Imperial Tobacco Group Makes Interim Management Statement
Cost Optimisation
- Focus on complexity reduction, improved ways of working and cost efficiencies ongoing
- Cost optimisation programme remains on track to deliver ?85 million savings in FY15
Capital Discipline
- Expect cash conversion of c.90 per cent for the full year with consistent focus on managing working capital
- Continuing commitment to ongoing debt reduction
- On track to deliver dividend growth of 10 per cent for the full year
| Overview | 9 months to 30 June |
Change | ||||
| 2015 | 2014 | Actual | Constant Currency1 | Underlying2 | ||
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1 Change at constant currency removes the effect of exchange rate movements on the translation of the results of our overseas operations.
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| Growth Brands volume | bn SE | 105.4 | 91.7 | +15% | - | +10% |
| Tobacco net revenue3 | ?m | 4,435 | 4,632R | -4% | +2% | 0% |
| Total Tobacco volume3 | bn SE | 207.4 | 213.3 | -3% | - | -6% |
Alison Cooper, Chief Executive, said:
“This has been another good quarter, building on the progress we made in the first half. Our continued focus on improving the consistency and quality of our performance has delivered excellent results from our Growth Brands which continue to grow net revenue, volume and market share. We’ve strengthened our performance in Returns Markets and maintained positive momentum in Growth Markets. We completed the US acquisition towards the end of the quarter and I am pleased with the successful start we’ve made in implementing our commercial and integration plans for ITG Brands. This consistent delivery against our strategic agenda leaves us on track to deliver against full year expectations and to create further sustainable value for our shareholders.”
BUSINESS REVIEW
Overview
We’re continuing to make good progress against our key strategic objectives. The consistent application of our strategy, supported by focused investment, is continuing to build momentum across the business. Our Growth Brands are outperforming the market and we continue to grow our Specialist Brands, which together represent an increasing proportion of our business. Our footprint provides both stability and opportunities for growth, with improving revenue in Returns Markets and continued top line momentum in many of our Growth Markets. Our expanded share in the US strengthens our footprint, further diversifying our earnings. We’ve continued to focus on cost and cash management with the removal of business complexity enhancing operational effectiveness.
Underlying tobacco net revenue was flat but grew 1 per cent excluding the impact in Iraq. Price mix was higher during the quarter as expected, particularly in a number of our Returns Markets where we grew net revenue by 1 per cent. Growth Market net revenue was down 1 per cent, held back by Iraq which masked growth of 3 per cent in the rest of the Division, with performance highlights in Russia, Taiwan, Norway and in premium cigars. In Returns Markets North we grew net revenue by 2 per cent with growth in markets including Germany, Australia and Ukraine. In Returns Markets South net revenue declined by 2 per cent with market pressures in Morocco continuing.
We have continued to increase the net revenue, volume and share of our Growth Brands, with brand migrations continuing to demonstrate consistently high consumer retention. Growth and Specialist Brands generated 59 per cent of total tobacco net revenue compared to 53 per cent in the same period last year.
Underlying volumes were down 6 per cent, impacted by the political and security situation in Iraq which continues to deteriorate. Excluding this impact, underlying volumes were down 4 per cent, slightly better than industry volumes in our footprint which were down 4.5 per cent.
Strengthening our Portfolio
Excellent Results from Growth Brands
We delivered another strong performance from Growth Brands, increasing net revenue by 14 per cent, volumes by 10 per cent and market share by 100 basis points.
JPS continues to perform well in many key markets, reinforced by a number of initiatives including a new marketing campaign and migration activities which supported share gains in Germany, Australia, Spain, the UK and Italy.
The overall performance of Gauloises was impacted by Iraq, though the new Vive le Moment campaign has produced positive results for the brand in Germany and we continue to build share in Algeria. We made further gains with Davidoff in Taiwan following a new marketing campaign and launch of a new premium variant, Absolute.
Share and volumes in West increased, supported by the success of current migrations. We grew West share in Saudi Arabia and a recently launched supermenthol variant is supporting share growth in Japan.
Growth Brands accounted for 51 per cent (up 780 basis points) of reported Group total tobacco volumes and 47 per cent (up 550 basis points) of reported tobacco net revenue.
Specialist Brands Continue to Grow Revenue
Specialist Brands net revenue was up 3 per cent, supported by growth in modern variants of Golden Virginia in the UK, Skruf in Scandinavia and premium cigars in both the US and Europe. Specialist Brands accounted for 12 per cent of reported tobacco net revenue, up 30 basis points.
Developing our Footprint
Momentum in Growth Markets
We continued to grow net revenue in Russia where we are benefitting from strong pricing and consumer demand in the value segment which has been captured by Maxim. A strong increase in online sales has contributed to consistent revenue growth in premium cigars in the US. We have achieved further success in the snus sector in both Norway and Sweden where growth in the market share of Skruf and Knox contributed to further revenue gains. In Taiwan we are strengthening customer engagement which together with increased share of Davidoff is supporting further growth. In Saudi Arabia we have made share gains in West and Gauloises and are increasing investment in distribution and availability. Investment in JPS and the migration of Fortuna are supporting our expansion in Italy. The security situation in Iraq held back Growth Market volumes which were also impacted by the growth of the illicit market in Vietnam post the introduction of pictorial health warnings last year.
Positive Performance in Returns Markets
Pricing in the quarter has contributed to improved price/mix within Returns Markets. In Australia we have continued to grow revenue, profit and share with JPS now the leading brand in the market. In the UK the strong performance of Carlton and Players has improved our share of the growing sub economy segment. Performance in Germany remains positive with price supporting growth in revenue, and JPS gaining share. In Returns South market declines have further eased in France and Spain, though conditions in Morocco remain challenging with recent excise increases and higher prices fuelling an increase in illicit trade. We are growing fine cut tobacco share through News and JPS in France and West in Spain, where we also held share in blonde cigarettes and continued to strengthen our portfolio with the migrations of Brooklyn and Ducados.
US
The integration of the newly acquired US assets is progressing well and performance is in line with our plans. The sales team is in the process of introducing new retail programmes, whilst the migration of manufacturing plant and equipment between Greensboro and Reynolds’ plant at Tobaccoville is also underway. The newly acquired brands are performing as expected and generated ?41 million net revenue in the period after completing the deal on 12 June. Challenges in the mass market cigars segment persist and this has impacted net revenue which was down by 1 per cent. The US performance includes revenue from our new cigarette brands, whilst the prior year includes a similar amount from a one-off MSA credit.
Fontem Ventures
Our standalone subsidiary Fontem Ventures continues to develop well, with blu growing encouragingly in the UK and an enhanced strategic approach starting to be rolled out in the US. The development and licensing of a range of patented technologies is ongoing.
Logista
Logista continues to demonstrate resilience and whilst distribution fees remain lower than last year, operating profit was up by 5 per cent. This was driven by cost savings and efficiency measures in tobacco logistics and growth in non-tobacco logistics, with gains in the pharma and transport divisions.
Cost Optimisation
We have built on progress made in the first half to reduce operational complexity and improve business processes. We continue to generate cost efficiencies, and are on track to deliver savings of ?85 million in FY15.
Capital Discipline
In mid-July we successfully issued \\$4.5 billion of new bonds with an average duration of 7 years, which have replaced a proportion of the bank term loans put in place during FY14 to finance the acquisition of assets in the US. The total blended average cost across the four bonds is 3.75 per cent. We expect our average Group cost of finance to be in the region of 4.4 per cent for FY15. We continue to prioritise ongoing debt reduction and maintain a consistent focus on the management of working capital. We remain on track to deliver cash conversion of c.90 per cent for the full year.
Financial Position
Since the publication of our Interim Results in May, we completed the acquisition of certain US cigarette and e-cigarette brands and assets previously owned by Reynolds and Lorillard Inc. The deal completed on 12 June 2015 for a consideration of \\$7.1bn (?4.6bn). There has been no other material change in the Company’s financial position since our Interim Results in May.
Exchange
At current rates we expect the movement in exchange rates to impact our earnings per share for FY15 by around 4 per cent.
Outlook
We remain on track to deliver our FY15 targets and committed to the progression of our strategic agenda, focusing on creating further value for shareholders in 2015 and beyond.
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