Imperial Brands : Conference call transcript

2022 Pre-Close Trading Statement Transcript - 6 October 2022

Stefan

Good morning everyone… and thank you for joining us for the announcement of our pre-close trading update.

Before we start, I will draw your attention to the disclaimer set out in our trading update, which also applies to the remarks we make on this call.

I am joined by our Chief Financial Officer Lukas Paravicini and Peter Durman, Head of Investor Relations.

I am first going to cover the news about our share buyback before coming onto the trading update, where, as we announced earlier today, we continue to trade in line with expectations.

So first, the buyback, which represents an important milestone in the delivery of our five-year strategy.

You will recall that the first two-year phase of our plan has focused on strengthening the business - investing to build the foundations for the next three-year phase of our plan.

This first phase has also been about strengthening our balance sheet, managing towards a clearly defined leverage target to underpin our commitment to an investment grade credit rating.

Capital allocation is an integral part of our strategy and a key value lever for shareholders.

I am delighted to announce that, having now reached our target leverage at the end of September, we are now able today to announce a £1 billion share buyback to be implemented over the next twelve months.

It also complements our existing progressive dividend policy.

Total capital returns in fiscal year 2023, including ordinary dividends and share buybacks, are expected to exceed £2.3 billion.

This represents around 13% of current market capitalisation, based on last night's share price.

Furthermore, our confidence in the future and the highly cash-generative nature of this business mean that we are today able to commit to an ongoing, multi-yearbuyback programme.

So Imperial has the potential to meaningfully and systematically reduce its capital base over time.

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This buyback is also possible because of the continued progress we are making with our strategy to transform Imperial Brands.

I am pleased to report that trading for the year has continued in line with expectations with constant currency net revenue and adjusted operating profit growing at around 1 per cent.

The key headlines are:

First, our targeted investments have driven a further improvement in aggregate market share in our top-five markets. This is another important piece of evidence confirming that we have now stabilised our core combustible business, following a long period of relative decline.

As expected, we have delivered an improved price mix in the second half, which has helped offset an anticipated increase in volume declines as borders have reopened and there is a return to pre-COVID purchasing patterns.

Second, we continue to make good progress in implementing our refreshed NGP strategy. We have achieved further share gains with Pulze and iD, our heated tobacco offering, in Greece and the Czech Republic.

This good progress validates our new, more consumer-centric approach, and has given us the confidence to launch the proposition in Italy, Europe's largest heated tobacco market. I recently attended the launch event and it was great to the see the team there using the learnings we've gathered from our two pilot markets.

And, our consumer trial of blu 2.0, a new pod-based vapour device, in selected cities in France has been well received by consumers and the trade.

This is further consumer endorsement of our NGP launches and has strengthened our confidence in our NGP strategy as we prepare for a broader roll-out of our new propositions. We look forward to updating you on progress as they occur.

And finally we remain on track to deliver an acceleration in performance for the next three-year phase of our plan.

The additional investment and the actions we have taken during the initial two-year strengthening phase have built strong foundations and enhanced our resilience as we face a more challenging macro-economic environment.

Over the next three-year phase of our plan, we continue to expect low single-digit constant currency net revenue growth, with constant currency adjusted operating profit growth acceleratingto deliver a mid-single digit CAGR over the three years.

So as this suggests… this means an average over the three years, and is in line with the expectations we set out in January 2021.

We are confident our investments and initiatives will continue to gain traction, particularly over the next year or so, and therefore we expect the growth rate of our

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adjusted operating profit to improve within this mid-single digit range over the three years.

We're conscious these are increasingly challenging times for all businesses, with rising interest rates and high inflation.

We won't be immune from these pressures but I am convinced that our actions are creating a strong business better able to navigate these uncertainties.

We remain committed to delivering our plan and to realise the full potential of this business and to unlock long-term value for shareholders.

Thank you for joining us today…

Lukas and I would now like to take your questions.

I will now hand over to operator to moderate your questions.

Thank you.

Q&A

Operator: Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by, we will compile a Q&A roster. We will now take the first question. Please stand by.

And the first question comes from the line of Rashad Kawan from Morgan Stanley. Please go ahead. Your line is open.

Rashad Kawan (Morgan Stanley): Hi, good morning, Stefan, Lukas, Peter. Thanks for the time this morning. A couple of questions for me, one on the buyback and one on the US. On the buyback, committing to a multi-year programme here, how are you going to think of buybacks in relation to dividends going forward? Do you think the £1 billion figure will be a good proxy for outer years, or will you be looking for a progressive increase on the buyback amount as well? Just some clarity on how you think of that going forward will be helpful.

And then on the US, can you talk about what you're seeing in the cigarette market there? I mean, clearly, it looks like momentum is continuing from a share perspective, but how do you expect your price mix to develop given the level of downtrading we're seeing in the market today? Thanks again.

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

Lukas Paravicini: Rashad, good morning. Thank you very much for the question. Yes, we, indeed, have committed to a multi-year and ongoing, as we have always said. When you go back to our capital allocation framework, we were very clear that we have four integral pillars to that capital allocation.

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We have now reached that low end of the leverage and that allows us to keep that leverage, which is very important to us going forward, but also in going to the share buyback. And as we have said always, this is part of our model. This is part of our capital allocation and therefore it is a commitment, an ongoing process, a multi-year commitment.

Now, we are focusing on the next year in terms of what we can afford, what makes sense in our capital allocation, and that is the £1 billion. And we will review that every year, as part of our ongoing capital allocation strategy to see what will be the next year's allocation to come. And that is what you should look at in that sense. It's a meaningful, systematic approach to that.

From a dividends point of view, for us, it is an integral part from the capital allocation as well. And we believe it is important that dividend continues to flow. We have made it very clear that it is a progressive dividend. And progressive in this sense means that it is progressive in line with our underlying performance. And so you will continue to see that continue as well over the years.

Stefan Bomhard: Firstly, and to answer your second question about US, I came back from the US west coast yesterday after spending time with our team there, and attending the National Association of the Convenient Store operators of the US, which happens once a year, and had, therefore, the chance to speak with the CEOs of several of our top customers. The interesting thing and what they were telling me, for the time they see limited downtrading, but they do see some downtrading starting. And I think that plays to our strengths because if you look at it, as you would be well aware, of the three major players in the US, we, clearly, have the most complete brand portfolio with a good presence in the deep discount segment.

So, in principle, should you, as consumers, start to downtrade in a more meaningful form, our portfolio at Imperial is very well-placed to accompany their needs, yeah? So, I feel quite comfortable whatever the situation in the US will develop to, we are in a good place.

Rashad Kawan: Thank you very much, gentlemen.

Operator: Thank you. We will now take the next question. One moment, please. And it comes from the line of Gaurav Jain from Barclays. Please go ahead. Your line is open.

Gaurav Jain (Barclays): Hi, good morning, Stefan, Lukas, Peter, a couple of questions from me. So, first, you know, on your e-cigarette strategy, so, clearly, you are talking a lot about heated tobacco, but could you also talk about how you are thinking about e-cigarettes and you haven't yet launched disposable in the EU. And in that context, you know, clearly, a lot of focus on the disposable e-cigarette market in the UK right now in the media. So could you just help us understand what really is happening and is it leading to increased cannibalisation of cigarette sales in the UK market?

Stefan Bomhard: Sure. Gaurav, good morning. I mean, as you ask about the disposable market or vaping overall, I mean, number one, you - clearly, we are very committed to the vaping market because we've always said that we are going to be

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consumer-led, yeah? Therefore, this launch of heated tobacco in Europe, which clearly is a big decision about going into the largest heated tobacco market in Europe and Italy. At the same time, our test market in France, we have blu 2.0, which an all-new device for us, is going very well.

Like you mentioned, we are clearly also observing a significant growth of the disposable vaping market. In the majority of the market, interestingly, we are observing that for the time being the disposable vaping market growth goes on top of the pod-based systems, yeah? So, we actually see an acceleration when you look at, for example, the Spanish market, an acceleration of our pod-based market overall. But at the same time, we will clearly also study the disposable vaping market. And some of you will hopefully remember, we do have a disposable vaping product in the US, as part of our line-up on the blu brand. So it's a market we are very familiar with, yeah?

Gaurav Jain: Sure. Then, if - you know, what exactly is happening in the UK market, if you could comment? Like, this accelerated growth in e-cigarettes because of disposables, is it leading to an accelerated cannibalisation on cigarette volumes?

Stefan Bomhard: No. I mean, Gaurav, what we are seeing is a significant - I mean, again, this is a very dynamic development, as you rightly point out. It's the growth of disposable is something that has accelerated very significantly very recently.

However, at the same time, we are not seeing an acceleration in the decline of the cigarette market in the UK. The only caveat I would have, the UK market is quite difficult to read because you will know of the COVID effects and the return of travel back to markets like Spain, yeah? But we don't see an underlying decline acceleration of the UK market of cigarettes.

Gaurav Jain: Okay. And then a second question just on the, you know, Australian market. You know, it was clearly a bit profit-driven in some of the past few years. But now as sales tax is, I think, gone up or not going up at the same pace, do you expect a big profit recovery now beginning to happen in - on that side of the market?

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

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

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