Imperial Tobacco Interim Report
Imperial Tobacco is the world's fourth largest international tobacco company, which manufactures, markets and sells a comprehensive range of cigarettes, tobaccos, cigars, rolling papers and tubes.
Strong Portfolio of Brands
Our international cigarette brands Davidoff, West and Gauloises Blondes are supported by a strong portfolio of regional and local brands such as Fortuna, Lambert & Butler, JPS, Horizon, Fine, Maxim, Excellence, Gitanes, Route 66, USA Gold and Sonoma. Fine cut tobacco brands including Drum and Golden Virginia, cigar brands including Cohiba, Romeo y Julieta, Montecristo and Dutch Masters and our Rizla rolling papers brand complement the cigarette portfolio.
Chairman and Chief Executive's statement
"We have again delivered a strong operational and financial performance in the first half of 2008. The major highlight was the completion of the acquisition of Altadis on 25 January 2008, which has further strengthened our position as the world's fourth largest international tobacco company."
Good organic growth with increased sales volumes and growing market shares, a consistent focus on our cost base and the effective use of our cash have continued to create sustainable shareholder value.
Adjusted earnings per share grew by 18 per cent to 72.4 pence (2007: 61.4 pence). Basic earnings per share was 34.6 pence (2007: 62.4 pence) primarily impacted by one-off acquisition accounting adjustments, amortisation of acquired intangibles and fair value movements on derivatives.
Our 2008 half year results consolidate the Altadis results from 25 January 2008. As a result there are a number of one-off acquisition accounting adjustments that are required under IFRS. These impact our 2008 reported results but have no effect on our business operations or cash flows, and we have revised our adjusted measures to ensure our results remain easily understood and comparable to previous and future periods.
The Board has declared an interim dividend of 24.0 pence (2007: 21.0 pence), an increase of 14 per cent1.
We believe the completion of the acquisition of Altadis will create significant value for shareholders. The acquisition has considerably enhanced our operating platform and scale, with an increased presence in profitable mature markets and improved opportunities in emerging markets. As well as our improved geographic profile we will benefit from stronger and more diversified brand and product portfolios.
The integration of Altadis has been a key focus since we completed the acquisition and we have been undertaking a review of the activities of the Group as a whole. As a result, the Directors have updated the targeted operational efficiencies to be generated through the integration.
The Directors believe that the Group will be able to generate annual operating efficiencies of approximately 300 million by the end of the financial year ending 30 September 2010, rising to approximately 400 million by the end of the financial year ending 30 September 2012. We estimate that the one-off cash cost of achieving these efficiencies will be approximately 600 million, ahead of the 470 million previously estimated, reflecting the higher efficiency target. In addition, we believe that annual revenue synergies of approximately 60 million in net revenue will be generated by the close of the financial year ending 30 September 2011 from our enhanced operating platform and brand and product portfolios.
We anticipate the detailed integration projects supporting the achievement of these targets will be progressed in accordance with applicable laws and regulations including those relating to consultation with works councils and employees in mid to late June 2008.
We completed the sale of Altadis' 49.95 per cent shareholding in Aldeasa to its joint venture partner Autogrill on 14 April 2008 for 275 million. This represents an Enterprise Value of 355 million, when Imperial Tobacco's share of Aldeasa's net debt is included.
Altadis Non-Core Asset Disposals
We have continued the programme of non-core asset disposals of 650 million, originally announced by Altadis in April 2007, with 332 million realised at the end of March 2008.
On 23 April 2008, we announced the sale of a number of fine cut and pipe tobacco brands to Philip Morris International for 254 million. The divestment of a small number of brands in certain European markets was a condition of the European Commission's approval of the Altadis acquisition. This sale is also subject to the Commission's approval.
At the time we completed the Altadis acquisition, Altadis owned approximately 59.62 per cent of Logista. Under Spanish takeover laws, we were required either to file a takeover offer for the shares in Logista which were not already owned by Altadis, or to reduce Altadis' shareholding in Logista to less than 30 per cent within three months from the date on which we acquired control of Altadis. We launched a takeover offer for the Logista shares held by minority shareholders at a price of 52.50 per share. Our tender offer for the 40.38 per cent minority which we did not acquire through the Altadis acquisition ended on 6 May 2008, with 37.3 per cent accepting our offer. As a result, we will use the squeeze-out mechanism to compulsorily acquire all of the remaining Logista shares. Once this process is complete, the Logista shares will be delisted from the Stock Exchanges in Spain. This will result in a total cash consideration of 922 million.
We have announced a 1 for 2 rights issue to raise £4.9 billion net of expenses) to part fund the Altadis acquisition. The remaining £6.4 billion will be funded by existing debt facilities. The subscription price of 1475 pence per share represents a 33.6 per cent discount to the theoretical ex-rights price (which has been adjusted for the 24.0 pence per share dividend declared today). It also represents a 43.1 per cent discount to Imperial Tobacco's closing share price on 19 May 2008 of 2618 pence per share, which has also been adjusted for the interim dividend declared today. The issue is fully underwritten and is sized to allow us to maintain our investment grade credit rating.
Enlarged Group Performance
Across the enlarged Imperial Tobacco Group we have delivered a number of good operational performances.
Our overall cigarette volumes were up to 121.1 billion cigarettes (2007: 90.7 billion), due to a combination of organic growth, the contribution of Commonwealth Brands and Altadis. Complementing our cigarette portfolio is our world leadership in fine cut tobacco, where our overall volumes were up to 11,650 tonnes, reflecting the contribution from Altadis and our recently launched portfolio of fine cut tobacco brands in the USA.
We increased our cigarette shares in a number of markets in Europe, particularly in France, Spain and Germany combined with a robust performance in the UK. With the acquisition of Altadis, our European cigarette footprint has been considerably extended and offers us many opportunities to grow our business. In our Rest of the World region, we have enhanced our profits by increasing our volumes, improving market shares and continuing to focus on cost management opportunities.
Volumes of our key strategic international cigarette brand Davidoff were up by 4 per cent, despite the ongoing impact of downtrading in Taiwan, with strong growth in the Middle East and Europe. We were extremely pleased to launch Davidoff in the USA in April. We continue to build on the brand's momentum with new market launches and brand extensions including Davidoff Black & White in Greece, Ukraine and Lebanon, and Davidoff Rich Blue in the Netherlands and New Zealand. JPS grew volumes by 10 per cent with an excellent performance in Germany. Market downtrading trends in Germany impacted West with overall volumes down by 4 per cent, but the brand made progress in Central and Eastern Europe. Gauloises Blondes made good progress in a number of markets in Europe and the Middle East, and Fortuna made gains in its major markets of Spain and France. With our geographic footprint significantly enhanced as a result of the Altadis acquisition, we are progressing plans for a number of additional brand and market launches.
The Altadis cigar and logistics businesses are both excellent additions to the Imperial Tobacco Group. In cigar we are now the world leader, with cigars sold in more than 120 countries worldwide. We performed well in the USA in both the premium and natural wrapper sectors with Dutch Masters and Backwoods, and in Spain we grew our cigar volumes. We now have a major European tobacco logistics platform and our logistics results were in line with our expectations.
We were delighted to welcome Bruno Bich to the Board as a Non-Executive Director on 25 April. Bruno has been a Non-Executive Director of Altadis, S.A. since November 1999 and we will benefit from his considerable international business experience. As previously announced, Jean-Dominique Comolli will join the Imperial Tobacco Board as Non-Executive Deputy Chairman from 15 July 2008.
David Cresswell, Manufacturing Director, retired at the end of December 2007 and Anthony Alexander, Vice Chairman, retired from the Board at our Annual General Meeting in January 2008. During their long service they both contributed significantly to the success of the Company and we offer our sincere thanks to them both.
Imperial Tobacco and Altadis are a great strategic fit. We will seek to take advantage of the organic growth opportunities that the increased operating platform and scale of the enlarged Group offers, with our enhanced cigarette portfolio and our world leadership in cigars, fine cut tobacco and papers. Our focus on cost and efficiency will continue throughout the enlarged Group, all of which we believe will create sustainable shareholder value.