Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for being here. I'm Pallav Mittal, Head of Global Tobacco at Barclays. I'm thrilled to have Lukas Paravicini here with me, CEO of Imperial Brands. Thank you so much, Lukas, for giving us the opportunity to host you. Without wasting any time, we'll go straight into questions.

Sure.

So Lukas, you have been in the CEO seat for now almost a year. Can you just help us understand how -- what things have worked, what hasn't? What have been your main priorities over the last year or so?

Yes. Firstly, thank you very much for your attendance, and good afternoon to all of you. It's a pleasure to be here and have this fireside chat with Pallav. Indeed, this is my first year as the CEO, and it has been a very interesting to say the least year. I enjoyed it. And I think for me, it is important that whatever I do, I do with passion for the sake of our consumers and our shareholders. We started off the year also with the evolution of the Strategy 2030. It is a continuation of what we have done with Stefan in the first 5 years. So it was also that opportunity for me to travel the organization, meet more of our people, discuss the strategy. And really what was very pleasing is to see the energy of our talent who are highly motivated to deliver again in these 5 years. It was also a year where -- let's say at the least, it was quite an interesting year with unfortunately, wars, tariffs, lots of things. You see my gray hair, it is not the first year over the last 40 years, I've never seen an easy year, but this was especially interesting year to say that. So I'm really proud on the organization that, again, we will deliver probably the fourth year in a row of positive net revenue growth of high single-digit EPS on the back of a profit growth. And again, our commitment to a healthy cash flow with -- in our guidance today is above GBP 2.2 billion. So we are fully in line with that guidance, and we stand to that guidance to the full year. It is also important that not only are we performing and overcoming hurdles here and there, but we're also making sure that while we perform, we transform. And we had a good start to the transformation as well. My work is not just to perform today with the organization to make sure that this organization can perform for the next 10 years and making it future proof. We have announced at the CMD that we are embarking on a transformation that will deliver GBP 320 million of savings, and we are well on track. We closed Langenhagen -- sorry, we exited Langenhagen. We sold Taiwan. Those are 2 big factories that alone will deliver an annualized savings of GBP 100 million once it is completed in July '27. We have also communicated that by the end of the year, our manufacturing excellence, which is actually focusing on the 7 strategic factories we have, will deliver another benefit of GBP 25 million on an annual basis. Our joint venture -- excuse me, joint venture -- our partnership with Capgemini is delivering good results as well. We kicked off in February. We already transferred 400 people, and we are progressing nicely on that journey. I just want to make one point. In a company where every $100 you sell, $50 go straight into profit, savings are very important. As an ex-CFO, as a CEO, I will never leave money on the table. But the real nugget of the transformation is actually the fact that we can improve revenue by focusing on what matters, which is our consumers, by building those capabilities and infusing AI into this equation. Capgemini will be a big partner in that. All right? I also want to recognize that I'll finish and not all my answers will be as long as this one. I also want to finish to recognize that there's more work to be done. As a CEO, I can be proud of the performance. I can be proud of many things. But when I look at the share price, there's more work to be done to convince the market that whatever you see in the U.S. and Germany, we will deliver, and we look at this beyond this year. And so -- I also need to reconfirm our confidence in what we can deliver going forward.

Right. We'll go into those details around U.S. and Germany in a bit. But if you could just start with, I mean, a key question that people right now have is on market share. So over the last 5 years, Imperial was gaining market share in their priority markets. But in the first half this year, Imperial has lost some market share. So how should we think about market share over the next few years? And how do you think about market share versus, say, value creation?

Yes. A very good question and obviously, a very hot topic over the last few months. I just want to start with one thing and reconfirm that if you're a consumer company, if you start with the consumer, market share will always be important for us, right? In fact, if you look at the U.S., we gained 185 basis points over the last 5 years. We lost 20 basis points at half year. Why? Because we gained market share at the bottom of the value ladder, been very successful. We've been the sole player there, very successful when KT&G left. But we always knew that at some stage, our competitors will want to participate from the market because right now, some of our competitors, when they down trade, naturally down trade, they will not have an option to serve that consumer. We do. So it was a matter of time for those competitors to come in. That's not a price aggression. That's not being more aggressive. That's just entering a market they were not there. Also benefiting that our volume declines in the U.S. have improved significantly, and those consumers will come in at the bottom. Guess what? They don't find those products from our competitors. They want to be there. I understand that. So our strategic rationale was, okay, we gained 185 basis points in 1 year to lose 20% to maintain the structure is not such -- much of a bad loss if you then continue going forward. So those decisions were made not just tactically short term. These were made when we look at how we progress in the U.S. over the next few years. And I remain confident U.S. is an attractive market. It is a market where we have options in all price ladders and where we have just launched Malibu to replace Crown, which has now priced up. We are in 40,000 stores. And we have 50 basis points price share -- share. So I remain confident that the U.S., whilst more competitive, will still be a big, big engine for us going forward.

Right. Just to follow up on that. In the U.S. market, cigarette volumes this year surprisingly have been pretty strong. So it's around minus 5% decline versus minus 8%, minus 9% over the last 3 years. So can you just help investors understand what is driving that cross-category movement, illicit vape crack down? And how are you planning in terms of your Malibu distribution expansion?

Yes. So I think to also -- we always have a lot of comments on the FDA. I also want to appreciate the work they have done in by going in the right direction in the regulation, but also helping the law enforcement agencies to enforce better existing laws and curb the illicit market. You can clearly see that the illicit vape has been retained better in the last few months, and that has had a positive effect. Remember, the consumers down trade and then they have an option to go into vape, which is a cheaper offer and readily available with attractive products because they're technologically advanced, which we can't compete on the PMTA restrictions. Now that it is harder to get to the illicit vape, now that the bottom end has attractive offerings on that price point, the consumer doesn't need to leave that category. In fact, they will come back. So we clearly see a correlation between the illicit and/or the better management of the illicit with the volume increase. And for us, we will always be where the consumer is. And so with Malibu, we have now the option to replace what Crown was to play together with our competitors at that bottom end. And as we always do, use the escalator to start -- slowly start to price up again.

Before we move on to some other markets, can you just remind what are the one-offs or the headwinds that we saw in 1H, specifically on tariffs, which won't repeat in the second half because clearly, U.S. is a significant part of the growth story. So just remind us of the one-off, the headwinds that you saw in 1H and what drives the growth in H2 to achieve the full year guidance?

Listen, I can have a long list of things that happened in the first half and the second half from the wars and tariffs. But I think what we said at the half year, there is a significant effect mainly on the tariffs in MMC and the significant effect on the market size reduction in Australia. While Australia will always remain a profitable market, the step down has been significant, very significant, and especially at the first half. We see that now lapsed. And so you'll see that improve in the second half. The tariffs also has improved. That has gone away or let's put it that way, we have stabilized at the level we -- which is better. And so that will improve. Now naturally, we always had a second half impact because of the way we invest at the beginning of the year and especially on how the pricing comes. So that's why we are confident that we will deliver the guidance for this year.

Right. So moving on to Germany, which is the second largest sort of profit market for you. Over the last couple of years, you have been gaining share, but I think over the last few months, again, IMB has lost some share. So can you just talk a bit about that? What did you change, which was driving the market share gains? And now what has changed again in the market? Plus, I think there is a big sort of German excise tax coming. So how do you view that? And what the impact could be as we think about 2027?

Yes. So again, I just want to reinforce the importance of market share. But if you look at -- and to your point, sorry, the way we looked at the playbook for all of these markets and not just the top 5, but all the markets is you need to invest in your brand equity. You need to maintain that brand equity and you need to invest in your sales force. You need to professionalize your price sales force. That took longer in Germany. You know the reasons for that, but that ultimately delivered the benefit. That has not changed, that we continue to do that. But I also want to go back to the point I made before. We don't look at the year only. We look at the longer perspective. Germany lost between 80 to 100 basis points of share every year up to 2 years ago, where these measures kicked in. But like in Spain, where every year, we gain share and then we monetize, we drop share, we gain share, we drop share, you will see the same behavior in Germany. We will -- we gained 40 basis points, and we lost, and we were flat. And so we will continue to be managing that over a longer period of time. That has not changed the importance of market share nor that it is a robust state we are in, in terms of market share in Germany. Again, the same discussion we had before. We have done extremely well in Paramount. We're doing very well in Gauloises at the top and Davidoff. And so we'll continue to manage those segments in accordance to how we best deliver the value and maintain that share very stable over time. The excise tax. I think that's been a little bit of sort of a lot of noise around the excise tax. As a Swiss-German, one of the attributes and virtues of Germans are that they are very structured. Germany has a tax calendar, which they issue every 5 years and is valid for the next 5 years. They are very rational on that. The next tax calendar is due on the 1st of January 2027. We knew that 5 years ago. Now in May, the news came out of that excise tax, and unfortunately, one of a very eager politician who realized that we had -- or Germany had a big gap in their funding, thought it would be a good idea to tax sugar, tobacco and alcohol and front-load the tax so they can get quicker cash. Now in Europe, sometimes you see these proposals coming out being quite aggressive because that's the way they negotiate to a level that is acceptable. So when they came out with what is a proposal to increase the tax by EUR 2 rather than the sort of EUR 0.40 -- EUR 0.30 to EUR 0.50 every year and start the taxation on the 1st of September, rightly, everybody was concerned. But we worked on it. We worked with the government. We worked with the ministry. We worked with the industry. Today, there is no tax increase in September. That's off the table. There will be a tax increase in January. The tax increase we're talking now is not EUR 2. It's now EUR 0.50 to EUR 1. I do not know honestly, where we're going to end up. That's still in dispute. There might be a point that they get to EUR 1. It might well be EUR 0.50, which is very close to what we do every year. As a side effect, they're also going to raise the minimum taxation, which closes the gap between your value price to the private label, which is the only market where there's a private label, and there's a significant gap between those 2 prices. By raising that minimum tax faster, that gap will close. I'll be very transparent. That gap will still be very relevant, but it will close. It will be smaller. So does that change the fundamental strength and power of Germany? No. Will it have an effect short term on some of the volume if we go up a euro? Most likely, because no consumer is immune to these changes. Will the industry all behave rationally and at some stage, transfer that to the pricing? That's my assumption. So these are things that are part of our life. We manage them. We work through them, but it doesn't undermine the huge size and power of the German market for all the industry, right?

Right. So as we think about next year, are there any other markets which you would just like to flag in terms of any significant excise tax shocks, any particular markets where you operate?

No. So there are probably -- so there are 3 areas. Let me go back 3 areas. You have the European tax, the [ UTP tax, ] or the European tax directive. That's well progressed. I think, again, the original proposal from the European Commission has been worked through, and it is now in a state which is much more acceptable to us. Like everything, there's a trade-off, some are better, some are worse, but it's something we can live with. It's also something that interesting for us, it is a longer perspective. We can work through that. That gives us a lead time to work through that. And the beauty of European Union is you need everybody to agree. And so that there's a lot of negotiation, but we're getting to a point where I think we are in an acceptable position. You have Africa, where you obviously have always these changes, et cetera. But again, that is in a manageable situation. Don't get me wrong. Our Corporate Affairs team has a lot of work. I mean they spend a lot of time also explaining to finance ministries that it is not such so easy to increase taxes. You lose them on illicit. And so we actually had a very interesting exchange with -- I think it was the Ivory Coast Ministry where we showed them the Australian case, not to increase taxes. Taxes are part of that, but to increase it in a rational way. So that we work on them to what you shouldn't do and what you can do. The interesting case is Australia. I mean those who have read the Australian news, we now hear, which you have never heard in the past, the opposition proposing an 80% slash of the illicit -- of the excise tax. Okay. If you're in the opposition and you only have 2 years -- you still have to wait 2 years, you can say a lot of things, but you would never have heard that in the past. And very interesting, illicit enforcement has made a huge impact to the volumes of Australia. Will it grow again? No. But it will still be a profitable business. And it does show you how important enforcement is and how important reasonable taxation is.

Right. So just to follow up on this, you have touched upon Australia, which I think volumes were down almost 50% in the first half. If I look at U.K., volumes were down almost 15%, 16%. And these are 2 important markets, probably 10% of the total profit pool for you guys. So how should we think about U.K., Australia, Spain, for example, what is your strategy in these markets going forward?

Yes. So -- by the way, just on taxation, you know that the U.K. taxation comes into force on the 1st of October on vape. And so that is 1 more year of taxation I missed to say before. Listen, the beauty of Imperial is that, yes, we have 2 strong engines, Germany and Europe. And they have to hum and they will deliver their share. Then we have another 8 to 9 clusters that we can play with. Yes, you pin on U.K., I would actually add Benelux to it, which is a smaller market and Australia. Just to give you an idea, Australia is less than 1% of our volume nowadays. It's the smallest of all 11 clusters we have, okay? So -- and it is highly profitable. It's just the smallest. U.K. is very interesting because, yes, it loses volume, and it might continue to lose volume because of the taxation that comes in next year. But actually, the value we extract from that market is significant. In no means is the profit evolution anywhere close to that volume evolution. And we are growing the NGP business. We are now above 10% in vape, and we have launched ZONE, the pouches very successfully. But we always knew these markets were tough. For those who remember Stefan and I were here as the CFO, 5 years ago, we told you that the U.K. is not the tobacco model that we could extract value. And over the last 5 years, it still remains one of the top 5 profitable markets. But you also have to reflect on we have another 5 clusters which are growing rapidly, among them, Iberia, huge potential, low affordability -- good affordability, low pricing, quite open regulation still. You have Africa growing ahead of the group, 10% of the group's AOP. You have Southeast Europe with Italy, Greece, Romania, not just in NGP doing very well, but in tobacco. You have Middle East doing very well, not just because we went back into Syria in January this year, which is actually contributing a significant change or value contribution. So you have quite a few additional clusters, which are very promising. And so yes, I have U.K., I have Australia. That's not a surprise. We always have them. We have 5 clusters which are doing very well, and we have 2 engines, which are humming well. It's quite a nice portfolio to have.