Imperial Brands : Semi-Annual Report to 31 March 2022

IMPERIAL BRANDS PLC

Legal Entity Identifier (LEI) No. 549300DFVPOB67JL3A42

HALF YEAR RESULTS STATEMENT

17 MAY 2022

GAINING MOMENTUM BEHIND OUR STRATEGIC PRIORITIES

Report for the six months ended 31 March 2022

Business Highlights

• Good progress in delivering on our strategic objectives
• Strategic investment driving growth in aggregate market share in top-five priority markets
• Successful NGP trials underpin further market roll-outs in heated tobacco and vapour
• Implementing our new purpose, vision and behaviours to align our culture to our strategy
• Strong operating cash generation delivering further deleverage, as anticipated
• On track to deliver full year results in line with guidance

Financial Summary

Six months ended			Reported				Adjusted3
31 March 2022									Constant
		2022	2021	Change	2022	20212	Actual	currency4
Revenue/Net revenue1	£m	15,362	15,568	-1.3%	3,495	3,571	-2.1%	+0.3%
Operating profit	£m	1,201	1,637	-26.6%	1,600	1,586	+0.9%	+2.9%
Basic earnings per share	pence	105.2	191.2	-45.0%	113.0	107.0	+5.6%	+7.7%
Net debt	£m	(9,757)	(11,003)		(9,157)	(10,328)
Dividend per share	pence	42.54	42.12	+1.0%	42.54	42.12	+1.0%	+1.0%

1. Reported revenue includes duty,similar items,distribution and sale of peripheral products which are excluded from net revenue; net revenue comprises reported revenue less duty and similar items, excluding sale of peripheral products and distribution revenue.
2. The 2021 net revenue and adjusted operating profit metrics exclude the contribution of the Premium Cigar Division from that financial reporting period following its divestment in October 2020.The Premium Cigar Division contributed £21 million to net revenue and £3 million to adjusted operating profit in 2021.
3. See page 3 for basis of presentation, page 17 and notes 3,5,9 and 12 of the financial statements for the reconciliation between reported and adjusted measures.
4. Constant currency removes effect of exchange rate movements on the translation of the results of our overseas operations.

Stefan Bomhard Chief Executive

"We are now 18 months into our five-year strategy to build a more sustainable Imperial capable of consistent growth

• and I am pleased with the progress we are making.

"These results provide further evidence that we have achieved the stabilisation of our core combustible business. During the first half of the year, we increased aggregate market share in the five priority markets which account for around 70 per cent of our operating profit, while maintaining pricing discipline. This strong performance is an outcome of our tighter performance management and disciplined investment in sales execution and brand building. Meanwhile, our more focused approach to our broader portfolio of markets is delivering a stronger performance from regions, such as Africa. In April, we delivered on our earlier commitment to exit Russia, with the orderly transfer of our business to local investors.

"In next generation products, consumers have given positive feedback on our recent trials, validating our new insights-driven approach. We will now roll out our Pulze and iD heated tobacco proposition to further European markets and, in US vape, we are extending our refreshed blu marketing proposition. We have also started a pilot in France for an all-new vapour device, the first new NGP product from our redesigned innovation pipeline.

"Our strategy is being supported by a comprehensive culture change programme, designed to embed more consumer- centric, collaborative and future-focused ways of working, across every level of the organisation.

"Our focus for the remainder of 2022 will be to invest further in our five priority markets and begin the roll-out of our NGP strategy. While these are uncertain times, as we move into 2023, we will have in place the capabilities and culture necessary to support the next phase of our strategy and deliver sustainable growth in shareholder value."

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Delivering Against our Strategic Priorities

Focus on priority combustible markets

• Investment in operational levers drives 25 bps growth in aggregate market share in priority combustible markets
• Share gains in USA, UK and Australia more than offset declines in Germany and Spain
• Investing in sales execution activities:
  o Enhancing sales force capabilities, e.g. in the USA and Germany o Strengthening our key account management, e.g. in the USA
• Investing in multiple brand equity building initiatives:

1. Building brand equity in premium segment, e.g. Winston pack change and new campaign in USA o Optimising our approach to the value segment, e.g. launch of Lambert & Butler in Australia
   o Maximising fine cut opportunities, e.g. development of West in Germany; Riverstone in UK and Australia

Build a targeted NGP business

• Successful consumer trials validate our approach and strengthen our confidence in our NGP strategy
• Heated tobacco trial results from the Czech Republic and Greece support further launches into new markets
• Positive trial results of new marketing proposition for blu in the USA supports further roll-out
• Trials underway of all-new blu vapour device into selected French cities

Drive value from our broader market portfolio

• Market prioritisation driving improved operational and financial performance
• Clear portfolio strategy in Africa delivering share gains and growth in net revenue and profit
• Concluded our exit from Russia, with a transfer of our business to local investors

Transforming our ways of working through our critical enablers

• Strategy supported by structured culture change programme to embed more consumer-centric, collaborative and future focused ways of working
• Programme will be rolled out across our whole Group by the end of the year
• Simplified and efficient operations: on track to deliver cost savings in line with our strategic plan
• Our environmental, social and governance strategy has been refreshed, underpinning our new ambitions

Results Overview*

Net revenue

• Net revenue up +0.3%, tobacco +0.1%, NGP +8.7%; reported revenue reduced -1.3%, due to lower excise duty in Europe
• Tobacco price mix of +0.8% reflects pricing of +1.2% and adverse mix of -0.4% (product mix in the Americas and market mix in AAA)
• Recent price increases in Q2 (+3.8%) support improved price mix in second half of the year
• Overall volumes down -0.7%: reflecting strong volume performance in the USA, Middle East and Australia, offsetting declines in Europe as COVID-19 restrictions ease
• NGP net revenue growth +8.7%, to £101m, driven by strong progress across all categories in Europe

Progress in improving profitability

• Group adjusted operating profit growth of 2.9%, driven by reduced losses in NGP reflecting prior year market exits
• Reported operating profit of £1,201m is lower by £436m, driven by charges related to our exit from Russia and associated markets (£201m) and non-recurrence of gains on disposal of Premium Cigar Division (£281m)
• Tobacco adjusted operating profit at a similar level to last year reflecting increased investment in strategy
• NGP adjusted operating losses reduced by +49.9% vs HY21, against comparator period that included exit from AAA
• Adjusted EPS up +7.7% driven by growth in adjusted operating profit and a reduction in tax rate to 21.9% following favourable developments in several tax authority audits and a lower adjusted finance charge
• Reported EPS down -45.0%, with lower reported operating profit and lower finance income as we reduced our exposure to unhedged currency exposures on financial instruments, partly offset by higher reported tax rate

Strong cash conversion supports year-on-year deleverage

• Strong 12-month cash conversion at +102%
• Adjusted and reported net debt both reduced by £1.2bn (12-month basis) driven by free cash flow
• Adjusted net debt to EBITDA improved to 2.4x in line with expectations (HY21: 2.6x), reflecting usual seasonality
• Maintaining our deleverage momentum to deliver further net reduction at the full year
• Interim dividend per share up 1%, consistent with our progressive dividend policy

* All measures at constant currency unless otherwise stated

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Basis of Presentation

• To aid understanding of our results, we use 'adjusted' (non-GAAP) measures as we believe they provide a better comparison of performance from one period to the next. Reconciliations between adjusted and reported (GAAP) measures are also included in the relevant notes. Further definitions of adjusted measures are provided in Note 1 of these accounts. Change at constant currency removes the effect of exchange rate movements on the translation of the results of our overseas operations. References in this document to percentage growth and increases or decreases in our adjusted results are on a constant currency basis unless stated otherwise. These are calculated by translating current year results at prior year exchange rates.
• Stick Equivalent (SE) volumes reflect our combined cigarette, fine cut tobacco, cigar and snus volumes.
• Market share is presented as a 6-month average to the end of March (MHT - moving half-year trend), unless otherwise stated. Aggregate market share is a weighted average across markets within our footprint.

Other Information

Investor Contacts			Media Contacts
Peter Durman	+44	(0)7970 328 093	Jonathan Oliver	+44	(0)7740 096 018
James King	+44	(0)7581 052 880	Simon Evans	+44	(0)7967 467 684
Jennifer Ramsey	+44	(0)7974 615 739

Analyst Presentation Webcast

Imperial Brands PLC will be hosting a live webcast at 09:00 (BST) for investors and investment analysts following the publication of our results on 17 May 2022. The webcast will be hosted by Stefan Bomhard, Chief Executive, and Lukas Paravicini, Chief Financial Officer. The presentation will be followed by a question and answer session. The presentation slides will be available on www.imperialbrandsplc.comfrom 07.00 (BST). An archive of the webcast and the presentation script and slides will also be available.

Please either listen to the Q&A session via the webcast link: https://edge.media-server.com/mmc/p/i7adfq8mor to ask a question, please use the dial-in details below. Please dial-in at least 10 minutes prior to the start time to provide sufficient time to access the event. You will be asked to provide the conference ID number below.

Conference ID No: 7855858

United Kingdom: 44 (0) 20 7192 8338 or toll free: 0800 279 6619

USA: [phone] or toll free: [phone]

Germany local call: 069 2222 2625

Switzerland local call: 044 580 71 45

Cautionary Statement

Certain statements in this announcement constitute or may constitute forward-looking statements. Any statement in this announcement that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is or may be a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied in any forward-looking statement. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this announcement. As a result, you are cautioned not to place any reliance on such forward-looking statements. The forward-looking statements reflect knowledge and information available at the date of this announcement and the Company undertakes no obligation to update its view of such risks and uncertainties or to update the forward- looking statements contained herein. Nothing in this announcement should be construed as a profit forecast or profit estimate and no statement in this announcement should be interpreted to mean that the future earnings per share of the Company for current or future financial years will necessarily match or exceed the historical or published earnings per share of the Company. This announcement has been prepared for, and only for the members of the Company, as a body, and no other persons. The Company, its Directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this announcement is shown or into whose hands it may come, and any such responsibility or liability is expressly disclaimed.

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CHIEF EXECUTIVE'S STATEMENT

Overview

These results cover an important six months in the strengthening phase of our five-year strategy to transform Imperial into a more sustainable business capable of consistent growth - year in, year out.

The essential foundations of this new strategy - a consumer mindset, a rigorous high-performance culture and a desire to challenge the status quo - are fast taking shape. And already we are seeing the fruits of these new ways of working and our focused investments in new capabilities. In particular, these results provide further evidence of the stabilisation of our core combustible business. In the first half, while maintaining pricing discipline, we delivered aggregate market share gain across the five priority markets, which account for around 70 per cent of our operating profit.

In next generation products (NGP), consumers have given positive feedback to the pilots we launched in the second half of last year. We now intend to roll out our Pulze and iD heated tobacco proposition in further European markets and, in the US vapour segment, we are extending our new blu consumer marketing proposition.

All this progress has been achieved by our people during a challenging period characterised by growing macroeconomic pressures, amplified by Russia's invasion of Ukraine. I would like to pay special tribute to the dedication of our teams working to keep safe our 600 Ukrainian colleagues and their families. Since the war began in February, we have been providing transport and accommodation to enable them to escape the areas most heavily affected by war, and resettlement assistance for those who have left Ukraine. Meanwhile, in April, we delivered on our commitment to fully exit Russia, with the orderly transfer of our business to local investors.

Our results

These results reflect a further step up in investment to build these new foundations during the two-year strengthening phase of our five-year strategy. Price mix was relatively weak in the first quarter but improved markedly in our second quarter as we achieved price increases in several of our key markets, which will support a stronger price mix performance in our second half. Our NGP business delivered top-line growth and reduced losses as we focused investment behind our new trials.

Adjusted Group operating profit grew 2.9 per cent at constant currency driven by reduced losses in NGP. Reported operating profit was 26.6 per cent lower, driven primarily by exit charges related to the divestment of our Russian business and the non-recurrence of gains on last year's divestment of the Premium Cigar Division. Our cash generation has remained strong supporting further debt reduction on a 12-month basis.

Developing the right culture

Building the right culture is essential to the successful delivery of our strategy. In 2021, we developed a new statement of purpose: "Forging a path to a healthier future for moments of relaxation and pleasure". Alongside this our vision statement "To build a strong challenger business powered by responsibility, focus and choice" underpins our strategy. We are embedding this purpose, and vision, together with our new behaviours through all levels of the business. So far over 400 of our senior leadership team have participated in extensive training sessions and a further 900 will take part in the next three months. These sessions are focused on helping our people work in ways which are more consumer-centric, collaborative, accountable, inclusive, and future focused. By the end of this year, all of our people will have had training in these behaviours.

Building our consumer capabilities

Having last year set up a new Group Consumer Office led by Andy Dasgupta, we are now embedding consumer packaged goods best practice in our insights, marketing and sales. Our investor webinar in March showcased how our largest market, the US, was successfully combining deep consumer research, creative marketing executions and new digital sales systems to drive stronger business performance. This more rigorous, integrated approach is being replicated across our key markets. Andy has now completed his senior team with new hires who are adopting a different approach based more on partnerships with third parties and informed by consumer insight to develop the pipeline for new products in both tobacco and NGP.

Becoming a strong challenger

As the smallest of the global tobacco businesses, we need to work more nimbly than our competitors. This means identifying value pools others overlook and innovating swiftly to satisfy unmet consumer needs. Recently, I have seen diverse examples of this challenger approach in action. In Australia, we achieved something rare in a dark market: the successful launch of a new brand, Lambert & Butler, which meets a consumer need for affordable quality. In Spain, we are taking a different approach to our competitors by building on the success of our investment behind our local jewel brand, Nobel. We are now extending this approach to our other Spanish local brands, Fortuna and Ducados. Even in some smaller markets in Africa and Eastern Europe, we have built share by addressing underserved niches, including different-sized products, pricing segments or brand positioning.

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Focusing on priority combustible markets

In combustibles, we remain focused on driving performance in our five largest markets: the US, Germany, UK, Australia and Spain. Historically, we posted annual double-digit declines in aggregate share - making us the sector's largest share donor. In FY21, thanks to our renewed focus on the priority markets, that decline was stabilised. And during the first half of 2022, we recorded a 25 basis point increase in share while maintaining pricing discipline. This outperformance has been driven by a tighter operational management and the focused investment initiatives in these five priority markets.

We grew share in the US, UK and Australia, which more than offset declines in Germany and Spain. We manage these markets as a portfolio where we recognise the mix of market performance will vary from period to period. For example, we recognise that Germany is likely to take longer to address after more than a decade of share declines. However, at the same time, we will have opportunities to outperform, such as we have done in the US market, where we quickly mobilised our team to capture some of the share made available by KT&G's exit from the US. This opportunity will not be repeated and therefore we expect our share performance momentum to moderate in the second half.

Driving value from our broader portfolio

We are applying the same disciplined focus to how we manage the rest of our combustible markets. Here we are prioritising investment behind the best growth opportunities in regions, while applying the same strict standards of responsible marketing to existing adult smokers.

The new divisional structure with Paola Pocci leading the Africa, Asia and Australasia region now provides a greater management focus and the specific skill-set needed to unlock value from these markets. For example, the Africa region, where we have strong positions in five markets, has performed well again in the first half with market share gains and profitable growth.

Building a targeted NGP business

In NGP, we continue to execute on our strategic objective to rebuild our business as a focused, sustainable, consumer- centric enterprise. We have received positive consumer feedback from trials of our Pulze heated tobacco system in Greece and the Czech Republic. While we will continue to innovate on our marketing proposition, device technology and the range and quality of our iD heat sticks, consumer data has validated our approach and strengthened our confidence in our NGP strategy. Heated tobacco remains a nascent market, where consumers have yet to form strong brand loyalties and they are willing to experiment with different propositions as they search for potentially less-risky alternatives to smoking, which best suit their personal preferences. In line with our strategy, we are now developing plans to roll out Pulze to additional European markets.

In vape in the US, we have been following a similar test-and-learn approach. A local pilot of an improved consumer marketing proposition has received positive consumer feedback and we now plan to extend to further territories in the US. The new proposition includes improved packaging and a new marketing approach targeting "next steppers" looking to migrate from combustibles. We were disappointed with the FDA's decision to issue Marketing Denial Orders for some of our myblu products in early April and we are currently seeking to overturn the decision through the administrative appeals process. Our products will remain in the market during the appeals process.

In April, we began piloting an all-new vape device, blu 2.0, in selected cities in France. We will evaluate consumer feedback from this pilot before moving to a wider roll-out in Europe.

In modern oral nicotine, we continue to focus on the Nordic markets, where we have achieved strong growth in Sweden and Norway, as well as Austria, where there is a heritage of oral tobacco.

Managing our Environmental, Social & Governance responsibilities

An important element of the foundation-building phase of our strategy has been a refresh of our approach to environmental, social & governance (ESG) responsibilities

Imperial has a long tradition of responsible business with a good track record of preventing under-age access, combating illicit trade and continually reducing its carbon footprint.

Our recent ESG review has focused on prioritising our activities to ensure they fully align with our new strategy, purpose and vision and meet the evolving expectation of stakeholders.

A full materiality study, which combined both quantitative data-led analysis and qualitative stakeholder interviews, highlighted eight key areas of focus.

We have grouped these into three broad categories:

• Healthier futures - comprising consumer health, climate change and packaging & waste;
• Positive contribution to society - comprising farmer livelihoods & welfare, sustainable & responsible sourcing and human rights; and
• A safe and inclusive workplace - comprising employee health, safety & wellbeing and diversity, equity & inclusion.

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