Good morning, everyone, and welcome to our 2018 preliminary results presentation. This morning, I'm joined by Oliver Tant, Chief Financial Officer, Matthew Phillips, our Chief Development Officer, in the front row by Dominic Brisby, Growth Markets Director, Jörg Bubenik, Returns Markets Director, and Richard Hill, Commercial Director for blu. Creating something better for the world's 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 smokers with an evolving, high-quality tobacco portfolio. 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, 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. We drive that growth through investment behind our codified market repeatable model. In NGP, our priority is blu. Building blu as the trusted vapor brand with a clear market prioritization and supported by our blu 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 blu.
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. We delivered another year of 10% dividend growth. The additional investment over the last two years behind our Tobacco & Max strategy has delivered volume outperformance with an increase in our overall market share. We delivered high-quality growth, with two-thirds of our revenue coming from our strongest equities. 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 blu.
We've significantly expanded the portfolio and rolled out myblu across new and existing markets, building distribution through the second half and starting to leverage our blu adoption model. We delivered strong growth in the pod repurchase rate, reflecting a positive response from smokers and vapers. We doubled sales in the year, with much of this in the second half, supporting an annualized exit rate of GBP 300 million. Building momentum for accelerated growth in 2019 and subsequent years. To support this acceleration, we've some exciting brand-building activities planned for this year, aligned to our blu adoption model, which will add around GBP 100 million to our AMP 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. Importantly, we have a clear route to profitability.
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. 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 of $0.8 billion at constant currencies. Our balance sheet is in good shape following our USA deal, with our gearing now below three times. We announced at the interim results that our strategic focus has also identified opportunities to actively reallocate capital. We realized GBP 280 million 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 Jörg providing more market color. I'll then update you on our progress in NGP. First of all, Oliver and the numbers.
Thank you, Alison. Good morning, everyone. These results demonstrate further delivery against our strategy in both NGP and Tobacco 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 GBP 200 million of revenue in the year and an annualized exit rate in September of GBP 300 million. EPS was up 5% at constant currency, driven by revenue growth, a better contribution from Logista, lower financing and tax charges, and after the additional investment into NGP. At actual rates, EPS was affected by a 3.1% currency headwind. Our focus on cash has delivered another strong performance, with a similar debt reduction to last year of $0.8 billion at constant currency. This is after higher restructuring cash costs, the additional NGP investment, and the impact of Palmer and Harvey earlier in the year.
This strong cash performance underpins another year of 10% dividend growth. Our volumes declined 3.6% in the year, outperforming the industry decline of 5%. As expected, we achieved a stronger price mix in the second half across a wide base of markets, which more than offset the volume declines. Our full year price mix of 5.7% was also boosted by the growth in our NGP revenues. Overall, our revenues grew by 2.1% at constant currency, with average FX rates impacting 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, growth 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 second half net revenues, despite the pressure in Returns South, driven mainly by France. Our group adjusted operating profit grew by 2.9% at constant currency. However, excluding three previously guided items, our underlying growth rate was almost 6%. Firstly, the increased NGP investment, which was slightly below our guidance of GBP 44 million. Secondly, transactional FX, primarily driven by U.S. leaf purchases affecting our cost of goods at GBP 34 million. Lastly, other gains included in operating profit were GBP 80 million, GBP 34 million lower than last year.
This latter item includes GBP 40 million profit from the sale of our other tobacco assets in the U.S. and a GBP 40 million sale from the disposal of our property in the U.K. You should assume that we can generate similar gains of between GBP 50 million and GBP 100 million in FY 2019, as we continue to monetize low return assets and manage our liabilities around the group. In addition, Logista improved profits by GBP 40 million, reflecting a stronger tobacco performance against a tough comparator, further development of their non-tobacco business, and a continued focus on cost control. 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 GBP 248 million and GBP 78 million from the P&H 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 the sale of Logista shares. Overall, free cash flow increased by GBP 207 million, more than offsetting the cash 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 of 2.9 times. Our cash conversion rate of 97% benefited from about 2% from the timing of some working capital benefits at Logista. Looking ahead, we expect cash conversion in 2019 to be slightly below 90% due to the reversal of this benefit from Logista, 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 GBP 30 million of contingency 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 tax, as far as Brexit is concerned. Our capital discipline is supporting our ability to invest, reduce debt, and deliver growing returns to shareholders. We maintained our focus on cost control during the year with a further GBP 110 million of annualized cost savings this year. Our first cost optimization program is now complete, delivering just over GBP 300 million of cumulative savings as planned. The second program, to run up until 2020, has now delivered GBP 180 million of cumulative savings with GBP 120 million to go.
We expect around GBP 80 million of these savings will be delivered in 2019, with a balance of GBP 40 million to come in FY 2020. These savings will go to support improving tobacco margins and our investment in NGP. 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 three tobacco and NGP segments, being Europe, Americas, and Africa, Asia, and Australia, with a fourth segment distribution for Logista. The three geographic regions will include all tobacco and NGP activities in that region, reflecting the market responsibility for both areas. At the same time, blu, currently a specialist brand, will be reclassified as a growth brand. 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, or distribution activities they perform on our behalf. Those that are currently booked as cost 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 U.S., 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 GBP 30 million. 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 growth, reinforced by the embedded pricing we've achieved this year. Together with ongoing efficiencies, this 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%-4% guidance range. Our guidance for constant currency EPS growth of 4%-8% remains in place. However, we've been so encouraged by the performance of blu, we'll be investing an additional GBP 100 million in the first 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 by a stronger second half to deliver full-year growth. We have clear levers to drive profitability in our NGP business. We expect it to contribute to the group profit as we exit 2019, with margins continuing to build thereafter. Thank you. 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 & Max, we're making clear investment choices to optimize performance and deliver the best returns with a focus on our priority markets. We're investing behind our strongest equities aligned with our MRM, our codified route to market model, ensuring consistent execution across our footprint. 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 deriving a significantly higher proportion of our revenues from our strongest equities.
With our asset brands now representing over two-thirds of our revenues, up from a half in 2013. Our focus on the right markets with targeted investment 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. Davidoff Reach has now been launched across 14 markets, and in Russia, queen size has been the key driver of growth in Parker & 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 & Simpson, and Davidoff in Eastern Europe and Asia.
For example, we've achieved very strong growth with Parker & Simpson crush ball in Russia, and recently launched West Purple in Taiwan. We continue to roll out our Parker & 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 demand for value grows. I'd now like to hand over to Dominic and Jörg 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 Kool, and our overall share trajectory in cigarettes continues to improve, with a reduction of just six basis points in the full year versus around 30 basis points historically in FMC. Our fourth 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 are 1% better than the first, and now declining by around 4.6% in the year. Price mix has been strong throughout the year, with cigarette pricing up around 8% on our portfolio. We made some clear portfolio choices to prioritize resources behind Winston and Kool, with meaningful investments in equity 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 two of our non-strategic brands, Montclair and Sonoma. Sonoma, in particular, is performing well. Mass market cigars have had another fantastic year, with revenue up almost 20% and overall share up 20 basis points. Backwoods has been especially strong and is now above 7% share, an 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 crushball formats in both Parker & Simpson and Davidoff. Davidoff Reach, our most recent launch, is showing great potential with crushball mint and berry flavors performing well. Our investment is focused on key accounts, which have grown significantly over the past three 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 and financial performance in the market this year. The Japanese combustible market has continued to see double-digit volume declines in 2018, driven by the growth of heated tobacco. 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 20 basis points.
Our recently launched zero nicotine variant of myblu 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, Davidoff 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 JPS 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 U.S. performance and our share growth in the last quarter. Thank you. Let me now hand over to Jörg.
Thank you, Dominic, and good morning. We had a strong performance in the U.K., delivering share growth for a second consecutive year, with asset brands now accounting for 75% of revenue. Our investment focus enabled us to extend our overall market leadership with our growing presence in the crush balls segment, supporting the number one position of Player's in FMC, alongside further success in FCT, where Gold Leaf has grown 150 basis points year on year. Financially, we improved our performance significantly, having leapt the impact of EU TPD earlier this year. 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 our investments into those important relationships and build capabilities.
It is satisfying to see that we were ranked number two only to Procter & Gamble in the recent independent customer survey. Finally, we were able to successfully launch myblu, 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 Davidoff was offset by Gauloises and legacy brands, something we are addressing going forward. Regarding NGP, we launched myblu in three cities in April. Results are pleasing, with more than two million 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 EUR 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. Whilst this price-led 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, we are prioritizing the rollout of myblu. Initial results are excellent as we already command the number one position in device sales in tobacconists. In Australia, we again achieved strong growth in revenue and operating profit, whilst 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 Superkings. 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.
Yeah. Thank you, Jörg. Before getting into the detail of our NGP performance, I'd just like to underline that 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 is handled in the right way. These products are for adult smokers only. Minors 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 to less harmful products. For 2018, was the year we stepped up our NGP activities, driven by the successful rollout of myblu across new and existing markets.
myblu's received a very positive response from smokers, vapers, 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 blu 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 at our Capital Markets Day in September, 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 we're often asked. The potential is big. We expect the global retail sales value of vaping to grow significantly, supported by 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 GBP 30 billion. For Imperial, this is easily additive, given our relatively small global tobacco share. We have around 14% share in our tobacco footprint, it's 86% of smokers aren't currently smoking our brands. The economics of vaping are attractive for both the smoker and us. It's a more affordable option for the smoker across many markets. We make more net revenue per pod than we do for 20 cigarettes. We have the levers to improve profitability over time.
We've also modeled the impact of cannibalization across the two largest vaping markets. In the U.S.A., where we have only a 9% tobacco share, we expect to source mainly from smokers of other companies' brands. Cannibalization isn't really an issue. In the U.K., 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. Even in one of our highest margin cigarette markets, like the U.K., sales of blu pods will be gross margin accretive. We've been rolling out myblu 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 blu adoption model. The U.S. and the U.K. were our first market priorities. 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 two important markets. As you have mentioned, the tobacco dynamics in France will only encourage more smokers to seek alternatives. 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. We'll be launching in more markets in 2019 also. Dynamic innovation supports smoker conversion. We're focused on creating something better for smokers.
In NGP, we're leveraging our smoker insights to create an exciting innovation pipeline. We've made great progress in 2018. This included the rollout of myblu INTENSE, a nicotine salt product that more closely replicates the experience and satisfaction of smoking a cigarette, adding to the broad range of nicotine levels we offer, including a nicotine-free variant. We're working on other enhancements, such as connectivity and 3D flavor, which will provide further smoker satisfaction to encourage not only conversion, but retention, all endorsed by a trusted brand in blu. While we believe the biggest opportunity lies with blu, we've developed products in hybrid, heated tobacco, and oral nicotine categories to give smokers even more choice. Earlier this year, we launched groov tobacco-free pouches in several markets, with encouraging share gains in a fast-growing segment in Norway and Sweden. We've also developed Pulze, 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. 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 blu, 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.
As we scale, operating leverage will improve our overall margins as our fixed cost base supports higher revenues. AMP will also normalize following initial market launch investments. In 2018, we've set up our NGP activity ready to accelerate growth in 2019. 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 blu and available where smokers want to buy it. We're improving that experience through innovation underpinned by leading-edge science and regulatory capabilities. We support a regulatory framework that protects consumers and prevents youth access. 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's smokers. We're making clear choices to ensure resilient delivery from our tobacco business whilst realizing a significant additive opportunity in NGP, 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. 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. We're also targeting divestments to streamline the business and free up capital. This will support continued debt reduction, further investments, and growing shareholder returns. It 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 the strategy, assets, and capabilities to generate growing returns for shareholders. Thank you. That concludes today's presentation. We'll now take questions. It's being recorded. Please use the microphone at the front of your seat and give your name and organization before asking a question. I think we'll start with John.
Right. I hope that's on. Well, hopefully that's on. Anyway, yeah. Just a quick question. Sorry, Jonathan Leinster, Berenberg. Just on the extra GBP 100 million, could you give some detail as to, first of all, 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've just launched into, where you actually need to expand quite quickly or put extra AMP in? Obviously, there's the online marketing as a relatively new area, also the new products that you're talking about. 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? Just the sort of breakdown between that and existing markets.
Okay. I will pass it across to Richard in a second. The answer to all of those points is yes, to some degree. Some clearly are smaller than others in terms of the mix. There is no doubt a significant focus on the markets that we have already launched into in 2018, there will also be some additional market launches that are supported during the year. The balance is more to the markets that we are already in and how we are going to take that forward. Maybe Richard pick up on it, also link to a lot of the work we did to really analyze how to spend this money in 2018. Yeah.
No, absolutely. As Alison said, the lion's share is going to be going in the core markets where we are currently leading, starts with the U.S., U.K., and into our European markets and Japan. We are investing behind the 4Bs model. We talked through that in the Investor Day last month. That is believe, buy again, and belong. The focus in the first six months is very much in driving awareness, that is through our advertising, also through new media right through the line. Also in building distribution, a big distribution push. We are in 100,000 points of sale so far and growing fast. Also in buying critically trial with consumers. We know if we get myblu into the hands of consumers, they get to try it, they will purchase and purchase again.
In the first six months, it is very much on building awareness and driving trial.
Okay. Thank you, Richard.
Sorry, this is 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? It's quite an unusual sort of hybrid.
Do you want to comment on that?
We're in discussions with them at the moment.
Adam, yeah.
Hi, it's Adam Spielman from Citi. Couple of questions. First, following directly on from John's. In your slide pack, you helpfully say that your pod sales are up 500%. Sort of meaningless because it comes from a low base. Can you give what you would expect to see if you took today's spot rate and in 12 months' time, or let's say September 2018 versus September 2019, what sort of growth trajectory would you expect in the U.K. and the U.S.? Are we talking 20%, 50%, 100%, 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 2020, which is the GBP 1.5 billion revenue number. Within that, we assumed 2 to 3 pods per vapor within that model. 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 U.K. and the U.S. Both of those are tracking really well against our plans to get up to those levels. We're doing well with that. 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 pods. How many consumers?
Yeah.
I sort of realize asking you for such specific forecasts is you're not going to give me, or you can't give me, or you don't know.
No.
equally
Yeah.
some realistic run rate of what you've done recently. I sort of do think putting 500% up there is a bit ridiculous, I suppose.
Okay. All right. Do you want to comment, Richard, on the USA in particular? We won't pick up on every market, but let's just pick up on the USA.
No, I can.
Yeah.
In the last month since we last met, we talked at Investor Day, our scan data, 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 two years, we will be in the upper end of the forecast we presented to you last month. Just to give a sense, there are already over 4 million devices in circulation in the U.S., just to give a sense of the scale of our business.
I think you were going to pick up on the U.K. quickly as well.
Mike
Mike. Let me just address one. I beg to differ on one thing, that it is not really a meaningless KPI, and I'm sure you don't really mean that anyway. When you have an FMCG launch, a CPG launch, whether or not you have a winner on hand is usually be seen within the first two months. I've hardly ever seen, you can check that with IRI or Nielsen, any initiative that was a dog in the first two months turned into a rock star. When we see this exponential growth of weekly accumulated pod sales in the U.K., that's a very good indicator. It's not the only KPI. We also look at, for instance, pods to device sales, which we expect to go up over time.
It's nice to see that when we started, in the first two months, we had only four pods per device sale, which is normal when you drive trial, and now we're already exiting with six. Now, obviously, we're not going to stop there. Our forecast is exponential, we're not going to go into details here, I think these are actually very meaningful numbers to look at and indicative of a very strong start.
Okay. 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 2018, 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 biased in 2019, and also, are you assuming a further acceleration in pricing in the second half of 2019? I hope that's clear.
Okay. Oliver, you good with this one?
Okay, yeah. You're right to say, obviously, we have a carryover from the second half. We had significant price mix benefit in the second half, over 11% in aggregate, 8.1%, I think, broadly from tobacco. We'd guided to about 8 at the half year, significantly better performance. That does carry over in part into the subsequent trading period, H1 2019. 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 first half provides a stronger comparator when we're looking at the volume numbers, which have an impact as well. We had a number of specifics in the first half of FY 2018, events that occurred that we're now rounding.
We had sort of slightly tougher environments in places like Saudi and France that impacted us, that are therefore affecting that underlying tobacco comparator. When you reverse out the impact of the additional investment in NGP, you still see quite strong FY 2019 H1 underlying tobacco performance.
Top line.
Top line.
Top line.
Top line. Just very quickly, what are you assuming about the sort of second half trajectory of or sorry, of price for this coming year, fiscal 2019?
Well, in second half terms, we're clearly assuming that we end up in overall terms with about the same standard guidance around the sort of 5% price mix. Over the duration of the full year, we're expecting price mix to be broadly in line.
Thank you.
It's James Edwardes-Jones from RBC. How do you see the competitive environment in the NGP, well, in the vaping sector developing compared with combustible tobacco? The other one is, you're putting an extra GBP 100 million into A&P behind NGPs. Is this a capability that already exists within Imperial, or are you having to buy in some of that capability, given obviously that A&P hasn't been one of your key drivers historically?
Okay, let's pick up on the second question first. The GBP 100 million is around spend behind the brand, in markets which, as we alluded to earlier, we've done quite a lot of work in 2018 to really look at how do we get smokers to adopt blu. 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? The GBP 100 million is going behind all those activities, 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.
At the same time, clearly, there are some additional capabilities we've brought in. We've upped our innovation capability, plus we've added Nerudia into the mix with that as well. We've upped our capabilities in a broader marketing sense, as clearly we had quite a constrained environment from a tobacco perspective historically. There have been pockets of capability. Digital, for example, has been quite an important area too. The GBP 100 million isn't reflecting that capability build, which has largely happened. It's reflecting spend behind the brand in 2019. That's that particular point. In terms of competitive environment, this is quite live really. I think maybe Matt can talk a bit about the regulatory developments here. We have been very focused on how we carve out an advantage in this space through the assets and capabilities that we build.
As regulation develops in this space as well, I think we will very much see the competitive environment 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 better.
Do you want to
Yeah. I would back that, really. The numbers of people playing in the vaping space, I think are going to reduce fairly substantially. The kind of assets that one needs range from brands to omni-channel capabilities, to deep scientific capabilities, as Alison was just talking about, the ability to operate at scale, deep understanding of patents and intellectual property more broadly. The numbers of players in the industry that are able to do that are not that great. As regulation continues to tighten and manufacturers are required to stand behind their products, I think the numbers are going to dwindle significantly. To pick up on Alison's point, there's a live debate, and I'm sure I'll get asked the question in a minute, about with the FDA in the U.S. at the moment.
They are very focused on, and are supportive of how do we off-ramp smokers into the vaping category, but yet protect against the on-ramping of non-smokers. When you stand back and you think about what's the impact of that, 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 omni-channel route to market. The kind of things that we bring are very aligned with being able to protect against the on-ramping risk that the FDA foresee at the moment.
Hello, morning guys. Owen Bennett, Jefferies. Couple of questions on the combustible business. Firstly, it looks like you've underperformed the industry in the second half. I was just wondering where you're seeing market share pressures perhaps pick up. Secondly, on mix in the U.S. with your moves into the deep discount, I was just wondering, especially if that continues to get traction, what sort of manufacturer take have you got on those deep discount brands versus, for instance, a Winston and a Kool? Thank you.
Okay. First of all, second half volumes were more in line with the market. I think that 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. Share in France has been under pressure in the second half and also some of the continuing pressures clearly from Saudi, where our share has also been under some pressure in the second half, and we're addressing that as well. Overall, yeah, it was in line, but there were a couple of markets affected. 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.
It is quite a large volume market and therefore affects the numbers. 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, with share growth, which we'll come back to on the next question. The progress across a number of markets is continuing the momentum through into 2019. On the mix in the U.S., I don't know whether Dominic wants to pick this up at all. Deep discount is happening in around 30% of the market, the non-EDLP part of the market. We are active with Sonoma and Montclair. At the same time, very focused on driving the growth from Kool and Winston and obviously here Maverick's 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? And I've probably said everything about that now, haven't I, Dominic?
I think it may just be worth adding. This year, all our sub-premium brands, which are present in EDLP outlets, the ones we were really focusing on, we managed to grow. We grew on Winston, we grew on Kool, and we grew on Maverick. 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. Having taken quite decisive action on Montclair and Sonoma, we ought to put ourselves in quite a good position in both parts of the market. In the EDLP part of the market and in the non-EDLP part of the market. It bodes quite positively, I think.
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. This year, they declined by only six basis points. The brands we've really focused on have managed to grow. Actually, also taking part in the non-EDLP section of the market makes eminent sense, when you look at the opportunity to grow share there as well.
Hi, Nico. Testing. 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&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 margin improvement? 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." Why should it be as high as it is, if it is? I'm not sure if it is. The last one is on the dividend.
On the outlook statement, you finished saying our medium-term guidance is for constant currency EPS growth of 4% to 8%. I understand the dividend growth of 10% is also there. Could you please confirm if it is also there? I don't see it in the press release, but I understand it is. Thanks.
Yeah. Yes.
Shall I take the last one?
Yeah, go with, uh .
It isn't, but 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.
Thanks.
Yeah. Okay, I'm going back up the list here. The listing fee element, it's not so much the listing fees as the trade margins, which are high within NGP. Listing fees, we're used to. A big fuss made of certain people listing in certain retail accounts. This is bread and butter, doing business for us in different markets. It's part of the initial launch in a market, so clearly we'll be lapping it in some markets, but it will be part of other markets that we need to add that into the mix. Actually, it's the trade margins that we've highlighted before that are very high in vaping. 40% type of levels versus circa 10% in tobacco.
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, but they are disproportionately high currently. That will be part of our just cost of doing business. That's not part of the A&P GBP 100 million that we're talking about. That just sits in arriving at gross margin. Then on the pod repurchase rate, to give an aggregate number is a bit meaningless given the different 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 two to three that I mentioned earlier. That's progressing well. Chaz? Sorry.
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 just on the pod repurchase rate. What I'd say is moving in the direction in line with our plans for 2019. Chaz?
Hi. If I can get this to work. Okay. On the combustible side, I think the second 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're 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, does that mean you're pulling back a bit from that you don't see that 3% as sustainable? Could you talk a bit around that?
Let me just clarify the numbers, Chaz. In the second half, as I mentioned earlier on, our price mix was over 11%. Our volumes, as Alison's mentioned, were broadly in line with the market, should we say down around about 5%. Actually, our revenues, the arithmetic would tell you we're 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.
That includes NGPs.
That includes NGP.
That includes NGPs.
The point is fine, apart from the fact that price mix isn't smooth, should we say, across the year. As you saw, it was lumpy towards the second half in 2018. It's going to be lumpy the price mix, but it's going to be higher in the first half in 2019, but with the volume points ameliorated that Oliver spoke about earlier. I think if you look at the year as a whole, the dynamics that we've been seeing of around market down roughly 4 and a bit% overall across the footprint, price mix of 5-ish, 5, 6-ish%. That's the sort of picture we're looking at. It could be a bit better. It could vary from that slightly, either plus or minus, but that's the broad shape of it that we're seeing going into 2019.
I think you've just got to adjust, or allow for the lumpiness of when pricing comes through.
The 8.1% price mix is the tobacco price mix in the second half.
Yeah.
Yeah.
Okay, then on NGP, Matt said he was expecting it, I might as well ask it. What if the FDA in November, in the next week or two, comes out with its new recommendations and one of those is to ban 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.
Yeah, they're clearly relevant, but for me, there's little point in speculating around all of this because there are what if flavors happens, or what if it's retail versus vape stores, what if it's Yes, there's lots of what ifs. We had a very constructive conversation with the FDA last week, and we put forward some really concrete proposals about how to try and address the youth access issue that they're trying to deal with. The one we're most keen on, for example, is this whole connected device that Alison talked about, because you can eradicate that. What that means is that the PMTA process that the FDA would normally insist on would have to be different. We focused 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.
I think after that, it's more appropriate to have some of these conversations. All I'd say is, in the middle of November, the FDA have said that they will come out with a proposal. Our diversity of portfolio, our diversity of flavor range, our omni-channel approach, the strength of our brand, et cetera, 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 smoker conversion. That drives a line of thinking, but 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. That's a very strong backdrop to all of their thinking. They've just got this point that we want to address, which is how that underage aspect is addressed. We're doing everything we can currently. This is in our DNA as tobacco. We market, everything we do is a responsible approach. If we could get connectivity, and that would be great, that would further reinforce that. That's clearly just the one area we've got to work through.
Sorry, two more questions, if I may. One is just number of users. Could you tell us your NGP number of users for the year and the exit rate maybe, and actually, number of smokers would be quite interesting. Then on the U.S., obviously, there's all this talk about youth vaping. Could you perhaps give us an idea of the size and growth of the market excluding youth, if you have that?
I'll let Richard contemplate that one for a minute. I think some of this is going to be vague, to say the least. I mean, your question about number of consumers who are vaping, number of smokers who've 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's one thing. Who is actually converted into a regular user is another. We have data in terms of our own ecosystem, and we have roughly
600
600.
We've got 1.5 million accounts.
We've got 1.5 million accounts. We've got about 600,000 regular users within that ecosystem. There's lots of registrations elsewhere. There's use of e-retail. There's also a lot of people who don't register at all online. 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. 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 equity scores, in terms of lifetime value attributes, where we can measure, are all looking like they're moving in a good direction. Do you want to have a comment on the vape market ex underage?
Yeah. How long is a piece of string?
Yeah. There's calculations involved, right?
The way we've looked at it is to look at the number of vapers globally. We said, if you remember our presentation in September, 36 million vapers in the world today. We would expect that to be growing, by the end of 2020, we would see that as being between 50 million-60 million vapers, and clearly, there's a large proportion of that in the U.S.A. We're seeing quite big step-ups in growth at the moment, and all the data coming out of either Nielsen or IRI is demonstrating that to be true in the U.S.
It's not a data-rich category currently. As you can all see by the number of people who do surveys of a number of people, we have 2,000 people or 400 people and extrapolate. It's not going to be very robust. Yeah. John?
Just following up on the FDA point. If the FDA does come out with something which you fundamentally disagree with, what are your potential legal challenges to that?
I think the answer simply is we'll wait and see what they come out with.
It's too early to comment on that.
I understand for PMTAs, you probably need about three years' worth of clinical data to support your application, for example, myblu. 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 so needs to come?
It's not as long as that. You're right, there are elements like clinical studies, which do take time. One of the things we've been discussing with the FDA, we want to discuss further with the FDA, is how can that process be clarified and speeded up? 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. There's plenty of time to do whatever is needed to be done ahead of that time. If that date were brought forward, then it depends on how far forward that date is brought, to then what the consequences of that are. All I'd say is we're very confident in our science.
Whether the whole industry would be in a position to be able to react to those kind of timelines, we'd have to see. The FDA are very mindful of that. We're good with where we're at at the moment. We'll just have to see what happens in a couple of weeks' time.
Adam? Stuart.
Do you support 21 years old?
I didn't hear the question.
Do we support 21 years old? 21 years age.
I don't find it a straightforward question, because what you're seeing playing out is people's individual commercial strategies. In some states where the smoking age is 18, to then have a vaping age at 21 seems a bit strange to us. A blanket support of that, absent everything moving to 21. What we are definitely happy to talk to the FDA, have been talking to the FDA about, is on online, where we do control actually sales, than having a 21 age on those.
Would you support 21 years old for cigarettes and other tobacco products, as well as vapor?
That's not something that the FDA can actually do. It's a state-by-state move, as I understand it. It doesn't feel like that's where we're going to end up.
Okay. One more?
Coming back to your guidance. You said EPS, I'm talking about 4% plus 3% currency headwind. Sorry, currency tailwind.
Tailwind.
Is there any scope impact we should be thinking about as you dispose of your GBP 2 billion of assets? Or is that already in the 4%?
Yeah, the guidance at the moment does not incorporate any impact of significant asset disposals. It'd be premature to do so. Okay. Well, thank you everybody for attending today. Thank you for the questions. Have a good rest of the day.