Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for being here. I'm Gaurav Jain, Barclays, Head of Global Tobacco. I'm thrilled to have the management of Imperial Brands here with me, Stefan Bomhard, CEO of Imperial; Lukas Paravicini, CFO of Imperial; and we also have Murray McGowan here. So as you might know, Stefan will retire from Imperial at the end of this month and Lukas will become the CEO from 1st of October, and Murray will be the CFO of Imperial from the 1st of October. So first of all, congratulations, Stefan; congratulations, Lukas, for your roles; congratulations, Murray.

Stefan, like before I ask all the questions, you have had a very interesting journey with Imperial over the last 5 years. You started in July 2020 when the stock was at GBP 12, more or less 4x PE. You're leaving a stock which has done exceptionally well since you joined and the multiple has also moved up, but it's still not like at eye-watering levels. So what -- if you think like -- and you had an Analyst Day in March, you laid out the plans for the next 5 years. But what are you -- what are the things which you think are still left which need to be done? And Lukas, please feel free to jump in here as what do you think could be the things which you would like to do over the next 5 years?

Sure. I mean, Gaurav, as you said, I think, look, I'm very pleased what we have achieved as a team in the last 5 years. We've deep involved with Lukas and with Murray as well. But I think -- and I think we as a team are pleased that this has been reflected in the share price as a signal of appreciation of shareholders. At the same time, I think there is a great continued opportunity. And I think that is reflected in the next 5-year program that we shared at the Capital Markets Day in March. And I think what is exciting, I think we've come a long way in the last 5 years, but there's still quite some way to go in the years to come. And one of them is clearly self-help opportunities that we clearly see inside the company. As we, as a management team, that joined in the last 5 years, at the deeper we understand the business, the more opportunity we have to see. The reality also is, I think, on the NGP side or on the reduced harm product side, as you will recall, that has been a complete reset of our strategy. And I think 5 years ago, there were quite some people when we revealed our strategy over the 5 years, quite some doubts whether we could compete there. And 5 years later now, I think there is a broad recognition that Imperial can clearly play in this space. And as you will know, at the half year, we report that we're growing market share in all 3 categories. But there's still quite some way to go from a low base. So I think as I pass the baton over to Lukas at the end of this month and Lukas to Murray, I think the great news, the business has a much stronger foundation versus where it was in 2020. But I think there's still a lot more potential in this business. And as I switch my position over from the CEO to becoming a shareholder, I'm looking forward for the team to continue to drive this business to its full potential.

I don't think building on the track record that Stefan has just mentioned and highlighted, I think the team is very excited not just with the value creation we have done in the past, but because we believe there is an equal opportunity to value creation for the future for our shareholders. So that's really the focus for us going forward. And in that sense, there is probably a combination of evolution and acceleration, evolution in the sense that we will continue to focus on the consumer. I think that was a guiding principle, which is fundamental to drive Imperial more as a fast moving consumers good, a company that is starting and understanding better than nobody else, our consumers. On that, we can then deliver against our combustible business, which is our core business and where we can extract further value for the benefit of our shareholders. That's one of the big pillars that will continue to drive, and we hope we'll continue to share value for -- create value for shareholders. It is our outspoken desire and commitment to continue to build our NGP business to a meaningful business by growing double-digit over the next 5 years. That is the other pillar that on top of a well-humming combustibles business will hopefully deliver more value for shareholders. And that all culminates in our ongoing commitment to our capital allocation policy, which has worked really well because it allows us to invest in our business, in our future. We're here for the long term. It helps us to create a very strong balance sheet, which we intend to maintain. But it robustly allows us to return excess capital to shareholders that we have committed again for the next 5 years to a share buyback in terms of the program, and we'll come back on the quantum every year. So to your point, that's the evolutionary part. I think the acceleration will be more about how we accelerate the self-help Stefan mentioned. There is an opportunity for us to exploit much more shared services to focus more our organization, what matters. That's the consumer and the capabilities we need to win with the consumer, but everything else, hopefully, we can use more shared services and for us, very important, the adoption of technology, machine learning, artificial intelligence. So you will see there more of an acceleration in transforming our organization, not just to be able to deliver value in the next 5 years, but beyond that as well.

So Lukas, a question for you because you mentioned NGP, you would want to grow it to double digit. Now one sort of, if I compare Imperial to your peers, then Imperial clearly has a lower share of NGPs right now. So how do you plan to do that? Like do you plan to do more M&A? Or is it going to be more organic growth that you think you will like to do there?

Good question. Clearly, the evolutionary part here is that our strategy is an organic, predominantly the organic strategy, as we have always said. But we also said that we will also want to do some bolt-on acquisitions. When it comes to NGP, that's probably the area where we would see those bolt-on M&As to come through. Now our NGP -- our next-generation products or reduced harm products, that strategy is based on us actually going in the markets where the market has been established. We are the fourth largest and we're happy to be the fourth largest. That gives us a bit more freedom to act. But when there is a market established and when we have a route to market, we will go into those markets and deliver with our innovative products, a value for a certain number of consumers that will actually accelerate the growth in that area. That's our strategy. But we'll continue, to your point, to complement that strategy with bolt-on M&A. That's probably the area where you'll see that, but it's always going to be a bolt-on attitude and strategy.

Okay. And to build on Lukas' point, I think the reality is the ambition that we outlined at the Capital Markets Day to grow double digit in net revenue in new gross products tells you it is an ambition, but the reality is if you look back at the last 2 years, we have delivered that. We have grown double digit. We have gained market share actually in the last year across all 3 categories. So shareholders, I think, can take comfort what was outlined in the Capital Markets Day, isn't an ambition that the company has no track record in. And I think the key drivers, as you asked, Lukas, about yes, M&A, bolt-on M&A is important, but we shouldn't forget the key investment we have made. We've built in the last 5 years, what we call the global consumer organization have made very significant investments in marketing, very significant investments in our market inside teams that allow us to really understand what consumers want and need in this field of reduced harm products.

Sure. So now let's focus on the existing business, and you have always spoken of your 5 key markets. So let's start with the U.S., which is your largest market, 1/3 of the company. And about 80% of your business is cigarettes, about 20% is cigars. We have seen a lot of changes happening in the U.S. cigarette market over time. Volumes have been weak. You have gained share for a long time, but recently, it seems that your share gains have slowed down in the U.S. as your peers are becoming more aggressive in the deep discount space, including the larger companies, Altria and BAT who haven't really gone down the price ladder, so as much as they have gone down recently. So can you just help us understand what is happening and how you are planning to react what those companies are doing?

Absolutely. I think you rightly referred to, we always look at our top 5 markets, which make more than 70% of our operating profit. And the U.S. is the largest of this one with roughly a bit more like a third of our business. And I think what is exciting, the last 4 years, we have delivered a holding share in these top 5 markets while before the current strategy, we were the #1 share donor in these 5 markets. And you're absolutely right. If you look at the last 4 years, our U.S. business has gained market share, yes. Now to be clear, we -- the ambition in the next 5 years is exactly the same to hold our market share in our top 5 markets. And we've always been very transparent in saying we don't think we'll ever gain market share in all fronts, yes? So we still believe that the U.S. will be a meaningful contributor to our success. But we, as a leadership team and Lukas and Murray going forward, will continuously look at where is the right mix to deliver this overall flatness of the market share. And you're absolutely right, it's become a more competitive field in the U.S. But to be fair, this is a highly competitive industry. And I think what doesn't go away, Imperial has had for a long period of time, a brand portfolio that offer U.S. consumers different brands at different price points in the U.S. market. That has been a competitive advantage as U.S. consumers, as incomes have come under pressure, that Imperial has well-established brands at every single price point.

Okay. And recently, there has been a lot of talk around the double drawback, which is benefiting some of your peers. Can you talk about where you are? And maybe for our audience, can you also just briefly help our audience understand what exactly is it? How does it work? And where do you stand on that?

So the -- what we refer to the duty drawback is a federal -- U.S. federal incentive for export. It basically requires companies to export a certain amount and then import it again could not be the same product or you have to have a factory somewhere in the abroad who could produce products and you can then import it. It also requires it to be brand-based, so you have to have a complete brand, you have to export and then import. You can't just do piecemeal. That incentive has been there. It was quite disputed. It was clarified in the latest Big And Beautiful bill that the administration brought through Congress a couple of weeks ago or a few weeks ago. And I think with that clarity, we will be looking into this incentive and see whether we can take opportunity. It takes a few months. It's quite complex because you have to, obviously, in our case, certify external factors or factories abroad through the FDA. Currently, we do not use that incentive. But given the clarity of the law today, we will be looking into this going forward.

And then there is this other dynamic which is happening, which is that your largest -- or the largest company in the U.S., they have decided to launch their nicotine pouch product, which still doesn't have a PMTA. Now you are playing in the nicotine pouch market and you have a 2.7% share, which has been now stable for the last few months. So do you see that as a route through which you would also want to go launch maybe another product and gain market share?

Sure. I think what is important here is we're very happy with the offer we have to U.S. consumers in the modern R&D team space with our own brand, which we launched in February 2024. And in 18 months, actually achieved already a 3% share, from 0% to 3%. And as you refer to 1 competitor publicly announcing launching more moist product versus the base brand, we have that product today in the marketplace. So we have found an avenue and Lukas touched upon our bolt-on M&A strategy is a primary example where we have been able to bring to U.S. consumers a product that we know has a very significant consumer appeal, but we have been able to do this in the way with respecting the process. So we see less of a need to go outside the process even we have an offer that absolutely respect the process, yes? And assume that we will continue to be innovative in this space going forward.

Sure. Now coming to the cigar business, which is about 20% of your business, COVID created some unusual dynamics. Before COVID, that business used to grow on a very steady basis. During COVID, that business was, I think, growing 20%, 30% at one time just because everybody was at home and receiving government checks and then spending on combustible products. And then for 2 years, there was a decline. So where do you see the cigar businesses now? And do you think it can again be sort of a secular mid-single-digit, high single-digit kind of growth business for you?

Yes. I mean, obviously, we -- so the mass market cigar is a small business for us in the U.S., but a highly attractive and profitable business where we actually own the most iconic brand called Backwoods, which is very much linked to grassroots music, Afro-American grassroots music. So highly sought after, commands a big price premium. So a very good brand, which we're very proud of and runs really well. It is an important business, and we invest a lot of time to make sure we curate that business, then we make sure it grows. To your point on the volumes, I think there was indeed volume spike through COVID because obviously, it is also used recreationally a lot of this product. It has naturally come down, but to be fair, it is now at the level of a reduction in volume, which is consistent with the long-term trend. So it's not that it is -- has accelerated like in combustible. It's actually the reduction is way less than it is in combustible. So overall, a positive outlook in a business where we have the lead and a very strong brand.

Sure. So now let's -- so that's the U.S. business. We have spoken of the various elements there, cigarettes, cigars, nicotine pouches. Let's now move internationally. So U.S. was 1/3, Germany is about 17% of EBIT, your second largest market, but you were losing market share forever until the last few months. And now market share is stable. The market itself is very attractive. So how do you see yourself now in Germany going forward? Like do we think these market share trends can stay like this accelerate? Or would you look to take pricing to monetize some of these German market share gains?

Sure. Absolutely. I mean it's exciting to sit here because in the past with sitting here talking about our more than 10 years market share losses, as a German national, I always said, we can fix Germany and it's the same must-to-win battles. But it was a promise, the greatest is the first time we're together here, we say and we fixed Germany's market share. We're not the #1 share donor in Germany any longer. In the last fiscal year, we stabilized market share. At the half year for this fiscal year, we reported market share gains, and it's probably fair to assume we will report for the full year market share gains in Germany. It logically triggers the question you ask is, oh, can we please continue to build market share? You will know we are a very prudent company. And I think what doesn't change at all is a principle where we've always said we look at the combination of our top 5 markets together and the ambition that our shareholders can count upon is that we will hold share in these top 5 markets. So I wouldn't sit here and say, "Oh, I can promise in fiscal year '26, there will be continued market share gains." I think what is fair to say, our investments in the quantity of our sales force in Germany, our investments in the quality and capabilities of our sales force from training and technology support, they're there, yes. And at the same time, the investments in the brand equities of our German brands are there, yes? But at the same time, Germany is not just an attractive market for Imperial, but it's an important market for our competitors. But I think what's fair to say, I don't think under the leadership of Lukas, Murray and the executive leadership team, we will return to the share losses that we would have seen in Germany over the last 10 years. So we feel very good about the German market, but it is a very attractive market for our competitors as well.

Sure. Now coming to your third key market, which is the U.K., which is -- it used to be a much bigger portion of your profit pool, now it is high single digit. The market has been declining volumes mid-teens probably for the last few years after the COVID boost that had happened. Excise taxes have gone up. The fiscal situation is pretty bad. We can see already in the news lines and U.K. every day right now. There is a budget coming next month, where we'll probably all see whoever is living in U.K. another tax hike and cigarettes are always an easy sector to tax. So why shouldn't we expect that something could happen on the tobacco side of things, which could prolong the pain, which we have had in the U.K.

Listen, I think when you run a multinational and you have a portfolio of markets, you will have markets who do better and markets who have different environments. The one good thing is in our top 5 markets, they are highly profitable. They all have done well. And it actually talks to the effort and the strength of the management team that we actually could still extract value out of the U.K. and Australia. And in Australia, in a very difficult environment as a regulatory point of view, we maintain market share. It is -- U.S., Germany, Spain, our biggest markets are way more affordable. They are driving and thriving, but doesn't mean that we will drop U.K. and Australia because they are profitable. And they are consumers who want our products, and we can extract further value for our shareholders from that. U.K. specifically is very attractive in the sense of that it is obviously possible to do NGP business, which is different in Australia again. And we have just crossed 10% mark share in our NGP, in our vapor business in the U.K. for the first time at half year. So there is an avenue that we can work through. It's not an easy avenue. I'll be honest with you, and it takes a lot of effort and the government does not often help when it increases excise tax. What happens in the future? I can't tell you, especially when it comes to budgets in government, but we are prepared for whatever comes. To be clear, I think the U.K. government does understand what a Laffer curve is that actually by increasing further the excise tax beyond the inflation, they would reduce their income. And I think that is well understood. So we'll see what happens and then we'll work with whatever comes.