Registered Office PLC Group Imperial Tobacco Imperial Tobacco Group PLC Imperial Tobacco Group PLC Annual Report and Accounts 2010 PO Box 244 Upton Road Bristol BS99 7UJ UK www.imperial-tobacco.com Growing our business... Annual Report and Accounts 2010 This document is printed by Park Communications. Park is an EMAS certified CarbonNeutral® Company and its Environmental Management System is certified to ISO14001. 100% of the inks used are vegetable oil based 95% of press chemicals are recycled for further use and on average 99% of any waste associated with this production will be recycled. This document is printed on Heaven 42; a paper sourced from well managed, sustainable, FSC certified forests, and bleached using a chlorine free process. Designed and produced by Black Sun Plc Contents / Index About this Report Cost Optimisation 9, 24 Nominations Committee 63 A Creditor Payment Policy 74 Non-Financial Performance Indicators 53 Accounting Policies 103 Critical Accounting Estimates Notes to the Financial Statements 112 Acquisitions 151 and Judgements 110 Notes to the Imperial Tobacco Adjusted Earnings Per Share 22 Czech Republic 35 Group PLC Balance Sheet 154 Adjusted Measures 108 Africa 38 D O Altadis 45 Deferred Tax Assets and Liabilities 139 Operating Review 32 American Depositary Directors Operational Highlights 3 Receipts/Shares 159, 160 Biographies 56 P Americas 37 Interests in Shares 83 People 8, 14 Analysis of Net Debt 150 Pensions 93 Pensions 93 Annual General Meeting 72, 160 Remuneration 78 Poland 35 Asia 39 Responsibilities 74 Portugal 36 Audit Committee 70 Directors and Employees 115 Principal Risks and Uncertainties 25 Auditors Directors’ Report Principal Subsidiaries 157 Remuneration 71, 114 Governance 54 Profit Before Taxation 114 Other Information 73 Report 97, 152 Property, Plant and Equipment 121 Australia 38 Performance 28 Strategy Provisions 144 2 Financial Highlights Financial Statements and Notes Austria 35 Strategy 6 Disclosure Committee 69 R 4 Chairman’s Statement 97 Independent Auditors’ Report to the B Dividend Reinvestment Plan (DRIP) 160 Reconciliation of Cash Flow to Members of Imperial Tobacco Group PLC Balance Sheet (Consolidated) 100 Dividends 30, 73, 117 Movement in Net Debt 151 98 Consolidated Income Statement Balance Sheet (Parent) 153 Registrars 159 Directors’ Report: Strategy Balances and Transactions with E 99 Consolidated Statement of Regulation 26, 50 6 Chief Executive’s Review Associates and Joint Ventures 151 Earnings Per Share 28, 118 Remuneration Committee 78 Performance Comprehensive Income 9 Strategic Review Belgium 35 Employees 75, 115 Remuneration Report 78 100 Consolidated Balance Sheet Board Committees 59 Excise Duty 26 10 Key Assets Rest of EU 35 101 Consolidated Statement of Changes in Equity Board of Directors 56 Execution Excellence 9, 18, 44 Rest of the World 38 16 Leveraging our Assets Borrowings and Derivative 102 Consolidated Cash Flow Statement F Restructuring Costs 115 Financial Instruments 123 22 Key Performance Indicators (KPIs) Financial Calendar 160 Retirement Benefit Schemes 107, 141 103 Accounting Policies Brand Equity 8, 12 25 Principal Risks and Uncertainties Financial Highlights 2 Russia 38 Governance 110 Critical Accounting Estimates and Judgements Business Overview 1 Financial Review 28 112 Notes to the Financial Statements S C Financial Statements 96 Sales Growth 9, 23 Directors’ Report: Performance 152 Independent Auditors’ Report to the Cash and Cash Equivalents 123 France 35 Saudi Arabia 38 28 Financial Review Cash Conversion Rate 24 Members of Imperial Tobacco Group PLC Future Foundations 9, 20, 48 Segment Information 112 Cash Flows from 32 Operating Review 153 Imperial Tobacco Group PLC Balance Sheet Share Capital 73, 144 Operating Activities 150 G 41 Corporate Responsibility 154 Notes to the Imperial Tobacco Group PLC Germany 33 Shares 148 Financials Cash Flow Statement 102 Governance 54 Share Schemes 145 53 Non-Financial Performance Indicators Balance Sheet Cash Utilisation 9, 24 Greece 35 Shareholder Information 159 Chairman’s Statement 4 Group Performance 28 Spain 34 Supplementary Information Chief Executive’s Committee 61 Directors’ Report: Governance Statement of Changes in Equity 101 Chief Executive’s Review 6 I 54 Chairman’s Introduction 157 Principal Subsidiaries Statement of Comprehensive Cigarette Volumes 23 Illicit Trade 26 Income 99 56 Board of Directors 159 Shareholder Information Commitments 149 Income Statement 98 Strategic Review 9 58 Corporate Governance Report IBC Index Consumer Centric 9, 16, 44 Intangible Assets 119 Strategy 6, 9 73 Directors’ Report: Other Information Contents IFC Inventories 122 78 Directors’ Remuneration Report Corporate Governance Report 58 Investments in Associates T for more information visit: Corporate Responsibility 41 and Joint Ventures 122 Taiwan 38 www.imperial-tobacco.com Anti-Illicit Trade 49 Ireland 35 Taxation 30, 116 Assurance and Verification 41 Italy 35 Tobacco Adjusted Business Integrity 48 Operating Margin 24 About this Report K Tobacco Net Revenue 23 Community Involvement 52 Key Performance Indicators 22, 31 Employee Development Total Shareholder Return 5, 22 and Engagement 45 L Total Tobacco 8, 11 Reflecting our belief that operating in a responsible manner is Environmental Performance 46 Laos 39, 49 Trade and Other Payables 123 Occupational Health and Legal Proceedings 110, 149 Trade and Other Receivables 123 simply part of how we do business, this year’s report incorporates Safety Management 46 Litigation 27, 76 Travel Retail 34 our Corporate Responsibility Review to provide stakeholders with Product Quality 44 Logistics 39 Turkey 38 Product Stewardship and M U Portfolio Management 44 a comprehensive overview of our activities and achievements. Market Footprint 8, 10 Ukraine 38 Regulatory Engagement 50 Middle East 38 United Kingdom 32 Responsible Sales Morocco 38 United States of America 37 and Marketing 44 Social Assessment and N W Human Rights 51 Net Finance Costs 116 White Stick Equivalent Volumes 23 Stakeholder Panel 51 Netherlands 35 Supplier Relationships 51 New Zealand 39 …to deliver sustainable shareholder returns What we do… We are a leading international tobacco company with a balanced market footprint and a unique portfolio that offers consumers high quality brands and products across all tobacco categories. We create value for our shareholders by driving sustainable sales growth, optimising costs and effectively utilising the cash we generate. How we do it… Consumer Centric: Understanding what drives our consumers Satisfying consumers and aligning our portfolio to their evolving preferences is fundamental to our sales growth strategy. Execution Excellence: A fast and flexible business focused on delivery We are a responsive business with strong and trusted customer and industry partnerships, which enhances our growth potential. Future Foundations: Building a sustainable future Operating responsibly, combined with our proactive approach to tackling illicit trade and regulatory engagement, is critical to our long-term success. for more information see pages 16 – 21 1 Financial Highlights Volumes1 2010 Change 2009 White stick equivalents KPI 348.5bn -2.9% 358.8bn Cigarettes KPI 308.7bn -4.2% 322.2bn Fine cut tobacco 39.8bn +8.7% 36.6bn Financial Highlights – adjusted basis2 2010 Change 2009 Tobacco net revenue KPI £7,055m +3% £6,818m Logistics distribution fees £936m -3% £964m Adjusted operating profit £3,067m +5% £2,933m Adjusted profit before tax £2,467m +10% £2,233m Adjusted earnings per share KPI 178.8p +11% 161.8p Financial Highlights – reported basis 2010 Change 2009 Revenue £28,173m +6% £26,517m Operating profit £2,528m +8% £2,337m Profit before tax £2,118m +124% £945m Basic earnings per share 148.5p +127% 65.5p Diluted earnings per share 148.0p +127% 65.3p Dividend per share 84.3p +15% 73.0p 1 White stick equivalents reflects our combined cigarette and fine cut tobacco volumes. 2 Management believes that these non-GAAP measures provide a useful comparison of business performance and reflect the way in which the business is controlled. Definitions are included in our accounting policies within the notes to the financial statements. Reconciliations between adjusted and reported measures are also included in the relevant notes. Performance Highlights +3% +8.7% +5% Tobacco net Fine cut tobacco Adjusted revenue growth volume growth operating profit 2 Operational Highlights Delivering Sustainable Shareholder Value Operating Responsibly We made gains with our global We signed a co-operation agreement strategic cigarette brands Davidoff, with the European Commission and the West and Gauloises Blondes. Member States of the European Union We have aligned our portfolio to to strengthen our joint efforts to combat consumers seeking value, with the illicit trade of tobacco products. particularly strong results from We have revised our Code of Conduct our regional brand JPS. in 2010 and are continuing to embed We have further developed our unique high standards of conduct and total tobacco portfolio, increasing our behaviour across the Group. fine cut tobacco volumes by 8.7%. Business in the Community’s 2009 We have made excellent progress in Corporate Responsibility Index awarded reducing our adjusted net debt levels, us a Gold rating with an improved score down by £1.5 billion to £9.3 billion. of 93.8%. for our financial and operational performance for our corporate responsibility performance see pages 28 – 40 see pages 41 – 52 Adjusted net +11% +15% debt reduced Adjusted