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Robert Dyrbus, finance director of Imperial Tobacco

At 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

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

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