Imperial Tobacco Group PLC Group Imperial Tobacco Annual Report and Accounts 2015 Imperial Tobacco Group PLC Annual Report and Accounts 2015 WHO WE ARE Our Business We are an international fast-moving consumer goods company, focused on maximising opportunities for our brands and generating sustainable returns for our shareholders. Our core business is built around a tobacco portfolio that offers a comprehensive range of cigarettes, fine cut and smokeless tobaccos, papers and cigars. Our tobacco operations include ITG Brands, a dynamic new company in the USA. We are also creating new consumer experiences beyond tobacco through Fontem Ventures and adding to the breadth of our activities is Logista, one of the largest logistics businesses in Europe. Through the consistent delivery of our strategy we have built a long track record of creating sustainable value for our shareholders. Our Values Our values express what we stand for and capture the individual and collective behaviours we expect from everyone who works for us. Our people take pride in what they do, bringing our values to life every day to ensure we make the most of our opportunities for growth. I own I engage We can We enjoy I am We surprise PERFORMANCE HIGHLIGHTS CONTENTS STRATEGIC REPORT OVERVIEW Dividend Per Share Adjusted Earnings 1,3 OVERVIEW Per Share Performance Highlights 1 How We Create Value 2 Our Brands and Markets 4 +10.1% +8.2% Chairman’s Statement 6 Our Operating Environment 7 STRATEGY 141.0p 212.5p STRATEGY Chief Executive’s Review 8 Investing in the USA 10 Tobacco Net Revenue1,3 Adjusted Operating Profit1 Key Performance Indicators 12 PERFORMANCE Operating Review 14 2 Financial Review 18 +3% +7% Corporate Responsibility 21 Risk Management 25 £6.3bn £3.1bn Principal Risks and Uncertainties 27 PERFORMANCE GOVERNANCE Chairman’s Introduction 31 Cash Conversion3 Growth Brand Volumes3 Board of Directors 32 The Board and its Committees 34 Directors’ Report 42 2 Directors’ Remuneration Report 49 +590bps +7% FINANCIAL STATEMENTS GOVERNANCE AND NOTES Independent Auditors’ Report 68 97% 145bn Consolidated Income Statement 74 Consolidated Statement of Comprehensive Income 75 Adjusted Net Debt Adjusted Net Debt Consolidated Balance Sheet 76 (includes the £4.6 billion Reduction Consolidated Statement of Changes in Equity 77 cost of the US acquisition) (excludes the £4.6 billion Consolidated Cash Flow Statement 78 cost of the US acquisition) Notes to the Financial Statements 79 Independent Auditors’ Report to the FINANCIALS Members of Imperial Tobacco Group PLC 116 Imperial Tobacco Group PLC Balance Sheet 117 +£3.5bn -13% Notes to the Financial Statements of Imperial Tobacco Group PLC 118 £11.6bn £1.1bn SUPPLEMENTARY INFORMATION 1 Changes in our adjusted results are presented on a constant currency basis. Related Undertakings 121 2 Underlying change. See explanation in the Performance Measures table below. Shareholder Information 131 3 KPIs used as bonus and LTIP performance criteria for Executive Directors. See Remuneration Report on page 49 for more information. Performance Measures Measure Explanation Where used Reported (GAAP) Complies with International Financial Throughout the report. Reporting Standards and the relevant legislation. Adjusted (Non-GAAP) Non-GAAP measures provide a useful Throughout the report. comparison of performance from one period to the next. These measures are defined in the Accounting Policies on page 77. Constant currency Removes the effect of exchange rate Throughout the report. basis movements on the translation of the results of our overseas operations. Underlying change Removes the impact on our growth rates of Throughout the report our 2014 stock optimisation programme in but only for volumes For a more interactive experience visit: order to reflect management’s estimate of the and tobacco net www.imperial-tobacco.com underlying performance before the one-off revenue. fall in sales arising from the reduction in excess stock held in distribution channels. Keep up to date with our news via twitter @ImperialTobacco Imperial Tobacco Group PLC Annual Report and Accounts 2015 1 HOW WE CREATE VALUE Our Strategy and Business Model Strategy Our strategy aims to maximise sales, cost and cash opportunities to deliver sustainable returns to shareholders. We are strengthening our portfolio by building the contribution of our Growth and Specialist Brands, supported by new launches from Fontem Ventures, and a strategic focus on share and profit performance is central to the development of our geographic footprint. Our cost optimisation programme is improving efficiencies and by embedding stronger capital discipline we are more effectively managing working capital and achieving high cash conversion. Maximising Shareholder ReturnsPortfolio High Management Margin Profits s er iv Innovation r D Growth Strong Strong h t and Dividend w Cash Strengthen Develop Cost Capital o r Specialist G Pricing Flow Growth Portfolio Footprint Optimisation Discipline s e Brands l a S Customer Reinvest Engagement How we Strong Governance Managing Risk Support High standards of governance are We actively identify, manage and Growth critical to our sustainability. mitigate the risks facing our business. Find out more on page 31 Find out more on page 25 Acting Responsibly Rewarding Success Operating responsibly is integral to Our people are rewarded fairly the way we do business. and incentivised to deliver our Find out more on page 21 sales strategy. Find out more on page 49 2 Imperial Tobacco Group PLC Annual Report and Accounts 2015 OVERVIEW Business Our business model shows how we create value. We are improving the Model quality of our growth by driving the performance of our Growth and Specialist Brands, which combined with effective cost management, delivers high STRATEGY operating margins. This generates the strong cash flows that are a hallmark of our business. We use this cash to reinvest in the business, pay down debt or return to shareholders through dividends, which we are committed to growing by at least 10 per cent a year over the medium term. PERFORMANCE Portfolio High Management Margin Profits s er iv Innovation r Growth D Strong GOVERNANCE Strong h t and Dividend w Cash o r Specialist G Pricing Flow Growth s e Brands l a S Customer Reinvest FINANCIALS Engagement Sales Portfolio management, innovation, Excellence in customer engagement Growth customer engagement and pricing are requires strong retailer partnerships. the four sales growth drivers we have We work with retailers to support their Drivers selected to drive the performance of business and maximise the availability our Growth and Specialist Brands. and advocacy of our brands at the point of sale. Through portfolio management we focus on connecting our brands with We evaluate pricing opportunities by consumers to enhance brand equity brand, pack size and sales channel. and build sales. We take excise structures into account when making pricing Our approach to innovation is to decisions and focus on maximising create a drumbeat of initiatives: small, revenue growth while continuing to frequent innovations that keep our give consumers value for money. brands relevant to consumers. Imperial Tobacco Group PLC Annual Report and Accounts 2015 3 OUR BRANDS AND MARKETS We’re optimising our portfolio to focus on our Growth and Our Brands Specialist Brands. These are the most important brands in our portfolio and generate more than half our tobacco net revenue. Growth Brands1 Specialist Brands1 Our Growth Brands have broad consumer appeal and account Our Specialist Brands are enjoyed by specific consumer for 50.9 per cent of our total volumes. We manage our Growth groups and include cigarette, fine cut tobacco, paper, cigar Brands to drive quality sustainable growth. and smokeless tobacco brands. Specialist Brands have a track record of generating strong returns. ® 1 As a result of the USA acquisition these brands have been reclassified, effective 1 October 2015. Details are on page 9. Tobacco net revenue by brand Portfolio Brands 43.1% Our 45.8% Growth Brands Brands 11.1% Specialist Brands 4 Imperial Tobacco Group PLC Annual Report and Accounts 2015 We manage our markets according to the strategic role OVERVIEW Our Markets they play, not by geographic location. Our markets prioritise either Growth or Returns, driving more effective resource allocation and greater collaboration. Growth Markets USA Market Returns Markets STRATEGY In Growth Markets, which include We manage the USA as a standalone In Returns Markets, which include selected markets in the EU, Eastern Growth Market following an acquisition Australia and markets in the EU, Europe, Asia and the Middle East, our that has significantly enhanced our Eastern Europe and Africa, we focus priority is to drive long-term share and portfolio, market share and distribution on sustainable profit performance, profit growth. coverage. while actively managing our strong share positions. PERFORMANCE GOVERNANCE FINANCIALS Tobacco net revenue by market Growth Markets 23.2% Our 42.4% Returns Markets North USA Market2 Markets 11.3% 23.1% Returns Markets South 2 Including a 3.9 per cent net contribution from ITG Brands since the completion of the acquisition on 12 June 2015. Imperial Tobacco Group PLC Annual Report and Accounts 2015 5 CHAIRMAN’S STATEMENT The deal, which was financed from debt and our own cash resources, has significantly enhanced our operations in the USA providing national distribution for our brands and improving our cigarette market share from around 3 per cent to over 9 per cent. The expanded business, ITG Brands, will significantly increase the diversity and sustainability of our cash flow and returns. The USA will become the largest contributor to Group revenues and as a result, we now disclose our USA performance as a separate reportable segment. Capital Discipline Our continued focus on embedding stronger capital discipline in the business was reflected in further improvements in cash conversion and debt reduction. Cash conversion increased to 97 per cent, up from 91 per cent last year. Adjusted net debt increased to £11.6 billion, the result of adding Mark Williamson Chairman £4.6 billion for the USA acquisition.