Imperial Brands share price: Group posts full-year results

Tobacco net revenue up 9.7%

Imperial Brands share price: Group posts full-year results

Imperial Brands (LON:IMB) has updated investors on its full-year performance this morning.

Highlights from the company statement:

Our results benefited from the acquisition of assets in the USA last year, with an additional volume of 12.1 billion stick equivalents and £682 million of net revenue in the year.

Outside the USA, volumes were affected by market size declines, difficult trading caused by the conflict in Iraq and Syria and by our decision to deprioritise volume in markets such as Ukraine where profitability has been affected by competitor discounting and adverse currencies. Positive price/mix and cost control initiatives mitigated these impacts. Reported tobacco net revenue was up 14.7 per cent, reflecting our market choices and the benefit of currency exposures.

Tobacco net revenue was up by 9.7 per cent at constant currency. The proportion of Group net revenue from our Growth and Specialist Brands increased to now represent 60.1 per cent, improving the quality of our revenue and strengthening our sustainability. Tobacco adjusted operating profit increased 10.4 per cent to £3.36 billion and on a reported basis increased 12.1 per cent.

Logista again delivered an encouraging performance in a challenging environment with adjusted operating profit of £176 million compared with £154 million last year, partly as a result of foreign exchange movements; on a constant currency basis adjusted operating profit grew 9.1 per cent. The improvement was driven by the development of its non‑tobacco business, particularly pharmaceutical, wholesale and transport, a stronger tobacco market, as well as the benefit of continued cost controls.

Adjusted net finance costs were higher at £524 million (2015: £467 million) reflecting the full year impact of the cost of the USA acquisition debt partially offset by a reduction in our all in cost of debt.

Reported net finance costs were £1,350 million (2015: £261 million), incorporating the impact of the net fair value and exchange losses on financial instruments of £807 million (2015: gains of £226 million) and post‑employment benefits net financing costs of £19 million (2015: costs of £20 million).

After tax at an effective adjusted rate of 20.0 per cent (2015: 20.7 per cent), adjusted earnings per share grew by 17.5 per cent to 249.6 pence. The effective reported tax rate is 26.2 per cent (FY15: 1.9 per cent). The effective reported tax rate for 2015 was unusually low, largely due to the recognition of previously unrecognised tax losses as a deferred tax asset, on the basis that taxable profits would arise in the relevant entities following the acquisition of assets in the USA.

The tax rate is sensitive to the geographic mix of profits, reflecting a combination of higher rates in certain markets, such as the USA, and lower rates in other markets, such as the UK. The rate is also sensitive to future legislative changes affecting international businesses, such as changes arising from the OECD's (Organisation for Economic Co-operation and Development) Base Erosion Profit Shifting (BEPS) work.

Reported earnings per share were 66.1 pence (2015: 177.4 pence) reflecting non‑cash amortisation of £1,005 million (2015: £697 million) and restructuring costs of £307 million (2015: £328 million), as well as the effects of fair value and exchange losses in finance costs mentioned above. The difference between reported (66.1p) and adjusted earnings per share (249.6p) is materially due to the same three items.

The weakening of sterling versus the euro and US dollar positively impacted reported and adjusted measures. On a constant currency basis, adjusted earnings per share grew 12.0 per cent.

The restructuring charge for the year of £307 million (2015: £328 million) relates mainly to our cost optimisation programme announced in 2013 (£188 million) and integration costs relating to the assets acquired in FY15 (£49 million).

The total restructuring cash flow in the year ended 30 September 2016 was £268 million (2015: £256 million).

Outlook

We have a track record of consistently delivering against our strategy, which has generated significant returns to shareholders and created a strong platform for future value creation.

To further drive delivery of our strategic priorities and underpin revenue growth over the medium term, we will invest an additional £300 million, which, net of investment returns, will have a £200 million impact in 2017. This will be partly offset by £90 million of cost optimisation savings resulting in a 4 per cent net impact on 2017 constant currency earnings. However, foreign exchange translation is expected to benefit earnings by around 14 per cent based on current rates, and supports the continued delivery of our financial targets in 2017.

The phasing of the increased investment will be biased to the early part of 2017, resulting in lower revenue and profit in the first half, offset by a stronger second half performance.

We intend to sustain an increased level of investment in subsequent years and we expect a return to constant currency earnings growth in line with our medium-term guidance of 4-8 per cent from the 2018 financial year.

We continue to prioritise capital discipline and strong cash conversion to underpin our commitment to deliver dividend growth of at least 10 per cent next year and over the medium term.

We have a strong track record of delivering sustainable shareholder returns over many years and we are well-placed to build on this in 2017 and over the next decade.

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