Home » News » FTSE 100 » Imperial Brands Tobacco value creation model continues to produce high margin sales growth
Imperial Brands

Imperial Brands Tobacco value creation model continues to produce high margin sales growth

Imperial Brands (LON:IMB) has announced its preliminary results for the year ended 30 September 2019.

“2019 has been a challenging year with results below our expectations due to tough trading in Next Generation Products (NGP). We are implementing actions to drive a stronger performance in the coming year.

“Our resilient tobacco value creation model continues to produce high margin sales growth and is well-placed to deliver sustained profitable growth in the years ahead.

“Although we grew NGP revenues by around 50 per cent, this was below the level we expected to deliver. Our delivery was also impacted by an increasingly competitive environment and regulatory uncertainty in the USA. Growth in Europe was also slower, despite achieving leading retail shares in several markets. We have taken the learnings from this year to reset our NGP investment plans for 2020, prioritising the markets and categories with the highest potential for sustainable, profitable growth. We will scale up investment as the visibility on returns and regulatory uncertainties improves.

“Our priority going forward is to optimise the profit and cash generation from our tobacco assets, while improving growth in NGP with greater discipline and a more tightly focused business model that will create long-term value for shareholders.”

Alison Cooper

Chief Executive

Results Overview

·     Net revenue up +2.2% driven by growth in tobacco and NGP

·     Adjusted EPS down -1.6% with the following changes since the pre-close trading update: crystallisation of NGP supply contract termination costs and lower than expected ‘other income’ partially offset by a lower adjusted tax rate

·     Resilient tobacco value creation model with growth in revenue, profit and cash

·     Good tobacco growth from Americas and Europe more than offsetting Africa, Asia & Australasia (AAA) challenges

·     NGP revenues of £285m up +48% with growth in Europe, the US and Japan

·     Quality growth from Asset Brands with net revenue up +4.4%; +140bps to 66.1% of Group net revenue

·     Adjusted operating profit reflects higher net NGP investment/costs (£112m) and reduction in other income (£70m)

·     Reported operating profit down 8.7% with a goodwill impairment and associated costs of disposal of the Premium Cigar Division (£525m); provisions for Russian excise tax liabilities (£139m), a fair value adjustment of acquisition consideration for Von Erl (£129m), partly offset by reduced restructuring costs (£144m) and prior year impact of distributor administration (£110m)

·     Premium Cigar impairment will be partly offset on completion by £300m-£400m of FX gains from reserves

·     Commitment to evolve non-GAAP financial disclosure with changes to adjusted performance measures in FY20

Operational Overview

Tobacco revenue and margin supported by strong price/mix

·     Tobacco delivering good net revenue and adjusted operating profit growth driven by Europe and Americas

·     Tobacco price mix +5.5%; more than offsetting volumes declines of -4.4%

·     Strong US financial performance supported by market share growth in cigarettes and cigars

·     European results reflect a balance between financial delivery and a focus on quality share growth

·     Tougher trading conditions in Russia, Middle East and Australia impacted AAA results

·     Tobacco profit up +1.8%; margins improved by 60bps

NGP below expectations, but providing additive growth opportunities

·     NGP revenue up +48% in a fast-evolving vapour category, albeit lower than our expectations

·     US results affected by regulatory uncertainty and increased consumer churn with greater competitor discounting

·     Good progress in AAA, while Europe growth slowed in H2 following market roll-out in H1 and category slowdown

·     Leading retail market positions for blu established in markets including Germany, Spain, Italy and Japan

·     Profit impacted by increased NGP investment; inventory provisions and termination of a supply contract (£54m)

·     Learnings from 2019 informing a revised investment model focused on sustainable, profitable growth

·     Reduction in FY20 investment, given the uncertainties; regulatory framework needs to enforce product standards

·     Pulze, our heated tobacco offer, rolling out nationally in Japan; with more market launches planned in FY20

·     Successful market pilots of oral nicotine add to our NGP category offering through FY20

Cost and capital discipline

·     Divestment programme focused on sale of premium cigars

·     Cost optimisation savings of £55m delivered; £60m to be delivered in FY20 to conclude the £300m programme

·     Cash conversion of 95%

·     Adjusted and reported net debt reduced by £0.3bn pre-FX & derivative fair values due to working capital timing

·     Annual dividend of 206.58p up +10%; revised capital allocation and shareholder distribution policy in place

Outlook

Tobacco will continue to be resilient, delivering modest revenue growth, high margins and strong cash flows, while our NGP business provides opportunities for additional revenue growth, with its strong growth prospects contributing to margins and cash returns over the medium term.

We remain focused on managing the operational and regulatory challenges associated with a rapidly evolving NGP category, including active regulatory engagement for higher product and marketing standards for vapour.

Given the increased uncertainties in NGP, we have reduced and reprioritised our NGP investment behind the markets and categories with the best prospects for sustainable and scalable growth and will focus on delivering a stronger performance in the coming year.

We have taken a more cautious approach to our outlook for 2020, with low single digit revenue and earnings per share growth expected, excluding any impact from the divestment programme. Performance is expected to be weighted to the second half as the benefit of our NGP reset takes effect through the year.

Our revised capital allocation policy supports a progressive dividend, which will grow annually taking into account underlying business performance.