Imperial Brands is the UK's second-largest cigarette manufacturer and among the world's largest tobacco products companies overall (behind Philip Morris International, British American Tobacco, and Japan Tobacco). The company makes and markets cigarettes and tobacco products under brands including Davidoff, Gauloises, and JPS (cigarettes), Drum (rolling tobacco), Rizla (rolling paper), and Montecristo (cigars). Imperial Brands operates some 45 cigarette and tobacco product and processing plants worldwide and racks up sales in 160-plus countries. With cigarette smoking declining in the West, Imperial is pivoting hard to next generation smoking products, particularly its vapor brand, blu. Besides its manufacturing operations, Imperial's Logista subsidiary is a major European distributor of tobacco and non-tobacco products.
Imperial Brands comprises five distinct businesses.
The Imperial Tobacco unit manufactures and markets tobacco products, including cigarettes, rolling tobacco, smokeless tobacco, mass-market cigars, and accessories. Its brands include Davidoff, West, JPS, Parker & Simpson, and Gauloises Blondes and its key subsidiaries are Reemstma, Altadis, and Seita.
Tabacalera is Imperial's main cigars business, which includes a 50% stake in Habanos, the US-facing cigar business Tabacalera USA, and separate divisions that manage cigar sales in Spain and France.
ITG Brands comprises the assets acquired from Reynolds America in 2015 and includes the brands Winston, Maverick, Kool, USA Gold, Salem, Dutch Masters, and Backwoods. The unit is headquartered in North Carolina and is the #3 tobacco company in the US.
Fontem Ventures is Imperial's division that focuses on growing its next-gen vapor brand, blu.
Lastly, Logista is Imperial's distribution business, supplying some 300,000 outlets in Spain, France, Italy, Portugal, and Poland with tobacco and non-tobacco products.
Imperial Tobacco, Tabacalera, ITG Brands, and Fontem are grouped as a single reporting segment, Tobacco & NGP (Next Generation Products) and are sliced into four product positions. Returns Market North and Returns Market South hold Imperial's activities in mature markets such as the EU, Australia, and Africa, and generate some 50% of Imperial's sales. Growth Markets (10% of sales) covers territories with good revenue growth potential. The US is the fourth division and is also considered a growth market.
Logista forms a reporting segment of its own, called Distribution, which accounts for around 25% of Imperial Brands' sales.
Based in Bristol, UK, Imperial Brands has roughly 45 manufacturing sites and operates in 160 countries worldwide. Imperial's revenue is geographically diversified: its home and largest market, the UK, accounts for around 15% of its total revenue. Germany also accounts for around 15% of total sales, while France and the US generate about 10% each.
Imperial divides its countries of operation into three groups, Growth Markets (US, Iraq, Italy, Japan, Norway, Russia, Saudi Arabia, Taiwan), Returns Markets North (Australia, Belgium, Germany, Netherlands, Poland, UK), and Return Markets South (France, Spain, and several African markets including Algeria, Cote d'Ivoire, and Morocco).
Note: Growth rates may differ after conversion to US Dollars.
Imperial Brand's revenue has grown quickly over the last four years thanks to acquisitions but organic revenue growth has been hard to come by. Sales of next-gen products, while growing, are struggling to offset declines in traditional tobacco products.
Fiscal 2018 (ended 30 September) saw Imperial turn in a remarkably similar performance to 2017. Its revenue grew 1% to £30.5 billion, half of which came from the Tobacco & NGP segment and half from Distribution. The company's investments in its Growth and Specialist brands (those brands Imperial considers its most important) helped shift their sales as a proportion of the whole from 63% to 67%.
Net income was materially unchanged at £1.4 billion due to similar general business performance across 2017 and 2018.
Imperial's coffers grew during 2018, ending the year £203 million higher at £775 million. It generated £3.1 billion from its operations, while investing activities absorbed £230 million and financing activities £2.7 billion. Imperial's main cash use in 2018 was on asset purchases, repayments of borrowings, and dividend payouts.
With rates of cigarette smoking declining in much of the world, Imperial Brands is investing heavily in its "Next Generation" product portfolio, particularly in smokeless products such as its e-cigarette vapor brand, blu. According to a number of key bodies, such as Cancer Research UK, the British Medical Association, and the National Academies of Sciences, Engineering, and Medicine, e-cigarettes present a lower health risk than tobacco-based forms of smoking. E-cigarettes offer a number of commercial advantages, including a model based on a long-life unit filled with disposable cartridges, a range of flavors, and degrees of product sophistication that offer upsell and higher margins. Imperial Brands' investments have included acquisitions of non-tobacco products and e-vapour technology development companies.
Imperial Brands has set very high growth targets for its Next-Gen team of 35-150% compound annual revenue growth in 2018-2020. It aims to transition smokers to blu products through an adoption model based on what Imperial calls the 4Bs -- Believe, Buy, Buy Again, Belong. In essence, that means getting potential customers to understand the brand and value proposition and deliver a product worth buying again, which Imperial hopes will convince the customer as the value of e-cigarettes and the blu brand.
As part of its pivot towards next-gen products, Imperial Brands is divesting certain legacy assets and seeking cost efficiencies. It sold a portfolio of tobacco products in the US and sold 10% of its shareholding in Logista, its European distribution business, for £281 million. Overall, Imperial Brands expects to generate disposal proceeds of up to £2 billion before 2020. The company also has £750 million earmarked for cost-saving initiatives with the goal of saving £300 million in operating expenses each year until 2020. The savings will come from the sale of lower-margin businesses and the transition to a single global HR platform. The company is also tightening its capital discipline, and succeeded in reducing its net debt by £800 million in 2018, on top of the £1.0 billion reduction in 2016 and the £1.1 billion reduction in 2015.
Mergers and Acquisitions
In 2017 Imperial Brands acquired two companies to boost its non-tobacco business. Von Erl GmbH, acquired for £17 million, will boost Imperial's ability to develop non-tobacco consumer experiences. Imperial also spent £86 million on Nerudia, an e-vapor and nicotine product developer whose experience will assist Imperials R&D capabilities.
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