Imperial's annual results show the scale of the problem. The UK still dominates the group, accounting for 80 per cent of sales. While UK sales rose slightly, operating profits were down a little from pounds 319m to pounds 310m after stripping out stocking effects. UK margins slipped from 48.8 to 47.6 per cent.
Mr Davis says no amount of restructuring or aggressive selling will reverse the trend, although Imperial's UK business should decline at a slower rate than the market overall. A blanket ban on cigarette advertising will not help.
Since its demerger from Hanson in 1996, Imperial has spent about pounds 1bn on overseas acquisitions to dilute its reliance on the UK. While the group's overseas results are at first sight impressive - organic growth of 26 per cent, operating profits up by 70 per cent - the operations have been built almost from scratch, so the comparatives are small and such growth will be difficult to sustain.
Last year benefited from the integration of Imperial's European sales forces following the acquisition of Rizla, the cigarette papers brand, and Van Nelle Tabak, the hand-rolled tobacco business. From here on, Imperial claims it has much to go for in Europe because of its small market share, but the prospect of a Europe-wide ban on tobacco advertising is cause for concern.
Imperial's target is to have 50 per cent of its business overseas. It has six or so deals on the go, and its strong cash generation means it won't be short of firepower. But while the rest of the world may be more benign than the UK on cigarette duty, the trend in smoking worldwide is downwards; global cigarette volumes are estimated to be falling by 5 per cent annually.
The largest markets - Russia and China - offer the weakest margins, and there is vicious competition in Imperial's target countries in South-east Asia, a region that disappointed last year.
Analysts expect pre-tax profits of about pounds 440m this year, giving earnings per share of 60p, rising to pounds 463m and 63.3p in 2001. The shares, down 3.5p at 664.5p, trade on a forward price/earnings multiple of 11 - more than generous given the lacklustre outlook.