Focused on Sustainable Growth Imperial Tobacco Group PLC Annual Report and Accounts 2013 WWW.IMPERIAL-TOBACCO.COM WWW.TWITTER.COM/IMPERIALTOBACCO Who We Are Total Tobacco 35,000 160 Employees Countries I am We enjoy I own We can I engage We surprise We are an international fast Our portfolio spans the entire moving consumer goods tobacco spectrum and our brands company with a long track and products are enjoyed by record of creating value for millions of consumers around our shareholders. the world. We focus on generating quality Our people take pride in what sustainable growth in our they do, bringing our values to core tobacco business, whilst life every day to ensure we make exploring new areas for the most of our opportunities long-term revenue growth. for growth. OVERVIEW 2013 Results in Brief Dividends Per Share Adjusted Earnings Per Share1 Adjusted Operating Profit1 +10 % +6% +1% STRATEGY 116.4 p 210.7p £3,180m PERFORMANCE 1 Throughout the annual report percentage Tobacco Net Revenue1 Growth Brand Volumes increases and decreases in our adjusted results are on a constant currency basis unless stated otherwise. -1% -2% GOVERNANCE £7,007m 129bn FINANCIALS Contents GOVERNANCE Chairman’s Introduction 42 Strategic Report Board of Directors 44 Board Committees 46 OVERVIEW Directors’ Governance Report 54 Directors’ Remuneration Report 62 2013 Results in Brief 1 How We Create Value 2 Chairman’s Statement 3 FINANCIAL STATEMENTS AND NOTES Independent Auditors’ Report 84 STRATEGY Consolidated Income Statement 87 Consolidated Statement of Comprehensive Income 88 Chief Executive’s Review 4 Consolidated Balance Sheet 89 Measuring Our Performance 8 Consolidated Statement of Changes in Equity 90 Optimising Our Portfolio 10 Consolidated Cash Flow Statement 91 A Realigned Footprint 12 Notes to the Financial Statements 92 Shaping Our Environment 14 Independent Auditors’ Report to the Members of Developing Our People 16 Imperial Tobacco Group PLC 131 Our Responsible Approach 18 Imperial Tobacco Group PLC Balance Sheet 133 Notes to the Financial Statements of Imperial Tobacco Group PLC 134 PERFORMANCE Operating Review 20 SUPPLEMENTARY INFORMATION Logistics 24 Principal Undertakings 137 Financial Review 25 Shareholder Information 139 Corporate Responsibility 28 Risk Management 35 Principal Risks and Uncertainties 37 Imperial Tobacco Group PLC Annual Report and Accounts 2013 1 How We Create Value Strategy Cost Optimisation Sales Growth Cash Utilisation Total Tobacco Delivering Sustainable Returns Our strategy creates value by maximising sales, cost and Effective cost and cash management supports our strategy, and cash opportunities. we ensure that our focus on shaping our environment, developing our people and managing our business responsibly is aligned with Realising the potential of our total tobacco portfolio, market our growth priorities. footprint and people is critical to delivering our strategy. The consistent application of our strategy has delivered signifi cant We apply consumer insights and our sales growth driver expertise returns to shareholders over the years and we’re focused on to generate quality growth across our portfolio, whilst developing building on this track record of value creation as we continue opportunities for additional long-term revenue growth through to transition the business. our new standalone business, Fontem Ventures. Business Model High Our business model illustrates in simple terms Margin how we create value through our strategic focus Profi ts on sales, cost and cash. Our focus on quality sustainable sales growth, combined with the effi cient way in which we manage costs throughout our operations, drives high operating margins. Strong Sales This generates the strong cash fl ows which we Cash Flow use to reward our shareholders and to reinvest in the business. Our strategy and business model are underpinned by strong governance and high standards of responsibility, and will continue to drive our sustainable development. Reinvest Maximising Shareholder Returns 2 Imperial Tobacco Group PLC Annual Report and Accounts 2013 Chairman’s Statement OVERVIEW I’m pleased to introduce this report which provides an overview of STRATEGY our performance and the actions we’re taking to strengthen the sustainability of our business. PERFORMANCE Iain Napier Chairman In 2013 we created further value for shareholders in what was a In addition, having served for nine years since his appointment diffi cult operating environment for many fast moving consumer to the Board of Altadis, Berge Setrakian will step down from the GOVERNANCE goods companies. Board at the 2014 AGM. The AGM will mark the ninth year of Susan Murray’s service and she will step down from the Board We achieved this through the consistent application of our at the end of September 2014. strategy and also made signifi cant progress in transitioning the business to strengthen our future growth potential. On 1 October we were delighted to welcome Oliver Tant to the Board in advance of his appointment as Finance Director on Growing Returns for Shareholders1 5 November. Oliver joined us from KPMG where he held a We grew total adjusted operating profi ts by 1 per cent and number of senior positions during a highly successful career. delivered 6 per cent adjusted earnings per share growth to He has extensive corporate fi nance and fi nancial management FINANCIALS 210.7 pence. Reported earnings per share were 96.2 pence. expertise and is a very strong addition to the business. The Board is recommending a fi nal dividend2 of 81.2 pence, Oliver succeeds Bob Dyrbus who will retire at the end of 2013 bringing the total dividend this year to 116.4 pence, up by after an illustrious 25-year career with the Company. I’d like to 10 per cent and increasing our dividend payout ratio to thank Bob for his tremendous contribution and wish him all the 55.2 per cent of adjusted earnings per share. Our intention is very best for the future. to grow dividends ahead of adjusted earnings and by at least 10 per cent per year over the medium term. Sustainable Value Creation Over the last year we’ve created further value for shareholders A Responsible Business in challenging conditions and I’d like to thank our people across We run our business responsibly and take pride in the positive the globe for all their hard work. I’d also like to thank my Board contributions we make in many countries across our international colleagues for their friendship and support during my 13 years footprint, providing employment for 35,000 people, respecting with Imperial Tobacco. the natural resources we use and contributing around £20 billion every year to governments in taxes. Our corporate responsibility It’s been a privilege to serve as Chairman for seven of those priorities are clearly set out in our responsibility framework and an years and I’m confi dent that the Group’s continued focus on the update on the progress we’re making in key areas can be found transition of the business and the drive for quality sales growth will on pages 28 to 34 of this report. reward shareholders with sustainable returns for many more years to come. Governance and Board Strong governance is integral to the long-term success of Imperial Tobacco and the Board is committed to ensuring that the business continues to be governed and managed with openness, honesty and transparency. Our Governance Report on page 42 sets out the approach we take and highlights the key focus areas of the Board in 2013. In January Mark Williamson, Senior Independent Non-Executive Iain Napier Director, was appointed Deputy Chairman of the Board and will Chairman succeed me as Chairman following our AGM in January 2014. It’s been a pleasure working alongside Mark since he joined the Board in 2007 and I wish him every success in the future. 1 Throughout the annual report percentage increases and decreases in our adjusted results are on a constant currency basis unless stated otherwise. 2 This will be paid on 17 February 2014 to those shareholders on the register on 17 January 2014. Imperial Tobacco Group PLC Annual Report and Accounts 2013 3 Chief Executive’s Review We’re focused on continuing the transition of the business and building momentum behind our quality growth agenda. Alison Cooper Chief Executive I’m pleased with the robust performance we’ve delivered in a We will continue adding to our track record of value creation challenging operating environment and I’d like to thank our people over the long term and I’m confi dent that our transition focus for their tremendous support over the year. Their relentless drive will strengthen our ability to capitalise on sales, cost and and commitment has ensured that we delivered earnings growth cash opportunities. and made signifi cant progress with our strategic transition. Transition on Track I’ve been particularly encouraged with the results we’re generating We’re on track with our transition plans and made signifi cant from our Growth Brands, which are outperforming market trends. progress in the year. These are quality brands, delivering quality growth and we’ll We’ve realigned our footprint into Growth Markets and Returns continue to drive their development. Markets and now manage markets based on the strategic role Our strategic transition remains on track and we will be building they play, rather than their geographic proximity. This new on the considerable achievements we’ve made in recent years. approach enables us to better target resource and is improving the clarity of our growth focus across markets. Our initial transition focus revolved around consumers, putting consumers at the centre of everything we do to better understand We’ve aligned our sales teams around the world to this new their evolving choices. Our consumer insight work is essential market reclassifi cation and now report our performance on this to our focus on driving quality growth.