This is your first full year reporting under IFRS rules. What’s been
the main impact?
There’s been no material impact in the Group. The impact from moving from UK
GAAP to IFRS is about half of one pence during 2005, and about 2.3 pence in the
The areas mainly impacted are goodwill which we historically excluded from
our adjusted earnings per share, but are taking a small amortisation charge
and the service cost of pensions.
Share-based payments have not impacted us, because since 1996 we have been
buying shares in the marketplace to satisfy our share schemes and taking that
charge directly to the P&L account.
Where are you at on the reorganisation of your manufacturing
We’ve completed the Berlin reorganisation and the closure of Treforest, which
we announced last September. And in the year, we announced further moves with
the closure of Lahr and Liverpool. Negotiations are concluded and we expect
those units to close early next year.
What’s been the financial impact of those restructuring initiatives?
In the current year, the restructuring initiatives have cost about £45m, of
which £13m was non-cash. I expect to see a benefit of around £4m coming through
next year and then a further £7m. So, £11m coming through by 2008.
Your peers are reducing costs significantly. Can you continue to cut
your costs at a similar rate?
We’re highly cost-focused. We aim to hold or reduce costs year-on-year. In the
current year, our productivity was up 6%, cigarette unit costs were down 6%, and
average tobacco products’ unit costs were down 4%.
You’re strongly cash-generative. How do you balance the use of cash
between capex, dividends, buybacks, and acquisitions?
We are very cash-generative. In fact, we are very capex light. Normally, we
would anticipate that if we compare operating profit to operating cashflow after
capex, it tends to be in the 95% to 100% mark. We’re effectively converting all
of our operating profit into cash after capex. Our dividend policy is to grow
dividends broadly in line with earnings, at about a 50% payout ratio, and we are
While we’d love to make an acquisition which we’re ready for we’re using
cash to buy back our shares to stop upward pressure on our rating. The advantage
of a buyback is that if an acquisition was to come along that met our criteria,
we could act and stop a buyback, whereas shareholders don’t like to have the
So will you be increasing the share buyback level this year,
particularly as interest cover has increased to 7.2 times?
Despite interest cover increasing, we did spend £368m in the final weeks of the
year, acquiring the Davidoff trademark. If we had been financing that for the
entire year, interest cover would have been closer to 6.5 times. However,
buyback is an important way of getting cash back to our shareholders.
The Board does keep it constantly under review and in the absence of another
acquisition, if I was sitting here in two or three years’ time and looking back,
I can assure you we would have bought back more than the current run-rate of
£600m per annum over that period.
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