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KEY PERFORMANCE INDICATORS – SUMMARY

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IFRS

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• Reported revenue increased 5.7% to £25,877��;
• Reported profit from operations was down 3.2% to £9,016��, with reported operating margin down 320 bps at 34.8%, as the Group was impacted by a number of financial headwinds totalling £2,114m. These include charges related to Canada (Quebec £436m), amortisation and impairment of trademarks (£481m), the Group’s restructuring programme Quantum (£264m), other litigation including Engle in the US (£236m), Russia (in relation to an excise dispute, £202m) and Indonesia (goodwill impairment £172m);
• Reported basic and diluted EPS both declined 5.4% to 249.7p and 249.0p respectively;
• Borrowings decreased to £45,366�� (2018: £47,509m), driven by the net repayment of borrowings, foreign exchange tailwinds and cash generation more than offsetting the non-cash recognition of lease liabilities under IFRS 16 of £607m; and
• Net cash generated from operating activities declined 12.6% to £8,996��, due to the timing of the Master Settlement Agreement (MSA) in the US in prior periods.

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Volume and Share
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• Total cigarette and THP volume declined 4.4% to 677bn sticks, with cigarette volume down 4.7% and THP volume up 31.6%. Group volume was particularly impacted by a one-off stock reduction in Russia, combined volume decline in Egypt (due to a change in local taxes impacting Pall Mall) and Venezuela (where macroeconomic conditions remain challenging). The remainder of the Group performed largely in line with the industry³��with combined cigarettes and THP volume down 3.2%. In the key markets, value share²��increased 30 bps while volume share¹��was 20 bps up against 2018; and
• Strategic Cigarette and THP volume was down 2.5%, with volume share up by 70 bps (or 30 bps excluding migrations), with growth in all regions.

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Non-GAAP adjusted basis

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• Adjusted revenue⁴��increased 6.2% to £25,827��, or 5.6% to £25,683�� on a constant currency basis, as cigarette price/mix of 9% and growth in revenue from New Categories and Traditional Oral, more than offset lower cigarette volume;
• Revenue from the Strategic Portfolio (defined on page 49 of the full announcement) was up 8.9%, or 7.3% on a constant rate basis, with the growth driven (at constant rates) by:
  • 5.6% growth in revenue from the strategic combustible brands;
  • 32.4% increase in revenue from New Categories to £1,214m, with volume growth across all categories:
    • THP revenue up 22.7% to £693m, with consumable volume up 31.6% to 9bn sticks, driven by Japan, Ukraine and Russia;
    • Vapour revenue up 23.4% to £392m, with consumables volume increasing 19.5% to 226m units, with volume higher across ENA and Canada, which more than offset the slowdown in the US. In the US, volume returned to growth in the final quarter of the year; and
    • Modern oral revenue up 273% to £129m, with volume 188% higher (to 1,194m pouches) driven by Scandinavia, US and Russia; and
  • 11.0% increase in revenue from strategic traditional oral to £980m;
• Adjusted profit from operations grew 7.6% to £11,130��, or 6.6% to £11,032�� at constant rates of exchange��as adjusted revenue growth and the continued drive for efficiency gains (including product rationalisation to remove complexity) more than offset the increased investment in New Categories;
• Adjusted operating margin, at current rates, was 50 bps higher than 2018 at 43.1%;
• Adjusted diluted earnings per share at constant rates of exchange increased 8.4% to 321.6p;
• Adjusted cash generated from operating activities��was down by 15.4% to £6,831�� due to the timing of payments related to the MSA in prior periods described on page 7 of the full announcement, and working capital movements. Operating cash conversion was 97% (2018: 113%);
• Adjusted net debt⁵��decreased to £41,726����(2018: £43,407m). The decrease in free cash flow (after dividends paid to shareholders) to £1,921m (2018: £3,337m) was largely due to the timing of payments related to the MSA in prior periods. Adjusted net debt to adjusted EBITDA reduced by 0.5x in 2019, 0.4x on a constant currency basis; and
• Dividend per share increased 3.6% to 210.4p, payable in four quarterly dividend payments of 52.6p per share, being a pay-out ratio of 65% of adjusted diluted EPS, in line with the Group’s dividend pay-out policy.

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2020 outlook

We anticipate global industry cigarette and THP volume to be down c.4%, with US industry volume down c.5%, in 2020. We expect adjusted revenue growth in the 3-5% guidance range (at constant rates of exchange), together with continued operating margin improvement and further progress in New Categories towards our 2023/24 ambition of £5bn in revenue. Results, in particular New Category revenue growth, will be weighted to the second half of the year. The business is performing well and we are confident of delivering another year of high single figure constant currency adjusted EPS growth, with strong operating cashflow conversion in excess of 90%. Extrapolating today’s foreign exchange spot rates for the full year, we would expect a headwind of around 4% on full year adjusted EPS growth.

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Preliminary announcement - year ended 31 December 2019 (1.9 mb)
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