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Imperial Tobacco Group PLC
17 November 2003
IMPERIAL TOBACCO GROUP PLC
PRELIMINARY RESULTS FOR THE 12 MONTHS ENDED 30 SEPTEMBER 2003
HIGHLIGHTS
* Strong profit delivery:
* Adjusted** operating profit of #1,135m - up 44%
* Adjusted** pre-tax profit of #898m - up 40%
* Adjusted** operating margin up to 35.5% from proforma 29% at time of
Reemtsma acquisition
* Rapid and successful integration of Reemtsma:
* Synergies of some #150m realised in 2003, exceeding initial estimates of
#140m
* Synergy delivery for 2004 around #210m, against initial #170m target
* Adjusted** earnings per share of 90.0p - up 32%
* Full year dividend of 42.0p - up 27%
* UK: Reinforced number one position with cigarette market share up to 44% - the
highest for 20 years
* Germany: Growth in overall market share to 21.4%, driven by leadership in other
tobacco products sector
* Rest of Western Europe: Good domestic trading performances with improved
margins across the region:
* Spain: market share increased to 4.2%
* Greece: highest-ever market share, up to 6.9%, driven by the continuing
strong performance of Davidoff
* Rest of the World: Continues to be strong volume generator for the Group with
improving profitability:
* Central and Eastern Europe: positive volume progress, with West up 18%
* Significant long-term development opportunities:
* China: 10-year commercial agreement signed with Yuxi Hongta Group for
the production and distribution of West cigarettes in China
* Turkey: construction of factory for the production and distribution of
cigarettes in Turkey
* Well positioned for future growth: Enhanced international platform and strong
brand and product portfolio
** Operating profit, pre-tax profit, operating margin and earnings per share are
before amortisation and exceptional items
Summarising today's announcement, Gareth Davis, Chief Executive, said:
"Organic growth in our key markets, coupled with the first full year
contribution from Reemtsma and synergy benefits, has delivered another excellent
set of results. We continue to focus on delivering value to our shareholders and
this is reflected in the 32 per cent increase in earnings per share and the 27
per cent increase in the full year dividend.
The rapid and successful integration of Reemtsma since acquisition in May 2002
has already realised some #150 million in cost savings in 2003, indicating a
full year benefit of around #210 million in 2004, exceeding our initial
forecasts.
I am delighted to confirm today that we have made tangible progress in the
Chinese market through the signing of a 10-year commercial agreement with the
Yuxi Hongta Group for the production and distribution of West cigarettes in
China. Production is due to begin before the end of the year, and although
volumes will be modest initially, in a market of 1.7 trillion cigarettes there
are significant long-term growth opportunities for the Group.
In Turkey we are building a cigarette factory which we expect to be fully
operational by early 2005. The Turkish market is the seventh largest in the
world at over 100 billion cigarettes and represents another growth opportunity.
This has been another very successful year for Imperial Tobacco, building on our
enhanced international platform, strong brand portfolio and efficient cost base.
I believe we have never been in a better position to continue our proven track
record of driving sustained profitable growth and delivering value to our
shareholders."
ENQUIRIES
Alex Parsons, Group Media Relations Manager +44 (0)7967 467 241
Nicola Tate, Investor Relations Manager +44 (0)117 933 7082
Imperial Tobacco Group PLC +44 (0)117 963 6636
High-resolution photographs are available to the media free of charge at:
www.newscast.co.uk +44 (0)20 7608 1000
Imperial Tobacco's 2003 Preliminary Results are available on our website:
www.imperial-tobacco.com
FINANCIAL HIGHLIGHTS
2003 2002
* Adjusted operating profit (1) #1,135m Up 44% #789m
($1,886m)
* Adjusted pre-tax profit (1) #898m Up 40% #642m
($1,492m)
* Adjusted profit after tax (1) #655m Up 41% #465m
($1,089m)
* Adjusted earnings per share (1) 90.0p Up 32% 68.4p
(149.6c)
* Dividend per share 42.0p Up 27% 33.0p
(69.8c)
* Turnover #11,412m Up 38% #8,296m
($18,967m)
* Operating profit #881m Up 46% #603m
($1,464m)
* Pre-tax profit #656m Up 55% #423m
($1,090m)
* Profit after tax #424m Up 50% #283m
($705m)
* Basic earnings per share 58.1p Up 42% 41.0p
(96.6c)
* Diluted earnings per share 57.9p Up 42% 40.8p
(96.2c)
(1) Adjusted to exclude the effect of amortisation and exceptional items.
Management believes that reporting results before amortisation and exceptional
charges (adjusted operating profit, adjusted profit before tax and adjusted
earnings per share) provides a better comparison of underlying business
performance for the year.
The exchange rate of US $1.662 to the #1, the pound sterling noon buying rate on
30 September 2003, has been used to translate this statement prepared under UK
GAAP.
CHAIRMAN'S STATEMENT
-------------------------------------
In a year of transformation for Imperial Tobacco, following the step change in
the scale and potential of the business resulting from the acquisition of
Reemtsma in 2002, I am very pleased to be reporting yet another excellent set of
results.
Our track record of organic growth and strategic acquisitions has taken us from
a strong UK base to become the world's fourth largest international tobacco
company with our products sold in over 130 countries. We have increased and
internationalised our cigarette portfolio, we are the world's leading
manufacturer of roll your own tobacco and rolling papers, and we have seen our
volumes grow from 42 billion cigarette equivalents in 1997 to over 220 billion
cigarette equivalents today.
Our performance in 2003 maintains an unbroken track record of strong earnings
and dividend growth, and clearly demonstrates our consistent ability to create
sustainable shareholder value.
2003 PERFORMANCE
In the first full year of the enlarged business, adjusted operating profit
before amortisation and exceptional items was up 44 per cent on 2002 to over
#1.1 billion, with turnover excluding duty also up 44 per cent to #3.2 billion.
Operating profit, after amortisation and exceptional items, was up 46 per cent
to #881 million (2002: #603 million). These results reflect organic growth
trends across many of our key markets, together with the delivery of some #150
million synergies generated following the Reemtsma acquisition, and a full
year's contribution from that business.
The adjusted profit on ordinary activities before tax was up 40 per cent to #898
million (2002: #642 million), after charging #237 million net interest (2002:
#147 million). The interest charge includes the full year effect of financing
the Reemtsma acquisition.
This performance has delivered basic earnings per share of 58.1 pence (2002:
41.0 pence) and adjusted earnings per share of 90.0 pence, an increase of 32 per
cent on 2002.
DIVIDEND
Your Directors are recommending a final dividend of 30.0 pence per share, making
a total dividend for the year of 42.0 pence. This represents an increase of 9.0
pence per share, or 27 per cent on the total 2002 dividend.
The dividend will be paid on 20 February 2004 to shareholders on the register at
the close of business on 23 January 2004.
CONSISTENT STRATEGY DELIVERING CONTINUED GROWTH
Imperial Tobacco's strategy remains to create sustainable shareholder value by
growing its international operations, both organically and through acquisitions,
while continuing to strengthen its position in the core markets of the UK and
Germany. The consistent application of this strategy has delivered compound
annual growth in adjusted earnings per share of 18 per cent and in dividends per
share of 15 per cent since Listing in 1996.
We are in an excellent position to continue this successful strategy. We have
enhanced our international potential by strengthening our positions in existing
markets and developing new markets, giving us more opportunity to exploit our
comprehensive international portfolio of tobacco products. While focused on
profitable sales growth, we remain committed to generating cost savings across
all aspects of the business. In addition, we continue to evaluate potential
acquisitions which meet our rigorous strategic and financial criteria.
SENIOR MANAGEMENT
Recognising the transformation in the scale of the business, I am delighted to
welcome David Cresswell, as Manufacturing Director, Frank Rogerson, as Corporate
Affairs Director and Bruce Davidson, as Sales and Marketing Director, to the
Board. The Sales and Marketing operation has subsequently been reorganised into
seven areas of operation: Western Europe, Central Europe, Eastern Europe, Africa
and the Middle East, Asia Pacific, Australasia and Global Duty Free/Travel
Retail.
Further strengthening the management overview of the strategic direction and
operations of the Group, the senior management steering group, the Chief
Executive's Committee, was expanded in June to include Alison Cooper, Director
of Finance and Planning and Kathryn Brown, Group Human Resources Director, who
join the Executive Directors on the Committee.
Ludger Staby resigned from his position as a Non-Executive Director of the
Company and from the Supervisory Board of Reemtsma. The Board also accepted the
resignation of Manfred Haussler, Sales and Marketing Director, from the PLC
Board and as Speaker of the Vorstand, Reemtsma Germany's Board of Directors.
CORPORATE RESPONSIBILITY
The Board takes its obligations as a responsible corporate citizen seriously and
is committed to high standards of corporate governance ensuring this is
reflected across all aspects of the business.
Governments around the world are pursuing in varying degrees the further
regulation of tobacco products. We continue to manage these challenges and seek
to engage with governments to find workable, practical solutions to changing
regulations.
In particular, in the UK, we were pleased to sign a Memorandum of Understanding
with HM Customs & Excise in July 2003, formalising jointly developed protocols
to combat the smuggling of tobacco products. We have also supplied information
to the Office of Fair Trading in relation to certain of its enquiries into the
operations of the UK tobacco supply chain. Investigations by the German
authorities into Reemtsma trading practices, which relate to a period prior to
acquisition, are ongoing. We continue to co-operate fully with the authorities
in their investigations, which in some instances could last several years.
The operating environment section reviews our progress in meeting the
expectations of a wide range of stakeholders and a more detailed review of our
activities will be published on our website in December 2003:
www.imperial-tobacco.com
OUTLOOK
It has been a year of transformation and strong profit delivery, following the
acquisition of Reemtsma in May 2002. The two businesses have proved to be an
excellent fit, providing a much stronger platform for future growth and enhanced
profitability. This inherent growth potential continues to be realised with
synergies of some #150 million delivered in 2003, rising to a full year delivery
of around #210 million in 2004, ahead of the #170 million forecast at the time
of the acquisition.
The search to improve profitability throughout the business continues and the
ongoing review of manufacturing capacity together with other initiatives will
generate further cost savings on an ongoing basis. These cost savings will not
only support margin improvements, but will release funds for investment in
brands and markets, driving forward the sustained profit development of the
business.
As we move into the next phase of our development, we are seeing the transfer of
skills, experience and best practice across the Group. It is testimony to the
strength and commitment of all our employees that, in a year of such significant
change, we have delivered yet another strong set of results.
While external regulatory, economic and political pressures will continue, I
believe we have never been better placed to continue to create long-term value
for our shareholders.
Derek Bonham
Chairman
OPERATING AND FINANCIAL REVIEW
-----------------------------------------------------
REGIONAL PERFORMANCE HIGHLIGHTS
Oper-
ating
Turn- Turn- margins
over over Oper-ating Operating Oper Operating pro-forma(2)
ex ex profit profit -ating margins enlarged
duty duty margins Group
2003 2002 2003 2002 2003 2002
#m #m #m #m % % %
UK 760 764 406 390 53.4 51.0 50.0
------ ------ ------ ------ ------ ------ ------
Germany 645 274 228 67 35.3 24.5 23.0
------ ------ ------ ------ ------ ------ ------
Rest of
Western
Europe 652 495 307 217 47.1 43.8 38.0
------ ------ ------ ------ ------ ------ ------
Rest of
the
World 1,143 686 194 115 17.0 16.8 15.0
------- ------ ------ ------ ------ ------ ------
Total as
adjusted
(1) 3,200 2,219 1,135 789 35.5 35.6 29.0
------- ------- ------- ------ ------ ------ ------
Amorti-
sation - - (203) (83)
------ ------ ------ ------
Except-
ional
items - - (51) (103)
------ ------ ------ ------
Total as
reported 3,200 2,219 881 603
------- ------ ------ ------
(1) Results before amortisation and exceptional items.
(2) Proforma enlarged Group margins are for illustrative purposes based on 2002
Imperial Tobacco results including annualised Reemtsma results, in line with the
proforma margin highlighted at the time of acquisition.
GROUP OPERATING PERFORMANCE
2003 was another year of excellent progress for the Group, with the strong
results reflecting organic growth in the underlying business, the synergies
delivered through the successful integration of the Reemtsma acquisition and a
full year's contribution from that business.
Group turnover, excluding duty, grew by 44 per cent to #3,200 million and
adjusted operating profit before amortisation and exceptional items also
increased by 44 per cent to #1,135 million. Operating profit after amortisation
and exceptional items was up 46 per cent to #881 million (2002: #603 million).
The 2003 results also include delivery of the synergies of some #150 million;
#35 million from production and purchasing efficiencies, #70 million from sales
and marketing and #45 million from corporate and regional overheads. Of the 2003
synergies, #105 million was delivered in the second half, implying a full year
benefit of around #210 million in 2004. The number of employees of the enlarged
Group has reduced by around 1,500 from the announcement of the acquisition in
March 2002.
The Group adjusted operating margin increased significantly to 35.5 per cent
from the proforma margin highlighted at the time of the Reemtsma acquisition of
29 per cent. This reflects the benefits of the rapid reorganisation and
integration activities, complemented by some good trading performances and
productivity improvements.
UK operating profit in the year increased to #406 million from #390 million in
2002 and margins were up to 53.4 per cent (2002: 51 per cent). These increases
reflect share growth, the benefits of manufacturer's price increases and a
reduced cost base, partly offset by downtrading effects.
Operating profit in Germany rose to #228 million in 2003 from #67 million in
2002. This result incorporates a full year of Reemtsma results, a positive
overall trading performance, synergy benefits and a favourable euro exchange
gain of approximately #20 million. In addition, a reduced cost base compared to
that applied in the previous Reemtsma business helped the significant uplift in
operating margins to 35.3 per cent in the year, compared to a proforma margin
for the enlarged Group of 23 per cent.
In the Rest of Western Europe, operating profit in the year grew to #307 million
from #217 million in 2002. These results reflect strong underlying trading
together with the first full year of Reemtsma results and the synergy benefits
from the combination, with local cost savings being partly offset by an
additional central overhead allocation. In addition, a favourable euro exchange
gain of approximately #30 million further enhanced reported profit. Operating
margins improved to 47.1 per cent compared with 43.8 per cent in 2002.
In the Rest of the World, operating profit in the year increased to #194 million
from #115 million in 2002. This increase incorporates a full year of Reemtsma
results and reflects some encouraging performances despite challenging
conditions in certain markets, notably those impacted by SARS, political unrest
and the conflict in the Middle East. The expected synergies have been achieved,
but these have been partly offset by currency losses of approximately #27
million. Operating margins nevertheless have shown a good improvement to 17 per
cent in the year from the proforma margins of 15 per cent for the enlarged
Group.
INTEREST
The increase in the Group's interest charge for the year to #237 million, up
from #147 million before the exceptional finance charge of #33 million in 2002,
was mainly as a result of the full year's cost of financing the Reemtsma
acquisition. Additionally, the strengthening of the euro increased the interest
charge on the euro portfolio of debt by #14 million, offset by lower interest
rates on the floating element of debt and cheaper bank facilities following the
refinancing during the year. This resulted in an all-in cost of debt in 2003 of
6.1 per cent (2002: 6.1 per cent); excluding fees the cost of core debt was 5.6
per cent (2002: 5.7 per cent). Interest cover before amortisation and
exceptional items was 4.8 times (2002: 5.4 times).
PROFIT BEFORE TAX
Group adjusted profit before tax increased by 40 per cent to #898 million. Of
this increase, exchange rate movements have contributed a net #9 million.
Reported profit before tax, after amortisation and exceptional items was #656
million (2002: #423 million).
In the year, profit before tax was increased by an exceptional gain of #12
million on the sale of the Dublin factory site. Other disposals, including the
fermentation and printing plant at Lahr, the Caritas wholesale business and
Liberty cigars in Germany had no material effect on the reported results. The
#81 million provision brought forward in respect of the integration of Reemstma
was fully utilised and further costs associated with synergies of #42 million
were charged in the year. In addition, #5 million was provided in respect of the
closure of the Meppel factory in The Netherlands, and a further #4 million in
respect of the final element of the October 2001 restructuring.
Profit was also enhanced by #7 million in respect of overpaid VAT, following a
recent court case won by Sinclair Collis Limited concerning the VAT treatment of
vending machines.
Reported profit before tax was also subject to an increased amortisation charge
of #203 million (2002: #83 million).
TAXATION
The tax charge for the year was #232 million, representing an effective tax rate
of 27.1 per cent (2002: 27.7 per cent) on profit before non-deductible
amortisation. The tax rate on reported profit before tax was 35.4 per cent. The
Group continued to benefit from lower tax rates applied to certain overseas
subsidiaries and we expect this benefit to remain.
EARNINGS AND DIVIDENDS
In 2003, the Group has delivered basic earnings per share of 58.1 pence (2002:
41.0 pence) and adjusted earnings per share of 90.0 pence (2002: 68.4 pence), an
increase of 32 per cent. The proposed final dividend for 2003 is 30.0 pence per
share, bringing the total dividend for the year to 42.0 pence per share, a 27
per cent increase. This is consistent with the Group's dividend policy of
growing dividends broadly in line with earnings, but allowing for the cash
impact of restructuring in the year.
Total shareholder return since our Listing in 1996 was 294 per cent (2002: 290
per cent) at the end of September 2003, compared with an overall return of 26
per cent (2002: 8 per cent) from the FTSE All-Share Index.
We have consistently delivered adjusted earnings and dividend growth, with
compound returns of 18 per cent and 15 per cent respectively since 1996.
FINANCING AND LIQUIDITY
During the year, the Group refinanced the remaining portion of the Reemtsma
acquisition bank facilities with a syndicated facility, signed in December 2002,
of #2.4 billion committed facilities and #400 million uncommitted facilities.
The weakening of sterling, principally against the euro, during the year has
adversely affected our reported net debt at the year end by #400 million
compared to the previous year. At the year end, net debt including the deferred
consideration for the remaining 9.99 per cent of the Reemtsma acquisition was
#4.1 billion (2002: #3.7 billion), of which 16.5 per cent was denominated in
sterling, 82.8 per cent in euros and 0.7 per cent in other currencies. At the
year end, 76.7 per cent of gross debt (2002: 85.1 per cent) was fixed by way of
interest rate derivatives.
CASH FLOW
The Group consistently converts a high level of adjusted operating profit into
operating cash flow after net capital expenditure, with an average conversion
rate since 1997 of 87 per cent.
In 2003, there were two working capital timing differences and cash outflows
associated with the utilisation of the integration provision which affected the
headline cash conversion rate. Adjusting for these factors, the underlying cash
conversion rate was 100 per cent.
The working capital timing differences arose principally from the profile of
periodic UK VAT settlements and the impact of higher debtors as a result of the
timing of the manufacturer's price increases in the UK.
In 2003, these factors, combined with a significant exchange translation
movement on net debt of #400 million, have resulted in an increase in closing
net debt to #4.1 billion as at 30 September 2003.
UNITED KINGDOM
The United Kingdom continues to make a significant contribution to the
performance of the Group generating 36 per cent of adjusted operating profit in
2003.
The UK Government announcement in October 2002 of increased duty paid indicative
levels for EU travellers, from 800 cigarettes to 3,200, prompted an initial
decline in the size of the UK duty paid market. However, the market stabilised
towards the end of the year, and we estimate the UK duty paid cigarette market
averaged 54 billion cigarettes in the year to September 2003 (2002: 56 billion)
with a roll your own tobacco market of 2,800 tonnes (2002: 2,800 tonnes).
We had another successful year in the UK, with our branded cigarette market
share continuing to grow from an average of 42.9 per cent in 2002 to 44 per cent
in 2003, further extending our market leadership.
Lambert & Butler, the top selling UK cigarette brand family, grew market share
to 16.2 per cent in September 2003. Richmond continued to strengthen and remains
the second largest selling brand family in the UK with market share consistently
growing in the four years since its launch to 12.2 per cent in September 2003.
In the premium sector, Embassy has delivered another robust performance closing
the year with market share of 3.9 per cent.
In our second year of distributing the Marlboro brand family on behalf of Philip
Morris, we have increased retail distribution such that its market share reached
7.5 per cent in September 2003.
Our strong position in the roll your own tobacco market was maintained with a
market share of over 64 per cent, with Golden Virginia retaining clear
leadership of the category. Drum and Drum Gold, now available in new resealable
pouches, strengthened their positions to 15.8 per cent market share at the end
of the year.
Rizla continued to hold over three-quarters of the rolling papers market and in
September, we announced the introduction of Rizla Silver, a premium ultra-fine
rolling paper. Our cigar range, including Classic, Panama and King Edward
Coronets, had a good year with market share growing to 38.6 per cent of the
small cigar sector.
In light of UK legislation, which significantly restricted tobacco advertising
and sponsorship, we have strengthened our brand availability and visibility at
the point-of-sale. Our focus has been on developing a leading position in the
supply of merchandising display furniture to retail outlets. We have over 33,000
units installed, in the various retail channels in the UK.
In July 2003, Imperial Tobacco was voted 'Supplier of the Year' by retailers
from the convenience sector, beating more than 60 leading branded grocery and
drinks manufacturers.
In the UK, our key integration actions are now complete with the closure of the
former Reemtsma company offices. Manufacturing of a range of private label
products has been transferred to the UK, sales of which have not been included
in the Group's market share.
The size of the market will continue to be a key factor affecting our UK profit
delivery. In the context of moderate market decline, we see opportunities to
improve profits further through effective management of the brand portfolio and
cost efficiencies. We will continue to transfer expertise gained through our
extensive UK operations to other similar markets, such as those in the rest of
Western Europe, ensuring that we share and build best practice and skills across
the Group.
GERMANY
Germany, the largest market in Western Europe, generated significant profits for
the Group, accounting for 20 per cent of adjusted operating profit in the
financial year.
Following an excise duty increase in January 2003, the German market has seen an
increasing search for value with consumers switching from cigarettes to other
tobacco products, mainly in the roll your own and make your own sector. This
market sector grew by 9 per cent to 24 billion cigarette equivalents, while the
factory made cigarette market has declined by around 6 billion to 138 billion
cigarettes. This decline has predominantly affected branded cigarettes, which
decreased by around 5 per cent to 116 billion cigarettes, while private label
cigarettes have increased slightly to 22 billion, 15.9 per cent of the market.
Subsequent to the excise duty increase of one euro cent per cigarette in January
2003, the German Government announced further significant increases in tobacco
tax on 8 May 2003, to finance the restructuring of the German health system. On
7 November 2003, the Federal Council Bundesrat decided to invoke a conciliation
procedure to review the Government's tax proposals including the amounts,
structure and timing of the increases. A final decision is expected by
mid-December 2003.
Our branded share of the total market, including other tobacco products,
increased in 2003 to 21.4 per cent up from 21.1 per cent in 2002. We are market
leaders in the growing other tobacco products sector, where our market share has
increased from 23 per cent in 2002 to 33.5 per cent in 2003. Our cigarette
market share has declined slightly to 19.6 per cent in 2003 from 20.3 per cent
in 2002, mainly due to consumers switching between cigarettes and other tobacco
products.
During the financial year, the West brand franchise, including other tobacco
products, strengthened its position in Germany with an increase in market share
to 11 per cent in 2003, while West retained its position as the second largest
selling cigarette brand in Germany. West Singles, an innovative make your own
product launched in November 2001, has made a significant contribution to this
success.
The premium brand family Davidoff strengthened its position by increasing market
share to an average of 1.1 per cent in 2003. The range was extended through the
launch of Davidoff Ultra in November 2002 and Davidoff Slims in September 2003.
R1 maintained its market leadership in the ultra light sector, with a market
share of 1.8 per cent and Peter Stuyvesant performed robustly at 2.2 per cent of
market in 2003.
The Cabinet brand family, our best selling brand in the former East Germany,
performed solidly with a market share of around 8 per cent in this region and
was complemented by JPS Red, introduced in February 2003, further strengthening
our position in this region.
By successfully integrating the three German sales forces following the
acquisition, we have realised significant synergies and improved our cost base.
The refocusing of the sales force has ensured we are well placed to optimise our
distribution in the convenience and supermarket sectors, where market share for
other tobacco products has grown to more than 33 per cent. In addition, the
former Reemtsma headquarters in Hamburg was sold in October 2003, and will close
no later than June 2004.
In an environment of regular tax increases, we expect to see increasing market
segmentation with downtrading in cigarettes and migration to other tobacco
products. With our market leadership position in other tobacco products,
complemented by cigarette portfolio opportunities and cost efficient operations,
we continue to be well positioned to benefit from the changing market dynamics.
REST OF WESTERN EUROPE
The Rest of Western Europe has again delivered a strong performance. Good
domestic results in a number of markets were enhanced by benefits from increased
indicative levels available to UK travellers within the EU.
In France, a significant tax increase in January 2003 has led to a market
decline of 7.6 per cent between January and September 2003. In spite of the
adverse external environment, we have succeeded in achieving improved margins in
cigarettes, and in May 2003, West was launched in France, achieving widespread
national distribution. In addition, we have grown our roll your own tobacco
market share to 30 per cent, driven by the successful performance of Interval,
averaging 13.5 per cent in the year.
Our business in Southern Europe has made significant progress. Our greater focus
on Italy has resulted in a strong performance for the combined portfolio
assisted by the launch of Route 66 and benefiting from improved distribution and
trade marketing structures. Volume and market share have increased in Spain, up
to 4.2 per cent in September 2003 (2002: 3.7 per cent), and in Greece a record
6.9 per cent market share in 2003 was driven by the performance of Davidoff.
In Belgium and Luxembourg, we have grown Interval and Route 66 while our key
domestic brand Bastos performed robustly. Distribution agreements with Altadis
in Belgium and Luxembourg were terminated in July 2003.
In the face of overall cigarette market decline in Ireland, we have succeeded in
growing market share, achieving 31.5 per cent in 2003 (2002: 31 per cent). In
The Netherlands, despite some adverse trends in the roll your own tobacco
market, Drum was stable at 24 per cent market share and Van Nelle grew to 25.5
per cent in September 2003. In the growing cigarette market, our share has
increased to 2.7 per cent (2002: 2.4 per cent), supported by good performances
from Davidoff and West.
After a strong start to the year, sales in the important registered mobile
operator sector, which includes cross-channel ferries, Eurotunnel shops and
French and Spanish airports, have been tempered in some outlets by the impact of
French domestic price increases in January 2003.
During the year, the integration of Reemtsma has delivered substantial
infrastructure savings and improved supply chain efficiencies throughout the
region, following a programme of distributor rationalisation.
Rising taxes in a number of markets will encourage cross border shopping within
the EU. The next few years will be challenging but we believe we are well placed
to meet these challenges. We are looking to benefit from the strength of the
enlarged brand portfolio, by leveraging existing market positions and
infrastructure, and continuing our focused approach to marketing expenditure.
REST OF THE WORLD
The Rest of the World remains a strong volume generator for the Group accounting
for 50 per cent of volumes with improving profitability.
Our strategy for Central and Eastern Europe continues to be focused on
strengthening our international strategic brands, particularly Davidoff and
West, and expanding our presence in key markets while seeking to improve
profitability.
In Poland, historically high tobacco tax increases have led to an overall
tobacco market decline and an erosion of industry margins. In July 2003 prices
were increased, but the market continues to be highly competitive. Against this
background, the increase in our market share from 17.9 per cent to 19.3 per cent
was driven by growth in Mocne and West and the launch of Route 66.
Our total sales volumes in the Ukraine exceeded last year, due to the strong
development of Prima and R1, with R1 growing by 30 per cent since launch. We
also increased prices in Ukraine, delivering improved margins.
We continued to grow market share in Russia for the third consecutive year,
rising to 5.1 per cent in September 2003. This was driven by the continuing
development of Davidoff, West and R1, supported by the successfully established
brand Maxim Classic. Davidoff shipment volumes grew by 24 per cent during the
period, and the brand has gained strength from the increased demand for Davidoff
Slims. In the highly competitive environment of the low and mid-priced segment,
Maxim was launched in a round cornered pack in April 2003, and has been well
received.
In a year characterised by an increasingly competitive environment in Australia,
cigarette volumes grew and share was broadly held at just under 18 per cent on
the back of improvements driven by Superkings and Peter Stuyvesant. Roll your
own tobacco volumes have also grown and our share has reached 62.4 per cent
(2002: 61.4 per cent) through the exceptional performance of the Champion brand.
In Asia Pacific, the world economic slowdown has adversely affected most Asian
economies and the SARS outbreak especially impacted Taiwan, China, Singapore and
Hong Kong.
In Taiwan, these factors and a general destocking across the market have led to
a decline in total market volumes from 42 billion to 39 billion cigarettes.
Consequently, our volumes and market share have been under pressure,
particularly due to our premium portfolio bias. In the last few months of the
financial year we have seen a recovery in volumes, and market share appears to
be stabilising, closing the year at 11.2 per cent (2002: 13 per cent). The
implementation of a new sales and distribution organisation should further
assist recovery.
Our businesses in Vietnam and Laos continue to perform beyond expectations.
Bastos enjoyed strong growth in Vietnam with an increase in volume of over 30
per cent during the year, taking our share to 8.6 per cent (2002: 8 per cent).
In Laos our volumes have more than doubled over the past year.
In China, our co-operation with the State Tobacco Monopoly Administration and
the negotiations with the Yuxi Hongta Group, resulted in the signing of a formal
contract for local production and distribution. Production of West is expected
to start in December 2003.
In the Middle East, growth continues to be driven by the excellent performance
of Davidoff across the region, including the key markets of Saudi Arabia, the
United Arab Emirates, Kuwait and Lebanon.
In Africa, the political situation in the Ivory Coast appears to have stabilised
and sales volumes are currently around two-thirds of their pre-crisis levels.
Both Burkina Faso and Senegal have performed well during the year with improved
volumes and market shares, and the West launch into the Senegalese market has
made encouraging progress. There has been an excellent performance in
Madagascar, which has returned to pre-conflict levels of profitability and
Nigeria has made good progress in the year with volumes up 15 per cent on last
year.
In the Global Duty Free business, significant progress has been made with the
enhanced portfolio, with over 180 new product listings; prices have increased
and distributor arrangements rationalised.
The key UK duty free market continues to perform well in both volume and share
terms. Market share has grown to 38.3 per cent in 2003 (2002: 33.8 per cent),
securing our leading position.
The conflict in the Middle East along with the outbreak of SARS has had an
adverse effect on the number of travellers this year which has particularly
impacted upon duty free market volumes in Asia, where Davidoff has a strong
brand presence.
We see many growth opportunities for the Group in the Rest of the World,
although the region is inherently more volatile than other regions in which we
operate. We will continue to concentrate on growing our volumes and
profitability in existing markets, looking for opportunities in new markets and
making focused investments where we see long-term potential.
MANUFACTURING
The integration of manufacturing throughout the combined Group has been a major
feature of the year. Productivity has increased by 8 per cent over the year and
unit costs have been reduced by 6 per cent compared to 2002. This performance
would have been further improved had conflicts in the Middle East and Africa,
along with the SARS outbreak not adversely affected operations. In addition in
the EU, factories were managing packaging changes resulting from the EU Product
Directive. Despite these factors, manufacturing contributed significantly to the
overall synergy delivery of the Group.
Simplification and rationalisation of product portfolios and packaging continue
to be areas of focus, while maintaining our reputation as a flexible supplier of
innovative and high quality products. In addition, we rationalised our supplier
base, realising purchasing economies of scale. We also concentrated on the
important area of business quality, particularly in applying common quality
standards and measures, and have obtained ISO accreditations across a number of
factories. The programme of Stock Keeping Unit reductions has been slow so far,
mainly due to the demands of the new EU health warning requirements, and we plan
to accelerate our work in the coming months.
As part of the integration we have disposed of the fermentation and printing
facilities at Lahr. Additionally, we recently announced closures in Meppel (roll
your own tobacco packing facility), Cambodia (cigarette factory) and Avonmouth
(distribution centre). The activities formerly conducted at these sites are
being integrated into other existing facilities with no adverse effect on
operations.
At key locations around the world, we have invested in state-of-the-art
equipment, further improving our efficiency and competitiveness. Capacity is
being significantly increased in Russia to meet the market demand for our
products. In Dublin, the new making and packing facility has been progressed
during the year and will come on-stream in the first half of 2004. We have
obtained a manufacturing licence to produce in Turkey and our greenfield site
facility near Izmir will be operational in early 2005.
In June, we simplified the structure of our manufacturing operations into three
regions covering the Group's global operations. Each region has responsibility
for all products including cigarettes, roll your own and pipe tobaccos, cigars,
filters, tubes and rolling paper products. Within each region, 'leading
factories' have been identified to provide supporting activities to local
satellite factories. Benefits will arise by avoiding service and support
duplication.
We have now established a consistent benchmarking system across our factories
and are looking to develop this further, extending productivity and efficiency
measures to the Group's supply chain, logistics and distribution activities.
Moving towards a consistently measured production capability across the Group
gives us significant opportunity to review and balance our total supply chain
activity, while retaining the flexibility to react quickly to changing market
conditions. This is an area from which we expect to gain significant benefit
over the coming years.
The future still holds considerable opportunities for further standardisation
and capacity optimisation across the Group's product range. We will continue to
focus on these opportunities, investing where appropriate, while keeping a tight
control of costs.
OPERATING ENVIRONMENT
We recognise that to build a sustainable profitable business, we need to ensure
high standards of corporate responsibility across all aspects of our business.
We have grown rapidly during recent years, both organically and through
substantial acquisitions of businesses operating in widely different markets.
This has created new opportunities and challenges as we build the profitability
and sustainability of the business.
A team focused solely on corporate responsibility has been established and
tasked with embedding our corporate responsibility principles and practices into
the Group's executive management processes and across the business.
An external review was completed during 2003, and a strategy for stakeholder
engagement and dialogue is being introduced to ensure stakeholders' views can be
better understood and incorporated into management decision-making as
appropriate.
We take our obligation to act as a responsible corporate citizen seriously and
are committed to our wider stakeholders and to supporting the local communities
in which we operate. A more detailed review of the Group's corporate
responsibility activities is to be published on our website
(www.imperial-tobacco.com) in December 2003.
EMPLOYEES
The health, safety and general welfare of all employees is a high priority. We
believe that fundamental to our business success is the way in which we
encourage and reward openness, innovation and good performance among our
employees at all levels.
The Group has an equal opportunities policy, which recognises and rewards
ability and performance.
We aim to promote good working relationships with employees and with their
representatives through trade unions, works councils and other organisations.
Where business changes may impact employment in a particular location, we aim to
reconcile the needs of the business with those of employees, ensuring those that
are affected are treated fairly. Mechanisms are put in place to inform and
consult with employees and their representatives. The local community and other
stakeholders may be involved if the changes are significant.
The Group encourages employees to share in the financial success of the Company,
through Sharesave, Share Matching and Long-Term Incentive Plans (where permitted
by statute), which were extended to 27 countries in 2003.
PRODUCT STEWARDSHIP
The Group believes no one should regard cigarettes as safe. We would welcome
further discussion with government authorities to agree objective criteria and
predictive tests by which they could judge whether future products offered a
potentially reduced risk. Under the terms of the EU Directive 2001/37/EC, we
provided the national authorities within the EU with information on the
ingredients used in our tobacco products.
Through the UK Tobacco Manufacturers' Association, we have continued to work
with the UK Department of Health on the analysis of 44 smoke constituents in 25
cigarette brands representing around 60 per cent of the UK market. The study
shows a strong relationship between almost all of the smoke constituents and the
tar and carbon monoxide (CO) levels in the brands studied. This study calls into
question the value of measuring smoke constituents other than tar, nicotine and
CO routinely. Details of the study may be found at www.the-tma.org.uk
OCCUPATIONAL HEALTH, SAFETY AND THE ENVIRONMENT
We continue to place a high priority on occupational health, safety and the
environment (OHS&E), setting standards that go beyond basic compliance. The key
issues identified in the 2002 OHS&E report remain our priority and progress will
be outlined in more detail in the corporate responsibility review which will be
published on our website (www.imperial-tobacco.com) in December 2003.
The introduction of the ISO 14001 environmental management system to all
manufacturing sites is on schedule and a total of seven sites have now gained
certification.
This progress is reflected in a 27 per cent increase in our score in the UK
Business in the Environment Index 2002, raising our ranking from 144 to 75.
Future scores may show a dip in performance until acquired sites are fully
integrated.
A climate change strategy for the Group has been developed following the Carbon
Disclosure Project involving the Global 500 companies. A review of
air-conditioning plants is underway, and vehicles with lower carbon emissions
have been selected in revised fleet management contracts. The renewable energy
contract in the UK has resulted in a reduction in carbon dioxide emissions of
around 28,000 tonnes in the year. Independent energy audits in the EU, Central
and Eastern Europe and our main African factories have been conducted this year
and identified additional potential energy savings.
Around 60 per cent of non-hazardous solid waste produced by sites in the Group
able to report data was recycled. Less than 0.3 per cent of the total was
classed as hazardous, as defined in local regulations.
The Group has commissioned a biodiversity impact assessment across all
operations. In Madagascar, plans for the operation to be self-sufficient in wood
in 2007 remain on target and native hardwood is being planted in addition to
fast-growing eucalyptus. Improved curing barns are being introduced which will
be more sustainable and fuel efficient.
SOCIAL AND COMMUNITY INVESTMENT
We purchase over 95 per cent of our tobacco from leaf suppliers and grow the
remainder, primarily in Madagascar. We are a significant employer in Madagascar,
both directly and indirectly. Employees have benefited from the Company securing
electricity and food supplies, as well as making contributions towards local
healthcare provision.
In 2003, we extended the Social Responsibility in Tobacco Production programme
across all our operations to ensure high standards for the cultivation and
purchase of tobacco leaf. The programme covers integrated crop management,
tobacco processing and socio-economic issues. It involves self-assessment,
continual improvement and verification visits on an intended three-year cycle.
The Board has decided that the Group will be guided on human rights issues by
the Organisation for Economic Co-operation and Development guidelines for
multinational enterprises, and a programme of social audit and performance
improvement has been established.
As a matter of policy, the Group does not employ children and our supplier
policy promotes compliance with international standards on child labour. We are
an active member of the Eliminating Child Labour Trust (www.endchildlabour.org).
The Group has long supported community activities in the geographical areas of
its operations and in 2003, our total charitable donations were #575,000.
We support and encourage employees to participate in community activities and to
raise money for charitable causes, and in many cases we match the money raised.
We also match donations made by employees under the Give As You Earn scheme,
administered through the Charities Aid Foundation.
TOBACCO INDUSTRY ISSUES
Regulatory pressures on the industry have continued in 2003.
In May 2003, the World Health Organisation's Framework Convention on Tobacco
Control (FCTC) was adopted at the 56th World Health Assembly. We agree with
several aspects of the Convention, most notably the need to prevent youth
smoking and the urgent need to stamp out both smuggling and counterfeiting of
tobacco products. However, the FCTC also includes measures more appropriately
dealt with by other relevant authorities, and some that we believe are
inappropriate. The Convention needs to be ratified by 40 countries before it
comes into effect, 90 days after the fortieth country has done so.
In 2001, the EU passed a Directive on the manufacture, presentation and sale of
tobacco products. Imperial Tobacco, together with British American Tobacco,
challenged it on the grounds that it violated several principles of European
law. In December 2002, the European Court of Justice ruled that the Directive
was valid.
The Directive has now been transposed into national regulations in all Member
States. Several EU accession countries are also starting to implement the
Directive prior to their accession in May 2004. By actively sharing best
practice and information across the Group, we are seeking to ensure we are in a
strong position to meet these regulations.
The most visible requirements of the Directive are the larger health warnings
required for all tobacco products and the removal of descriptors such as 'light'
and 'mild'. In September 2003, the EU Commission adopted a Decision which
outlines the use of pictorial health warnings that may replace the warnings on
the back of the pack should a Member State choose to require them. It is
unlikely that the precise details of the warnings will be known until September
2004.
The Directive also required manufacturers and importers to submit details of all
ingredients used in tobacco products to each Member State, along with any
available toxicological data. In December 2002, we submitted ingredient
information and toxicological data in all Member States, even in the absence of
national regulations. The format in which the ingredient information was
submitted has been accepted by most Member States.
However, The Netherlands has rejected this format, and required the submission
and publication of the detailed recipes of all tobacco products sold in the
Dutch market. The Company believes that the Tobacco (Lists of Ingredients)
Regulation 2003, which provides for publication of ingredients and formulae of
tobacco products, goes beyond what is allowed by the EU Directive on which the
Dutch regulation is based. Like any company, we have concerns about revealing
unique product formulae and, together with other leading tobacco manufacturers,
we began legal procedures in September 2003. Belgium has also expressed concerns
about the format of the ingredients information, but as yet there has been no
similar action.
In December 2002, the Council of EU Health Ministers adopted a Recommendation on
the prevention of smoking and on initiatives to improve tobacco control (2003/54
/EC). The Recommendation is non-binding to the Member States and includes
restrictions on vending machines, a ban on packs of less than 19 cigarettes and
the prohibition of promotional items bearing tobacco brand names.
The EU also passed a new Advertising and Sponsorship Directive in May 2003.
Whilst the new Directive is narrower in scope than its predecessor, which was
annulled by the European Court of Justice in October 2000, we believe it
contains several flaws. Germany recognised this and voted against it, and is now
challenging the Directive in the European Court of Justice.
In the UK, the Advertising & Sponsorship Act came into force in February 2003.
All advertising is now prohibited except at the point-of-sale, which may also be
severely restricted if the draft regulations notified to the European Commission
come into force. Sponsorship is also banned, but there is an exemption for world
events such as Formula 1 and the Embassy World Snooker Championships until July
2005, in line with the dates set by the EU Advertising Directive.
In Ireland, the Office of Tobacco Control has been established and the draft
Public Health (Tobacco) Bill has been notified to the EU Commission. The Bill
prohibits cigarette packs containing less than 20 cigarettes and the display of
tobacco products at the point-of-sale. The Irish Government also intends to
introduce a ban on smoking in public places from early February 2004. There is
considerable opposition to this ban from the hospitality sector concerned at its
effect on trade.
The debate on smoking in public places continues in many countries. To date, the
UK Government has indicated that it prefers to proceed with voluntary
restrictions on smoking, working with the hospitality industry rather than
introducing legislation.
We remain committed to continuing to work constructively with individual
governments and other regulatory bodies to ensure the sensible and proportionate
regulation of tobacco products.
TAXATION
We have seen the announcement of a number of significant tax increases across
Western Europe during 2003, particularly in France, The Netherlands and Belgium,
with the most notable being proposed in Germany. On 7 November 2003, the Federal
Council Bundesrat decided to invoke a conciliation procedure to review the
Government's tax proposals including the amounts, structure and timing of the
increases. A final decision is expected in mid-December. We remain concerned
that continued tax increases will fuel the level of illegal cross-border trade.
The fall in the smuggling of Imperial Tobacco's brands back into the UK has been
significant and encouraging. An investigation by the German authorities into
Reemtsma trading practices, which relates to a period prior to the acquisition,
is ongoing. In July 2003, we signed a Memorandum of Understanding with HM
Customs & Excise in the UK, formalising the adoption of jointly developed
protocols to combat the smuggling and counterfeiting of tobacco products. We
continue our dialogue with governments in other markets to explore opportunities
for the possible extension of protocols.
TOBACCO RELATED LITIGATION
The one legal action in England and Wales, in which Imperial Tobacco was
involved, has been dismissed.
In Scotland, Imperial Tobacco is currently involved in 11 separate cases, where
individual claimants are seeking damages for alleged smoking-related health
effects. Of these cases, nine have been stayed. In one of the other cases,
commenced by Alfred McTear in 1993, the trial started on 7 October 2003 and is
scheduled to last until March 2004. In the other case, the claimant is
representing himself and there has been no activity since July 2001.
In the Republic of Ireland, the number of active individual claims against
Imperial Tobacco currently stands at 45. Statements of claim have been served in
42 of these cases. Since 1997, 351 claims against Imperial Tobacco and other
tobacco companies have been dismissed, discontinued or confirmed as not
proceeding. No trial dates have been set in any of the claims against Imperial
Tobacco.
In The Netherlands, Imperial Tobacco has received claim letters on behalf of 44
individuals, although 15 of those individuals have now withdrawn. Other tobacco
companies have received similar letters. Testimony has been taken from a
majority of the claimants at preliminary hearings, but no actual proceedings
have been commenced against Imperial Tobacco or any of its subsidiaries in The
Netherlands.
In Germany, one individual claimant had served proceedings on Imperial Tobacco.
On 14 November 2003 the German court rejected this claim as being without merit.
In Poland, one individual claimant has served proceedings on Imperial Tobacco.
There have been several preliminary hearings with further hearings anticipated
during 2004.
In Australia, an individual claimant has served proceedings on seven tobacco
companies including Imperial Tobacco. A statement of claim has been served.
To date, no judgment has been entered against Imperial Tobacco and no action has
been settled in favour of a claimant in any tobacco-related litigation involving
Imperial Tobacco or any of its subsidiaries. Imperial Tobacco has been advised
by its lawyers that it has meritorious defences to the legal proceedings in
which individuals are seeking damages for alleged smoking-related health effects
and to threatened actions of a similar nature.
FINANCIAL STATEMENTS
------------------------------------
The figures and financial information for the year ended 30 September 2003 do
not constitute the statutory financial statements for that year. Those
financial statements have not yet been delivered to the Registrar, nor have the
Auditors yet reported on them. The accounting policies that have been adopted
are consistent with those stated in the Annual Report and Accounts for the
period ended 28 September 2002.
SUMMARY CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30 SEPTEMBER 2003
2003 2002
#m #m
Turnover 11,412 8,296
Duty in turnover (8,212) (6,077)
Costs and overheads less other income (2,319) (1,616)
--------- -------
Operating profit 881 603
--------- -------
Group operating profit before
amortisation and exceptional items 1,135 789
Amortisation (203) (83)
Exceptional items (51) (103)
--------- --------
Profit on disposal of fixed assets 12 -
--------- --------
Profit on ordinary activities before interest
and taxation 893 603
Interest and other finance charges (237) (180)
--------- --------
Exceptional finance charges - (33)
Other interest and finance charges (237) (147)
--------- --------
Profit on ordinary activities before taxation 656 423
Taxation (232) (140)
--------- --------
Profit on ordinary activities after taxation 424 283
Equity minority interests (3) (11)
--------- --------
Profit attributable to shareholders 421 272
Dividends (304) (229)
--------- --------
Retained profit for the year 117 43
--------- --------
Earnings per ordinary share
Basic 58.1p 41.0p
Adjusted
(before amortisation and exceptional items) 90.0p 68.4p
Diluted 57.9p 40.8p
--------- --------
Dividends per ordinary share
Interim 12.0p 10.0p
Proposed final 30.0p 23.0p
---------- --------
All activities derive from continuing operations.
There is no difference between the profit as shown above and that calculated on
an historical cost basis.
The 2002 comparatives include 4.5 months of Reemtsma results compared to a full
year in 2003.
SEGMENTAL INFORMATION
2003 2002
#m #m
Turnover
By destination
UK 4,568 4,486
Germany 2,765 1,139
Rest of Western Europe 1,635 1,190
Rest of the World 2,444 1,481
--------- --------
International 6,844 3,810
--------- -------
11,412 8,296
--------- --------
Operating profit
By destination
UK 406 390
Germany 228 67
Rest of Western Europe 307 217
Rest of the World 194 115
--------- ---------
International 729 399
--------- ---------
Trading operations 1,135 789
Amortisation (203) (83)
Exceptional items (51) (103)
---------- ---------
881 603
---------- ---------
Exceptional operating costs of #51m comprise #42m in respect of the
reorganisation of the Group, announced in September 2002, to integrate Reemtsma
with the Group's existing businesses, #5m in respect of the closure of the
Meppel factory in The Netherlands and a further #4m to finalise the streamlining
of the Group's operations announced in October 2001. These provisions relate
primarily to termination of employment.
In 2002 exceptional operating costs of #103m comprised #9m in respect of the
streamlining announced in October 2001 and #94m in respect of the reorganisation
of the Group following the Reemtsma acquisition. These costs related primarily
to termination of employment.
EARNINGS PER SHARE
2003 2002
Earnings per share
Basic 58.1p 41.0p
Adjustment for amortisation and exceptional items 31.9p 27.4p
-------- --------
Adjusted 90.0p 68.4p
Diluted 57.9p 40.8p
-------- --------
2003 2002
#m #m
Earnings
Basic 421 272
Adjustment for amortisation and exceptional items 231 182
------- -------
Adjusted 652 454
------- -------
Adjusted earnings per share are calculated before tax effected exceptional items
of #28m (2002: #99m) and amortisation of #203m (2002: #83m), since the Directors
consider that this gives a useful additional indication of underlying
performance.
There would be no significant dilution of earnings if the outstanding share
options were exercised.
2003 2002
Number Number
Weighted average number of shares outstanding
during the year
Basic 724,328,162 663,380,317
Effect of share options 3,225,153 3,677,285
---------------- ----------------
Diluted 727,553,315 667,057,602
---------------- ----------------
SUMMARY STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 30 SEPTEMBER 2003
2003 2002
#m #m
Profit attributable to shareholders 421 272
Exchange movements on retranslation of
net investments and related borrowings 101 10
Taxation credit on borrowings hedging overseas
equity investments 33 2
-------- --------
Total recognised gains for the year 555 284
-------- --------
SUMMARY CONSOLIDATED BALANCE SHEET
AT 30 SEPTEMBER 2003
2003 2002
#m #m
Fixed assets
Intangible assets 3,807 3,563
Tangible assets 714 751
Investments 43 23
-------- --------
4,564 4,337
-------- --------
Current assets
Stocks 1,009 977
Debtors 1,002 734
Investments 68 112
Cash 321 312
-------- --------
2,400 2,135
-------- --------
Creditors: amounts falling due within
one year (2,875) (2,322)
-------- --------
Net current liabilities (475) (187)
-------- --------
Total assets less current liabilities 4,089 4,150
Creditors: amounts falling due after
more than one year (3,485) (3,694)
Provisions for liabilities and charges (509) (531)
-------- --------
Net assets/(liabilities) 95 (75)
-------- --------
Capital and reserves
Called up share capital 73 73
Share premium account 964 964
Profit and loss account (961) (1,129)
-------- --------
Equity shareholders' funds 76 (92)
Equity minority interests 19 17
-------- --------
95 (75)
-------- --------
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 30 SEPTEMBER 2003
2003 2002
#m #m
Profit attributable to shareholders 421 272
Dividends (304) (229)
-------- --------
Retained profit for the year 117 43
Rights issue - 985
Goodwill exchange movements (83) (10)
Other net exchange movements 101 10
Taxation credit on borrowings hedging overseas
equity investments 33 2
-------- --------
Net addition to shareholders' funds 168 1,030
Opening shareholders' funds (92) (1,122)
-------- --------
Closing shareholders' funds 76 (92)
-------- --------
SUMMARY CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30 SEPTEMBER 2003
2003 2002
#m #m
Net cash inflow from operating activities 802 824
-------- --------
Returns on investments and servicing of finance (237) (156)
-------- --------
Taxation (154) (157)
-------- --------
Capital expenditure and financial investment (99) (54)
-------- --------
Acquisitions
Payments to acquire businesses (2) (3,442)
Net cash acquired with businesses - 266
Deferred consideration in respect of prior year
acquisitions (47) -
-------- --------
Net cash outflow from acquisitions (49) (3,176)
Equity dividends paid (254) (184)
-------- --------
Net cash inflow/(outflow) before management of liquid
resources and financing 9 (2,903)
------- --------
Management of liquid resources 58 233
------- --------
Financing
Issue of ordinary share capital - 985
(Decrease)/increase in borrowings (86) 1,798
------- -------
(Decrease)/increase in cash in the year (19) 113
------- -------
RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOW
FROM OPERATING ACTIVITIES
2003 2002
#m #m
Operating profit 881 603
Depreciation and amortisation 286 137
(Decrease)/increase in provisions for liabilities and
charges (69) 78
Decrease in stocks 62 11
Increase in debtors (233) (50)
(Decrease)/increase in creditors (125) 45
-------- --------
Working capital cash (outflow)/inflow (296) 6
-------- --------
Net cash inflow from operating activities 802 824
-------- --------
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
2003 2002
#m #m
(Decrease)/increase in cash in the year (19) 113
Cash outflow/(inflow) from decrease/(increase) in debt 86 (1,798)
Cash inflow from decrease in liquid resources (58) (233)
-------- --------
Change in net debt resulting from cash flows 9 (1,918)
Currency and other movements (382) (35)
Current asset investments acquired with subsidiary - 199
Loans acquired with subsidiary - (20)
Deferred consideration - (381)
--------- ---------
Movement in net debt in the year (373) (2,155)
Opening net debt (3,695) (1,540)
-------- --------
Closing net debt (4,068) (3,695)
-------- --------
ANALYSIS OF NET DEBT
Current Loans due
within one
asset year Loans due Deferred
after one
invest-ments #m year consider-
Cash #m #m ation Total
#m #m #m
As at
28 September 2002 312 112 (93) (3,645) (381) (3,695)
Cash flow (19) (58) (501) 587 - 9
Exchange
movements 28 14 (11) (369) (44) (382)
As at ------ ------ ------- ------- -------- -------
30 September 2003 321 68 (605) (3,427) (425) (4,068)
------ ------ ------- ------- -------- -------
SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United Kingdom
("UK GAAP"). Such principles differ in certain respects from generally accepted
accounting principles in the United States ("US GAAP"). A summary of principal
differences and additional disclosures applicable to the Group is set out below.
Explanation 2003 2002
Reference #m #m
Profit attributable to shareholders
under UK GAAP 421 272
US GAAP adjustments:
Pensions (i) 2 13
Amortisation of goodwill (ii) 194 48
Amortisation of brands/trade marks/
licences (ii) (102) (38)
Deferred taxation (iii) 57 16
Mark to market adjustments due to
non designation of hedge
accounting per SFAS 133 (iv) (82) (10)
Employee share schemes charge to the
profit and loss account (vii) 6 (4)
Acquisitions inventory step-up (viii) - (42)
Restructuring costs on acquisition (ix) - 44
-------- --------
Net income under US GAAP 496 299
-------- --------
2003 2002
Amounts in accordance with US GAAP
Basic net income per ordinary share (x) 68.5p 45.1p
Basic net income per ADS (x) 137.0p 90.2p
Diluted net income per ordinary share (x) 68.2p 44.8p
Diluted net income per ADS (x) 136.4p 89.6p
Explanation 2003 2002
Reference #m #m
Equity shareholders' funds under UK
GAAP 76 (92)
US GAAP adjustments:
Pensions (i) 345 335
Goodwill, less accumulated
amortisation of #(190)m (2002: #4m) (ii) (1,060) (1,122)
Brands/trade marks/licences, less
accumulated amortisation of #162m
(2002: #62m) (ii) 2,921 2,712
Deferred taxation (iii) (1,008) (967)
Mark to market adjustments due to
non designation of hedge accounting
per SFAS 133 (iv) 13 95
Proposed dividend (v) 217 167
ESOT shares (vi) (36) (19)
Employee share schemes (vii) 2 (4)
-------- --------
Shareholders' funds under US GAAP 1,470 1,105
-------- --------
(i) Pensions
Under UK GAAP, pension costs are accounted for under the rules set out in
Statement of Standard Accounting Practice No. 24 (SSAP 24). Its objectives and
principles are broadly in line with those set out in the US accounting standard
for pensions, Statement of Financial Accounting Standard No. 87, "Employers'
Accounting for Pensions" (SFAS 87). However, SSAP 24 is less prescriptive in
the application of the actuarial method and assumptions to be applied in the
calculation of pension costs.
In accordance with SSAP 24, no pension expense has been reflected in the profit
and loss account and no pension asset has been recognised in the balance sheet
for the UK and Irish pension schemes. A pension liability and related pension
expense is recognised for the German unfunded pension schemes.
Under US GAAP, the annual pension cost comprises the estimated cost of benefits
accruing in the period as determined in accordance with SFAS 87. Under SFAS 87,
a pension asset representing the excess of Imperial Tobacco Pension Fund assets
over benefit obligations has been recognised in the balance sheet.
(ii) Intangible assets
Both UK and US GAAP require purchase consideration to be allocated to the net
assets acquired at their fair value on the date of acquisition. Under UK GAAP,
goodwill arising and separately identifiable and separable intangible assets
acquired on acquisitions made on, or after, 27 September 1998 are capitalised
and amortised over their useful life, not exceeding a period of 20 years. Prior
to 27 September 1998, all goodwill and separately identifiable and separable
intangible assets were written off to reserves on acquisition.
Under US GAAP, identifiable intangible assets are separately valued and
amortised over their useful lives. The separately identifiable intangible
assets included in the US GAAP balance sheet are principally comprised of brand
rights which are being amortised over 25 to 30 years.
The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" with effect
from 1 July 2001 and accordingly goodwill generated on acquisitions after this
date was not amortised. For purchase transactions prior to 1 July 2001,
goodwill was capitalised and amortised over its useful life. From 29 September
2002, in accordance with SFAS 142, the Company no longer amortises goodwill but
rather will test such assets for impairment on an annual basis or where there is
an indicator of impairment.
The Company has completed the first step of the impairment test under the
transitional requirements of SFAS 142 and an annual impairment review as of 30
September 2003. No impairment charge of goodwill was indicated. A
reconciliation of previously reported net income under US GAAP and income per
share to the amounts adjusted for the exclusion of goodwill amortisation is
presented below. Income per ordinary share adjusted for goodwill charges is
calculated by adding back the goodwill charge to net income and dividing by the
weighted average ordinary shares outstanding for all periods presented.
2003 2002
#m #m
Net income under US GAAP 496 299
Adjustment for net goodwill amortisation - 27
-------- --------
Adjusted 496 326
-------- --------
Basic net income per ordinary share 68.5p 45.1p
Adjustment for net goodwill amortisation - 4.1p
-------- --------
Adjusted 68.5p 49.2p
-------- --------
Diluted net income per ordinary share 68.2p 44.8p
Adjustment for net goodwill amortisation - 4.0p
-------- --------
Adjusted 68.2p 48.8p
-------- --------
(iii) Deferred taxation
Under UK GAAP, deferred taxation is provided in full on all material timing
differences. Deferred tax assets are recognised where their recovery is
considered more likely than not.
US GAAP requires deferred taxation to be provided in full, using the liability
method. In addition, US GAAP requires the recognition of the deferred tax
consequences of differences between the assigned values and the tax bases of the
identifiable intangible assets, with the exception of non tax-deductible
goodwill, in a purchase business combination. Consequently, the deferred tax
liability attributable to identifiable intangible assets has been recognised and
is being amortised over the useful economic lives of the underlying intangible
assets.
(iv) Derivative financial instruments
The Group has entered into certain swap transactions with contractual maturities
exceeding those of the underlying debt being hedged, in anticipation of there
being additional floating rate debt when the existing debt matures. Under UK
GAAP, derivative financial instruments, that reduce exposures on anticipated
future transactions, may be accounted for using hedge accounting.
US GAAP requires the Group to record all derivatives on the balance sheet at
fair value. The Group has decided not to satisfy the SFAS 133 requirements to
achieve hedge accounting for its derivatives, where permitted, and accordingly
movements in the fair value of derivatives are recorded in the profit and loss
account.
(v) Proposed dividends
Under UK GAAP, dividends paid and proposed are shown on the face of the profit
and loss account as an appropriation of the current year's earnings. Proposed
dividends are provided on the basis of recommendation by the Directors and are
subject to subsequent approval by shareholders.
Under US GAAP, dividends are recorded in the period in which they are approved
by the shareholders.
(vi) Shares held by the Employee Share Ownership Trusts (ESOTs)
Under UK GAAP, shares held by the Trusts are recorded at cost and reflected as a
fixed asset investment in the Group's balance sheet.
Under US GAAP, these shares are recorded at cost and reflected as a deduction
from shareholders' funds.
(vii) Employee share schemes charge to the profit and loss account
Under UK GAAP, the cost of shares purchased by the ESOTs in conjunction with an
employee share scheme are charged to the profit and loss account according to
the book value of the shares at the date of purchase. The cost of employee
share schemes not held under the ESOTs are charged using the quoted market price
of shares at the date of grant. The charge is accrued over the vesting period
of the shares in both cases.
Under US GAAP, the compensation cost is recognised for the difference between
the exercise price of the share options granted and the quoted market price of
the shares at the date of grant or measurement date and accrued over the vesting
period of the options. For option plans which contain performance criteria,
compensation cost is remeasured at each period end until all performance
criteria have been met.
(viii) Inventory step-up
On acquisition under UK GAAP, the fair value of inventory is represented by the
acquired companies' current cost of reproducing that inventory.
On acquisition under US GAAP, the fair value represents the selling price less
any further costs to be incurred to sale.
(ix) Restructuring costs
On acquisition under UK GAAP, restructuring provisions may only be recognised as
a fair value adjustment, if the acquired company had an irrevocable commitment
to restructure which was not conditional on the completion of the purchase.
On acquisition under US GAAP, restructuring liabilities relating solely to the
acquired entity may be provided in the opening balance as a fair value exercise,
if specific criteria about restructuring plans are met.
(x) Net income per ordinary share
Basic net income per ordinary share has been computed using US GAAP net income
and weighted average ordinary shares. Diluted net income per ordinary share has
been calculated by taking into account the weighted average number of shares
that would be issued on conversion into ordinary shares of options held under
employee share schemes. There would be no significant dilution of earnings if
outstanding share options were exercised.
Each American Depositary Share (ADS) represents two Imperial Tobacco Group PLC
ordinary shares.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included herein, are,
or may be deemed to be, "forward-looking statements" within the meaning of
Section 21E of the US Securities Exchange Act 1934, as amended. For a
discussion of important factors that could cause actual results to differ
materially from those discussed in such forward-looking statements please refer
to Imperial Tobacco's Annual Report on Form 20-F for the fiscal year ended 28
September 2002, filed with the Securities and Exchange Commission, on 14
February 2003.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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