from disposal of Logista shares - - 221 - 221 - 221
Dividends paid - - (1,528) - (1,528) (49) (1,577)
At 30 September 2017 104 5,717 (965) 828 5,684 542 6,226
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
Consolidated Cash Flow Statementfor the year ended 30 September
£ million 2017 2016
Cash flows from operating activities
Operating profit 2,278 2,229
Dividends received from investments accounted for under the equity method 28 19
Depreciation, amortisation and impairment 1,364 1,244
(Profit)/loss on disposal of assets (24) 6
Post-employment benefits (157) (111)
Costs of employees' services compensated by share schemes 27 29
Movement in provisions 52 4
Operating cash flows before movement in working capital 3,568 3,420
Increase in inventories (76) (149)
Decrease in trade and other receivables 189 171
(Decrease)/increase in trade and other payables (46) 116
Movement in working capital 67 138
Tax paid (570) (401)
Net cash flows generated from operating activities 3,065 3,157
Cash flows from investing activities
Interest received 11 7
Loan to joint ventures (17) (9)
Loan to third parties (30) -
Purchase of property, plant and equipment (191) (164)
Proceeds from sale of property, plant and equipment 30 42
Purchase of intangible assets - software (44) (51)
Purchase of intellectual property rights (15) (14)
Internally generated intellectual property rights - (2)
Purchase of brands and operations (31) -
Net cash used in investing activities (287) (191)
Cash flows from financing activities
Interest paid (548) (547)
Cash from employees on maturity/exercise of share schemes 12 9
Purchase of shares by Employee Share Ownership Trusts - (7)
Increase in borrowings 852 897
Repayment of borrowings (2,183) (2,637)
Cash flows relating to derivative financial instruments (37) (209)
Repurchase of shares (119) -
Proceeds from sale of shares in subsidiary to non-controlling interests 221 -
Dividends paid to non-controlling interests (49) (42)
Dividends paid to owners of the parent (1,528) (1,386)
Net cash used in financing activities (3,379) (3,922)
Net decrease in cash and cash equivalents (601) (956)
Cash and cash equivalents at the start of year 1,274 2,042
Effect of foreign exchange rates on cash and cash equivalents (49) 188
Cash and cash equivalents at the end of year 624 1,274
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
New Accounting Standards and Interpretations
There have been no new standards or amendments which became effective for the
current reporting period, that have had a material effect on the Group.
The following Standards which have not been adopted in these financial
statements were in issue but not yet effective for the 2017 year end. IFRS 9
'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers'
will be adopted in the financial year commencing 1 October 2018, and IFRS 16
'Leases' will be adopted in the year commencing 1 October 2019.
IFRS 9 'Financial Instruments' published in July 2014 is effective for periods
beginning on or after 1 January 2018, with early adoption permitted. This
standard replaces IAS 39 'Financial Instruments: Recognition and Measurement'
and includes revised guidance on:
Classification and measurement: Financial assets will be classified as either
amortised cost, fair value through other comprehensive income, or fair value
through profit or loss, depending on the entity's business model and the
contractual cash flow characteristics of the instruments. The application of
this requirement is not expected to materially impact the financial
statements.
Impairment of financial assets: Impairment will be based on a forward looking
expected credit loss approach for financial assets, rather than the incurred
loss approach applicable under IAS 39. At the current time the application of
this requirement has not been fully quantified however is not expected to
materially impact the financial statements.
Hedge Accounting: Adoption of the IFRS 9 hedge accounting requirements is
currently optional as organisations are allowed to continue to apply the IAS
39 requirements. IFRS 9 contains revised requirements on hedge accounting,
which aligns the accounting approach with an entity's risk management
strategies and risk management objectives. The Group is currently assessing
whether to adopt the hedge accounting aspects of IFRS 9, or continue to apply
the IAS 39 rules on hedge accounting.
IFRS 15 'Revenue from Contracts with Customers' is effective for periods
beginning on or after 1 January 2018, with early adoption permitted. IFRS 15
introduces an amended framework for revenue recognition and replaces the
existing guidance in IAS 18 'Revenue'. The standard provides revised guidance
on revenue accounting, matching income recognition to the delivery of
performance obligations in contractual arrangements for the provision of goods
or services. It also provides different guidance on the measurement of
revenue contracts involving discounts, rebates and payments to customers.
The Group is assessing the impact of adopting IFRS 15. From the work
undertaken to date, the Group expects to reclassify certain distribution,
advertising and selling costs arising from payments to customers as discounts
from revenue. This will reduce the overall level of revenue, but will have no
net impact on gross profit. The adoption of the standard has not yet been
fully quantified however is not expected to have any other material impact on
the Group's net assets or results.
IFRS 16 'Leases' (not yet endorsed by the EU) is effective from 1 January
2019, with early adoption permitted. The new standard requires operating
leases to be accounted for through the recognition of a 'right of use asset'
and a corresponding lease liability. Interest-bearing borrowings and
non-current assets will increase on implementation of this standard.
Operating lease costs will no longer be classified within the income statement
based on amounts paid, but via a 'right of use asset' depreciation charge
recognised within operating profit and a lease interest expense within finance
costs, subject to the exemptions on amount and duration. The Group is
currently assessing the impact of the new standard. Our initial assessment of
IFRS16 leases 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 2017, 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 2017 2016
Revenue 22,786 20,890
Net revenue 7,757 7,167
Operating profit 2,199 2,126
Adjusted operating profit 3,595 3,360
Adjusted operating margin % 46.3 46.9
Logistics
£ million unless otherwise indicated 2017 2016
Revenue 8,269 7,505
Distribution fees 914 809
Operating profit 94 98
Adjusted operating profit 181 176
Adjusted operating margin % 19.8 21.8
Revenue
2017 2016
£ million Totalrevenue Externalrevenue Total Revenue External revenue
Tobacco
Growth Markets 3,665 3,602 3,137 3,085
USA 3,125 3,125 2,942 2,942
Returns Markets North 13,533 13,503 12,537 12,504
Returns Markets South 2,463 1,748 2,274 1,598
Total Tobacco 22,786 21,978 20,890 20,129
Logistics 8,269 8,269 7,505 7,505
Eliminations (808) - (761) -
Total Group 30,247 30,247 27,634 27,634
Tobacco net revenue
£ million 2017 2016
Growth Markets 1,768 1,568
USA 1,665 1,477
Returns Markets North 2,755 2,645
Returns Markets South 1,569 1,477
Total Tobacco 7,757 7,167
Tobacco net revenue excludes revenue from the sale of peripheral products of
£62 million (2016: £190 million).
Adjusted operating profit and reconciliation to profit before tax
£ million 2017 2016
Tobacco
Growth Markets 411 443
USA 1,013 823
Returns Markets North 1,485 1,439
Returns Markets South 686 655
Total Tobacco 3,595 3,360
Logistics 181 176
Eliminations (15) 5
Adjusted operating profit 3,761 3,541
Amortisation of acquired intangibles - Tobacco (1,005) (927)
Amortisation of acquired intangibles - Logistics (87) (78)
Restructuring costs - Tobacco (391) (307)
Operating profit 2,278 2,229
Net finance costs (450) (1,350)
Share of profit of investments accounted for using the equity method 33 28
Profit before tax 1,861 907
4. Restructuring Costs and Provisions
Restructuring costs
£ million 2017 2016
Employment related 244 144
Asset impairments 79 51
Other charges 68 112
391 307
Restructuring costs analysed by workstream:
£ million 2017 2016
Cost optimisation programme (1) 383 222
Acquisition integration costs 4 49
Other restructuring activities (1) 4 36
391 307
(1) £34 million of costs classified as other restructuring activities in the
2016 have been restated to be included within the cost optimisation
programme.
The cost optimisation programme (Phase I announced in 2013 and Phase II
announced in November 2016) is part of the Group's change in strategic
direction to achieve a unique, non-recurring and fundamental transformation of
the business. The costs of factory closures and implementation of a
standardised operating model are considered to be one off as they are a
permanent scaling down of capacity and a once in a generation transformational
change respectively. The cost optimisation programme is a discrete project
which, given its scale, will be delivered over a number of years and once
delivered the associated restructuring costs will cease.
Costs of implementing cost savings that do not arise from the change in
strategic direction are excluded from restructuring costs.
Cost optimisation programme costs of £383 million (2016: £222 million)
comprise £278 million incurred in restructuring our product manufacturing
activities including France, Morocco, Russia and the US and £105 million in
respect of restructuring overheads mainly by implementing a standardised
operating model.
Of the remaining £8 million (2016: £85 million), £4 million (2016: £49
million) of acquisition integration costs were in respect of the assets
acquired from Lorrilard in 2015 and £4 million (2016: £36 million) of other
restructuring activity was in respect of pre-2013 restructuring.
The cost optimisation programme Phase I is expected to have a cash
implementation cost in the region of £600 million and generate savings of £300
million by 2018, and Phase II is expected to have a cash implementation cost
in the region of £750 million, generating savings of a further £300 million by
2020. In 2017 the cash cost of Phase I of the programme was £42 million
(2016: £123 million) and £132 million (£2016: nil) for Phase II, bringing the
cumulative net cash cost of the programme to £610 million (Phase I £478
million, Phase II £132 million).
The total restructuring cash spend in the year was £201 million (2016: 268
million).
Restructuring costs are included within administrative and other expenses in
the consolidated income statement.
Provisions
2017
£ million Restructuring Other Total
At 1 October 2016 304 171 475
Additional provisions charged to the consolidated income statement 222 52 274
Amounts used (119) (22) (141)
Unused amounts reversed (31) (59) (90)
Exchange movements 4 3 7
At 30 September 2017 380 145 525
Analysed as:
£ million 2017 2016
Current 187 188
Non-current 338 287
525 475
5. Net Finance Costs and Reconciliation to Adjusted Net Finance Costs
£ million 2017 2016
Reported net finance costs 450 1,350
Fair value gains on derivative financial instruments 744 484
Fair value losses on derivative financial instruments (679) (825)
Exchange gains/(losses) on financing activities 47 (466)
Net fair value and exchange gains/(losses) on financial instruments 112 (807)
Interest income on net defined benefit assets 107 143
Interest cost on net defined benefit liabilities (132) (162)
Post-employment benefits net financing cost (25) (19)
Adjusted net finance costs 537 524
Comprising
Interest on bank deposits
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