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RNS
Imperial Brands PLC  -  IMB   

Half-year Report

Released 07:00 03-May-2017

RNS Number : 0055E
Imperial Brands PLC
03 May 2017
 

IMPERIAL BRANDS PLC

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2017

 

INVESTING IN QUALITY GROWTH AND DELIVERING SUSTAINABLE RETURNS

To view a PDF version of the half year results please paste the following URL into the address bar of your browser:

http://www.rns-pdf.londonstockexchange.com/rns/0055E_1-2017-5-3.pdf

Delivering against our strategy

·      Results in line with expectations with additional investment programme on track

·      Investments are strengthening share trends in many priority markets, supporting quality growth

·      Strong results from Growth and Specialist Brands, which now generate 60.4% of tobacco net revenue

·      Excellent progress with cost optimisation and reducing business complexity

·      Focus on capital discipline delivering 99.6% cash conversion and 10% dividend growth

 

Alison Cooper, Chief Executive, commented

"We're delivering encouraging improvements in share trends in many of our priority markets after significantly stepping up investment behind our strategy and quality growth. The volume and share gains we achieved with our Growth Brands in the period were particularly pleasing. Our performance is underpinned by the rollout of our Market Repeatable Model, which provides an effective and consistent approach for delivering sustainable quality growth in markets. We are deploying this model in e-vapour and believe it can also be successfully applied to drive growth in other consumer adjacencies. As expected, first half revenue and profit were impacted by the considerable increase in investment. In a challenging industry environment, we are delivering against our strategy and remain on track to meet full year earnings expectations at constant currency. Cash conversion remains strong and we are delivering another dividend increase of 10%."

 

Headline Financials

Overview - Adjusted Basis

Half Year Result

Change

 

2017

2016

Actual

Constant Currency1

Total tobacco volume

bn SE

126.3

133.9

-5.7%

 

Growth Brand volume

bn SE

73.0

70.7

+3.2%

 

Tobacco net revenue

£m

3,716

3,399

+9.3%

-5.5%

Tobacco adjusted operating profit

£m

1,667

1,577

+5.7%

-8.1%

Logistics adjusted operating profit

£m

82

68

+20.6%

+4.4%

Total adjusted operating profit

£m

1,740

1,637

+6.3%

-7.6%

Adjusted earnings per share

pence

121.9

113.0

+7.9%

-5.9%

Dividend per share

pence

51.7

47.0

+10.0%

 

Adjusted net debt

£m

(13,927)

(13,710)

 

 

 

Overview - Reported Basis

Half Year Result

Change

 

2017

2016

Actual

 

Revenue

£m

14,298

12,806

+11.7%

 

Operating profit

£m

902

1,002

-10.0%

 

Basic earnings per share

pence

70.7

30.4

+132.6%

 

See page 4 for basis of preparation and page 13 for the reconciliation between reported and adjusted measures.

1 Change at constant currency removes the effect of exchange rate movements on the translation of the results of our overseas operations



 

 

Delivering Against Strategic Priorities

We are investing more behind the right brands and the right markets to deliver further quality growth and ongoing returns. Our Market Repeatable Model provides a clear framework for our investment and is supporting Growth Brand performance and improved market share trends in priority markets.

Strengthening our Portfolio

·      Growth Brand volumes up 3.2% with a 60 bps increase in market share

·      Growth and Specialist Brands up 200bps to 60.4% of reported tobacco net revenue

·      Brand migrations and SKU rationalisation realising simplification benefits

·      Building blu through investment in brand building and technology development

Developing our Footprint

·      Investment is delivering improved share trends in priority markets; Growth Brand share gains in all divisions

·      In USA: Winston and Kool share increased; mass market cigars performing well

·      Growth Markets: increased share in Italy, Japan and Saudi Arabia; and improving trend in Russia

·      Returns Markets: gaining share with Growth Brands in UK and Australia; other priority markets stabilising

·      Market Repeatable Model informing investment choices and supporting effective market execution

Cost Optimisation

·      Cost optimisation expected to deliver £130m of savings in FY17, ahead of the £90m announced in November

·      Continued focus on reducing business complexity driving effectiveness and efficiency

·      Savings supporting investment programme

Capital Discipline

·      Cash conversion of 99.6%

·      Net debt reduction of £1.2bn before adverse FX of £1.4bn: adjusted net debt of £13.9bn

·      Interim dividend of 51.7p; up 10%

 

Highlights show movements based on adjusted numbers at constant currency

 

Portfolio Strengthened through Growth Brand Performance

·      Reported volume 126.3bn SE; down 5.7% driven primarily by increased industry volume declines

·      Industry volumes down 4.3% year to date, following a strong comparator period last year and affected by increased excise and regulatory changes

·      Growth Brands gaining volume (up 3.2%) and share (up 60 basis points) reflecting improved quality of growth

·      Rest of portfolio share down 90 basis points as our portfolio transformation focuses on Growth Brands

·      Specialist Brands volume driven by migration of Route 66 to Growth Brands and market size declines

·      Portfolio Brands volume affected by multiple migrations to Growth Brands, delistings and market size

 

VOLUME BRIDGE: -5.7%

HY16 reported volume

133.9 bn SE


Growth Brands

-2.3bn


Specialist Brands

-0.7bn


Portfolio Brands

-9.2bn


HY17 reported volume

126.3 bn SE

-5.7%

 

 

 

 

 

 

 

 

 

 

 

Net Revenue Growth of 9.3% at Actual Exchange Rates

·      Net revenue of £3.7bn; up 9.3% at actual exchange rates; down 5.5% on a constant currency basis

·      Flat price/mix reflects increased price investment, the phasing of price increases and the impact of termination of PMI contracts in the UK and Morocco

·      14.8% benefit from foreign exchange on translation

 

NET REVENUE BRIDGE: +9.3%

HY16 net revenue

£3,399m


Volume

-5.7%


Price/mix

+0.2%


Translation FX

+14.8%


HY17 net revenue

£3,716m

+9.3%

 

Adjusted Earnings per Share up 7.9% at Actual Exchange Rates

·      Adjusted EPS of 121.9p

·      Constant currency adjusted EPS down 5.9% reflecting impact of increased investment of £160m

·      Translation FX benefit of 15.6p with 7.8p from US dollar; 3.9p Euro, 2.3p Australian dollar and 1.6p of other currencies

·      Reported EPS up 132.6% to 70.7p driven primarily by the impact of foreign exchange on the fair value of derivatives

 

EPS BRIDGE: -5.9% (CC); +7.9% (Reported)

HY16 adjusted EPS

113.0p


Investment

   -13.1p


Operating profit ex-investment

+2.7p


Interest, Tax, MI and JV

+3.7p


HY17 constant currency EPS

106.3p

-5.9%

Translation FX

+15.6p


HY17 adjusted EPS

121.9p

+7.9%

 



 

OTHER INFORMATION

Investor Contacts

 

Media Contacts   

 

Peter Durman

+44 (0)7970 328 093

Alex Parsons

+44 (0)7967 467 241

Matt Sharff

+44 (0)7964 110 921

Simon Evans

+44 (0)7967 467 684

Mat Slade

+44 (0)7811 974 438

 

 

Webcast and Conference Call

Imperial Brands PLC will be hosting a live webcast for investors and investment analysts with senior management following the publication of our Interim Results on 3 May 2017. The webcast will be hosted by Alison Cooper, Chief Executive, and available on www.imperialbrandsplc.com from 9.00am (GMT). An archive of the webcast and the presentation script and slides will also be available.

The webcast can also be accessed on a listen only basis using the following telephone details:

United Kingdom: +44(0)20 3427 191

USA: +1646 254 3388

Confirmation code: 3011623

 

A media conference call will be hosted at 7.30am, at which there will be the opportunity for questions.

Dial-in Number: +44 (0)330 336 9412

Participant code: 2618718

A replay of this call will be available for one week. To listen, please dial:

Replay Number: +44 (0)207 984 7568

Access Code: 2618718

Basis of Presentation

·      To aid understanding of our results, we use 'adjusted' (non-GAAP) measures in accordance with our usual practice. Reconciliations between adjusted and reported (GAAP) measures are also included in the relevant notes. Further definitions of adjusted measures are provided in the 2016 Annual Report and Accounts.

·      Stick Equivalent (SE) volumes reflect our combined cigarette, fine cut tobacco, cigar and snus volumes. 

·      Change at constant currency removes the effect of exchange rate movements on the translation of the results of our overseas operations. References in this document to percentage growth and increases or decreases in our adjusted results are on a constant currency basis unless stated otherwise.

·      Market share is presented as a 12 month average (MAT).  Aggregate market share is a weighted average across markets within our footprint.

Cautionary Statement

Certain statements in this announcement constitute or may constitute forward-looking statements. Any statement in this announcement that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is or may be a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied in any forward-looking statement. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this announcement. As a result, you are cautioned not to place any reliance on such forward-looking statements. The forward-looking statements reflect knowledge and information available at the date of this announcement and the Company undertakes no obligation to update its view of such risks and uncertainties or to update the forward-looking statements contained herein. Nothing in this announcement should be construed as a profit forecast or profit estimate and no statement in this announcement should be interpreted to mean that the future earnings per share of the Company for current or future financial years will necessarily match or exceed the historical or published earnings per share of the Company. This announcement has been prepared for, and only for the members of the Company, as a body, and no other persons. The Company, its Directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this announcement is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed.

 

 

 



 

CHIEF EXECUTIVE'S STATEMENT

We made a promising start to the year as we continued to focus on delivering against our strategic priorities. This year we are investing an additional £300m in Growth and Specialist Brands in priority markets to deliver improved revenue growth and early results are encouraging, with improved share trends in many of these markets.

Our increased investments support our strategy to generate quality growth and sustainable shareholder returns and they are focused on areas where we have a proven track record of generating quality revenue growth and are funded by further savings from our cost programme. Investments are aligned with the rollout of our Market Repeatable Model, which provides an effective and consistent approach for winning across our geographic footprint. Our investments are supporting share growth in our Growth Brands in many of our priority markets or improved share trends in others.

We remain focused on our four strategic priorities: strengthening our portfolio, developing our footprint, cost optimisation and capital discipline. Our footprint exposure has supported positive currency translation with growth in net revenue, adjusted operating profit and earnings per share at actual exchange rates. The additional investment has impacted our first half actual and constant currency revenue and profitability in line with our expectations and we expect a stronger second half performance as the investments gain further traction. Our investment plans are on track with £160m spent against the £300m we announced last year.

Cash conversion remained strong at almost 100% and we increased the interim dividend by 10% for the ninth consecutive year.

Winning in Market - Market Repeatable Model

Our Market Repeatable Model was developed as part of the review we undertook last year and builds on the success of our sales growth drivers. It is based on insights from across the business, including analysis of markets where we have generated significant quality growth.

The model provides a simple and consistent operating framework that is now being deployed throughout our footprint. The six elements of the model ensure that everywhere we operate we have: a simple market-focused portfolio, sustained brand investments, a consistent price strategy, a focus on maximising the availability of our core range, tailored customer solutions and honest and accurate learning mechanisms.

The Market Repeatable Model has become an integral component of our strategy and strengthens our ability to maximise the performance of our brands and markets.

Strengthening our Portfolio

We delivered excellent results from our Growth Brands, which outperformed the market with strong growth in volumes and share.

Growth Brands continue to benefit from brand migrations and we have also begun a more radical portfolio simplification exercise to further reduce complexity and improve the on-shelf availability of our brands. This has now been implemented in several markets including Russia, France, Germany, Italy, Spain and Australia, and will be rolled out across other geographies.

We have increased investment in our Growth Brands, focusing support behind markets and activities with the best growth potential. This includes a broad range of initiatives such as consumer activations, new product offerings to meet changing consumer needs, as well as brand equity building campaigns for JPS, West, Winston, Davidoff and Gauloises Blondes.

Our Specialist Brands performance included strong revenue contributions from our Premium Cigar portfolio, Skruf in Norway and Sweden, Backwoods in the USA and Rizla.

Together, Growth and Specialist Brands accounted for 60.4% of the Group's tobacco net revenue.

Investing in Consumer Adjacencies

We continue to develop our presence in consumer adjacencies through our subsidiary, Fontem Ventures. Fontem's current priority is to capitalise on the rapid growing e-vapour sector by building sales of blu and licensing a range of patented technologies, as well as exploring other consumer adjacencies such as caffeine energy products. E-vapour is the largest part of the fast-growing next generation product category, offering the broadest consumer choice with its range of devices, flavours and nicotine strengths and providing the biggest growth opportunity.

 

Our Market Repeatable Model provides a framework to drive growth in e-vapour and can be applied across other consumer adjacencies. We have a market-focused portfolio centred on blu, a high quality e-vapour brand with a consistent premium pricing strategy. We continue to invest in building brand equity and improving technologies. We have further developed our next generation product to provide an improved consumer experience and we are undertaking consumer trials as a prelude to a launch during 2017. We are also enhancing our distribution in our four priority markets of the USA, UK, France and Italy as we evaluate opportunities to expand into new markets. During the period Fontem further enhanced revenues by licensing its first generation technology to a number of other e-vapour companies.

Developing our Footprint

In Growth Markets, we further improved our quality of growth and achieved continued market share gains in Saudi Arabia, Italy and Japan, while improving our share trajectory in markets such as Russia. Our Premium Cigars business also made a strong contribution. We enhanced our presence in China, the world's largest tobacco market, through a joint venture with China Tobacco.

Our US business, ITG Brands, continues to perform well as we invest behind our two focus premium brands, Winston and Kool, which delivered further market share improvements, helping to offset Portfolio Brand declines. We have also achieved a significant improvement in the performance of our mass market cigar business.

In Returns Markets, we also enhanced our quality of growth as we focused on Growth Brand share and our investments delivered increasing year to date share in markets such as the UK, Australia and Algeria and improving share trends in markets including Germany and Spain.

Cost Optimisation and Capital Discipline

We have two cost optimisation programmes underway, which will each deliver £300m of cost efficiencies and improved ways of working. The first programme is on track to deliver £300m by FY18. We announced a second phase last year which is scheduled to deliver another £300m by FY20. We have delivered £60m of savings in the first half and we now expect to deliver £130m of savings this year ahead of the £90m announced last November.

Our commitment to capital discipline underpins our focus on cash generation and the effective management of our working capital. Cash conversion remained strong at 99.6% and we generated £1.2bn of free cash flow after dividend payments.

We are now in our ninth consecutive year of dividend growth of 10% or more and we remain committed to continuing to grow the dividend by at least 10% a year over the medium term.

Good Results from Logista

Our European distribution business Logista had a great start to the year with growth in revenue and operating profit. This has been driven by the development of its non‑tobacco businesses, particularly convenience products, pharmaceutical, wholesale and transport, more than offsetting the impact of lower tobacco volumes.  The results also benefited from the sale of an investment in an Italian business that provides transactional services at point of sale. Logista profitability continues to benefit from improved cost management across its operations, with efficiency gains in its distribution network and warehousing.

Outlook

In November 2016, we announced a significant additional investment commitment in the current year to enhance our market position and drive further quality growth. These investments have already yielded improved trends in the first half and we expect these positive trends to continue, resulting in a stronger second half despite a further deterioration in industry volumes, combined with competitive pricing in a number of geographies.

Through a combination of our additional investment initiatives and an ongoing focus on cost optimisation, we expect constant currency earnings to be in line with expectations. Foreign exchange translation is expected to benefit earnings by around 9% based on current rates.

Our focus on capital discipline and cash flow management remains a core element of our strategy. Strong cash-flows will continue to be used for returns to shareholders, investing behind our business and paying down debt.

The positive progress we are making in driving our strategic agenda underpins our commitment to continue to generate value for our shareholders in 2017 and beyond.

 

Alison Cooper

Chief Executive

OPERATING REVIEW

We are focused on delivering quality growth with the right brands in the right markets. This is being reinforced this year by increased investment aligned to our Market Repeatable Model to drive improved revenue growth over the medium term. Initial results are encouraging, with either higher market share or improved share trends in a number of Growth and Returns Markets supported by stronger Growth Brand performances.

Brand Performances

We achieved another strong performance with our Growth and Specialist Brands. These are the most important assets in our portfolio and together they now account for 60.4% of our tobacco net revenue, up 200 basis points on last half year. We have substantially increased our investment behind these brands in the first half, improving their growth momentum and supporting the success of our migration and SKU simplification programmes.

Total Group tobacco volumes were 126.3bn stick equivalents (2016: 133.9bn), with volumes down by 5.7% mainly reflecting industry volume declines.  Against this backdrop our Growth Brands increased volume and market share by 60 basis points as we continue to migrate consumers from local, low priority brands.  As a result our Portfolio Brands lost 90 basis points of share as we simplify and focus on our strongest brand equities. Our priority is to continue to reshape the portfolio and improve our quality of growth.

Growth Brands

 

Half Year Result

Change

 

2017

2016

Actual

Constant Currency

Market share

%

8.0

7.4

+60 bps


Net revenue

£m

1,682

1,486

+13.2%

-2.5%

Percentage of Group volumes

%

57.8

52.8

+500 bps


Percentage of tobacco net revenue

%

45.3

43.7

+160 bps

 

 

Our Growth Brands are Davidoff, Gauloises Blondes, JPS, West, Fine, News, Winston, Bastos, Lambert & Butler and Parker & Simpson. These are quality brands with broad consumer appeal that are generating an increasing amount of our volume and revenue.

Growth Brands outperformed the market in the period, with volumes growing 3.2% supported by migrations.  Net revenue grew 13.2% on a reported basis, although fell 2.5% at constant currency reflecting targeted price investment.  Growth brand investment was also prioritised behind brand equity building campaigns, additional consumer activations and new formats to meet changing consumer demands.

Growth Brands now account for 57.8% of total Group tobacco volumes, an increase of 500 basis points, and 45.3% of overall tobacco net revenue, an increase of 160 basis points benefiting from migrations as well as organic growth.



 

 

Brand Chassis

Highlights

JPF

(JPS, Parker & Simpson and Fine)

Volume and share growth in the chassis was driven by JPS and Parker & Simpson.  Players in the UK and Parker & Simpson Queen Size and Crushball variants in Russia have continued to perform well. Investments in JPS in Italy have increased share especially in soft pack variants. The migration of Route 66 to Parker & Simpson has also helped volumes.

West

(West, L&B, News

and Bastos)

West has grown volumes and share driven by Saudi Arabia and Japan, and by the migration of Stolichnye in Ukraine. L&B Blue has performed well with share gains in recent months helped by key account investment. News is making good progress in France as the special edition News & Co helped drive positive share momentum.

Winston

Winston made further share gains supported by increased investment through our retailer programmes coupled with a new pack design, digital marketing initiatives and improved point of sale.

Davidoff

Revenue growth in the period was driven by Saudi Arabia with the benefit of our new Fresh Box pack and increased consumer contact points.  In Greece, increased consumer activations have continued to support increases in market share.

Gauloises

Gauloises gained share in Algeria to consolidate its market leadership, supported by the success of Gauloises L'autre. We increased investment in Germany behind the successful 'Vive le Moment' campaign to address recent share declines.

Specialist Brands

 

Half Year Result

Change

 

2017

2016

Actual

Constant Currency

Net revenue

£m

561

499

+12.3%

-2.0%

Percentage of tobacco net revenue

%

15.1

14.7

+40 bps

 

 

Specialist Brands appeal to specific consumer groups and include: blu (e-vapour), Style, Gitanes, Kool (cigarettes), Golden Virginia, Drum, Route 66 (fine cut tobacco), Cohiba, Montecristo, Romeo Y Julieta (premium cigars), Backwoods (cigars), Skruf (snus) and Rizla (papers). Our specialist brand Style is being migrated to Jadé as part of our new Chinese joint venture. Jadé will eventually replace Style as one of our Specialist Brands as we build scale behind Jadé for further development outside of China.

We continued to make good progress with our Specialist Brands, driven by revenue growth in Backwoods, Skruf in Scandinavia, Premium Cigars and Rizla papers. Specialist Brands now represent a greater proportion of the business at 15.1% of net revenue, up 40 basis points on last half year.

Portfolio Brands

The rest of the portfolio is comprised of Portfolio Brands. Some of these are strong local brands that support our volume and revenue development, while others are delisted or migrated into Growth Brands as part of our portfolio simplification initiatives to improve the quality of growth and drive efficiencies.

Portfolio Brand volumes and net revenue fell 17.6% and 10% respectively, primarily reflecting the effect of further migrations into Growth Brands and delistings. We achieved price mix gains of 22.4%, as we further optimised the profitability of the brands.



 

Market Performances

Growth Markets

 

Half Year Result

Change

 

2017

2016

Actual

Constant Currency

Net revenue

£m

859

707

+21.5%

+1.7%

Adjusted operating profit

£m

211

192

+9.9%

-8.9%

Growth Brand % of net revenue

%

47.6

45.1

+250 bps


Growth Brand volume

bn SE

22.3

21.3

+4.7%

 

Growth Brand market share

%

3.9

3.4

+50 bps

 

 

Targeted investment in Growth Brands and the implementation of our Market Repeatable Model has enabled us to build positive momentum and deliver improved share trends in our priority markets.

We have strengthened the quality of growth through further migrations and more focused investment in our Growth Brands. Growth Brand volumes grew 4.7% and we increased Growth Brand revenues as a proportion of the total by 250 basis points. Growth Brand share gained 50 basis points.

Net revenue and adjusted operating profit grew strongly at actual rates, driven by the benefit of currency translation. At constant currency, net revenue grew 1.7% supported by strong increases in Saudi Arabia, Italy, and Norway, and despite increased investment in price and mix in Russia.

Our investments have driven continued improved share performances in Saudi Arabia, Italy and Japan, offset by declines in Cambodia, Macedonia and Slovenia.  The increased investment impacted adjusted operating profit, which fell 8.9% at constant currency materially driven by the investments in Russia.

In January, we announced a new joint venture with a subsidiary of China Tobacco which will develop growth opportunities in China and international markets. The partnership will promote Davidoff and West in China and Horizon and Jadé in other markets outside China.

 

Country

Performance

Russia

We increased investment in simplifying the portfolio, maintaining a consistent price strategy and in key account activities, which have begun to deliver an improved share trend in a highly competitive market. Parker & Simpson gained share with the successful launch of a Queen Size format while Maxim benefited from a new Superkings variant.

Saudi Arabia

Share and revenue increased as we invested in consumer activations to support West, which achieved strong growth, especially in Lights and Ultra Lights. Davidoff share is stable in a declining premium segment, supported by the launches of Fresh Box and Absolute.

Italy

JPS performed well in the period, benefiting from additional brand investment and increased distribution, while Davidoff grew as we expanded its distribution.

Greece

We delivered strong share growth in Davidoff as we continue to invest in consumer activations.

Sweden and Norway

Continued success with Skruf has resulted in share, revenue and profit gains as we benefit from positive pricing in a growing market.

Japan

We continue to deliver share and revenue growth in Japan with West performing strongly, as we extend our retailer coverage.

Taiwan

Davidoff market share remains stable despite a declining high price segment and Parker & Simpson is growing share supported by the migration of Boss.



 

USA Market

 

Half Year Result

Change

 

2017

2016

Actual

Constant Currency

Net revenue

£m

785

711

+10.4%

-6.8%

Adjusted operating profit

£m

457

384

+19.0%

0.0%

Asset Brand % of net revenue

%

43.1

42.8

+30 bps


Asset Brand volume

bn SE

5.2

5.3

-0.3%


Growth Brand market share

%

2.4

2.3

+10 bps


 

Our priority in the USA is to grow our focus brands, Winston and Kool, as we reshape the portfolio behind our strongest equities. We have invested in improved distribution through our retailer agreements, new packaging, new formats and digital marketing to build brand awareness.

Net revenue was up 10.4% at actual rates but fell 6.8% at constant currency as a result of our investments and volume declines. Industry volumes declined 2.5% year to date following a strong comparator last year. The percentage of tobacco net revenue generated by our Asset Brands increased 30 basis points to 43.1%, as we stepped up our price support for Winston expanding price repositioning into more territories across the USA. We continue to invest in our successful US retail programme which is now in 169,000 stores nationwide.  As a result, Growth Brand market share gained 10 basis points. Our Specialist Brand, Kool also grew share in the fast growing menthol segment as we invested to build brand awareness.

Our mass market cigar business which includes the Dutch Masters and Backwoods brands has continued to perform strongly with growth in volumes, revenue and profit. We restructured the business last year and changed our route to market which, coupled with new consumer activation and engagement programmes, have delivered quality share growth.

Adjusted operating profit grew 19.0% at actual rates and was flat at constant currency, despite significant uplift in our brand investments, which have been supported by the realisation of further cost efficiencies and the benefit of a one-off pension curtailment gain following the closure of the US defined benefit pension plan.

Returns Markets

 

Half Year Result

Change

 

2017

2016

Actual

Constant Currency

Net revenue

£m

2,072

1,981

+4.6%

-7.7%

Net revenue per '000 SE

£

25.74

23.03

+11.8%

-1.3%

Adjusted operating profit

£m

999

1,001

-0.2%

-11.0%

Growth Brand % of net revenue

%

54.6

52.2

+240 bps


Growth Brand market share

%

15.9

15.1

+80 bps


 

Investments in key Returns Markets are delivering early improvements in share trends and we continue to enhance our quality of growth through our footprint choices and by driving a greater proportion of revenue from Growth and Specialist Brands.

Net revenue and adjusted operating profit were down at constant currency reflecting the higher investments and the termination of PMI contracts in the UK and Morocco, although positive currency translation supported gains at actual exchange rates.

The increased investment in conjunction with our Market Repeatable Model has delivered improved share trends in many of our priority markets. We achieved share gains in the UK, Australia, Algeria and Portugal and delivered some improvements in recent share trajectories in Spain and Germany as our investments start to gain traction.  We faced some share pressure in Azerbaijan, Belgium, Poland and Ivory Coast.

Growth Brands generated 54.6% of tobacco net revenue, an increase of 240 basis points. Growth Brand volumes increased 2.7% while industry volumes declined 4.1% year to date, following a strong comparator period last year and reflecting the impact of excise and regulatory increases. Growth Brand share gained 80 basis points supported by migrations and strong brand performances including Players in the UK and JPS in Australia.

 

 

 

Returns Markets North

 

Half Year Result

Change

 

2017

2016

Actual

Constant Currency

Net revenue

£m

1,301

1,246

+4.4%

-6.5%

Net revenue per '000 SE

£

30.67

27.33

+12.2%

+0.5%

Adjusted operating profit

£m

671

676

-0.7%

-9.9%

Growth Brand % of net revenue

%

57.9

55.1

+280 bps


Growth Brand market share

%

15.7

14.9

+80 bps


 

Country

Performance

UK

We grew share year to date as our increased investment gained traction although this affected revenue and profit. Our fine cut tobacco share increased, led by good growth from Gold Leaf and Players. In cigarette we grew share strongly with Players.

Germany

Our investment is supporting share gains in fine cut tobacco in West and Fairwind and an improving performance from JPS cigarettes. We are investing in brand equity building and consumer activations behind Gauloises. Overall share declined but with an improving recent trend.

Benelux

While JPS has gained market share, overall market size and our share declined following market excise increases.

Australia

We delivered another excellent performance focused on JPS and resulting in further gains in market share, revenue and profit.

Ukraine

Our market share has largely recovered following our decision not to participate in the price war last year although market size has declined sharply as prices recovered.

Returns Markets South

 

Half Year Result

Change

 

2017

2016

Actual

Constant Currency

Net revenue

£m

771

735

+4.9%

-9.7%

Net revenue per '000 SE

£

20.25

18.18

+11.4%

-4.1%

Adjusted operating profit

£m

328

325

+0.9%

-13.2%

Growth Brand % of net revenue

%

49.0

47.4

+160 bps


Growth Brand market share

%

16.3

15.5

+80 bps


 

Country

Performance

Spain

 

Increased investment is supporting an improvement in market share trend with West performing particularly well.

France

News has continued to gain share with increased investment. Industry volumes declined with the impact of additional taxes and other regulatory changes while pricing remains highly competitive.

Algeria

We have continued to grow share with the success of Gauloises, the market-leading brand.

Morocco

Our value brand Fox has driven overall year to date share gains. Revenue and profit was affected by the conclusion of the PMI agreement.

 

 



 

FINANCIAL REVIEW

We have continued to build the financial strength of the business through a relentless focus on our strategic priorities. Our cost optimisation programme and our strong capital discipline are providing the resources to invest in growth initiatives, generate returns for shareholders and pay down debt. We are increasing our investment by £300m this year to drive further growth in the right brands and right markets.

When managing the performance of our business we focus on non‑GAAP measures, which we refer to as adjusted measures. We believe they provide a useful comparison of performance from one period to the next. These adjusted measures are supplementary to, and should not be regarded as a substitute for, GAAP measures, which we refer to as reported measures. The basis of our adjusted measures is explained in our accounting policies accompanying our financial statements, and reconciliations between reported and adjusted measures are included in the appropriate notes to our financial statements*. Percentage growth figures for adjusted results are given on a constant currency basis, where the effects of exchange rate movements on the translation of the results of our overseas operations are removed.

Investing for Growth

The simplification of our brand portfolio combined with our drive to reduce complexity across the business is supporting our cost optimisation and capital discipline programmes. As we cut the number of brands and SKUs, we are able to align our manufacturing and supply chain to deliver operating efficiencies and optimise our working capital needs. At the same time, we are adopting new ways of working and embracing lean principles to reduce overheads and improve our effectiveness.

This is delivering tangible savings that we are investing in driving top‑line growth. We have established a track record of increasing operating profit margins and adjusted earnings per share in each of the past three years. Our capital discipline has driven high cash conversion which underpins our commitment to grow dividends, repay debt and invest in the business.

Group Results - Constant Currency Analysis

£ million

(unless otherwise indicated)

Six months
ended 31 March 2016

Foreign Exchange

Constant currency movement

Six months
ended 31 March 2017

Change

Constant currency change

Tobacco Net Revenue

 

 

 

 

 

 

Growth Markets

707

140

12

859

+21.5%

+1.7%

USA Market

711

122

(48)

785

+10.4%

-6.8%

Returns Markets North

1,246

136

(81)

1,301

+4.4%

-6.5%

Returns Markets South

735

107

(71)

771

+4.9%

-9.7%

Total Group

3,399

505

(188)

3,716

+9.3%

-5.5%

Tobacco Adjusted Operating Profit


 

 

 

 

 

Growth Markets

192

36

(17)

211

+9.9%

-8.9%

USA Market

384

73

0

457

+19.0%

0.0%

Returns Markets North

676

62

(67)

671

-0.7%

-9.9%

Returns Markets South

325

46

(43)

328

+0.9%

-13.2%

Total Group

1,577

217

(127)

1,667

+5.7%

-8.1%

Logistics


 

 

 

 

 

Logistics distribution fees

371

61

10

442

+19.1%

+2.7%

Logistics adjusted operating profit

68

11

3

82

+20.6%

+4.4%

Group Adjusted Results


 

 

 

 

 

Adjusted operating profit

1,637

227

(124)

1,740

+6.3%

-7.6%

Adjusted net finance costs

(266)

(40)

34

(272)

+1.9%

-12.8%

Adjusted EPS (pence)

113.0

15.6

(6.7)

121.9

+7.9%

-5.9%

*  For further details please see Page 4 and our September 2016 Annual Report and Accounts

Group Earnings Performance

£ million unless otherwise indicated

Adjusted

Reported

HY 2017

HY 2016

HY 2017

HY 2016

Operating profit

 

 

 

 

Tobacco

1,667

1,577

872

979

Logistics

82

68

39

31

Eliminations

(9)

(8)

(9)

(8)

Group operating profit

1,740

1,637

902

1,002

Net finance costs

(272)

(266)

(115)

(562)

Share of profit of investments accounted for using the equity method

 

17

 

12

 

17

 

12

Profit before tax

1,485

1,383

804

452

Tax

(298)

(277)

(114)

(142)

Profit for the period

1,187

1,106

690

310

Earnings per ordinary share (pence)

121.9

113.0

70.7

30.4

Reconciliation of Adjusted Performance Measures

£ million unless otherwise indicated

Operating profit

Net finance costs

Earnings per share (pence)

HY 2017

HY 2016

HY 2017

HY 2016

HY 2017

HY 2016

Reported

902

1,002

(115)

(562)

70.7

30.4

Amortisation of acquired intangibles

554

473

-

-

41.3

40.5

Fair value (gains)/losses on
derivative financial instruments

 

-

 

-

 

(169)

 

287

 

(13.8)

 

25.7

Post‑employment benefits net financing costs

 

-

 

-

 

12

 

9

 

0.9

 

0.6

Restructuring costs

284

162

-

-

20.5

12.5

Tax on unrecognised losses

-

-

-

-

3.2

4.1

Items above attributable to non‑controlling interests

 

-

 

-

 

-

 

-

 

(0.9)

 

(0.8)

Adjusted

1,740

1,637

(272)

(266)

121.9

113.0

Footprint Supporting Positive Financial Results

Our footprint bias to developed markets has driven the positive currency translation in the half year. Tobacco net revenue was up by 9.3% at actual rates. The proportion of Group net revenue from our Growth and Specialist Brands increased to now represent 60.4%, improving the quality of our revenue. Tobacco adjusted operating profit increased 5.7% to £1.67bn at actual exchange rates.

We signalled our plans for increased investment this year to drive revenue growth over the medium term. This increased investment has been prioritised behind our Growth and Specialist Brands and in priority markets that offer the best opportunities for quality growth. Our investment in additional advertising and promotion, overheads such as larger sales teams, and targeted price investment has affected our actual and constant currency results in line with our year end guidance.  Tobacco net revenue fell 5.5% reflecting volumes down 5.7% and price/mix up 0.2% at constant currency.  Volumes have been affected primarily by a decline in market size following a strong performance last year and increases in excise and regulation.  Price/mix reflects our increased investment in our price strategies in our Growth Brands in priority markets.  Adjusted tobacco operating profit fell 8.1% on a constant currency basis as a result of the increased investment.

Logista again delivered an encouraging performance in a challenging environment with adjusted operating profit of £82m compared with £68m in 2016, partly as a result of foreign exchange movements; on a constant currency basis adjusted operating profit grew 4.4%. The improvement was driven by the development of its non‑tobacco business, particularly pharmaceutical, wholesale and transport, as well as the benefit of continued cost controls, and benefiting from the sale of an investment.

Adjusted net finance costs were higher at £272m (2016: £266m) reflecting the weakening of Sterling against the US dollar and the euro, partially offset by a lower all in cost of debt after refinancing at lower rates.

Reported net finance costs were £115m (2016: £562m), incorporating the impact of the net fair value and exchange gains on financial instruments of £169m (2016: losses of £287m) and post‑employment benefits net financing costs of £12m (2016: costs of £9m).

After tax at an effective adjusted rate of 20.0% (2016: 20.0%), adjusted earnings per share grew by 7.9% to 121.9 pence. The effective reported tax rate is 14.2% (2016: 31.4%).

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 70.7 pence (2016: 30.4 pence) reflecting non‑cash amortisation of £554m (2016: £473m) and restructuring costs of £284m (2016: £162m), as well as the effects of fair value and exchange gains in finance costs mentioned above. The difference between reported (70.7 pence) and adjusted earnings per share (121.9 pence) is materially due to the same three items.

The weakening of sterling versus the US dollar and euro positively impacted reported and adjusted measures. On a constant currency basis, adjusted earnings per share fell 5.9% principally due to the investment programme we have undertaken.

The restructuring charge for the period of £284m (2016: £162m) relates mainly to our two cost optimisation programmes (£275m) announced in 2013 and 2016. The balance of £9m covers all other restructuring activities across the Group.

Cost Optimisation

Our simplification agenda and the implementation of new ways of working is core to our third strategic priority of cost optimisation.  There are two phases underway.  The first phase of our cost optimisation programme is on track to deliver savings of £300m per annum from September 2018, with a cash implementation cost of around £600m.

We have identified further opportunities to extend this programme and announced a second phase of cost optimisation that is expected to drive a further £300m of annual savings from September 2020, at a cash cost in the region of £750m.

We delivered £60m of savings in the first half and we now expect to deliver a total of £130m of savings this year, ahead of the £90m announced last November.

Capital Discipline

Our continued focus on capital discipline is driving free cash flow that has enabled a further £1.2bn of debt reduction at constant currency over the last 12 months.

The increase in adjusted net debt over the last 12 months of £0.2bn represents a £1.2bn debt reduction from our continued focus on capital discipline before taking into account a £1.4bn adverse impact of foreign exchange and fair value of derivatives. Reported net debt over the last 12 months also increased by £0.2bn.

Free cash flow generation through the period allowed us to repay $0.9bn and €350m of bank facilities, meaning we have now fully repaid the acquisition facilities through which we funded our 2015 USA acquisition.

Our all‑in cost of debt reduced 20 basis points to 3.9% (2016: 4.1%) as older debt matured and was replaced with cheaper financing. Our interest cover was 7.3 times (2016: 6.3 times). We remain fully compliant with all our banking covenants and remain committed to retaining our investment grade ratings.

All of our capital allocation decisions are subject to relevant commercial analysis and hurdle rates to ensure they deliver appropriate levels of return, and potential acquisitions are judged on strict financial and commercial criteria including the ability to enhance the Group's return on invested capital (ROIC). Typically, we seek an overall internal rate of return in excess of 13% across the investments we make in our existing business. This disciplined approach is supporting our investment choices and underpins returns for shareholders.

Dividends

We have declared an interim dividend of 51.7 pence per share, an increase of 10%. This dividend will be paid as two payments of 25.85 pence per share on 30 June 2017 and 29 September 2017, with an ex-dividend date of 18 May and 17 August respectively.

The third interim and final dividends will be announced with our full year results in November 2017 and paid in December 2017 and March 2018 respectively, subject to AGM approval.  We expect to deliver another year of 10% dividend growth, in line with our commitment to growing shareholder returns.

Liquidity and Going Concern

The Group's policy is to ensure that we always have sufficient capital markets funding and committed bank facilities in place to meet foreseeable peak borrowing requirements.

In reviewing the Group's committed funding and liquidity positions, the Board considered various sensitivity analyses when assessing the forecast funding and headroom requirements of the Group in the context of the maturity profile of the Group's facilities. The Group plans its financing in a structured and proactive manner and remains confident that sources of financing will be available when required.

Based on its review, and having assessed the principal risks facing the Group, the Board is of the opinion that the Group as a whole and Imperial Brands PLC have adequate resources to meet operational needs for a period of at least 12 months from the date of this report and conclude that it is appropriate to prepare the financial statements on a going concern basis.

Principal Risks and Uncertainties

The principal risks and uncertainties to which the Group is exposed and our approach to managing those risks are unchanged from those identified on pages 26 to 32 of our 2016 Annual Report and Accounts and cover the following areas:

§  reduction in the size of the legitimate tobacco market;

§  optimising market share;

§  access to funding;

§  cost optimisation and strategic changes initiatives; and

§  compliance with legal and regulatory requirements.

The Group's Risk Management approach enables ongoing identification and assessment of risks and development of related mitigations. For example, in the period we have considered risks relating to the wider potential impacts arising from the result of the United Kingdom European Union membership referendum and any associated regulatory, tax or foreign exchange risks. In this context, it is the Board's view that the principal risks and uncertainties surrounding the Group in the second half of the financial year remain those set out in the 2016 Annual Report and Accounts.

Statement of Directors' Responsibilities

The Directors confirm that this condensed consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely: an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and material related party transactions in the first six months of the current financial year and any material changes in the related-party transactions described in the last annual report.

A list of current directors is maintained on the Imperial Brands PLC website: www.imperialbrandsplc.com. 

The Directors are responsible for the maintenance and integrity of the Company's website.  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

By order of the Board

 

 

 

 

 

Alison Cooper

 

 

 

 

 

Oliver Tant

Chief Executive

Chief Financial Officer

 

 



 

SUMMARY OF KEY FOOTPRINT FINANCIALS & METRICS


Half Year Result

Change

FOOTPRINT

2017

2016

Actual

Constant

Currency

Volume






Growth Markets

bn SE

34.5

35.6

-3.1%


US Market

bn SE

11.3

12.3

-8.3%


Returns Markets North

bn SE

42.4

45.6

-7.0%


Returns Markets South

bn SE

38.1

40.4

-5.8%


Returns Markets Total

bn SE

80.5

86.0

-6.4%


Total Group

bn SE

126.3

133.9

-5.7%








Tobacco Net Revenue






Growth Markets

£m

859

707

+21.5%

+1.7%

US Market

£m

785

711

+10.4%

-6.8%

Returns Markets North

£m

1,301

1,246

+4.4%

-6.5%

Returns Markets South

£m

771

735

+4.9%

-9.7%

Returns Markets Total

£m

2,072

1,981

+4.6%

-7.7%

Total Group

£m

3,716

3,399

+9.3%

-5.5%







Net Revenue per '000 SE






Growth Markets

£

24.89

19.84

+25.4%

+5.0%

US Market

£

69.74

57.89

+20.5%

+1.7%

Returns Markets North

£

30.67

27.33

+12.2%

+0.5%

Returns Markets South

£

20.25

18.18

+11.4%

-4.1%

Returns Markets Total

£

25.74

23.03

+11.8%

-1.3%

Total Group

£

29.43

25.38

+16.0%

+0.2%







Price/Mix






Growth Markets

%



+24.6%

+4.8%

US Market

%



+18.7%

+1.5%

Returns Markets North

%



+11.4%

+0.5%

Returns Markets South

%



+10.7%

-3.9%

Returns Markets Total

%



+11.0%

-1.3%

Total Group

%



+15.0%

+0.2%







Adjusted Tobacco Operating Profit




Growth Markets

£m

211

192

+9.9%

-8.9%

US Market

£m

457

384

+19.0%

0.0%

Returns Markets North

£m

671

676

-0.7%

-9.9%

Returns Markets South

£m

328

325

+0.9%

-13.2%

Returns Markets Total

£m

999

1,001

-0.2%

-11.0%

Total Group

£m

1,667

1,577

+5.7%

-8.1%







Logistics






Logistics Distribution Fees

£m

442

371

+19.1%

+2.7%

Logistics Operating Profit

£m

82

68

+20.6%

+4.4%

Logistics Operating Margin

%

18.6

18.3

+30 bps

+30 bps







 

 

 



 

SUMMARY OF KEY PORTFOLIO FINANCIALS & METRICS


Half Year Result

Change

 

PORTFOLIO

2017

2016

Actual

Constant

Currency


Growth Brand Volume







Growth Markets

bn SE

22.3

21.3

+4.7%



US Market

bn SE

2.9

2.9

+0.4%



Returns Markets North

bn SE

27.1

25.5

+6.2%



Returns Markets South

bn SE

20.6

21.0

-1.6%



Returns Markets Total

bn SE

47.7

46.5

+2.7%



Total Group

bn SE

73.0

70.7

+3.2%










Growth Brands as % of Volume

 

Growth Markets

%

64.6

59.7

+490 bps



US Market

%

26.1

23.8

+230 bps



Returns Markets North

%

63.9

56.0

+790 bps



Returns Markets South

%

54.2

51.8

+240 bps



Returns Markets Total

%

59.3

54.0

+530 bps



Total Group

%

57.8

52.8

+500 bps










Growth Brand Market Share

 

Growth Markets

%

3.9

3.4

+50 bps



US Market

%

2.4

2.3

+10 bps



Returns Markets North

%

15.7

14.9

+80 bps



Returns Markets South

%

16.3

15.5

+80 bps



Returns Markets Total

%

15.9

15.1

+80 bps



Total Group

%

8.0

7.4

+60 bps










Growth Brand Tobacco Net Revenue

 

Growth Markets

£m

409

319

+28.2%

+6.9%


US Market

£m

142

133

+7.3%

-9.7%


Returns Markets North

£m

753

686

+9.7%

-3.3%


Returns Markets South

£m

378

348

+8.5%

-6.5%


Returns Markets Total

£m

1,131

1,034

+9.3%

-4.4%


Total Group

£m

1,682

1,486

+13.2%

-2.5%









Growth Brands as % of Tobacco Net Revenue





Growth Markets

%

47.6

45.1

+250 bps



US Market

%

18.1

18.6

-50 bps



Returns Markets North

%

57.9

55.1

+280 bps



Returns Markets South

%

49.0

47.4

+160 bps



Returns Markets Total

%

54.6

52.2

+240 bps



Total Group

%

45.3

43.7

+160 bps










Specialist Brand Net Revenue






Total Group

£m

561

499

+12.3%

-2.0%









Specialist Brands as % of Tobacco Net Revenue

 

 

Total Group

%

15.1

14.7

+40 bps










Growth & Specialist Brands as a percentage of Group Net Revenue   

60.4

58.4

+200 bps









 

 

INDEPENDENT REVIEW REPORT TO IMPERIAL BRANDS PLC

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Imperial Brands PLC's condensed consolidated interim financial statements (the "interim financial statements") in the Interim Results of Imperial Brands PLC for the 6 month period ended 31 March 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

§  the Consolidated Balance Sheet as at 31 March 2017;

§  the Consolidated Income Statement and Consolidated Statement of Comprehensive Income for the period then ended;

§  the Consolidated Cash Flow Statement for the period then ended;

§  the Consolidated Statement of Changes in Equity for the period then ended; and

§  the explanatory notes to the interim financial statements.

The interim financial statements included in the Interim Results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the Directors

The Interim Results, including the interim financial statements, are the responsibility of, and have been approved by, the Directors. The Directors are responsible for preparing the Interim Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the Interim Results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the Interim Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

 

 

 

 

PricewaterhouseCoopers LLP

Chartered Accountants

Bristol

3 May 2017

 

a)     The maintenance and integrity of the Imperial Brands PLC website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.



 

b)     Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

The figures and financial information for 6 months ended 31 March 2017 do not constitute the statutory financial statements for that year. Those financial statements have not yet been delivered to the Registrar, nor have the Auditors yet reported on them. The financial statements have been prepared in accordance with our accounting policies published in our financial statements available on our website www.imperialbrandsplc.com.

 

 

CONSOLIDATED INCOME STATEMENT



Unaudited

Unaudited

Audited

£ million unless otherwise indicated

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Revenue

3

14,298

12,806

27,634

Duty and similar items


(7,035)

(6,244)

(13,535)

Other cost of sales


(4,173)

(3,730)

(8,143)

Cost of sales


(11,208)

(9,974)

(21,678)

Gross profit


3,090

2,832

5,956

Distribution, advertising and selling costs


(1,210)

(1,007)

(2,070)

Amortisation of acquired intangibles


(554)

(473)

(1,005)

Restructuring costs

4

(284)

(162)

(307)

Other expenses


(140)

(188)

(345)

Administrative and other expenses


(978)

(823)

(1,657)

Operating profit

3

902

1,002

2,229

Investment income


730

290

634

Finance costs


(845)

(852)

(1,984)

Net finance costs

5

(115)

(562)

(1,350)

Share of profit of investments accounted for using the equity method


17

12

28

Profit before tax


804

452

907

Tax

6

(114)

(142)

(238)

Profit for the period


690

310

669






Attributable to:





Owners of the parent


675

290

631

Non-controlling interests


15

20

38

Earnings per ordinary share (pence)





- Basic

8

70.7

30.4

66.1

- Diluted

8

70.6

30.4

66.0

 



 

CONSOLIDATED STATEMENT ON COMPREHENSIVE INCOME





Unaudited

Unaudited

Audited

£ million


6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Profit for the period


690

310

669

Other comprehensive income





Exchange movements


137

282

1,260

Items that may be reclassified to profit and loss


137

282

1,260

Net actuarial gains/(losses) on retirement benefits


155

(79)

(604)

Deferred tax relating to net actuarial gains/(losses) on retirement benefits


(32)

25

115

Items that will not be reclassified to profit and loss


123

(54)

(489)

Other comprehensive income for the period, net of tax


260

228

771

Total comprehensive income for the period


950

538

1,440






Attributable to:





Owners of the parent


939

490

1,336

Non-controlling interests


11

48

104

Total comprehensive income for the period


950

538

1,440



RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT



Unaudited

Unaudited

Audited

£ million

Notes

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Operating profit


902

1,002

2,229

Amortisation of acquired intangibles


554

473

1,005

Restructuring costs

4

284

162

307

Adjusted operating profit


1,740

1,637

3,541



RECONCILIATION FROM NET FINANCE COSTS TO ADJUSTED NET FINANCE COSTS



Unaudited

Unaudited

Audited

£ million

Notes

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Net finance costs


(115)

(562)

(1,350)

Net fair value and exchange (gains)/losses on financial instruments

5

(169)

287

807

Post-employment benefits net financing cost

5

12

9

19

Adjusted net finance costs

 5

(272)

(266)

(524)

 



 

CONSOLIDATED BALANCE SHEET







Unaudited

Unaudited

Audited

£ million

Notes

31 March 2017   

31 March 2016

30 September 2016

Non-current assets





Intangible assets

9

20,390

19,415

20,704

Property, plant and equipment


1,955

1,794

1,959

Investments accounted for using the equity method


793

651

744

Retirement benefit assets


11

59

5

Trade and other receivables


94

93

89

Derivative financial instruments

11

703

905

1,063

Deferred tax assets


557

566

631



24,503

23,483

25,195

Current assets





Inventories


3,824

3,951

3,498

Trade and other receivables


2,745

2,524

2,671

Current tax assets


46

123

45

Cash and cash equivalents

10

653

561

1,274

Derivative financial instruments

11

35

40

46



7,303

7,199

7,534

Total assets


31,806

30,682

32,729

Current liabilities





Borrowings

10

(2,760)

(2,591)

(1,544)

Derivative financial instruments

11

(59)

(103)

(118)

Trade and other payables


(7,563)

(7,003)

(7,991)

Current tax liabilities


(169)

(247)

(284)

Provisions

4

(206)

(185)

(188)



(10,757)

(10,129)

(10,125)

Non-current liabilities





Borrowings

10

(11,694)

(11,717)

(12,394)

Derivative financial instruments

11

(1,070)

(1,124)

(1,646)

Trade and other payables


(20)

(13)

(17)

Deferred tax liabilities


(946)

(1,123)

(1,034)

Retirement benefit liabilities


(1,271)

(1,040)

(1,484)

Provisions

4

(402)

(264)

(287)



(15,403)

(15,281)

(16,862)

Total liabilities


(26,160)

(25,410)

(26,987)

Net assets


5,646

5,272

5,742






Equity





Share capital


104

104

104

Share premium and capital redemption


5,836

5,836

5,836

Retained earnings


(1,745)

(1,014)

(1,525)

Exchange translation reserve


1,037

(44)

896

Equity attributable to owners of the parent


5,232

4,882

5,311

Non-controlling interests


414

390

431

Total equity


5,646

5,272

5,742

 



 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


Unaudited

 

 

 

£ million

Share

capital

Share

premium

and capital

redemption

Retained

earnings

Exchange

translation

reserve

Equity

attributable

to owners

of the parent

Non-

controlling

interests

Total

equity

At 1 October 2016

104

5,836

(1,525)

896

5,311

431

5,742

Profit for the period

-

-

675

-

675

15

690

Other comprehensive income

-

-

123

141

264

(4)

260

Total comprehensive income

-

-

798

141

939

11

950

Transactions with owners








Cash from employees on maturity/exercise of share schemes

-

-

6

-

6

-

6

Purchase of shares by Employee Share Ownership Trusts

-

-

(1)

-

(1)

-

(1)

Costs of employees' services compensated by share schemes

-

-

11

-

11

-

11

Dividends paid

-

-

(1,034)

-

(1,034)

(28)

(1,062)

At 31 March 2017

104

5,836

(1,745)

1,037

5,232

414

5,646









At 1 October 2015

104

5,836

(315)

(298)

5,327

369

5,696

Profit for the period

-

290 

290 

20 

310 

Other comprehensive income

-

-

(54)

254

200

28

228

Total comprehensive income

-

-

236

254

490

48

538

Transactions with owners








Cash from employees on maturity/exercise of share schemes

-

-

1

-

1

-

1

Purchase of shares by Employee Share Ownership Trusts

-

-

(12)

-

(12)

-

(12)

Costs of employees' services compensated by share schemes

-

-

12

-

12

-

12

Dividends paid

-

-

(936)

-

(936)

(27)

(963)

At 31 March 2016

104

5,836

(1,014)

(44)

4,882

390

5,272



 

CONSOLIDATED CASH FLOW STATEMENT





Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Cash flows from operating activities




Operating profit

902

1,002

2,229

Dividends received from investments accounted for under the equity method

9

13

19

Depreciation, amortisation and impairment

656

612

1,244

Loss on disposal of property, plant and equipment and software

-

1

6

Loss on disposal of businesses

-

1

-

Post-employment benefits

(90)

(55)

(111)

Costs of employees' services compensated by share schemes

11

14

29

Movement in provisions

134

(5)

4

Operating cash flows before movement in working capital

1,622

1,583

3,420

Increase in inventories

(293)

(889)

(149)

(Increase)/decrease in trade and other receivables

(59)

76

171

(Decrease)/increase in trade and other payables

(433)

(209)

116

Movement in working capital

(785)

(1,022)

138

Tax paid

(274)

(251)

(401)

Net cash flows generated from operating activities

563

310

3,157

Cash flows from investing activities




Interest received

4

4

7

Loan to joint ventures

(10)

-

(9)

Purchase of property, plant and equipment

(77)

(62)

(164)

Proceeds from sale of property, plant and equipment

13

20

42

Purchase of intangible assets - software

(21)

(18)

(51)

Purchase of intangibles assets -  intellectual property rights

(1)

(7)

(14)

Internally generated intellectual property rights

(4)

(7)

(2)

Net cash used in investing activities

(96)

(70)

(191)

Cash flows from financing activities




Interest paid

(336)

(368)

(547)

Cash from employees on maturity/exercise of share schemes

6

1

9

Purchase of shares by Employee Share Ownership Trusts

(1)

(6)

(7)

Increase in borrowings

2,995

1,815

897

Repayment of borrowings

(2,612)

(2,212)

(2,637)

Cash flows relating to derivative financial instruments

(75)

(56)

(209)

Dividends paid to non-controlling interests

(28)

(27)

(42)

Dividends paid to owners of the parent

(1,034)

(936)

(1,386)

Net cash used in financing activities

(1,085)

(1,789)

(3,922)

Net decrease in cash and cash equivalents

(618)

(1,549)

(956)

Cash and cash equivalents at the start of period

1,274

2,042

2,042

Effect of foreign exchange rates on cash and cash equivalents

(3)

68

188

Cash and cash equivalents at the end of period

653

561

1,274

 



 

NOTES TO THE FINANCIAL STATEMENTS

1.  ACCOUNTING POLICIES

 

BASIS OF PREPARATION

 

The financial information comprises the unaudited results for the six months ended 31 March 2017 and 31 March 2016, together with the audited results for the year ended 30 September 2016.

 

The information shown for the year ended 30 September 2016 does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006, and is an abridged version of the Group's published financial statements for that year. The Auditors' Report on those statements was unqualified and did not contain any statements under section 498 of the Companies Act 2006. The financial statements for the year ended 30 September 2016 were approved by the Board of Directors on 8 November 2016 and filed with the Registrar of Companies.

 

This condensed set of financial statements for the six months ended 31 March 2017 has been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting as adopted by the European Union. The condensed set of financial statements for the six months ended 31 March 2017 should be read in conjunction with the annual financial statements for the year ended 30 September 2016 which have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

 

The Group's principal accounting policies used in preparing this information are as stated in the financial statements for the year ended 30 September 2016, which are available on our website www.imperialbrandsplc.com.

 

NEW ACCOUNTING STANDARDS AND INTERPRETATIONS

 

There have been no new standards or amendments which became effective for the current reporting period, that have had a material effect on the Group.

 

Certain changes to IFRS will be applicable to the consolidated financial statements in future years.  IFRS 15 Revenue from Contracts with Customers which is effective for the Group for its 2019 financial statements will result in some items currently classified as costs being netted against revenue.  It is not expected to have material effect on the Group's net asset or results.   Management has yet to fully assess the impact of IFRS 9 Financial Instruments which is also effective for the Group for its 2019 financial statements. Our initial assessment of IFRS 16 Leases, effective for the Group for its 2020 financial statements, is that it will not have a material effect on the Group's net assets or results. There are no other standards or interpretations that are expected to have a material effect on the Group's net assets or results.

 

 

2.  CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

 

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience, and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the current financial year are discussed in the financial statements for the year ended 30 September 2016, with the exception of the impairment analysis disclosed in note 9.

 

Actuarial valuations for the Group's retirement benefit plans are updated annually as at 30 September.  An interim update is carried out at 31 March for the main plans.  As part of this interim update, the most material plan assets are revalued based on market data at the period end and the liabilities for the most significant schemes are recalculated to reflect key changes in membership data and revised actuarial assumptions.

 



3.  SEGMENT INFORMATION

 

TOBACCO





Unaudited

Unaudited

Audited

£ million unless otherwise indicated

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Revenue

10,783 

9,762

20,890

Net revenue

3,716 

3,399

7,167

Operating profit

872 

979

2,126

Adjusted operating profit

1,667 

1,577

3,360

Adjusted operating margin %

44.9 

46.4

46.9

 

LOGISTICS





Unaudited

Unaudited

Audited

£ million unless otherwise indicated

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Revenue

3,912 

3,408

7,505

Distribution fees

442 

371

809

Operating profit

39 

31

98

Adjusted operating profit

82 

68

176

Adjusted operating margin %

18.6 

18.3

21.8

 

REVENUE




 


Unaudited

Unaudited

Audited


6 months ended

31 March 2017

6 months ended

31 March 2016

Year ended

30 September 2016

£ million

Total

revenue

External

revenue

Total

revenue

External

revenue

Total

Revenue

      External revenue

Tobacco







Growth Markets

1,694 

1,663 

1,382

1,361

3,137

3,085

USA

1,513 

1,513 

1,424

1,424

2,942

2,942

Returns Markets North

6,396 

6,382 

5,851

5,837

12,537

12,504

Returns Markets South

1,180 

828 

1,105

776

2,274

1,598

Total Tobacco

10,783 

10,386 

9,762

9,398

20,890

20,129

Logistics

3,912 

3,912 

3,408

3,408

7,505

7,505

Eliminations

(397) 

(364)

-

(761)

-

Total Group

14,298 

14,298 

12,806

12,806

27,634

27,634

 

TOBACCO NET REVENUE





Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Growth Markets

859 

707

1,568

USA

785 

711

1,477

Returns Markets North

1,301 

1,246

2,645

Returns Markets South

771 

735

1,477

Total Tobacco

3,716 

3,399

7,167

 

Tobacco net revenue excludes revenue from the sale of peripheral products of £32 million (6 months 2016: £119 million).

 



 

ADJUSTED OPERATING PROFIT AND RECONCILIATION TO PROFIT BEFORE TAX


Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Tobacco




Growth Markets

211 

192

443

USA

457 

384

823

Returns Markets North

671 

676

1,439

328 

325

655

Total Tobacco

1,667 

1,577

3,360

Logistics

82 

68

176

(9) 

(8)

5

Adjusted operating profit

1,740 

1,637

3,541

Amortisation of acquired intangibles - Tobacco

(511) 

(436)

(927)

Amortisation of acquired intangibles - Logistics

(43) 

(37)

(78)

Restructuring costs - Tobacco

(284) 

(162)

(307)

Operating profit

902 

1,002

2,229

Net finance costs

(115) 

(562)

(1,350)

17 

12

28

Profit before tax

804 

452

907

 

 

4.  RESTRUCTURING COSTS AND PROVISIONS

 

RESTRUCTURING COSTS





Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Employment related

198

80

144

Asset impairments

64

49

51

Other charges

22

33

112


284

162

307

 

The charge for the period of £284 million (6 months 2016: £162 million) relates mainly to our two cost optimisation programmes (£275 million) announced in 2013 and 2016. The balance of £9 million covers all other restructuring activities across the Group.

 

In the 6 months to 31 March 2017 the cash cost of the programmes was £107 million (6 months 2016: £30 million) bringing the cumulative cash costs of Phase I to £460 million and Phase II to £67 million. The cost optimisation programmes Phase I and Phase II are expected to have a cash implementation cost in the region of £600 million and £750 million, respectively. Phase I is expected to generate savings of £300 million by 2018 and Phase II to deliver a further £300 million of savings by 2020. 

PROVISIONS





Unaudited


6 months ended 31 March 2017

£ million

Restructuring

Other

Total

At 1 October 2016

304

171

475

Additional provisions charged to the consolidated income statement

220

16

236

Amounts used

(71)

(9)

(80)

Unused amounts reversed

(2)

(20)

(22)

Exchange movements

(1)

-

(1)

At 31 March 2017

450

158

608





Analysed as:





Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Current

206

185

188

Non-current

402

264

287


608

449

475

 

 

5.  NET FINANCE COSTS AND RECONCILIATION TO ADJUSTED NET FINANCE COSTS

 

RECONCILIATION FROM REPORTED NET FINANCE COSTS TO ADJUSTED NET FINANCE COSTS


Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Reported net finance costs

115

562

1,350

Fair value gains on derivative financial instruments

670

216

484

Fair value losses on derivative financial instruments

(503)

(429)

(825)

Exchange gains/(losses) on financing activities

2

(74)

(466)

Net fair value and exchange gains/(losses) on financial instruments

169

(287)

(807)

Interest income on net defined benefit assets

54

71

143

Interest cost on net defined benefit liabilities

(66)

(80)

(162)

Post-employment benefits net financing cost

(12)

(9)

(19)

Adjusted net finance costs

272

266

524





Comprising:




Interest on bank deposits

(4)

(3)

(7)

Interest on bank loans and other loans

276

269

531

Adjusted net finance costs

272

266

524

 

 

 



 

6.  TAXATION

 

RECONCILIATION FROM REPORTED TAX TO ADJUSTED TAX

 

Reported tax for the six months ended 31 March 2017 has been calculated on the basis of an estimated effective rate for the year ended 30 September 2017.  The table below shows the taxation impact of the adjustments made to reported profit before tax in order to arrive at the adjusted measure of earnings disclosed in note 8.


Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Reported tax

114 

142

238

Deferred tax on amortisation of acquired intangibles

 160

86

261

Tax on net fair value and exchange movements on financial instruments

 (36)

42

80

Tax on post-employment benefits net financing cost

 3

3

7

Tax on restructuring costs

 88

43

79

Tax on unrecognised losses

(31)

(39)

(56)

Adjusted tax charge

298 

277

609

 

UNCERTAIN TAX POSITIONS

 

On 29 March 2017 the UK notified the European Council in accordance with Article 50(2) of the Treaty on European Union of the UK's intention to withdraw from the European Union.  As an international business the Group is monitoring developments but does not currently consider any provision is required.

 

In November 2015 the Group received a challenge from the French tax authorities that could lead to additional tax liabilities of up to £246 million (31 March 2016: £253 million). The challenge concerns the valuation placed on the shares of Altadis Distribution France (now known as Logista France) following an intra group transfer of the shares in October 2012 and the tax consequences flowing from a potentially higher value that is argued for by the tax authorities. Based on professional advice, an amount of £41 million (31 March 2016: £41 million) is included in the provision for uncertain tax positions. 

 

 

7.  DIVIDENDS

 

DISTRIBUTIONS TO ORDINARY EQUITY HOLDERS


Unaudited

Audited

Audited

£ million

2017

2016

2015

Paid interim of nil pence per share (2016: 101.1 pence, 2015: 91.9 pence)




 - Paid June 2015

-

-

204

 - Paid September 2015

-

-

204

 - Paid December 2015

-

-

468

 - Paid June 2016

-

225

-

 - Paid September 2016

-

225

-

 - Paid December 2016

-

517

-

Interim dividend paid

-

967

876

Proposed interim of 51.7 pence per share (2016: nil, 2015: nil)




 - To be paid June 2017

247

-

-

 - To be paid September 2017

247

-

-

Interim dividend proposed

494

-

-

Paid final of nil pence per share (2016: 54.1 pence, 2015: 49.1 pence)




- Paid March 2016

-

-

468

 - Paid March 2017

-

517

-

Final dividend

-

517

468

Total ordinary share dividends of 51.7 pence per share (2016: 155.2 pence, 2015: 141.0 pence)

494

1,484

1,344

 

The declared interim dividend for 2017 amounts to a total dividend of £494 million based on the number of shares ranking for dividend at 31 March 2017.  This will be paid in two stages, one in June 2017 and one in September 2017.

 

The dividend paid during the half year to 31 March 2017 is £1,034 million (2016: £936 million).



8.  EARNINGS PER SHARE

 


Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Earnings: basic and diluted - attributable to owners of the

Parent Company

675

290

631





Millions of shares




Weighted average number of shares:




Shares for basic earnings per share

954.3

953.7

954.0

Potentially dilutive share options

2.2

1.8

2.7

Shares for diluted earnings per share

956.5

955.5

956.7





Pence




Basic earnings per share

70.7

30.4

66.1

Diluted earnings per share

70.6

30.4

66.0

 

RECONCILIATION FROM REPORTED TO ADJUSTED EARNINGS AND EARNINGS PER SHARE


Unaudited

Unaudited

Audited


6 months ended

31 March 2017

6 months ended

31 March 2016

Year ended

30 September 2016

£ million unless otherwise indicated

Earnings per share (pence)

Earnings

net of tax

Earnings per share (pence)

Earnings

net of tax

Earnings per share (pence)

Earnings net of tax

Reported basic

70.7

675

30.4

290

66.1

631

Amortisation of acquired intangibles

41.3

394

40.5

387

78.0

744

Net fair value and exchange gains

on financial instruments

(13.8)

(133)

25.7

245

76.2

727

Post-employment benefits

net financing cost

0.9

9

0.6

6

1.3

12

Restructuring costs

20.5

196

12.5

119

23.9

228

Taxation on unrecognised losses

3.2

31

4.1

39

5.9

56

Adjustments attributable to

non-controlling interests

(0.9)

(9)

(0.8)

(8)

(1.8)

(17)

Adjusted

121.9

1,163

113.0

1,078

249.6

2,381

Adjusted diluted

121.6

1,163

112.8

1,078

248.9

2,381

 

 



 

9.  INTANGIBLE ASSETS

 

At the 2016 year end the impairment test for the Drive Growth CGU grouping that includes our markets in Russia, Italy and Japan indicated headroom of £210 million and that an impairment would result in the event of relatively small changes in an individual assumption or assumptions.

 

During the period a strategic investment programme was initiated in the Russia CGU, in order to grow our business footprint.  This investment included initiatives to build long-term improvement in our market share and support a consistent pricing strategy.  The actions involved in this programme reflect our confidence in the ongoing opportunity for growth offered by the Russian market despite it being a very competitive market.  The consequence of these actions is expected to reduce net cash flows in both the current and subsequent period, but deliver significantly higher growth and profitability in future years.  We have consequently tested the goodwill and intangible assets for impairment.

 

The assumptions used in our impairment testing remain consistent with the assessment conducted at 30 September 2016 with the exception of the initial cash flow growth rate for the Russia CGU, which has increased from 5% to 34%.  The increase in the Russia CGU cash flow growth rate is primarily explained by the short term impact of our investment strategy in the Russian market preceding a return to historical levels of profitability as revenues steadily grow.

 

Our impairment test for this CGU grouping indicated headroom had reduced to £203 million.  A reduction in the initial growth rate for these markets of 6% or a 1.75% increase in the discount rate would cause the carrying value to fall below the recoverable amount.  The assessment confirms that there are sufficient future cash flows to support the current carrying values.  Taking account of all of these factors, we have concluded that the carrying value for the Drive Growth CGU grouping included in our 31 March 2017 balance sheet is appropriate, but remains highly sensitive to adverse movements in any individual assumption or assumptions.

 

 

10.  NET DEBT    

 

The movements in cash and cash equivalents, borrowings, and derivative financial instruments in the period were as follows:


Unaudited

£ million

Cash and cash

equivalents

Current

borrowings

Non-current

borrowings

Derivative

financial

instruments

Total

At 1 October 2016

1,274

(1,544)

(12,394)

(655)

(13,319)

Reallocation of current borrowings from non-current borrowings

-

(966)

966

-

-

Cash flow

(618)

(248)

(134)

74

(926)

Accretion of interest

-

24

46

(1)

69

Change in fair values

-

-

-

191

191

Exchange movements

(3)

(26)

(178)

-

(207)

As at 31 March 2017

653

(2,760)

(11,694)

(391)

(14,192)

 

ADJUSTED NET DEBT

 

Management monitors the Group's borrowing levels using adjusted net debt which excludes interest accruals and the fair value of derivative financial instruments providing commercial cash flow hedges.


Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Reported net debt

(14,192)

(14,029)

(13,319)

Accrued interest

152 

151

221

Fair value of derivatives providing commercial hedges

113 

168

216

Adjusted net debt

(13,927)

(13,710)

(12,882)

 

The fair value of bonds is estimated to be £13,621 million (2016 6 months: £12,338 million) and has been determined by reference to market prices at the balance sheet date.  The carrying value of bonds is £12,456 million (2016 6 months: £11,134 million).  The fair value of all other borrowings is considered to be equal to their carrying amount.

 



 

11.  DERIVATIVE FINANCIAL INSTRUMENTS

 

The Group's derivative financial instruments are held at fair value, are as follows.


Unaudited

Unaudited

Audited

£ million

6 months ended 31 March 2017

6 months ended 31 March 2016

Year ended 30

September 2016

Assets




Interest rate swaps

732 

885

1,095

Forward foreign currency contracts

6

9

Cross-currency swaps

54

5

Total carrying value of derivative financial assets

738

945

1,109

Liabilities




Interest rate swaps

(846)

(1,088)

(1,339)

Forward foreign currency contracts

(18)

(11)

(11)

Cross-currency swaps                             

(331)

(174)

(548)

Carrying value of derivative financial liabilities before collateral

(1,195)

(1,273)

(1,898)

Collateral 1

66

46

134

Total carrying value of derivative financial liabilities

(1,129)

(1,227)

(1,764)

Total carrying value of derivative financial instruments

(391)

(282)

(655)





Analysed as:




Interest rate swaps

(114)

(203)

(244)

Forward foreign currency contracts

(14)

(5)

(2)

Cross-currency swaps

(329)

(120)

(543)

Collateral 1

66

46

134

Total carrying value of derivative financial instruments

(391)

(282)

(655)

 

¹ Collateral deposited against derivative financial liabilities under the terms and conditions of an ISDA Credit Support Annex

 

Fair values are determined based on observable market data such as yield curves and foreign exchange rates to calculate the present value of future cash flows associated with each derivative at the balance sheet date, and are consistent with those applied during the year ended 30 September 2016.

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Half-year Report - RNS