Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Imperial Brands Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stefan Bomhard. Please go ahead.

Good morning, everyone, and thank you to all of you for joining us this morning for the announcement of our pre-close trading update. And before I start, I would draw your attention to the disclaimers set out in our trading update, which also applies to the remarks we will make on this call. And I'm joined here by our CFO, Lukas Paravicini; and by Peter Durman, our Head of Investor Relations. I'm first going to cover the news about our share buyback before coming on to the trading update, where we announced earlier today will continue to trade in line with expectations. So first, the buyback, which represents an important milestone in the delivery of our 5-year strategy. Now you will all recall that the first 2-year phase of our plan has focused on strengthening the business, investing to build the foundations for the next 3-year phase of our plan. The first phase has also been about strengthening our balance sheet, managing towards a clearly defined leverage target to underpin our commitment to an investment-grade credit rating. And capital allocation is a very integral part of our strategy and the key value lever for shareholders. So in this context, I am delighted to announce that having now reached our target leverage at the end of September, we're now able today to announce a GBP 1 billion share buyback to be implemented over the next 12 months. It also complements our existing progressive dividend policy. This means as total capital returns in fiscal year 2023, including ordinary dividends and share buybacks, I expect it to exceed GBP 2.3 billion. This represents around 13% of the company's current market capitalization based on last night's share price. Furthermore, our confidence in the future and the highly cash-generative nature of this business means that we are today able to commit to an ongoing multiyear buyback program. So Imperial has the potential to meaningfully and systematically reduce its capital base over time. Now this buyback is also possible because of the continued progress we're making with our strategy to transform Imperial Brands. I'm pleased to report that trading for the year has continued in line with expectations with constant currency net revenue and adjusted operating profit growing at around 1%. The key headlines here are: first, our targeted investments have driven a further improvement in aggregate market share in our top 5 markets. This is another important piece of evidence confirming that we have now stabilized our core combustible business following a long period of relative declines. As expected, we've delivered an improved price/mix in the second half, which has helped offset an anticipated increase in volume declines as orders have reopened and there's a return to pre-COVID purchasing patterns. Second, we continue to make good progress in implementing our refrac NGP strategy. We have achieved further share gains with pulp and ID, or heat tobacco offering in Greece and the Czech Republic. This good progress validates our new, more consumer-centric approach and has given us the confidence to launch the proposition into Italy, Europe's largest heated tobacco market. And I firstly recently attended the launch event, and it was great to see the team there using the learnings was gathered from our 2 pilot markets. And our consumer trial on vaping on blu 2.0, a new pot-based vaper device in selected cities in France has been well received by consumers and the trade. This is further consumer endorsement of our new NGP launches and has strengthened our confidence in our NGP strategy as we prepare for a broader rollout of our new propositions, and we look forward to updating you on the progress as they occur. And finally, we remain on track to deliver an acceleration in performance for the next 3-year phase of our plan. The additional investments and the actions we have taken over the initial 2-year strengthening phase have built strong foundations and enhanced our resilience as we face a more challenging macroeconomic environment. Over the next 3-year phase of our plan, we continue to expect low single-digit constant currency net revenue growth with constant currency adjusted operating profit growth accelerating to deliver a mid-single-digit CAGR over the 3 years. So as this suggests, this means an average over the 3 years and is in line with the expectations we set out in January 2021 at our Capital Markets Day. We're confident our investments and initiatives will continue to gain traction, particularly over the next year or so. And therefore, we expect the growth rate of our adjusted operating profit to improve within this mid-single-digit range over the 3 years. We're conscious, these are increasingly challenging times for all businesses of rising interest rates and high inflation. We won't be a new from these pressures, but I'm convinced that our actions are creating a strong business, better able to navigate these uncertainties. We remain committed to delivering our plan and realize the full potential of this business and to unlock long-term value for shareholders. So thank you for joining us today. Lukas and I would now like to take your questions. And I will now hand it over to the operator to moderate your questions. Thank you.

[Operator Instructions] And the first question comes from the line of Rashad Kawan from Morgan Stanley.

A couple of questions for me. One on the buyback and one on the U.S. On the buyback, as you're committing to a multiyear program here. How are you going to think of buybacks in relation to dividends going forward? Do you think the $1 billion figure will be a good proxy for outer years? Or will you be looking for at a progressive increase with the buyback amount as well? Just some clarity on how you think of that going forward would be helpful. And then on the U.S., can you talk about what you're seeing in the cigarette market there? I mean, clearly, it looks like momentum is continuing from a share perspective. But how do you expect your price mix to develop given the level of down trading we're seeing in the market today?

I would suggest that Lukas goes on the first question, and I will come back to you on your second question. Lukas?

Rashad, good morning. Thank you very much for the question. Yes, we indeed have committed to a multiyear on ongoing that we have always said. When you go back to our capital allocation framework, we were very clear that we had 4 integral pillars to that capital allocation. We have now reached that lower end of the leverage, and that allows us to keep that leverage, which is very important to us going forward, but also go into the share buyback. And as we have said always, this is part of our model. This is part of our capital allocation. And therefore, it is a commitment on an ongoing process, a multiyear commitment. Now we are focusing on the next year in terms of what we can afford, what makes sense in our capital allocation, and that is the GBP 1 billion. And we will review that every year as part of our ongoing capital allocation strategy to see what will be the next year's allocation to come. And that is what you should look at in that sense. It's a meaningful systematic approach to that. From a dividend point of view, for us, it is an integral part from the capital allocation as well. And we believe it is important that, that dividend continues to flow. We have made it very clear that it is a progressive dividend and progressive in this sense means that it is progressive in line with our underlying performance, and so you will see that continue as well over the years.

First, I mean, to answer your second question about U.S. I mean the great signs because eventually yesterday, I came back from the U.S. West Coast spending time with our dean there and attending the National Conference of the Convenience Store Operators of the U.S., which happens once a year. And have set the chance to speak with the CEOs of several of our top customers. The interesting thing, and what they were telling me. For the time being, they see limited down trading, but they do see some down trading starting. And I think that plays to our strength. Because if you look at it, as you would be well aware of the 3 major players in the U.S., we clearly have the most complete a brand portfolio with a good presence in the deep discount segment. So in principle, should you as consumers start to down trade in a more meaningful form, our portfolio at Imperial is very well placed to our company their needs. Yes. So I feel quite comfortable whatever the situation in the U.S. will develop to, we are in a good place.

We will now take the next question, and it comes from the line of Gaurav Jain from Barclays.

So a couple of questions from me. So first is on your e-cigarette strategy. So clearly, you're talking a lot about heated tobacco. But could you also talk about how you are thinking about e-cigarettes, and then you haven't yet launched disposable in the EU. And in that context, clearly, a lot of focus on the disposable e-cigarette market in the U.K. right now in the media. So could you just help us understand what really is happening and is it leading to increased cannibalization of cigarette sales in the U.K. market?

Sure. I mean it's -- if you -- as you asked about the disposal of the market of vaping overall. I mean, number one, you -- clearly, we are very committed to the vaping market because we've always said that we are going to be consumer net that, therefore, this launch of heated tobacco in Europe, which clearly is a big decision about going to the larger heated tobacco market in Europe and Italy. But at the same time, our test market in France, they had blu 2.0, which is an all-new device for us is growing very well. Like you mentioned, we are clearly also observing a significant growth of the disposal of vaping markets. In the majority of the markets, interestingly, we are observing that for the time being, the disposable vaping market growth goes on top of the cost base systems. Yes. So we actually see an acceleration when you look at, for example, the Spanish market and acceleration of our hot based market overall. But at the same time, we will clearly also study the disposal of vaping market and some of you will hopefully remember, we do have a disposal vaping product in the U.S. It's part of our lineup on the blu brand. So it's a market that's a very familiar with. Yes.

Sure. And what exactly is happening in the U.K. market, if you could comment like -- and this is accelerated growth in e-cigarettes because of disposables, is it leading to an accelerated cannibalization on cigarette volumes?

No. I mean, Gaurav, what we have seen is a significant -- I mean, again, this is a very dynamic development, as you rightly pointed out. It is the growth of disposal was something that has accelerated very significantly very recently. However, at the same time, we are not seeing an acceleration in the decline of the cigarette market in the U.K. The only caveat I would have, the U.K. market is quite difficult to read because you will know of the COVID effects and the return of travel back to markets like Spain, yes? But we don't see an underlying decline acceleration of the U.K. market of cigarettes.

Okay. And then a second question, just on the Australian market. It was clearly a big profit headwind in some of the past few years. But now excise taxes haven't gone up, are not going up at the same pace. Do you expect a big profit recovery now beginning to happen on that side of the market?

I mean, Gaurav, you're absolutely right. The government has chosen not to continue with its duty accelerator. That is good news for the industry. At the same time, I think, I wouldn't count on significant profit growth out of Australia. Our focus as a company has been to make sure that we participate market share-wise in the right way. In the market, and you would have probably picked up that our market share has grown in Australia and there would be also the expectations when we report the end numbers. And we'll make sure that we participate in the right way in the market. But I wouldn't count on a profit recovery in the Australian market because the underlying volume decline of Australia doesn't continue for the time being.

Sure. And if I could sneak in 1 last question. So look, clearly, you will have a big translation FX benefit next year because of where pound is. Could you also remind us what's the transaction benefit that happens at Imperial because clearly, a lot of your costs are in pounds. So there should be some transaction benefit as well.

So Gaurav, we will have to come back to you. I mean our transactional effect is very small and it's covering our normal forecasting. And so we would have to come back to you with the details. But I would assume that it is a minor effect in our overall business.

And it comes from the line of Faham Baig from Credit Suisse.

Could I firstly double-click on top line growth because I believe at the half year stage, you were guiding to 0% to 1%, but now expect around 1%. So that would imply a slightly better second half performance. Is that driven by market share performance? If so, where? I believe the 2 markets you were losing share at H1 was Spain and Germany, the situation there. Or is it the price point as pricing stepped up meaningfully better than you expected, which should continue going into next year. My second question is probably just a quick housekeeping one for Lukas. I believe the debt at the half 1 stage was around 64% fixed, and therefore, the remainder floating. I know there's been a few changes in purchasing and raising debt over the last few months. How should we see that fixed versus floating ratio right now? And what sort of interest costs are you expecting for next year?