Financial Statements

Notes to the half yearly statements

1. Segmental Information

Imperial Tobacco comprises two distinct businesses – Tobacco and Logistics – which have been used as the basis for the primary segment reporting below. The Tobacco segment comprises the manufacture, marketing and sale of tobacco and tobacco-related products, including sales to (but not by) the Logistics segment. The Logistics segment comprises the distribution of tobacco products for tobacco product manufacturers, including Imperial Tobacco, as well as a wide range of non-tobacco products and services. Central costs of the Group are allocated to the Tobacco and Logistics segments based on management's assessment of the level of support provided to each business segment. The business segments presented reflect the management structure of the Group and the way in which the Group's management reviews business performance. Transactions between segments are undertaken on an arm's length basis reflecting market prices for comparable products and services.

Segmental revenue

6 months ended 31 March 2009
In £s million Tobacco Logistics Eliminations Total
External revenue 8,183 4,237 - 12,420
Inter-segment revenue 522 - (522) -
Total segment revenue 8,705 4,237 (522) 12,420
6 months ended 31 March 2008
In £s million Tobacco
 Logistics Eliminations
 Total
External revenue 6,756 1,300 - 8,056
Inter-segment revenue 180 - (180) -
Total segment revenue 6,936 1,300 (180) 8,056

Tobacco and Logistics have been restated to reflect the reclassification of the Moroccan business from Logistics to Tobacco.

Year ended 30 September 2008
In £s million Tobacco
 Logistics
 Eliminations
 Total
External revenue 14,967 5,561 - 20,528
Inter-segment revenue 683 - (683) -
Total segment revenue 15,650 5,561 (683) 20,528

Segmental profit from operations and reconciliation to adjusted profit from operations

6 months ended 31 March 2009
In £s million Tobacco Logistics Eliminations Total
Profit from operations 1,139 10 (10) 1,139
Amortisation of acquired intangibles 156 68 - 224
Restructuring costs 6 - - 6
Adjusted profit from operations 1,301 78 (10) 1,369
6 months ended 31 March 2008
In £s million Tobacco Logistics Eliminations Total
Profit from operations 766 7 (68) 705
Acquisition accounting adjustments 56 - 61 117
Amortisation of acquired intangibles 75 21 - 96
Adjusted profit from operations 897 28 (7) 918

Tobacco and Logistics have been restated to reflect the reclassification of the Moroccan business from Logistics to Tobacco

Year ended 30 September 2008
In £s million Tobacco
 Logistics Eliminations Total
Profit from operations 1,531 23 (83) 1,471
Acquisition accounting adjustments 76 - 85 161
Amortisation of acquired intangibles 225 84 - 309
Brand investment gain (174) - - (174)
Restructuring costs 449 14 - 463
Adjusted profit from operations 2,107 121 2 2,230

Segmental and geographic analysis of results

External revenue
In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
European Union 9,988 6,652 17,012
Americas 631 323 874
Rest of the World 1,801 1,081 2,642
  12,420 8,056 20,528

European Union comprises the EU member states plus Norway, Iceland, Liechtenstein and Switzerland. Americas comprises North, Central and South America. The Cuban joint ventures are included in the Rest of the World.

Tobacco segment
In £s million unless otherwise indicated 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Revenue 8,705 6,936 15,650
Net revenue 3,252 2,126 5,238
Profit from operations 1,139 766 1,531
Adjusted profit from operations
 1,301 897 2,107
Adjusted operating margin 40.0% 42.2% 40.2%
Logistics segment
In £s million unless otherwise indicated 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Revenue 4,237 1,300 5,561
Distribution fees 467 159 607
Profit from operations 10 7 23
Adjusted profit from operations
 78 28 121
Adjusted distribution margin 16.7% 17.6% 19.9%

Tobacco and Logistics for six months ended 31 March 2008 have been restated to reflect the reclassification of the Moroccan business from Logistics to Tobacco.

Geographic analysis of Tobacco

6 months ended 31 March 2009
In £s million Revenue Net
revenue		 Adjusted profit from operations
UK 2,271 418 276
Germany 1,624 376 183
Spain 298 298 126
Rest of European Union 2,080 708 272
Americas 631 443 141
Rest of the World 1,801 1,009 303
  8,705 3,252 1,301
6 months ended 31 March 2008
In £s million Revenue Net
revenue		 Adjusted profit from operations
UK 2,327 430 291
Germany 1,353 285 124
Spain 114 113 40
Rest of European Union 1,738 530 210
Americas 323 181 63
Rest of the World 1,081 587 169
  6,936 2,126 897
Year ended 30 September 2008
In £s million Revenue Net
revenue		 Adjusted profit from operations
UK 4,711 869 584
Germany 2,945 664 309
Spain 411 411 150
Rest of European Union 4,067 1,250 494
Americas 874 542 166
Rest of the World 2,642 1,502 404
  15,650 5,238 2,107

2. Restructuring Costs

In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Employment related (mainly termination) 5 - 420
Asset impairments 1 - 17
Other operating charges - - 26
  6 - 463

Restructuring costs in 2009 relate primarily to updated provisions for European Integration projects announced in June 2008 as part of the integration of Imperial Tobacco and Altadis. They affect sales and marketing, manufacturing and central support functions in a number of markets and will be implemented progressively over a period of three years. In addition to the European Integration projects, restructuring costs in 2008 include expenses relating to the closure of our cigar factory in Selma, Alabama, USA, the integration with Commonwealth Brands of the Lignum 2 operation acquired in May 2008, and costs in relation to streamlining Logistics operations in France.

Restructuring costs are included within administrative and other expenses in the consolidated income statement.

3.  Net Finance Costs

In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Interest on bank deposits (23) (25) (74)
Expected return on retirement benefit assets (91) (112) (224)
Fair value gains on derivative financial instruments providing commercial hedges (415) (58) (104)
Fair value gains on derivative financial instruments hedging underlying borrowings (305) (121) (141)
Investment income (834) (316) (543)
Interest on bank and other loans 394 263 697
Interest on retirement benefit liabilities 100 87 179
Unwind of discount on redundancy and social plan liabilities 6 - -
Fair value losses on derivative financial instruments providing commercial hedges 1,352 224 376
Exchange losses on underlying borrowings 305 121 141
Finance costs 2,157
695 1,393
Net finance costs 1,323 379 850

Reconciliation from reported net finance costs to adjusted net finance costs

In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Reported net finance costs 1,323 379 850
Expected return on retirement benefit assets 91 112 224
Interest on retirement benefit liabilities (100) (87) (179)
Unwind of discount on redundancy and social plan liabilities (6) - -
Fair value gains on derivative financial instruments providing commercial hedges 415 58 104
Fair value losses on derivative financial instruments providing commercial hedges (1,352) (224) (376)
Adjusted net finance costs 371 238 623

4.  Taxation

Reported Taxation

Reported taxation for the six months ended 31 March 2009 has been calculated on the basis of an estimated effective tax rate for the year ended 30 September 2009.

In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Total tax (credit)/charge (42) 86 180

Reconciliation from reported taxation to adjusted taxation

Adjusted taxation for the six months ended 31 March 2009 has been calculated on the basis of an estimated adjusted effective tax rate of 26.5% for the year ended 30 September 2009. This is in line with the rate for the year ended 30 September 2008.

The table below shows the tax impact of the adjustments made to reported profit before tax in order to arrive at the adjusted measure of earnings disclosed in note 6.

In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Reported taxation (42) 86 180
Tax on acquisition accounting adjustments - 37 51
Deferred tax on amortisation of acquired intangibles 37 16 40
Tax on brand divestment gain - - (59)
Tax on fair value losses on derivative financial instruments 262 48 79
Tax on restructuring costs 2 - 148
Tax on post-employment benefits net financing income 5 (7) (13)
Adjusted tax charge 264 180 426

5. Dividends

Amounts recognised as distributions to ordinary equity holders in the period:

In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
Final dividend for the year ended 30 September 2008 of 42.2p per share (2007: 42.2p) 427 326 326
Interim dividend for the year ended 30 September 2008 of 20.9p per share (2007: 18.2p) - - 161
  427 326 487

The Directors have declared an interim dividend for 2009 of 21.0p per share. This amounts to £213 million based on the number of shares ranking for dividend at 31 March 2009.

The dividend per share figures included in the table above reflect the bonus element of the rights issue described in note 6.

6.  Earnings Per Share

Basic (loss)/earnings per share is based on the profit for the period attributable to the equity holders of the Company and the weighted average number of ordinary shares in issue during the period excluding shares held to satisfy the Group’s employee share schemes and shares purchased by the Company and held as treasury shares. Diluted earnings per share have been calculated by taking into account the weighted average number of shares that would be issued if rights held under the employee share schemes were exercised.  No instruments have been excluded from the calculation on the grounds that they are anti-dilutive.

In £s million Post rights issue basis
6 months ended 31 March 2009
 Post rights issue basis
6 months ended 31 March 2008
 Pre rights issue basis
6 months ended 31 March 2008
 Post rights issue basis
Year ended
30 September 2008
(Loss)/earnings: basic and diluted (149) 233 233 428
In millions of shares        
Weighted average number of shares:        
Shares for basic earnings per share 1,011.9 774.4 672.9 846.5
Potentially dilutive share options - 3.0 2.6 3.0
Shares for diluted earnings per share 1,011.9 777.4 675.5 849.5
In pence        
Basic (loss)/earnings per share (14.7)p 30.1p 34.6p 50.6p
Diluted (loss)/earnings per share (14.7)p 30.0p 34.5p 50.4p

Basic and diluted earnings per share for the six months ended 31 March 2008 have been calculated on both a pre rights issue and post rights issue basis. The pre rights issue basis uses the historical weighted average number of shares. For the post rights issue basis the weighted average number of shares has been calculated to reflect the increased number of shares in issue after the rights issue and the bonus element for periods prior to the closing date of the rights issue. The bonus factor used was 1.1509.

Reconciliation from reported to adjusted (loss)/earnings and (loss)/earnings per share on a post rights issue basis

  6 months ended 31 March 2009 6 months ended 31 March 2008 Year ended 30 September 2008
In £s million unless otherwise indicated (Loss)/ earnings per share
(Loss)/
earnings
(Loss)/ earnings per share		 (Loss)/
earnings		 (Loss)/ earnings per share (Loss)/
earnings
Reported basic (14.7)p (149) 30.1p 233 50.6p 428
Acquisition accounting adjustments - - 10.3p 80 13.0p 110
Amortisation of acquired intangibles 18.5p 187 10.3p 80 31.8p 269
Brand divestment gain - - - - (13.6)p (115)
Fair value losses on derivative financial instruments providing commercial hedges 66.6p 675 15.3p 118 22.8p 193
Restructuring costs 0.4p 4 - - 37.2p 315
Post-employment benefits net financing income 1.0p 10 (2.3)p (18) (3.8)p (32)
Adjustments above attributable to minority interest - - (0.8)p (6) (1.1)p (9)
Adjusted 71.8p 727 62.9p 487 136.9p 1,159
Adjusted diluted 71.8p 727 62.6p 487 136.4p 1,159

7. Provisions

In £s million Restructuring
 Other Total
At 1 October 2008 557 401 958
Additional provisions charged to the income statement 19 5 24
Unwind of discount on redundancy and social plan liabilities 6 - 6
Amounts used (56) (27) (83)
Unused amount reversed (4) - (4)
Exchange movements 87 61 148
At 31 March 2009 609 440 1,049

Analysed as:

In £s million 2009 2008
Current 234 187
Non-current 815 771
  1,049 958

Restructuring provisions relate primarily to European Integration projects announced in June 2008 as part of the integration of Imperial Tobacco and Altadis. They affect sales and marketing, manufacturing and central support functions in a number of markets and will be implemented progressively over a period of three years. These liabilities are expected to crystallise over a number of years. Redundancy and social plan costs have been discounted at 5.0%.

Other provisions principally relate to commercial legal claims and disputes. The majority of other provisions represent the fair value at acquisition of current and potential Altadis commercial disputes, litigation and duty claims arising in the normal course of business. These liabilities are expected to crystallise within the next five years.

8. Changes in Equity

In £s million Share
capital		 Share
premium		 Retained
earnings		 Exchange
trans-
lation
reserve		 Equity
attrib-
utable
to equity
holders of
the
Company
At 1 October 2007 73 964 58 23 1,118
Profit for the period attributable to equity holders of the Company - - 233 - 233
Actuarial losses on retirement benefits - - (29) - (29)
Deferred tax relating to net actuarial losses on retirement benefits - - 7 - 7
Proceeds from sale of shares by Employee Share Ownership Trusts - - 1 - 1
Purchase of shares by Employee Share Ownership Trusts - - (23) - (23)
Costs of employees’ services compensated by share schemes - - 8 - 8
Dividends paid - - (326) - (326)
Exchange movements - - - 421 421
At 31 March 2008 73 964 (71) 444 1,410
Profit for the period attributable to equity holders of the Company - - 195 - 195
Actuarial losses on retirement benefits - - (127) - (127)
Deferred tax relating to net actuarial losses on retirement benefits - - 50 - 50
Deferred tax on share- based payments - - (6) - (6)
Current tax on share- based payments - - 1 - 1
Current tax on exchange movements - - - (88) (88)
Proceeds from sale of shares by Employee Share Ownership Trusts - - 4 - 4
Purchase of shares by Employee Share Ownership Trusts - - (3) - (3)
Costs of employees’ services compensated by share schemes - - 10 - 10
Rights issue 34 4,962 - - 4,996
Rights issue costs - (93) - - (93)
Dividends paid - - (161) - (161)
Other movements - - (1) - (1)
Exchange movements - - - 120 120
At 30 September 2008 107 5,833 (109) 476 6,307
Loss for the period attributable to equity holders of the Company - - (149) - (149)
Actuarial losses on retirement benefits - - (484) - (484)
Deferred tax relating to net actuarial losses on retirement benefits - - 131 - 131
Current tax on exchange movements - - - (180) (180)
Proceeds from sale of shares by Employee Share Ownership Trusts - - 1 - 1
Costs of employees’ services compensated by share schemes - - 10 - 10
Dividends paid - - (427) - (427)
Other movements - - (1) - (1)
Exchange movements - - - 896 896
At 31 March 2009 107 5,833 (1,028) 1,192 6,104

Cumulative goodwill of £2,410 million relating to acquisitions prior to 1998 was written off directly to reserves in line with the requirements of the accounting standards that were in force at the time.

9.  Cash Flows from Operating Activities

In £s million 6 months
ended
31 March 2009		 6 months
ended
31 March 2008		 Year
ended
30 September
2008
(Loss)/profit for the period (142) 240 441
Adjustments for:      
Taxation (42) 86 180
Finance costs 2,157 695 1,393
Investment income (834) (316) (543)
Share of post-tax profits of associates (1) - (2)
Depreciation, amortisation and impairment 308 153 457
Profit on disposal of property, plant and equipment (7) - (1)
Profit on divestment of brands - - (174)
Post-employment benefits 13 (1) 6
Cost of employees’ services compensated by share schemes 10 8 18
Movement in provisions (62) (13) 388
Operating cash flows before movements in working capital 1,400 852 2,163
Increase in inventories (485) (254) (44)
Decrease in trade and other receivables 245 25 21
Decrease in trade and other payables (357) (328) (39)
Movement in working capital (597) (557) (62)
Taxation paid (228) (86) (401)
Net cash flows from operating activities 575
209 1,700

For the six months ended 31 March 2008 decrease in trade and other receivables has been restated to include £10 million of proceeds from the sale of financial assets which is consistent with its treatment in the year ended 30 September 2008.

10.  Analysis of Net Debt

The movements in cash and cash equivalents, borrowings, derivative financial instruments and finance lease liabilities in the period were as follows:

In £s million Cash and cash equivalents Current
borrowings		 Non-current borrowings Derivative financial instruments Finance lease liabilities Total
At 1 October 2008 642 (2,678) (9,558) (67) (26) (11,687)
Cash flow - 2,677 (3,324) 354 1 (292)
Accretion of interest - 23 (51) - - (28)
Change in fair values - - - (1,452) - (1,452)
Exchange movements 57 (238) (1,567) (3) (4) (1,755)
At 31 March 2009 699 (216) (14,500) (1,168) (29) (15,214)

Adjusted net debt

Management monitors the Group's borrowing levels using adjusted net debt which excludes interest accruals, the fair value of derivative financial instruments providing commercial cash flow hedges and finance lease liabilities.

In £s million 6 months ended 31 March
2009		 6 months ended 31 March
2008		 Year ended 30 September
2008
Reported net debt (15,214) (17,137) (11,687)
Accrued interest 188 88 158
Fair value of derivatives providing commercial cash flow hedges 992 32 (40)
Finance lease liabilities 29 31 26
Adjusted net debt (14,005) (16,986) (11,543)

In February 2009 the Group issued a €1.5 billion bond with an 8.375% coupon maturing on 17 February 2016 and a £1.0 billion bond at 9.0% maturing on 17 February 2022. These issuances provided sufficient funds to repay in February 2009 the €2 billion bank facility which was due to mature in July 2009.

11. Retirement Benefits

Actuarial valuations of the Group's retirement benefit plans are updated annually as at 30 September. An interim update is carried out at 31 March for the main plans. As part of this interim update, the plan assets are revalued based on market data at the period end and the scheme liabilities are recalculated to reflect key changes in membership data and revised actuarial assumptions.

12. Capital Expenditure and Commitments

In the six months ended 31 March 2009 capital expenditure on property, plant and equipment and intangible assets was £112 million (2008: £102 million). Property, plant and equipment and intangible assets with a net book value of £33 million (2008: £3 million) were disposed of during the period. Profit on disposal was £7 million (2008: £nil million). Commitments for capital expenditure contracted for, but not provided, at 31 March 2009 were £104 million (2008: £52 million).

13. Acquisitions

Since 30 September 2008, the fair value adjustments arising from the acquisition of Altadis have been finalised. Provisions and tax liabilities have increased by £7 million and £15 million respectively and fixed assets have been reduced by £3 million. Goodwill on the acquisition of Altadis has consequently increased by £25 million. Consolidated balance sheets at 30 September 2008 and 31 March 2008 have been restated to reflect the finalisation of the fair value adjustments.

On 7 October 2008 the Group acquired the outstanding 49% minority shareholdings in 800 JR Cigar and MCM Management for cash consideration of USD81 million (£46 million).

14. Balances and Transactions with Associates and Joint Ventures

The level of balances and transactions with associates and joint ventures has not materially changed during the six months ended 31 March 2009.