REG - Imperial Brands PLC - Half-year Report
17/05/2022 07:00
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RNS Number : 6963L Imperial Brands PLC 17 May 2022
IMPERIAL BRANDS PLC
Legal Entity Identifier (LEI) No. 549300DFVPOB67JL3A42
HALF YEAR RESULTS STATEMENT
17 May 2022
GAINING MOMENTUM BEHIND OUR STRATEGIC PRIORITIES
Report for the six months ended 31 March 2022
Business Highlights
· Good progress in delivering on our strategic objectives
· Strategic investment driving growth in aggregate market share in
top-five priority markets
· Successful NGP trials underpin further market roll-outs in heated
tobacco and vapour
· Implementing our new purpose, vision and behaviours to align our
culture to our strategy
· Strong operating cash generation delivering further deleverage,
as anticipated
· On track to deliver full year results in line with guidance
Financial Summary
Six months ended Reported Adjusted(3)
31 March 2022 2022 2021 Change 2022 2021(2) Actual Constant currency(4)
Revenue/Net revenue(1) £m 15,362 15,568 -1.3% 3,495 3,571 -2.1% +0.3%
Operating profit £m 1,201 1,637 -26.6% 1,600 1,586 +0.9% +2.9%
Basic earnings per share pence 105.2 191.2 -45.0% 113.0 107.0 +5.6% +7.7%
Net debt £m (9,757) (11,003) (9,157) (10,328)
Dividend per share pence 42.54 42.12 +1.0% 42.54 42.12 +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) The 2021 net revenue and adjusted operating profit metrics exclude the
contribution of the Premium Cigar Division from that financial reporting
period following its divestment in October 2020. The Premium Cigar Division
contributed £21 million to net revenue and £3 million to adjusted operating
profit in 2021.
(3) See page 3 for basis of presentation, page 17 and notes 3, 5, 9 and 12 of
the financial statements for the reconciliation between reported and adjusted
measures.
(4) Constant currency removes effect of exchange rate movements on the
translation of the results of our overseas operations.
Stefan Bomhard Chief Executive
"We are now 18 months into our five-year strategy to build a more sustainable
Imperial capable of consistent growth - and I am pleased with the progress we
are making.
"These results provide further evidence that we have achieved the
stabilisation of our core combustible business. During the first half of the
year, we increased aggregate market share in the five priority markets which
account for around 70 per cent of our operating profit, while maintaining
pricing discipline. This strong performance is an outcome of our tighter
performance management and disciplined investment in sales execution and brand
building. Meanwhile, our more focused approach to our broader portfolio of
markets is delivering a stronger performance from regions, such as Africa. In
April, we delivered on our earlier commitment to exit Russia, with the orderly
transfer of our business to local investors.
"In next generation products, consumers have given positive feedback on our
recent trials, validating our new insights-driven approach. We will now roll
out our Pulze and iD heated tobacco proposition to further European markets
and, in US vape, we are extending our refreshed blu marketing proposition. We
have also started a pilot in France for an all-new vapour device, the first
new NGP product from our redesigned innovation pipeline.
"Our strategy is being supported by a comprehensive culture change programme,
designed to embed more consumer-centric, collaborative and future-focused ways
of working, across every level of the organisation.
"Our focus for the remainder of 2022 will be to invest further in our five
priority markets and begin the roll-out of our NGP strategy. While these are
uncertain times, as we move into 2023, we will have in place the capabilities
and culture necessary to support the next phase of our strategy and deliver
sustainable growth in shareholder value."
Delivering Against our Strategic Priorities
Focus on priority combustible markets
· Investment in operational levers drives 25 bps growth in aggregate
market share in priority combustible markets
· Share gains in USA, UK and Australia more than offset declines in
Germany and Spain
· Investing in sales execution activities:
o Enhancing sales force capabilities, e.g. in the USA and Germany
o Strengthening our key account management, e.g. in the USA
· Investing in multiple brand equity building initiatives:
o Building brand equity in premium segment, e.g. Winston pack change and new
campaign in USA
o Optimising our approach to the value segment, e.g. launch of Lambert &
Butler in Australia
o Maximising fine cut opportunities, e.g. development of West in Germany;
Riverstone in UK and Australia
Build a targeted NGP business
· Successful consumer trials validate our approach and strengthen our
confidence in our NGP strategy
· Heated tobacco trial results from the Czech Republic and Greece
support further launches into new markets
· Positive trial results of new marketing proposition for blu in the
USA supports further roll-out
· Trials underway of all-new blu vapour device into selected French
cities
Drive value from our broader market portfolio
· Market prioritisation driving improved operational and financial
performance
· Clear portfolio strategy in Africa delivering share gains and growth
in net revenue and profit
· Concluded our exit from Russia, with a transfer of our business to
local investors
Transforming our ways of working through our critical enablers
· Strategy supported by structured culture change programme to embed
more consumer-centric, collaborative and future focused ways of working
· Programme will be rolled out across our whole Group by the end of the
year
· Simplified and efficient operations: on track to deliver cost savings
in line with our strategic plan
· Our environmental, social and governance strategy has been refreshed,
underpinning our new ambitions
Results Overview*
Net revenue
· Net revenue up +0.3%, tobacco +0.1%, NGP +8.7%; reported revenue
reduced -1.3%, due to lower excise duty in Europe
· Tobacco price mix of +0.8% reflects pricing of +1.2% and adverse mix
of -0.4% (product mix in the Americas and market mix in AAA)
· Recent price increases in Q2 (+3.8%) support improved price mix in
second half of the year
· Overall volumes down -0.7%: reflecting strong volume performance in
the USA, Middle East and Australia, offsetting declines in Europe as COVID-19
restrictions ease
· NGP net revenue growth +8.7%, to £101m, driven by strong progress
across all categories in Europe
Progress in improving profitability
· Group adjusted operating profit growth of 2.9%, driven by reduced
losses in NGP reflecting prior year market exits
· Reported operating profit of £1,201m is lower by £436m, driven by
charges related to our exit from Russia and associated markets (£201m) and
non-recurrence of gains on disposal of Premium Cigar Division (£281m)
· Tobacco adjusted operating profit at a similar level to last year
reflecting increased investment in strategy
· NGP adjusted operating losses reduced by +49.9% vs HY21, against
comparator period that included exit from AAA
· Adjusted EPS up +7.7% driven by growth in adjusted operating profit
and a reduction in tax rate to 21.9% following favourable developments in
several tax authority audits and a lower adjusted finance charge
· Reported EPS down -45.0%, with lower reported operating profit and
lower finance income as we reduced our exposure to unhedged currency exposures
on financial instruments, partly offset by higher reported tax rate
Strong cash conversion supports year-on-year deleverage
· Strong 12-month cash conversion at +102%
· Adjusted and reported net debt both reduced by £1.2bn (12-month
basis) driven by free cash flow
· Adjusted net debt to EBITDA improved to 2.4x in line with
expectations (HY21: 2.6x), reflecting usual seasonality
· Maintaining our deleverage momentum to deliver further net reduction
at the full year
· Interim dividend per share up 1%, consistent with our progressive
dividend policy
* All measures at constant currency unless otherwise stated
Basis of Presentation
· To aid understanding of our results, we use 'adjusted' (non-GAAP)
measures as we believe they provide a better comparison of performance from
one period to the next. Reconciliations between adjusted and reported (GAAP)
measures are also included in the relevant notes. Further definitions of
adjusted measures are provided in Note 1 of these accounts. Change at constant
currency removes the effect of exchange rate movements on the translation of
the results of our overseas operations. References in this document to
percentage growth and increases or decreases in our adjusted results are on a
constant currency basis unless stated otherwise. These are calculated by
translating current year results at prior year exchange rates.
· Stick Equivalent (SE) volumes reflect our combined cigarette,
fine cut tobacco, cigar and snus volumes.
· Market share is presented as a 6-month average to the end of
March (MHT - moving half-year 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 (BST) for
investors and investment analysts following the publication of our results on
17 May 2022. 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 (BST). 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/i7adfq8m
(https://edge.media-server.com/mmc/p/i7adfq8m) 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: 7855858
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
Germany local call: 069 2222 2625
Switzerland local call: 044 580 71 45
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
Overview
These results cover an important six months in the strengthening phase of our
five-year strategy to transform Imperial into a more sustainable business
capable of consistent growth - year in, year out.
The essential foundations of this new strategy - a consumer mindset, a
rigorous high-performance culture and a desire to challenge the status quo -
are fast taking shape. And already we are seeing the fruits of these new ways
of working and our focused investments in new capabilities. In particular,
these results provide further evidence of the stabilisation of our core
combustible business. In the first half, while maintaining pricing discipline,
we delivered aggregate market share gain across the five priority markets,
which account for around 70 per cent of our operating profit.
In next generation products (NGP), consumers have given positive feedback to
the pilots we launched in the second half of last year. We now intend to roll
out our Pulze and iD heated tobacco proposition in further European markets
and, in the US vapour segment, we are extending our new blu consumer marketing
proposition.
All this progress has been achieved by our people during a challenging period
characterised by growing macroeconomic pressures, amplified by Russia's
invasion of Ukraine. I would like to pay special tribute to the dedication of
our teams working to keep safe our 600 Ukrainian colleagues and their
families. Since the war began in February, we have been providing transport
and accommodation to enable them to escape the areas most heavily affected by
war, and resettlement assistance for those who have left Ukraine. Meanwhile,
in April, we delivered on our commitment to fully exit Russia, with the
orderly transfer of our business to local investors.
Our results
These results reflect a further step up in investment to build these new
foundations during the two-year strengthening phase of our five-year strategy.
Price mix was relatively weak in the first quarter but improved markedly in
our second quarter as we achieved price increases in several of our key
markets, which will support a stronger price mix performance in our second
half. Our NGP business delivered top-line growth and reduced losses as we
focused investment behind our new trials.
Adjusted Group operating profit grew 2.9 per cent at constant currency driven
by reduced losses in NGP. Reported operating profit was 26.6 per cent lower,
driven primarily by exit charges related to the divestment of our Russian
business and the non-recurrence of gains on last year's divestment of the
Premium Cigar Division. Our cash generation has remained strong supporting
further debt reduction on a 12-month basis.
Developing the right culture
Building the right culture is essential to the successful delivery of our
strategy. In 2021, we developed a new statement of purpose: "Forging a path to
a healthier future for moments of relaxation and pleasure". Alongside this our
vision statement "To build a strong challenger business powered by
responsibility, focus and choice" underpins our strategy. We are embedding
this purpose, and vision, together with our new behaviours through all levels
of the business. So far over 400 of our senior leadership team have
participated in extensive training sessions and a further 900 will take part
in the next three months. These sessions are focused on helping our people
work in ways which are more consumer-centric, collaborative, accountable,
inclusive, and future focused. By the end of this year, all of our people will
have had training in these behaviours.
Building our consumer capabilities
Having last year set up a new Group Consumer Office led by Andy Dasgupta, we
are now embedding consumer packaged goods best practice in our insights,
marketing and sales. Our investor webinar in March showcased how our largest
market, the US, was successfully combining deep consumer research, creative
marketing executions and new digital sales systems to drive stronger business
performance. This more rigorous, integrated approach is being replicated
across our key markets. Andy has now completed his senior team with new hires
who are adopting a different approach based more on partnerships with third
parties and informed by consumer insight to develop the pipeline for new
products in both tobacco and NGP.
Becoming a strong challenger
As the smallest of the global tobacco businesses, we need to work more nimbly
than our competitors. This means identifying value pools others overlook and
innovating swiftly to satisfy unmet consumer needs. Recently, I have seen
diverse examples of this challenger approach in action. In Australia, we
achieved something rare in a dark market: the successful launch of a new
brand, Lambert & Butler, which meets a consumer need for affordable
quality. In Spain, we are taking a different approach to our competitors by
building on the success of our investment behind our local jewel brand, Nobel.
We are now extending this approach to our other Spanish local brands, Fortuna
and Ducados. Even in some smaller markets in Africa and Eastern Europe, we
have built share by addressing underserved niches, including different-sized
products, pricing segments or brand positioning.
Focusing on priority combustible markets
In combustibles, we remain focused on driving performance in our five largest
markets: the US, Germany, UK, Australia and Spain. Historically, we posted
annual double-digit declines in aggregate share - making us the sector's
largest share donor. In FY21, thanks to our renewed focus on the priority
markets, that decline was stabilised. And during the first half of 2022, we
recorded a 25 basis point increase in share while maintaining pricing
discipline. This outperformance has been driven by a tighter operational
management and the focused investment initiatives in these five priority
markets.
We grew share in the US, UK and Australia, which more than offset declines in
Germany and Spain. We manage these markets as a portfolio where we recognise
the mix of market performance will vary from period to period. For example, we
recognise that Germany is likely to take longer to address after more than a
decade of share declines. However, at the same time, we will have
opportunities to outperform, such as we have done in the US market, where we
quickly mobilised our team to capture some of the share made available by
KT&G's exit from the US. This opportunity will not be repeated and
therefore we expect our share performance momentum to moderate in the second
half.
Driving value from our broader portfolio
We are applying the same disciplined focus to how we manage the rest of our
combustible markets. Here we are prioritising investment behind the best
growth opportunities in regions, while applying the same strict standards of
responsible marketing to existing adult smokers.
The new divisional structure with Paola Pocci leading the Africa, Asia and
Australasia region now provides a greater management focus and the specific
skill-set needed to unlock value from these markets. For example, the Africa
region, where we have strong positions in five markets, has performed well
again in the first half with market share gains and profitable growth.
Building a targeted NGP business
In NGP, we continue to execute on our strategic objective to rebuild our
business as a focused, sustainable, consumer-centric enterprise. We have
received positive consumer feedback from trials of our Pulze heated tobacco
system in Greece and the Czech Republic. While we will continue to innovate on
our marketing proposition, device technology and the range and quality of our
iD heat sticks, consumer data has validated our approach and strengthened our
confidence in our NGP strategy. Heated tobacco remains a nascent market, where
consumers have yet to form strong brand loyalties and they are willing to
experiment with different propositions as they search for potentially
less-risky alternatives to smoking, which best suit their personal
preferences. In line with our strategy, we are now developing plans to roll
out Pulze to additional European markets.
In vape in the US, we have been following a similar test-and-learn approach. A
local pilot of an improved consumer marketing proposition has received
positive consumer feedback and we now plan to extend to further territories in
the US. The new proposition includes improved packaging and a new marketing
approach targeting "next steppers" looking to migrate from combustibles. We
were disappointed with the FDA's decision to issue Marketing Denial Orders for
some of our myblu products in early April and we are currently seeking to
overturn the decision through the administrative appeals process. Our products
will remain in the market during the appeals process.
In April, we began piloting an all-new vape device, blu 2.0, in selected
cities in France. We will evaluate consumer feedback from this pilot before
moving to a wider roll-out in Europe.
In modern oral nicotine, we continue to focus on the Nordic markets, where we
have achieved strong growth in Sweden and Norway, as well as Austria, where
there is a heritage of oral tobacco.
Managing our Environmental, Social & Governance responsibilities
An important element of the foundation-building phase of our strategy has been
a refresh of our approach to environmental, social & governance (ESG)
responsibilities
Imperial has a long tradition of responsible business with a good track record
of preventing under-age access, combating illicit trade and continually
reducing its carbon footprint.
Our recent ESG review has focused on prioritising our activities to ensure
they fully align with our new strategy, purpose and vision and meet the
evolving expectation of stakeholders.
A full materiality study, which combined both quantitative data-led analysis
and qualitative stakeholder interviews, highlighted eight key areas of focus.
We have grouped these into three broad categories:
· Healthier futures - comprising consumer health, climate change
and packaging & waste;
· Positive contribution to society - comprising farmer livelihoods
& welfare, sustainable & responsible sourcing and human rights; and
· A safe and inclusive workplace - comprising employee health,
safety & wellbeing and diversity, equity & inclusion.
In some areas, we have already defined targets and begun the work required to
meet these goals. In climate change, for example, we have pledged to become a
net zero company by 2040 and have set intermediate objectives in order help us
to track our progress. We are developing initiatives across the value chain to
decarbonise our business at pace. More than 90 per cent of our electricity is
now supplied by traceable renewable sources. Our first carbon neutral factory,
the Skruf plant in Savsjo, Sweden, is now acting as an example for our other
facilities as they work to further improve their energy efficiency and
sustainable sourcing. Meanwhile, we will be launching a pilot salary-sacrifice
scheme to encourage uptake of electric cars among our UK-based staff, which we
will extend to other markets where enabled by local tax rules.
We are developing detailed metrics and targets for all ESG focus areas,
including consumer health, and these will be integrated into our executive
remuneration policy during this financial year. We will provide an update to
investors and analysts at an ESG webinar in September.
Allocating capital with discipline
We have a clear capital allocation framework to support investment in our
strategy and 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.
We delivered another strong cash performance supporting a further reduction in
our leverage with our adjusted net debt/EBITDA improving by 0.2 times to 2.4
times, in line with expectations and reflecting usual seasonal variations. We
are on track to deliver a year-on-year improvement in our full year leverage.
We have announced a 1 per cent increase in the dividend for this year,
consistent with our progressive dividend policy taking into account underlying
performance and our broader capital allocation priorities.
Outlook
We are making good progress in implementing our five-year plan and we remain
on track to deliver against expectations.
We expect to deliver full-year net revenue growth of around 0-1 per cent and
adjusted operating profit growth of around 1 per cent, at constant currency.
Our net revenue will benefit from a stronger price mix in the second half
although we expect volume declines to revert to historic norms as
pandemic-related restrictions are now largely lifted in the majority of our
markets.
We are mindful of the inflationary pressures and growth headwinds all
businesses are facing across the economy. While we are not immune as a tobacco
company, Imperial is well placed to manage these through the balance of this
year through cost initiatives, high gross margins and pricing.
Our full year adjusted earnings per share will now benefit from a lower
adjusted tax rate of c. 22 per cent and a reduced finance charge of around
£330 million. At current exchange rates, foreign exchange translation is
expected to be a c. 1.5 per cent benefit to earnings per share.
Our five-year plan to transform Imperial is divided into two distinct periods.
We are now into the final year of the two-year strengthening phase. During the
remainder of 2022 we will make further investment in our five priority markets
and begin full roll-out of our new focused NGP strategy and the embedding of
new ways of working and cost-saving initiatives. I am confident that, as we
move into 2023, we will have in place the capabilities and culture necessary
to support the subsequent acceleration phase, delivering sustainable growth in
shareholder value.
OPERATING REVIEW
EUROPE REGION
Half Year Result Change
2022 2021 Actual Constant Currency
Tobacco volume bn SE 57.8 60.0 -3.6%
Total net revenue £m 1,569 1,670 -6.1% -2.2%
Tobacco net revenue £m 1,492 1,615 -7.6% -3.8%
NGP net revenue £m 77 55 +39.5% +44.7%
Adjusted operating profit £m 671 750 -10.6% -7.3%
Headlines
· Share growth in the UK driven by local jewel brands strategy;
share declines in Germany and Spain
· Increased travel begins to repatriate volumes to historical
channels and markets
· Price/mix relatively weak reflecting price phasing and adverse
geographic/product mix
· Price increases secured in key markets support a stronger second
half
· Pulze heated tobacco trials support plans for further market
roll-outs
· Pilot of new vape device underway in France
Our first half European results faced a strong comparator as we began to see
an unwind of the COVID-19 impacts on consumer buying patterns with the lifting
of restrictions and increased travel.
Investment behind our strategic initiatives in the UK, particularly the
continued growth of local jewel brand, Embassy, supported strong market share
growth in the UK. In Germany, our share remains under pressure with the
investment initiatives to rejuvenate JPS and West, as well as sales execution,
expected to take time. We have repositioned heritage brands in our portfolio
to further enhance our consumer offering across the price segments as a result
of increased consumer preferences for value for money offerings. In Spain, we
achieved price increases early in the period although this adversely impacted
our market share performance in the first quarter. Encouragingly, this is the
first notable price increase taken in Spain in several years.
Volumes for the region declined 3.6 per cent, as sales are beginning to be
repatriated to historical markets and channels as restrictions ease. Tobacco
net revenue was down 3.8 per cent at constant currency with negative price mix
of 0.2 per cent reflecting price phasing and adverse geographic mix as the
COVID-19 related shifts in market and channel buying patterns began to unwind.
Recently implemented price increases in key markets such as Germany and the UK
will support a stronger price mix in the second half. Our global duty free
business and our travel retail sales in the holiday destinations in Southern
Europe have begun to recover as cross-border travel resumes, helping to offset
volume declines in Northern European markets such as Germany and the UK.
Our focus in Ukraine, which has been affected by the conflict with Russia, has
been on the safety and wellbeing of our 600 Ukrainian colleagues and their
families. It is a fast-moving situation, which we are monitoring closely.
Our NGP portfolio has performed well with NGP net revenue up 44.7 per cent at
constant currency reflecting a strong performance across all three categories:
heated tobacco, modern oral and vapour. We have received positive consumer
feedback from trials of our Pulze heated tobacco system in Greece and the
Czech Republic and we are now developing plans to roll out Pulze to additional
European markets later this year. Our blu share in several markets such as the
UK, France and Italy remains relatively stable despite lower levels of
investment. In modern oral nicotine, we have continued to achieve strong
growth in Sweden, Norway and Austria, while also launching ZoneX in the global
duty free channel.
In April, we began piloting a new blu vape device in selected cities in
France. We will evaluate consumer feedback from this pilot before determining
further market roll-outs.
Adjusted operating profit declined 7.3 per cent at constant currency
reflecting the lower tobacco net revenue driven by price phasing and adverse
geographic mix, as well as increased investment behind our new strategy. This
was partially offset by reduced losses in our NGP business.
Priority Market Performance
Tobacco Share
Germany Market size declined 4.6% on a six-month basis against a strong prior-year
19.1% (-80 bps) comparator which benefited from COVID-19 travel restrictions. Our market share
declined despite increased investment behind our strategy. Our brand portfolio
is well positioned across price segments having taken action to tier Gauloises
variants within premium and repositioned portfolio heritage brands within the
lower-tier value segment to offer consumers choice in both cigarettes and
fine-cut. We continue to invest behind JPS and West to rejuvenate brand
equity, with targeted point-of-sale marketing campaigns coupled with retailer
advocacy programmes driving increased consumer awareness.
13% of Group net revenue
UK Tobacco industry volumes are beginning to revert to historic declines, as
41.8% (+105 bps) COVID-19 related travel restrictions begin to unwind and there is growth in
illicit trade. Our strong market share gains benefited from investment in our
portfolio, particularly behind the local jewel brand, Embassy, and as we
8% of Group net revenue invested in new sales effectiveness initiatives to enhance on-shelf
availability with retailers. We increased prices towards the end of the
period, the first increases in two years.
Spain Tobacco market volumes have started to recover following two years of decline
28.2% (-45 bps) as tourism recovers. Spain has a stable excise regime and for the first time
in five years we achieved price increases across key product lines. This led
to some share loss at the beginning of the period although our share has since
4% of Group net revenue begun to recover. We continue to invest behind our local jewel brands and to
capture downtrading through our super-king variant of our West brand.
AMERICAS REGION
Half Year Result Change
2022 2021 Actual Constant Currency
Tobacco volume bn SE 9.7 9.4 +3.9%
Total net revenue £m 1,160 1,131 +2.6% +2.2%
Tobacco net revenue £m 1,136 1,098 +3.5% +3.2%
NGP net revenue £m 24 33 -28.0% -28.1%
Adjusted operating profit £m 453 426 +6.4% +6.0%
Headlines
· Cigarette share growth up 70 basis points to 9.8 per cent
· Investment in initiatives driving operational improvements
· Revenue growth reflects strong cigarette pricing offset by
adverse product mix
· NGP net revenue declined as we did not participate in the
category price discounting
· Successful trial of new consumer marketing proposition for blu
supports further roll-out
· Adjusted operating profit growth reflects lower litigation costs
and higher investment
We delivered a strong combustible tobacco performance in the US, which is our
largest single market, contributing around 34 per cent of Group net revenue.
Tobacco volumes grew by 3.9 per cent against an industry volume decline of 6.8
per cent. This outperformance primarily reflects the improvement in our US
cigarette market share of 70 basis points, to 9.8 per cent with the benefit of
our increased investment in sales execution and our brands, as well as our
agile response to capture share following KT&G's exit from the US market.
We estimate our underlying share growth, excluding the KT&G-related share
gains, was around 50 basis points. Our volumes also reflect an increase in
wholesaler customer inventories of around 250 million sticks at the period end
as wholesalers pulled forward orders ahead of anticipated price increases. In
addition, wholesaler inventories at the beginning of this financial period
were c. 150 million sticks lower than the equivalent point in the prior year.
Excluding these inventory movements, our volumes were broadly flat on last
year.
Industry volume declines of 6.9 per cent are against a strong comparator that
benefited from COVID-19 related changes to consumer buying patterns as a
result of lockdowns and fiscal stimulus payments. Volume decline rates have
deteriorated further recently, reflecting some increased inflationary pressure
on consumer spending, although our brand portfolio is well-placed across key
price segments, particularly if downtrading accelerates.
We achieved two price increases in the period. On a constant currency basis,
tobacco net revenue increased by 3.2 per cent, benefiting from cigarette
pricing offset by adverse product mix with strong growth in the deep discount
cigarette segment.
We continue to step up investment in our strategic priorities to strengthen
performance. In the premium segment, trials of a new pack design and a new
marketing campaign for Winston in Texas have gone well and have now been
rolled out nationally and a series of initiatives behind the Kool brand are
underway. We have increased our sales force by around a quarter and are
investing to improve our sales execution through adopting best practices such
as route optimisation and better information systems. We are also achieving
improved traction with key accounts following the expansion of our key account
team.
Our mass market cigar portfolio achieved further market share gains driven by
strong performances by Backwoods and Dutch Leaf. We have strengthened our
position as the second largest manufacturer in the US market, having been
number four a year ago. Our volumes were broadly flat on last year compared
with an industry that experienced volume declines against an exceptionally
strong comparator period, which benefited from changes in consumer buying
patterns caused by pandemic-related lockdowns. We remain well positioned to
capture consumer demand in this category with our portfolio of iconic heritage
brands.
Our NGP revenues were down 28.1 per cent on a constant currency basis,
reflecting the continued competitive environment with greater discounting in
the category. Our trial of the refreshed consumer marketing proposition for
blu in Charlotte has performed well and we now plan to roll-out to other
territories in the US. We were disappointed with the FDA's decision to issue
Marketing Denial Orders for some of our myblu products in early April and we
are currently seeking to overturn the decision through the administrative
appeals process. Our products will remain in the market during the appeals
process.
Adjusted operating profit was 6.0 per cent higher at constant currency driven
by market share gains, the benefit of trade inventory phasing and lower NGP
costs. The non-repeat of the litigation settlement cost in Minnesota and Texas
in the prior period more than offset the increased investment to support our
strategic priorities, the inflation-indexed increase in Master Settlement
Agreement costs and higher leaf costs in mass market cigars.
AFRICA, ASIA AND AUSTRALASIA REGION
Half Year Result Change
2022 *2021 Actual Constant currency
Tobacco volume bn SE 42.4 41.3 +2.6%
Total net revenue £m 766 770 -0.6% +3.1%
Tobacco net revenue £m 766 763 +0.4% +4.1%
NGP net revenue £m 0 7 -101.1% -101.1%
Adjusted operating profit £m 357 286 +25.0% +25.8%
* The 2021 net revenue and adjusted operating profit metrics exclude the
contribution of the Premium Cigar Division from that financial reporting
period following its divestment in October 2020. The Premium Cigar Division
contributed £21 million to net revenue and £3 million to adjusted operating
profit in 2021.
Headlines
· Strong financial delivery driven by Africa and Middle East
regions
· Clear portfolio focus in Africa delivered gains in market share
and financial performance
· Investment in Australian portfolio driving market share gains
· NGP revenue declines reflect last year's market exits from Japan
and Russia
· Successful transfer of Russian operation as a going concern to
investors based in Russia
Our Africa, Asia and Australasia region performed strongly with growth in
tobacco volumes and constant currency growth in total net revenue and adjusted
operating profit. This reflects the benefit of a more focused approach under
the new regional structure and leadership team.
We turned around our share performance in Australia, the region's priority
combustible market, as we focused our investment behind sales execution and
marketing in line with our strategy. We invested behind our brand portfolio
with the launch of Lambert & Butler in the fifth price tier, which enabled
us to ensure we had a clear brand offering at each of the key price points. We
also invested in our sales execution, particularly in key accounts, and
reinforced our supply chain to enhance customer delivery.
Our African portfolio of markets performed strongly with further market share
gains in the region and continued growth in revenue and profit. This has been
driven by a clear portfolio focus, which is leveraging key international
brands, such as Gauloises in targeted markets, as well as harnessing the power
of our local jewel brands with adult smokers.
Our Middle East business performed well as pandemic-related travel
restrictions lifted in the region and customer buying patterns normalised. In
Asia, we delivered a strong financial performance driven primarily by Taiwan,
where we grew share through Davidoff Absolute and West 25s.
Our performance in Russia was affected by our decision to initially suspend
operations and then exit the market. We have now completed the transfer of our
Russian business as a going concern to investors based in Russia, which
concludes Imperial's operations in Russia. In FY21, Russia represented around
1.5 per cent of net revenues and 0.2 per cent of adjusted operating profit.
Tobacco volumes were 2.6 per cent higher, driven by a strong volume
performance in the Middle East as the region recovered from some COVID-19
related disruption in the prior period. As expected, volumes also benefited
from a normalisation in Australia shipment patterns, following the Australian
Government's decision last year to step away from the 12.5 per cent annual
excise duty accelerator.
Tobacco net revenue grew 4.1 per cent at constant currency, driven by the
improved volumes and price mix of 1.5 per cent. Our net revenue was partially
impacted by last year's changes to the Australian excise regime, which
benefited the prior period net revenue and adjusted operating profit by about
£41 million.
NGP net revenue declined to zero, following our decision to exit the vapour
market in Japan and Russia and the heated tobacco market in Japan. This is
consistent with our more targeted approach to NGP as we have increased
investment in other regions, particularly behind the heated tobacco trials in
Europe.
Adjusted operating profit was up 25.8 per cent at constant currency, driven by
a strong financial performance in Africa and the Middle East, as well as lower
NGP investment in the region, compared to the same period last year.
Priority Market Performance
Tobacco Share
Australia We grew share through investment in our total portfolio strategy to meet
31.6% (+70 bps) consumer needs. We launched Lambert & Butler in the fifth price tier in
November, enabling a clear differentiation with Parker & Simpson at the
higher price tier. We also invested in improving sales force effectiveness and
strengthened our supply chain to ensure on-shelf availability. While the
4% of Group net revenue market remains highly competitive, the market dynamics have stabilised
following changes to the excise regime and as COVID-19 restrictions ease.
Distribution
Half Year Result Change
2022 2021 Actual Constant Currency
Net revenue £m 502 533 -5.8% -0.6%
Adjusted operating profit £m 121 121 +0.3% +5.5%
Adjusted operating margin % 24.1 22.7 +140bps +145bps
Eliminations £m (2) 3 -174.9% -179.0%
Adjusted operating profit (inc. eliminations) £m 119 124 -4.0% +1.0%
COVID-19 related travel restrictions have now largely been lifted for the
markets in which Logista operates. While inflation has been exacerbated by the
Russian invasion of Ukraine and transport union strikes have impacted economic
growth in Spain, the business has been able to mitigate these pressures.
Net revenues at £502 million were 0.6 per cent lower on a constant currency
basis as strong performance in Iberia was offset by weaker performance in
France and Italy.
In Iberia net revenue growth was driven by tobacco and related products which
benefited from an increase in pricing without an increase in excise tax,
transport with growth in Logista Parcel and higher B2B activity at parcel
delivery business (Nacex), and pharmaceutical distribution as the business
expanded both its customer base and product offering. In Italy, net revenues
were weaker as the distribution of tobacco and related products cycled against
a tough comparator period with higher stock profit last year than in the
current period. A reduction in tobacco volumes with no significant change in
prices led to weaker net revenue in France.
The adjusted operating profit contribution to the Group, after eliminations,
increased 1.0 per cent on a constant currency basis, as a focus on cost
control and contracts that allow increased costs to be passed through,
mitigated inflationary pressures and enabled margin expansion.
During the period, Logista announced the acquisition of 70 per cent of
Speedlink Worldwide Express B.V, a Dutch express courier company and disposed
of Supergroup S.A.S, a subsidiary in France, that had already been classified
as held for sale at the end of the last financial 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 £1.9 billion, with movements in the cash position
during the 12-month period varying from a high of £2.2 billion to a low of
£1.3 billion, primarily due to the timing of excise duty payments. At 31
March 2022, the loan position was £1.8 billion compared to £1.8 billion at
30 September 2021.
FINANCIAL REVIEW
These financial results demonstrate our continued progress against our
strategic priorities as we enter the latter part of the two year strengthening
phase of our five-year strategy. In the period, Group net revenues grew 0.3
per cent and Group adjusted operating profit rose 2.9 per cent, both on a
constant currency basis.
Reported operating profit reduced 26.6 per cent, mainly due to exit charges
related to the Russian asset disposal (£201 million) and the non-recurrence
of gains on disposal of the Premium Cigar Division (£281 million) in the
comparator period.
We have had favourable developments in several tax authority audits, which
have reduced uncertainty for the current financial year. As a result our
adjusted effective tax rate for the period was 21.9 per cent and is expected
to remain at a similar level for the rest of the current financial year. Our
reported effective tax rate was 17.6 per cent.
Our focus on cash generation supported the delivery of £336 million of free
cash flow in the seasonally weaker first half of the year, with 102 per cent
operating cash conversion on a 12-month basis. This enabled us to reduce
reported net debt by £1.2 billion to £9.8 billion.
Capital allocation remains a key value lever and we achieved a further
reduction in net debt, with adjusted net debt / EBITDA reducing by 0.2-2.4
times on a 12-month basis. We are making good progress towards meeting our
target leverage at the lower end of 2.0-2.5 times adjusted net debt to EBITDA
range.
We are also reshaping the finance function to become a more effective business
partner to support the Group as we build the foundations for future growth.
SUMMARY INCOME STATEMENT
Half Year Results
Reported Adjusted
£ million (unless otherwise indicated) 2022 2021 2022 *2021
Net Revenue
Tobacco & NGP Net Revenue 3,495 3,592 3,495 3,571
Distribution Net Revenue 502 533 502 533
Operating Profit
Total Tobacco & NGP 1,124 1,560 1,481 1,462
Distribution 79 74 121 121
Eliminations (2) 3 (2) 3
Group operating profit 1,201 1,637 1,600 1,586
Net finance income/(costs) 75 414 (165) (206)
Share of (loss)/profit of investments accounted for using equity method (20) 8 4 4
Profit before tax 1,256 2,059 1,439 1,384
Tax (221) (215) (316) (318)
Profit for the period 1,035 1,844 1,123 1,066
Earnings per ordinary share (pence) 105.2 191.2 113.0 107.0
Dividend per share (pence) 42.54 42.12 42.54 42.12
* The 2021 net revenue and adjusted operating profit metrics exclude the
contribution of the Premium Cigar Division from that financial reporting
period following its divestment in October 2020. The Premium Cigar Division
contributed £21 million to net revenue and £3 million to adjusted operating
profit in 2021.
Adjusted performance measures
When managing the performance of our business we focus on non-GAAP measures,
which we refer to as adjusted measures. We believe they provide a useful
comparison of underlying performance from one period to the next as GAAP
measures can include one-off, non-recurring items and recurring items that
relate to earlier acquisitions. These adjusted measures are supplementary to,
and should not be regarded as a substitute for, GAAP measures, which we refer
to as reported measures. The basis of our adjusted measures is explained in
our accounting policies accompanying our financial statements.
Reconciliations between reported and adjusted measures are included in the
appropriate notes to our financial statements. Percentage growth figures for
adjusted results are given on a constant currency basis, where the effects of
exchange rate movements on the translation of the results of our overseas
operations are removed.
While we believe that adjusted performance measures can provide helpful
information which supplements reported measures we are also aware of the need
to ensure that an appropriate balance is maintained between the two sets of
reporting metrics with adjusted disclosures not being given greater prominence
than GAAP measures. In line with this we have made a number of changes to
our adjusted performance measures this year, reducing the total number used.
SUMMARY CASH FLOW STATEMENT - STATUTORY RECONCILIATION
Half Year Result
Reported Adjusted
£ million (unless otherwise indicated) 2022 2021 2022 2021
Group Operating Profit 1,201 1,637 1,600 1,589
Depreciation, amortisation and impairments 356 372 125 161
EBITDA 1,557 2,009 1,725 1,750
Loss/(profit) on disposal of subsidiaries 16 (281) - 0
Other non-cash movements 52 (125) (45) (101)
Operating Cash Flows before movement in Working Capital 1,625 1,603 1,680 1,649
Working capital (652) (1,331) (665) (1,331)
Tax cash flow (273) (431) (273) (431)
Cash Flows from Operating Activities 700 (159) 742 (113)
Net capex (64) (61) (64) (61)
Restructuring - - (42) (46)
Cash interest (242) (255) (242) (255)
Minority interest dividends (58) (63) (58) (63)
Free Cash Flow 336 (538) 336 (538)
Acquisitions / disposals 44 626 44 626
Shareholder dividends (917) (906) (917) (906)
Purchase of ESOT shares (1) - (1) -
Net Cash Flow (538) (818) (538) (818)
GROUP RESULTS - ADJUSTED CONSTANT CURRENCY ANALYSIS
£ million Half year ended 31 March 2021* Foreign Movement at constant currency Half year ended Change Constant
(unless otherwise indicated)
exchange
31 March 2022
currency
change
Tobacco & NGP Net Revenue
Europe 1,670 (63) (38) 1,569 -6.1% -2.2%
Americas 1,131 3 26 1,160 2.6% 2.2%
Africa, Asia and Australasia 770 (28) 24 766 -0.6% 3.1%
Total Group 3,571 (88) 12 3,495 -2.1% 0.3%
Tobacco & NGP Adjusted Operating Profit
Europe 750 (24) (55) 671 -10.6% -7.3%
Americas 426 1 26 453 6.4% 6.0%
Africa, Asia and Australasia 286 (3) 74 357 25.0% 25.8%
Total Group 1,462 (26) 45 1,481 1.3% 3.1%
Distribution
Net revenue 533 (28) (3) 502 -5.8% -0.6%
Adjusted operating profit including eliminations 124 (6) 1 119 -4.0% +1.0%
Group Adjusted Results
Adjusted operating profit 1,586 (32) 46 1,600 0.9% 2.9%
Adjusted net finance costs (206) 1 40 (165) 19.8% 19.3%
Adjusted EPS (pence) 107.0 (2.2) 8.2 113.0 5.6% 7.7%
* The 2021 net revenue and adjusted operating profit metrics exclude the
contribution of the Premium Cigar Division from that financial reporting
period following its divestment in October 2020. The Premium Cigar Division
contributed £21 million to net revenue and £3 million to adjusted operating
profit in 2021.
SALES PERFORMANCE
Reported revenue adjusted net revenue
-1.3% +0.3%
• Reported revenue declined -1.3% due to a reduction in duty
and similar items.
• Adjusted net revenue grew 0.3% at constant currency
comprising +0.1% from tobacco and +8.7% from NGP.
• Tobacco volume was down -0.7%, reflecting volumes declines
in Europe as COVID-19 restrictions begin to unwind, partly offset by a strong
volume performance in the Americas and Africa, Asia and Australasia region
• Aggregate market share growth in our top-five priority
market of +25bps (HY21: +6bps).
• Tobacco price mix of 0.8% was below historical levels, due
to price phasing, product mix in the Americas and market mix in AAA. Price
increases in the latter part of the first half support a stronger price mix in
the second half of the year.
• NGP adjusted net revenue increased 8.7% at constant
currency with growth across all three categories in Europe (heated, modern
oral & vapour), partly offset by strategic market exits in AAA.
• Translation FX was adverse due to sterling strengthening
against the euro.
NET REVENUE BRIDGE: +0.3% (CC); -2.1% (Actual Exchange Rate)
HY21 net revenue £3,571m
Tobacco volume -0.7%
Tobacco price/mix +0.8%
NGP net revenue +0.2%
HY22 constant currency net revenue £3,583m +0.3%
Translation FX -2.5%
HY22 net revenue £3,495m -2.1%
The net revenue of £3,571m for 2021 excludes a £21m contribution from the
Premium Cigar Division following its divestment in September 2020.
OPERATING PROFIT
Reported operating profit adjusted operating profit
-26.6% +2.9%
• Reported Group operating profit of £1,201m declined
26.6%, primarily driven by exit charges related to the Russian asset disposal
(£201m) and the non-recurrence of gains on disposal of Premium Cigar Division
(£281m).
• Adjusted Group operating profit increased 2.9% at constant
currency due to reduced losses in NGP as we reprioritised investment.
• Tobacco adjusted operating profit was broadly flat at
constant currency. Profit growth in the AAA and Americas was offset by Europe
where price phasing was weighted towards the end of the period. Tobacco
adjusted profit benefited from lower US state litigation costs which was
offset by higher investment in strategic initiatives.
• The reduction in NGP losses drove the majority of
improvement in Group profit growth as we benefited from exiting loss making
markets and rationalised investments
• Translation FX was adverse due to sterling strengthening
against the euro.
ADJUSTED OPERATING PROFIT BRIDGE: +2.9% (CC); +0.9% (Actual Exchange Rate)
HY21 AOP £1,586m
HY21 US State Litigation +£36m
Strategic Investments -£35m
NGP AOP +£44m
Distribution AOP (including eliminations) +£1m
HY22 AOP constant currency £1,632m +2.9%
Translation FX -£32m
HY22 AOP £1,600m +0.9%
The adjusted operating profit figure of £1,586m for 2021 excludes a £3m
contribution from the Premium Cigar Division following its divestment in
September 2020.
EARNINGS PER SHARE
Reported EPS adjusted EPS
-45.0% +7.7%
• Reported EPS declined 45.0% to 105.2 pence driven by the
lower reported operating profit and lower net finance income as we reduced our
exposure to the marked to market foreign exchange accounting gains on unhedged
financial instruments, partly offset by a higher reported tax rate.
• Adjusted EPS was 113.0 pence, up 7.7% at constant currency
due to increased adjusted operating profit, lower adjusted interest costs due
to a reduction in net debt driven by last year's US bond repayment and a lower
adjusted tax rate, following favourable developments in several tax authority
audits.
EPS BRIDGE: +7.7% (CC); +5.6% (Actual Exchange Rate)
HY20 adjusted EPS 107.0p
Operating profit +4.8p
Interest +4.2p
Minorities & JV -0.2p
Tax -0.4p
Number of shares -0.2p
HY21 organic adjusted constant currency EPS 115.2p +7.7%
Translation FX -2.2p
HY21 organic adjusted EPS 113.0p +5.6%
The adjusted earnings per share figure of 107.0p for 2021 excludes a 0.6p
contribution from the Premium Cigar Division following its divestment in
September 2020.
CASH FLOW
Cash flows from operating activities were £700 million (2021: £(159)
million).
The year-on-year improvement in free cash flow to £336 million (2021: £(538)
million) was driven by a lower working capital outflow as duty payment dates
at Logista return to normal following changes to duty payment dates in
preceding years, and a lower cash tax payment after a one off payment in 2021
of £101m for Controlled Foreign Company (CFC) state aid in the UK.
While the net cash outflow of £538 million (2021: £(818) million) improved
year-on-year, the improvement was impacted by lower disposal proceeds than in
the same period in 2021 which benefitted from the sale of the Premium Cigar
Division. Disposal proceeds in the first half of 2022 were mainly related to
the divestment of Supergroup, a French subsidiary of Logista. The La Romana
factory sale is now expected to be delayed into the second half of the current
financial year. Shareholder dividend payments of £917 million, are weighted
towards the first half of the year in line with past practice.
Capital expenditure of £64 million was similar to the prior year (2021: £61
million) but is anticipated to increase in the second half of the year in line
with our full year guidance of c. £300 million, with investments in projects
to support our strategic plan.
Cash conversion was 102 per cent on a 12-month basis (2021: 122 per cent)
driven by neutral working capital over the period and lower capital
expenditure. Cash conversion in the comparator period was temporarily inflated
by duty deferrals in Logista, which led to a significant working capital
inflow in the second half of 2020.
Half Year Result
£ million (unless otherwise indicated) 2022 2021
Cash flow from operating activities 700 (159)
Free cash flow 336 (538)
Net cash flow (538) (818)
Cash Conversion (all numbers below on a 12 month basis)
Adjusted operating profit 3,584 3,647
Adjusted operating cash flow 3,643 4,437
Adjusted operating cash conversion 102% 122%
ADJUSTED NET DEBT/EBITDA
Active capital discipline remains a key value lever for our strategic plan.
The strong cash generation of the business on a 12-month basis delivered a 0.2
times reduction on adjusted net debt/EBITDA to 2.4x from 2.6x. Adjusted net
debt has reduced by £1.2 billion on a 12-month basis, driven by strong cash
generation.
We remain on track to reduce our gearing to the lower end of 2.0x to 2.5x.
Reported net debt reduced by £1,246 million to £9,757 million (2021:
£11,003 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 £9,157 million (2021: £10,328
million).
Half Year Result
£ million 2022 2021
Reported net debt (9,757) (11,003)
Accrued interest 68 81
Lease liabilities 241 269
Fair value of interest rate derivatives 291 325
Adjusted net debt (9,157) (10,328)
RECONCILIATION BETWEEN REPORTED AND ADJUSTED PERFORMANCE MEASURES
Half Year Results
£ million unless otherwise indicated Operating profit Net finance income/(costs) Earnings per share (pence)
2022 2021 2022 2021 2022 2021
Reported 1,201 1,637 75 414 105.2 191.2
Russian and associated markets exit 201 - - - 21.3 -
Acquisition and disposal costs 5 - - - 0.5 -
Amortisation & impairment of acquired intangibles 182 211 - - 18.4 21.1
Excise tax provision (10) (1) - - (1.1) (0.1)
Fair value adjustment of loan receivable (2) (17) - - (0.2) (1.8)
Loss/(profit) on disposal of subsidiaries 16 (281) - - 1.0 (30.4)
Restructuring costs 7 40 - - 0.4 3.3
Fair value & FX movements on financial instruments - - (236) (619) (25.2) (74.9)
Post-employment benefits net financing costs - - (4) (1) (0.4) (0.1)
Brand impairment in equity accounted JV - - - - 2.5 -
Uncertain tax positions - - - - (6.0) -
Deferred tax on unremitted earnings - - - - (2.7) -
Tax on unrecognised losses - - - - 0.8 1.1
Adj. above attributable to non-controlling interests - - - - (1.5) (1.8)
Adjusted 1,600 1,589 (165) (206) 113.0 107.6
Adjusting items
The adjusting items are set out in the table above. Please refer to notes 5, 9
and 12 of the financial statements for a full reconciliation of adjusted
performance measures including cash and debt.
The Group announced in April its exit and sale of its Russian business and
associated markets. In the period, the exit charges at the operating profit
level total £201 million, with an additional £24 million recognised in
profit before tax. These are outlined below:
· The Russian businesses met the criteria to be shown as an asset
held for sale in the Group balance sheet at 31 March 2022. The Russian assets
have been revalued on a 'fair value less cost of disposal' basis to £16
million. An impairment charge of £166 million arises on revaluation.
· The planned exit from a limited number of associated markets has
resulted in the recognition of asset impairments provisions and exit costs
currently estimated at £35 million.
· Joint venture Jadé impairment: the Global Horizons joint venture
with China Tobacco holds an intangible asset for the Jadé brand, which is
sold in Russia. This is now impaired with a charge to the Group of £24
million.
The sale of the Russia business has been disclosed as a post balance sheet
event in these results. The transaction has triggered a recycling of foreign
exchange losses estimated to be in the range of £150 million to £190
million, which will be recognised in the second half of the current financial
year.
Last year we announced the outcome of our 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 is resulting in one-off costs being incurred in order to
reshape the business to support delivery of the new strategy. It excludes
any costs associated with factory footprint rationalisation. Only the
restructuring costs for the 2021 Strategic Review Programme are being treated
as an adjusting item in 2022. An overview of the this programme's cumulative
charges, cash spend and annualised savings, together with those from the two
previous programmes, Cost Optimisation Programme I and Cost Optimisation
Programme II, is shown in the section below.
Restructuring programmes
Half Year 2022
£m Income Statement Cash
Cost Optimisation Programme I - 6
Cost Optimisation Programme II - 12
2021 Strategic Review Programme 7 24
Total 7 42
Income Statement Charges Cash Costs Savings
£m Cumulative Anticipated Cumulative Anticipated Annualised Savings
to date
Total
to date
Total
Cost Optimisation Programme I (2013) 945 945 577 634 305
Cost Optimisation Programme II (2018) 848 848 560 650 320
2021 Strategic Review Programme 233 375-425 72 275 100-150
During the course of 2021, the Group announced a restructuring programme as
part of delivering its new five-year strategy. 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 plan.
The £7 million restructuring charge in this period brings the cumulative
costs of this restructuring programme to £233 million. The remainder of this
programme is expected to be recognised in the second half of this financial
year and will be treated as an adjusting item.
There are ongoing cash costs for all three restructuring programmes as
detailed in the table above.
Finance costs
Adjusted net finance costs were lower at £165 million (HY21: £206 million),
reflecting the early repayment of a US bond last year. Reported net finance
income was £75 million (HY21: £414 million), incorporating the impact of
fair value and foreign exchange gains on financial instruments of £236
million (HY21: £619 million) and post-employment benefits net financing
income of £4 million (HY21: £1 million). The gains on financial instruments
are due to foreign exchange accounting gains of £164 million mainly resulting
from sterling having strengthened against the euro by 1.7 per cent in the
period, together with fair value gains on derivative financial instruments of
£72 million caused by increasing market interest rates.
Our all-in cost of debt decreased to 3.5 per cent (HY21: 3.7 per cent) in
line with continued efficiently controlled debt management.
Our interest cover increased to 10.8 times (HY21: 8.5 times) reflecting the
lower adjusted finance costs.
Taxation
Our adjusted effective tax rate is 21.9 per cent (2021: 23.1 per cent) and
the reported effective tax rate is 17.6 per cent (2021: 10.4 per cent). The
decrease in the adjusted effective tax rate was due to favourable developments
in tax authority audits in several jurisdictions. The adjusted tax rate is
higher than the reported rate due to one off releases of provisions for
uncertain tax positions partially offset by no tax relief arising on the
impairment of Russian assets. The increase in the reported effective tax rate
was due to no tax relief arising on the impairment of Russian assets in 2022
and limited tax arising on the gain on the divestment of the Premium Cigar
Division in 2021. We expect our adjusted effective tax rate for the year ended
30 September 2022 to be around 22 per cent. Over the medium term, we expect
upward pressure on the effective tax rate.
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 (1.9 per cent) as sterling
strengthened against the Euro (5.5 per cent). Other major currencies remained
broadly flat compared to the prior year.
Dividend payments
The Group paid two dividends of 48.48 pence per share in December 2021 and
March 2022.
The Board has approved an interim dividend of 42.54 pence per share which will
be paid in two payments of 21.27 pence per share. The first interim dividend
payment will be paid on 30 June 2022 to shareholders registered on 27 May
2022. The second interim dividend payment will be paid on 30 September 2022 to
shareholders registered on 19 August 2022. This interim dividend is an
increase of 1 per cent, or £4 million, in line with the Group's progressive
dividend policy.
Funding and liquidity
During the period, we repaid one bond of £1.0 billion, from a combination of
utilising excess cash together with some short term debt drawings. The
denomination of our closing adjusted net debt was split approximately
74 per cent euro and 26 per cent US dollar. As at 31 March 2022, the
Group had committed financing in place of around £11.7 billion, which
comprised 25 per cent bank facilities and 75 per cent raised from capital
markets. During the period the maturity date of our existing revolving credit
facility of €3.5 billion was extended to March 2025.
The Group remains fully compliant with all our banking covenants and remains
committed to retaining our investment grade ratings.
Principal Risks and Uncertainties
Risk Management is the responsibility of everyone across the Group. Whilst the
Board remain ultimately accountable for Risk Management, our approach is
designed to enable our people to proactively identify and assess risks on an
ongoing basis and to ensure the effectiveness and appropriateness of related
mitigating actions. The business is supported by subject matter experts in our
second line of defence to ensure the Group's control frameworks align to
achieving our strategic objectives whilst operating within the Board's defined
risk appetite.
Over the past six months the Group, in common with other organisations, has
had to manage the continuing impacts of COVID-19, as well as those arising
from Russia's invasion of Ukraine. The Group's priority remains the safety and
welfare of its people and our crisis committee and cross-functional Executive
Leadership Team working groups continue to manage our responses to the dynamic
environment. They continue to inform the Board of potential and current
impacts arising, along with assurance over the continuity and sustainability
of the wider business.
The wider socio-economic effects of COVID-19 and the conflict in Ukraine have
started to impact businesses and consumers across all goods and services and
could impact the commercial environment into the longer-term. Inflationary
pressures increase input costs and commodity prices, with further pressure
placed upon consumer disposable income from increases in fuel and food prices
potentially creating affordability concerns. This, in turn, could result in
reduced consumption, consumer downtrading or increased consumption of illicit
products. These pressures could adversely impact the size of the legitimate
nicotine market with additional impacts from regulatory change, excise tax or
increases in other product taxes. Compared to other consumer goods companies,
however, the Group has a high gross margin with the low cost of goods sold.
The long purchasing terms for tobacco leaf gives the Group visibility of
upcoming inflationary pressures and this, combined with the Group's resilient
business model, enables the Group to pass on cost inflation through product
pricing, which mitigates the Group's inflationary risk.
Additionally, the impacts on global supply chains, financial markets, and
businesses in commercial distress are being actively considered and mitigating
actions taken across the business. The significant pressures on all consumer
markets increases the potential variability of outcomes in commercial
decisions as the ability to accurately predict and quantify these risks may be
reduced in comparison to previous periods.
Given the recent increase in cyber criminality combined with current
geopolitical tensions, the Group increased investments in IT security in the
period. The Group continuously evaluates the risk posed by cyber criminals
and will continue to monitor the effectiveness of our IT security
infrastructure.
The Board continues to monitor the principal risks and uncertainties to which
the Group is exposed. The risks and the approach to managing the risks
remains consistent with that identified on pages 80-93 of our 2021 Annual
Report and Accounts, and covers the following areas:
· Failure to manage the impacts of regulatory change
· Failure to develop commercially sustainable NGP categories
· Inability to develop, execute, and communicate an effective ESG
strategy in line with expectations of stakeholders
· Pricing, excise, or other product taxes not in line with business
plan assumptions or expectations
· Product portfolio and/or interaction approach not aligned to
consumer preferences
· Failure to ensure expected benefits of strategic transformation
programmes
· Major incident resulting from cyber or similar technology risk
· Failure to appropriately manage litigation and investigations
results in adverse judgements and/or related costs
· Management of liquidity and financing requirements
· Product supply fails to meet market demands (stock issues in
market)
· People and organisation
Climate risks are specifically considered across the business in relation to
their impact on existing risks, rather than as a risk in itself. This ensures
that all risk owners consider the impacts of climate change, notably within
our supply chain, on both a current and forward looking basis. Expert second
line assistance is provided by our sustainability team along with independent
external advice to best understand impacts on our global footprint.
We assess geo-political risks on the same basis as climate above. As a
multi-national we are exposed to a wide variety of operating environments and
cultures, and so local assessment of risks and impacts form a key input to our
ongoing management of geo-political risks, with support available from second
line centres of expertise. This approach ensures responsibility for
identification, assessment, and mitigation of risks is consistently understood
and applied across the business.
The Group continues to successfully progress with its organisational change
initiatives. Failure to manage both the potential short and long-term adverse
impacts of organisational change could result in material adverse effects on
the Group, from both the crystallisation of risks and the failure to seize
opportunities in an increasingly dynamic marketplace. Appropriate frameworks
and governance continue to be applied to our change programmes to best ensure
achievement of intended positive commercial and strategic outcomes.
Liquidity and Going Concern
The Group's policy is to ensure that we always have sufficient capital markets
funding and committed bank facilities in place to meet foreseeable peak
borrowing requirements.
The Group recognises that the current political situation in Ukraine and
Russia brings uncertainty. During the period of the COVID-19 pandemic, the
Group effectively managed operations across the world, and has proved it has
an established mechanism to operate efficiently despite uncertainty. The
Directors consider that a one-off discrete event with immediate cash outflow
is of greatest concern to short term liquidity of the Group.
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 or tax payments of c. £900 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 June 2022.
· The additional impact of potential bad debt risks arising from a
recession, of c. £200 million.
· The withdrawal of facilities that provide receivables factoring
of c. £660 million.
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 2023. 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 that could be implemented should such a
scenario arise.
Based on its review of future cashflows covering the period through to
September 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 September 2023 and concludes that it is appropriate to
prepare the financial statements on a going concern basis.
Statement of Directors' Responsibilities
The Directors confirm that this condensed consolidated interim financial
information has been prepared in accordance with UK-adopted IAS 34 and that
the interim management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8, namely: an indication of important events
that have occurred during the first six months of the financial year and their
impact on the condensed set of financial statements, and a description of the
principal risks and uncertainties for the remaining six months of the
financial year; and material related party transactions in the first six
months of the current financial year and any material changes in the
related-party transactions described in the last annual report.
A list of current directors is maintained on the Imperial Brands PLC website:
www.imperialbrandsplc.com.
The Directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
LUKAS PARAVICINI
Chief Financial Officer
INDEPENDENT REVIEW REPORT TO IMPERIAL BRANDS PLC
Conclusion
We have been engaged by the Company to review the condensed consolidated set
of financial statements in the Half Year Results of Imperial Brands PLC for
the six months ended 31 March 2022 which comprises the consolidated income
statement, consolidated statement of comprehensive income, consolidated
balance sheet, consolidated statement of changes in equity, consolidated cash
flow statement and the notes to the financial statements. We have read the
other information contained in the Half Year Results and considered whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 March 2022 is not prepared, in
all material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board. A review of interim financial information consists of
making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 1, the annual financial statements of the group will be
prepared in accordance with UK adopted international accounting standards. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion is based on procedures that are
less extensive than audit procedures, as described in the Basis for Conclusion
paragraph of this report.
Use of our report
This report is made solely to the company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK and
Ireland) "Review of Interim Financial Information Performed by the Independent
Auditor of the Entity" issued by the Auditing Practices Board. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the company, for our work, for this report, or for the conclusions
we have formed.
Ernst & Young LLP
London
17 May 2022
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
Unaudited Unaudited Audited
£ million unless otherwise indicated Notes 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Revenue 3 15,362 15,568 32,791
Duty and similar items (7,539) (7,640) (16,229)
Other cost of sales (5,087) (5,068) (10,535)
Cost of sales (12,626) (12,708) (26,764)
Gross profit 2,736 2,860 6,027
Distribution, advertising and selling costs (968) (1,097) (2,118)
Russian and associated markets exit 10 (201) - -
Amortisation and impairment of acquired intangibles 11 (182) (211) (450)
Restructuring costs 4 (7) (40) (257)
Fair value adjustment of loan receivable 2 17 15
(Loss)/profit on disposal of subsidiaries 10 (16) 281 281
Acquisition and disposal costs (5) - (17)
Excise tax provision 10 1 1
Other expenses (168) (174) (336)
Administrative and other expenses (567) (126) (763)
Operating profit 3/5 1,201 1,637 3,146
Investment income 908 1,071 1,060
Finance costs (833) (657) (979)
Net finance income 5 75 414 81
Share of (loss)/profit of investments accounted for using the equity method (20) 8 11
Profit before tax 1,256 2,059 3,238
Tax 7 (221) (215) (331)
Profit for the period 1,035 1,844 2,907
Attributable to:
Owners of the parent 995 1,806 2,834
Non-controlling interests 40 38 73
Earnings per ordinary share (pence)
- Basic 9 105.2 191.2 299.9
- Diluted 9 104.8 190.9 299.1
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Profit for the period 1,035 1,844 2,907
Other comprehensive income
Exchange movements (96) (917) (680)
Exchange movements recycled to profit and loss upon disposal of subsidiaries - (337) (337)
Current tax on hedge of net investments and quasi-equity loans (9) (130) (105)
Deferred tax on hedge of net investments and quasi-equity loans - 2 (12)
Items that may be reclassified to profit and loss (105) (1,382) (1,134)
Net actuarial (losses)/gains on retirement benefits (12) 6 41
Current tax relating to net actuarial (losses)/gains on retirement benefits 10 14 2
Deferred tax relating to net actuarial (losses)/gains on retirement benefits (14) (12) (21)
Items that will not be reclassified to profit and loss (16) 8 22
Other comprehensive loss for the period, net of tax (121) (1,374) (1,112)
Total comprehensive income for the period 914 470 1,795
Attributable to:
Owners of the parent 885 476 1,761
Non-controlling interests 29 (6) 34
Total comprehensive income for the period 914 470 1,795
CONSOLIDATED BALANCE SHEET
Unaudited Unaudited Audited
£ million Notes 31 March 2022 31 March 2021 30 September 2021
Non-current assets
Intangible assets 11 16,431 16,753 16,674
Property, plant and equipment 1,609 1,714 1,715
Right of use assets 232 263 242
Investments accounted for using the equity method 67 88 88
Retirement benefit assets 6 1,048 942 1,046
Trade and other receivables 74 63 62
Derivative financial instruments 12/13 179 480 391
Deferred tax assets 503 303 564
State aid tax recoverable 101 101 101
20,244 20,707 20,883
Current assets
Inventories 4,445 4,575 3,834
Trade and other receivables 2,284 2,780 2,749
Current tax assets 261 219 234
Cash and cash equivalents 12 588 765 1,287
Derivative financial instruments 12/13 58 86 68
Current assets held for disposal 10 231 - 35
7,867 8,425 8,207
Total assets 28,111 29,132 29,090
Current liabilities
Borrowings 12 (1,721) (1,498) (1,107)
Derivative financial instruments 12/13 (49) (42) (62)
Lease liabilities 12 (55) (60) (57)
Trade and other payables (8,746) (9,012) (9,106)
Current tax liabilities (213) (323) (253)
Provisions 4 (159) (153) (188)
Current liabilities held for disposal 10 (215) - (35)
(11,158) (11,088) (10,808)
Non-current liabilities
Borrowings 12 (7,979) (9,488) (8,715)
Derivative financial instruments 12/13 (592) (1,037) (984)
Lease liabilities 12 (186) (209) (194)
Trade and other payables (8) (5) (7)
Deferred tax liabilities (961) (911) (1,037)
Retirement benefit liabilities 6 (1,139) (1,179) (1,199)
Provisions 4 (195) (187) (206)
(11,060) (13,016) (12,342)
Total liabilities (22,218) (24,104) (23,150)
Net assets 5,893 5,028 5,940
Equity
Share capital 103 103 103
Share premium and capital redemption 5,837 5,837 5,837
Retained earnings (712) (1,447) (788)
Exchange translation reserve 106 (43) 200
Equity attributable to owners of the parent 5,334 4,450 5,352
Non-controlling interests 559 578 588
Total equity 5,893 5,028 5,940
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
Share Share Retained Exchange Equity Non- Total
capital premium earnings translation attributable controlling equity
and capital reserve to owners interests
£ million redemption of the parent
At 1 October 2021 103 5,837 (788) 200 5,352 588 5,940
Profit for the period - - 995 - 995 40 1,035
Exchange movements on assets - - - (77) (77) (11) (88)
Exchange movements on net investment hedges - - - 28 28 - 28
Exchange movements on quasi equity loans - - - (36) (36) - (36)
Current tax on hedge of net investments and quasi-equity loans - - - (9) (9) - (9)
Net actuarial losses on retirement benefits - - (12) - (12) - (12)
Current tax relating to net actuarial gains on retirement benefits - - 10 - 10 - 10
Deferred tax relating to net actuarial gains on retirement benefits - - (14) - (14) - (14)
Other comprehensive expense - - (16) (94) (110) (11) (121)
Total comprehensive income/(expense) - - 979 (94) 885 29 914
Transactions with owners
Costs of employees' services compensated by share schemes - - 14 - 14 - 14
Dividends paid - - (917) - (917) (58) (975)
At 31 March 2022 103 5,837 (712) 106 5,334 559 5,893
At 1 October 2020 103 5,837 (2,364) 1,295 4,871 647 5,518
Profit for the period - - 1,806 - 1,806 38 1,844
Exchange movements on assets - - - (1,316) (1,316) (44) (1,360)
Exchange movements on net investment hedges - - - 600 600 - 600
Exchange movements on quasi equity loans - - - (157) (157) - (157)
Exchange movements recycled to profit and loss upon disposal of subsidiaries - - - (337) (337) - (337)
Current tax on hedge of net investments and quasi-equity loans - - - (130) (130) - (130)
Deferred tax on hedge of net investments and quasi-equity loans - - - 2 2 - 2
Net actuarial gains on retirement benefits - - 6 - 6 - 6
Current tax relating to net actuarial gains on retirement benefits - - 14 - 14 - 14
Deferred tax relating to net actuarial gains on retirement benefits - - (12) - (12) - (12)
Other comprehensive income/(expense) - - 8 (1,338) (1,330) (44) (1,374)
Total comprehensive income/(expense) - - 1,814 (1,338) 476 (6) 470
Transactions with owners
Costs of employees' services compensated by share schemes - - 9 - 9 - 9
Dividends paid - - (906) - (906) (63) (969)
At 31 March 2021 103 5,837 (1,447) (43) 4,450 578 5,028
CONSOLIDATED CASHFLOW STATEMENT
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Cash flows from operating activities
Operating profit 1,201 1,637 3,146
Dividends received from investments accounted for under the equity method - 4 4
Depreciation, amortisation and impairment 356 372 815
Loss on disposal of non-current assets 2 2 2
Loss/(profit) on disposal of subsidiary 16 (281) (281)
Post-employment benefits (24) (73) (63)
Costs of employees' services compensated by share schemes 14 11 25
Fair value adjustment of loan receivable (2) (17) (15)
Movement in provisions 62 (52) 18
Operating cash flows before movement in working capital 1,625 1,603 3,651
(Increase)/decrease in inventories (689) (720) 70
Decrease/(increase) in trade and other receivables 240 (28) (201)
Decrease in trade and other payables (203) (583) (533)
Movement in working capital (652) (1,331) (664)
Tax paid (273) (431) (820)
Net cash flows generated from/(used in) operating activities 700 (159) 2,167
Cash flows from investing activities
Interest received 2 - 15
Proceeds from the sale of non-current assets 23 30 50
Proceeds from sale of subsidiaries, net of cash disposed of 57 626 845
Purchase of non-current assets (87) (91) (200)
Purchase of subsidiaries, net of cash acquired (13) - -
Net cash (used in)/generated from investing activities (18) 565 710
Cash flows from financing activities
Interest paid (244) (255) (415)
Purchase of shares by Employee Share Ownership Trusts (1) - -
Lease liabilities paid (34) (38) (69)
Increase in borrowings 891 856 858
Repayment of borrowings (1,004) (899) (2,224)
Cash flows relating to derivative financial instruments 40 14 41
Dividends paid to non-controlling interests (58) (63) (93)
Dividends paid to owners of the parent (917) (906) (1,305)
Net cash used in financing activities (1,327) (1,291) (3,207)
Net decrease in cash and cash equivalents (645) (885) (330)
Cash and cash equivalents at the start of period 1,287 1,626 1,626
Effect of foreign exchange rates on cash and cash equivalents (12) 24 (9)
Transferred to held for disposal (42) - -
Cash and cash equivalents at the end of period 588 765 1,287
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PREPARATION
The financial information comprises the unaudited results for the six months
ended 31 March 2022 and 31 March 2021, together with the audited results for
the year ended 30 September 2021.
The comparative information shown for the year ended 30 September 2021 does
not constitute statutory accounts within the meaning of section 434 of the
Companies Act 2006, and does not reflect all of the information contained in
the Group's published financial statements for that year. The Auditors' Report
on those statements was unqualified with no reference to matters to which the
auditor drew attention by way of emphasis and did not contain any statements
under section 498 of the Companies Act 2006. The financial statements for the
year ended 30 September 2021 were approved by the Board of Directors on 15
November 2021 and have been filed with the Registrar of Companies.
As previously reported, the financial statements of the Group for the year
ending 30 September 2022 will be prepared under UK-adopted International
Accounting Standards ("UK-adopted IAS"). Accordingly, this condensed set of
financial statements for the six months ended 31 March 2022 has been prepared
in accordance with the Disclosure Guidance and Transparency Rules of the
Financial Conduct Authority and with UK-adopted IAS 34 Interim Financial
Reporting. The condensed set of financial statements for the six months ended
31 March 2022 should be read in conjunction with the annual financial
statements for the year ended 30 September 2021 which 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.
Except for the adoption of the new standards and interpretations effective as
of 1 October 2021, the Group's principal accounting policies and methods of
computation used in preparing this information are the same as those applied
in the financial statements for the year ended 30 September 2021, which are
available on our website www.imperialbrandsplc.com.
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 Group recognises that the current political situation in Ukraine and
Russia brings uncertainty. During the period of the COVID-19 pandemic, the
Group effectively managed operations across the world, and has proved it has
an established mechanism to operate efficiently despite uncertainty. The
Directors consider that a one-off discrete event with immediate cash outflow
is of greatest concern to short term liquidity of the Group.
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 or tax payments of c. £900 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 June 2022.
• The additional impact of potential bad debt risks arising from a
recession, of c. £200 million.
• The withdrawal of facilities that provide receivables factoring of c.
£660 million.
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 2023. 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 that could be implemented should such a
scenario arise.
Based on its review of future cash flows covering the period through to
September 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 September 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.
NEW ACCOUNTING STANDARDS ADOPTED IN THE PERIOD
The following amendments to the accounting standards, issued by the IASB or
International Financial Reporting Interpretations Committee (IFRIC) and
endorsed for use in the UK, have been adopted by the Group from 1 October 2021
with no impact on the group's consolidated results, financial position or
disclosures:
• 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 Group 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. In the first half of
the fiscal year all GBP LIBOR derivatives have been changed to reference SONIA
instead of GBP LIBOR. All USD LIBOR derivatives will be changed to reference
SOFR instead of USD LIBOR during the remainder of calendar year 2022. There
are no changes pending for EUR derivatives. No temporary reliefs or practical
expedients were required to be taken by the Group.
USE OF ADJUSTED MEASURES
Management believes that non-GAAP or adjusted measures provide an important
comparison of business performance and reflect the way in which the business
is controlled. The adjusted 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 5 to the financial statements, adjusted and reported net finance
costs in note 5, adjusted and reported tax in note 7, and adjusted and
reported earnings per share in note 9. There are also other adjusted reported
measures which are defined below.
The adjusted 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
measures are used by management to assess the Group's financial performance
and aid comparability of results year on year.
The adjusted performance measures used by the group are as follows:
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. A reconciliation can be found in note 5.
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.
The impairment losses arising due to the revaluation of the assets of the
Group's Russian operations on classification as an asset held for sale have
been treated as an adjusting item as they relate to a disposal. Impairments
and exit costs arising in associated markets that have been caused by the
transfer of the Russian business have also been classified as adjusting items
as they are linked to the disposal.
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 5. 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 7.
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 can be found in note 9.
OTHER NON-GAAP MEASURES USED BY MANAGEMENT
TOBACCO AND NGP 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 arm's 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 FLOW
Adjusted operating cash flow 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. A reconciliation can be found in note 5.
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 12.
CASH CONVERSION
The Group uses cash conversion as a key metric for assessing underlying cash
performance. Cash Conversion is calculated as adjusted operating cash flow as
a percentage of adjusted operating profit. A reconciliation can be found in
note 5.
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. A
reconciliation of adjusted operating profit can be found in note 5 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. A reconciliation can be
found in note 5.
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 12. Adjusted EBITDA is calculated as adjusted
operating profit plus amortisation, depreciation and impairments. A
reconciliation of EBITDA can be found in the RNS on page 13.
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 12). A reconciliation of adjusted net
finance costs can be found in note 5.
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.
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 current financial year are discussed in note 2 of the financial statements
for the year ended 30 September 2021.
Those risks particularly relevant to the current period and the remaining 6
months of the year include:
• Determination of the useful life of intangible assets
• Amortisation and impairment of intangible assets
• Income taxes
• Legal proceedings and disputes
• Provisions
• Categorisation of Russian business assets as assets and liabilities held
for sale (see note 10)
CONTROL OF LOGISTA
The Group continues to determine that it has effective control of Logista,
principally by virtue of its holding 50.01% of the voting shares and the
powers set out in the Relationship Framework Agreement; and that it is
appropriate to consolidate this entity in line with the requirements of IFRS
10 Consolidated Financial Statements.
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
Unaudited Unaudited Audited
£ million unless otherwise indicated 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Revenue 11,044 11,244 23,863
Net revenue 3,495 3,592 7,610
Operating profit 1,124 1,560 2,991
Adjusted operating profit 1,481 1,465 3,308
Adjusted operating margin % 42.4 40.8 43.5
RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Adjusted operating profit 1,481 1,465 3,308
Russian and associated markets exit (201) - -
Amortisation and impairment of acquired intangibles (156) (168) (365)
Restructuring costs (7) (36) (249)
Fair value adjustment of loan receivable 2 17 15
Profit on disposal of subsidiaries - 281 281
Acquisition and disposal costs (5) - -
Excise tax provision 10 1 1
Operating profit 1,124 1,560 2,991
DISTRIBUTION
Unaudited Unaudited Audited
£ million unless otherwise indicated 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Revenue 4,639 4,654 9,589
Distribution net revenue 502 533 1,069
Operating profit 79 74 148
Adjusted operating profit 121 121 258
Adjusted distribution margin % 24.1 22.7 24.1
RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Adjusted operating profit 121 121 258
Amortisation of acquired intangibles (26) (43) (85)
Loss on disposal of subsidiaries (16) - -
Acquisition and disposal costs - - (17)
Restructuring costs - (4) (8)
Operating profit 79 74 148
REVENUE
Unaudited Unaudited Audited
6 months ended 6 months ended Year ended
31 March 2022 31 March 2021 30 September 2021
£ million Total External Total External Total External revenue
revenue revenue revenue revenue Revenue
Tobacco & NGP
Europe 6,596 6,275 6,873 6,543 14,720 14,059
Americas 1,550 1,550 1,512 1,512 3,393 3,393
Africa, Asia & Australasia 2,898 2,898 2,859 2,859 5,750 5,750
Total Tobacco & NGP 11,044 10,723 11,244 10,914 23,863 23,202
Distribution 4,639 4,639 4,654 4,654 9,589 9,589
Eliminations (321) - (330) - (661) -
Total Group 15,362 15,362 15,568 15,568 32,791 32,791
RECONCILIATION FROM TOBACCO & NGP REVENUE TO TOBACCO & NGP NET REVENUE
Unaudited Unaudited
6 months ended 6 months ended
31 March 2022 31 March 2021
£ million Tobacco NGP Total Tobacco NGP Total
Revenue 10,937 107 11,044 11,143 101 11,244
Duty and similar items (7,533) (6) (7,539) (7,634) (6) (7,640)
Sale of peripheral products (10) - (10) (12) - (12)
Net Revenue 3,394 101 3,495 3,497 95 3,592
Audited
Year
ende
d
30
Sept
embe
r
2021
£ million Tobacco NGP Total
Revenue 23,664 199 23,863
Duty and similar items (16,218) (11) (16,229)
Sale of peripheral products (24) - (24)
Net Revenue 7,422 188 7,610
RECONCILIATION FROM DISTRIBUTION REVENUE TO DISTRIBUTION NET REVENUE
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Revenue 4,639 4,654 9,589
Distribution cost of sales (4,137) (4,121) (8,520)
Distribution Net Revenue 502 533 1,069
TOBACCO & NGP NET REVENUE
Unaudited Unaudited
6 months ended 6 months ended
31 March 2022 31 March 2021
£ million Tobacco NGP Total Tobacco NGP Total
Europe 1,492 77 1,569 1,615 55 1,670
Americas 1,136 24 1,160 1,098 33 1,131
Africa, Asia & Australasia 766 - 766 784 7 791
Total Tobacco & NGP 3,394 101 3,495 3,497 95 3,592
Audited
Year
ende
d
30
Sept
embe
r
2021
£ million Tobacco NGP Total
Europe 3,425 126 3,551
Americas 2,478 56 2,534
Africa, Asia & Australasia 1,519 6 1,525
Total Tobacco & NGP 7,422 188 7,610
ADJUSTED OPERATING PROFIT AND RECONCILIATION TO PROFIT BEFORE TAX
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Tobacco & NGP
Europe 671 750 1,670
Americas 453 426 1,037
Africa, Asia & Australasia 357 289 601
Total Tobacco & NGP 1,481 1,465 3,308
Distribution 121 121 258
Eliminations (2) 3 7
Adjusted operating profit 1,600 1,589 3,573
Russian and associated markets exit - Tobacco & NGP (201) - -
Amortisation and impairment of acquired intangibles - Tobacco & NGP (156) (168) (365)
Amortisation of acquired intangibles - Distribution (26) (43) (85)
Restructuring costs - Tobacco & NGP (7) (36) (249)
Restructuring costs - Distribution - (4) (8)
Fair value adjustment of loan receivable - Tobacco & NGP 2 17 15
Profit on disposal of subsidiaries - Tobacco & NGP - 281 281
Loss on disposal of subsidiaries - Distribution (16) - -
Acquisition and disposal costs - Tobacco & NGP (5) - -
Acquisition and disposal costs - Distribution - - (17)
Excise tax provision - Tobacco & NGP 10 1 1
Operating profit 1,201 1,637 3,146
Net finance income 75 414 81
Share of profit of investments accounted for using the equity method (20) 8 11
Profit before tax 1,256 2,059 3,238
4. RESTRUCTURING COSTS AND PROVISIONS
RESTRUCTURING COSTS
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Employment related 3 5 145
Asset impairments - 24 92
Other charges 4 11 20
7 40 257
Restructuring costs analysed by workstream:
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
2021 strategic review programme 7 27 226
Cost optimisation programme - 8 23
Other restructuring activities - 5 8
7 40 257
The charge for the period of £7 million (6 months to 2021: £40 million)
relates to our 2021 Strategic review programme.
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 £7 million (6 months to 2021: £27 million) related to
the 2021 Strategic Review Programme have been incurred in the period, £7
million (6 months to 2021: £7 million) of charges in respect of the change
programme itself and nil (6 months to 2021: £20 million) impairments
associated with NGP assets.
2021 Strategic Review Programme cash spend for the period was £24 million (6
months to 2021: £7 million).
COST OPTIMISATION PROGRAMME
The cost optimisation programmes (Phase I announced in 2013 and Phase II
announced in November 2016) were 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.
Restructuring costs of nil (6 months to 2021: £8 million) related to the Cost
optimisation programmes includes nil (6 months to 2021: £4 million) of
impairments associated with tangible assets.
Phase II of the programme focused on reducing product costs and overheads.
Phase II cash spend for the period was £11 million (6 months to 2021: £27
million), bringing the cumulative cash cost of the programme to £559 million
as at 31 March 2022. Phase II was delivering savings of c. £320 million per
annum from September 2021.
Phase I cash spend for the period was £6 million (6 months to 2021: £4
million), bringing the cumulative cash cost of the programme to £577 million
as at 31 March 2022. Phase I has delivered savings of c. £305 million per
annum from September 2018.
OTHER RESTRUCTURING
In the period, restructuring costs related to Logista were nil (6 months to
2021: £5 million). In the period other restructuring cash spend was £1
million (6 months to 2021: £8 million).
PROVISIONS
Unaudited
31 March 2022
£ million Restructuring Other Total
At 1 October 2021 251 143 394
Additional provisions charged to the consolidated income statement 12 152 164
Amounts used (28) (10) (38)
Unused amounts reversed (22) (15) (37)
Transferred to held for disposal (note 10) - (121) (121)
Exchange movements (5) (3) (8)
At 31 March 2022 208 146 354
Current 96 63 159
Non-current 112 83 195
208 146 354
Analysed as:
Unaudited Unaudited Audited
£ million 31 March 2022 31 March 2021 30
September 2021
Current 159 153 188
Non-current 195 187 206
354 340 394
Restructuring provisions relate mainly to our 2021 Strategic Review Programme
and Cost optimisation programmes.
The restructuring provision is split between 2021 Strategic review programme
of £69 million, Cost Optimisation Programmes of £130 million and other
programmes of £9 million.
Within the Cost optimisation programme provisions of £68 million related to
costs of consolidating the manufacturing capacity within the Group. It is
expected that the Cost optimisation programme restructuring provisions will be
predominantly utilised over the next 2 years.
Other provisions include £44 million relating to local employment
requirements including holiday pay, £44 million to various local tax or duty
requirements, £23 million of distribution requirements relating to employment
and duty, and £17m relating to the impact of Russian exit on other
operations. The provisions are spread throughout the Group and payment will be
dependent on local statutory requirements.
5. ALTERNATIVE PERFORMANCE MEASURES
RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT
Unaudited Unaudited Audited
£ million Notes 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Operating profit 1,201 1,637 3,146
Russian and associated markets exit 10 201 - -
Amortisation and impairment of acquired intangibles 182 211 450
Restructuring costs 4 7 40 257
Fair value adjustment of loan receivable (2) (17) (15)
Loss/(profit) on disposal of subsidiaries 16 (281) (281)
Acquisition and disposal costs 5 - 17
Excise tax provision (10) (1) (1)
Adjusted operating profit 1,600 1,589 3,573
Amortisation and impairment of acquired intangibles, profit on disposal of
subsidiaries, acquisition and disposal costs and restructuring costs are
discussed in further detail in note 1.
RECONCILIATION FROM REPORTED NET FINANCE INCOME TO ADJUSTED NET FINANCE COSTS
Unaudited Unaudited Audited
£ million Notes 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Reported net finance income 75 414 81
Fair value gains on derivative financial instruments (688) (487) (508)
Fair value losses on derivative financial instruments 616 402 457
Exchange gains on financing activities (164) (534) (445)
Net fair value and exchange gains on financial instruments (236) (619) (496)
Interest income on net defined benefit assets (53) (45) (89)
Interest cost on net defined benefit liabilities 49 44 87
Post-employment benefits net financing income (4) (1) (2)
Adjusted net finance costs (165) (206) (417)
Comprising
Interest income on bank deposits 3 5 18
Interest cost on lease liabilities (4) (4) (7)
Interest cost on bank and other loans (164) (207) (428)
Adjusted net finance costs (165) (206) (417)
CASH CONVERSION CALCULATION
Unaudited Unaudited Audited
£ million unless otherwise stated 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Net cash generated from/(used in) operating activities 700 (159) 2,167
Tax 273 431 820
Proceeds from sale of non-current assets 23 30 50
Purchase of non-current assets (87) (91) (200)
Restructuring cash spend 42 46 112
Adjusted operating cash flow 951 257 2,949
Adjusted operating profit 1,600 1,589 3,573
Cash Conversion % 59 % 16 % 83 %
RECONCILIATION FROM NET CASH FLOW FROM OPERATING ACTIVITIES TO FREE CASH FLOW
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Net cash generated from/(used in) operating activities 700 (159) 2,167
Purchase of non-current assets (87) (91) (200)
Net proceeds from sale of non-current assets 23 30 50
Dividends paid to non-controlling interests (58) (63) (93)
Net interest paid (242) (255) (400)
Free cash flow 336 (538) 1,524
6. 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.
In December 2021 the Imperial Tobacco Pension Fund (ITPF) entered into an
agreement to purchase a bulk annuity of c. £1.8 billion. The bulk annuity
will cover around 60% of the pensioner member obligation and is funded by
existing assets held in the ITPF.
DEFINED BENEFIT PLAN ASSETS AND LIABILITIES RECOGNISED IN THE CONSOLIDATED
BALANCE SHEET
Unaudited Unaudited Audited
31 March 2022 31 March 2021 30
September 2021
Retirement benefit assets 1,048 942 1,046
Retirement benefit liabilities (1,139) (1,179) (1,199)
Net retirement benefit liabilities (91) (237) (153)
The movement in the net retirement benefit is mainly from actuarial gains and
losses on the Group's pension assets and liabilities. The actuarial gains and
losses were from the changes in principal actuarial assumptions on the Group
schemes.
KEY FIGURES AND ASSUMPTIONS USED FOR MAJOR PLANS
Unaudited Unaudited
6 months ended 6 months ended
31 March 2022 31 March 2021
£ million unless otherwise stated ITPF RCPP ITGBH ITPF RCPP ITGBH
Defined benefit obligation (DBO) 3,122 723 364 3,303 743 387
Fair value of scheme assets (4,080) - (391) (4,188) - (370)
Net defined benefit (asset)/liability (958) 723 (27) (885) 743 17
Principal actuarial assumptions used (% per annum)
Discount rate 2.8 1.8 3.7 2.1 1.0 3.0
Future salary increases 3.6 3.8 n/a 3.1 2.8 n/a
Future pension increases 3.6 2.7 n/a 3.1 1.7 n/a
Inflation 3.6 2.7 2.3 3.1 1.7 2.5
Audited
30
September 2021
£ million unless otherwise stated ITPF RCPP ITGBH
Defined benefit obligation (DBO) 3,404 765 403
Fair value of scheme assets (4,386) - (396)
Net defined benefit (asset)/liability (982) 765 7
Principal actuarial assumptions used (% per annum)
Discount rate 2.1 1.1 2.7
Future salary increases 3.4 3.1 n/a
Future pension increases 3.4 2.0 n/a
Inflation 3.4 2.0 2.3
7. TAX
RECONCILIATION FROM REPORTED TAX TO ADJUSTED TAX
Reported tax for the six months ended 31 March 2022 has been calculated on the
basis of a forecast effective rate for the year ended 30 September 2022.
Unaudited Unaudited Audited
£ million 6 months ended 31 6 months ended 31 March 2021 Year ended 30
March 2021 September 2021
Reported tax 221 215 331
Deferred tax on amortisation and impairment of acquired intangibles 8 12 31
Tax on net foreign exchange and fair value gains and losses on financial 2 88 78
instruments
Tax on post-employment benefits net financing cost - - 1
Tax on restructuring costs 3 9 72
Tax on disposal of subsidiaries 7 6 11
Recognition of tax credits - - 239
Uncertain tax positions 57 - -
Deferred tax on unremitted earnings 26 - -
Tax on unrecognised losses (8) (10) (47)
Adjusted tax charge 316 320 716
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. 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 £230
million. The challenge concerns the valuation placed on the shares of Altadis
Distribution France (now known as Logista France) following an intra-group
transfer of shares in October 2012 and the tax Consequences flowing from a
potentially higher value that is argued for by the tax authorities. In October
2018 the Commission Nationale, an independent adjudication body, whose
decision is advisory only, issued a report supportive of the Group's arguments
for no adjustment. In December 2018 the French tax authorities issued their
final assessments seeking the full amount of additional tax assessed of £230
million (2021: £234 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. All submissions have
been made to the court and we await a hearing date. The Group believes it is
appropriate to maintain a £40 million (2021: £41 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 £700 million (2021: £900 million). The Group holds a
provision of £163 million (2021: £260 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,
which has since been paid. Based on advice, the Group continues to believe
this is a transfer pricing matter. On conclusion of the transfer pricing
discussions, an appropriate refund is anticipate for all DPT payments.
The Group believe the transfer pricing provision held above appropriately
provides for this and other transfer pricing issues.
FRENCH BRANCH TAX
In December 2021 the Group received assessments from the French tax
authorities which could lead to additional liabilities of £169 million. The
challenge concerns the intragroup financing of the French branch of Imperial
Tobacco Limited. In February 2022 the Group appealed against the assessment.
Advice to date is that our appeal should ultimately be successful.
8. DIVIDENDS
DISTRIBUTIONS TO ORDINARY EQUITY HOLDERS
Unaudited Audited Audited
£ million 2022 2021 2020
Paid interim of nil pence per share (2021: 90.60 pence, 2020: 89.70 pence)
- Paid June 2020 - - 197
- Paid September 2020 - - 197
- Paid December 2020 - - 453
- Paid June 2021 - 199 -
- Paid September 2021 - 199 -
- Paid December 2021 - 458 -
Interim dividend paid - 856 847
Proposed interim of 42.54 pence per share (2021: nil, 2020: nil)
- To be paid June 2022 201 - -
- To be paid September 2022 201 - -
Interim dividend proposed 402 - -
Paid final of nil pence per share (2021: 48.48 pence, 2020: 48.01 pence)
- Paid March 2021 - - 454
- Paid March 2022 - 459 -
Final dividend - 459 454
Total ordinary share dividends of 42.54 pence per share (2021: 139.08 pence, 402 1,315 1,301
2020: 137.71 pence)
The declared interim dividend for 2022 amounts to a total dividend of £402
million based on the number of shares ranking for dividend at 31 March 2022.
This will be paid in two stages, one in June 2022 and one in September 2022.
The dividend paid during the half year to 31 March 2022 is £917 million
(2021: £906 million).
9. EARNINGS PER SHARE
Unaudited Unaudited Audited
£ million 6 months ended 31 March 2022 6 months ended 31 March 2021 Year ended 30
September 2021
Earnings: basic and diluted - attributable to owners of the 995 1,806 2,834
Parent Company
Millions of shares
Weighted average number of shares:
Shares for basic earnings per share 945.7 944.6 945.0
Potentially dilutive share options 4.1 1.4 2.5
Shares for diluted earnings per share 949.8 946.0 947.5
Pence
Basic earnings per share 105.2 191.2 299.9
Diluted earnings per share 104.8 190.9 299.1
RECONCILIATION FROM REPORTED TO ADJUSTED EARNINGS AND EARNINGS PER SHARE
Unaudited Unaudited Audited
6 months ended 6 months ended Year ended
31 March 2022 31 March 2021 30 September 2021
£ million unless otherwise indicated Earnings per share (pence) Earnings Earnings per share (pence) Earnings Earnings per share (pence) Earnings net of tax
net of tax net of tax
Reported basic 105.2 995 191.2 1,806 299.9 2,834
Russian and associated markets exit 21.3 201 - - - -
Amortisation and impairment of acquired intangibles 18.4 174 21.1 199 44.3 419
Restructuring costs 0.4 4 3.3 31 19.6 185
Fair value adjustment loan receivable (0.2) (2) (1.8) (17) (1.6) (15)
Loss/(profit) on disposal of subsidiaries 1.0 9 (30.4) (287) (29.7) (281)
Acquisition and disposal costs 0.5 5 - - 1.8 17
Excise tax provision (1.1) (10) (0.1) (1) (0.1) (1)
Net fair value and exchange movements on financial instruments (25.2) (238) (74.9) (707) (60.7) (574)
Post-employment benefits net financing cost (0.4) (4) (0.1) (1) (0.3) (3)
Brand impairment in equity accounted joint venture 2.5 24 - - - -
Tax on disposal of premium cigar division - - - - (1.2) (11)
Recognition of tax credits - - - - (25.3) (239)
Uncertain tax positions (6.0) (57) - - - -
Deferred tax on unremitted earnings (2.7) (26) - - - -
Tax on unrecognised losses 0.8 8 1.1 10 5.0 47
Adjustments above attributable to non-controlling interests (1.5) (14) (1.8) (17) (4.6) (43)
Adjusted 113.0 1,069 107.6 1,016 247.1 2,335
Adjusted diluted 112.6 1,069 107.5 1,016 246.4 2,335
Organic adjusted 113.0 1,069 107.0 1,011 246.5 2,330
Premium Cigar divestment adjusted - - 0.6 5 0.6 5
Adjusted 113.0 1,069 107.6 1,016 247.1 2,335
Organic adjusted diluted 112.6 1,069 106.9 1,011 245.8 2,330
Premium Cigar divestment adjusted diluted - - 0.6 5 0.6 5
Adjusted diluted 112.6 1,069 107.5 1,016 246.4 2,335
10. DISPOSAL OF SUBSIDIARIES
PREMIUM CIGAR DIVISION
On 27 April 2020 the Group announced that it had agreed the sale of the
Premium Cigar Division ("the Division"). The share sale element of the sale of
the Division completed on 29 October 2020. Further deferred consideration of
€88 million (£74 million) relating to the share sale was received on 26
October 2021.
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
(£58 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 (£49 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.
LOGISTA
On 2 February 2022 the Group's subsidiary Logista sold its interest in
Supergroup S.A.S. for a consideration of nil. A loss on disposal of £16
million before tax and £9 million after tax has been recognised. In addition
Logista sold two properties in the period that had previously been recognised
as assets held for sale for consideration of €15 million (£13 million).
RUSSIAN OPERATIONS
On 15 March 2022 the Group announced it had entered into negotiations to
transfer its Russian assets and operations (the Disposal Group) to a third
party. On 27 April 2022, following registration with the Russian tax
authority, the Group completed the transfer of assets for a total
consideration of £20 million. Disposal costs of c. £4 million are expected
to be incurred. The transaction met the IFRS 5 criteria for presentation as an
asset held for sale as at the 31 March 2022 balance sheet date.
IMPAIRMENT AND PRESENTATION AS AN ASSET HELD FOR SALE
There is a requirement to reassess the carrying value of the Disposal Group
immediately prior to classification as held for sale. At 31 March 2022 an
impairment test was undertaken. The test involved an assessment of the level
of proceeds expected to be achieved on completion of the disposal, less
transaction tax and costs with a comparison of this figure to the carrying
value of the net assets of the Disposal Group (as it is required to be valued
at the lower of cost and its fair value less costs to sell). Since bid offers
are an observable input not based on a quoted price the fair value is based on
a level 2 valuation under IFRS 13.
The fair value less costs to sell was £16 million based on the sales
consideration less associated disposal costs. As a result of this test an
impairment of £166 million was recognised at 31 March 2022 against the
carrying value of the Disposal Group. The non-current assets have been written
down to zero and the current assets of the Disposal Group have been presented
at their original carrying values within current assets held for sale as the
balance of the impairment has been recognised as a provision within
liabilities held for sale. Total net assets held for sale (after impairment)
is £16 million. The actual transfer consideration has been used as the basis
of the fair value and therefore no further disclosure of sensitivities has
been given.
IMPACT OF RUSSIAN EXIT ON OTHER OPERATIONS
The decision to transfer the assets of the Russian operations has implications
for a limited number of Group markets that have historically been supplied by
the Volgograd factory. Following a review of the impacts resulting from the
decision to transfer the Russian factory it was determined that it was
unviable to continue trading in these areas for a number of reasons including
duty and supply chain challenges. The decision to exit operations results in a
number of assets held by these markets having to be impaired. In addition
certain exit costs are expected to have to be incurred ending operations.
Total impairment and exit costs of £35 million are now required to be
recognised. As the original decision to cease Group operations in Russia was
the triggering event resulting in the impairments these provisions have been
recognised as at the 31 March 2022 balance sheet date.
The Group has an investment in the Global Horizon Ventures joint venture
company which is accounted for as an investment using the equity method. This
entity held an intangible asset relating to royalties arising on the sales of
a specific brand within Russia. Following the transfer of the Russian assets
these royalties will cease and therefore the Group's share of this asset has
now been fully impaired with a charge of £24 million.
The total value of all direct and indirect impairments and exit costs
associated with the transfer of operations in Russia that were recognised at
31 March 2022 was £225 million. Within this charge, £201 million has been
treated as an adjusting item and removed from Adjusted Operating Profit. The
impairment charge of £24 million relating to the joint venture operations is
recognised in the consolidated income statement within the share of profit of
investments accounted for under the equity method line. This impairment has
also been treated as an adjusting item and is excluded from Adjusted Earnings.
ASSET HELD FOR DISPOSAL
The assets and liabilities classified as held for disposal are as follows:
Unaudited Unaudited Audited
£ million 31 March 2022 31 March 2021 September 2021
Non-current assets
Property, plant and equipment - - 8
Deferred tax assets 6 - -
6 - 8
Current assets
Inventories 56 - 9
Trade and other receivables 127 - 18
Cash and cash equivalents 42 - -
225 - 27
Total Assets 231 - 35
Current liabilities
Trade and other payables (85) - (13)
Lease liabilities (2) - -
Tax liabilities (7) - (4)
Provisions (121) - (18)
(215) - (35)
Total liabilities (215) - (35)
Net assets 16 - -
11. INTANGIBLE ASSETS
The Group tests goodwill and intangible assets with indefinite lives for
impairment annually, or more frequently if there are any indicators that
impairment may have arisen. Goodwill is allocated to groups of cash-generating
units (CGUs) and is monitored at a Cash Generating Unit Grouping (CGUG) level.
The last goodwill impairment test was conducted as at 30 September 2021. At
present there is a significant level of headroom for the recoverability of
goodwill within each CGUG. The next goodwill impairment review will take place
on or before the 30 September 2022. We have reviewed goodwill and indefinite
life intangible assets for indicators of impairment as required by IAS 36.
Following a review of the recoverable values of other intangible assets not
currently subject to amortisation, no intangible assets (2021: £20 million)
were identified as not being recoverable. Nil impairment charge (2021: £20
million) was therefore recognised. We have not identified any other indicators
and therefore there is no requirement to undertake a full impairment test at
this stage.
On 16 February 2022, the Group's subsidiary Logista acquired 70 per cent of
the share capital of Speedlink Worldwide Express B.V. for a purchase
consideration of €17 million (£14 million) comprised of €15 million (£13
million) which has been paid in cash and €2 million (£2 million) of
contingent consideration which is payable upon achievement of certain business
objectives, the maximum contingent consideration payable is €3 million (£3
million). There is an intention to purchase the remaining 30% of share capital
over the next 3 years. As effective control has been achieved through this
acquisition, Speedlink Worldwide Express B.V. has been consolidated as a
subsidiary within the Group with a 65 per cent minority interest. Provisional
goodwill of €16 million (£14 million) was recognised on acquisition. If new
information is obtained within one year of the date of acquisition about the
facts and circumstances that existed at the date of acquisition that
identifies adjustments, the value of the goodwill will be revised.
12. NET DEBT
The movements in cash and cash equivalents, borrowings, and derivative
financial instruments in the period were as follows:
Unaudited
Derivative Liabilities Cash
Current Lease Non-current financial from financing and cash
£ million borrowings creditors borrowings instruments activities equivalents Total
At 1 October 2021 (1,107) (251) (8,715) (587) (10,660) 1,287 (9,373)
Reallocation of current borrowings from non-current borrowings (746) - 746 - - - -
Cash flow 113 34 - (40) 107 (645) (538)
Change in accrued interest 55 (3) 21 (4) 69 - 69
Change in fair values - - - 72 72 - 72
New leases and modifications - (26) - - (26) - (26)
Exchange movements (36) 3 (31) 155 91 (12) 79
Transferred to asset held for disposal (note 10) - 2 - - 2 (42) (40)
At 31 March 2022 (1,721) (241) (7,979) (404) (10,345) 588 (9,757)
Unaudited
Derivative Liabilities Cash
Current Lease Non-current financial from financing and cash
£ million borrowings creditors borrowings instruments activities 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 899 38 (856) (14) 67 (885) (818)
Change in accrued interest 56 (4) 17 2 71 - 71
Change in fair values - - - 85 85 - 85
New leases and modifications - (20) - - (20) - (20)
Exchange movements 44 16 506 230 796 24 820
At 31 March 2021 (1,498) (269) (9,488) (513) (11,768) 765 (11,003)
Average reported net debt during the period was £10,027 million (2021:
£11,887 million).
ADJUSTED NET DEBT
Management monitors the Group's borrowing levels using adjusted net debt which
excludes lease liabilities, interest accruals and the fair value of derivative
financial instruments. Adjusted net debt is used for the purpose of debt
monitoring as it excludes non-cash accounting adjustments and therefore better
tracks operational debt management performance.
Unaudited Unaudited Audited
£ million 31 March 2022 31 March 2021 30
September 2021
Reported net debt (9,757) (11,003) (9,373)
Accrued interest 68 81 140
Lease liabilities 241 269 251
Fair value of interest rate derivatives 291 325 367
Adjusted net debt (9,157) (10,328) (8,615)
The fair value of bonds is estimated to be £8,690 million (2021: £11,668
million) and has been determined by reference to market prices at the balance
sheet date. The carrying value of bonds is £8,743 million (2021: £10,926
million). The fair value of all other borrowings is considered to be equal to
their carrying amount.
Average adjusted net debt during the period was £9,278 million (2021:
£11,062 million).
13. FINANCIAL INSTRUMENTS
The table below sets out the Group's accounting classification of each class
of financial assets and liabilities:
Unaudited
31 March 2022
Fair value Fair value Assets and
through through liabilities at
income comprehensive amortised
£ million statement income cost Total Current Non-current
Trade and other receivables 43 - 2,151 2,194 2,138 56
Cash and cash equivalents - - 588 588 588 -
Derivatives 237 - - 237 58 179
Total financial assets 280 - 2,739 3,019 2,784 235
Borrowings - - (9,700) (9,700) (1,721) (7,979)
Trade and other payables - - (8,133) (8,133) (8,133) -
Derivatives (471) (170) - (641) (49) (592)
Lease liabilities - - (241) (241) (55) (186)
Total financial liabilities (471) (170) (18,074) (18,715) (9,958) (8,757)
Total net financial liabilities (191) (170) (15,335) (15,696) (7,174) (8,522)
Unaudited
31 March 2021
Fair value Fair value Assets and
through through liabilities at
income comprehensive amortised
£ million statement income cost Total Current Non-current
Trade and other receivables 38 - 2,648 2,686 2,628 58
Cash and cash equivalents - - 765 765 765 -
Derivatives 566 - - 566 86 480
Total financial assets 604 - 3,413 4,017 3,479 538
Borrowings - - (10,986) (10,986) (1,498) (9,488)
Trade and other payables - - (8,319) (8,319) (8,319) -
Derivatives (886) (193) - (1,079) (42) (1,037)
Lease liabilities - - (269) (269) (60) (209)
Total financial liabilities (886) (193) (19,574) (20,653) (9,919) (10,734)
Total net financial liabilities (282) (193) (16,161) (16,636) (6,440) (10,196)
Audited
30
September 2021
Fair value Fair value Assets and
through through liabilities at
income comprehensive amortised
£ million statement income cost Total Current Non-current
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)
Trade and other receivables excludes prepayments and Trade and other payables
excludes accruals.
The Group's derivative financial instruments which are held at fair value, are
as follows.
Unaudited Unaudited Audited
£ million 31 March 2022 31 March 2021 30
September 2021
Assets
Interest rate swaps 190 541 451
Forward foreign currency contracts 21 21 4
Cross-currency swaps 26 4 4
Total carrying value of derivative financial assets 237 566 459
Liabilities
Interest rate swaps (480) (862) (813)
Forward foreign currency contracts (16) (3) (4)
Cross-currency swaps (179) (261) (266)
Carrying value of derivative financial liabilities before collateral (675) (1,126) (1,083)
Collateral (1) 34 47 37
Total carrying value of derivative financial liabilities (641) (1,079) (1,046)
Total carrying value of derivative financial instruments (404) (513) (587)
Analysed as:
Interest rate swaps (290) (321) (362)
Forward foreign currency contracts 5 18 -
Cross-currency swaps (153) (257) (262)
Collateral (1) 34 47 37
Total carrying value of derivative financial instruments (404) (513) (587)
¹ Collateral deposited against derivative financial liabilities under the
terms and conditions of an ISDA Credit Support Annex
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 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 £17 million (2021: £21 million) and would have been a £33
million (2021: £46 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.
14. CONTINGENT LIABILITIES
The following summary includes updates to matters that have developed since
publication of the 2021 Annual Report and Accounts.
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", with Mississippi, Florida, Texas and
Minnesota known collectively as the "Previously Settled States"). ITG is a
party to the MSA and to the Mississippi, and Minnesota State Settlement
Agreements.
In connection with its 12 June 2015 acquisition of four cigarette brands
(Winston, Salem, Kool and Maverick, referred to as the "Acquired Brands") from
Reynolds and Lorillard, ITG has been involved in litigation and other disputes
with the Previously Settled States, Philip Morris, and Reynolds in their state
courts. ITG has also been involved in litigation with Reynolds in the Delaware
court that has jurisdiction over disputes under the acquisition agreement for
the Acquired Brands. All cases have now been resolved with the exception of
Florida which continues to be heard before the Delaware court.
The Court will hear argument on potentially dispositive motions in May 2022
with a trial, if necessary, in September 2022. Amounts at issue range from
$105 million to $184 million through 2021 and $17 million to $27 million
annually going forward.
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. There have been no material updates in any product liability
investigations in the first half of FY22.
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 stated that such conduct may be contrary to Article IV.1
CEL and Article 101 TFEU.
Following the parties' defence and a hearing, an infringement Decision was
issued in April 2022 by the BCA Competition College imposing a fine of €7.14
million on the Company's Belgian subsidiary, payable within 30 Days of the
notification of the Decision. This amount had been fully provided for in the
accounts. The Company's Belgian subsidiary will pursue an appeal to the Market
Court in Brussels, by submitting its detailed grounds of appeal in May 2022.
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. 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 authorised
Imperial to file and litigate a motion to dismiss the action.
Imperial is pursuing a motion to dismiss the filed claim and, the Claimants
having been granted leave to amend their claim a second time, Imperial filed a
motion to dismiss the second amended complaint in April 2022. A decision on
Imperial's motion to dismiss is not expected until the third quarter of 2022
at the earliest. In the event the motion to dismiss is denied, the court has
set a schedule for further proceedings, with trial commencing in July 2023.
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 allegation 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
British American Tobacco (BAT) group by a group of tobacco farm workers. The
Imperial Defendants 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.
The Claimants' disclosure application to be heard at the end of November 2021
was adjourned. The deadline for Imperial and BAT to file a defence has been
postponed pending other case management actions and will be determined at a
subsequent case management hearing. 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. A total of 128 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. To date SMT has filed
retractions proceedings against 14 of these decisions.
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. SMT is due to present further legal arguments before the Court
of Appeal by June 2022.
SPAIN
A claim has been made against the Group's subsidiary, Altadis SA, by the
General Attorney of Spain (GA) seeking repayment of state aid paid out between
c. 2004 - 2010 (a period prior to the Group's acquisition of Altadis, which
took place in 2008). State aid was paid by the regional government of
Andalusia to various insurance companies, to finance the early retirement
costs of Altadis ex-employees following the termination of their employment
contracts related to closure of an Altadis factory. In January 2022 the Court
ordered that the claim should proceed to the next stage and that Altadis
should file a bank guarantee in the sum of €27.3 million at Court (the
amount claimed plus 1/3 required under Spanish law). There is no immediate
requirement to pay this sum and Altadis has challenged the ruling on the
guarantee. The Group does not expect this claim to succeed and no associated
provision has been recognised.
15. POST BALANCE SHEET EVENTS
COMPLETION OF THE RUSSIAN BUSINESS TRANSFER AFTER THE BALANCE SHEET DATE
The transfer of the Russian assets and operations completed on 27 April 2022
and has been treated as a non-adjusting post balance sheet event with the
transaction being accounted for in the second half of the financial year ended
30 September 2022. The sales consideration will be recognised and the net
assets of the Disposal Group be derecognised. There is then a requirement to
recycle the cumulative foreign exchange losses arising on the retranslation of
non-sterling assets of the Disposal Group into the income statement. Given
that the net assets of the Disposal Group have already been written down to
their fair value loss costs to sell value as at 31 March 2022 the loss on
disposal will be primarily due to these foreign exchange losses.
We estimate the associated cumulative foreign exchange losses arising on
completion is in the range of £150 million - £190 million.
The Russian assets and operations contributed £54 million (31 March 2021:
£61 million) of net revenue and £8 million (31 March 2021: £4 million) of
operating profit before tax in the six month period and was part of the
Africa, Asia and Australasia division. The business comprised Imperial Tobacco
Sales and Marketing LLC a company involved in tobacco sales in Russia and
Imperial Tobacco Volga LLC a company which owns the Volgograd factory which
manufactures tobacco products for Russia and a small number of other
countries.
US FOOD AND DRUG ADMINISTRATION MARKETING DENIAL ORDERS
On 8 April 2022 the US Food and Drug Administration issued Marketing Denial
Orders against a number of myblu products. We are currently seeking to
overturn the decision through an appeal process. This decision has been
treated as a non-adjusting post balance sheet event and consequently had not
had any impact on the carrying value of associated assets as at 31 March 2022.
16. RELATED PARTY TRANSACTIONS
Transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this
note. No related party transactions have taken place in the 6 months ended 31
March 2022 (6 months to 2021: none) that have materially affected the
financial position or performance of the group during that period.
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