Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Good morning to all of you over here in the room and also a warm welcome from my side to our fiscal year '23 results presentation. And thank you, especially for all of you joining us here in the room in London, but I also want to say hello to the people who will watch us online today. As usual, I will draw the attention to the disclaimer before, introduce you to the rest of the team and the agenda. Now on the team, you all know Lukas Paravicini, our Chief Financial Officer; and I'm sure you all know Peter Durman, our Head of Investor Relations. What I will do today is, first, I will highlight to you the key achievements of -- from today's results. Lukas will then outline our financial delivery in the year and who will also give you an outlook for the next 12 months. And then I will come back and update you on the broader range and transformation of the company to build a business that delivers sustainable growth. And finally, the 2 of us are very much looking forward to answer any questions that you might have. Now I am pleased to report that these results are further evidence of the strong progress we're making in our 5-year strategic plan. And the key headlines are, as you see over here, first, our targeted investments are driving further aggregate market share gains in our priority combustible markets. Second, we have delivered strong pricing and grown margin despite high inflation and squeezed consumer wallets. And thirdly, in next-generation products, our challenger approach to innovation and the disciplined execution are accelerating revenue growth. And fourth, while once again delivering on our annual plans, we're also making very good progress on our long-term transformation. Now as I will discuss in more detail later, we are patiently building a new culture, new capabilities and new ways of working. And these results are further evidence that we are becoming a more resilient business, delivering stronger returns to you, our shareholders. At the same time, we're also playing a more active role in the industry's transition towards a healthier, more sustainable business model. Now we manage this business using a balanced dashboard of operational and financial measures. For the third year in a row, this dashboard is a sea of green with all arrows pointing in the right direction. But the one that jumps out at me is obviously the 3.9% increase in profitability, demonstrating to you the acceleration in profit growth we promised you this year. Now you know our industry is highly competitive and characterized by shrinking volumes in our core product, so to deliver these results with this quality and consistency is not easy. Therefore, at this point, I want to say a big thank you to the 25,000 colleagues across the world because every extra basis point of market share we show here and every pound of additional revenue is a result of the strategic focus of the company and the hard work of our teams. What is also pleasing about this dashboard is the way it highlights how operational success in combustibles and NGP is translating directly into financial progress and then into growing capital returns for shareholders. On top of the 10% increase in our ongoing share buyback program that we announced last month, we are today announcing a 4% increase in the annual dividend. Now this is all hard evidence that our strategy is working. Now when I return, I will try to bring this strategy to life in a little more detail. But now I wanted to hand over to Lukas, who will take you through the financial results.

Good morning, everyone. Thanks for being back with us here. It's been another strong year of financial delivery. After the first 2 years of foundation building, we are now seeing acceleration of our returns. The business has delivered in line with our expectations and against key financial metrics. Tobacco and NGP net revenue is up 1.4% on a like-for-like basis, driven by broad share gains and strong pricing. In NGP, new products and targeted market launches helped drive faster net revenue growth, particularly in Europe. In line with our strategy, we delivered an acceleration in adjusted operating profit growth, which supported growth in EPS. This strong performance means we can again meet our capital allocation priorities. Leverage was 1.9x, and we expect to hold around 2x. Cash remained strong with GBP 2.4 billion of free cash flow. We returned around GBP 2.3 billion to you last year, combining ordinary dividends and the GBP 1 billion share buyback. We remain committed to our multiyear capital returns program, and our GBP 1.1 billion share buyback for next year is well underway. Tobacco volume, price and mix is similar to the half year. Strong pricing gains, here shown on the orange color, have continued to offset volume headwinds shown here in blue. If we start with the Americas on the left side with the U.S., pricing increased 10%, driven by our cigarette portfolio. With volumes, it's important to differentiate between our cigarette portfolio and our mass market cigars. Cigarette volumes held up well, declining by just 2% compared to the industry declines of more than 8%. But just like the first half, cigars account for the majority of the 6% decrease in total U.S. volumes. Our cigar performance has been affected by the wholesaler inventory movements caused by Hurricane Ian in September last year. We are also seeing a rebalancing of market size and share post COVID. This decline in cigar volumes also drove the majority of the negative mix of 9%. This is because our cigars are relatively high value and low volume products with a net revenue per stick 2.5x that of a cigarette. So any movement in our cigar business up or down has an outsized impact on overall product mix. In a moment, Stefan will talk more about the dynamics of our U.S. business and the positive outlook for our cigars. Moving to Europe and AAACE, we've seen exceptionally strong pricing of 11%. And this has more than offset volume declines, resulting in strong revenues and an improved gross margin. At the group level, excluding Russia, volumes declined 7% against a strong comparator down just 1.2%. Turning to operating profit. Excluding Russia, adjusted operating profit grew by 3.9% at a constant currency. As you can see here, this growth was largely driven by improved performance in tobacco and at Logista. As I've said, profitability in tobacco benefited from strong pricing and we grew operating margins by 150 basis points. In line with our plan to invest in new products at markets, NGP losses increased by GBP 42 million. And we remain on course to break even by the end of our 5-year plan. Logista's positive contribution was driven by robust underlying performance helped by pricing and targeted acquisition. This M&A was an important step in Logista's diversification strategy which we support. It also means that less than half of their sales now come from tobacco. Like other businesses, we make certain adjustments to our IFRS numbers to help performance comparisons over time. When I joined Imperial, I made a commitment to be transparent with you about these adjustments, and I'll continue to do so. The first item of GBP 4 million was driven by a write-down of assets in Ukraine and our exit from certain Central Asian markets following our exit from Russia. The second is our usual amortization of acquired intangibles, very much in line with last year. Third is the fair value adjustment to financial assets, including group's investment in cannabis. We incurred GBP 85 million of charges relating to provisions for some legacy legal disputes, which are all one-offs. Finally, I want to highlight there were no adjustments for restructuring costs. On the contrary, our adjusted numbers absorbed some GBP 30 million of factory closure costs, which we have funded by the profit on sales of some former sites. This is a pragmatic approach to optimizing our factories. Turning to EPS. Our EPS benefited from improved profit growth and the share buyback. Of course, the averaging effect of the share buyback through the year contributed only 2.6%, and this will be compounded into next year. These benefits, as we said at half year, have been partially offset by higher interest, minorities and tax costs. Interest costs have increased with higher interest rates and new bonds. However, we've mitigated the impact of rising interest by fixing around 85% of our debt. Looking ahead, we expect interest costs to increase this year to around GBP 460 million. Our adjusted effective tax rate is the same as last year. However, we expect next year's rate to be around 23%. Central to our strategy is strong cash generation and disciplined capital allocation. Operational cash conversion was the conversion for the period was 92% against a strong comparator of 102%, which have been helped by the timing of duty payments at Logista. The business continues to generate significant free cash flow to support our 4 capital allocation priorities. Our first priority is to invest in the business. And this year, we invested in organic growth and target acquisitions in NGP and Logista. Second, it is about having a strong and efficient balance sheet. Our year-end leverage was marginally below our 2x target, helped by FX. We are recommending an annual dividend growth of 4%, in line with our progressive dividend policy. Finally, we continue with our multiyear share buyback program, increasing it by 10% to GBP 1.1 billion for this coming year. This currently equates to further 7% of share capital. We will continue to manage these priorities responsibly to deliver growing returns, while keeping some headroom for uncertainties. This was the first in the next phase of our strategy. We have delivered the acceleration in profit growth that we promised. In the coming year, we expect to grow net revenue at low single digits. And we expect a further improvement in profit growth, growing close to the middle of our mid-single-digit range. This will be driven by pricing and operational gearing, reducing our NGP losses, improved geographic mix from priority market focus and cost savings. Performance will be weighted to the second half due to the phasing of our pricing in the prior year and NGP investments front loaded to the first half. As a result, the first half adjusted operating profit is expected to be low single digit. Foreign exchange translation is currently at 0% to 1% headwind to the P&L. Our improving profit growth and the full year effect of share buyback will drive EPS. As usual, there's more guidance in the appendices. Whilst macroeconomic and geopolitical challenges remain, our strategy and investment has strengthened the business, which underpins our confidence for the year ahead. We remain very well placed to generate long-term value for our shareholders. Thank you very much. And I'll hand back to Stefan.

Well, thank you, Lukas. And now for me, what's hard to believe this is now the fourth set of Imperial full year results that I'm presenting to you. And it's always the opportunity to reflect. So back in November 2020, we could only meet virtually. The new executive team was just forming and candidly, we're still exploring the business opportunities and considering our options. By November 2021, we had planted the first acorns. Now the basic framework you see on the screen here now, our strategy, our purpose and our behaviors had been set then. Our teams were mobilized around the distinctive vision that united all these priorities. The time was right we believe for a strong challenger business in our sector. And we saw that strong challenger should be us. This time last year, we were reporting the first green shoots. What we're seeing encouraging signs of stability in our core combustible business after many years where we have been the industry's #1 share donor. We had begun to reboot NGP, and there was positive feedback from our pilot markets. Now today, we can say that our tree has grown its first branches and its first leaves. In combustibles, we now have a 3-year track record of share stability and strong pricing. In NGP, we have credible offerings in all key categories. And there has been a step change in financial performance and the step change in capital returns to you as shareholders. Now while this growth is encouraging, we know we're still a long way from becoming a fully grown mighty oak. And that's what's so exciting for us about at Imperial right now. We've made great progress so far. But we can clearly see the upside to come. And we know we can get there as long as we stay focused on the plan that we have and we stick to that plan. Now when I look at the chart, which I've shown you many times in the past, what I'm excited about is how well it has aged. Sure. There are things that have happened over the last 3 years, which we didn't fully anticipate. I mean, for example, I think all of us here would have been surprised by the dynamism that we've seen in the vaping market with the sudden emergence of disposals. But on the whole, what we've been doing is systematically working through the detailed plans, which support each of the 6 segments in our strategy wheel: the 3 enablers and the 3 priorities. And we've also been embedding those 5 behaviors to see at the bottom of the chart in a really structured way. And as we advance our NGP business and broader ESG priorities, we're making progress towards the healthier future, which is at the heart of our purpose as a company. As our transformation progresses, we are now able to show you the hard work of the teams as well as some equally hard numbers. We've highlighted to you in June at our event in New York how we committed to placing the consumer at the center of the business. In insights, not only have we improved the quality, for example, through the demand spaces work we previously showcased to you, but we've also increased the quantity. Over the past year, for example, we've expanded our consumer tracker to cover 120,000 participants in 35 countries, a 20% increase over last year. We're also scaling our distinctive partnership approach to innovation with 3 new hubs now open in Liverpool, Hamburg and Shenzhen. And this is translating into a step change in the pace of new product launches. Our investments in a new performance culture is also leading to clear measurable returns. Over the past year, 300 leaders took part in an intensive course lasting 7 working days, designed to improve their management and coaching skills. And activities like this have supported a 10% point increase in the engagement scores among global business leader cohorts. And company-wide, all employees, we've maintained a benchmark beating 74% engagement score. And we have achieved a participation rate in excess of 90%, with 50,000 verbatim comments received through the survey. Now to put this into context, this means more than 2 verbatims for every person who has responded. Now while there's always room for improvement, this is a positive sign. We're making -- bringing our people with us on that transformation journey. And we continue to work through the legacy of this company's acquisitive history creating simpler, more efficient ways of working and investing in data and our systems. The savings, we promised you when we launched our strategy in 2021 have been delivered. And it is important to note, however, that the full upside potential of our major investments in our single ERP platform that we talked before about would take time to emerge. And this future benefit is one of the reasons why -- so we are pleased with the achievements over the past 3 years. We are equally excited about the prospects for further progress in the years to come. Now in ESG, as part of our wider business strategy, we set out some challenging long-term objectives across 8 priorities, and we're now making material progress towards those objectives with reduction in carbon emissions, waste and lost-time accidents. Delivery of these outcomes is supported by a more structured approach to ESG governance. Our cross functionally is ESG committee, which I chair includes all of the executive leadership team. This provides the oversight and the direction to our ESG agenda and underpins our more rigorous, more performance-focused approach, and I look forward to sharing with you progress at future meetings. Now let me turn now to how are we delivering against our 3 strategic priorities, starting with our focus on our top 5 combustible markets. As I said earlier, this is the third consecutive year where we have reported stable or growing weighted market share. At the same time, as we have discussed, we've maintained strong pricing discipline. And remember, that our medium-term objective is stable share at a portfolio level. So we do not expect to grow share in all 5 markets in any given year. This year, we've grown share in 3 of the top 5 markets. U.S., Spain and Australia and lost share in U.K. and Germany. During fiscal year 2024, our planning assumption is that we will hold our full year share flat on last year. Now let me provide you with a deeper dive on our priority markets, starting with our largest, the U.S. As Lukas mentioned, this has been -- this year has been a strong cigarette performance, offset by challenges in cigars. Cigarette market share was up 65 basis points, coupled with strong revenue growth. We've again held or gained share in every one of the 3 price segments where we focus and achieved strong broad-based pricing. Brand investments and retail initiatives behind Winston and Kool enabled us to hold our share in the highly competitive premium value segment. We also grew share in the traditional discount segment with a strong performance from Maverick, and we gained further share in the fast-growing deep discount price segment where Sonoma and Crown continue to grow volume and revenue. And all of this was achieved against a challenging market dynamic with volumes down more than 8% in the market year-on-year. In cigars, we have experienced a transition year. However, the outlook now is more positive. And the 3 factors that affected our performance in fiscal year '23 are now largely behind us. I mean first and more significantly, we've normalized wholesaler inventory changes caused by Hurricane Ian in September last year. Second, we were affected by the wider COVID unwind, which has now annualized. And third, we lost share as competitors resolved earlier supply chain issues during COVID, and we experienced some pressure from consumers downtrading. Also, the share trends have improved in the second half with the support of some of the innovations that we've put in place. And looking ahead, our iconic brands like Backwoods continue to be very well positioned within a category with attractive long-term characteristics. Now in the other 4 priority markets, we've made some very deliberate choices around balancing market share with the delivery of pricing and value. In the U.K., we increased prices early in the fiscal year. We anticipated a short-term impact on share, but was the right decision for long-term value creation. In the second half of the year, our share stabilized, thanks to the focus we managed -- with which we managed our portfolio of local jewels. And we ended the year with both revenue and profit growth in the U.K. Now this was a great achievement. Given the sharp decline in market size, driven, a, by the COVID unwind; and b, by the high inflation-linked excise increase. As you know, the U.K. Prime Minister recently announced an intention to introduce a generational ban on tobacco. There is a consultation process underway. So some of the details are still unclear. However, the earliest that this regulation would come into force is in January 2027. Now moving to Spain. We raised prices for the second year after a long period of price stability. At the same time, we achieved further share gains driven again by our local jewel brand initiatives. This has been led by the relaunch of the Nobel brand in 2022 with new packaging and line extensions, which have resonated very well with Spanish consumers. In Australia, a refresh of our portfolio and pricing strategy -- a good pricing strategy enabled us to both grow share and value. In Germany, after more than a decade of shared losses, we saw a further decline over the year. But we're patiently investing in building brand equity and sales force effectiveness. However, as we've said before, it will take some time for us to stabilize market share in Germany. In a similar way to how we focus investments in our 5 priority markets, with an equally rigorous approach for our broader market portfolio, so we've created ways of working to help teams in all markets maximize their contributions through the pooling of insights, expertise and services. Now we're applying the same principles that we use in our 5 priority markets. So go-to-market strategies are now successfully deployed elsewhere in the group, and we have repeated them across a wider market portfolio. Greater consumer and customer engagement has guided our investments with brand innovations and supporting specific price increases. Our African cluster that accounts for 8% of operating profit. And here strong price increases were combined with revenue growth management measures and other tools developed alongside our global consumer office team. And we've used our unique portfolio of local jewels and international brands to meet local consumer preferences. Also, for instance, in the Middle East, international brands like Davidoff resonate very well with consumers, particularly in Kuwait. It brings this focus and discipline, combined with our new consumer skills, is enabling us to continue to drive value from our broader market portfolio. Turning to NGP. I want to start with an overview where we have got to and what's next? Over 3 years, this business has been rebuilt almost from scratch. First, we reset our investment priorities, exiting some markets such as heated tobacco in Japan. Then we took a consumer-led approach of test and learn to understand how best to position our products and our brands. And this consumer valuation was a critical point before we invested in further market rollouts. At the same time, our new partnership approach innovation has led to a complete refresh of our offering in the 3 major NGP categories, vaping, heated tobacco and modern oral. As a result, we now have new propositions in all these categories, which are credible. So of course, no where are we perfect. And we're up and running in most of the markets where we feel we have a right to succeed. The next 12 to 24 months will be a period of consolidation, building scale in the existing market that matter with some further innovation and targeted market launches. And I expect the regulatory environment and innovation will remain highly dynamic. We'll continue to adjust our offering. Also, it is early days, and we're still very much coming from behind. You can see that all these efforts are starting to translate into an acceleration in revenue growth in NGP. We have a disciplined, challenger approach to market entries. We have launched products only in markets where the category is a big proportion of overall nicotine consumption and where we have strong existing route to market. As you can see from the chart, in some markets, NGP is on the way towards overtaking combustibles as the largest source of revenue. Looking ahead, the big challenge and the big opportunity is to replicate this relative success in markets like Italy, Greece and Austria in our large European markets such as the U.K., Spain and France. Now the 3 markets I just mentioned are all growing vaping markets. And in this category, we're up and running in a total of 11 European countries, a step change compared to a year ago. We have a refreshed product lineup with blu bar disposables and the blu 2.0 pod system, and we expect to see more innovation in the coming year. And as you will have seen, a number of European governments are developing new regulations designed to curb use access and drive out drug operators selling illegal products. We are supportive of these new rules, provided they're both effective and proportionate and we are engaging closely with the policymakers. In heated tobacco, consumer feedback supported the development and launch of Pulze 2.0, our newest device. With its all-in-one design and 25 or more sessions from a single charge, this device appeals to consumers who appreciate the convenience of not having to recharge. Now following 5 new market launches, the Pulze proposition alongside our iD sticks is now available in 7 European markets. This means we're now present in more than 60% of the addressable market in Europe. Now these are still early days, and we take nothing for granted. Competitors are, of course, innovating with new propositions on their own. But continuing with our insight product innovation -- insight-driven product innovation, this month, we launched [ iSenzia ], a new range of nontobacco tea-based nicotine sticks in a variety of flavors. These will be rolled out in our heated tobacco markets during fiscal year '24 as we continue to refresh our overall offer. In modern oral nicotine, we delivered a step-up in net revenue growth through launches of new flavors supported by improved brand positioning. The footprint of Zone X is focused on the Nordics and other European markets with a heritage of snus tobacco. Here, we are building a distinctive proposition with innovative flavors designed to attract and retain adult consumers migrating from traditional snus and other tobacco products. And our agile challenger approach enabled us to be the first entrant into Finland following a government decision to allow modern oral products. During the year, we continued to perform very well in modern oral in the Nordics, especially in Norway through the growth in the Skruf super white format and we're the fastest-growing modern oral player in the important Norwegian market. In 2024, we will enter the world's largest modern oral market with the launch of a new U.S. brand using the range of pouches required earlier this year. So the past year has been the first big test for our new strategy, where we faced high inflation and a squeeze on consumer wallets. Internally, the fast pace of our transformation continued. And amid all of this, we delivered growing share, strong pricing and an acceleration in NGP growth. And we delivered a step-up in financial performance and shareholder returns. So looking ahead, there will be no doubt, be more challenges. The macroeconomic scenario clearly is uncertain. The regulatory environment will be dynamic. And we have a healthy respect for our competitors and their own ability to innovate. But we are building a track record that gives us more confidence that we are now a more resilient, more agile business than we were in the past. And as we look at our pipeline of transformation initiatives, there's more upside to come. And this future upside is an important part of our investment case. We are building a stronger tobacco business. We have a sustainable and growing NGP business. And we are embracing further self-help opportunities through new ways of working and changing our culture. All of these support our medium-term financial delivery and have grown shareholder returns with a 4% increase announced -- in the dividend announced today and a 10% increase in our share buyback announced last month. Taken together, our dividend buybacks represent around 15% of our current valuation. And we're just partway through our transformation with more to go after. So to conclude, Imperial represents a very attractive opportunity to invest in the global consumer goods business, which is committed to making a difference by forging a path to a healthy future. So thank you to all of you to join us today. And Lukas and me would be more than delighted to take any questions from you here in the room or online.

Great. Thank you, Stefan. So I'll now run through the process of how we're going to run the Q&A. We'll take questions from the room first, and then we'll take questions from those of you who have joined us by telephone. If you wish to ask a question remotely, you'll need to register to receive the dial-in details. The link to registry is available on the webcast page on the top right where it says phone details, and it's also available in today's press release as well. [Operator Instructions] Great. So we'll now take the first question from the room, if that's okay. [Operator Instructions] Jon?

Jon Leinster, Societe Generale. I've a couple of questions, please. First one, obviously, on the price/mix, you noted quite significant price/mix -- mix decline, I should say. And some of that is obviously mass market cigars. But do you think on the FMC side, that will continue to get worse, particularly as the majors are now beginning to promote a lot more? And do you think the rest of the world is going to see a sort of mix decline to offset pricing? And secondly, on the expansion or the getting NGP to sort of break even, I mean, what sort of -- does that -- you seem to imply there's not going to be many too many market launches. So what sort of growth of sales are you expecting to actually get that business to sort of breakeven in a couple of years' time?

Sure. Thank you, Jon, for the 2 questions. Lukas will answer the first one, and I will answer the second one.

So on your question of price/mix, I think let's be very clear, we had a very strong year of pricing in a very big context, which actually also led to an increase in the gross margin. Now the mix is really only in the U.S. You can see from the rest of the world, there is hardly any mix, and we don't expect that to change going forward. Now in the U.S., as you probably pointed out, Jon, there is 2 effects here, the FMC and the MMC. Now it's very clear that the FMC, we actually beat the market and that's really important. Our volumes decreased much less than the average in the market. Our pricing was very strong. And the mix that you see there is really the deep discount volume that has grown while keeping our Kool and Winston brands at the same level. So that did not come at the expense of that. So that will see mix effect there. And we have very -- a lot of confidence for the next year in terms of FMC. MMC was a transition year. Stefan pointed out that it was the destocking, it was the effect of post-COVID, the rebalancing of volumes, if you look back a few years. And so this is a rebalancing and we'll see the headwinds reduce in '24, so that's on the U.S. And there's really no mix effect on the rest of the world, as I pointed out to you before.

And Jon, to answer your second question, I think on NGP, I think what is, for me, I think, truly exciting, what you see in the fiscal year '23 results, we have really stepped up our performance, 27% gross worldwide with the focus region of Europe being up 40%, should give you the confidence we are now a serious player in NGP. As we look forward, what hasn't changed is that kind of point that we put in the ground 3 years ago, which saying about this business will be breakeven at the end of fiscal year '25, which is 2 years away from today. I think one thing which is important, as you picked up about, we see fiscal year '24 -- fiscal year '23 saw us enter in quite a number of markets in the NGP category. When we look ahead, we are going to enter the oral nicotine market in the U.S., which is a very significant investment for the company. But at the same time, we wanted to signal to you, we are now in the right portfolio of markets with our NGP portfolio. So the focus will be to build out our position sets. At the same time, I think when you look at the comment I made earlier about disposables, the NGP market continues to be a highly dynamic market. That's why I'm a bit hesitant to say what markets will go into, not go into build out because I think it's difficult to forecast which are going to be the most attractive market in 2 years' time. But I think what you should take away, we're not really in the game in the market that matter with our challenger mindset with a business that actually is on track to deliver what we promised 3 years ago.

We'll take a question from Rashad.

Rashad Kawan from Morgan Stanley. A couple of questions for me. First, on the U.S. Impressive share gains again this year. But as you look into next year, what gives you the confidence that you can hold on to the share gains that you've had to the extent that the environment normalizes there with inflation kind of coming down? Consumption patterns potentially coming back to more normalized levels. And then the second question, just overall in terms of kind of your revenue growth for next year, do you expect kind of -- given the strong pricing that we've seen this year, do you expect the balance to be a little bit more less in terms of pricing, a little bit less kind of volume headwinds? Is that kind of the right way to think about it?

Yes. Thank you for the question. I mean nobody can ever make you a commitment about what the market share will be a year term. But I think what you should take away from today's presentation, it's very clear as we referred in the presentation, what -- eyes are gaining share, holding share in every single segment. And I think as we enter the U.S. I feel very strongly about the prospect of our U.S. FMC business, specifically because we have better offers in every single place in the marketplace versus where we were 3 years, which is a reflection of a massive investment we've done in sales force capabilities and coverage that will also benefit us in fiscal year '24. We also invested very significantly in the brand equities of our brands, yes? So as I think we're very well prepared, whatever direction the U.S. consumer will take in fiscal year '24 to have an Imperial [indiscernible].

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Yes. Absolutely. Now it's always difficult to comment on pricing. I think the reality is, look, we are -- it's a highly competitive marketplace. We're now proven 3 years in a row, that we get the balance right between pricing and volume. You see then the reflection of our market share development in our top 5. So we'll place that mix in the right way going forward. So we'll see what happens in the marketplace, but you're very right to point out that probably less pricing overall would mean a better volume performance for the market. But I think you hopefully take away, we do now have the skill set, not just in the U.S. but globally to place that in the right way.

Great. I think we'll pause on questions in the room, if that's okay because we do have some questions online. So I'm just going to hand over to Sharon, the operator, to start taking questions from the phone line.

We will go to the first phone question. [Operator Instructions] And your first phone question comes from the line of Gaurav Jain from Barclays.

Three questions from me. So the first one, Stefan, if I looked at Imperial over the last few years and your guidance for next year, which is 4.5%, 5% EBIT growth, Imperial hasn't done that in years. And if I look at the mix of markets, so U.S. overall market is down, 9% cigarette volumes; U.K. market is down mid-teens; Australia is down mid-teens; Germany is better, but you're losing share. So with that sort of a backdrop, what gives us the confidence that your EBIT growth will accelerate next year?

Sure. Absolutely. Gaurav, on this question, I mean, I think one thing which is important to remind ourselves in this fiscal year '23, the year we just finished had some very significant headwinds in the volume outlook. I mean we refer to it at 7%, 7.1%. What we shouldn't forget the year before the volume decline was 1.2%. So if you add the 2 years together, you're looking at a roughly 4.1% decline. That's very similar to what we had in the years pre-COVID at 4%. So I think what is as some of the headwinds, specifically of the COVID unwind and some important markets like the U.K. are coming behind us, we are forecasting from what we can see as a slightly better volume performance. But I think what's also very clear with very strong operational plans across all our top markets that will allow us to deliver the performance that we kind of promised with our guidance today. So I feel very confident in our delivery in the year, and you've seen about a lot of the upper levers that we are pulling at this point in time. And I think I come back to the point the question asked before about one of the benefits we have at Imperial is that we have a brand at every single price point in the marketplace in every one of our top 5 markets. So we are in a position to serve our consumers at every single price point. And I think that is a differentiated competitive advantage in today's world.

And if I may, just add at a further point. You mentioned a couple of markets there, particularly the U.K. and Australia, where there were heightened volume declines for very good reasons, COVID unwind, higher inflationary excise increases. But actually, in both of those, we still managed to grow revenue and profit in spite of those higher volume decline. So hopefully, that as well gives you some confidence of the kind of value focus we have in terms of generating value from this portfolio in even in some of those more challenging markets.

Sure. The second question I have is on the flavored heated tobacco brand, which has happened in Europe last month or 3 weeks ago. And what has been any impact you have seen on your flavor heated tobacco products?

Sure. Gaurav, the one thing you're absolutely right, the European directive said as of last month, flavor heated tobacco sticks have to come off. But the European directive has to be translated in local independent state laws. So what you will see is a truly stacked approach, ranging from last month over to in a year's time. So it's -- I mean, the only real market that it has come off the market is the Czech Republic that implemented early, where we've launched [ iSenzia ], the product I referred to earlier, which is a tea-based product. So to date, it's far too early to see what is the impact of it. But I think what you should take away, and I think the team is quite happy about this, we have become the challenger. We are virtually on the day the flavor ban arrived in the Czech Republic, Imperial offered for its Pulze users in the marketplace, a product that actually allows them to continue to enjoy the product in the right way. Yes. So too early to tell, but I think the exciting thing is that we do have an offer for our consumers that are in the Pulze system.

Sure. And just to confirm, so the ban has only come in Czech Republic and then the rest of EU, it will happen in the next few months.

Absolutely. It goes country by country depending on how the individual country turns that EU directive into local law.

Sure. And my last question is on NGPs, and you have said that the losses will come off. And then you have also said that you will have a U.S. modern oral launch next year. When some of your larger competitors launch the competitor brand [ to Zen ], I mean, they spend a few tenths, if not hundreds of millions of dollars, just discounting, getting shelf space to get on the market. So how should one think of potential investments behind Zone as you build it out in the U.S.

Sure. To be clear, I think one other thing, as you rightly referred to, we spent more than a year studying that U.S. market. And in the spirit of the challenger company, we'll look how can we bring a differentiated offer to our consumers. Now we can't talk about the products specifically. We look like what the branding and so on. But the reality is we are quite confident that what we will bring to the marketplace is a differentiated product and a differentiated brand, yes. And we see fiscal year '24, and this is within the financial guidance as the investment year to get the brand on the ground with U.S. consumers. We are in the process of presenting our proposal to our U.S. customers, our retail partners. They're quite excited about what we have to show them. So more to follow on this one, but to see it as a sign of confidence that we are now entering this important market with something that we believe is something that brings something new to U.S. consumers.

And Stefan, it's probably -- well, it's good to point out that an investment that we consider, which will be very much in the challenger mindset that we have done in the past is in the wrapper of the guidance that we have given. So that's all covered in that guidance.

[Operator Instructions] We will now go to our next question. And your next question comes from the line of Alicia Forry from Investec.

My first one, I wonder if I could just build on your previous answer regarding the modern oral rollout in the U.S. I appreciate you don't want to talk about the product ahead of its launch, but perhaps if you could talk a little bit about what particular strengths you think will benefit you in rolling that product out and then perhaps also any findings in terms of the fact that you've been studying that product in that market for some time. What gives you confidence that it is an attractive opportunity? That would be the first question. And then the second question, if I may, just on the cannabis impairments. Just wondering if you could update us on how you're thinking about the cannabis opportunity longer term?

Sure. Very happy to answer to your question. On the entry into modern oral nicotine, I mean, as you rightly say, we've studied this market for now quite a while. And at the same time, we have looked at all our competitors, and we have done a lot of consumer research in the last 12 months to really understand what is missing in the marketplace, what does it offer, the opportunity we have. So as I say, it's -- I don't logically want to go into the detail of it. We do have done a lot of consumer testing in the U.S. in the last 12 months. And we feel quite confident what we're bringing to the market is a differentiated product. It will take time to get the right traction in the U.S. and will take a phased approach of the rollout, but we feel very good about what we have to offer is differentiated in the U.S. marketplace. And that's done a lot of testing, not just on the product, but also on the brand and all the elements. So I think what is exciting about it will showcase the skill set we've built now at Imperial, the marketing capabilities that we now have invested in, in the last 3 years inside the company. So that's where we are. And the second question, just remind me was on cannabis. On cannabis, reality is our position in cannabis remains the same. In simple terms, there's always a watching brief, but the reality is as we are companies that will only look at legal cannabis markets, nothing has really moved in reality on this market. So we maintain a watching brief, but at this point in time, there's no change of our strategy on cannabis.

Thank you. There are currently no further phone questions. I will hand the call back to Peter.

Great. Thanks very much. [Operator Instructions] We'll take further question from Jon at the back there.

Just a couple of follow-up ones. Just to confirm on the [ iSenzia ] launch, I wasn't quite sure in regard to your previous answer. Are those -- I mean, clearly, they're nontobacco and flavored. But are they allowed to be sort of nontobacco flavored under current rules? Or is that -- is it just a sort of tobacco-flavored product? And secondly, what guidance, if any, have you got in terms of regulation and taxation for these products as a nontobacco product would be the first question.

On [ iSenzia ], Jon, absolutely, just to reassure you, clearly, this product absolutely complies with any regulation in place in the markets so we're launching it. So as you rightly say, today, these are non-tobacco containing products. Yes, they contain nicotine, but they're not tobacco containing. So they absolutely are products that are in -- we launch in the marketplace to meet the needs of our base of consumers that were built in our heated tobacco business. And reality is, as with any other product in NGP or in our core business, as regulation changes, we'll adopt our offer to it. But I think what's -- I want to come back to this broader point. I think what should give you the confidence that from virtually having no heated tobacco business in Europe about a year ago, apart from our 2 pilot markets as regulation changes in Europe with the removal of tobacco flavors in the heated tobacco range, from day 1, our consumers and the market impacted are having an offer from us, and I think that's for us the exciting piece, and we'll adopt -- we'll adapt this offer as regulation changes potentially in the future?.

Sorry, just to be specific, though, I mean, at this stage, are they even taxable if they're not a tobacco product? And secondly, under current EU regulations, which is my ignorance, are they allowed to produce flavors, which are nontobacco if it's a nontobacco product or it still fall under the sort of fan of nontobacco products.

Jon, I think the important piece is very simple. It depends on the local regulation in the country we're launching into. So together with our corporate affairs team, our legal team, every product that we, as Imperial would launch in the product will meet the absolute local standard in that market.

Okay. And secondly, on the legal challenge to the FDA on myblu, obviously, you've got a positive result in August. Have you decided to bring that forward to the Supreme Court or on bank on bulk federal court or is that still being decided?

No. I think on this one is a simple answer. With the court decision, the marketing denial order has been overturned, yes, the FDA has not appealed that decision. So I think what is really exciting, as we shared with you in the past, that we felt very confident and we felt very convinced that the case we had was a very strong case and the court that did rule on it did vote unanimously in our favor. So in principle, the marketing denial order has been removed. That means the product is now -- has always been in the market, as you will know. It gives us the chance to drive distribution more into the marketplace. So that's what we're excited about, and we can now resubmit the documents into the process. Yes, which brings us back to exactly where the majority of the market is today is in the market where you can sell the product while your application is being considered. So we do not have to appeal to the Supreme Court or anything else it has been decided by the legal courts.

Great. Any further questions from the room? If not, I'll hand back to Stefan to conclude.

Thank you for your question and I think for me, hopefully, today, what we showed you in the presentation and also in the question answers, give you some further evidence of the strong operational progress that we're making as a company and the transformation journey that we're on. And I think -- you can also see how that is translating in profit growth in the company. This was year 3 as a strategy. This was a step-up year of our strategy, and we've delivered on that. And I think what is exciting and we might not have spoken a lot about it today. But I think what you also see is that sustainability of the cash flows of the company that will allow us to deliver and give us that ability for growing returns to our shareholders, which is something we're very excited and very committed to. Thank you very much.