Profit from operations
The reported Group revenue at £14,208 million grew by 17 per cent and profit from operations at £4,101 million grew by 15 per cent.
The growth in Group revenue would have been 10 per cent, to £13,280 million, at constant rates of exchange.
In order to better understand the underlying performance of the business, it is necessary to adjust for a number of items relating, for example, to restructuring costs. We call the underlying profit after adjusting for these items, adjusted profit. These adjustments are described further below. Adjusted profit from operations was £4,461 million, up 20 per cent from £3,717 million in 2008.
Adjusted profit from operations translated at constant rates of exchange, was up 10 per cent to £4,106 million.
For 2009, revenue growth was enhanced by the full year benefits of the acquisitions of the cigarette and snus businesses of Skandinavisk Tobakskompagni (ST) and the purchase of the cigarette assets of Tekel, the Turkish state tobacco company. During 2009, the Group also acquired PT Bentoel Internasional Investama Tbk, which contributed to the second half of the year’s results.
In 2008, it was announced that the Group wanted to continue the success of the previous five year programme of cost savings which ended in 2007, by launching a new five year programme – to achieve annual savings of £800 million by 2012. It includes areas such as supply chain efficiencies, back office integration and slimmer management structures. During the first two years of the programme, savings of over £484 million were delivered.
These cost reduction initiatives resulted in the adjusted profit from operations, as a percentage of net revenue, improving to 31.4 per cent compared to 30.7 per cent in 2008 and 30.0 per cent in 2007. More details of the Group’s adjusted operating performance can be found in the Regional review.
Percentage increases in revenue and in profit from operations
|Excluding adjusted items||+17%||+20%|
|Excluding adjusted items at constant rate||+10%||+10%|
The adjusting items below included in the profit from operations, are separately disclosed as memorandum information on the face of the income statement and in the segmental analysis. Excluding them from the reported profit from operations helps to provide a better understanding of the Group’s underlying financial performance and is referred to as adjusted profit from operations.
During 2009, the Group incurred costs as a result of initiatives to improve the effectiveness and the efficiency of the Group as a globally integrated enterprise. These initiatives include a review of the Group’s manufacturing operations, overheads and indirect costs, organisational structure and systems and software used. The costs of these initiatives plus the costs of integrating acquired businesses into existing operations were £304 million for the year ended 31 December 2009, compared to £160 million for 2008.
Restructuring and integration costs principally relate to costs in respect of the planned closure of the Soeborg factory in Denmark, the planned downsizing of the manufacturing plant in Australia, the continued integration of ST and Tekel and the merger of Bentoel with existing Indonesian operations, as well as other restructuring initiatives. The costs for these other initiatives include redundancies, principally in respect of activities in the Group’s subsidiary in Canada, and impairment charges for certain software assets where developing global software solutions has resulted in these assets having minimal or limited future economic benefits.
On 31 July 2008, the Group’s subsidiary, Imperial Tobacco Canada, announced that it had reached a resolution with the federal and provincial governments with regard to the investigation related to the export to the United States of Imperial Tobacco Canada products in the late 1980s and early 1990s. The subsidiary entered a plea of guilty to a regulatory violation of a single count of Section 240(i)(a) of the Excise Act and Imperial Tobacco Canada paid a fine of£102 million which was expensed in 2008 and treated as an adjusting item.
The acquisitions of the assets of Tekel and the ST businesses in mid-2008, as well as the Bentoel business in mid-2009, resulted in the capitalisation of trademarks which are amortised over their expected useful lives, which do not exceed 20 years. The 2009 amortisation charge in respect of trademarks amounted to £58 million, while it was £24 million in 2008.
As part of the ST transaction, the Group realised a gain of £139 million in 2008 with the disposal of its 32.35 per cent holding in the non-cigarette and snus businesses of ST. The acquisition was subject to regulatory approval which was received on the condition that the Group divest a small number of local trademarks, primarily in Norway. The disposal of the trademarks was dealt with in two packages, which were completed in February and May 2009. The total proceeds from the two packages resulted in a gain of £2 million.
Net finance costs
Net finance costs at £504 million were£113 million higher than last year. The increase principally reflects the full year impact of the costs of financing the two acquisitions made during 2008 and the acquisition of Bentoel in the middle of 2009, as well as exchange rate movements.
The Group assesses, as two principal measures of its financial capacity, cash flow and interest cover. Interest cover is distorted by the pre-tax impact of adjusting items. The chart shows gross interest cover, excluding adjusting items, on the basis of profit before interest payable over interest payable. The interest cover remains strong at 8.6x (2008: 8.5x), with the higher cover reflecting the Group’s increased profit and the contribution of ST and Tekel since the middle of 2008 and Bentoel since the middle of 2009, offset by the increase in interest costs as a result of the financing arrangements for the acquisitions.