Imperial Brands PLC (LON:IMB) has today announced its interim results for the six months ended 31 March 2020.
Financial Overview
Overview – Adjusted Basis
| Half Year Result 2020 | Half Year Result 2019 | Change Actual | Constant Currency1 | ||
| Total tobacco volume | bn SE | 114.6 | 115.2 | -0.5% | -0.5% |
| Tobacco net revenue | £m | 3,509 | 3,508 | 0.0% | +0.9% |
| NGP net revenue | £m | 83 | 148 | -43.9% | -43.2% |
| Tobacco & NGP net revenue | £m | 3,592 | 3,656 | -1.7% | -0.9% |
| Asset Brand net revenue | £m | 2,290 | 2,355 | -2.8% | -1.7% |
| Tobacco & NGP adjusted operating profit | £m | 1,383 | 1,538 | -10.1% | -8.5% |
| Distribution adjusted operating profit | £m | 95 | 102 | -6.9% | -4.9% |
| Total adjusted operating profit | £m | 1,469 | 1,620 | -9.3% | -7.7% |
| Adjusted earnings per share | pence | 103.0 | 115.6 | -10.9% | -9.2% |
| Adjusted net debt | £m | (13,476) | (12,958) |
Overview – Reported Basis
| Half Year Result 2020 | Half Year Result 2019 | Change Actual | ||
| Revenue | £m | 14,672 | 14,390 | 2.0% |
| Operating profit | £m | 925 | 1,150 | -19.6% |
| Basic earnings per share | pence | 55.6 | 71.2 | -21.9% |
| Dividend per share | pence | 41.70 | 62.56 | -33.3% |
| Reported net debt | £m | (14,144) | (13,381) |
See page 3 for basis of preparation and page 13 for the reconciliation between reported and adjusted measures.
1 Constant currency removes effect of exchange rate movements on the translation of the results of our overseas operations.
2 2019 Asset Brand net revenue restated for reclassification of brands. See Basis of Presentation on page 3.
“While we delivered against our revised expectations, we are disappointed with these results, and we remain fully focused on all opportunities to strengthen performance.
“We would like to thank our employees for their hard work and commitment in these challenging times. Their support has been outstanding and we continue to prioritise their health, safety and well-being.
“Our enhanced focus on tobacco has driven stronger in-market execution and an improved share performance, with gains in most of our priority markets. We have reduced our NGP spend following the poor returns on investment last year and this, together with recent weaknesses in the vapour category, has resulted in lower NGP revenue.
“Overall, COVID-19 has so far had only a small impact on trading but we expect this to be more pronounced in the second half due to continued pressures on our duty free and travel retail business, changes in consumption patterns including downtrading and a reversal of some first half inventory build.
“Agreeing the sale of our premium cigar business for €1.2 billion in the current climate was a major achievement and will further simplify the business and reduce debt. Deleveraging remains a key priority, such that the Board has decided to rebase the dividend by one-third to accelerate debt repayment, while retaining a progressive dividend policy, growing annually from the rebased level. This will strengthen the balance sheet and support a more flexible approach to capital allocation in the future.”
Dominic Brisby and Joerg Biebernick
Joint Interim Chief Executives
Highlights
· Protecting our people in uncertain times: we have taken all necessary steps to ensure our hard-working employees remain safe and well
· Delivered share growth in tobacco: market share gains for the overall Group and in 7/10 priority markets
· Right-sized our NGP investment: disciplined approach to improve returns and build sustainability
· Submitted PMTAs to FDA for myblu products: myblu plays an important role in our NGP portfolio and we look forward to working with the FDA to help develop an evidence-based regulatory policy
· Challenged the cost base and strengthened the balance sheet: drove a further cost saving initiative and secured additional credit facilities
· Agreed sale of Premium Cigars for €1.2 billion: reinforces our focus on simplifying the business and realising value for shareholders, with proceeds to be used to reduce debt
Results Overview
· Results in line with revised expectations in AGM update
· Overall results affected by lower NGP sales, write-downs and impairments totalling £95m
· A temporary COVID-19-related trade inventory build caused c. 1% net increase to net revenue and profit
Volume and net revenue
· Tobacco market share up 40 basis points to 13.6% on YTD basis; share gains in 7/10 priority markets
· Net revenue down -0.9% driven by declines in NGP offset by tobacco net revenue growth of 0.9%
· Tobacco price mix +1.4% reflects pricing of 6.7% offset by adverse market mix of 2.6% (e.g. Middle East, Australia) and adverse product mix of 2.7% (e.g. Backwoods USA and downtrading in UK, Germany, Australia)
· NGP investment has been reduced to improve returns
· Asset Brand net revenue declined 1.7% reflecting lower sales of blu and Backwoods
Profit
· Adjusted operating profit down -7.7% reflecting US NGP flavour write-down (£48m); increased provisions for slow-moving inventory (£28m), an additional impairment to NGP intellectual property assets (£19m) and lower NGP sales partially offset by cost savings; excluding the £95m of write-downs adjusted operating profit fell 1.8%
· Tobacco adjusted operating profit down -0.7% reflecting an increase in A&P in Europe driven by the timing of promotional activities and the phasing of overheads; tobacco gross profit up 1.3%
· Reported operating profit down -19.6% reflecting lower adjusted operating profit and a goodwill impairment and associated disposal costs of the Premium Cigar Division (£147m) and higher restructuring costs (£40m), more than offsetting the prior year increase in contingent consideration for Von Erl (2019: £119m) not repeated this year
· Adjusted EPS down -9.2% principally due to the phasing of the NGP write-downs and an increased tax rate, partially offset by lower interest costs and share buyback benefit
Cash and debt
· Cash conversion of 103% (12-month basis) driven by the £445m working capital inflow in the period
· Adjusted net debt increased £518m (12-month basis) due to adverse FX, payments for share buybacks, the Von Erl acquisition, a Russian excise settlement, and lower profit partly offset by lower working capital
· Reported net debt up £763m (12-month) driven additionally by inclusion of lease liabilities of £302m for the first time under IFRS 16
Capital allocation and dividend
· Modified our capital allocation policy to accelerate debt reduction
· Dividend to be rebased by one third; implying an annual dividend for 2020 of 137.7 pence per share
· Progressive dividend policy growing annually from the revised level thereafter, taking into account underlying business performance consistent with the policy outlined in July 2019
· All dividend savings will be used to reduce gearing to the lower end of our 2-2.5x target range by the end of 2022
· The policy recognises the Group’s continued strong cash generation and the importance of growing dividends for shareholders, while strengthening the business for the future
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 12-month average (MAT), unless otherwise stated. Aggregate market share is a weighted average across markets within our footprint.
· Asset Brand volumes and net revenue for 2019 have been restated to reflect the inclusion of fine cut tobacco brand, Riverstone, and NGP brands, Pulze, iD and Zone X and the reclassification of our premium cigar brands, Cohiba, Montecristo and Romeo y Julietta and our cigarette brands, Bastos and Style as Portfolio Brands.
Outlook
We have responded rapidly to an evolving situation and are taking every necessary action to protect the interests of all our stakeholders. The impact of COVID-19 on the Group was relatively small in the first half with widespread lockdowns in our footprint only being enforced during March. We have assumed the first half inventory build by customers will fully unwind in the second half.
The business is well-placed to navigate the challenges arising from COVID-19, which is reinforced by the defensive qualities of tobacco and our financial stability. However, we also recognise no company is immune and there are external factors outside our control at this time, such as the severity and duration of the pandemic and how lockdown measures might affect our supply chain, retail channels and consumer behaviour. These are expected to have a more significant impact on our second half, although at this early stage it is difficult to assess their extent.
We currently estimate COVID-19 related factors will have a low single digit impact on earnings per share, in addition to current market expectations (constant currency EPS down 2%), which reflect the full year guidance given in our February AGM update.
Although there are different trends across different markets, we see three main drivers of the COVID impact that will influence the outcome:
· Market size declines have deteriorated due to significant restrictions on certain sales channels. This principally relates to a material decline in demand in our global duty free/travel retail operations with the cessation of international and cross border travel. Given the outlook for international travel, we are currently assuming no recovery in this business during the second half. The Horeca channel has also experienced declines in demand.
· There is evidence of changes to consumption and buying patterns, including increased downtrading across certain markets. We expect these trends will continue and potentially deteriorate further with recessionary pressures. However, we believe we are relatively well placed with a lower exposure to premium products within our portfolio.
· The current COVID-related restrictions on some of our manufacturing facilities have reduced their production capacity and affected their operating efficiencies. We have assumed these will be back to full capacity by the end of June. We have also assumed there is no second spike that will further disrupt other areas of our manufacturing and supply chain.
In addition, our full year results will now also reflect the impact of the intellectual property asset impairment of £19 million (c. 0.6% impact to EPS), which has been recognised in the first half but was not included in our previous guidance in February. We now also expect the Premium Cigar disposal will complete in July resulting in earnings dilution of c. 0.3% in the current year.
Imperial Brands expect the impact of translation foreign exchange to be neutral on full year earnings per share based on latest exchange rates.
