Report for the year ended 30 September 2022
Business Highlights
o Five-year strategy on track and delivering improved operational performance
o Aggregate market share for top-five combustible markets up 35bps – first annual share gain in >five years
o Next generation products (NGP) net revenue up 11% driven by market launches in all categories
o Strong adjusted operating cash conversion of 102% enables balance sheet to reach target leverage of 2.0x
o Increased shareholder returns with 1.5% growth in dividend enhanced by an ongoing £1 billion share buyback
o Embedding of culture changes continues, with all 26,000 Imperial colleagues set to complete training in our new purpose, vision and behaviours by calendar year-end
Financial Summary
| Reported | Adjusted3 | |||||||||
| 2022 | 2021 | Change | 2022 | 20212 | Actual | Constant currency4 | ||||
| Revenue/Net revenue1 | £m | 32,551 | 32,791 | -0.7% | 7,793 | 7,589 | +2.7% | +1.5% | ||
| Operating profit | £m | 2,683 | 3,146 | -14.7% | 3,694 | 3,570 | +3.5% | +1.8% | ||
| Basic earnings per share | pence | 165.9 | 299.9 | -44.7% | 265.2 | 246.5 | +7.5% | +4.9% | ||
| Free cash flow | £m | 2,562 | 1,524 | +68.1% | 2,562 | 1,524 | +68.1% | |||
| Net debt | £m | (8,492) | (9,373) | (8,054) | (8,615) | |||||
| Dividend per share | pence | 141.17 | 139.08 | 1.5% | 141.17 | 139.08 | +1.5% | +1.5% | ||
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 following its divestment in October 2020. The Division contributed £21m to net revenue and £3m to adjusted operating profit in 2021.
3 See page 3 for the basis of presentation and the supplementary section 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
“In line with our five-year strategy, increased investment and a more consumer-centric approach have improved delivery in both our priority combustible markets and our next generation product operations. At the same time, disciplined capital allocation has strengthened our balance sheet to reach our target leverage. This has enabled us to enhance shareholder returns through an ongoing share buyback programme alongside a progressive dividend.
“In tobacco, a sharper focus on brand building and sales execution has supported aggregate market share gains in our top-five priority markets. Price mix improved in the second half, helping to offset the anticipated acceleration in volume declines, which occurred as borders reopened, prompting a return to pre-COVID buying patterns.
“In NGP, successful consumer trials have validated our approach and we are now stepping up investment in new product and market launches across all three product categories. Our heated tobacco proposition, Pulze and iD, continued to perform well in our pilot markets of Czech Republic and Greece, and we have recently launched in Portugal, Hungary and Italy, the largest European market for this category. Following the successful French trial of our new vapour device, blu 2.0, we have now launched in the UK. In modern oral, we expanded our range of flavours for Zone X in key markets and successfully introduced the Zone X format into Norway.
“Looking ahead, we are well positioned to deliver against the next phase of our five-year strategy. The additional investment and the actions we have taken during the initial two-year strengthening phase have built stronger foundations as we face into a more challenging macro-economic environment. We are well placed to build on our track record of delivery over the next three years, improving returns and creating sustainable growth in shareholder value.”
Delivering Against our Strategic Priorities
Focus on five priority combustible markets
· Investment delivering 35 bps growth in aggregate market share; first share gains in >five years
· Four out of five markets in share growth; gains in US, UK, Australia and Spain offsetting declines in Germany
· Driven by investment in multiple initiatives across all five markets
o Expanding sales force and improving sales execution, e.g. US
o Building brand equity and increasing presence in premium, e.g. Winston and Kool in US, Gauloises in Germany
o Optimising our approach to the value segment, e.g. Lambert & Butler launch in Australia
o Rejuvenating local jewel brands, e.g. Embassy and Regal in UK, Nobel and Fortuna in Spain
o Maximising potential of fine cut category, e.g. Players Easy Rolling and Riverstone in the UK
Drive value from our broader market portfolio
· New capabilities and increased focus with a clear market prioritisation are driving operational improvements
· Disciplined market focus with exits from Japan and Russia completed
· Focus on Eastern Europe is delivering growth in net revenue (+6%) and operating profit (+4%)
· Africa continues to perform well with further share gains and revenue growth (+3%), against a strong comparator
Build a targeted NGP business
· Strategy delivering net revenue growth driven by Europe and despite uncertainties caused by the MDO in the US
· Heated tobacco Pulze & iD gained share in Czech; now also launched in Italy, Portugal, Hungary
· Successful trial of our all new pod-based vapour device, blu 2.0, in France supports recent UK launch
· Modern oral product, Zone X, launched in Norway, new flavour launches in other markets
· Consumer and trade feedback validates strategy and further investment and market expansion in FY23
Transforming our ways of working
· Increased investment in building consumer-focused capabilities in insights, innovation and marketing
· New behaviours framework launched and set to be rolled out across all employees by calendar year end
· On track to deliver annual savings target of £150m by end FY23; actions taken to realise £120m in FY23
· ESG review for tobacco & NGP completed and aligned to strategy, purpose and vision; eight priorities identified
Results Overview*
Net revenue growth driven by resilient tobacco pricing and NGP growth
· Net revenue up 1.5% with tobacco +1.3% to £7,585m and NGP +10.8 % to £208m
· R eported revenue reduced by -0.7% driven by adverse translation FX from a weaker Euro
· Tobacco price mix up 6.0%, with an acceleration in H2 to +10.7%
· Tobacco price mix driven by gross pricing of 4.8%, (e.g. US, Germany) and positive market mix of 2.7% (e.g. Russia exit, US) partially offset by adverse product mix of 1.4% (e.g. US)
· Tobacco volumes declined -4.7% (-1.2% excluding Russia); H2 volumes -8.4%, reflecting Russia exit and COVID unwind
Delivering improved profitability and increased investment
· Adjusted Group operating profit up 1.8%: growth in tobacco and NGP more than offsetting Distribution decline
· Reported operating profit of £2,683m reduced by £463m , driven by charges related to our exit from Russia and associated markets (£399m) and non-recurrence of gains on disposal of the Premium Cigar Division (£281m)
· Tobacco adjusted operating profit up +0.3% , reflecting the non-recurrence of US state litigation costs taken in FY21 offset by increased investment in our strategic plan
· NGP losses reduced by 39.1% to £87m , despite market launches as investment is optimised behind new strategy
· Distribution adjusted operating profit ( incl. eliminations ) down 1.2%, reflecting £11m of restructuring charges
· Adjusted EPS up 4.9% driven by growth in operating profit and lower interest costs
· Reported basic EPS down 44.7 % at 165.9p with lower operating profit and lower finance income as we reduced our unhedged currency exposures on financial instruments, partly offset by a higher reported tax rate
Strong free cash flow supporting investment and deleverage
· Strong adjusted operating cash conversion of 102% and with free cash flow of £2.6bn
· Adjusted net debt reduced by £0.6bn
· Adjusted net debt to EBITDA improved to 2.0x (2021: 2.2x)
· Reported net debt reduced by £0.9bn , with £0.3bn benefit from difference in fair value of interest rate derivatives
· Annual dividend per share up 1.5% to 141.17 pence per share, in line with our progressive dividend policy
· Returning surplus capital with initial £1.0bn share buyback in FY23
* All measures at constant currency unless otherwise stated
Outlook
We remain on track to deliver against our five-year plan. The additional investment and the actions we have taken during the initial two-year strengthening phase have built strong foundations for the next three-year phase of our plan to deliver improving returns.
As we move into that phase, we continue to expect low single-digit constant currency net revenue growth with constant currency adjusted operating profit growth accelerating to deliver mid-single digit CAGR over the next three years.
We are confident our investments and initiatives will continue to gain traction and we therefore expect the growth rate of our adjusted operating profit to improve within this mid-single digit range over the three years. In FY23, the acceleration will be driven by pricing and operational gearing, improved geographic mix from our priority market focus and cost savings, partially offset by cost inflation and increased NGP investment.
Performance will be weighted to the second half of the year due to the phasing of NGP investment, the impact of our exit from Russia in April 2022, and the continued unwind of COVID-19 that will all affect the first half. As a result, the first half adjusted operating profit is expected to be at a similar level to last year, at constant currency.
At current rates, foreign exchange translation is expected to be a 5-6% tailwind to net revenue, adjusted operating profit and earnings per share.
We remain confident in our plans in the face of current macro-economic challenges with potential pressure on consumer spending and high inflation. And as we align our business more closely with the secular consumer trend towards healthier moments of relaxation and pleasure, we believe we are well placed to generate long-term value for shareholders and all our stakeholders.
Basis of Presentation
· To aid understanding of our results, we use ‘adjusted’ (non-GAAP) measures to provide a consistent comparison of performance from one period to the next. Reconciliations between adjusted and reported (GAAP) measures and further definitions of adjusted measures are provided in the supplementary information section. 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 12-month average to the end of September (MAT – moving annual trend), unless otherwise stated. Aggregate market share is a weighted average across markets within our footprint.
Other Information
| Investor Contacts | Media Contacts | ||
| Peter Durman | +44 (0)7970 328 093 | Jonathan Oliver | +44 (0)7740 096 018 |
| Jennifer Ramsey | +44 (0)7974 615 739 | Simon Evans | +44 (0)7967 467 684 |
Analyst Presentation Webcast
Imperial Brands PLC will be hosting a live webcast at 09:00 (GMT) for investors and investment analysts following the publication of our preliminary results on 15 November 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 from 07.00 (GMT). An archive of the webcast and the presentation script and slides will also be available.
The webcast will be available on https://edge.media-server.com/mmc/p/ec6yjmqi . To participate in the Q&A session, please register in advance via this link: https://register.vevent.com/register/BIe768936f71994dacb923ba8162ac809f .
You will then receive the dial-in details and your own PIN to access the live Q&A session.