Half Yearly results presentation 10 May 2011

Transcription

1 Alison Cooper Chief Executive Good morning and welcome to our 2011 half year results presentation. Who s Presenting I m Alison Cooper, Chief Executive of Imperial Tobacco and I m here today with our Finance Director, Bob Dyrbus, and other members of our senior management team. Delivering Our Strategy I m pleased to be presenting another good set of results which highlight the strength of our growth strategy. We delivered successes across our international footprint driving growth through our unique Total Tobacco portfolio. Volumes of our key cigarette brands, fine cut tobacco, luxury Cuban cigars and snus were all up with gains in EU and non-eu markets. Our focus on building sales whilst effectively managing costs and cash are key to our growth and enable us to create long term sustainable value for our shareholders. We are investing in brands, products and capacity to support our sales growth agenda, enabling us to capitalise on consumer growth segments, and in maintaining our disciplined approach to investment and cost management we ve also increased tobacco adjusted operating margins in the first half. Effectively managing the cash we generate is a key element of delivering returns to shareholders. 12 month cash conversion was again strong at 98 per cent, and today we ve announced plans to further increase dividends in 2012 and beyond, and a share buyback programme which starts immediately. HY11 Overview Turning to the first half headline numbers. In terms of our overall volume performance total stick equivalent volumes were down just 0.7 per cent in the first half a pleasing result given the difficult trading conditions in Spain. Looking at year on year comparatives, this half year has been significantly impacted by foreign exchange translation, principally the Euro. Performance is therefore better understood using constant currency which will be the basis of all our comments today, and on that basis tobacco net revenues were up by 2.7 per cent, tobacco adjusted operating profit up by 3.8 per cent and adjusted earnings per share up by seven per cent. The interim dividend is 28.1p per share as is usual, this represents a third of last year s total dividend and an increase of around 16 per cent on last year s interim. Information correct at

2 Underlying Growth: ex Spain; adjusted for UK trade buying In our pre-close trading update we highlighted a shift in trade buying patterns in the UK from the first to the second half. To give you a feel for our underlying performance, if we adjust our results for this and exclude Spain given the exceptional environment, Group stick equivalent volumes were up 1 per cent, revenues up 4.4 per cent and tobacco operating profits up over 7 per cent, and the chart also shows our underlying performance in the EU. Cash Utilisation As you are aware, we generate a lot of cash and how we use that cash is a key component of our value creating strategy. We ve been very successful in reducing our debt and earlier this year announced that we expect to reach a 50 per cent payout ratio for Thereafter we expect to further increase the payout ratio, with dividends per share continuing to grow steadily ahead of adjusted earnings per share over the long term. In addition we will begin a share buyback programme effective today at an annualised rate of 500 million pounds. Bob will provide you with more detail later. Returning to today s results. HY11 Key Achievements We uniquely provide consumers with experiences across the tobacco spectrum, which we refer to as Total Tobacco. This gives us opportunities to capitalise on consumer growth segments across our market portfolio driving underlying sales growth in the EU and 7 per cent sales growth outside the EU. In the first half we grew combined cigarette volumes of our global strategic brands Davidoff, Gauloises Blondes and West by 5 per cent reflecting our success in emerging markets outside the EU, and together, these three brands now account for 23 per cent of our total cigarette volumes. And we achieved another excellent performance from our international cigarette brand JPS, with volumes up by 16 per cent. We also grew fine cut tobacco volumes by five per cent, Habanos cigar sales were very strong outside the EU, increasing by 16 per cent, and we grew snus volumes by 19 per cent. Let me now focus on each of these headlines. Total Tobacco 5% global strategic brand growth Our investments in the rejuvenation of Davidoff, Gauloises Blondes and West with new formats and variants have made these brands more dynamic and relevant for today s consumers. Davidoff had an excellent first half, growing nine per cent with very strong performances in a number of key markets in Eastern Europe, Asia and the Middle East. In 19 of its top 20 markets Davidoff either grew or maintained its market share. Information correct at

3 The core premium line franchise grew over 8 per cent and we ve made very encouraging progress with new variants such as King Size Super Slims. We improved volumes of Gauloises Blondes, our biggest selling brand, by five per cent following the supply disruption last year with good results in markets across Africa and the Middle East including Morocco and Algeria. And finally West, our leading international value brand, grew one per cent, performing well in Eastern Europe where new variants such as West Fusion, our King Size Super Slims offering, have provided consumers with an innovative product at an attractive price. Total Tobacco JPS: 16% volume growth We ve also been evolving the JPS portfolio - reinforcing its smart choice positioning with the consumer, being premium on everything but the price, and this is reflected in another excellent performance. Volumes were up 16 per cent overall with strong growth in the UK, Germany and Australia. We achieved a significant milestone in Germany this half, with JPS capturing 10 per cent market share for the first time, confirming its position as the second largest brand in the market, while rapid growth in Australia has resulted in the brand achieving a 3.8 per cent market share, up from 2.2 per cent last year. Total Tobacco 5% fine cut tobacco growth Fine cut tobacco is in growth in many EU markets and we have continued to capitalise on our leadership in this segment to drive volumes up five per cent in the first half, and this was complemented by strong growth in papers which grew 8 per cent and tubes which were up 12 per cent. A key element of our fine cut tobacco success story has been leveraging cigarette brand equity into fine cut tobacco and JPS is a great example of this, having achieved 6 per cent volume growth this half, the brand now accounts for almost nine per cent of the German fine cut tobacco market and over three per cent in France. We re focused on building on this success and recently launched JPS in a roll your own and make your own format in the UK and Ireland. Elsewhere we ve been very successful with West, particularly in make your own, and delivered 10 per cent volume growth in the first half. Route 66 is also gaining traction, achieving excellent results in our Rest of EU region. The brand now represents over 11 per cent of our total fine cut tobacco volumes. Total Tobacco Habanos: 16% sales growth outside EU In cigars, our luxury Habanos portfolio grew sales outside the EU by 16 per cent and delivered two per cent overall volume growth, a great performance given Spain is the largest Habanos market. Information correct at

4 Cohiba, Romeo y Julieta, Partagas, Hoyo del Monterrey and H.Upmann all grew volumes. In terms of markets, volume growth was driven by very strong performances outside the EU including Russia, Brazil, the Middle East, Asia and in particular China. Total Tobacco Snus 19% volume growth Finally our highly successful snus business, where total volumes grew 19 per cent across Sweden and Norway with growth from Skruf and Knox. Both brands were recently rejuvenated and with our new factory having removed capacity limitations we are well placed to drive further growth in this category. Growth in EU and non-eu Turning to our markets. One of the key consumer trends in the EU is the move to value and we are well placed to capitalise on this trend given the versatility of our Total Tobacco portfolio. We have strong representation in all key tobacco segments and at all price points providing us with the flexibility to respond quickly to consumer growth trends. This has meant we have reinforced our leadership in the UK with a stable cigarette share and increased cigarette and fine cut tobacco share in Germany. Spain continues to be a difficult market but there are growth opportunities and we ve grown our domestic fine cut tobacco share and our domestic cigarette share has been improving in recent months. We made further gains in the Rest of EU, notably with JPS cigarette volumes up 12 per cent and total fine cut tobacco volumes up 5 per cent. In the USA its also a value seeking story with consumers economising in cigarettes and cigars in a very competitive environment and earlier this month we began integrating our cigarette and mass market cigar sales forces to further strengthen our customer and consumer interface. In our Rest of the World region we are capitalising on the considerable opportunities there are for us to develop our business. We are driving growth in key consumer growth segments through the success of our global strategic cigarette brands and our strong portfolio of local and regional brands. Profits grew by over 30 per cent in Eastern Europe, by over 20 per cent in Asia Pacific and by just under 10 per cent in Africa & Middle East. In addition, there is great potential for our prestigious luxury Cuban cigar brands and we achieved significant growth in a number of major emerging markets including China, Russia and Brazil. HY11 EU Stick Equivalent Volumes Total EU volumes were down 4.5 per cent or 3.6 billion sticks whereas outside the EU they grew by 2.4 billion sticks or nearly three per cent. In the EU our reported performance was in line with the market. In the UK the shift in trade buying patterns from the first half to the second half accounted for more than half the volume decline with underlying UK volumes down around 4 per cent. Information correct at

5 In Germany our share growth in cigarette and fine cut tobacco generated volume growth of 3 per cent in a stable market. In Spain our stick equivalent volume performance was in line with the market. There are challenges, but there are also growth opportunities and we are making good progress in queen size cigarette, fine cut tobacco and cigarillo growth segments. In our Rest of EU region our volumes declined 2.1 per cent against a market decline of over four per cent reflecting strong share performances across cigarette and fine cut tobacco in a number of markets including Austria, Czech Republic, Poland and Portugal. Non-EU Stick Equivalent Volumes In the US Fortuna sales were strong in the first half and we also grew volumes in our fine cut tobacco business. In Eastern Europe we continue to make gains in growing segments and grew volumes of Davidoff and Style in Russia and Ukraine. Our volumes were down just 0.6 per cent with Russia and Ukraine stabilising and were up one per cent excluding Balkan Star. Markets continue to grow across the Africa and Middle East region and we delivered a strong half with volumes up four per cent driven by growth in a number of markets including Morocco and Saudi Arabia. In Asia-Pacific volumes increased nearly 7 per cent driven by growth in Laos, Vietnam and in South Korea following the launch of Davidoff. Tobacco Net Revenue stable EU constant currency revenues Turning now to look at our tobacco net revenues on a constant currency basis where despite the impact of Spain, and the shift in trade buying patterns in the UK, overall EU revenues were stable and non-eu revenues were up 90 million pounds or 7 per cent. UK revenues were down 5 per cent, impacted by the shift in trade buying patterns. German revenues increased 1 per cent and Rest of EU increased by 5 per cent. Tobacco Net Revenue excellent non-eu constant currency growth America s revenues were down one per cent as we continued to invest in price support behind our brands while our Rest of World revenues were up nine per cent. Africa and Middle East revenues were up over 4 per cent and Eastern Europe, Asia-Pacific and Duty Free all reported revenues up nine per cent or more reflecting excellent price/mix driven by growth in our global strategic brands across the Rest of World region. My review of our operational performance has given you a sense of how we are driving growth in our business through Total Tobacco, with underlying sales up in the EU and a strong performance outside the EU. Our global strategic cigarette brands, fine cut tobacco portfolio, snus and Habanos all had a strong first half. Total Tobacco gives us a unique opportunity and one we will continue to exploit. I ll now hand over to Bob to go through the related Group results. Information correct at

6 Group Results 7% constant currency EPS growth Bob Dyrbus Finance Director Good morning everyone. I ll start with an overview of the results. This table shows a reconciliation between reported and constant currency numbers. As Alison mentioned, this half year has been significantly impacted by foreign exchange translation; principally the euro sterling exchange rate and I will focus on a constant currency analysis in all of my comments. There was no transactional impact from foreign exchange in the first half. Tobacco net revenues rose by 2.7 per cent while Logistics distribution fees were down 1.5 per cent. Tobacco adjusted operating profit increased by 3.8 per cent with margins slightly up and Logistics adjusted operating profit declined 3.4 per cent, giving combined growth of 3.3 per cent. Further repayment of bank debt partially offset by a minor increase in average cost of net debt meant that our interest charge for the period was down three per cent on last year. After tax being charged at an effective rate of 24.5 per cent, adjusted earnings per share grew by seven per cent. Results have been adjusted and presented on our usual basis with the main differences to reported results being amortisation of acquired intangibles of 210 million pounds, fair value losses on derivative financial instruments of 47 million pounds and the exclusion of one-off tax provision releases of 205 million pounds as we have resolved certain prior year tax matters, there are further details in the appendices. EU Adjusted Operating Profit I have split the analysis of tobacco constant currency operating profit growth of 3.8 per cent between EU and non-eu markets and highlighted the absolute profit movements on this and the subsequent slides. Starting with the EU, where UK operating profits declined by five per cent due to the shift in trade buying patterns. In Germany, share growth in both cigarette and fine cut tobacco drove a seven per cent increase in profits aided by ongoing efficiencies in the business. Our performance in Spain reflects the difficult economy and the public smoking ban and in the Rest of EU, operating profit was up two per cent with growth in a number of markets being partly offset by weaker performances in markets affected by the financial crisis, notably Greece. Information correct at

7 Non-EU Adjusted Operating Profit In our non-eu operations, starting with the Americas, and principally the US where, despite a highly competitive market, we grew our profits by three per cent. We increased profits in our Rest of the World region by 18 per cent with all subregions performing strongly. In Eastern Europe, we grew profits by over 30 per cent benefiting from improved pricing and strong performances from our global strategic brands and a number of regional brands. In Asia-Pacific, our share gains across the region generated profit growth of over 20 per cent. Our Africa and Middle East region also performed well with volume growth driving profits up close to 10 per cent. And our Cuban cigar business has also made good progress, particularly so given Spain, increasing profits by more than 10 per cent. Overall, we grew profits outside the EU by 15 per cent. Cost Optimisation As I mentioned earlier, we have grown our constant currency Tobacco margin by just under half a percentage point. We maintain our cost disciplines while continuing to invest for growth, in brands, in growing segments, or in expanding capacity. We will continue to focus on maximising the returns from our assets and there are still opportunities for us to become more effective, and the merger of our US cigarette and mass market cigar sales forces is a current example. Logistics In Logistics, profits declined 3 per cent. In Tobacco logistics growth in cigars and fine cut tobacco has helped offset the decline in cigarette volumes in Spain and we have taken further costs out of the business. In other logistics our transport operations performed well but the weak economic environment has impacted other areas of our business. Our ongoing cost saving programme continues to focus on maximising profitability. Operational Outlook Looking ahead to the remainder of the year, firstly in the EU. In the UK, we expect a stronger performance in the second half as the shift in trade buying patterns unwinds. In Germany, the market remains strong and we will build on the share gains we have delivered in the first half, with recent price increases further benefiting results. In Spain, we expect the challenging environment to persist. Against this backdrop we are focused on delivering further successes from our value portfolio and taking share in the growing consumer segments. Information correct at

8 Across the Rest of EU we are focused on driving the continued success of our cigarette portfolio, cigarette branded fine cut tobacco products and our snus business. Outside the EU we will build on the results we have delivered in the first half of the year, particularly with our global strategic cigarette brands Davidoff, Gauloises Blondes and West and our luxury Cuban cigar portfolio. In the USA, the market remains competitive though the rate of volume decline has stabilised and combining our cigarette and mass market cigar sales forces will strengthen our position. In Eastern Europe, market conditions in Russia and Ukraine are more stable and we are focused on increasing our market shares in growing consumer segments such as Superslims and King Size Superslims. In Africa, market volumes are growing and our strong portfolio of local and regional brands should continue to perform well, while in the Middle East we seek to further grow sales particularly with Davidoff and Gauloises Blondes. In Asia-Pacific, we will further build on our improving positions in our key markets across the region. In logistics we will continue to identify growth opportunities and manage our costs in a difficult trading environment. Adjusted Net Debt Turning to the financing of the business. At the end of March, our closing net debt was 10.1 billion pounds reflecting the usual first half net working capital outflow and the final dividend payment. Working capital outflows were 700 million pounds and included the unwinding of last year s one-off timing benefit in our Italian logistics business. Despite this, the working capital outflow was 100 million pounds less than last year. Capital expenditure, tax and interest payments are comparable to last year while end-march cross rates means foreign exchange has not been a material influence on our net debt position when compared to September Measured over the last 12 months and thereby capturing the full business cycle, cash conversion was 98 per cent, toward the top end of our 90 to 100 per cent target range. Financing and Cost of Debt Our average adjusted net debt for the period fell to 10.3 billion pounds, some 1.3 billion pounds down on last year. Last December we took advantage of lower credit spreads and refinanced two and a half billion pounds of bank facilities until 2015, ahead of their maturity in July of next year. As I mentioned earlier, our average all-in cost of net debt rose to 6.1 per cent, partly as a result of this refinancing and because our cash flow can only be used to reduce the relatively low cost revolving credit facilities. Information correct at

9 Our net interest charge fell to 280 million pounds on the back of reduced debt levels while our interest cover improved to over five and a half times. The appendices contain further detail on our interest rate fixings and debt maturities. FY11 Financial Outlook Guidance for our average interest cost for the full year is around 6.1 per cent, slightly down on our previous estimates as underlying rates have not risen as implied by yield curves at the start of the year. Our tax rate will remain around 24.5 per cent. As usual, we expect the normal first half working capital outflow to unwind in the second half. We anticipate a year end outflow in the region of 100 million pounds reflecting the unwinding of the timing benefit in our logistics business. Cash Utilisation Turning to cash utilisation, as Alison said earlier, our strategy is about delivering sustainable shareholder returns with efficient cash utilisation a key component of value creation. Following successful debt pay down and announcing the 50 per cent dividend payout for 2011 we have reviewed our options as to how best to deploy our ongoing strong cash flows. Our dividend yield is around 4.5 per cent and our shares trade on a PE of around 11 times based on 2011 forecasts. A higher dividend payout and share buybacks are not mutually exclusive, and noting where our shares trade, we recognise the value in both. Accordingly, from a base of around a 4.5 per cent dividend yield we envisage growing dividends per share ahead of earnings per share over the long-term thereby steadily increasing the payout ratio. By steadily increasing the payout ratio we are able to offer strong dividend growth from an already attractive yield while also employing a share buyback programme starting immediately at an annualised rate of 500 million pounds. Absent M&A, for which, as always, returns have to exceed both a risk adjusted weighted average cost of capital and the returns from a share buyback, utilising a combination of a steadily increasing payout ratio and an appropriate level of share buybacks allows us to maximise our cash returns and maintain an appropriate capital structure. Thank you, I will now hand you back to Alison to conclude the presentation. Information correct at

10 Alison Cooper Chief Executive HY11 Key Achievements Our portfolio is the most comprehensive in the industry and this Total Tobacco approach provides many growth opportunities, opportunities we are capitalising on. Sales grew 3 per cent in the first half, we grew combined cigarette volumes of our global strategic brands Davidoff, Gauloises Blondes and West by 5 per cent. JPS volumes were up 16 per cent, we grew fine cut tobacco volumes five per cent, Habanos sales grew 16 per cent outside the EU, we grew snus volumes by 19 per cent, and we remain focussed on building on this momentum in the second half. Our Strategy Our good performance in the first half reflects our continuing focus on the three key components of our growth strategy: sales, cost and cash. Consumer choices are continually evolving and it s our understanding of how consumers behave, coupled with the versatility of our brands and products, that will ensure that we continue to make the most of our sales growth opportunities, and that sales success will continue to be enhanced by our diligent approach to managing costs and cash. We maintain our cost discipline whilst continuing to invest behind our portfolio to drive sustainable sales growth, while dividend increases in 2011 and beyond, and our share buyback programme will return excess cash to our shareholders further enhancing their returns. We have the assets, the opportunities and the capabilities to deliver long term success. Imperial Tobacco Group PLC Thank you, we will now take any questions you may have. The presentation is being recorded so I would be grateful if you would wait for a microphone before speaking and then give your name and organisation. Information correct at