Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining our interim results presentation. I would like to draw your attention to this disclaimer before I introduce you to the team and outline our agenda. I'm joined by Lukas Paravicini, our CFO; and Peter Durman, our Head of Investor Relations. First, I will highlight some key points from today's strong set of results. Lukas will then discuss our first half financials in more detail and confirm our outlook for the full year. I will then return with some more color on how we are continuing to drive operational improvements to support our strategic transformation. And finally, we look forward to taking your questions. Now this has been a 6-month period characterized by a range of external pressures, continued high inflation in some markets, a squeeze on consumer wallets, supply chain disruptions and fast-evolving regulation. Amid these very challenges, our teams have performed well and delivered a consistent broad-based set of results. In Tobacco, we've driven robust pricing with price mix up 9%. At the same time, we've consolidated the strong aggregate market share gains achieved in variety markets over the past 2 years. In next-generation products, we've continued to scale up with revenue growth of 17%. While at the same time, we have driven increased gross margins and reduced losses. Looking at our broader transformation. As you can see from today's figures, we're succeeding at a day-to-day operational level. We're also making good progress on our long-term ambitions to become more consumer-centric and to drive more efficient and effective ways of working. The future is always uncertain, and we know this is a competitive industry, prone to disruptive change. So we never take anything for granted. All of that said, today's results are another set of data points, evidencing that we are a stronger business than we were 3 years ago. We are now better able to deliver consistent and broad-based performances with positive price and share in combustible and in NGP growth and improved margins. This is the sixth half year period when I've showed you this dashboard and for the sixth time in a row, there's a tick in every box and all the lights are green. When we launched our strategy in January 2021, we divided the 5-year period into an initial foundation building phase, followed by a phase of accelerating returns. We're now 18 months into the acceleration phase. And there are two metrics which most clearly highlights our success in stepping up performance. First, is the 2.8% growth in net revenue. This is the strongest organic growth in pure brands as reported for at least 10 years, and it has been driven by strong performance in both Tobacco and NGP. The second metric is to focus on, is the 7.7% growth in earnings per share, highlighting the accelerated profit growth and the powerful year-on-year compounding effect of our ongoing share buyback. Since starting the buyback in 2022, we have retired 9% of our share capital. And taking the longer view, over three years, we are on course to make cumulative capital returns to shareholders of GBP 6 billion through buybacks and dividends. Underpinning this operation and financial progress is a steady transformation of Imperial Brands into the strong challenger business for our industry. Being a challenger is about getting super close to consumers. It's about a strong culture focused on performance. It's also about agile ways of working, supported by tech and data. In previous presentations, I've spoken about how we have invested in consumer insights, innovation and brand building. And I've spoken about how we're upskilling our leaders to coach stronger performances from their team. Later in this presentation, I will shine the spotlight on the strategic long-term improvements, we're making the business data, supply chain management, and our enabling functions. Taken together, as there's still much more work to do, this transformation is already making us more agile and better able to deliver consistent growth. I've always believed that there's in times when a business faces external headwinds that its agility becomes most apparent. And in the first half, it's fair to say we successfully navigated through some pretty stormy conditions. We manage inflationary pressures and the squeeze in consumer wallet in some key markets, thanks to how we have strengthened our brands and a more rigorous approach to revenue growth management. We've so far responded well to the challenges of the Red Sea crisis, thanks to the ability of our supply chain teams to respond that phase. It is this improving agility, our evolution into a stronger challenger that gives us the confidence in our ability to continue to deliver in the second half and beyond. I will now hand over to Lukas to take you through the financial results and outlook in more detail.

Thanks, Stefan, and good morning, everyone. Once again, I'm pleased to show you a positive financial dashboard. As Stefan mentioned, we delivered strong pricing while consolidating the aggregate share gains in our five priority markets, achieved in recent years. In NGP, revenue growth is translating into gross margin improvement. This operational success has supported the improvement in group adjusted operating profit growth of 2.8%. Cash conversion was strong at 97% on a 12-month basis. Leverage at 2.5x is higher than the full year for the usual seasonal reasons, but remains within our target range. This performance has meant that at half year, we are on track to deliver against plan, as well as meet our capital allocation priorities. Our results offer a good illustration of the tobacco value model in action. Strong pricing across our footprint, in orange, has more than offset volume declines to deliver an acceleration in Tobacco net revenue growth. In Europe, our largest region, strong and broad-based pricing has significantly outpaced volume declines. In the U.S., price/mix increased 12.9%, driven mainly by pricing gains in our Cigarette portfolio. This more than compensated for the volume declines, which also reflect some temporary wholesaler destocking in Cigarettes. In our AAACE region, volume has been affected by shipment timings in the Middle East due to higher border controls and the Red Sea crisis. There have also been market size declines in Australia. Group operating profit growth was driven by all three parts of the business: Tobacco, NGP and Logista. In Tobacco, the strong pricing has dropped through to higher profit. In NGP, we reduced our losses by building scale in our existing footprint and improving gross margins. Logista also made a strong contribution with robust underlying performance helped by pricing in its Tobacco-related business. Our adjusted EPS reflects our adjusted operating profit growth and the reduced share count due to our ongoing buyback. You can really see the year-on-year effect on the buyback coming through. As Stefan said, we have already repurchased 9% for our share capital since the start of our buyback program just 18 months ago. This offset, the small increase in interest and tax, the net finance costs reflect a slightly higher all-in cost of debt as we refinanced at higher rates. This was offset by a currency switch to minimize the overall rate increase. Our adjusted effective tax rate was at 23%, in line with our full year guidance. Turning to cash and capital allocation. We remain focused on cash generation and disciplined in how we allocate capital. Operating cash conversion was 97% on a 12-month basis. The strong operating cash conversion is driven by improved working capital at Imperial, partially offset by higher working capital at Logista and higher cash tax. Disciplined capital allocation remains a key part of our value creation model. Our first priority is to invest in the business. Leverage at the half year is broadly flat year-on-year and our year-end leverage will be around the lower end of our 2x to 2.5x range. Our progress on strengthening the balance sheet is being recognized externally with Moody's upgrade to their outlook from stable to positive in December 2023. We have announced an interim dividend increase of 4%, retaining the increase in growth rate from fiscal year '23. And the GBP 1.1 billion buyback will be largely complete by the end of September. Together, this means we are on track to have returned GBP 6 billion to shareholders over a 3 years period. The strength of our strategy and the performance in the first half means we are confident we can further improve adjusted operating profit growth in the second half, in line with guidance. This step-up will be partly underpinned by pricing already taken in the first half and improved operational gearing. And over the second half, we see an improvement in NGP profit trends as we grow into our newly expanded footprint. As previously guided, we continue to expect full year constant currency Tobacco and NGP net revenue to grow in the low single digits. Constant currency adjusted operating profit is expected to grow close to the middle of our mid-single-digit range. At current rates, we expect foreign exchange translation to be a 3% to 3.5% headwind to profit. As usual, there is a slide in the appendices with guidance on specific items. Our strategic transformation and disciplined capital allocation means we are well placed to generate a long-term value for shareholders. Thank you. I now hand back to Stefan, who will provide an update on operational progress.

Thank you, Lukas. Most of you will now be well familiar with this slide, our strategy and how it links to our purpose, our vision, and our behaviors. In every element, we're making good progress. Starting with the strategic priorities, the top half of the wheel on the left. Our priority, Tobacco markets. We're simultaneously delivering share, price, and value. In NGP, we're building both scale and margins. And as you've just heard from Logista, our distribution business is contributing strongly. Now success in these strategic priorities is underpinned by our critical enablers, the bottom three segments of the wheel. Our consumer and innovation capabilities are maturing. Our three Sense Hubs in Liverpool, Hamburg, and Shenzhen, which bring together our consumers, partners, and their own product developers are now fully up and running. We're making measurable progress on our performance culture. During the first half, close to 200 leaders participated in our intensive 7-day Connected Leadership course. This enables us to become better coaches to their teams and drive stronger performance. Investments like these in our people are enabling us to embed our five behaviors shown along the bottom of the slide. The way our people are becoming more collaborative, accountable, and future-focused is a key reason for our growing success. I spoke earlier to you about the importance of our vision of being a strong challenger. And in a moment, I will flag a few further examples of this mindset in action during the first half. Turning to our purpose. As our NGP business develops and as we deliver on our wider ESG commitments, we're steadily moving along the path to a healthier future. I'm going to spend a few moments focusing on how we're building a more simplified and efficient organization. What is the three critical enablers for our strategic wheel? We are transforming the business across key functions, finance, procurement, people and culture, and IT to enable our people to provide more insightful advice and make smarter, faster decisions. As I've said before, being a challenger is not just about mindset. It's always about equipping our people for good data and efficient processes. Over the past 2 years, we have created an all new global business services function with 300 colleagues sitting in sites in Poland, Philippines, and Bulgaria. This centralizes key processes and operations, freeing up our business partners in the markets become more commercially focused. Now recently visited our GBS site in Krakow, and saw firsthand the visible transformation the team are supporting, which is on track to deliver a 10% productivity improvement in year 1. Both are progressing well with the global upgrade to our technology and data architecture through the creation of a single ERP platform, replacing 60 legacy systems. In the first half, we'll move from the planning and design phase to preparing for our early adopter markets to go live at the end of this year. Alongside and integrated to these major programs, we're moving ahead with technology initiatives, which will empower colleagues in the supply chain, people and culture and finance functions. While the benefits of these transformations are already flowing through, it's a step change in our effectiveness and efficiency would come in future years. And this is one of the things which gives me confidence about this company's headroom for future growth. We continue to make good progress with our ESG agenda or People & Planet as we call it internally. As usual, we will publish our full ESG update at the year-end. So today, I will just highlight a few achievements from the last 6 months. Looking first at our net zero ambition, we were awarded an A rating for climate from CDP for the fifth successive year. In addition, our transition plans have now been validated by science-based targets initiative. Turning to Waste and Recycling. I'm pleased to report we achieved zero landfill across our factories, operations 18 months ahead of our 2025 target. In Health and Safety, we have been focused on analyzing the root causes of accidents and then mitigating them through Education and Awareness. Over the past 6 months, more than 100 leaders have been trained on behavioral safety. And I look forward to reporting further progress in future presentations. Over the past 3 years, we've achieved our objective of stabilizing market share across our five priority markets. We can now report 3.5 years of stable or growing share after years of decline. As a reminder, our objective is to maintain our shares. Our top five markets are highly competitive, and we manage them as a portfolio. Therefore, some markets may be up and some down within the period. We've gained share in the United States, Spain, and Australia, with declines in the U.K. and Germany. Now let me take you through our performance in our priority markets, starting with the U.S. Our Tobacco portfolio has continued to perform strongly. Despite the volume pressures, strong pricing mix means we've once again both grown revenue and profits. This is within the market that saw industry volumes declined around 8.5%. We delivered further growth in Cigarette share, up 5 basis points. Underpinning this consistent success has been a long-term focus on upskilling our sales force, targeted brand equity investments and careful management of our portfolio. The breadth of our offering means we're well placed to capitalize on evolving consumer preferences. Turning to mass market cigars. Last year was marked by a transition with our performance affected by post pandemic changes to consumer behavior as well as wholesaler destocking caused by Hurricane Ian. As we said, these factors are now behind us. And while market size remains under pressure, we have delivered an improved performance, most notably in backwards our premium brand. Our other four priority markets continue to perform well. In terms of share trends, all delivered an improvement over the same period last year. And like other years, we've made clear choices around balancing market share with the delivery of pricing. In Germany, many of you will know that this has been a tougher market to turn around. However, after sustained period of share losses, we're now seeing an improvement in the trend. I was in the market recently, and I could see how new sales force initiatives are starting to build stronger relationships with key customers. But at the same time, there's still much still to do before we can declare victory. In the U.K., we choose to increase prices in February with the clear expectation that this would have a short-term impact on share. But we're confident this was the correct decision for long-term value creation. In Spain, we delivered strong market share growth through initiatives focused on local true brands such as Nobel. This share improvement was accompanied by price increases of a third consecutive year following a period of price stability. In Australia, the high excise environment has driven an increase in the illicit trade, and this means the size of the legal market is under pressure. That said, our team in Australia has done a great job in optimizing value from the portfolio, while also delivering share gains. Each of these top 5 businesses are operating in very different environments with different challenges and different opportunities. But what unites them all is that they're all delivering strongly against their individual strategies. And this is enabling us to meet our overarching objective of delivering value with stable aggregate shares. Now turning to NGP. Both the market environment and our capabilities continue to evolve at pace. Consumer preferences and regulatory environments are changing rapidly. All of this means it is important for us to be able to offer consumer choices across multiple categories and remain targeted and agile in our execution. The first 3 years were about building the foundations for a sustainable NGP business. We followed and continue to follow our test-and-learn methodology using consumer trials to validate our approach. We recognize that we have to play differently to our competitors and are mindful of the need to be smart with our investments. Following a period of new market and product launched in fiscal year '23, our focus this year is about building scale in our existing footprint. We've continued to grow both NGP net revenue year-over-year and to improve the gross margin. Early evidence, I would suggest of the sustainability of the NGP platform we're building. Our focus has continued to be revenue growth in Europe, this is the world's largest NGP region. It's even bigger than the U.S. NGP now makes up more than 7% of net revenue of European markets, up from 2%, 4 years ago. We showed the market-by-market bar chart on the left at our full year results in November. And even then, since then, we have made some considerable progress. In six markets, NGP now accounts for 25% or more of total revenue. Looking at the financials. Group-wide, we delivered 17% net revenue growth in the first half and 24% in Europe, including Central and Eastern European markets. In Vapor, we're building scale and encouraging, we're seeing growth in our larger European markets, including the U.K. and Germany. I've spoken before about how our consumer-centric partnership approach was helping us make us more competitive. What's new in the past 6 months is that we have proven we can not only be fast follower, but sometimes can also lead the pack with new product features. Consumers have told us they wanted to see a longer lasting, disposable vape, and we've responded by becoming the first tobacco player to offer a product with 1,000 puffs in a single device. This all New blu bar also contains a removable battery to enable more of the product to be recycled. It is now available in the United Kingdom and early consumer feedback is extremely positive. While growth in vaping continues to be driven by disposables, our Blu 2.0 pot-based product continues to appeal the consumers in some key markets such as Spain, but will lead the pot category. Now turning to heated products. As a reminder, Pulze 2.0 is now present in seven European markets, which represent more than 60% of the addressable European market. The device with its 25 or more sessions from a single charge appeals to consumers who like consecutive sessions and appreciate its convenience. Our proposition has been supported by the introduction of the flavored non-tobacco heat sticks under the new iSenzia brand. As this is a competitive market and our competitors are also innovating farms. However, we continue to remain highly focused on our target consumers, so we can secure our fair share in this category. In Modern Oral Nicotine, the exciting news is that we have now entered the fast-growing U.S. market with our own brand Zone in February of this year. The product has been introduced across 12 metropolitan areas in the U.S. To maximize consumer appeal, the portfolio includes 14 SKUs across two different strengths. And we've taken a challenger approach by offering a very clearly differentiated part. Zone pouches are more moist than others on the market, and our testing suggests this makes for a better mass feel. And I was in the U.S. recently, and it was great to see what our sales teams have implemented at the point of sale to achieve an eye-catching profile in stores. While it is too early to get a read on consumer uptake, we're now on track with the planned rollout, and we have received an encouraging initial reaction from consumers and the trade. Turning to Europe. We've continued to deliver strong growth through Zone X, driven by new flavor launches shown here. Overall, our European Model Oral business grew by more than 30% from last year. So to summarize, the first half represents another period of improved operational and financial delivery. We've landed in line with our commitments and in some areas, for example, on net revenue delivered beyond expectations. These good results are more data points, more evidence that our strategy is working. Investments and consumer capabilities, culture and ways of working mean that is now a stronger business, better able to deliver consistent growth. Our vision to be the industry challenger is being relaunched. We're always going to be smaller, but we can be more focused on operational performance and more focus on creating value for you, our shareholders. As Lukas said, we expect to deliver a full year performance in line with our guidance. And despite the varied challenges we continue to face in the external environment, also confident about our ability to grow sustainably in the years to come. Now thank you again for joining us today. We'd now like to take your questions. I will hand back to the operator to start the Q&A session. Thank you.

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

A couple for me, please. So the first one on Germany, and nice sequential narrowing of the share losses there. What's your outlook for the market there over the next 2 years? I know Stefan, you said that it's too early to declare victory, but are you finally seeing a path to neutral or even share gains from here? And then my second question, on the price/mix in the U.S., clearly very strong at 13%. Can you break down how much of that was price versus mix? And should we expect that strength going to continue into the second half of the year?

Sure. I will take your first question, Lukas will answer the second question. On Germany, as you rightly say, I mean, we are encouraged by the progress we're making in Germany, which has been our top five markets, the one where turnaround share performance is taking the longest. I think what is important also to remind that our strategy was about the combination of our top five markets together that we would hold share or gain share, but with the key line being the holding share. And we've achieved that in the 3.5 years despite the German share movement. I think what is exciting to see is that we must-win battles that we've put into place in Germany are now starting to bear fruit. And I think -- look, I think for this year, for sure, we will still see a negative territory. But I think you do see now a movement in the right direction, German share number. And let us remind that our -- Germany is a very attractive market. The market size declines in Germany are noticeably smaller than some of the other markets. So getting to a better share position in this market will bode well for Imperial in the years to come, but I wouldn't want to predict at this point in time in a highly competitive marketplace, what our share performance will be in the years to come.

Thank you. And just on the price/mix, Rashad, indeed, we had a very strong price/mix of 12.9% in the Americas. That is mainly pricing with catalog, the mix is neutral. And yes, as we said in the presentation, the outlook for the second half, we obviously confirm the guidance. And part of that delivery is because we have taken the pricing and as you pointed out, it will roll over into the second half. So you could continue to see a strong pricing in the second half in the U.S. and pricing is equally in cigarettes as it is in mass market cigars, by the way.

We will now go to our next question. And your next question comes from the line of Faham Baig from UBS.

I've got three, if that's okay. I'll start with the U.S. as well. So I guess your overall group strategy to accelerate growth towards the mid-single-digit range relies on the U.S delivering at that or slightly above. Could you maybe discuss how you expect the volume environment in the U.S. to improve from here? And in a competitive market, how sustainable it would be for you to continue to deliver double-digit pricing in order to try and hit the mid-single-digit operating profit growth?

Okay. Yes. Let me answer this question. I think, number one, I think U.S. is, as you -- it's around 35% that business. So I think as you know, we play a total portfolio for three regions in a lot of markets. So it's not -- I wouldn't go to the assumption that to hit mid-single adjusted operating profit, that's exactly the performance the U.S. needs to deliver. The U.S. does need to make a contribution to it. But you see, for example, in these half year results that our European region, which is a larger region has made a contribution well ahead of them. So we are playing our global mix in this context as well. Yes. That would be point number one. Point number two, I think when we look at the half 1 results, I think what you can see that we have the right product portfolio, the right strategy for the U.S. because what you can see here, we took pricing to more than compensate for the market size decline in U.S., but at the same time, have continued to gain market share, yes, and improved our profitability. So I feel very confident that in a U.S. market where we will continue to see market size decline in the years to come, we have the right portfolio and the right strategy to deliver the set of numbers that we rely for our U.S. business and our global business. And then on the question of market size decline, you're absolutely right. What we're seeing in many of our markets globally, market size declines have started to more normalize now. The U.S. is one of the exceptions of that. There are two effects that we're seeing in the U.S. market that for the time being lead to an elevated level. Number one, the macroeconomic factors, the overall cost inflation for consumer and then yes, remains elevated versus historical trends. Now we see it improving, but we're still not back to normal. So that's definitely one factor. And the second factor that we're clearly seeing is the growth of listed is specific in vape. At this point in time is impacting the FMC volumes. But again, here, encouragingly, we are now seeing the regulator actually going more aggressively after it. But it will be difficult to predict from our side as the smallest of the big three players what the outlook will be. We do would forecast that in the next 1 to 2 years, we should see a reduction of these two special factors in the U.S.

And if I may, Stefan, just to add to that. As you know, the U.S. remains one of our most affordable markets still. So if you combine that affordability with what Stefan had said, that the macroeconomics will improve and hopefully also trickle into the consumer's pockets, then not only can we could stay that double-digit price, but the pricing will probably be required to be less than it is currently, because volumes will normalize again.

So secondly, I just want to move on to growth in vapor, seems to have slowed in the first half. And if I take into account the entire category, I think it's slightly underperforming the category as well. Could you maybe discuss some of the drivers behind this outside of the U.S., any sort of planned innovations or launches or changes in approach?

Sure. I mean, on -- number one, we're not seeing a slowdown in our growth in vaping, just to be clear. Yes. I think what you see, you see, the run rate has slightly reduced overall for NGP business versus last year, we were at 24% growth. We had 17% growth. But don't forget, last year, saw for example, some new market entries and launches specifically in the Heated Tobacco business. So that is one of the key drivers. We're not seeing a slowdown in our NGP business overall. We're not seeing a slowdown in our vaping business. So we're very encouraged by the performance that we're seeing across our vaping business. Well, you're pretty right, if some markets, the extraordinary growth that vaping has seen per a market size perspective has become more normal, but it is still the fastest growing category in many of the markets that we have seen. And on the innovation, I think, look, as you probably understand, we're not -- cannot share our forward innovation plans. But I think what you should take -- courage from is what I referred to earlier so that we launched in the disposable vaping category, the blu bar with 1,000 puffs and the removable battery, which were among the established tobacco players, the first one to launch such a high puff count and also the first one to launch a removable battery, which should give you a sense of what the challenger might set and also the cooperation with outside partners is capable of delivering into the business.