RSS feedsAt a results presentation to City analysts last November, Imperial Tobacco Group chief executive Gareth Davis introduced his finance director as “the legendary Bob Dyrbus”. Davis and Dyrbus have been together as a double-act since the company floated away from Hanson plc in October 1996, though they’d known each other for much longer than that.
Davis has been an Imperial Tobacco man since his graduate trainee days, while Dyrbus first encountered the group when he was at Hanson, shortly after the 1980s’ best corporate raider snatched the cigarette company from under the nose of rival suitor United Biscuits. Given the huge transformation in the Imperial group over the past two decades – and in particular, the smart, long, northeastwards-pointing share price chart – it’s little wonder Dyrbus might be acquiring ‘legendary’ status among City fans. Measured by total shareholder returns, Imperial Tobacco has delivered about 750% since it floated, the FTSE-All Share just 98%.
The man himself is a little more modest about his colleague’s introduction. “I think the reality of the situation is that Gareth and I had a very good relationship going back a large number of years and what we try to do at analyst meetings is in some way, shape or form, to inject the occasional bit of humour into it,” he says. “It just lightens it up a bit.”
It also gives an insight into his working relationship with Davis – a CEO-FD partnership that must be one of the longest-serving in the FTSE-100. Davis, who quickly learned the disciplines of doing things the Hanson way back in the 1980s, would say that he understands finance, but without being a financial technician; and Dyrbus says he is perfectly at ease as a finance director who can show people round the Nottingham plant, for example, and explain what all the machines and processes are.
Dyrbus certainly is at ease – remarkably so for someone who heads up finance in a company operating in a declining and increasingly unpopular industry. During our interview, for example, we discussed the recent Irish ban on smoking in pubs. In fact, as this article is being written, British MPs have just voted to do the same in the UK, so what happened around and beyond the Liffey could well be repeated here. Cigarette sales dipped for a while in Ireland, but have since bounced back as pub landlords, supported by Imperial Tobacco and other suppliers, introduced awnings, outdoor heaters and other novelties to create sheltered smoking areas outside the pubs.
Dyrbus is part of the “significant minority” who choose to smoke. “If you said to me, would I prefer to go into a pub that’s a smoking or a non-smoking pub I would prefer personally to go to a smoking pub. And if it was a non-smoking pub then I might decide to go and have a cigarette and a drink at Gareth’s place or my place. People were making those choices [in Ireland] and not going to the pubs.” It was, therefore, a “logical reaction” for the pubs to create a smoker-friendly environment to entice back their customers.
Advertising restrictions
In many countries, advertising bans have been introduced which, as Dyrbus points out, make it more difficult to make progress in a market – more difficult, but not impossible. “In what we call a dark environment – there’s no posters, there’s no press or magazine advertising – it takes longer to build consumer awareness if you have limited means of communicating.” He says, for example, when they launched the UK brand Super Kings in Australia, which has no cigarette advertising, “I must admit we were talking once or twice about whether the brand was going to make it or not. I suppose one is used to a certain brand trajectory. But instead of seeing things move up by 1% or 2% in the market you’ll see it move up by 0.1% or 4 0.2% so it takes longer to get to the end product.”
The company has taken short-term knocks from huge duty increases in Germany and is currently dealing with French, Belgian and Italian regulations that impose minimum selling prices in those markets – a policy stance that is illegal under EU law, Dyrbus says. “What any government can do is set a minimum instance of duty, rather than a minimum selling price.” Imperial Tobacco, itself, isn’t taking any legal action, but Dyrbus expects the European authorities to issue infringement notices against those three member states eventually.
Growing market share
It’s hardly a great background against which to try and grow a business, but Imperial Tobacco is managing to do so. Profits have gone up every year since Hanson took over the company, Dyrbus says, and despite the fall in the overall market he still expects to see growth in the rest of western Europe (that is, outside the UK and Germany).
“While we have a relatively large position in other tobacco products, we have relatively low cigarette market shares, so we are growing well in just about every European country,” he says. “The one thing that’s great about having small shares is that if we’ve got a 3% share, a 0.3% gain is a 10% move against a market that’s in decline.” Last year the market in the rest of Western Europe declined about 3%, but Imperial Tobacco’s volumes were up 7%.
A little nearer to home, there are other regulations that play a part in shaping Dyrbus’s working day. Sarbanes-Oxley, for a start. Even though Imperial Tobacco has no business presence in the US (and so, no horrific class action litigation) it has a US listing – and Americans comprise about a quarter of the share register, a legacy of the 1996 demerger from Hanson. Despite the burden of Sarbox, Dyrbus says that he wouldn’t be in a rush to ditch the US listing, even if that were possible. Moreover, as an overseas registrant, the company gets the advantage of a 12-month deferral in the compliance deadline, so he will be able to get the benefit of US companies’ experience before Imperial Tobacco has to satisfy all the regulations.
Different times
With a September year-end, the group also has a nine-month lag behind the calendar year companies that are now producing maiden preliminary results under IFRS. As with every other FD affected by the changeover, Dyrbus and his team have been putting a lot of work into the conversion programme. Imperial Tobacco won’t be seriously affected by the change: the goodwill rules will affect them because of their acquisitions, but there is a tiny pensions impact (the company has one of the few remaining FRS17 surpluses). Share-based payments will affect many companies that will now be required to write off the cost of these payments, but Imperial Tobacco has always adopted the policy of buying shares for options in the market, rather than issuing new shares, so they have always been taking the cost of that on the chin.
Dyrbus is more irritated by the IAS39 rules relating to derivatives and financial instruments. As he puts it, if you issue debt at a fixed rate and then swap some of that into floating – “because you don’t want necessarily to fix in with a 10-year interest rate on the day you just happen to be going to market” - you will then have “layered derivatives” that don’t count as a hedge for accounting purposes, “whereas obviously commercially and economically it is a hedge”, he says. “The way around it is just to issue floating rate debt and let it all float – which is obviously commercially and economically not the thing to do.” So, no, he won’t be changing his hedging strategy to accommodate the new accounting treatment – the tail won’t be wagging this particular dog.
The answer, he says, is just to try to explain 4 it to the market. In fact, as the first wave of IFRS results hits the market, he is as interested in how companies explain the changes as much as in the scale of the changes themselves: “What people are disclosing, how they’re disclosing it, the format in which they’re disclosing it”.
Different times
If the regulatory world has moved on since Dyrbus first encountered the company, the corporate world has changed even more. In the mid-1980s when Imperial Group (as was) agreed a merger with United Biscuits, the Bristol-based tobacco company was almost as much of a sprawling conglomerate as Hanson itself, which launched a hostile – and ultimately successful – bid for Imps. Back then, it owned not just tobacco interests but Ross Young frozen foods, Golden Wonder crisps, Courage brewing, Finlays newsagents, Happy Eater restaurants, Lea & Perrin sauce, among others. Hanson sold the lot for billions and wound up paying a net £228m for a tobacco business that made around £200m a year. You could do that sort of deal in those days.
Dyrbus was part of the process of sorting out Imperial Group. In its new incarnation, some of the acquisition skills learned at Hanson have come into their own. Since its 1996 demerger and flotation Imperial Tobacco has spent £4.7bn on acquisitions in Europe and elsewhere, diversifying its business geographically away from being almost entirely UK-based (but sticking emphatically to the cigarette and tobacco products line) – and Dyrbus insists that each and every acquisition has created value for the group. “We have very strict strategic and financial criteria and unless we get ticks in the boxes we don’t go forward,” he says. “Our aim is to beat the group’s weighted average cost of capital in the short term and a hurdle rate thereafter. I suppose it’s by being reasonably cautious in terms of the assumptions we’re making compared to what we finally achieve.”
Hanson taught him that the skills needed to change Imperial Group were to a large extent already there. “When you get into an acquisition there are a whole series of other things that you unlock, which is the ingenuity of the people that are there. I’m sure if you go down in most organisations people know what needs to be done; it’s [a case of] releasing that ingenuity, it’s freeing up people to do jobs with clear areas of responsibility.”
One aspect of the necessary restructuring that Dyrbus certainly didn’t learn from Hanson is the way that the company treats employees who have had to be made redundant. Imperial Tobacco has always been a slightly paternalistic company, but when it closed its Glasgow factory, for example, the company spent a lot of money on retraining the workforce. The result, he says, was that “practically everybody who wanted a job in what was technically an unemployment black spot got jobs.”
Impressive – but a big investment by a company in a workforce that it no longer needed. So why do it? “You can’t be a slash-and-burn merchant because you can’t operate in a climate of fear,” says Dyrbus. “You’re not going to have an efficient effective operating unit going forward. The people in Glasgow ended up in that position through no fault of their own; they were loyal employees and we treat people with respect. That’s part of the culture. This could happen to anybody; it could happen to me.”
Though the way things have been going over the past ten years, that seems unlikely.
