Imperial Brands: Dividend up, profits down

Imperial Brands announced higher interim dividends in its half-year results, however, the group noted a fall in operating profit owing to the charges from the exiting Russia on Tuesday morning sending Imperial Brands shares to gain 6.5% to 1,824p.

Imperial Brands recorded a fall of 1.3% in reported net revenue from £15.6bn to £15.4bn in H1 2022 due to lower excise duty in Europe. However, next-generation products (NGP) net revenue grew 8.7% to £101m with support from progress in Europe.

- Advertisement -

The group’s overall volumes saw a decrease of 0.7% due to reductions noted in Europe which were offset by strong volume performance in the USA, Middle East and Australia.

The group noted a 26.6% drop to £1.2bn in reported operating profit from £1.64bn as a result of Imperial Brands having to pay a £201m charge for exiting Russia in 2022.

However, in 2021, the group had sold its cigar business which generated £281m contributing to the total of £1.64bn then.

The tobacco company’s group adjusted operating profit grew 2.9% on a constant currency basis due to reduced losses in NGP reflecting the prior year’s market exits.

- Advertisement -

Imperial Brands noted a drop of £0.8bn in pretax profit from £2.06bn to £1.26bn in H1 2022.

The group’s reported EPS declined by 45% to 105.2p from 191.2p due to lower reported operating profit and lower finance income as Imperial attempted to limit its impact from unhedged currency exposures on financial instruments.

However, on a constant currency basis, adjusted EPS for Imperial Brands rose 7.7% to 113p from 107p as a result of growth in adjusted operating profit and a reduction in the tax rate to 21.9% owing to favourable results in many tax authority audits.

The group’s cash conversion was strong at over 102% which helped the deleverage momentum and Imperial’s net debt declined by £1.2bn due to free cash flow, on a 12-month basis.

The tobacco makers also noted an improvement in adjusted net debt to EBITDA to 2.4x due to “usual seasonality” which was in line with expectations according to Imperial Brands.

Imperial Brands raised its interim dividend by 1% to 42.54p from 42.12p issued in H1 2021, following the group’s progressive dividend policy.

Imperial Brands Performance

Europe Region

Imperial Brands noted a change in consumer behaviour as Covid restrictions eased and travel increased.

The group said sales are starting to return to conventional markets and channels, however, there was a 3.6% drop in volume for the region, which is offset by the group’s worldwide duty-free business and travel retail sales in “Southern European holiday locations”.

As the COVID-19-related swings in markets and channel buying patterns began to unwind, tobacco net sales fell 3.8% at constant currency, with a negative price mix of 0.2% reflecting price phasing and an adverse geographic mix.

Imperial’s NGP portfolio has done well, with net revenue growing 44.7% at constant currency, indicating great success in all three categories, hot tobacco, modern oral, and vapour.

At constant currency, adjusted operating profit fell 7.3% due to reduced tobacco net revenue as a result of price phasing, an unfavourable geographic mix and additional investment in the group’s new strategy.

Strong market share gain for Imperial in the UK was aided by investment in its strategic projects such as the local jewel brand, Embassy.

With investment attempts to revitalise JPS and West, and sales performance, the group’s market position in Germany is under attack. Imperial raised prices early in the period in Spain, but this harmed its market share.

The group launched a pilot program for a new vape, ‘blu’ in France to determine market reaction prior to rolling the product out.

Regarding Ukraine, the company is monitoring closely developments in the region while focusing on the safety and well-being of its 600 colleagues and their families.

The group’s heated tobacco system, Pulze fared well in its trials in Greece and Czech Republic, resulting in the plans to roll out Pulze to other European markets later this year.

Americas Region

The US contributed 34% of Imperial Brands’ group net revenue due to “strong combustible tobacco performance” said the group.

The volume of tobacco increased by 3.9% compared to the decline in industry volume of 6.8%. Imperial’s growth in volume came from improvements in the US cigarette market share to 9.8% which the group took from KT&G’s exit from the US market and its increased investments in sales execution.

Tobacco net sales climbed by 3.2 % in constant currency, boosted by cigarette pricing but offset by an unfavourable product mix, with substantial growth in the deep discount cigarette market. During the half-year, the company saw two price rises.

Market share advances, the advantage of trade inventory phasing, and decreased NGP costs all contributed to a 6.0% rise in adjusted operating profit at constant currency.

On a constant currency basis, Imperial Brands’ NGP revenues decreased 28.1%, reflecting the category’s continuing competitive environment and increased discounting.

The updated marketing plan for blu has successfully completed in Charlotte, and they now want to expand to other US territories.

The group was disappointed by the FDA’s decision in early April to issue Marketing Denial Orders for some of its myblu products, and they are actively pursuing an administrative appeal to overturn the decision during which the products will stay on the market.

In the premium segment, Winston’s trials of a new pack design and marketing strategy in Texas were successful, and they have now been pushed out nationally. The mass market cigar portfolio gained market share thanks to Backwoods and Dutch Leaf’s great performances.

Africa, Asia, and Australasia Region

Imperial’s Africa, Asia, and Australasia area fared well, with tobacco volumes increasing and total net revenue and adjusted operating profit increasing in constant currency.

Imperial Brand’s tobacco volumes increased by 2.6%, owing to a robust volume performance in the Middle East, which had recovered from a COVID-19-related disruption in the previous month.

The group’s tobacco net revenue increased by 4.1% in constant currency, owing to stronger volumes and a 1.5% price mix.

Following its decision to abandon the vapour market in Japan and Russia, as well as the hot tobacco business in Japan, NGP net revenue fell to zero.

When compared to 2021, adjusted operating profit increased by 25.8% at constant currency, owing to excellent financial performance in Africa and the Middle East, as well as lower NGP investment in the region.

Imperial improved its market share in Australia by focusing on sales execution and marketing in accordance with its strategy. Lambert & Butler was launched in the fifth price tier, allowing the company to ensure that it had a distinct brand offering at each of the important pricing points.

The group’s African portfolio of markets did exceptionally well, with increased market share and revenue and profit growth which has been driven by portfolio concentration on international brands such as Gauloises.

As pandemic-related travel bans in the region were relaxed and consumer behaviours normalised resulting in the Middle East business performing strongly.

The group had a solid financial performance in Asia, led by Taiwan, where it increased market share with Davidoff Absolute and West 25s.

Imperial Brands’ choice to cease operations and eventually quit the Russian market had an impact on overall results as Russia accounted for roughly 1.5% of net revenues and 0.2% of adjusted operating profit in FY21.

Imperial’s operations in Russia have now been completed with the sale of its Russian business as a going concern to Russian investors.

Ross Hindle, Analyst at Third Bridge said, “Imperial Brands saw revenue drop 1.3% to £15,362m, with management suggesting the group remains on track to hit its full-year guidance.”

“The structural decline of combustibles continues to push tobacco companies towards alternative business models, with all focusing on developing a strong portfolio of next-generation products (NGPs).”

“The Group’s NGP division still operates at a loss. Our experts say that Imperial probably went too widely across geographies with Myblu. The company will learn from their experience of heat-not-burn and try to get Myblu back on track, mainly in US and UK, where the brand has a good heritage.”

“The cost-of-living crisis should benefit Imperial Brands, given how their portfolio is more focused towards the lower end of the pricing scale.”

Latest News

Subscribe to the UK Investor Magazine email newsletter

Register for our free email newsletter and receive the latest investment news, podcasts, event information and offers.

More Articles Like This

Tagdiv Cloud library - template content.