Imperial's strategy of focusing on margins and cash flow, instead of chasing volume growth, is paying off.
Brand migrations and cost savings are on track. Imperial has a large number of local and regional brands which have limited consumer appeal (Portfolio Brands). The group is in the process of migrating consumers into a select number of stronger, higher quality Growth Brands. This significantly reduces cost and complexity.
The integration of the US businesses is delivering against expectations. The deal with Reynolds American last year raises the proportion of US revenues from 7% to almost a quarter of the group total. Cigarette prices in the US are amongst the most affordable in the world. Because prices start from a much lower base, the group should have much more scope to raise prices to offset falling tobacco volumes.
The industry is subject to numerous risks, with governments increasingly keen to crack down on tobacco consumption. The introduction of plain packaging in the UK and Ireland in mid-2016 (and its possible adoption in other EU markets in the longer term) is a potential threat; and taxes will only go one way. In theory, this will make it harder to keep pushing up prices.
But if Imperial can keep up its cost and efficiency drive and successfully integrate the US assets, it ought to be able to grow profits, pay off debt, and return further cash to shareholders. The prospective yield is 4%, and the company aims to grow the dividend by at least 10% per year over the medium term. Despite this, net debt is expected to fall by c. 20% over the next four years.
Imperial Brands - Full year pre-close statement
In its full year pre-close statement, Imperial Brands announced that it is on track to meet full year expectations, at both constant and reported exchange rates. The shares rose 1% in early trading.
The group continues to make progress in the US, seeing market shares gains for the new Winston and Kool brands, with strong performances from the Growth Markets segment and e-cigarette focused Fontem Ventures. Cost saving initiatives are reportedly on track to deliver targeted cash savings, with cash conversion remaining strong.
However, performance in the group's Return's Markets has been undermined by a combination of adverse mix (particularly in the UK), European regulatory costs and the conclusion of distribution agreements with PMI in the UK and Morocco.
Currency translation is expected to add 4-5% to full year earnings, as a result of lower sterling, while full year transactional currency headwinds are expected to impact earnings at around 3% for the full year.
Preliminary results for the full year are due to be announced on 8th November 2016.
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