Chairman and Chief Executive's Statement

“In the first half of 2009 we achieved further gains in a number of markets and made considerable progress on the integration of Altadis.”

Our balanced multi-product portfolio includes strength in value brands and products, enabling us to capitalise on consumer downtrading while continuing to drive the international growth of our premium brands. Our focus on maximising growth opportunities, combined with our diligent approach to cost and cash management, has resulted in another good operational performance. While tobacco is not immune from the current difficulties affecting the global economy the defensive qualities of our business provide resilience in a recessionary environment.

Our adjusted profit from operations increased by 49 per cent to approximately £1.4 billion reflecting a full contribution from Altadis compared with two months in the 2008 first half, continued operational progress and foreign exchange benefits. Excluding foreign exchange, on a comparable basis profit from operations grew by just over 6 per cent.

Our adjusted earnings per share grew by 14 per cent to 71.8 pence (2008: 62.9 pence) after adjusting last year’s earnings per share for the bonus element of the rights issue launched in May 2008. Basic earnings per share was a loss of 14.7 pence (2008: earnings of 30.1 pence).

In 2009 and future years it is our intention that the interim dividend per share will amount to approximately one-third of the prior year’s full dividend. Our policy of progressive dividends based on underlying earnings growth is unchanged with a payout ratio of around 50 per cent, whilst recognising the cash impact of the Altadis restructuring. The Board has declared an interim dividend payment of 21.0 pence per share (2008: 20.9 pence per share), which will be paid on 19 August 2009 to those shareholders on the register at the close of business on 19 June 2009.

Enlarged Group Performance

We delivered a good operational performance, increasing our global cigarette volumes by 25 per cent to 151.5 billion cigarettes (2008: 121.1 billion) and our fine cut tobacco volumes by 4 per cent to 12,150 tonnes (2008: 11,650 tonnes).

Our international footprint and versatile portfolio of cigarette and other tobacco products have improved our position in a number of markets across our regions. Our strength in fine cut tobacco and value cigarette brands means we are well placed in markets where downtrading is ongoing. This is complemented by our presence in the premium sector where we increased volumes of our key brands Davidoff and Gitanes Blondes by 9 per cent and 21 per cent respectively. We are also well represented in the mainstream sector where Gauloises Blondes performed well with volume gains of 11 per cent.

Within Western Europe we successfully launched the JPS Silver range in the UK and further growth from JPS in Germany reinforced the brand’s position as the number two cigarette brand in the market. In Spain and France we delivered good cigarette performances in the key domestic blonde segments. In the USA, we gained share in both cigarette and fine cut tobacco, and our African and Middle Eastern operations continued to deliver significant growth with strong brand performances and share gains in many markets. We have been building on the success of Gauloises Blondes as our leading brand in the Middle East while also introducing it into new markets including Slovakia, Serbia, Cyprus and Romania in the first half of 2009. In Eastern Europe, we achieved volume and profit gains and improved our financial performance in Asia. We continue to develop Davidoff with new brand extensions, such as Superslims which have been introduced into a number of new markets.

In cigar, the performance of our premium brands has been impacted by the global economic downturn and the increase in public smoking restrictions. Despite these effects we delivered a strong first half performance in the USA, prior to a significant increase in Federal Excise Taxation in April 2009. The rationalisation of our cigar portfolio and a number of cost reduction initiatives will ensure our cigar business is well positioned for the future.

Our tobacco logistics business remains resilient, while our other logistics operations have been impacted by the weak economic climate. There has been active management of the cost base throughout the logistics business to strengthen its competitive position.

Financial Position

The first half of 2009 has seen consolidation of our financial position following the debt and equity issues to fund our acquisition of Altadis in 2008. Adjusted net debt at the end of March 2009 amounted to £14.0 billion, compared with £11.5 billion at 1 October 2008. Most of the increase was attributable to currency movements and, in particular, to the weaker value of sterling against the euro and US dollar. We are a highly cash generative business and retain an investment grade credit rating. In February, we issued two long-term bonds with proceeds totalling £2.3 billion, which were partly used to redeem bank facilities maturing in 2009. The success of this issuance leaves us with no further refinancing requirements until July 2010. Our average all-in cost of debt was broadly stable at 5.5 per cent (2008: 5.4 per cent).

Altadis Integration

Our achievements with the integration of Altadis have been considerable. We have successfully completed all consultations on our European integration projects, enabling us to further progress implementation. We merged all our sales forces and marketing teams in the first half, providing an integrated and more comprehensive service to our customers. We also made good progress on manufacturing. As well as the closure of our Smolnik factory in November, our operations in Poland, Morocco and Russia have been reorganised. Our focus on aligning processes, systems and standards ensures that we have the right foundations for continued manufacturing excellence. We continue to support employees affected by integration, rationalisation and factory closure.

In the first half we delivered €39 million of incremental synergies, bringing the total so far to €82 million, and remain very confident of achieving our previously announced targets of €180 million in the current financial year and €400 million by the end of our 2012 financial year. We also remain on track to achieve the net revenue synergy target of €60 million by the end of our 2011 financial year due to our focus on the brand development of the enlarged portfolio.

Regulation

Tobacco is highly regulated throughout the industry supply chain. We support regulation that is reasonable, proportionate and evidence-based and will continue to resist legislation that does not meet these criteria.

Plans are being developed for the phased introduction of a product display ban in England and Wales. Advocates of tobacco display bans claim these measures will stop people, particularly children, smoking. Data from Canada and Iceland, where display bans have been in place for a number of years, shows that they have had no impact on overall rates of tobacco consumption or specifically on youth smoking rates. This was recognised in New Zealand in February 2009 when the Government confirmed it would not be proceeding with a display ban on the grounds that “there is no international evidence that it actually works and it’s hugely expensive to do it”. We continue to oppose product display bans whilst supporting credible initiatives that will address youth smoking.

Board Changes

In March we were delighted to announce the appointment of Alison Cooper to the new role of Chief Operating Officer. Alison has extensive commercial experience and has made a significant contribution to the success of Imperial Tobacco over the past ten years. She will focus on driving the operational performance and strategic direction of the business, ensuring that we maximise our long-term growth potential. Alison will also continue to manage the smooth integration of Altadis into the wider Group. Her appointment is a further step in ensuring that our Board structure is aligned with the ongoing international development of our enlarged business.

Outlook

There are undoubtedly challenges as a result of the current economic climate but our enhanced geographic and brand portfolio enables us to look to the future with confidence. We will focus on building our positions in mature markets while pursuing growth opportunities in emerging markets. 

We have seen no significant change to the ongoing downtrading trends in mature markets and the strength of our value brands and products means we are well positioned to continue to capitalise on this dynamic. We also remain optimistic about the continued growth of our premium and mainstream cigarette and fine cut tobacco brands, and we are taking steps to improve our cigar and logistics operations.  

This, combined with our ongoing focus on cost and efficiency, will further strengthen our competitive position and continue to create sustainable value for our shareholders.

Iain Napier
Chairman

Gareth Davis
Chief Executive