Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our presentation. Thank you for joining my first results presentation as Imperial's CEO. I'm sorry, we cannot meet in person today, but I very much look forward to doing so in the future. I'm joined today by Oliver Tant, our Chief Financial Officer; and Peter Durman, our Investor Relations Director. And before we get started, I suspect some of you might be asking why I took the role and what I think I can bring to Imperial. I've spent the majority of my career in consumer goods. I started in Procter & Gamble, and I've had a range of senior sales and marketing and general management roles across a diverse range of consumer-facing businesses: Burger King, Unilever, Cadbury and Bacardi. So I believe I bring many years of sales and marketing experience. And as Imperial's first external CEO, I bring a fresh perspective to test and challenge the business, and I'm determined that we'll deliver our full potential for all our stakeholders. I'm also someone who's passionate about delivery. I firmly believe a commitment is a commitment, and I've always been focused on making sure we do our best to deliver against our promises. So that's a bit about background about me and my approach. Now why did I that take the job in Imperial? There were a number of attractions. Firstly, Imperial is a good business with some good assets and people. The problem is it has been underperforming for several years, and having the opportunity to turn that around is very appealing to me. I've also always enjoyed being in business and sectors that are going through change, and that is certainly the case for Imperial and tobacco. My role as CEO at Inchcape allowed me to lead the business through the evolving automotive industry and to reshape the organization to play to its strengths. My time at Bacardi brings experience of working in the highly regulated spirits industry, where you have to navigate the challenge of marketing products in dark markets as well. I also enjoy being in businesses which are not the market leaders and when there is a real opportunity to move the business forward, companies where you often need to work harder and smarter to identify the competitive point of difference and what gives you the right to win. For example, Burger King was a distant #2 to McDonald's. And Bacardi, like Imperial, was the global #4 in its industry. So Imperial has many attractive qualities for me. And from day 1, I've been focused on addressing the issues that need to be resolved in order to enable us to deliver a stronger and more consistent performance over time. Today, I will give you my initial observations on the business and outline my time line for our strategic review. But I want to be clear, while this review is advancing well, this is still work in progress. And our plans, the building blocks to create a stronger business, are still being finalized. However, I've already identified a number of areas for improvement and changes underway. I will detail some of these areas to you this morning. I will also provide some context for this set of results, including an assessment of the impact of COVID-19 and how is it influencing consumer behavior. I will then touch on our progress in managing our ESG responsibilities before handing over to Oliver, who will take you through the results themselves. I will then share our outlook and priorities for 2021. We'll then conclude as usual with your questions. So let me start with my priorities over my first 4 months. My first priority has been to visit our markets to learn about the business. Because of the coronavirus, most of these had to be virtual, but I did manage to physically visit all of our most important European markets. Over the past few months, I've met with all 12 of our cluster teams and all of our major functions, hosting around 300 virtual or physical meetings. Wherever I've had meetings, I've held online employee town halls, which enabled me to reach thousands of employees around the world to hear their views, their challenges and answer their questions. I also made a point of meeting a range of our stakeholders, consumers, retail partners, competitors and shareholders in order to build a clear view of the business and how are we perceived. I've also been focused on gathering and understanding as much data as I can, a lot of it. It is important we base our decisions on real data and insight. In order to begin addressing the performance and execution issues, I've already implemented monthly business reviews with the divisions and our top 5 markets to embed a much more rigorous approach to tracking performance. I'm already instilling a greater sense of discipline in the way we monitor progress and deliver against our commitments. One of the areas colleagues have raised with me is accountability for delivery. This is one of the key elements I'm now looking to improve as part of the change in the culture at Imperial and a theme I will come back to you shortly. I recognize that some areas like culture take time to change. But I'm already seeking to deliver better outcomes by placing a greater emphasis on performance management and revising incentive structures. One of my biggest focus areas has been leading the complete strategic review of the business with the support of my colleagues. This will continue to be our key focus over the coming months. And as you may have seen in our trading update last month, I've been working to strengthen my executive team with a number of new senior leaders joining from outside the industry. I believe it is critically important for us to introduce new ways of thinking, particularly given our industry is undergoing such change. We have plenty of tobacco expertise in the organization, which is important, but we're now adding to that by bringing in new skills, capabilities and experience developed in other consumer goods businesses. For example, Javier Huerta, will bring more than 20 years of experience at Nestlé and Unilever at reconfiguring supply chains to adapt to changing consumer needs and developing new supply chains for new product segments, important for addressing our NGP strategy. I worked with Alison at Inchcape. So I've seen firsthand how she can help drive the necessary organization and cultural change to support our strategic objectives. Murray McGowan is the first Head of Strategy at Imperial with a strategy consultancy background, having worked at McKinsey, but as well as with extensive FMCG experience. In a similar vein, Therese has taken steps to strengthen our Board, recently appointing 2 new NEDs who both bring a wealth of international business experience. So although I'm not yet in a position to fully share all of my thoughts with you today, I would like to take a moment to provide you with some initial observations about the business. I should say at the outset that I recognize the disappointment around performance and valuation. We will address this over time, and my first 4 months have reinforced my view about the future value creation potential of Imperial. For example, tobacco is proving its resilience in these uncertain times, and while there will always be some regulatory uncertainty, I'm confident the tobacco pricing model is intact and can support increasing returns going forward. We have a solid business with good brands, high margins and strong operating cash flow, all of which underpin the opportunity to deliver a stronger and more consistent performance over time. I recognize that there's a debate as to whether these brands are underinvested, but it is also important to recognize that marketing spend in the tobacco sector is relatively low percentage of revenue compared to other consumer sectors. So adjustments to spend are unlikely to be significant over time in the context of our high margins. We have exposure to some highly attractive markets such as the U.S. and Germany. Both are large profit pools, where consumer affordability is good, which supports future pricing opportunities. I believe that our manufacturing supply chain operations provide us with a real core strength in the tobacco business. The team has delivered consistently and coped admirably, for example, with the challenges of the coronavirus, with the vast majority of our factories operating throughout with minimum disruption. I also believe they run relatively efficiently despite the complexity of the business. Our approach to customer engagement is also a real strength. I've spoken personally to many of our customers at length, which has provided real insight. In talking to customers, they really value the insight around the product and support that Imperial brings on areas such as regulation, helping to build solid retail and wholesaler relationships. I believe this strength is critical in tobacco given the role that retailers play in influencing consumer brand and product choices, particularly in dark markets. With Imperial typically being the #2 or #3 player in a country, I found customers like to partner with us to provide good competitive tension on shelf. I think we can build on these strengths going forward. In the U.S., for example, our sales force coverage varies significantly by state. So there's an opportunity to allocate resources more effectively. While in Germany, our sales team need to be better aligned to the fastest-growing channels and outlets. One of our big German retail customers also commented to me that he has not met with a senior Imperial leader in many years. I'm determined to make sure we stay close to all our customers. This is my DNA, and it's critical to build a strong and competitive business. I've also been impressed with the commitment and passion of our employees across the business and also the warm welcome I've received. Our people have done a great job in embracing new ways of working in these uncertain times. For example, our sales force adapted their approach to meet and serve customers. And when I was out with our sales force in Madrid, they described to me how we were the fastest to adapt our outlet coverage to the changes caused by COVID. In general, I've found good people on the ground, who we need to empower and give greater accountability. I would also like to be candid in talking about some of the issues I think we have to address. In tobacco, the market share performance has been mixed over the last 5 years. We've often grown share in markets that make a relatively small financial contribution like Russia or Saudi Arabia while losing share in some of our larger contributors such as Germany and U.K. We need to deliver a more consistent result, particularly in the markets that drive our overall financial delivery. This is such a priority. I've already changed the way market share is incentivized in our bonus structure to improve alignment with this objective. It's important to recognize that we operate in competitive markets, and it will take time to change the share performance, but there is scope to improve our consumer insight to better inform our marketing programs and deliver stronger results. As part of improving performance management in our major markets, we're now reviewing the marketing initiatives in detail against their KPIs every quarter. With NGP, we're starting with consumer preferences, where it's clear that many adult smokers are choosing reduced risk alternatives to combustible tobaccos. As a consumer goods company, we have an opportunity to meet that consumer demand, and therefore, NGP needs to be part of our offer to consumers where we can make a meaningful contribution to harm reduction. However, it has been challenging with uncertain regulatory backdrop, low barriers to entry and the highly competitive environment. While these factors have played a part, our NGP business has underperformed, and our investment decisions have not delivered the anticipated returns. We've already taken steps to address this by cutting investments to reduce their losses while we assess our assets and capabilities. The NGP team and the markets have raised areas with me where we can improve our execution, for example, by ensuring we develop products that are sufficiently differentiated and thoroughly tested before we scale them up widely. But we'll also continue to be more disciplined with our investments in this context. The real positive here, in my view, is that no company has found the NGP solution that truly meets the needs of adult smokers across the world. So there's more to play for, and with a more prudent and disciplined business model, I'm confident we can build a stronger NGP business that provides returns to our shareholders. As I mentioned earlier, there's a need to manage performance more closely. I've already begun to make change to deliver this through detailed monthly business reviews. This will enable us to be more agile and responsive to changing circumstance and to course-correct when investments are not delivering. This must be supported by a more rigorous analysis so that decisions can be informed by consumer insight. I found that we have plenty of detailed brand-level market share data that's often not being meaningfully used to drive decision-making and planning. All of this needs to be supported with the right culture, with a greater sense of accountability and better ownership of results, all supported with collaborative team working. We should be more outward-looking, embracing new thinking and learning from others. We must also embed greater discipline around returns that reflect the inherent risk of different business areas. It was often the case that tobacco investments had to pay back within a relatively short period of time even though their risk profile was well understood and low. However, NGP investments did not face the same returns requirements despite the greater uncertainty. We need to implement a more disciplined return-focused framework. I'm also encouraging everyone to have the confidence to be more transparent and to challenge accepted wisdom while being much more open in their assessment of performance. I'm determined that our communication should also be balanced and open. We've already taken steps to improve these -- in these results, and we'll strive to do better. In summary, there's so much things that we can achieve, and I see Imperial as having great potential. With clearer focus, better execution, we will, over time, be able to create long-term shareholder value. I will be able to share much more of my thinking after concluding our strategic review. As you might expect, I'm looking at all aspects of the business to explore options to create value. I'm approaching this with an open mind, recognizing the current strategy and business model have not been delivering. We need to put the consumer at the center of our thinking and planning, recognizing their freedom of choice. In tobacco, we're looking at what gives us competitive advantage across our footprint of markets, how our brands are perceived by customers and consumers and what gives us the right to win in the market. I'm looking at the role that NGP can play in terms of providing consumers with reduced risk alternatives to combustible tobacco. I want Imperial to be able to play a meaningful role in harm reduction, which means having a successful NGP business, one that is more focused and better managed. On organization and capabilities, as I've said, we're exploring how we strengthen the team and build our capabilities in certain areas and making sure we have the right organization structure to deliver the strategy. Alongside the strategy, we'll need to ensure our capital allocation supports the strategic delivery with the right mix of funding sources, the right investment levels and the appropriate returns to shareholders. We'll come out of this process with a clear strategy and priorities that will define what Imperial needs to do in the next couple of years and how we are facing up to the challenges and capitalize on the opportunities ahead. We will provide you with an update of the review on the 27th of January in more detail. I know lots of you have lots of questions on these future plans, but you will understand today I will be limited to what I can talk with you about. So now let me provide you with my perspective on this year's results. This has been a challenging year, and I recognize these results have fallen short of original expectations. Encouragingly, consumer demand for tobacco has proved resilient, and we grew net revenue while the business adapted well to a rapidly changing environment caused by the global pandemic. COVID-19 continues to affect and shape all our lives, requiring flexibility and resilience. I've been really impressed with the commitment demonstrated by all our people to keep the business going. Our tobacco volume declined by 2.1%, reflecting some temporary COVID-related changes in consumer behavior. We delivered share gains for the group overall, although much of the improvement was in lower-value markets and products, leading to a weaker-than-expected gross profit contribution. Our profit delivery has also been affected by some additional COVID-19-related costs in manufacturing as well as some increased provisions following a cautious assessment of further risks given the ongoing uncertainties. We also had some additional regulatory expenses and investments in overheads, which weighed on our tobacco profitability, which Oliver will explain in more detail. While the NGP results are disappointing, we've delivered against our revised expectation, and it's encouraging we've seen some sequential improvements in sales progression in the second half. A more disciplined approach has substantially reduced investments, which has supported a significant reduction in losses during the second half. Although somewhat delayed, we've now concluded the sale of the Premium Cigar business, which was a major achievement in the current environment. Proceeds of EUR 1.2 billion will be used to support deleverage. It is clear that COVID has impacted consumer and market dynamics, influencing how and where consumers are purchasing and using our products. With more time spent in the home and restrictions meaning fewer discretionary spending opportunities, it would appear that some consumers allocated a greater percentage of their income to tobacco. This has been reinforced in some markets like the U.S., where consumer wallets were boosted by stimulus payments. From a market and channel perspective, it was clear from the start of the pandemic that travel restrictions would severely limit sales in the duty-free channel, in HoReCa outlets and in markets which traditionally benefit from seasonal holiday travel. The U.K., Germany and France have benefited from the repatriation of some tourist volumes and the reduction in illicit trade. The pandemic has caused some minor disruption to our manufacturing supply chain, resulting in some inefficiencies, which Oliver will talk about. It is clear we will be living with the virus for some time yet. And while I believe our business will be resilient, we're taking a cautious assessment of the potential risks. Finally, I would like to touch on ESG. I firmly believe that effectively managing ESG responsibilities is important to our future success. And although the pandemic affected some of our planned activities in the year, we'll make further progress against all 5 of our priority focus areas here. The establishment of an ESG Steering Committee, chaired by Therese Esperdy and comprising senior figures from around the business, highlight the importance of ESG to the Board, as does the fact we insist our auditors assure our ESG KPIs. If there's one area where we could be stronger, it's on metrics. For some of the priority areas such as climate and energy, we have very robust KPIs. But for some others, we need to do better. That would be changing this fiscal year. The Steering Committee has been working with the business to identify and agree appropriate KPIs for all of our main ESG issues. That work is complete. And once they have been validated against the new strategy, we will make them available to you. I will now hand over to Oliver to take you through the numbers.

Thanks, Stefan, and good morning, everyone. This has been a difficult year. While our tobacco revenue was somewhat better than we originally expected, this has not translated into better profits. Our NGP revenue also fell short of our original expectations, but the steps we've taken to cut costs have significantly reduced the losses in the second half, creating a better platform for the future. In tobacco, we grew our total market share across our footprint by 50 basis points and delivered further growth in the majority of our priority markets. Much of the gain, however, was in lower-value markets, leading to adverse mix and lower gross profit contribution. Overall, our tobacco net revenue was up 1.8%, benefiting from a strong second half performance in the U.S. and a return to growth in our AAA division. In NGP, revenue was down 27% as we destocked trade inventories in the first half and as we scaled back investment, particularly in the second half. Profit and EPS reflected NGP losses and a decline in tobacco profits, which I'll come on to in a moment. EPS declined by 5.6%, more than the decline in operating profit, which reflects the slightly higher tax rate in the year. As previously guided, I expect the upward pressure on our tax rate to continue at around 23% for FY '21. Dividend per share of 137.7p was 33% lower, reflecting the Board's decision to rebase the dividend, which we announced back in May. A headline cash conversion of 127% includes a 20% temporary benefit from a change in the timing of excise duty collections. Our underlying cash conversion of 107% was ahead of our expectations, driven by working capital improvements. Tobacco volumes declined by 2.1%, better than the level we've been used to over recent years. In Europe, volumes were down 3.5% with slightly better-than-expected market size trends, offset by the significant impact of COVID on our duty free business. As a reminder, our global duty free business is all reported within our Europe division. We've also seen a benefit to market size from border closures, particularly in Europe, where a reduction in the level of illicit product has supported duty paid volumes in markets like the U.K. In the Americas division, our volumes declined 3.3%. Within the U.S. market specifically, we saw a decline of 2.5% compared to a market size decline of 1.8%. Adjusting for the year-on-year impact of inventory movements in the U.S. of 700 million sticks, our volumes outperformed the market, reflecting 10 basis points of market share gain. Volumes in the AAA division grew 0.4%, reflecting stronger sales performance in the Middle East and Africa, which more than offset weaker volumes in Australia. Stefan mentioned there have been winners and losers as the result of COVID. For example, Spain and the Canaries and the duty free channel have suffered, whereas markets in Northern Europe and the U.S. have benefited. Coronavirus is clearly on the rise again, creating further uncertainty about how consumer behavior and channel shifts may develop going forward. I'll talk about how we've chosen to provide for this risk shortly. As I mentioned earlier, group share was up 50 basis points. And although we grew in 7 of our 10 priority markets, including the U.S., we've continued to lose share in the U.K. and Germany. Our position is, however, improving in the U.K., with sequential growth supported by the launch of Lambert & Butler fine cut tobacco together with several larger-value offerings across a number of our cigarette brands. In Germany, we are continuing to reshape our portfolio, led by JPS and West, with a focus on value formats in both fine cut and cigarettes. This has delivered a better second half, but we're still down for the year as a whole. In Spain and France, we delivered share gains for the first time in many years with gains in blonde now offsetting the drag from dark formats. Our share in Italy came under pressure as we increased prices on JPS ahead of our peers. In the U.S., cigarette share was up for the second year. This was primarily driven by continued success with Sonoma in deep discount, while Winston and Kool maintained their position in the declining premium segment. Mass market cigars gained 70 basis points led by Backwoods. Overall market size decreased by 4.3% with some stronger performers in H2 such as the U.K. and the U.S., offset by accelerated declines in markets such as Australia and Spain. Overall, net revenue grew by 0.8% at constant currency. We grew tobacco net revenue by 1.8%, supported by the lower rate of volume decline. Price/mix of 3.9% was weaker than normal, reflecting adverse market and product mix, which I will come to in a moment. Our NGP revenues declined 27% driven by destocking of the supply chain and lower investment levels. If we look at price/mix in tobacco in more detail, we've seen a pretty consistent level of gross pricing across the year as a whole, as is shown here. Overall, price/mix was held back by negative market and portfolio mix, particularly in the first half. Market mix has been a story of 2 halves with stronger sales in lower-value markets such as the Middle East and weaker sales in Australia creating a drag during H1. A stronger mix of market volumes in the second half was driven by increasing sales in higher-value markets in Northern Europe and stronger volumes in the U.S., offsetting the impact of adverse market mix in AAA. Adverse product mix was driven by a stronger performance from our lower-priced formats in the U.K., Australia and Germany, with the private label brands in the latter adding over 1 billion sticks to our volumes but with very little revenue. The improvement in product mix in H2 was driven by the turnaround in Backwoods sales, which were up over 30% in the second half. Looking at the divisional performances in more detail. Our tobacco net revenue improved in the second half across all divisions except Europe, which was impacted by reduced sales in global duty free. Tobacco net revenue in the Americas grew 1.9%, benefiting from the robust market volumes, continued strong pricing and further share gains in both cigarettes and cigars. In AAA, net revenue grew by 5% against a weak comparator, with strong volume performances in the Middle East and Africa and an improved pricing environment in Russia. We also benefited from greater stock profits in Australia, which, as you'll recall, is a carryover from 2019. Looking into 2021, we expect that this will be a headwind of around GBP 50 million to revenue and profits year-on-year. Our NGP revenue performance has been affected by the reduced investment levels in H2 and first half trade destocking. Encouragingly, following the destock, we've seen revenue improve sequentially in the second half in both Europe and the U.S., with actual consumer offtake remaining broadly stable. In AAA, the second half decline reflects a pause in our expansion of Pulze and blu in Japan, the former pending our assessment of the heated tobacco category as part of the strategic review. Adjusted operating profit was down 4.8% at constant currency. We've restated the prior year comparative by GBP 10 million to strip out the benefit of our Auxly revaluation last year. This is as a result of changes to our adjusted performance measures we announced last year. Tobacco profits were GBP 118 million lower. I will provide further detail on the drivers of this decline on the next slide. Our NGP losses increased by GBP 84 million, driven primarily by inventory write-downs, which more than offset the benefit in underlying profitability from cost and investment reductions. Our tobacco profits were impacted by 4 main drivers. Despite strong pricing across the year, price/mix was below par, affected by the negative product and market mix I referred to earlier. I estimate the adverse mix represented about a GBP 50 million drag on profit. COVID-related costs of GBP 90 million include around GBP 25 million of manufacturing inefficiencies as a result of disruption to our normal working practices. We expect that many of these manufacturing cost increases will continue into FY '21. We've also taken provisions of around GBP 65 million against potential stock and debtor risks relating to COVID-19. For example, in the case of stock, this relates to certain SKUs where we are experiencing much lower levels of consumer offtake. And so stock durations have increased dramatically, for example, with duty free. As regards these risks, we have deliberately adopted a more cautious approach against a rapidly evolving environment. Regulation costs were around GBP 50 million higher than usual, driven by the implementation of track and trace as part of EUTPD II and inventory write-downs following the menthol ban in Europe. We also had some industry fines relating to competition authority cases in the Netherlands and the Ukraine, which we are appealing. We expect about GBP 20 million of regulation costs will continue next year relating mainly to track and trace. Tobacco overheads were also higher as we allocated more investment towards the tobacco sales force. In NGP, we had a further GBP 29 million of write-downs in the second half, bringing the total for the year to GBP 124 million. These additional write-downs also relate to slow-moving inventory and IP. We significantly reduced operating losses in the second half as we cut costs, reduced investment and renegotiated trade margins with retailers. Cash conversion benefited from a 20% temporary benefit to our working capital from the timing of duty payments in the U.K. and Logista. Excluding this benefit, which we expect to unwind in 2021, underlying cash conversion of 107% was driven by working capital improvements and lower CapEx. As a reminder, we benefit from a daily cash pooling arrangement with Logista. Over the year, the daily average cash balance under the Logista cash pooling arrangement was GBP 1.9 billion, with movements varying from a high of GBP 3.9 billion to a low of GBP 0.5 billion. At the year-end, the loan position was GBP 2.4 billion. Our reported net debt to EBITDA, including temporary benefits from the timing payments, was 2.7x. Excluding this benefit, underlying gearing was 2.9x. Including the proceeds from the Premium Cigar sale, which completed post the year-end, our pro forma net debt to EBITDA is closer to 2.7x. As a reminder, the sale of Premium Cigars will dilute next year's EPS by around 3% as detailed in a slide in the appendices, where you will also find guidance on a range of finance items for the coming year. I would now like to hand back to Stefan.

Thank you, Oliver. So as we now look forward, I'm expecting a stronger operational and financial performance in 2021. On an organic basis, excluding the impact of the Premium Cigar sale, we expect to deliver a low to mid-single-digit growth in adjusted operating profit at constant currency. We're conscious that COVID continues to impose restriction across our markets, and against this uncertainty, we've been deliberately cautious in forecasting for the year ahead. Underlying tobacco pricing is expected to remain strong, although ongoing mix headwinds are likely to persist, coupled with lower level of stock profits from Australia and the U.K. We expect tobacco consumption will trend back to more normalized levels, particularly as the benefit of fiscal stimulus reduces and potential recessionary pressures takes effect. Given the outlook for travel, we're not assuming any recovery in our duty free business this year. We also expect the COVID-19 restrictions will cause further manufacturing inefficiencies in the coming year, and similarly, the regulatory costs related to truck and trace will continue. We expect the NGP losses will continue but at the moderated level achieved in the second half. A higher tax rate will have a 2% impact on earnings with constant currency earnings per share expected to be slightly ahead of the prior year. Turning to my priorities for the coming year. They are about 3 things: the right strategy, the right team and the right performance. My immediate priority is to complete the strategic review and implement the right strategy to unlock the group's full potential over time. I look forward to providing more details in January. It is also about the right people, by combining the strengths of our existing people with the fresh perspective of new hires. The people in the business have impressed me, and this reinforces my confidence. Recognizing that many are watching today, I would like to thank you for your support so far. It is also about the right performance. I'm already taking steps to improve accountability to strengthen performance with more rigorous data-led oversight. I'm confident that with a more disciplined focus on execution, we can begin to deliver better and more consistent results. I'm excited about the future and truly believe that, over time, we will deliver a stronger performance and unlock long-term value for shareholders. Thank you very much for listening today. We would now like to take questions. I'll hand you back to the operator to start the Q&A session.

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

First question is I was just hoping maybe you could comment on the trends on blu in the U.S. and what you're going to do to try to improve market share trends there. I guess more specifically, obviously, little that can be done by way of innovation anytime soon with new products due to PMTA. So do you think that the Kool and blu product in the U.S. market is good enough? And how do you start to drive some improved momentum there? That's my first question.

It's Stefan speaking. So nice to meet you, at least in this virtual world. On blu, in the -- your question on market share in the U.S., in principle, what we're seeing -- what is quite encouraging, we're seeing a flattening out of the market share in blu in the last couple of months, yes. So we are clearly seeing that the business is quite resilient in the current environment, yes. On the second part of your question, as you will know, the future about our NGP strategy, that is what we're currently still working through in preparation for our overall strategy. So on that one, I'm sorry, but that is probably some -- that is something we'll share in the 27th of January Capital Markets Day.

Okay. I think your next answer will be similar. But I was just going to ask, maybe talk about possible further divestiture of noncore assets. And is this something you're looking at? And specifically, would you look at potentially selling the mass market cigars in the U.S. or even parts of the emerging market cigarette business?

I think you got it right. I mean in principle, look, we are -- this is not a question that I think would be right to answer ahead of the completion of the strategic review, yes. I mean what I can reassure you is that we are taking a very rigorous, very disciplined and detailed review of the business, yes, unit by unit, brand by brand, country by country. So we will look at our footprint, assets and the performance and the execution against it, yes. So that is truly something we'll come back to you at the end of January. But I can reassure you, we are looking at all options inside the business.

Your next question comes from the line of Gaurav Jain from Barclays.

So a few questions from me. So one of the biggest concerns investors have had is if there's a margin reset at Imperial. And you are giving an EPS guidance today, and you will have a CMD in January. So should we assume that the guidance you are giving today, will it stand in January as well? So if you could just comment on that.

Sure. Gaurav, in principle, I think the -- key points you're picking up here. I think one thing to keep in mind is when you compare the levels of marketing investments specifically in our industry versus other consumer goods industry, we're talking about single-digit level of investments versus many other consumer goods industry in double digit. So I think overall, as I have looked at the business the last 4 months, and this is based on today's knowledge, yes, I think we're reasonably invested in our brands in the right way. We are clearly also looking about how do we spend that money today about driving performance, yes. So it's pretty fair to say based on our knowledge that you shouldn't expect a major margin reset when we come at the Capital Markets Day.

Sure. You mentioned in your comments that you are having monthly business reviews with your top 5 markets, but I think you have 10 key focus markets. So could you share what those top 5 markets are and those other 5 markets that are no longer a focus?

No. Gaurav, I think the most -- the broader comment is very clearly, in my first couple of months, yes, I had to clearly focus my attention, and it's very clear that 5 of our top markets make a very disproportionate impact to our business performance. So one of the changes I've implemented, I have now monthly direct reviews with these top 5 markets together with the 2 divisions we have. So I'm not just relying on the 2 divisions to look at the business. But as a CEO of this company, I feel it's very important to really have a direct grip on the business. The other thing, just to share with you one detail, it isn't just with the Managing Director of the market. It's with the entire management team, the Head of Sales, the Head of Marketing, the Head of Consumer Insights because these are clearly the market that are driving the best value creation. Yes. Now the 5 markets, you can figure out when you look at this time, you will have seen in our release, we call out the profitability, yes, and the revenue impact of these key markets. So probably pick the top 5 markets from a revenue and a profit perspective, and you are in the right place. It doesn't mean the other ones are not important, to be clear. But I do believe focus in this business is one of the key messages I'm sending, which are the markets that will move the needle in this company.

Sure. And last question, just a technical question maybe on the excise tax scenario. So Australia and France have been difficult markets in the last few years because we had the very steep excise tax hikes. And it seems that in both those countries, those excise tax cycles are at an end right now. So first of all, is that assessment correct? And does this imply that Australia and France can improve for you as well as for everyone else over the next couple of years?

If I can take that. It's Oliver here. I think one factor you need to reflect in Australia is the fact that we've also benefited from, and we referred to it at the end of last year, duty windfall as a part of the excise changes. And those have benefited us and the market over the last couple of years to the tune of about GBP 50 million. So I think you actually -- we're expecting that to largely unwind as we move forward. So we're starting from a lower base. So I would sit with Australia and say, actually, that's likely to be a headwind for the business in the context of the outlook for FY '21 and beyond. France is progressing in a measured way is the way I think I would probably describe where we are in France.

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

You talked a lot about changes happening in your industry, and I think most of that is aimed at NGPs. But I noticed a couple of years ago, in 2018, at an Imperial company presentation, 70% of profit was derived from the top 10 markets. And now in a couple of years' time, that's concentrated into the top 5 markets contributing 70% of profit. So I'm just curious if you can talk about some of the changes in profitability in your main markets that are behind that shift and that consolidation. I think that would be interesting to understand more about. That's the first question.

Yes. Alicia, I mean, on the -- to be honest, it's because I haven't been here in 2018, so quite difficult for me to comment on profitability development over time. I think what is clear, and I think one message I'm sure you're taking away, is about -- it's very important, yes, that a significant chunk of our profit gets generated by a group of countries, which I think that's -- and focusing management's attention on these ones. At the same time, I would just be mindful as well that the rest of the market still make a very meaningful contribution in this company if we are in a privileged position of a good level of profitability in this company. But I think it's also very clear that a lot of our markets make still some very significant contributions to the overall profitability.

I'd just add a couple of points. I mean I think we have actually seen quite strong growth in profitability from the 5 that we're currently focused on over that period of time. But also, it would be fair to say that there was a big difference between the larger ones and the smaller ones. And therefore, disproportionately increases in the larger ones have a much more impactful contribution in overall terms. So if we take the U.S., for example, which has always been pretty transparent in our numbers because we've talked about the Americas and it's been a large portion of our business, the profitability of that business has grown pretty strongly over the last 3 or 4 years and much stronger than the average for the group as a whole. So it shouldn't entirely come as a surprise. And it's -- I guess it drives the comment Stefan's making about. We need to be very focused on that group because they make a massive difference if we get them up. And that's where a lot of the focus, time and attention will be as we're moving forward.

Understood. And then secondly, you talk about becoming more agile. Is this a matter of reorganizing where accountability lies within the organization? Or is it a question of more investment is needed in the systems to monitor data? Is it a structural organizational issue or more a capability as an investment issue?

Alicia, it's a great question. One thing I can reassure you, it is not -- the primary answer is that it's not a structural investment, yes, in IT. I think it's more -- we'll talk more at the Capital Markets Day once we've completed our work, yes. It's a combination, yes, of -- on the one side, about kind of how do we focus our attention from the top-down on the core markets and the core decisions. It is also logically a question of how we operate from a cultural perspective, yes. I mean you've seen I've appointed Alison Clarke as the Head of People and Culture. There's a cultural opportunity here. And for example, introducing what you could call skip level management meetings with the top 5 market is one of these examples. That makes us significantly faster. So I give you an example from these ones. In these meetings last month, we could very quickly take price decisions in a couple of our markets because we suddenly have all the leadership team together of the company, and we do this now on a monthly basis. So becoming more agile is going to be a combination of many things, but I feel very comfortable that we as an organization can become faster in our decision-making process.

And if I could just get one last question through, please. Could you talk about how the crisis has impacted trends in fine cut tobacco in the last few months? Just curious how the consumer is either moving more towards that product or away from it.

Yes. I mean number one, interestingly, fine cut tobacco has an important position in some of our markets, and it is a relatively small part of our -- of the business or the industry in some of the markets. So we haven't really seen a major shift there. I think the one I would probably call out specifically is in some markets, as borders shut, what you see in the United Kingdom, yes, a large part of the market growth reported has actually occurred in fine cut tobacco. However, when we look -- when I look at the deeper data, it doesn't look like consumers have down-traded to fine cut tobacco. Our hypothesis at this point in time, a lot of illicit trade, consumers who were buying illicit products have actually switched into fine cut tobacco. So we're not -- so it's an interesting tendency. And we'll need to see whether that is something that will continue over time, whether that will revert back at another point in time.

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

And I'm looking forward to meeting the new top 2. So my first question, I'm trying to ask a question in a way you can answer it. And I suppose that as I listen to what you said very carefully, a lot of what you've talked about is more intense management, particularly of the top 5 markets. And that's quite a big contrast to what we used to hear about under Alison Cooper, where the main strategy or a lot of talk was about streamlining Imperial, which I suppose meant asset sales and I guess I thought personally potentially buybacks. So here's the question. The question is am I right to assume that you think there's more value to be gained through intense management of the existing business, particularly the most profitable elements of it, relative to restructuring and streamlining the overall company?

Adam, as you say -- I mean, first, welcome, and I absolutely look forward to meet you in person as well, yes. Trying to answer the question today in November, I mean, logically, the key answer is that's one of the key focus areas for the Capital Markets Day, yes. But trying to give an idea, I think you are rightly reading into that. I do believe, yes, there is more opportunity for managing our core markets in the right way, yes. I think there is some low-hanging fruits in this company, which gives me confidence because I think the underlying assets of this company are in a solid base, especially as we talk about the tobacco side, yes. So I think that is clearly one of the opportunities I see, and I think that is in the interest of our shareholders because that is clearly going to give us a relatively good return on this one. More details, we're happy to share that at the end of January when the strategic review is really complete, where I think it would be more appropriate to give you the fuller picture.

All right. And again, I'm trying to ask questions that you can answer. Clearly, the share price is sort of very disappointing. The valuation is very low, and you're obviously -- and everyone's acutely aware of that. And I guess do you think that's something you can address directly, most obviously, through buybacks? Or in your mind, is it something that will just -- that with good operations would just sort itself out over time? And your view is give me 3, 4, 5 years, and hopefully, the operations will improve. To such a degree, the share price will go up. I guess it's the balance between those 2 things.

Adam, actually, let me answer this in 2 parts. I think number one, it is very clear, when you look at our relative share performance, yes, clearly as you will all know very well, there is -- a sector re-rating has clearly occurred in the last couple of years, yes, which impacts us as many as the other players in the industry. But it's also very fair to say and candid that within the sector, where the company has underperformed, the primary driver of that is that we have consistently not delivered against the expectation that we said before. So to a certain extent, what you hopefully -- I'm sure you read in these results and also our outlook for FY '21, there's a clear strategic imperative from my side that we make promises that we can keep. You heard me talk earlier about our commitment is a commitment. So I think it is important. That is clearly one of the elements I have myself, with the team here, want to get Imperial to a better place, yes. Secondly is about -- you're asking logically the question about capital allocation. I think on this one, I think we should start with the strategy first, yes. That's the effort that is clearly under way, making sure that we are having the appropriate level of funding to actually allow Imperial to compete properly in this market for over the years to come, yes. How does that logically -- and that's why I put it on the chart very explicitly. In the end of January, we will share with you the capital allocation policy of the company. In my last 5 years at Inchcape, we had a very clear capital allocation policies that we adhered through that period of time. So we'll give you clarity how, based on the strategy, we would like to allocate capital going forward.

Okay. And presumably that -- one of the things about capital allocation is the leverage you want to have in the company. And historically, there's been this target of between 2 and 2.5x net debt to EBITDA. Presumably, that is something that you're at least thinking about, whether that's the right level again or that's the right level going forward?