Our track record of organic growth and strategic acquisitions has taken us from a strong UK base to become the world’s fourth largest international tobacco company with our products sold in over 130 countries. We have increased and internationalised our cigarette portfolio, we are the world’s leading manufacturer of roll your own tobacco and rolling papers, and we have seen our volumes grow from 42 billion cigarette equivalents in 1997 to over 220 billion cigarette equivalents today.
Our performance in 2003 maintains an unbroken track record of strong earnings and dividend growth, and clearly demonstrates our consistent ability to create sustainable shareholder value.
2003 PERFORMANCE
In the first full year of the enlarged business, adjusted operating profit before amortisation and exceptional items was up 44 per cent on 2002 to over £1.1 billion, with turnover excluding duty also up 44 per cent to £3.2 billion. Operating profit, after amortisation and exceptional items, was up 46 per cent to £881 million (2002: £603 million). These results reflect organic growth trends across many of our key markets, together with the delivery of some £150 million synergies generated following the Reemtsma acquisition, and a full year’s contribution from that business.
The adjusted profit on ordinary activities before tax was up 40 per cent to £898 million (2002: £642 million), after charging £237 million net interest (2002: £147 million). The interest charge includes the full year effect of financing the Reemtsma acquisition.
This performance has delivered basic earnings per share of 58.1 pence (2002: 41.0 pence) and adjusted earnings per share of 90.0 pence, an increase of 32 per cent on 2002.
DIVIDEND
Your Directors are recommending a final dividend of 30.0 pence per share, making a total dividend for the year of 42.0 pence. This represents an increase of 9.0 pence per share, or 27 per cent on the total 2002 dividend.
The dividend will be paid on 20 February 2004 to shareholders on the register at the close of business on 23 January 2004.
CIGARETTE EQUIVALENTS VOLUME TRENDS 1997-2003 (BILLIONS)
CONSISTENT STRATEGY DELIVERING CONTINUED GROWTH
Imperial Tobacco’s strategy remains to create sustainable shareholder value by growing its international operations, both organically and through acquisitions, while continuing to strengthen its position in the core markets of the UK and Germany. The consistent application of this strategy has delivered compound annual growth in adjusted earnings per share of 18 per cent and in dividends per share of 15 per cent since Listing in 1996.
We are in an excellent position to continue this successful strategy. We have enhanced our international potential by strengthening our positions in existing markets and developing new markets, giving us more opportunity to exploit our comprehensive international portfolio of tobacco products. While focused on profitable sales growth, we remain committed to generating cost savings across all aspects of the business. In addition, we continue to evaluate potential acquisitions which meet our rigorous strategic and financial criteria.
18% COMPOUND EARNINGS PER SHARE GROWTH
ADJUSTED EARNINGS PER SHARE (PENCE) / DIVIDEND PER SHARE (PENCE)
SENIOR MANAGEMENT
Recognising the transformation in the scale of the business, I am delighted to welcome David Cresswell as Manufacturing Director, Frank Rogerson as Corporate Affairs Director and Bruce Davidson as Sales and Marketing Director to the Board. The Sales and Marketing operation has subsequently been reorganised into seven areas of operation: Western Europe, Central Europe, Eastern Europe, Africa and the Middle East, Asia Pacific, Australasia and Global Duty Free/Travel Retail.
Further strengthening the management overview of the strategic direction and operations of the Group, the senior management steering group, the Chief Executive’s Committee, was expanded in June to include Alison Cooper, Director of Finance and Planning and Kathryn Brown, Group Human Resources Director, who join the Executive Directors on the Committee.
Ludger Staby resigned from his position as a Non-Executive Director of the Company and from the Supervisory Board of Reemtsma. The Board also accepted the resignation of Manfred Häussler, Sales and Marketing Director, from the PLC Board and as Speaker of the Vorstand, Reemtsma Germany’s Board of Directors.
CORPORATE RESPONSIBILITY
The Board takes its obligations as a responsible corporate citizen seriously and is committed to high standards of corporate governance ensuring this is reflected across all aspects of the business.
Governments around the world are pursuing in varying degrees the further regulation of tobacco products. We continue to manage these challenges and seek to engage with governments to find workable, practical solutions to changing regulations.
In particular, in the UK, we were pleased to sign a Memorandum of Understanding with HM Customs & Excise in July 2003, formalising jointly developed protocols to combat the smuggling of tobacco products. We have also supplied information to the Office of Fair Trading in relation to certain of its enquiries into the operations of the UK tobacco supply chain. Investigations by the German authorities into Reemtsma trading practices which relate to a period prior to acquisition, are ongoing. We continue to co-operate fully with the authorities in their investigations, which in some instances could last several years.
The operating environment section on pages 30 to 33 in this report reviews our progress in meeting the expectations of a wide range of stakeholders and a more detailed review of our activities will be published on our website in December 2003: www.imperial-tobacco.com
OUTLOOK
It has been a year of transformation and strong profit delivery, following the acquisition of Reemtsma in May 2002. The two businesses have proved to be an excellent fit, providing a much stronger platform for future growth and enhanced profitability. This inherent growth potential continues to be realised with synergies of some £150 million delivered in 2003, rising to a full year delivery of around £210 million in 2004, ahead of the £170 million forecast at the time of the acquisition.
The search to improve profitability throughout the business continues and the ongoing review of manufacturing capacity, together with other initiatives, will generate further cost savings on an ongoing basis. These cost savings will not only support margin improvements, but will release funds for investment in brands and markets, driving forward the sustained profit development of the business.
As we move into the next phase of our development, we are seeing the transfer of skills, experience and best practice across the Group. It is testimony to the strength and commitment of all our employees that, in a year of such significant change, we have delivered yet another strong set of results.
While external regulatory, economic and political pressures will continue, I believe we have never been better placed to continue to create long-term value for our shareholders.
Derek Bonham
Chairman
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