Good morning, everyone, and welcome to our 2018 Preliminary Results Presentation. This morning, I'm joined by Oliver Attent, Chief Financial Officer, Matthew Phillips, our Chief Development Officer, and in the front row by Dominic Brisbee, Growth Markets Director Jorg Biebenick, Returns Markets Director and Richard Hill, Commercial Director for Blue. Creating something better for the world smokers. That's our purpose and it drives our focus in both tobacco and NGP both internally and externally. It sets the agenda for an exciting future for Imperial.
It embraces our drive for continuous improvement in tobacco to provide a better experience for smoke with an evolving, high quality tobacco portfolio. And for NGP, this is about providing smokers with alternative products with lower health risks, delivering an outstanding experience and underpinned by Leading Edge Science. Our strategy is fully aligned with our purpose. The focus hasn't changed, but we've refreshed the representation of the strategy to more clearly highlight our NGP ambition. In tobacco Max, we're focused on the right brands, our asset brands, in our priority markets to drive quality growth.
And we drive that growth through investment behind our codified market repeatable model In NGP, our priority is blue, building blue as the trusted vapor brand, with a clear market prioritization, and supported by our blue adoption model and investment to drive accelerated growth. It's about delivering quality growth from both tobacco and NGP, it's about high margins, strong capital discipline, supporting investment and growing shareholder returns. 2018 was a successful year of delivery against our strategic priorities. Net revenue grew 2% with around 1% coming from tobacco and 1% from the success of blue. We grew earnings per share by 5%, whilst increasing our investment in NGP and following a step up in tobacco investment in the previous year.
And we delivered another year of 10% dividend growth. The additional investment over the last 2 years behind our tobacco mix strategy has delivered volume outperformance, with an increase in our overall market share. We delivered high quality growth with 2 thirds of our revenue coming from our strongest equities. And we've continued to make clear choices to balance financial returns with volume progression depending on the market dynamics. Increased investment behind our MRM has delivered share gains or improving share trends in many of our priority markets, with our growth brands gaining share across all divisions.
We said 2018 would be a step up year for NGP, and it has been. As we focused on building sales of blue. We've significantly expanded the portfolio and rolled out My Blue across new and existing markets building distribution through the second half and starting to leverage our blue adoption model. We delivered strong growth in the pod repurchase rate, reflecting a positive response from smokers and vapors, and we doubled sales in the year. With much of this in the second half, supporting an annualized exit rate of 1,000,000, building momentum for accelerated growth in 2019 and subsequent years.
To support this acceleration, we have some exciting brand building activities planned for this year. Aligned to our blue adoption model, which will add around £100,000,000 to our A and P in the first half. We've also built a strong pipeline of innovative products in vapor, heated tobacco and oral nicotine delivery. To further drive smoker conversion levels. And importantly, we have a clear route to profitability.
So NGP can begin contributing to profit as we exit 2019 with margins continuing to build thereafter. Strong cost and capital discipline are always front of mind. And 2018 was another year of good progress. And this discipline also reads across to our NGP approach. Our capital light returns focused model.
Our cost and cash delivery has been strong with another year of debt reduction and 1,000,000,000 at constant currencies. Now balance sheet is in good shape following our USAA deal with our gearing now below 3 times. We announced that the interim results that our strategic focus has also identified opportunities to actively reallocate capital. We realized 1,000,000 of proceeds from asset disposals during the year, and we're making good progress on other divestments to free up capital and streamline the business. When we're able to provide further detail, we will All in all a successful year where all the elements of our strategy have contributed to our results, building momentum going into 2019.
I'll hand over to Oliver shortly to take you through the financial results in more detail. I'll then cover how we're delivering our tobacco max strategy, with Dominic and Jurg providing more market color. I'll then update you on our progress in NGP. So first of all, Oliver and the numbers,
Thank you, Alison,
and good morning, everyone. These results demonstrate further delivery against our strategy in both NGP and top max. Net revenue grew by over 2% at constant currency, with around half coming from tobacco and the other half from NGP. Overall, our NGP business delivered 1,000,000 of revenue in the year and an annualized exit rate in September of GBP 300,000,000. EPS was up 5% at constant currency, driven by revenue growth, a better contribution from LaHista and lower financing and tax charges and after the additional investment into NGP.
At actual rates, EPS was affected by a 3 point strong performance with a the additional NGP investment and the impact of Palmer and Harvey earlier in the year. This strong cash the decline of 5%. As expected, we achieved a stronger pricemix in the second half across a wide base of markets, which more than offset the volume declines. Our full year pricemix of 5.7 percent was also boosted by the growth in our NGP revenues Overall, our revenues grew by 2.1 percent at constant currency with average FX rates impact the actual rate numbers by 2.4% due to the weaker US dollar more than offsetting the marginally stronger euro. If we now look at the divisional performance, asset brand net revenue and growth brand share increased across all divisions with growth brand share up by another 70 basis points.
Growth markets benefited from strong growth in NGP, particularly in the second half with net revenues up over 17%. Excluding NGP, gross market revenues was also up. Our U. S. Business continues to perform well with further price mix gains in cigarettes and mass market cigars.
In returns markets, price increases in several markets such as Germany and Australia supported a 1.4% increase in 2nd half net revenues. Despite the pressure in return south, driven mainly by France. Our group adjusted operating profit grew by 2.9% at constant currency. However, excluding 3 previously guided items, our underlying growth rate was almost 6% Firstly, the increased NGP investment, which we've slightly below our guidance of 1,000,000 secondly, transactional FX primarily driven by U. S.
Leaf purchases affecting our cost of goods at 1,000,000. And lastly, other gains included in operating profit were 1,000,000 1,000,000 lower than last year. These latter item includes 1,000,000 profit from the sale of our other tobacco assets in the U S and a 40,000,000 cell from the disposal of our property in the UK. You should assume that we can generate similar gains of between 1,000,001,000,000 in FY19 as we continue to monetize low return assets. And manage our liabilities around the group.
In addition, La Hester improved profits by 1,000,000, reflecting a stronger tobacco performance against a tough comparator, further development of their non tobacco business and a continued focused on cost control. So overall, a good underlying performance from Imperial Brands. 2018 was also another good year of cash delivery. Our cash flow from operating activities benefited from higher operating profits and lower cash tax payments. This was achieved after restructuring cash outflows of CHF248,000,000 from the PNH write off.
Where we worked closely with the administrators to successfully reduce the final impact. You can see we delivered cash benefits on interest CapEx and from the proceeds of flow from the dividend growth and enabling a slightly higher level of debt repayment in the year. This resulted in a net debt to EBITDA ratio 2.9x. Our cash conversion rate of 97% benefited from about 2% from the timing of percent due to the reversal of this benefit from LaHista, but primarily due to additional working capital to support NGP growth. In addition to avoid any potential disruption to supply that might arise with Brexit, we will be building around 1,000,000 of contingent stocks in the first half, which we expect to unwind by the year end.
This is part of our broader contingency planning across several areas including manufacturing, supply chain and and deliver growing returns to shareholders. We maintained our focus on cost control during the year with a further 110,000,000 annualized cost savings this year. Our first cost optimization program is now complete, delivering just over 1,000,000 of cumulative savings as planned. The 2nd program to run up until 2020 has now delivered savings with 1,000,000 to go. We expect around 1,000,000 of these savings will be delivered in 2019, with a balance of CHF 40,000,000 to come in FY 2020.
These savings will go to support improving tobacco margins and our investment in MGP. We previously announced our intention to change segmental reporting for 2019. The additive growth opportunity we see in NGP means that our historic segmental descriptors of growth and returns are no longer applicable. We will therefore move to a geographic split of the business with 3 tobacco and NGP segments being Europe, Americas and Africa, Asia Australia with a 4th segment distribution for LaHista. The 3 geographic regions will include all tobacco and NGP activities in that region, reflecting the market responsibility for both areas.
At the same time, Blue currently are specialist brand will be reclassified as a growth brand, and we will also make some minor brand reclassifications elsewhere. In addition, we'll be implementing some accounting changes for 2019, including the adoption of IFRS 15, which affects payments we currently make to customers for promotion, listing of sales will be moved to be a deduction from net revenue. With the adoption of IFRS 15, we've also reviewed payments under the master settlement agreement in the US, which are currently deducted from net revenue. With IFRS, these payments will be deducted from the cost of sales. The overall impact from the adoption of IFRS 15 will be to reduce net revenue by just over 1000000, but it does not affect operating profit.
These segmental and accounting changes are set out in the appendices with the 2018 financials restated. So you have the comparators for the 2019 reporting. You can also see other aspects of our guidance on tax, interest and FX in the appendices. Looking at the year ahead, we will continue to prioritize quality growth and expect our tobacco business to deliver continued modest
revenue
is expected to deliver tobacco margin progression and strong cash flows. In NGP, we expect to deliver an acceleration in revenues as we build on the momentum achieved this year In aggregate, we expect to deliver constant currency revenue growth at or above the upper end of our 1% to 4% guidance range. Our guidance for constant currency EPS growth of 4% to half in brand building and consumer activations. This will result in a slightly lower year on year adjusted operating profit in the first half which will be more than offset clear levers to drive profitability in our NGP business and we expect it to contribute to the group profit as we exit 2019 with margins continuing to build thereafter. Thank you and I'll hand you back to Alison.
Thank you, Oliver. We made significant progress across all areas of the business in 2018. I'll come back to NGP shortly, but let's first cover tobacco max, where our focus on quality growth is delivering share gains and strong financial results. In tobacco mix, we're making clear investment choices to optimize performance and deliver the best returns with a focus on our priority market. We're investing behind our strongest equities aligned with our MRM, our codified route to market model, ensuring consistent execution across our footprint.
And we're supporting our top line growth agenda through lean ways of working and an efficient operating model. Our growth brands are outperforming the market and have grown share by around 80 basis points a year since 2013. We're generating quality growth, driving a significantly higher proportion of our revenues from our strongest equities, with our asset brands now representing over 2 thirds of our revenues, up from a half in 2013. Our focus on the right markets with targeted investments is delivering improved share trends and financial delivery supporting overall improved group performance. As well as focusing on the right brands, we're also focusing on the right formats.
For example, formats such as queen-size are the fastest growing in Eastern European markets. David off reach has now been launched across 14 markets, and in Russia, queen-size has been the key driver of growth in Parker and Simpson, doubling its share this year to 2.7% of the market. The trend for crush balls has been growing globally for a number of years, and although these products won't feature in the EU from 2020, there are growth opportunities in West, Parker and Simpson and Davidov in Eastern Europe and Asia. For example, we've achieved very strong growth with Parker and Simpson Crushport in Russia and recently launched West Purple in Taiwan. And we continue to roll out our Parkland Simpson and JPS ranges in Western And Central Europe with lighter tasting tobacco blends and new filter formats.
And launching larger fine cut and cigarette formats as demands for value grows. I'd now like to hand over to Dominic and Jurg to share some more insights on how we're performing in our priority markets, Dominic.
Thanks, Alison. We've had an excellent year in the U S. We've grown share in Winston, Maverick and Cool, and our overall share trajectory in cigarettes continues to improve. With a reduction of just 6 basis points in the full year versus around 30 basis points historically in FMC. Our 4th quarter share was also higher than it was last year.
Having annualized the impact of the increase in California state excise, industry volumes in the second half were 1% better than the first and now declining by around 4.6% in the year. Pricemix has been strong throughout the year with cigarette pricing up around 8% on our portfolio. We made some clear portfolio building and consumer activations and with a focus on Maverick in the discount segment. In the rapidly growing deep discount segment, we've been active with 2 of our non strategic brands, Moncler and Sonoma. Saloma in particular is performing well.
Mass market cigars have had another fantastic year, with revenue up almost 20% an overall share up 20 basis points. Backwards has been especially strong and is now above 7% share increase of around 150 basis points this year. Overall, we've delivered a particularly strong financial performance driven by the right assets. We've also had a very good year in Russia performing well on all metrics, While an increase in illicit has driven a decline in market volumes, we've achieved a good level of pricing. Portfolio investment behind key demand shifts and in key accounts has seen us achieve another year of share growth and strong financial delivery.
Market share is up 90 basis points, driven by queen-size and crushable formats in both Parker and Simpson and Davidof. Davidofreach, our most recent launch, is showing great potential with Crossball Mint and Berry flavors performing well. Our investment is focused on key accounts, which have grown significantly over the past 3 years, and now represent a third of our volumes. Our key account focus has driven increasingly strong distribution levels for our brands, supporting our strong share growth has continued to see double digit volume declines in 2018, driven by the growth of heated tobacco. And against this backdrop, we have grown share increasing volumes by 5%.
We've made further distribution gains in the convenience channel and West has grown share by Our recently relaunched 0 nicotine variant of MyBlue also continues to perform well. In Saudi, last year's excise changes effectively doubled retail selling prices, which has had a significant impact on the size of the profit pool. The associated shift from premium to value brands benefited West, which grew share, particularly in the first half. Although the market remains somewhat volatile from a regulatory perspective, we are focused on driving our growth brands, Davadov, and West and leveraging the MRM, particularly ensuring we have the right brand initiatives and distribution. We had another good year in Italy.
Our share was up by 40 basis points and is now over 5% following another APS, which exited the year at over 4% of the market. Overall, growth markets have had a good year, delivering increased revenues and share growth. I'm particularly pleased with our strong US performance and our share growth in the last quarter.
Thank you, Dominic, and good morning. We had a strong performance in the UK, delivering share growth for a 2nd consecutive year. With asset brands now accounting for 75 percent of revenue. Our investment focus enabled us to extend our overall market leadership with our growing presence success in FCT, where Goldleaf has grown 150 basis points year on year. Financially, we improved our performance significantly, having left the impact of EU TPD earlier this year.
Industry volume trends have improved and we increased prices in April, which delivered substantially stronger price mix in the second half. Commercially, we are committed to winning in the critical key account channel. Over the last few years, we significantly step up in Gamble and a recent independent customer survey. Finally, we were able to successfully launch My Blue, which is now available nationwide in 95% of top tier key accounts. Germany had another excellent year delivering strong top and bottom line growth with asset brands now accounting for 83% of revenue.
Margins have improved 240 basis points year on year with good pricing and an ROI focus on investments. We have increased investment in key accounts, gaining a higher proportion of distribution and shelf space, optimal brand positioning, and exclusive digital point of sale. Our portfolio strategy has focused investments behind growing demand shifts, including larger value oriented formats and lower nicotine variants in both cigarette and fine cut. These choices resulted in significant share growth in fine cut particularly from West. In Cigarettes, the growth in JPS and Davidov was offset by Gurwas and legacy brands, something we are addressing going forward.
Regarding NGP, we launched My Blue in 3 cities in April, Results are pleasing with more than 2,000,000 consumers reached through our activities already. France has been a more challenging market following the implementation of a government excise plan to increase cigarette pricing to €10 per pack by 2020. As expected, this has resulted in a decline of the profit pool, particularly as some of our competitors did not pass on excise. We did pass on the excise increases and whilst this price letter compression did affect our volume share, we were able to grow our value share by 70 basis points year on year. Moreover, it is reassuring to see market volume and share stabilizing in the last quarter.
The changes to tobacco regulation and excise are supporting a growing vapor market, so we are prioritizing the rollout of My Blue. Initial results are excellent as we already command the In Australia, we again achieved strong growth in revenue and operating profit, which at the same time consolidating JPS as the leading brand in the market. A lower price tier has emerged where we have positioned Parker Simpson and Horizon, which contributed to our move back to stable share in the last quarter. In Spain, we delivered further improvement in our blonde share trend following investment in larger value formats including Fortuna and West Super Kings. These initiatives, together with a 200 basis point improvement in our fine cut share performance, have strengthened our overall share trajectory.
This combined with diligent cost control supported our stronger profit delivery year on year. Overall, this was a strong performance in returns markets with good momentum in the second half and a growing NGP platform as we start 2019. I'll hand back to Alison.
Thank you, Yorg. So before getting into the detail of our NGP performance, I'd just like to underline this whilst NGP represents a genuine opportunity to create something better for the world's smokers. It's imperative that the sale and marketing of NGP handled in the right way. These products are for adult smokers only. Minor should never use tobacco or nicotine products, and we fully support the FDA's desire to eradicate underage sales.
We recently had a very constructive meeting with the FDA and we will continue to ensure that the right framework is put in place to support the conversion of smokers for less harmful products. 2018 was the year we stepped up our NGP activities, driven by the successful rollout of MyBlue across new and existing markets. My Blues received a very positive response from smokers, vapors, and retailers, which is reflected in the growing pod repurchase rate. We built a comprehensive vape portfolio, solving for smoker satisfaction with significant learnings that continue to improve our scalable blue adoption model. We made substantial progress with our exciting innovation pipeline underpinned by Leading Edge Science.
We have a hugely engaged organization behind our ambitions, all focused on accelerating our NGP growth as we move into 2019. We gave further details of our Capital Markets Day in September. But here is a brief reminder. NGP is a significant additive opportunity for Imperial. On top of our tobacco business, leveraging a unique combination of assets and competencies.
We have clear levers to drive both sales and profitability. With NGP beginning to contribute to group profit as we exit this year and building thereafter. The growth potential of NGP and the extent of possible cannibalization of our existing tobacco business are two questions were often asked. The potential is big. We expect the global retail sales value of vaping to grow significantly, supported are a growing public health agenda in favor of these reduced risk products.
We're initially prioritizing markets that together have a retail value potential of over $30,000,000,000. And from Imperial, this is easily additive given our relatively small global tobacco share. We have around 14% share in our tobacco footprint. So it's 86% of smokers aren't currently smoking our brands. And the economics of vaping are additive attractive for both the smoker and us.
It's a more affordable option for the smoker across many markets but we make more net revenue per pod than we do for 20 cigarettes. And we have the levers to improve profitability over time. We've also modeled the impact of cannibalization across the 2 largest vaping markets. In the USA where we have only a 9% tobacco share, we expect to source mainly from smokers of other companies' brands. So cannibalization isn't really an issue.
In the UK where our tobacco market share is more than 40%, cost of goods efficiencies already underway will deliver an absolute gross margin contribution per pod that exceeds an average pack of 20 cigarettes by the end of 2019. So even in one of our highest margin cigarette markets like the UK, sales of blue pods will be gross margin accretive. So we've been rolling out my blue across a number of markets, offering smokers an excellent vaping experience in a convenient format, This has included national rollouts where we're building distribution in both traditional retail and vape stores. Supplemented by targeted city tests as we develop our blue adoption model. The US and the UK were our first market priorities, and momentum is building in line with our plans, particularly encouraging is the 500% increase in weekly pod sales we've achieved in both markets since launch, reflecting a strong repurchase rate in these 2 important markets.
As Yorg mentioned, the tobacco dynamics in France will only encourage more smokers to seek alternatives, and we've been building awareness and distribution through the tobacconist channel. With encouraging share development. We've also invested in Japan, Russia, Germany, Italy and Spain, building learnings ahead of accelerating growth in 2019. And we'll be launching in more markets in 2019 also. Dynamic Innovation supports microconversion.
We're focused on creating something better for smokers. In NGP, we're leveraging our smoker insights to create an exciting innovation pipeline, and we made great progress in 2018. This included the roll out of MyBlue Intense, a nicotine salt product that will closely replicate the experience and satisfaction of smoking a cigarette adding to the broad range of nicotine levels we offer, including a nicotine free variant. And we're working on other enhancements such as connectivity and 3 d flavour, which will provide further smoker satisfaction to encourage not only conversion but retention, all endorsed by our trusted brand in blue. And while we believe the biggest opportunity lies Blue, we've developed products in hybrid, heated tobacco, and all nicotine categories to give smokers even more choice.
Earlier this year, we launched Screw tobacco free pouches in several markets with encouraging share gains in a fast growing segments in Norway and Sweden. We've also developed pulse, our heated tobacco product. We've taken our time to listen to smokers and address frustrations such as portability ease of cleaning and the ability to enjoy consecutive experiences without needing to recharge. We're looking forward to launching in the first quarter of calendar 2019. So we have a clear focus on solving for the smoker, but what about the financials?
Here we have clear levers that we can control to drive improved profitability. And target margins similar to tobacco in the medium term. The first of these is cost of goods, which we're reducing through scale and innovation, including enabling automation, all of which contribute to a significant unit cost reduction. As we build blue, we also expect to see some normalization of trade margins and will capitalize on our omni channel distribution strategy to reduce route to market costs. Also as we scale, operating leverage will improve our overall margins as our fixed cost base supports higher revenues.
An AMP will also normalize following initial market launch investments. In 2018, we've set up RNGP activity ready to accelerate growth in 'nineteen. We have a great portfolio of assets, and are leveraging the key competencies from our tobacco heritage alongside new capabilities. We're delivering a compelling proposition for smokers a satisfying less harmful experience endorsed by a trusted brand in blue and available where smokers want to buy it. We're improving that experience through innovation underpinned by leading edge sites and regulatory capabilities.
And we support a regulatory framework that protects consumers and prevents youth access. And in terms of the proposition for shareholders, It's about a substantial revenue opportunity for Imperial, delivered by a lean and scalable business and supported by asset efficient and returns focused model. In conclusion, we have a clear purpose to create something better for the world smokers. We're making clear choices to ensure resilient delivery from our tobacco business whilst realizing a significant additive opportunity in MGP. Both top and bottom line as profitability improves.
Our ongoing focus on cost control and cash conversion ensures we have the funds to invest behind our ambition. And we're active managers of capital with clear investment priorities behind both tobacco and NGP and an agile asset light approach to emerging growth opportunities. Also, targeting divestments to streamline the business and free up capital. This will support continued debt reduction further investments and growing shareholder returns. This has been a strong year of value creation by Imperial Brands team globally.
Many of whom were watching this presentation. A big thank you to you all. We've got a strong foundation for the next chapter of Imperial's growth story. These are exciting times. And we have strategy assets and capabilities to generate growing returns for shareholders.
Thank you. That concludes today's presentation. We'll now take questions. And it's being recorded. Please use a microphone at the front of your seat and give your name and organization before asking your question.
I think we'll start with John.
Well, hopefully that's on. Anyway, yes, just a quick question, just sorry, John Lentzter Berenberg. Just on, the extra GBP 100,000,000. Could you give some detail as to, first of all, that's you seem to say it's all in the first half. Secondly, how does that break down in terms of, new geographies, are there some markets where you just launched into where you actually need to expand quite quickly or put up X-ray and P.
Obviously, there's the, online marketing as a relatively new area, Or is this actually sort of and also the new products that you're talking about? So broadly speaking, therefore, are you indicating that there's going to be a series of new geographic and product launches all in the first half and just the sort of breakdown between that and existing markets.
Okay. I'll pass it across to Richard in a second, but, the answer to all of those points is yes, to some degree. Some clearly are smaller than others in terms of the mix. There's no doubt a significant focus on the markets work that we've already launched into in 2018, but there will also be some additional market launches that are supported during the year, but the balance is more to the markets that we're already in how we're going to take that forward. But maybe Richard pick up on it, but also linked to a lot of the work we did to really analyze how to spend this money in 'eighteen, yeah?
No, absolutely. As Alison said, the lion's share is going to be going in the core markets where we're currently leading. So starts with the U. S, U. K.
And into our European markets and Japan, we're investing behind the 4 Bs model. We talked through that in the Investor Day last month. So that's believe, by, by again and Belong. The focus in the 1st 6 months is very much in driving awareness, and that's through, our advertising but also through new media, right through the line, then also in building distribution. So a big distribution push, we're in 100,000 points of sale so far.
And growing fast, but also in buying critically trial with consumers. We know if we get my balloons that had to consumers, they get to try it they'll purchase and purchase again. And so in the 1st 6 months, it's very much on building awareness and driving trial.
Supplemental. I was wondering, with the, NICS product, have you actually had, Japanese Ministry of Finance approval for that product to be launched into the Japanese market yet because it's quite an unusual sort of hybrid.
Who's currently?
We're in discussions with them at the moment.
Adam, yeah.
Hi, it's Adam Spoon from Citi. A couple of questions. First, following directly on from John's. In your slide pack, you hopefully say that your pod sales are up 500% sort of meaningless because it comes from a low base. So I can you sort of give what you'd expect to see if you took today's spot rate and in 12 months time or let's say September 18 versus September 19.
What sort of growth trajectory would you expect in the UK? We're sort of talking in the U. S. Are we doing 20%, 50% 100? I mean, if you have to guess?
I think to put this in context, you may remember, Oliver's chart from the Capital Markets afternoon, where we looked at the construct of what components would make up per end of our incentive target for for 2020, which is the billion revenue number. Within that, we assumed 2 to 3 pods per vapor within that model. And that's really what we're tracking towards and looking to move towards in the markets where we've launched a longer time ago such as the UK and the US. And both of those are tracking really well against our plans to get up to those levels. And so we're doing well with that.
So the 500% is a meaningful number because it's actually representing the growth we were looking for to get towards that 2 to 3 pod consumption level for those smokers.
2 to 3 ports, how many I mean, how many consumers, and I sort of realized asking you for such specific forecasts is, you know, you're not going to give me or you can't give me or you don't know, but 20. I'm sort of slightly. So some realistic run rate of what you've done recently. I sort of do you think putting 500% up there is a bit ridiculous, I suppose. Okay.
All right. George a comment which on the USA in particular, we won't pick up on every market, but let's just pick up on the USA in particular. We won't pick up on every market, but let's just pick up on the USA in the last
month since we last met and we talked at the Investor Day, our scan date, so it's public data from IRI, shows that our U. S. Month on month sales have increased by 11% If that were to continue, which we think it will for the next year or 2 years, then we will be in the upper end of the forecast we presented to you. Last month. So just to give a sense, there are already over 4,000,000 devices in circulation in the U.
S. Just to give a sense of the scale, of our business.
You're going to pick up on the UK quickly as well? Mike
Let me just address one. I'm back to differ on one thing that it is not really a meaningless KPI. And I'm sure you don't really mean that anyway. Because, when when you have an FMCG launch, a CPG launch, whether or not you have a window on hand is usually be seen within the 1st 2 months, I've hardly ever seen and you can check that with IRI or Nielsen any initiative that was a dog in the 1st 2 months and then turned into a rock star. When we see this exponential growth of weekly cumulated pot sales in the UK, that's a very good indicator.
Not the only KPI. We also look at, for instance, pods to device sales, which we expect to go up over time. And it's nice to see that when we started, the 1st 2 months, we had only 4 pods per device sale, which is normal when you drive trial. And now we're already exiting with 6. Now obviously, we're not going to stop there.
Our forecast is financial. And we're not going to go into details here, but I think these are actually very meaningful numbers to look at and indicated from a very strong start.
Thank you. Moving on. I'm intrigued about your first half, second half guidance for 2019. Given that all your pricing was in the second half of 'eighteen, one would naturally imagine that the 2019 would be biased towards the first half, particularly on pricing, particularly on profitability. And yet, that's not what you've guided to.
I'm just wondering if you can talk about why that beyond the NGP investment why it isn't more first half bias in 'nineteen? And also, are you assuming a further acceleration in pricing in the second half of 'nineteen? So I hear that's fair.
Okay.
Oliver, are you good with this one? Yes. I mean, you're right to say, obviously, we have a carryover from the second half. We had significant pricemix benefit in the second half over 11% in aggregate, 8.1%, I think broadly from tobacco, we guided to about 8 at the half year, so significantly better performance. And that does carry over in part into the subsequent trading period H1 'nineteen.
But we also need to be aware that we're rounding a number of other factors. We have particularly strong volume performance in the first half of 2018 and a slightly weaker volume performance in the second half and the strong volume performance, obviously in the 1st half provides a stronger comparator when we're looking at the volume numbers, which have an impact as well. We have a number of specifics in the in the first half of FY twenty eighteen events that occurred that have that we're now roundings. So we had sort of slightly tougher environments in places like Saudi and France that impacted us, that are therefore affecting that underlying tobacco comparator. But when you reverse out the impact of the additional investment in NGP, you still see quite strong FY19 H1 underlying tobacco performance.
And top line.
And top line.
And top line.
And just very quickly, what are you assuming about the sort of second half trajectory of growth? Oh, sorry, at a price? For this coming year, fiscal 2019?
Well, in the second half terms, I mean, we clearly assuming that we end up in overall terms with about the same standard guidance around the sort of 5% price mix. So over the duration of the full year, we're expecting price mix to be broadly in line.
It's James Edward Jones from RBC. How do you see the competitive environment in the NGP well in the vaping sector developing compared with combustible tobacco. And the other one is you're putting an extra GBP 100,000,000 into A and P behind NGBs. Is this the capability that already exists within Imperial or are you having to buy in some of that capability given obviously that A and P hasn't been, what one of your key drivers historically?
Okay. Let's pick up on the second question first. And 1,000,000 is around spend behind the brand in markets, which as we alluded to earlier. We've done quite a lot of work in 'eighteen to really look at how do we get smokers to adopt blue? So what do we need to do for awareness?
What do we need to do for trial? What do we need to do to really make them become a loyal user of that lifestyle brand? So the million is going behind all those activities is as Richard spoke about earlier. Aside from that, there has been a ramp up in capability in certain areas in the business over the last few years. I spoke at the NGP capital market session about the fact that we have some really important competencies within our tobacco business that we're leveraging to drive NGP, but at the same time, clearly, there are some additional capabilities we've brought in.
We've upped our innovation capability plus we've added Narudu into the mix with that as well. We've upped our capabilities in a broader marketing sense, as clearly we've got quite a constrained environment a tobacco perspective historically. So there have been pockets of capability digital, for example, has been quite an important area too, but the million isn't reflecting that capability bill, which has largely happened, it's reflecting spend behind the brand in 2019. So that's that particular point. In terms of competitive environment, This is, this is quite live, really.
And I think maybe Matt can talk a bit about the regulatory developments here, but we have been very focused on how we carve out an advantage this space through the assets and capabilities that we build and as regulation develops in this space as well, I think we will very much see the competitive environments evolve in line with that regulation as well as we get people to stand behind their products a lot more, which is essential when you're wanting to move smokers from combustible cigarettes to something, something better.
Yeah, I mean, I would I would back that really. I mean, the numbers of people playing in the vaping space, I think, are going to reduce fairly substantially. And, the, the kind of assets that one needs range from, brands to omnichannel capabilities, to deep scientific capabilities as Allison was just talking about, the ability to operate at scale, deep understanding of patents and intellectual property more broadly, And the numbers of players in the industry that are able to do that are, are not that great. So as regulation continues to, to tighten and manufacturers are required to stand behind their products. I think the numbers, the numbers are going to dwindle significantly.
So I mean, to pick up on point, there's a live debate. I'm sure I'll get asked the question in a minute about, with the FDA in the U. S. At the moment. And, they are very, very focused on and the supportive of how do, how do we off ramp smokers into the vaping category, but yet protects against the on ramping of, of non smokers.
And when you stand back and you think about what's the impact of that, I mean, you're going to have to have a great brand. You're going to have to have a diverse product portfolio, you're going to have to have scientific capabilities. You're going to have to have an omnichannel route to market. So the kind of things that, that we bring are, are very aligned with being able to protect against the off, the on ramping risk that the FDA foresee at the moment.
Hello.
Good morning, guys. A couple of questions, Owen Bennett, Jefferies. A couple of questions on the combustible business. Firstly, it looks like you've underperforming industry in the second half. I was just wondering, where you're seeing market share pressures perhaps pick up.
And then secondly, on mix in the US, with your moves into the deep discount. I was just wondering, especially if that continues to get to action, what sort of manufacturer take if you've got on those deep discount brands versus, for instance, a Winston and a and a cool? Thank you.
Okay. 1st of all, I mean, 2nd half volumes were more in line with the market. That's reflects some of the pressure we've had particularly in France on share, which was a decision. It was a choice that we didn't want to absorb the excise and therefore we passed that on. So Sharon France has been under pressure in the second half and also some of the continued pressures clearly from from Saudi, where our share has also been under some pressure in the second half, and we're addressing that as well.
But overall, yeah, it's it was in line, but there were a couple of markets, in fact, one that I don't like to mention again, but it was Ukraine as well. Ukraine is still not great from a share perspective or a volume perspective as we make choices for profitability in that market, but it is quite a large volume market and therefore affects the numbers. So those are probably the key drivers. Overall, I'm very happy with the progress in priority markets as Dominic highlighted U. S.
In particular fourth quarter is coming strong and with share growth, which will come back to your next question, and the progress across a number of market is continuing the momentum through into 2019. On the mix in the US, I don't know whether Dominic wants to pick this up at all, but I mean deep discounts is around is around it's happening in around 30% of the market than on EDLP part of the market. We are at with Sonoma and Moncler, but at the same time, very focused on driving the growth from Cool and Winston and also you hear Maverick performing well as well. So I think it's a dynamic we need to manage, but at the same time, I don't see it as a particular risk on our US business. We already get a disproportionate price impact on our portfolio versus the competition because we have a lower price portfolio generally to the market.
So as we take the same absolute price increase, it's a bigger percentage benefit for us. Yeah. Probably said everything about that now, haven't I, Dominic?
I mean, I think it may just be worth adding. So this year, all our sub premium brands, which are present in EDLP outlets, the ones we were really focusing on, we managed to grow. So we grew on Winston, we grew on Cool, and we grew on Maverick, but there is still quite a big part of the market, which is the non EDLP stores, where volumes are growing quite significantly. And also where certain brands are growing quite significantly, where we weren't really present. So having taken quite decisive action on Moncler and Sonoma, we ought to put ourselves in quite a good position in both parts of the market.
So in the EDLP part of the market and in the non EDLP part of the market. So it bodes quite positively, I think. And if you look at our absolute share trend, of course, the brands that we acquired before Imperial acquired these brands in the U S, they were declining quite quickly. Since we acquired them until this year, they were declining in absolute terms by about 30 basis points a year, And this year, they've declined by only 6 basis points, but the brands we've really focused on have managed to grow. So actually also taking part in the non EDLP section of the market makes imminent sense, when you look at the opportunity to grow share there as well.
Hi,
Digi.
Nico Von Stackelberg from Liberum. I had a quick question. You mentioned the pod repurchase rate. Could you please specify your pod repurchase rate? And what is that relative to your peers, please?
The next question is on A and P spend for next generation products. I understand a big expense line that's more discretionary in nature is, listing fees. Could you discuss, when do you see that normalizing and when do you have more annual related discussions with your retailers. Is that a catalyst for, for margin improvement? Because when I talk to vapor entrepreneurs, they say, wow, these big tobacco guys, they spend a lot on listing fees compared to what we do.
And so why should it be as high as it is it is. I'm not sure if it is. And the last one is on the dividend. On the outlook statement, you finished saying our medium term guidance is for constant EPS growth of 48%. I understand the dividend growth of 10%, is also there.
Could you please confirm if it is also there? Because I don't see it in the press release, but I understand it is.
We didn't put it in last year. We are reaffirming our commitment, in the same way as we have done over the last couple of years.
Yes. Okay. I'm going back up the list here. The listing fee element, it's not so much the listing fees, the trade margins, are high within NGP. So I mean listing fees we're used to.
I mean, big fuss are made of certain people listing in certain retail accounts. I mean, this is are doing business for us in different markets, and is part of the initial launch in the market. So clearly we'll be lapping it in some markets, but it will be part of part of other markets that we need to add that into the mix. But actually it's the trade margins that we've highlighted before that are very high in vaping. So 40% type of levels versus circa 10% in tobacco.
And that's something I mentioned in the presentation earlier that we will look to work on over time and we are working on over time. They are disproportionately high currently. But that will be part of our just cost of doing business. That's not part of the A and P 100,000,000 that we're talking about. That just in arriving at gross margin.
And then on the pottery purchase rate, I mean, to give an aggregate numbers a bit meaningless, given the markets we're in and the phasing of different markets, but all I would say is we're making good progress towards the levels that we want to achieve within our business plan for 2019. In line with that 2 to 3 that I mentioned earlier. So that's progressing well. Charles? Sorry.
Could you give
color on the repurchase rate in some key markets like the U. S. And the U. K? Or is that We
haven't given a lot of detail on that today. I think we've got to give a more rounded set of KPIs that we look at rather than the pottery purchase rate, but it well, I'd say it's moving in the direction in line with our plans for 2019. Janice?
Hi. I can get this to work. Okay. On the combustible side, I think the 2nd half performance was like 3%, something like that. Correct me if I'm wrong.
You're guiding to modest net revenue growth in the next fiscal, I think your history you did 0% organic sales growth when you were losing share now that you've tightened that up. You meant to be getting to the classic tobacco business model of more like 3% or 4% organic sales growth, you're sort of there in the second half. This thing about modest growth for tobacco in, does that mean you're pulling back a bit from that that you don't see that 3% as sustainable. Could you talk a bit around that? Let me
just clarify the numbers, Jess. So in the second half, as I mentioned earlier on, our pricemix was over 11%. Our volumes, as Alison's mentioned, were broadly in line with the market. So should we say down round about 5? So actually our revenues, the arithmetic would tell you, were up 6 in the second half against 2.1% down in the first half, giving the average of 2.1% over the year as a whole.
But that includes NGPs.
That includes NGP.
You, essentially. The point is fine, apart from the fact that price mix isn't smooth, should we say across the year? So as you saw, it was lumpy towards the second half in 2018, it's going to be lumpy to the price mix, but it's going to be higher in the first half in 2019, but with the volume points ameliorator that some that a lot of us spoke about earlier. So I think if you look at the year as a whole, the dynamics that we've been seeing of around mark it down roughly 4, 4 and a bit percent overall across the footprint, price mix of 5 ish, 5 ish, 5 ish, I mean, that's the sort of a picture we're looking at. It could be a bit better.
It could vary from that slightly either plus or minus, but I mean, that's the broad shape of it that we're seeing going into 2019. So I think you just got to adjust or allow for the lumpiness of when pricing comes through.
The 8.1% price mix is the is the tobacco price mix in the second half.
Okay. And then, on NGP, Matt said he was expecting it, so I might as well ask it. So what is the FDA in November in the next week or 2, comes out with these new recommendations? And one of those is to Is the band pod based systems? How dependent are you on pod based systems for your NGP plans?
And how would you adapt to that. Yeah.
Okay. Matt alluded to some of this earlier? Yes.
I mean, they're clearly relevant, but I mean, there's for me, there's little point in speculating around all of this because there are, you know, what if flavors happens or what if, you know, what if retail versus vape stores? What if it's, yes, there's lots of what ifs. I mean, we we had a very constructive conversation with the FDA last week. And we put forward some really concrete proposals about how how to try and address the youth access issue that they're trying to deal with. And the one we're most keen on, for example, is this whole connected device that Alison talked about because you can, you can eradicate that.
But what that means is that the PMTA process that the FDA would would normally insist on would have to be different. So we focus the conversation on steps that we can positively make. And, I think we will be formally responding to the FDA this week, to their written requests. And I think after that, it's more appropriate to have some of these conversations. And, all I say is, the middle of November, the FDA have said that they will come out with, they will come out with a proposal.
And, our diversity of portfolio, our diversity of flavor range, our omnichannel approach, the strength of our brand, etcetera, mean that we will be able to deal with whatever comes out in the middle of November. Clearly, we've got preferences because we're focused on how on smoker conversion. And that drives that drives a line of thinking, but it's we'll be able to adapt and we'll be fine.
I think what does come through as well very strongly from the FDA, which I think doesn't get picked up as much. Is the fact that there is a really clear commitment and conviction that vaping is a really important opportunity to get smokers to switch into a healthier product. And that's a very strong backdrop to all of their thinking. They've just got this well, we've all got this point that we want to address which is how that underage aspect is addressed. But we're doing everything we can currently.
We've this is in our DNA as tobacco. We market everything we do is a responsible approach. But if we could get connectivity, that would be great. That would further reinforce that but that's clearly just the one area that we've got to work through, yes.
Sorry, two more questions, if I may. One is just number of users. Could you sellers, you know, your NGP number of users for the year and the exit rate may be. And actually, a number of smokers would be quite interesting. And then on the U S, obviously, there's all this talk about use faping.
Could you perhaps give us an idea of the size and growth of the market excluding use, if you have
I'll let Richard contemplate that one for a minute, but I think some of this is, is going to be vague to say the least. I mean, your question about number of consumers, who are, who are vaping, a number of smokers who have converted is also a very difficult one because you have to make all sorts of assumptions on usage rates. We know we've got a lot of devices out there. So that one thing, but then who is actually converted into a regular user's another? We have data in terms of our own ecosystem, and we have roughly 6600?
1,500,000 accounts.
We've
got 1,500,000 accounts. We've got about 600,000 regular users within that ecosystem system, but there's lots of registrations elsewhere. There's use of eretail and there's also a lot of people who don't register at all online. So it's not something you can do a very precise science around. All I would say is that we've delivered against the revenue level we were planning for 2018.
So it's running well on track. The other key indicators we look at in terms of repurchase rates in terms of where we can measure in terms of repurchase rates, in terms of equity scores, in terms of lifetime value attributes where we can measure or looking like they're moving in a good direction. Do I have a comment on the VOTE Market X underage?
Yes, how long is the piece of string?
Installations involved
as well? The way we've looked at it is to look at the number of vapers globally. So we said, if you remember, our presentation in September, 36,000,000 vapers in the world today, we would expect that to be growing. So by the end of 2020, we will see that as being between 1000000 to 1000000 vapers. And clearly, there's a large proportion of that in the USA.
So we're seeing quite big step ups in growth at the moment and all the data coming out of either Nielsen or RA, is MS rating that, that to be true in the US?
It's not a data rich category currently. As you can all see by the number of people surveys of a number of people, we had 2000 people or 400 people and extrapolate, it's not going to be very robust. John?
Just following up on the FDA point, if the FDA does come out with something which you fundamentally agree with, what are your legal potential legal challenges to that?
I would be answering simply as we'll wait and see what they come out with.
It's too too early to comment on
that. I I under I understand for, PMTA, as you probably need about 3 years' worth of clinical data to support your application, for example, My Blue. Could you tell me how long you've been testing this? And, do you have a long, I guess, do you have many years' worth of data to support a PMTA if it's so to come?
I mean, it's not as long as that, but you're right. There are elements like clinical studies, which, which which do take time. But one of the things we've been discussing with the FDA, we want to discuss further with the FDA is how how can that process be clarified and speeded up? So we've currently got a situation where products that were on the market before August 2016 are allowed to stay on the market until August 2022. And, so there's plenty of time to do whatever is needed to be done ahead of that, ahead of that time.
If, if that date were bought forward, then, then it depends on how far forward that date is bought. So then what the consequences of that are, and, and all I'd say is we're very confident in our science. But whether the whole industry would be in a position to be able to react to those kind of timelines we'd have to see, but the FDA had very mindful of that. And, it's, it's, it's, it's, we're good with where we're at at the moment. And, we'll just have see what happens in, in a couple of weeks' time.
Do you support twenty one years old? I didn't hear the question.
Could you support twenty one years old? 20, 2020 is Asia?
It's it's a difficult, I don't find it a straightforward question because what what your, what you're seeing playing out is people's individual commercial strategies. And, in some states, where the smoking rate is the smoking age is eighteen to then have a vaping age at 21 seems a bit a bit strange to us. And so a blanket, a blanket support of that absent everything moving to 'twenty one. I mean, what we are definitely happy to talk to the FDA have been talked to the FDA about is, is on online where we do control actually sales, then having a having a twenty one age on those. But
would you support twenty one years old for cigarettes as well as and other tobacco products as well as vapor?
I think we'd have to I mean, that's not something that the FDA can actually do. It's a state by state, a state by state moves. I understand it. So I'd it doesn't feel like that's where we're going to end up, but
Okay.
On your, again, congrats to your guidance, you said EPS I'm talking about 4% +3 percent currency headwind. Sorry, currency tailwinds. Is there any scope impacts we should be thinking about as you dispose of your 1,000,000,000 of assets? Or is that already in the 4%?
Yes, the guidance at the moment does not incorporate, any impact of significant asset disposals. Would be premature to do so. Okay. Well, thank you everybody for attending today. Thank you for the questions.
And have a good rest of the day.