The Lowdown: He's addicted to profits, not fags

Gareth Davis tells Abigail Townsend why Imperial Tobacco won't be weeded out

Gareth Davis loves smoking. A dedicated follower of nicotine, the Bolton-born chief executive of Imperial Tobacco is only too happy to sing the praises of his 20-a-day habit:

"I believe in the right to smoke," he says. "It gives me an enormous amount of pleasure and I'm stunned that you get so many unbalanced arguments about it."

And even for a committed smoker, one of the arguments with which Davis takes issue is the idea of nicotine addiction. "It's one of the most over-used and misused words in the English language," he says. "If addictive means you can't give up, then that clearly isn't the case with smokers."

Davis has spent all his career with Imperial - becoming chief executive in 1996 when it was demerged from the Hanson conglomerate - so he has had plenty of time to hone his beliefs about fags. Yet, in western markets at least, his views aren't widely shared. Consumption has slumped over recent years, with smokers put off by the health risks and, in the UK, by duties that mean a pack of 20 now costs almost £5. Advertising, sponsorship and marketing have been curtailed and the health warnings on packets keep getting bigger and more stark. Meanwhile, smokers struck down by illness continue to seek compensation in the courts.

Davis remains unruffled. For a start, he is quick to defend much of the industry, particularly over accusations that tobacco companies deliberately misled smokers into believing "light" brands were better than normal ones: "That annoys me. It's an absolute travesty. Everyone was working on the basis less was best."

Those allegations surfaced in litigation in the US, where Imperial, which owns Embassy, Lambert & Butler and Golden Virginia, does not have any operations. But the company does have the dubious distinction of being at the centre of the UK's first tobacco compensation case. Margaret McTear is suing it for £500,000 after her husband's death, and a decision is due early next year. Yet litigation, says Davis, "doesn't keep me awake at night". Giving evidence last week, he refused to accept smoking killed, arguing that there was no firm proof linking cigarettes to lung cancer.

He is similarly dismissive of the ban on sports sponsorship, now in force in the UK and due to affect other European Union countries by 2006. Embassy has sponsored snooker for 28 years and its West brand sponsors Formula One team McLaren Mercedes.

But Davis counters: "If a child is watching a car whizz round on television with West on it, does that incite them to get up off the sofa and buy a packet of cigarettes? I don't think so."

One thing that is indisputable is the slump in the UK, Imperial's biggest market, to around 54 billion sticks a year from 130 billion when Davis entered the industry 31 years ago.

Yet he has not given up on the home market and believes actual consumption is higher, around the mid-70s, as smokers buy cheaper fags from abroad.

"What we have seen in recent years is consumption being fairly flat," he adds. "That's indicative that you are reaching a core group of people who are saying: 'I've heard the warnings, I'm an adult, I want to smoke and I'm going to smoke.' There's no advertising, there's some fairly restrictive practices around and yet people still smoke."

But Davis is reducing Imperial's reliance on the UK. Along with rivals, the focus is shifting to emerging markets, where anti-smoking legislation is minimal and people puff away happily. In the past six years, Imperial has spent £4.4bn on acquisitions, including papers business Rizla and Tobaccor, the second-largest manufacturer in sub-Saharan Africa. The biggest deal, though, was the £3.5bn purchase last year of Germany's Reemtsma, which has operations in the vital markets of central and eastern Europe, Africa and Asia.

Tomorrow, when Imperial posts its final results, the effect of the Reemtsma deal is expected to be shown as a pre-tax profits surge from £642m to around £865m. The company is also likely to detail further growth plans. In China, where the population gets through 1.7 trillion fags a year, Imperial is set to announce a licensing agreement with partner Yuxi Hongta Group. Details of an investment in Turkey are also imminent.

At the time of the deal with Reemtsma, Imperial said it was bowing out of industry consolidation, but Davis is now gearing up for a return to the acquisitions fray. "Obviously we did not have the cash to go into another deal immediately, but we have quickly rebuilt the interest cover. If you're looking into next year, by the time you get to May or June, we will be in fairly strong shape."

Europe, Africa and the Asia Pacific are the regions in his sights and the goal is to have 80 per cent of profits derived from non-domestic markets. Davis guards the group's equity vigorously and hopes to do largely debt-based acquisitions, though he does appreciate the demand for tobacco equity among investors as governments sell off state-owned companies and the deals keep coming. Imperial's share price has surged more than 90 per cent in the last three years; in the same period, the FTSE 100 has lost 30 per cent of its value.

Davis occasionally gets back to Bolton to watch his favourite football team, enjoys golf and likes spending time with his family. But the overriding impression is of a man wedded to a company that most people would find hard to recommend. He accepts that but ultimately doesn't care. "I always liken myself to a guy I was at business school with. He worked for Marks & Spencer and he was always complaining that he couldn't sit down at a dinner table without some woman complaining about the strength of her bra.

"[Smoking is] a big issue for some people. But I'm a big lad and I know where the door is."

Left to his own devices, he won't be walking out of it any time soon.