Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Good morning. Welcome to our 2020 interim results presentation. I'm Dominic Brisby, Joint Interim CEO; together with Joerg Biebernick, who will also be presenting today; along with our CFO, Oliver Tant. Since Joerg and I were asked by the Board to lead Imperial in early February, we've been working with Oliver on 5 key areas: protecting the health, safety and well-being of our people; maintaining supply to customers; enhancing our focus on our tobacco performance; rightsizing investment behind our next-generation products; and strengthening the balance sheet. Over the course of the presentation, we will outline the progress we've made in each of these areas. Joerg and I will provide an initial overview before handing over to Oliver to take you through the financials, our revised approach to capital allocation and the outlook. We will then cover our divisional performance before taking questions. Let me start by talking about how we have managed the business through coronavirus, starting with how we have protected the health, safety and well-being of our people. We employ more than 32,000 people around the world. They are the lifeblood of the business, and we value everything they've been doing in these challenging times. In all our markets, we have scrupulously followed the advice of governments and public health bodies, and we will continue to do so. Large swathe of the business have been working remotely for some time where our employees have to work on site, such as our manufacturing facilities. They are doing so in such a way that prioritizes their health and well-being with social distance and hygiene guidelines strictly adhered to. Our manufacturing and supply chain have benefited from its diversified nature. We operate 38 factories, and it's a credit to the manufacturing teams that they have kept the vast majority operating throughout the crisis. We have had temporary closures of some smaller factories, mainly in cigars, but they're now back online, although operating with a reduced capacity, which may affect future supply. To date, we've still been able to supply customers, and we typically have 8 to 10 weeks of finished goods across most key product lines. Our people have done a remarkable job, and I know many of them will be listening in today. On behalf of the Board, Joerg, Oliver and myself, I would like to say that we are immensely proud to lead you at this time. Thank you for your incredible support and dedication. Turning to our customers and consumers. Sales of tobacco in the first half have been pretty stable. International travel restrictions have adversely affected duty free and travel retail sales, although this has been more than offset by some temporary stockpiling we saw in March with a net upside to revenue and profit of around 1% for the half. Looking forward, it seems inevitable that we'll continue to see a significant reduction in international and cross-border travel for the rest of this year. So we're very unlikely to see this part of the business improve in the second half. We've also outlined a number of risks associated to COVID-19 and the RNS, including the impact on consumer trends and regulation, and we will continue to actively monitor them. Let's now look at how we have reshaped our focus in the first half, and I will hand over to Joerg.

Thanks, Dominic. Although we delivered against our revised expectations in the first half, the results are clearly disappointing. However, what the numbers fail to show is the progress we're making in refocusing the business, in particular, through adopting a back-to-basics approach to tobacco. Our enhanced focus on in-market executions has delivered growth in tobacco share for the group overall and in 7 of our 10 priority markets. Underlying pricing has remained strong, although this has been partly offset by some temporary adverse market mix and the impact of down-trading. The fundamentals of the Tobacco business are sound, and we expect it to continue to grow over the medium term with high margins and strong cash flows. In NGP, we've been taking action to rightsize our investment and resources to take account for the uncertain environment and last year's disappointing performance. We've reset our plans, which has involved focusing on the most effective investment behind blu and reducing it in areas, which weren't working as well as we would have liked in both the U.S. and Europe. Last month, we submitted PMTAs to the FDA for a range of myblu products. We continue to believe that myblu has a key role to play in realizing our goal of providing adult smokers with a range of potentially less harmful products. Our priority for this year is to improve returns to strengthen the foundations of our NGP business and to maintain a range of options for future growth. We've also taken steps to strengthen the business and its balance sheet, rigorously challenging the cost base around all aspects of discretionary spend to improve profitability. We have taken a similar approach to improve cash delivery. In March, we announced a new 3-year credit facility. And last month, we agreed the sale of our Premium Cigar business, a major achievement under the current circumstances. The disposal further simplifies the business with proceeds being used to accelerate debt reduction. Faster deleverage of the balance sheet will also be supported by today's announcement that we are rebasing the dividend by 1/3. The Board recognizes the importance of growing dividends for shareholders, and we are committed to a progressive policy growing from the revised base while strengthening the business for the future and underscoring its defensive characteristics. Oliver will provide some further color later. Before handing over to Oliver, I'd like to briefly touch on our sustainability strategy, which focuses on 3 key areas that define the approach we take to managing our environmental, social and governance responsibilities: maintaining a sustainable tobacco supply; developing NGPs that are potentially less harmful to health; and running our operations responsibly, keeping our people safe and providing them with a rewarding environment. Within the current environment, our focus on our people and operations is, clearly, especially relevant, and we continue to ensure that all our people are able to work safely. We are monitoring government guidelines closely across all our markets, making certain that as lockdown conditions ease, our people are fully supported with any return to their normal place of work whether that's in the field, an office or factory. As we said today, the coronavirus has not affected delivery against our ESG KPIs. However, some specific initiatives we had planned for the year have inevitably been affected, including progress on the independent environmental assessment of a blu device. This work is ongoing, and we will do our best to get it completed this financial year. We remain fully committed to our ESG agenda and are currently in the process of developing KPIs for all 5 of our priority ESG issues. Our intention is to get these finalized with the new CEO, Stefan Bomhard, in summer and implemented in the new financial year. Thank you. I'll now hand over to Oliver.

Thank you, Joerg, and good morning, everyone. From an earnings perspective, these results reflect actions we're taking in 2020 to mitigate the poor returns from the NGP business in 2019. Over 6% of the 8.5% decline in operating profit during the half relates to one-off charges from the write-down of flavored pods in the U.S., slow-moving inventory more generally and an impairment of some vapor intellectual property assets. However, our performance is also starting to reflect the renewed emphasis that we're placing on our Tobacco business. Volumes in Tobacco benefited from a better performance in the AAA division against a weak comparator, but also reflect the continuing improvement we're making from a share perspective across many of our priority markets. Towards the end of the period, we experienced some COVID-19-related inventory build, though this is expected to fully unwind during the second half. Share for the group as a whole was up 15 basis points over the 12 months to February and 40 basis points in the last 6 months. Tobacco revenues were 0.9% higher, supported by a relatively strong volume performance and pricing, although this was partially offset by some adverse mix that I will explain in a moment. A decline in NGP revenues reflects destocking and the category slowdown in the U.S. and Europe, although sellout rates have proved relatively resilient with blu maintaining share in several markets. Overall, revenues declined by 0.9% for the period. EPS came in slightly better than we expected, and I will outline the drivers shortly. Cash conversion of 103% over a 12-month period was higher than expected, driven by NGP write-downs, which impact profit but not cash, and a benefit from working capital inflows, which will unwind in the second half. The decline in constant currency EPS for the half year of just over 9% was slightly better than guidance. This was driven by a 2% improvement from trading, partially offset by a 1% headwind from a GBP 19 million impairment of NGP intellectual property assets, which was not included in our original guidance. This arose from a review of our IP against our updated product launch plans. We believe that around 1% of trading benefit in the first half was COVID-19-related, being with the net of a decline in duty free and travel retail, offset by some consumer and customer stockpiling in March. Tobacco volumes declined by only 0.5% in the half. This was largely driven by the recovery in the Middle East and Southeast Asia, both of which had a weak first half last year due to the timing of regulatory changes and distributor disruption. As a result, tobacco volumes in AAA grew by 4%. U.S. volumes were better than expected with strong promotional activity in Q2, which supported share gains as well as some COVID-19-related trade pool and the timing of normal industry inventory movements. Europe was broadly in line with the wider market with an increase in German private label volumes and some stockpiling in March, broadly offset by a double-digit decline in the Ukraine, though this latter point had little impact on revenues or profit. Although underlying pricing was strong, it has been partially offset by several discrete temporary mix headwinds, which I will explain. Good pricing was driven predominantly by MPIs in the second half of 2019 in key markets, notably the U.S., U.K. and Germany. We also benefited from a carryover of Australian stock profit, which wasn't realized at the end of last year. Market mix has been negative in the period. We grew volumes strongly in the Middle East against a weak comparator where revenue per 1,000 is significantly lower than the group average. Conversely, lower volumes in Australia, one of the highest value markets, has been driven by the growth of illicit trade, which has more than offset the benefit of our recent share growth. We also suffered from a product mix headwind during the half. This was predominantly due to down-trading in Australia with the expansion of the fifth price tier and a decline in sales of Backwoods in the U.S., with the latter already seeing some pickup in the early part of H2. We grew Tobacco net revenue by just under 1% for the half. NGP net revenue declined by 43%, reflecting destocking in Europe and the U.S., partly offset by growth in heated tobacco in Japan. Overall, at constant currency, revenue was down by 0.9% and 1.7% at actual rates after a 0.8% currency headwind. Tobacco profits fell by GBP 12 million or 0.7% in the half, driven predominantly by cost phasing, something I'll come back to in more detail on the next slide. NGP-related write-downs of inventory IP assets impacted profit by GBP 95 million. Just over half of this relates to the value of flavored pods in the U.S. with a further GBP 28 million provided against slow-moving inventory, reflecting our revised growth expectations for the vapor category in our business. We also had the GBP 19 million impairment of intangible assets that I mentioned earlier. Reduced trading income from NGP reflects lower sales and gross profit following destocking. This impact is partly offset by A&P and overheads, which are lower both year-over-year and sequentially versus the second half of last year as we reduced less effective investment. This reduction was more significant during the second quarter as we worked through the drag of spend, which was committed at the end of last year. The growth of Logista's operating profit contribution to the group reflects the reduction in eliminations as a result of cycling the NGP inventory build in the first half of 2019 in support of market launch activity. Group adjusted operating profit, including logistics, was down 7.7% in constant currencies and 9.3% at actual rates. I've already talked through the drivers of the growth in Tobacco net revenue, which supported an increase in gross profit of 1.3%. This increase hasn't translated into improved operating profit because of an increase in operating costs, which was predominantly timing-related. In line with our increased focus on Tobacco, we have revisited our investment plans and refocused some initiatives. As a result, we've seen a rephasing of promotional activity into the latter part of H1, particularly in Europe, resulting in a greater proportion of trade spend in this half compared to last year. Overheads attributable to the Tobacco business have also been more first half weighted this year, reflecting the increased emphasis that's been placed on this part of the business by the sales force as we rightsize NGP. Production costs related to EUTPD2 and the new regulations around track and trace have also contributed to this cost profile. Finally, while finished goods stocks meant our ability to supply has been largely unaffected, the disruption to our supply chain caused by government-enforced closures of our cigar sites in Honduras, Puerto Rico and the Dominican Republic has meant some under-recovery of production costs during H1. All 3 sites reopened after only a few weeks. They are unlikely to return to full capacity while new COVID-related safety procedures remain in place. We further increased our focus on optimizing cost and cash opportunities across the business with even greater emphasis on managing investment and working capital. In addition to reducing NGP investment and overhead expenditure, we've also initiated an even greater attention to cost-reduction initiatives to improve returns and mitigate the profit impact from inventory write-downs. This has included travel restrictions, recruitment freezes, cancellation of discretionary expenditure and postponement of nonessential capital expenditure. Alongside this, we're continuing to target a more efficient use of working capital to further improve cash generation. Cash conversion for the trailing 12 months benefited from temporary working capital inflows related to changes in production schedules. Looking forward, the COVID-19 situation has called some temporary changes in working capital as we build contingency stocks to support the supply chain, which we expect to unwind in the second half. We are continuing to closely monitor all aspects of working capital, including the timing of excise payments, which are a fundamental part of the positive working capital inflow we benefit from as part of our cash pooling arrangement with Logista. Although the effect of COVID-19 in H1 was limited, the situation continues to evolve, and we've therefore undertaken extensive stress testing of our liquidity needs and financial resources. We've modeled a range of situations, including recessions, with different profit impacts over a span of time periods as well as temporary and permanent reductions in our manufacturing capacity. Our testing demonstrates that we have the ability from a solvency perspective to absorb significant systemic shock. We've recently agreed a new EUR 3.5 billion multicurrency revolving credit facility, which is undrawn, and have taken further steps to improve liquidity by securing an additional EUR 1.7 billion of committed 18-month bank facilities, of which EUR 1.1 billion was secured after the COVID-19 lockdowns. We've also agreed funding through the Bank of England's Covid Corporate Financing Facility. The liquidity of our business is underpinned by strong operating cash flows from tobacco within our business directly and through our cash pooling arrangement with Logista. We also have a strong committed financing position with no immediate funding requirements. And the actions we've taken to ensure efficient cost and cash management and to improve liquidity has strengthened the resilience of the group. The Premium Cigars transaction was complex, and we're very grateful for the hard work and persistence of our teams, which ensured we got it over the line and even greater achievement in the current environment. The multiple of just under 12x EBITDA recognizes the luxury nature of the business and its international growth profile. The sale moves us further towards our ambition of becoming a leaner, more agile organization. Cash proceeds will be used to strengthen the balance sheet, reducing net debt to EBITDA by around 0.2x with full year dilution of around 6p equivalent to 2% of full year '19 earnings. With the transaction now expected to complete in July, I expect dilution in FY '20 of around 0.3%. We also expect to realize a noncash credit to our foreign exchange reserves, which will partly offset the noncash impairment charge we've taken to date. In accordance with accounting requirements, this will be recognized on completion. We have been focused on a deleverage plan for some time. And while the Premium Cigars sale moves us closer to our target range for net debt-to-EBITDA of between 2 and 2.5x, we've not been able to pay down debt quite as quickly as we would have liked over the past couple of years. We also recognize investor appetite for debt has reduced over the past year or so. Therefore, while our tobacco business model remains strongly cash generative, we've modified our priorities for capital allocation to rebalance deleverage and shareholder returns, thereby, providing greater balance sheet resilience and flexibility. This is not, and I repeat not, a decision driven by concern over future cash flows or by COVID-19, although the uncertainties created by COVID-19 reinforce the importance of a strong balance sheet. This is about accelerating the pace of debt reduction. In that context, the Board has decided to rebase the dividend by 1/3, meaning the total dividend for this financial year will be 137.7p per share. We will retain a progressive dividend policy as outlined last year, which will see the dividend grow annually from the rebase level, taking into account the underlying performance of the business. The reduction in dividend amounts to about GBP 650 million per annum, which will be used to accelerate debt repayment. Our intention is to reduce gearing towards the lower end of our 2 to 2.5x target range, which we expect to achieve by the end of 2022. The revised policy also enables a more flexible approach to shareholder distributions with a potential return of surplus cash flows through share buybacks or special dividends once our target leverage has been achieved. Our overall objective is unchanged. We will continue to invest in the business to support the delivery of strong and sustainable operating cash flows. This investment will be within clear returns hurdles with a greater emphasis on risk evaluation and mitigation. As a result, we expect any investment to be prioritized behind Tobacco in the short-term where the investment risk profile is lower. We will also actively manage the capital base, seeking opportunities to realize value and streamline the business. We will update the market on our investment priorities once our new CEO, Stefan Bomhard, has arrived and have the opportunity to assess his strategic priorities and set out a vision for the future of the business. Our revised priorities for capital allocation continue to recognize the importance of growing dividends for shareholders with a rebased payout level, providing the business with greater financial flexibility to strengthen the balance sheet. Following our updated guidance in our AGM statement in February, analyst consensus for the full year currently shows EPS declines of 2% at constant currency, excluding a foreign exchange headwind of around 3%. While our underlying business remains broadly stable given the defensive qualities of tobacco, we have identified downside risks to trading in H2. Although the effects of COVID-19 were relatively limited in our first half, we've started to see a more significant impact develop over recent weeks. This is particularly noticeable in our duty free and travel retail operations where severe restrictions on cross-border and international movement have resulted in a material decline in the business. With only a small proportion of volume being repatriated into domestic markets and with the curtailment of both business and leisure travel likely to persist for some time, we're currently not assuming any recovery during the second half. We've also seen some changes to consumption and buying patterns. For example, we saw some down-trading during the first half since the lockdowns took effect. This trend has accelerated with a greater demand for value formats such as fine cut tobacco and big box products. Recessionary pressures may exacerbate this effect, though we are relatively well placed with a lower exposure to premium products in our portfolio. Although all of our cigar sites are now reopened following government-enforced closures during the first half, social distancing measures and other COVID-related restrictions have led to cost inefficiencies and temporarily reduced production capacities. We've assumed a return to full capacity for our cigar facilities by the end of June. We expect to incur increased manufacturing costs driven by the disruptions. We have also assumed there is no second spike in COVID infection rates, which would further disrupt other areas of our manufacturing and supply chain. Although at this early stage, it's difficult to assess the extent to which these factors will affect our business. We are currently assuming a low single-digit impact to EPS. In addition, our full year results will now also reflect the impact of the intellectual property asset impairment of GBP 19 million, a 0.6% impact to EPS, which has been recognized in the first half but was not included in our previous guidance. We also expect around 0.3% dilution from the disposal of Premium Cigars. At current rates, we also expect currency to have a neutral impact on our earnings per share. Thank you. Now back to Dominic to take you through divisional performance of the Americas and AAA division.

Thanks, Oliver. We delivered cigarette share growth in the U.S. as we continue to manage our portfolio to actively participate across all price segments. We achieved good pricing across the portfolio with cigarette price/mix of a little over 5%. However, this upside was offset by cigars with lower backwards revenue and higher sales of lower-priced Dutch, which has driven negative portfolio mix. Backwoods sales have continued to be affected by supply constraints and growing competition in the natural leaf wrapper segment. We are already addressing this and have already seen a marked improvement in H2, supported by greater promotional activity, more limited additions and increased distribution. The well-known NGP challenges inevitably impacted NGP revenue and profit. We've significantly reduced our vaping investment, shifting away from nationwide above-the-line, out-of-home advertising to much more targeted spend with selected high-value distributors and retailers. As you heard, our PMTA applications for myblu have been submitted and we now look forward to working with the FDA as it develops and enforces an evidence-based regulatory policy. Excluding the one-off charges in the period for inventory write-down on vapor, underlying profit growth was 1.4%. In AAA, our sales performance benefited from the normalization of shipment timings in the Middle East following the regulatory changes last year. The results also reflected -- reflect the expected upside in Australia from last year's sell-through of duty-paid inventory ahead of the September price increase. Net revenue delivery was partly offset by adverse geographic mix, driven by increasing volumes of lower-margin product in the Middle East and by growth in the Australian economy segment. We continue to invest behind NGP in Japan, growing sales in both nicotine-free vapor and heated tobacco with increased distribution of Pulze via 2 nationwide convenience chains. Adjusted operating profit was impacted by the geographic mix and the increased investment in Pulze following its launch in May last year. We grew share in all priority markets across the division, actively shaping the portfolio to meet shifting demand to value formats in brands like West and P&S as well as premium brands like Davidoff. In the U.S., portfolio simplification has enabled us to enhance investment behind our core brands with a lessening drag from the tail. In Australia and Japan, we are responding to rising consumer demand for value offerings through P&S and West. In Russia and Saudi, share performance has been driven by optimizing our sales force activities and increasing line extensions to meet demand in the King and Queen size ranges for Davidoff. Thank you. I'll now hand over to Joerg.

Thanks, Dominic. Results in Europe were affected by lower NGP revenues and associated write-downs, which more than offset growth in tobacco revenues. We have continued to balance our priority market share positions with optimizing financial returns, ensuring that we deliver quality growth in the right markets with the right brands. We achieved share gains in Italy and Spain where growth in blown tobacco is now offsetting the drag from dark formats and have improved sequential share in the U.K. and France. Tobacco volumes decreased by 3%. This largely mirrors the trend across the broader market with some benefit from accelerated buying around COVID-19 and strong sales of private label products in Germany, offsetting declines in the Ukraine. Tobacco revenues grew by 0.5% with positive pricing in several markets, including a carryover of pricing in Germany and the U.K. from last year. This offset the impact of lower global duty free and travel retail sales as a result of virus-related travel restrictions. Overall, divisional net revenue was down 2%, driven by a 56% decline in NGP sales to GBP 30 million, reflecting the destocking of the supply chain and category weakness. Encouragingly, our blu share in several markets, such as the U.K., France and Italy, proved to be relatively stable, reinforcing our view that the blu proposition is competitive. The decline in sales is driven primarily by destocking and some weakness in the category size. We also extended the distribution of our modern oral nicotine products following initial launches in 2019, achieving good growth in Germany and Austria. Operating profit was lower by 6.7%. This reflects lower NGP revenues and the impact of write-downs but also the different half-on-half phasing of A&P in key European markets, including the U.K. and Germany where promotional activity has been much more H1 weighted than it was last year. In the U.K., we launched Lambert & Butler branded fine cut tobacco, which, together with several larger value offerings, has had a great start and is contributing to a sequential share growth versus the second half of 2019. However, share is still down on an MAT basis following the declines last year. In Germany, we are making further investments to reshape our portfolio led by JPS and West with a focus on value formats. In France, our share is also showing sequential growth versus the second half of fiscal year '19, supported by a greater sales team focused on tobacco and increased asset brand distribution. In Spain, we have gained share in blonde cigarettes and fine cut following the successful launch last year of Horizon and good progress in West, Ducados and Fortuna. Italy share gains have been driven by the continued success of JPS. In summary, it's clear that from a purely financial perspective, this has been a 6-month period with obvious challenges. And although we lowered our expectations for the year to reflect the potential impact of COVID-19, we are making progress and continue to focus on strengthening performance. An increase in market share for the group as a whole reflects our back-to-basics approach and a renewed drive for growth in tobacco, which is the bedrock of our business and provides the foundation for long-term growth opportunities. The decisive action we're taking to rightsize our NGP operations and ensure optionality going forward is providing a stronger platform for growth, and we have enhanced that optionality with our recent PMTA filing in the U.S. The sale of Premium Cigars reinforces our focus on simplifying the business and realizing value for shareholders with proceeds accelerating deleverage and strengthening the resilience of our balance sheet. The fact that our business has continued to manufacture, distribute and sell our products, largely unimpeded by coronavirus, it's done through the hard work, flexibility and commitment of all of our people. We're immensely proud of their ongoing efforts. Thank you very much for listening. We would now like to take questions. As we are in different locations, Peter Durman, our Director of IR, will help to facilitate the question-and-answer session. I will hand back to the operator to start the Q&A session.

[Operator Instructions] Your first question comes from the line of Owen Bennett from Jefferies.

Just one question for me and relating to the COVID guidance. So you talk about down-trading and flagged you have little premium exposure. But how do you see the risk of down-trading from value into list, which we have seen before post-2008?

Thanks, Kevin. What I'll do is I'll try and facilitate the questions by passing them out because we're in different locations, just so you're aware. So on that one, I'm going to ask Dominic to give a view on that.

Yes. Owen, we haven't -- interestingly, during the COVID time, we have, if anything, seen a reduction in illicit just because of the fact that so many borders have been closed. So, so far, it hasn't had a major impact. And most of our modeling suggests it's unlikely to have a major impact going forward once the lockdown is less extreme. It is worth saying there that down-trading is occurring. And as far as possible, we're trying to take advantage of that, which is one of the reasons. And our success in doing so is one of the reasons why we've been able to grow share in 7 out of our 10 priority markets as we make sure that we adapt our offerings to consumer demands. And as consumers are focusing more on this area, it's been essential that we have a sufficient offering for them, which is one of the reasons why we've been able to grow.

Next question comes from the line of Gaurav Jain from Barclays.

I have 3 questions. So my first question is on U.S. volume guidance, which you had given at CAGNY of minus 5% to minus 6% for FY '20. Now your 1H volumes are minus 2%, and this had probably some reversal of the inventory build, which had happened at the end of 2019. So how are you looking at your FY '20 U.S. volumes? That's question one. Question 2 is on your NGP losses, which were quite big in the first half. So you are outlining a lot of ways in which you will be controlling those losses, but you still are talking of investing in NGPs, and you have 3 categories: blu, Pulze and oral nicotine pouches. So which of those categories would you be investing in? And third is just on the volume and price/mix dynamics. Your volumes were much better. Price/mix was much first. But COVID hit only in March. So when we look at 2H, should we expect even a worse price/mix?

Thanks, Gaurav. That's -- what I'll do is I'll ask Dominic to answer the first one on the U.S. volume guidance. And I'll ask Oliver to answer the second two, which were on the NGP and the investment side and the losses and also around the volume price/mix dynamics.

Gaurav, thanks for the question. So in terms of the U.S., you're right, we said at CAGNY, we expect the total market to be down something like 5% or 6%. This is still broadly the case. In fact, if anything, we'd probably slightly refine that to say that we'd expect the total market to be down around 5%. And it's essential when talking about the U.S. to be clear that we're very focused on growing market share in that market. We grew market share in FY '19 in the U.S.A. with that collection of brands for the first time in decades. We've grown market share at the half year, and this is something we're continuing to focus on going forward.

Gaurav, so let me start with the NGP question. So obviously, we've got 3 categories that we're focused on: O&D, heated tobacco and EVP. I think it will be fair to say that the focus in terms of investment on O&D hasn't really changed. We have been driven in the heated tobacco and EVP by 2 considerations. The first of which is we are moderating some of our longer-term investment decision-making to focus on things, give shorter-term paybacks, and that is limiting the level of investment in both heated and EVP. We've also reviewed, in particular, in relation to EVP, the returns from different consumer groups. We see a very clear community within EVP of loyal consumers who were continuing to focus and support, but there is a group of less loyal consumers who are more fickle in their consumption patterns where the economics at the moment simply don't make sense for us. So we are curtailing investment, in particular, in EVP around that second group. Just in relation to guidance. I mean you can see from our numbers that in the first half, we incurred a loss of around about GBP 220 million, of which GBP 95 million was write-down, but principally related to decisions that were made in FY '19. The underlying performance, therefore, in the first half was around about GBP 125 million loss. We're driving through both the impact of increasing sales as we come out of a period where we have destocked the trade around a number of products, particularly in EVP, an improvement in sales performance in the second half that will generate additional gross profit for us. We're also, with the investments refocus that I talked about, reducing levels of A&P and overhead. I think you can broadly look to that having around about a sort of GBP 75 million impact on our overall numbers to the benefit in the context of the second half. So if you take GBP 125 million and do the arithmetic from that base, you'll get a sense of what we're expecting in the second half, which I think is slightly different from the numbers you had in your note this morning. Then on the value price margin -- price/mix impacts. I mean we experienced, I think, a pretty good pricing in the first half gross pricing. It was about 6.7%. That was driven by price increases that happened in the last part of last year, which obviously, when rounding against H1 '19, gives us a benefit in H1 '20. We're expecting some price activity in the second half, less market-driven mix issues. Then we have a very strong performance in terms of recovery in our Middle East and North African volumes in the first half. By the time we get to the second half, we're largely rounding a relatively consistent performance. So the impact of market mix is much lower in the second half. Clearly, from what we've said around COVID, one of the risks that we will have in the second half to manage is potential down-trading in the context of product mix. But we're largely assuming levels that were similar to the first half based on an expectation of slightly stronger performance in Backwoods, which we've witnessed and you've seen it from some of the third-party commentary on our MMC volumes in the U.S. market in April.

Sure. Oliver, if I can just ask a follow-up on that reduction in NGP losses. So you are saying that losses will be down GBP 75 million in 2H on an underlying basis.

On an underlying base.

So your 2H losses will be around GBP 50 million, which if I then take at a run rate for next year. So you are essentially saying that NGP losses next year will be about GBP 100 million in FY '21.

No, I think that's probably a step too far to go. I mean we're seeing, over the course of the next 6 months, the performance in that business gets stronger. So I think we'll have to wait and see how it progresses over the 6 months. And it's a little early to start giving guidance around what FY '21 will involve. We'll do that later on in the year. And clearly, we'll have Stefan's direct input at that stage as well around the priorities that he wants to establish. But what we're saying is that, broadly speaking, you're looking at that level of curtailment. We've seen a strong reduction in Q2 of H1. And we expect that trend to continue in Q3 and Q4 with better performance in Q4 than Q3. And if you -- in your modeling, were to, if I was modeling, I would, broadly speaking, assume that, that's the sort of magnitude of what we're expecting in NGP in the second half.

Our next question comes from the line of Michael Lavery, Piper Sandler.

Can you touch on -- when you say that with the dividend reduction, you'll prioritize debt reduction. What, if any, room should we expect for something like buyback? Is that just going to be opportunistic? Is that off the table? Is it just a more modest piece? Just a little bit more context there. And then on the outlook for the second half. How much can you quantify some of how to think about duty free or down-trading? And what, if any, margin impact there is from a transition from a duty free sale to one in a local market?

Thanks, Michael. What I'll do is I'll get, I think, Oliver to answer both those. So the one on the dividend and the one on the outlook around duty free and down-trading.

So I think if I start with the dividend question, I mean, very clearly, we've had a focus on deleverage over a period of time. And notwithstanding the disposal of PCD, which will give us about a 20 basis point improvement in our net debt-to-EBITDA numbers, we have not achieved the level of deleverage over the past couple of years that we would have liked. The Board very clearly believes that our priority should be to address balance sheet risk issues and create the flexibility for the business as we move forward. And that is our priority. And therefore, for the next couple of years, the priority will be debt paydown and not share buybacks. Obviously, as we get to the end of the period that we anticipate, well, it will take to get to those revised ambitions around net debt to EBITDA, i.e., at the lower end of that range. Other options in terms of shareholder returns will be open to us. We clearly will want to continue to invest behind the business and support the strategy that Stefan will develop over that period of time, but we'll revisit shareholder returns when we get to 2022. I think the challenge with share buybacks is that, from a broad perspective, and we've seen a greater level of shareholder sensitivity around balance sheet risk emerge pre-COVID, obviously, it's been exacerbated by COVID, but we certainly saw evidence to pre-COVID. The problem with buybacks is that they don't address that concern. And the Board were clear in their view that we believe that, that should be our priority in the short term. And as regards your second question around the price/mix dynamics, and I'm just -- that was specifically...

Yes. It's around duty free, down-trading and what -- how that plays into outlook for H2.

Yes. I mean, clearly, the challenge here is sizing this in terms of both the length of period during which international travel is disrupted by the current crisis. Now we, in giving the guidance of the higher end of that range or assuming that, actually, we don't see a recovery before the end of September, i.e., the whole of the rest of this year is impacted. Clearly, to the extent that, that actually unwind sooner, actually, the impact of the disruption will be proportionately lower. And in fact, a very quick recovery would be relatively much, much more limited. The other feature that one needs to reflect upon when trying to assess the impact of it is that we don't expect those consumers not to purchase. They just won't purchase through their international travel. They'll buy in their home markets, where, in many cases, the margins just may be higher because, naturally, the incentive to buy on duty free or in travel environments is driven by a value dynamic. For us, the challenge in part is being very clearly able to size the level of that repatriation of purchase. But in overall term, if we look at the more negative scenario of this impacting our business through to the end of September, the overall impact, we would imagine, would be about maybe a little north of a percent. Its impact on price/mix perversely may well be slightly positive because, although it will be a lower volume, the net revenue at which it sold is probability likely to be slightly higher.

Your next question comes from the line of Nico Von Stackelberg from Liberum.

Just a quick question on Germany. It seems like there was some investment going to that market. You guys commented on that. And yet the performance wasn't quite up to expectations. And I was just wondering why was that. And is there any comment? Or is it just too early to really tell? And on a related question, it sounds like there was some investment going into the U.K. year-over-year, and that's a bit confusing to me because I thought this was more of a market that's being run for cash, broadly speaking. We've seen the share declines and the pricing be supportive that suggests it's being run for cash, and so why frequent there? I have a quick question on cash flow for the full year, please. Last year, the free cash flow was GBP 2.4 billion. There are a few one-offs that have been called out before, which takes this number to around GBP 2.1 billion on a steady state. Is this sort of level of GBP 2.1 billion of free cash flow achievable for FY '20? And then, I guess, 2 smaller questions, but we can -- maybe I'll go back in the queue.

Okay. Thanks, Nico. What I'll do is I'll ask Joerg to answer the first 2 of those on Germany and the U.K., and I'll ask Oliver to deal with the one on cash flow.

Okay. Nico, yes, Germany had a number of years of very strong financial performance. And it's true that we had stronger expectations going into the year from a share performance as well. You may recall that we had said we want to launch Davidoff and exploit it, and that, unfortunately, hasn't turned out to be a success. We then saw a continued pressure on JPS, which we're now rectifying with some portfolio choices, and they're launching at this stage. So we're expecting actually JPS to stabilize and regrow. And finally, you may know that Germany is a very strong footprint of ours for FCT. And we have refocused our sales force on FCT, and that has also started to stabilize, and most recently, actually delivered a quarter-on-quarter share growth in Q2 versus Q1 in Germany. So we believe that, actually, those choices are starting to pay dividends. And in the U.K., it hasn't been a cash cow market in the sense that we've been growing share in the U.K. since 2017 continuously. We did, though, take unilateral pricing in the spring of 2019 and took a share hit. That is now reversing, and we're seeing, again, sequential share growth. H1 was above H2 2019. Now we're lapping a lower base. The key driver for that were actually a couple of launches on the FCT side, which are up to a great start. I'll leave it there. So actually, quite decent performance, especially sequentially in both markets.

So I guess just a quick question, as a follow-up on the U.K. This is a market that you should expect profit growth out of [indiscernible] and it warrants the investment, broadly speaking?

Yes, exactly. And we've been growing top and bottom line also in H1 versus a year ago in the U.K. You're absolutely right. So this is profitable growth.

In relation to your cash flow question, Nico, yes, GBP 2.1 billion free cash flow is perfectly achievable in the context of the current year outturn. But what I wanted to do is maybe just reflect on some of the things that are happening. The certainty of which is, at this point of time, probably subject to slightly greater forecast than risk. So we clearly, in the first half and we will continue in the second half, make great strides in terms of the underlying levels of working capital that we're utilizing through more effective inventory management, credit control management and making sure that we are in line with our accounts payable-related policies and dealing with our supplier base. But there's no doubt that COVID has had an impact in terms of working capital deployment. So in order to secure supply, for example, we've acquired more nontobacco material stocks in our factories, so that in the event of disruption in our supply chain, we are capable of expanding through those buffer stocks, greater periods of interruption to our supplier manufacturing capabilities. We've also, in a number of markets, actually increased the level of finished good stock in case we have disruptions in terms of our ability to supply into market. So in general, our inventories have risen. Obviously, the degree to which COVID unwinds and speed of which the lockdowns release will influence the degree to which we hold on to those additional buffer stocks and the extent to which they unwind moving forward. But there is clearly opportunity for us in the context of a greater level of unwind if the lockdown finishes earlier. The second thing I would say is that we are also influenced in terms of our working capital by government policy on excise duty, and there are 2 elements to this. So as that kind of duties rise, we usually collect from our customers before we pay to customers an excise. So as rising duties usually have a positive impact on our overall working capital position, whereas if governments choose to recover that duty earlier, then that has a negative impact on working capital. Depending on how those 2 factors play out through the rest of the year and where the governments use that to impact their overall excise duty receipts, we could see a different impact on our working capital, which clearly is beyond our control, which could range to the other -- the positive or to the slightly negative in the context of the latter point I was making around, just collecting earlier. What we're doing in terms of CapEx, we clearly haven't been able to spend as much CapEx through the lockdown as we would ordinarily have spent. We deferred some of that. And I think that will cause a reduced CapEx outflow over the course of the year. And obviously, we are not intending to spend any significant money in any form of investment activity between now and the year-end. So I think the GBP 2.1 billion from my perspective at the moment, subject to those cautions around COVID, looks at a pretty probable outturn.

Your next question comes from the line of Alicia Forry from Investec.

Dominic, Joerg and Oliver, 3 questions, please, if I may. First, I'd like to hear more about trends in the nonpriority emerging markets, which we didn't hear too much about, but just if you could discuss briefly what's been happening over the last 6 months and how they've traded through the crisis so far. Secondly, I wanted to build on Michael's question about duty free. I think you were saying that duty free as a whole is possibly lower margin than the group average. Can you confirm whether it's more profitable or less profitable in its entirety vis-à-vis the group? And then finally, the changes to the dividend and debt policy. Was the new CEO consulted about this? Or did the Board take the step independently?

Okay. Thanks very much, Alicia. What I'll do is I'll ask Oliver -- sorry, I'll ask Dominic to deal with the question on the nonpriority emerging market performances, and then I'll ask Oliver to cover off the one on the duty free profitability and the dividend and the new CEO.

Yes. So in terms of nonpriority emerging markets, I guess the most important ones to focus on probably in Africa. And overall, as usual for our African business, particularly our Sub-Saharan African business, we've seen the performance to be very, very resilient and very strong, both in trading and in market share terms. There's one slight watch out here, which is in certain markets, as we've seen greater degrees of lockdown during the coronavirus. In very recent times, we've seen an impact on market size, particularly given that's combined with Ramadan as well. So I think that's something to watch out for in some of these African markets. But so far this year, our performance has been very satisfactory.

So on the duty free margins, on average, our duty free margins are slightly better than the average for the business as a whole. I just want to spend -- just go in a bit of detail around the earlier comments. So our travel business is obviously comprised of 2 components. One of which is duty free, which is the shops we see in airports, on planes, ferries, where people are traveling and they're outside the excise duty environment. The other element is travel retail where people are crossing border to buy duty pay products in an environment where there's actually a price advantage to that trade. The -- both categories are impacted by repatriation, which is to the extent that, that opportunity isn't available, the consumer may purchase and does, to some degree, purchase within the country from which they are traveling. And the impact of the loss of duty free, therefore, needs to be in margin terms, considered in the context of the fact that, that consumer will then buy in a market where, in all probability, the margin for us is higher than the margin in the market where they would be purchasing or the environment where they would be purchasing, whether that's through the airport or whether that's from that home market. My expectation is that on the more positive, the repatriation could largely compensate for the impacts of the travel restrictions. On the more negative, we could see a dilution from a gross profit perspective. But I think the margin is in all probability to be there or thereabout, probably slightly higher than we would expect if they were purchasing whilst they were traveling. As regards to the Stefan question, we have been keeping Stefan informed and in dialogue with them through the discussions that we've been having as a Board. It's worthwhile noting, Stefan is not yet on the Board. He is still a full time Chief Executive at Inchcape, and that's where his responsibilities currently sit. But we have been aligning with him in relation to any of the material decisions that we've been making to ensure he's comfortable.

Your next question comes from the line of Jon Leinster.

Yes. Actually, I've got a few questions, please. First of all, just to follow up on an earlier one. Given the down-trading and the focus on improving market shares, this seems a bit congruous that you'll be taking some notable price increases in the second half. And do you think, just to be clear, that overall price/mix on the tobacco side will be negative -- or flat or negative in the second half? That's the first question. Second question, although, clearly, you've stated your net sales of NGP in terms of, clearly, okay, there's been destocking and so on. What do you think the broad trend in terms of your consumer sales for NGP is likely to be in the first half because, clearly, it will be somewhat different given the destocking levels? And lastly, given that you've got to focus on costs and the sort of cost-reduction program, the restructuring program previously announced pretty much comes to an end in 2020, should we expect further announcements with regards to cost reductions and restructurings?

Thanks, Jon. I think what I'll do is I'll ask Oliver to deal with the first one around the sort of the downtrading and the sort of outlook around Tobacco price/mix piece that was there. What I'll do, I think, is I'll ask Dominic and Joerg to talk a little bit about the consumer trends across their respective markets to give you some flavor on that one. And then on the final one, on the cost program, I'll ask Oliver to deal with that. So perhaps to start off with, I'll ask Dominic and Joerg to deal with the consumer trends one first.

Yes. Sure. So I mean, it's probably worth talking about the U.S.A. to start with since it's the most important market for vapor. We've -- in absolute terms, we've lost share on blu in the U.S. in the first half. However, the kind of broad numbers are slightly more complex, so it's probably worth picking them apart slightly. So blu in absolute terms have declined in share. What's interesting is that myblu has had slight growth in share year-on-year. So half year versus half year, it's grown by 54 basis points. But overall, we've declined due to the legacy SKUs, which were in long-term terminal decline. This is interesting. In spite of the fact that we've significantly reduced investment and we've taken a very strict approach both in the U.S.A. and the AAA division and in Europe, that we're only going to invest behind areas in NGP where we get a quick and satisfactory payback. That's meant that we've diverted or cut large amounts of A&P to put it in the areas where we believe we get the best return. One of the areas in the U.S.A. where we've done that, which has worked quite successfully, has been in making sure that we really focused on our online sales. Interestingly, the online sales of myblu are not reflected in any of the IRI or Nielsen data, which you'll pick up because this is store data. But I can tell you that in the first half, our online sales of myblu increased by 58% versus last year and now represents about 25% of our total sales. Joerg?

Thank you, Dominic. And when it comes to Europe, let me cover both vape and oral nicotine, but starting with vape as a priority category. First of all, the category globally had been impacted by the negative news coming out of the U.S. last summer, and that had an impact on the European category growth, which was very strong up until then. That category took a dip up until, I would say, the November, December month. And that had an impact on our sellout rate. The positive news is that our leadership market shares that we have built over the last 18 months were actually, by and large, intact in places like Spain, Italy and also in Germany where we're closely fighting for market leadership. So we have 50% share in Italy, and that hasn't changed much; in Spain, about 50%. So that was actually helping us. And the second thing we saw was that when the category came down, loyalty went up. So we have now, I think, more loyal consumers that are continuing to buy our [ products ] and helping our share performance. Overall, actually, probably slightly better than anticipated given the investment retrenching we've done. On O&D, it's quite a positive story because the category is in strong growth in Austria and in Germany and in the Nordic countries, which are the priority markets, and we are performing very well. We're market leaders in Austria since we launched there the test market, and we have 20-plus share in Germany. So quite a healthy performance and quite profitable.

Jon, so I think your third question was around the trend in price/mix. And we are expecting pricing in the second half of this year. In fact, if we look at the first half, the gross pricing benefit was substantially driven by pricing that happened in the second half of last year, and we're expecting that to occur or repeat itself in H2. So we're expecting some underlying price momentum, and that will more than compensate for any price/mix pressures based on our current forecast. So we're expecting that to provide a contribution to our net revenue trajectory. As regards to the cost of restructuring, I mean, I think, first point probably to make is that some of the activities that we would have looked to have undertaken in FY '20 have probably been delayed slightly by the current crisis. And therefore, at least in terms of cash cost, a number of the initiatives that we had advanced would have probably now spill over into FY '21. As regards any additional restructuring programs beyond our COPII initiative, we currently don't have any plans for anything, but obviously, we will be reviewing with Stefan's strategy focus. And really, it's a bit too early to comment on whether as a consequence of that, because we haven't had those discussions yet, there might be anything forthcoming.

Okay. Sorry, just to be clear. Oliver, you're indicating that price/mix probably will -- is going to be positive in the second half of this year.

I'm not indicating. I'm saying it is likely to be positive. We expect it to be positive. We do not expect negative price/mix. We don't expect impact of the downtrading to offset materially the gross price benefit that we'll have in the second half.

Your next question comes from the line of Adam Spielman from Citi.

I want to make sure that I have understood really what you've been saying, Oliver. In terms of the investment priorities. And so if I think back, it was a pretty clear set of investment priorities. You had the returns markets where you weren't particularly investing and the growth markets where you were hoping to gain market share and NGPs. And following, let's say, mix results, the best of that, it seems to me, and I just want to make sure I've got this crystal clear, that your focus now on investment is priority in the top 10 tobacco markets with a SKU, if anything, to lower-end products in tobacco. And then in NGPs, basically, you're very focused on short-term sort of benefits from whatever you do with a slight sort of emphasis on what's happening in heated tobacco in Japan and also the sort of nicotine -- oral nicotine products in Germany and Austria. I mean, is that -- and that has been sort of, to some degree, aligned with Stefan. Is that a fair summary of what I've heard? Or have I sort of picked things up wrongly somehow?

I think we might need to recalibrate it to some degree, Adam. So I mean, actually in Tob Max, we've not materially changed our strategy. So our strategy has been to focus on our priority markets and our priority brands. And those -- we have 10 markets which we've always been clear on represent the majority of our profitability, and inevitably, therefore, they draw the majority of the investment. We have a number of brands who tend to outperform the market average and our average and we focus on those brands. What we've clearly done, and I think Dominic referred to this earlier on, is that we've had, over the last couple of years, a significant focus on our NGP business with sales forces, elements of our marketing teams being focused on the opportunity in EVP. We're -- to some degree, we're refocusing that capability on our Tobacco business to drive further and better performance out of that business. As regards -- and otherwise, not a lot has changed other than the operational and tactical decisions that we're making on a day-to-day basis around the types of initiatives that we're progressing. In terms of NGP, we had a focus with, I think, what was raised in the context of wanting sort of lead in the context of EVP to be a fast follower in the other 2 categories. As far as O&D is concerned, our investment hypothesis hasn't changed. That's a business which is progressing well for us, and the category is performing strongly. In the context of heated, the investment profile is clearly a much longer-term profile, and we are applying some degree of moderation to that investment. Until we had the chance to talk through with Stefan and he's had a chance to get into the business and understand performance and assess his own priorities rather better, we're moderating the level of investments in heated tobacco. And exactly the same but to a slightly greater degree is the case with our EVP business. EVP consumers also include a group that we have, over time, been recruiting whose loyalty has been relatively poor. And we're deprioritizing focus on essentially recruiting those consumers onto the franchise in short term in favor of a group whose performance contribution is much stronger as regards to our results. So the combination of those things mean that we're pulling back investment and aggregates in the current year. And in answer to Gaurav's question earlier on, I sort of gave you a sense of the scale of that in terms of second half performance. As regards Stefan, Stefan has yet to arrive, yet to develop his strategy. We are continuing with a recalibrated version of our focus in the past, preparing the ground. We don't want to lose our position materially in any of the environments that we're in until we've had the ability to discuss with Stefan and he's outlined his focus and strategy, from which we will then move forward in the months and the year to come.

And sorry, I'll just -- maybe I'll just add a point to that about -- you asked about the sort of brand portfolio and the focus on tobacco at the value end. I think it's important to realize, actually one of the strongest performing brands this year was actually Davidoff, and we've done quite a lot of work on the Davidoff brand. And so a lot of our market share growth has been from Davidoff, so not just the other. But clearly, given particularly what we said about downtrading and so on, we are also opportunistically looking at how we can position our portfolio just for the current circumstances. So that is, at the moment, looking also more on the value end.

Okay. And if I can ask a second one. You've obviously given guidance about what you think the impact will be for the corona crisis and the recession that we're all sort of expecting. And if you had to guess where the sort of balance of risk lies, do you think it's sort of equally skewed to the downside and to the upside of that low single-digit impact? Or do you think there's sort of -- I mean, clearly, that's what you think is most likely to happen. But would you say the chances of it -- of you are doing better than that is greater or less than you're doing worse than that? I mean there's clearly quite a lot of forecast risk here.

Look, I think it will be fair to say, Adam, that inevitably, there's forecast risk. I mean what we've not assumed is a second peak. We've not assumed a whole series of government intervention that are driven by a second peak in a large number of markets. And therefore, there is that risk that we could experience a second peak. We could see some individual initiatives that could have an effect, although we've looked at the number of those and we consider them to be quite remote. We've tried, in terms of the bottom end of that range, to be pretty conservative in our judgments. I mean actually assuming, for example, that the travel environment remains shut until the end of September, well, more recent noise over, I guess, the last few days has suggested we might see a little more tolerance towards modest levels of travel taking place. But it is difficult to be confident around how governments are going to react to the crisis at this point of time. And from our perspective, we felt it was important to range what we see. We believe we can range what we see. We believe we can do that on the basis of what most people would regard as a sensible set of assumptions. And you can see that the impact is within a manageable and tolerable range. Many of the issues that we're talking about, we wouldn't expect to have permanency in terms of the medium-term prognosis for the business.

Your next question comes from line of Sanath Sudarsan from Morgan Stanley.

I hope you're all well. I just wanted to pick up from Adam in terms of your NGP strategy. From what I understand, a lot of your new strategy seems to be revolving around limiting investments and priority in certain markets where you can generate faster cash flow. Could you perhaps give us more sense about how that also changed your approach towards product development, branding and approach towards certain categories within that? And also, while we're at it, can you also please give more color on your approach to tobacco that you said you're going back-to-basic approach to tobacco. What does that reflect in terms of operational performance in terms of numbers? If you could give us some color, that would be great. My second question is in terms of your path to accelerating deleverage. Operationally, it still seems that you're about 2 years away from getting to the lower end of your 2 to 2.5x of net debt to EBITDA, but of course, more volatility now in the market. Do you have any thoughts about more strategic asset sales that you might be willing to do to accelerate this deleveraging process?

Thanks very much, Sanath. What I think I'll do is I'll ask Dominic to comment on the NGP aspect to that, the sort of strategy around the approach there, and also to perhaps comment on the back-to-basics approach to tobacco. Although perhaps, Joerg, you might want to also just add in about your -- and in your markets, what you're seeing around the back-to-basics approach towards tobacco. And then on the final one on deleverage, et cetera, I'll ask Oliver to respond.

Yes. Thank you. So on NGP strategy, it's worth saying we're not adopting a new strategy on NGP, but what we are doing is refining an existing strategy. And this means we need to be particularly conscious. And since Joerg and I took over in February, we have been particularly conscious that we gain a better return on investment for the money that we put into NGP than perhaps we have done previously. This has meant that we've been very conscious about where we put our investment, making sure we get an acceptable return on that and making sure that return comes through reasonably quickly. That's in terms of our in-market activities and how we execute NGP in markets. Having said that, as you rightly pointed out, there are some activities which take much longer and which is still essential to carry on with around long-term brand building, around product development and around innovation. We've taken a look at all of those activities, and where we think they're important and where we believe they can give us a good return in future, we've continued with those. So we're still having significant [ focus ] innovating our product portfolio, which we believe is essential given the nature of this category. So that's continuing. In terms of the back-to-basics approach on tobacco, really, this is very simple. It's about making sure that we give the consumer what the consumer wants in the way that the consumer wants it. It's about making sure that we occupy the price points where the consumer is moving. It's about making sure that we have very coherent brand identities, and it's also about making sure that we're fully distributed in the places where the consumer wants to buy. And this is doubly important in the coronavirus situation at the moment. This has resulted in, I think, a better overall tobacco strategy but also a better in-market execution as well. And the outcome of this is that we've managed to grow in 7 out of our 10 priority markets at the half year, which is something which I think we've never done before. So it does appear to be bearing fruit.

Yes. And I want to echo what Dominic has said. I think the same applies to Europe. We essentially wanted to participate actively where the consumer is going, and that meant in a number of markets, an increased focus on FCT from a portfolio point of view. So we launched brands: Horizon in Spain; we invested in France but also in the U.K. with the Lambert & Butler launch in FCT. We rectified price points and hit those more consistently in places like France again. And also the in-market execution was focusing more on tobacco, frankly, away from a focus that was more skewed towards vape in the last year. And that also paid us dividends. And as a result of that, we've now grown, I think for the first time ever or in a long time, total market share in Spain, even despite the drag on the dark side. We started to grow again share in France sequentially. Q2 share in Germany was ahead of Q1. And in the U.K., I already mentioned that we're also growing sequential share on top of the performance we had in Italy already for a while. So overall, all those -- in the end, the simple moves are helping to drive performance.

So on the deleverage trajectory, I mean, we've obviously -- we've talked earlier on in the conversation about the level of free cash flow that we believe we can generate. And in fact, the 12-month to the half year, we generated broadly around GBP 2.4 billion, GBP 2.5 billion cash flow. We invested, including the share buyback, around GBP 450 million in that 12-month period. Now based on where we are today, the fact that Stefan will need some time to review his strategy and establish his focus, we certainly don't envisage in the shorter to medium term that we'll be repeating that level of investment in the context of M&A and share buyback activity. And we're also reducing dividends by GBP 650 million on an annualized basis, and we've got the benefit of roughly GBP 1 billion of cash inflow from the sale of PCD. So from my perspective, I think we would expect to see potentially over a 2-year period GBP 500 million, GBP 600 million reduction in the level of investment outflow against the trend we've seen over the last 12 months, around GBP 650 million a year of improved -- of reduced dividend outflow. Obviously, we've got the benefit of increased operational cash inflow, and we've got the benefit of the PCD disposal and the GBP 1 billion was in flowing. I think it is -- I would expect that deleverage, assuming that we don't get any further interruptions to our cash flow enforced exogenously, to largely enable us to reach that objective over the 2-year period, and hence, the statement that we've made in the RNS. I'm not anticipating that we would need to engage in any form of realization activity in order to drive that trajectory.

Your next question comes from the line of Patrick Folan from Redburn.

Just 2 questions for me. First, you mentioned downtrading in the U.S. Can you provide some color on the deep discount segment? And how has that evolved over the last few months? And any color on how the Sonoma brand has performed relative to this segment? And then on the upcoming menthol ban, which kicks in tomorrow, are you doing a buyback scheme for any of the menthol cigarettes found then? And if so, what impact does this have on margins?

Okay. Thanks very much, Patrick. What I'll do is I'll ask Dominic to talk about the downtrading dynamics in the U.S. and the performance of the Sonoma brand within that. And then I'll ask Joerg to talk about menthol ban in Europe. Over to you, Dominic.

Yes. Thanks for that. So there does continue to be downtrading in the U.S., which has continued during this coronavirus period. But I wouldn't say that it's changed or dramatically exacerbated the overall trend which was present before. Sonoma has performed particularly well. It's up 20% and it's growing share within the segment, and of course, within a growing segment which has been one of the contributors to our share growth in absolute terms at the half year in the U.S. It's also worth saying, though, that a number of our brands, including those at higher-priced segments such as Kool, even though some of them are declining share in absolute terms within that price segment, they're growing. So the action and the decisive work we've taken on our brand propositions on our distribution has meant that overall, our U.S. portfolio is in pretty good shape as well as achieving a cigarette price/mix of 5%. So we're quite satisfied with our U.S. performance.

Thanks, Dominic. And as far as menthol is concerned, it's a relatively small part of our business in Europe. It's about 3% to 4% of our volumes. We don't really expect the ban to have a significant impact as we believe the majority of consumers are likely to stay in tobacco and with their current brand. To that degree, we have launched a number of variants in our major brands to help their transition from menthol to a future. And beyond that, obviously, we have a keen interest of transitioning consumers also to potentially risk-reduced products. And blu is available in menthol flavors, as much as we have launched, especially in the U.K., also our Rizla flavor cards so consumers can adjust their experience using those high-quality products. And net-net, we don't expect a significant impact.

Your next question comes from the line of Nico Von Stackelberg from Liberum.

There was a comment before about, I guess, it was NGP optionality, and that made me think about you're potentially thinking about selling some or all the NGP. And I don't think that's necessarily the case because there was another comment there at the end that you don't feel the need to sell assets to sort of reach the target. And I guess the question is, taking a step back, you were able to offload the Premium Cigar business at a reasonable multiple, certainly higher than the group's multiple. And is there a scope for Imperial to revisit the overall divestment program? Or is this kind of getting ahead of any ideas that Stefan may have?

Thanks, Nico. I'll ask Oliver to address those.

Yes. I mean, I think, look, we need to sit down with Stefan and talk about where his focus and priorities are after he's had a chance to get a better understanding of the business as a whole. What we can say at the moment is that in the short term, we have no intention of any further divestitures. Clearly, when we've agreed that focus and we've had the broader capital allocation discussions, we'll update you at that point of time. But it's not appropriate really at this stage to update. We can't because are still in the process of transition and will be for a while in terms of onboarding Stefan, determining the strategy and then considering the consequences of that in capital allocation terms. What I think I can say is that the program that we talked about in May of 2018 with the disposal of PCD has essentially been brought to an end now. Our gross proceeds were about GBP 1.5 billion as compared to up to GBP 2 billion, which is the statement we made at that time.

Your next question comes from the line of Alicia Forry from Investec.

Just a quick follow-up here. You talked about Stefan being in a transition process for a while. Is there anything you can say about the expected timetable for him to present his new strategy and vision? I think perhaps the market had been assuming this might come at the full year results presentation in November, but that seems perhaps a bit early based on your comments. But equally, waiting until this time next year seems too long. So is there a plan for a sort of Capital Markets Day or some events whereby he can communicate his new vision to all of us?

I'll ask Dominic to respond on one there. Thanks, Alicia.

I think it's premature to speculate on when Stefan might choose to do that. So bear in mind, Stefan is still an active CEO of Inchcape. We're looking forward to welcoming him to the business on the 1st of July. But like any incoming CEO, Stefan is going to need a bit of time to decide what his strategic priorities are and how he wants to run the business. So I think it will be up Stefan to update you on the timing around that after he's joined at some point.

There are no further questions at this time. Please continue.

Great. Well, it just leaves me to thank you all for joining the call today, and thank you for your questions. And obviously, the IR team will be around during the rest of the day if you have anything further. Thanks very much. Goodbye.

That does conclude our conference today. Thank you all for participating. You may all disconnect.