Results - Alison Cooper, Chief Executive
Q: You've just announced your full year results. So what's your take on the announcement?
A: I'm really pleased with the progress that the business has made this year, and they're good results despite some tough conditions in a couple of our key markets. In Spain, for example, we've had a very difficult market this year. And in the UK we had the impact of the trade buying patterns on our results as well. If you look at the results overall, therefore there’s a 1.5% decrease in stick-equivalent volumes, with a 2% increase in revenues. But adjusting for those factors to give you a better feel for the rest of the business, volumes were flat, and revenues were up 4.5%.
So some good EU performances and gains in a number of markets, and a fantastic performance from our emerging markets, are delivering the sales growth. Cost and cash are still very much there in terms of focus as well, and overall earnings up by 5%, with a strong growth in dividend of 13% in the year.
Q: So it does seem as though you're achieving decent levels of growth in some key areas. Where's that growth coming from, and what can you tell us about performance in your key brands?
A: Well, we have a unique asset in Imperial; it's what we call our total tobacco portfolio. So we're not just a cigarette company, we're in all the tobacco product categories, we’re number one in the world in fine cut and cigars, and across the other tobacco products we have a full range in our portfolio.
And that means we look at markets through a unique lens. We see growth in every market. We see opportunities with consumers, we see growth segments, we have the portfolio to meet those growth opportunities.
If I look at the year and I look at our key strategic brands, they were up 4% with some great growth from Davidoff, JPS and Gauloises in the year. Fine cut also up 4%, a very strong trend in EU markets in particular. We're driving our portfolio forward in fine cut and in particular in make your own tobacco, doing exceptionally well.
Then in Cigar; premium, luxury, Habanos, handmade cigars are really big in emerging markets. And outside of the EU we again saw volumes grow by 4%. And our snus business as well... it’s a nice business in Scandinavia, growing very rapidly; up 30% in the year.
So some really good portfolio performances across the total tobacco spectrum.
EU - Alison Cooper, Chief Executive
Q: So turning now to a regional breakdown, what can you say about performance in the EU, starting with Spain and the UK, which both endured challenging years?
A: Well, the key trend in the EU is, and has been for a while, towards value products. We've got a very good portfolio positioned for those value-seeking consumers. The model has very much been about managing the portfolio, but also looking for opportunities where we can increase our price as well, which is all part of the strong profit growth model we have in EU markets.
Looking at the UK and Spain, these are both key markets for Imperial, and we focused on reinforcing our market leadership during the year. The UK market was quite soft, and there was a shift in trade buying patterns around the timing of a price increase. And in Spain we've seen a considerable impact on consumers because of the economic and regulatory environment in Spain with significant market volume declines during the year.
So in both these markets, it's been about playing our total tobacco portfolio. With value cigarettes, with fine cut in particular as well, providing good value for consumers in these difficult economic circumstances, particularly in Spain.
So we've grown JPS in the UK, we've grown Ducados in Spain, and our fine cut portfolio in Spain in particular. Ducados has grown to 16% of market, and we hold the leadership position in that segment in Spain.
So some good performances from the portfolio. Price increases as well, and actually in Spain now we're back to a price level that we were at at the beginning of the year or above in some cases.
Q: So that's the UK and Spain. What's the picture like for the rest of the EU, starting perhaps with Germany?
A: Well, we delivered an excellent performance in Germany this year. Again that’s the total portfolio; so not only cigarettes but our fine cut portfolio has also delivered. JPS continues to perform very well in Germany. And in fine cut, Route 66 has added to our portfolio growth as well. So overall in Germany there’s been a 7% growth in profits in the year. So, as I say, an excellent performance.
And if I look outside of Germany to the rest of the EU region, we grew profits by 3%. Again in cigarettes, value-seeking consumers are looking for opportunities in our portfolio, but also fine cut as well, with Route 66 performing exceptionally well, up by 49% in the year. As I say, growth in Germany, but also Czech Republic and Poland as well are performing exceptionally strongly for in fine cut for us.
So you can see from the EU model overall that the portfolio is playing well, but also the price increase opportunities are delivering the profit growth in these areas.
Non-EU - Alison Cooper, Chief Executive
Q: And looking now beyond the EU, what's the picture like for the rest of the world?
A: Our rest of the world region comprises the emerging markets, but also more mature markets like the US and Australasia. If I kick off with the US; the US has had quite a tough year in terms of the market, but I'm very pleased with our share performance, and we've held in there with around about 4% share in cigarette. In cigars as well we've got a big mass market cigar business, but also a premium cigar business, which has grown very successfully during the year.
In emerging markets, we've delivered some superb performances. Our key strategic brands, Davidoff, Gauloises, and West, are all delivering some great performances in a number of regions, some of it with slimmer formats and in novelty formats (particularly in West) but there’s some really good momentum behind that portfolio in our emerging markets.
Headline profits are good as well. If you look at Asia Pacific, profits were up by 27%. If you look at Eastern Europe, profits were up by 21%. We also delivered 8% profit growth in Africa and the Middle East. So some really good momentum in those businesses, with strategic brands, and then also opportunities for our regional brands.
And not forgetting Habanos. Habanos is a really great product in emerging markets. We saw some great growth from those brands this year; 4% growth outside of the EU.
Financials - Robert Dyrbus, Finance Director
Q: So as the Finance Director, what's your take on the results today?
A: We've had a very good year. Sales and operating profit grew even with the impact of Spain and revised trade buying patterns in the UK. If we actually adjust for those, then sales were up some 4%, and operating profit almost 6%. Margins were again strong, over 42%, and non-EU margins rose by 150 basis points. Productivity improved by 3% during the year. Earnings per share grew by 5%. We remain cash-generative; cash conversion was 88% despite an increase in capex behind our sales growth strategy. Dividends per share grew by 13% to just over 95p. All in all, a very good year.
Q: So, as you say, the dividend’s up again. What's the thinking here?
A: Well, the thinking was, we're confident in the future and I think the 13% increase in dividend to just over 95p shows that. Going forward, we intend to continue to grow dividends per share ahead of earnings per share. This year, for example, the payout ratio rose from 47% to over 50%. And going forward it will continue to rise.
Q: And what can you tell us about cash conversion during the period?
A: Cash conversion has been very good. Free cash flow, before buy-backs and dividends, was £1.6bn. Cash conversion was 88%, which is a really good result, especially given the increase in capital expenditure I mentioned behind the sales growth strategy and the £100m headwind coming into the year from last year's benefit which unwound in the year.
As to the £1.6bn of free cash flow, how it was used was £900m in dividends to our shareholders, we also bought back £180m of our own stock and reduced debt by some £500m. During the year we also refinanced our bank deal and issued two bonds. That took the average maturity of our financing out to beyond five years with a third of our debt now maturing well after five years.
Outlook - Alison Cooper, Chief Executive
Q: And overall, taking everything we've been talking about in the round, what do you see as the outlook for Imperial Tobacco for the year ahead?
A: We've got some key focus areas to drive sales growth. We've got an excellent portfolio, we've got a lot of opportunities around the globe to drive growth in growing segments - consumer insight's a key to that. Then you look at the portfolio and we see opportunities both at the value end, with cigarettes and fine cut, but also at the premium and above end, with Habanos, with Davidoff, with Gauloises. And we've got a great portfolio; we are where the consumers are going with our portfolio.
Consumers everywhere are looking for value, but they're also looking for quality and innovation. We've been very active in building up our innovation pipeline during the course of the last year. We’ve had some great successes with GlideTec in the UK, which has added to the equity of the Lambert & Butler range, and we're looking at more opportunities to roll that out.
But innovation is not just about GlideTec. We've got a pipeline of other scaleable, incremental initiatives to add to our opportunities from an innovation perspective.
And price is clearly a very important part of the tobacco model. It's great to be going into the year with a number of price increases already achieved, which will add to our profit potential in 2012.
So overall, some good results in 2011, and considerable progress taking our sales agenda forward in the business, looking at ways to further maximise the potential of our assets. There's great commitment and momentum in the business behind the sales agenda, and going to 2012 that gives me great confidence in our ability to further drive sales while keeping the focus on cost and cash, and creating significant returns for our shareholders.