Imperial brings down net debt

With ‘Big Oil’ cast as the new pantomime villain, the recent COP 26 summit must have provided a bit of breathing space for Imperial Brands (IMB) and its peers. It may be fanciful to suggest that tobacco companies were once deemed every bit as important as hydrocarbon producers, at least by a sizeable proportion of the population, but those days are long gone anyway, as both sectors are being forced to evolve in response to changing regulatory demands.

By now, the anatomy of the tobacco group’s full-year figures is well known: secular decline in its traditional products, strong cash generation, high-yielding dividends, and a hefty debt burden. Those factors are still in evidence, but Imperial is looking to deleverage its balance sheet, while prioritising its most lucrative end-markets.

In practical terms, the group increased tobacco prices by 4.4 per cent to help offset a 2.9 per cent decline in overall volumes. You imagine that demand for nicotine products would be quite inelastic, but there must be a point at which consumers have second thoughts. Perhaps next generation products (NGPs) such as e-cigarettes and tobacco-heating products will gradually attract more discretionary income flows if traditional tobacco is effectively priced out of the market.

An overall market share decline in the five priority markets was largely arrested, evidenced by a relatively modest 2 basis point contraction, with share gains in the US, UK and Spain partially offset by declines in Germany and Australia. But the group’s exit from certain other markets contributed to a 3.9 per cent decrease in revenues from next generation products. Somewhat against the odds, therefore, the 1.4 per cent increase in organic net revenue was down to Imperial’s traditional product groups.

Net debt fell by £1.77bn year-on-year to £9.37bn, or 2.2 times cash profits, helped along by proceeds from the sale of the Premium Cigar division and continued efficient cash conversion. Free cashflow of £1.52bn was half that of the prior year, but that was primarily due to a working capital outflow driven by changes to duty payment dates.

Healthcare matters predominate. Imperial admits that it can’t accurately predict the impact on product volumes if widespread Covid-19 restrictions are reintroduced. More bizarrely, reports have emerged that NGPs may eventually become available under the NHS – proscriptions giving way to prescriptions.

Management is concentrating on those areas of the business it can directly influence, with market optimisation and debt reduction to the fore. But until we see further progress on both fronts, the ability of the group to grow pay-rates is still open to question. Sell.