Imperial Brands Plc – Final Results 2021

IMPERIAL BRANDS PLC

FULL YEAR RESULTS STATEMENT

16 NOVEMBER 2021

Report for the year ended 30 September 2021

• Transformation programme underway to create more consumer-focused, efficient and performance-driven organisation
• Operational improvements supporting growth in net revenue, profit and free cash flow
• Sharper focus on top-five priority markets beginning to arrest long-term share declines
• NGP pilots in heated tobacco and vapour on track
• Strong cash flows enabling deleverage progress in line with our plans

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 See page 3 for basis of presentation, page 28 and notes 3, 6 and 10 of the financial statements for the reconciliation between reported and adjusted measures. For comparison purposes, the Group uses the term “organic” to exclude the contribution of the Premium Cigar Division, which was divested on 29 October 2020.

³   Constant currency removes effect of exchange rate movements on the translation of the results of our overseas operations.

“This has been a year of important progress and significant change, as we begin to deliver on the new, focused strategy we announced in January 2021. We have substantially refreshed our leadership team, making new hires to strengthen our consumer-facing capabilities, while building on our existing deep tobacco experience. We have changed the way we work, placing the consumer at the centre of our decision making. We have simplified the organisation, creating efficiencies for reinvestment. And we have introduced more rigorous performance management, enabling better prioritisation of resources.

“This approach is already delivering improved operational and financial outcomes. In tobacco, our sharper focus and increased investment in the top-five priority markets have begun to stabilise the aggregate market share performance. This is encouraging early progress in addressing the long-term historical declines. We will build on this foundation in the coming year, with further investment in brand building and sales execution.

“Through our focused, consumer-led next generation products strategy, we are committed to making a meaningful contribution to harm reduction over time by offering adult smokers potentially reduced risk products. In line with our plans, we launched market trials for our heated tobacco proposition, Pulze and iD sticks in the Czech Republic and Greece, as well as a trial of an improved consumer marketing proposition for our US vapour product, blu. We will track the consumer data over the coming months to inform our next steps.

“Our five-year plan to transform Imperial is divided into two distinct periods. The year ahead will complete the two-year strengthening phase, with further investment in our five priority markets and NGP pilots, the embedding of new ways of working and cost-saving initiatives. This period builds the foundations for the subsequent three-year phase, which focuses on the acceleration of returns and sustainable growth in shareholder value.

Focus on Priority Combustible Markets

• Stabilising aggregate priority market share performances: down 2 bps (MAT) vs 17 bps decline last year
• Share gains in US, UK, and Spain broadly offsetting declines in Germany and Australia
• nvesting behind clear operational levers in line with our plans for our priority markets, for example:
• Expanding our sales force and enhancing sales execution, e.g. adding 200 new sales people in US
• Leveraging our regional sales coverage, e.g. expanding coverage in south of UK and in eastern Germany
• Building brand equity and increasing participation in subpremium, e.g. JPS in Germany, Winston in US
• Optimising our approach to the value segment, e.g. Parker & Simpson in Australia
• Rejuvenating our local jewel brands, e.g. growing Embassy in the UK, Nobel and Fortuna in Spain
• Maximising the potential of fine-cut category, e.g. leveraging Riverstone in Australia

Drive Value from our Broader Market Portfolio

• Strong Africa performance: net revenue up 8%; adjusted operating profit up 20%; share gains in several markets
• Group tobacco share growth of 20 bps (MAT) with share gains in all regions

Build a Targeted NGP Business

• Building foundations for a sustainable NGP business to underpin our commitment to harm reduction
• Heated tobacco trials of Pulze and iD in Greece and the Czech Republic progressing well
• Trial of a new consumer marketing proposition for our vapour product, blu, in Charlotte, North Carolina
• Resources prioritised behind the markets and categories with best sustainable growth prospects

Adopting New Ways of Working

• Leadership team strengthened with new hires bringing strong consumer goods experience
• New Group Consumer Office created to place consumer at centre of our thinking
• Restructured sales and marketing organisation to align with strategy and drive effectiveness
• Reshaped our divisions and reduced our market clusters from 13 to 10 to support market prioritisation
• Culture change underway with a reset of our purpose, vision and behaviours to support strategic delivery

Net revenue growth driven by resilient tobacco pricing

• Organic net revenue up 1.4% driven by tobacco growth of 1.5%; NGP net revenue down 3.9% reflecting market exits
• Tobacco price mix up 4.4% more than offset tobacco volume declines of 2.9%
• Excluding Australia stock profit effects, tobacco price mix up 5.6% and tobacco net revenue up 2.7%
• Reported revenue grew 0.7%, due to increases in excise duty

Delivering improved profitability

• Organic adjusted Group operating profit up 4.8% driven by reduced NGP losses and higher Distribution profit
• Reported operating profit of £3,146m is higher by £415m, driven primarily by gains on disposal of the Premium Cigar Division (£281m) and a reduction in amortisation and impairment of acquired intangibles (£73m)
• Delivering against profit expectations despite absorbing headwinds of:
• lower stock profit in Australia (£88m) as previously guided
• a charge to meet US state litigation costs (£52m), which removes uncertainty
• Excluding these factors, underlying adjusted organic tobacco profit grew 2.7% or £98m
• Including these factors, adjusted organic tobacco profit was lower by 1.2% (£42m)
• NGP losses reduced by 56.7% to £138m as we optimise investment and begin our market trials
• Distribution adjusted operating profit (including eliminations ) up 11.3% driven by growth in pharmaceutical
• Organic adjusted EPS up 2.8% at constant currency driven by growth in operating profit, partially offset by an increase in the tax rate to 22.6%
• Reported basic EPS up 89.5% at 299.9p reflecting marked to market foreign exchange accounting gains on financial instruments and the impact of the Premium Cigar disposal, with intangible write downs in the prior period and the profit on sale of assets booked this year

Strong free cash flow supporting investment, deleverage and progressive dividend

• Strong cash conversion of 83% in line with expectations reflecting unwind of prior year Logista working capital
• Adjusted net debt reduced by £1.7bn due to strong free cash flow of £1.5bn, a reduced dividend, proceeds from the sale of the Premium Cigar Division and FX translation
• Net debt to EBITDA reduced to 2.2x (2020: 2.7x) or 2.3x at constant exchange rates
• Reported net debt reduced by £1.8bn, broadly in line with reduction in adjusted net de
• Annual dividend per share up 1.0% to 139.08 pence per share, in line with our progressive dividend policy

We are making good progress with the implementation of our new strategy and we remain on track to deliver the five-year plan we set out in January 2021.

2022 is the second year of our two year strengthening phase, where we will step up investment behind our growth initiatives in our priority combustible markets, in our NGP trials and in our new ways of working. It will be a year of further reorganisation and change as we strengthen our foundations for the future.

At constant exchange rates, we expect to deliver net revenue growth at a similar rate to FY21, while adjusted operating profit is expected to grow slightly slower than net revenue, reflecting the step up in investment in line with our five-year strategic plan and after taking into account the non-repeat of the US state litigation settlement costs (net benefit of c. 40m in FY22).

We expect performance will be weighted to the second half reflecting the phasing of investment and the prior year comparator.

Some uncertainties remain about how the further lifting of COVID-19 restrictions will affect consumer buying patterns and the unwind of the small mix benefit in the past year. There is also risk of inflationary pressures although we are well placed to manage them through our purchasing strategy, high margins and pricing.

A higher effective tax rate of around 24 per cent is expected to be partly offset by lower interest costs.  At current exchange rates, foreign exchange translation is expected to be broadly neutral on revenue and earnings per share.

• 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 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.
• In these results, we also use the term organic to remove the impact of the divestment of our Premium Cigar Division to show a like-for-like performance, which is the basis of the performance commentary. The impact of the divestment is analysed in notes 3, 6 and 10 of the financial statements on adjusted performance measures.
• 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 – moving annual trend), unless otherwise stated. Aggregate market share is a weighted average across markets within our footprint.