Well, good morning, everyone, and welcome. I'm joined here today by our CFO, Oliver Tant, Chief Development Officer, Matthew Phillips, chairman, Mark Williamson, plus Dominic Brisbee, Biebenick, Anamal Pramanek, from the senior executive team. I'm pleased to be updating you on our progress in the last 6 months. Building on the success of our investments behind our strategy, both in tobacco and in NGP. And building on the improving metrics in the second half of twenty seventeen.
Let's start with some headlines. With a clear focus on our product, brand and market priorities. And that focus is delivering results. Our volumes are outperforming the market, reflecting the outperformance of our growth brands, including good organic growth. And our share is up overall and in our 7 priority markets.
As we previously flagged, pricemix has been weak in the first half, but is now strengthening into the second half. And we're stepping up our activity in NGP And it's exciting to get the early feedback from the My Blue Launches and see the significant progress with our innovation pipeline. And as we continue to sharpen our strategic focus, we're progressing opportunities to divest assets which will further simplify the business and create additional value. We're delivering against our strategy in a better environment. Many of the headwinds carried over from 2017 into the beginning of 'eighteen are ameliorating.
We're lapping the EU TPD impacts of last year, particularly the negative mix in the UK from the ban of high margin small packs. We're also lappings and excise increases, although there are continuing negative impacts in Saudi and Taiwan. And France continues to be I think the polite word is challenging. If we look at the headline industry declines they seem high but stripping out an outlier like Japan where we have limited exposure, the decline is around 4% which is more manageable. And price mix is improving at around 4% in the 2nd quarter.
Against this backdrop, as I've already highlighted, our performance is ahead of the market and with improved quality of growth. We're on track to target with our NGP launches. I therefore anticipate a much stronger H2 with tobacco growth driven by our growth brands and improved price mix. And NGP growth from market expansion and growth in existing markets, including mix sought launches from next month. In addition, profits will benefit from further cost savings, which are 2nd half weighted.
We're on track to deliver in line with our guidance. Now to Oliver to cover off the financials.
Thank you, Alison, and good morning, everybody. I'm going to start with a summary of our results smalling are further evidence of our investment initiatives delivering with our volumes outperforming the industry. Volumes were down 2% in the first half, comfortably ahead of the industry footprint declines of 5.7%. We delivered 1st half results slightly ahead of our expectations at the time of our February update. First half net revenue was down 2.1% with flat price mix due to the carryover of a tough trading environment from last year and the impact of a one off IP settlement in the first half of FY 'seventeen.
We've seen a much better price mix performance in our second quarter of around 4% and this improving trend is expected to underpin our second half delivery. EPS was down 1%, reflecting the revenue performance, which was partially offset by lower finance costs due to deleverage, a marginally lower tax rate and a better contribution from La Hester. At actual rates, EPS was impacted by a 5.2 percent currency headwind. Our focus on cash has delivered another strong performance, with debt reduction of 1,200,000,000 or 900,000,000, excluding FX movements. Our volume performance, as I said, has significantly outperformed the market, driven by market share gains.
As I've also and our volume performance has been led by our growth brands as these continue to benefit from the increased focus and investment. Growth brands outperformed with volumes up over 6%, growing 100 basis points of market share. Excluding the benefits of our migration program, they grew 1.6%, demonstrating the benefits of our focused brand strategy in generating quality growth. We've achieved a strong performance in our growth brands since we began this strategy in 2013. In specialist brands, we've delivered strong volume performance with Backwards and Cool, However, volume was disproportionately impacted by lower volumes of Jetan in the Middle East, although this has had minimal financial impact.
Growth in specialist brands now represent 65.2 percent of total tobacco revenue, up 3.9% at constant currency. Portfolio brands were down partly as we migrate volumes into growth brands as compared to the industry volumes in our footprint These brands underperformed by only 1.7% are really good performance given the focus and investment is directed elsewhere. We continue to optimize the portfolio brands for profit and cash which has an impact on volumes. Revenue reflects our volume outperformance and a pricemix that was broadly flat in line with our year end guidance. This has been driven by some adverse mix in certain markets.
Price mix was also affected by the benefit of the FOMT MIP royalties we received in the first quarter of last year. These royalties are an ongoing revenue stream for Imperial, although their timing is irregular, Pricemix was up 1% excluding the NGP IP and up 4% in the 2nd quarter. A weaker dollar resulted in an FX translation headwind of 2.9% and resulted in a 5% decline in revenues in the period on an actual basis. The adjusted operating profit reflects the lower revenue and the additional investment in NGP. It was also impacted by a 13,000,000 transactional FX, which we expect to be circa 1,000,000 for the full year in line with guidance.
This is primarily due to the increased input costs of LEAF We also achieved other gains in operating profit with a net benefit of 7,000,000, comprising 40,000,000 profit from the sale other tobacco assets in the U. S, offset by last year's 1,000,000 of gains on the sale of La Hester Bank Shares and the benefits arising on post retirement benefit schemes in the U. S. And the prelims we undertook to provide greater clarity and transparency on these gains in future. As a result and in line with our full year guidance of 1,000,000 to 1,000,000 we expect further one off gains in the second half.
La Hester improved profits by 1,000,000 by further developing their non tobacco business and continued cost discipline. Looking at the markets, growth market volumes were up with the growth of West in Saudi Arabia and improved share performance in other priority markets. The net revenue movement reflects mixed pressures in Saudi as a result of excise duty changes as well as the font M IEP income we received in FY 'seventeen, which I've referred to already. The U. S.
Has had another strong positive performance with strong net revenue reflecting pricemix and the continued growth of our mass market cigars business. Profits in the U. S. Were helped by the sale of other tobacco assets, although stripping these out, underlying profits were still up over 12%. Returns markets saw volumes down, broadly in line with market declines in the footprint.
Revenues were affected by the carryover of last year's trading conditions, particularly with a tough trading in France and the mix impact from EUTPD in the UK. As you can see, our portfolio simplification and investment focus has delivered growth brand share gains across all our divisions Overall, the business continues to generate strong cash flows with cash conversion of 111% in the half, benefiting from better working capital with a million inflow over the 12 month period. Of this, around 250,000,000 came from the timing of duty payments at La Hester and around 350,000,000 was from lower finished goods levels in the UK and Russia to the changes in the timing of excise increases. Without these, the cash conversion would have been around 90%. None of these are expected to benefit the full year cash conversion, which we expect to be around 95%.
We've also seen another $900,000,000 of debt pay down at constant currency over the last 12 months and the $1,200,000,000 at actual rates. I should remind you that the full year cash flows will be affected by 1,000,000 due to PNH entering administration and a step up in restructuring spend of circa 200,000,000 this year as previously guided. Given the strong track record on cash generation and debt pay down credit metrics continue to improve, and I'm sure many of you will have seen 2 of our credit rating agencies recently reaffirmed our rating. In summary, these results are full year constant currency revenue and earnings growth in line with our medium term guidance. This will be driven by a far stronger pricemix delivery and we will build on the improved volume and share performances we've achieved over the last 6 months.
It will also be supported by the rollout of My Blue, which we expect to enhance our top line growth. The improving top line will drive a better margin performance in the second half as will the cost savings which will be 2nd half weighted. We expect that full year earnings will additionally benefit from the lower tax charge although FX will remain a headwind of around 4% to 5% at current rates. Our view on full year finance charges, CapEx etcetera are unchanged and more detail is provided in the appendices to this presentation. So to finish, We're delivering ring through a focus on growth brands and priority markets with improving performance metrics that will drive results.
On NGP, we are sheet supports our strategic agenda as well as growing returns for shareholders and enabling debt repayment. Thank you. I'll now hand over to Matt.
And good morning, ladies and gentlemen. For the next few minutes, I'd like to update you on progress in next generation products before handing over to Allison to give you some more color on the progress in our tobacco business. As you know, we see a meaningful opportunity with next generation products, namely e vapor, oral products and heated tobacco. And that opportunity is to generate additive revenues and profits. As a reminder, over 85 percent of the world's smokers are not currently consumers of Imperial Brands products.
And down trading within tobacco remains a really important dynamic globally. So being able to offer affordable, yet highly profitable experiences to smokers in such an environment is vital. We're investing for growth. In 2018 in e vapor, we're continuing to build the Blue brand, and are in the early stages We're expanding our existing successful offerings with the introduction later this month of tobacco free pouches. And in heated tobacco, we have 2nd stage consumer trials planned for the next few months.
For all three areas, we of course been investing in production capacity too. And we're focused on building great brands. Great brands require great consumer experiences, and our innovation pipeline remains totally focused on delivering these experiences across the NGP spectrum. To repeat, we see a meaningful and additive opportunity for Imperial Brands in next generation products. And none more so than in e vapor, which is by far the biggest NGP experience in terms of numbers of consumers, and even more so in our markets.
Whilst the e vapor market today is fragmented in certain countries, we actually see this as a fantastic opportunity everything starts with the consumer. Simplistically, what has been missing to date are standouts consumer experiences, The marrying of a fantastic brand with a drumbeat of new innovations that continually improve the experience with a consumer engagement strategy that is seamless across channels. The more we enhance the experience the more the consumer base grows, and the more the consumer spend grows. As we scale, the more we can leverage overheads and normalize marketing spend more effectively. And as we innovate, our cost of goods fall dramatically, all driving our profitability.
And you'll recall from a recent presentation by Oliver that we're targeting gross margins of around 70% and operating profit margins of around 45 sent over the next few years. And all of this is underpinned by the increasing levels of scientific and regulatory know how, required to bring innovative new products to market an area in which few have the requisite capabilities. Before talking a bit more about some of the innovations coming over the next 12 months, a reminder about My Blue and Blue Ace. Both platforms are simple to use and therefore, of wide consumer appeal. My Blue is a simple to use pod based platform, that genuinely provides smoker satisfaction.
Over the next couple of months, we'll be enhancing the platform further with the introduction of nicotine salt liquids under the name My Blue Intense, all targeting adult smoker conversion. Building on the success of our Blue Pro platform, we're also launching a simple to use and powerful open system platform called Blue Ace. Enhanced by adult focused rollout of MyBlue, we are currently in the early launch stages in 5 markets with a further 5 to follow in the second half of the year. We aim to be in 20 markets during FY 'nineteen. And by the end of 2020, we're aiming to have at least 8,000,000 blue consumers.
As I said earlier, the consumer engagement strategy has to be seamless across channels. And you can see on the slide, examples of accretivations, in this case, in partnership with VATE channel players and online retailers. We're already receiving really good consumer feedback and seeing positive early traction and reorder in retail, the vape channel and online. The approaches we are testing have different biases in different markets. And by way of example, over the next few months, we expect to be in more than 50,000 retail outlets in the USA, 6000 outlets in Russia, and 12,000 outlets in France, reflecting the different approaches being tested in the different markets.
As I said earlier, we're building we're focused on building great brands. Great brands require great consumer experiences, and our innovation pipeline is totally focused on delivering these of these experiences across the NGP spectrum. So finally, therefore, here's a reminder of Blue's proprietary innovation pipeline for the next 12 months. I've touched on many of these already, and many of you in this room have experienced a number of them. Of course, in oral products, We're expanding our existing successful offerings with the introduction of tobacco free pouches.
And in heated tobacco, we've 2nd stage consumer trials planned for the next few months. There are 1 or 2 other exciting opportunities we hope to be able to talk to you about over the coming weeks months. In summary, we are delivering the significant step up outlined at the end of last year, with revenue momentum expected hand you back to Allison to give you some more color on the progress in our tobacco business.
NGP Momentum is building through focused investment as we step up behind NGP this year. We've also recently restructured our NGP business to leverage the strengths of the tobacco business even more effectively. And in tobacco, momentum is also building through focused investment. Focus investment behind our priority markets and behind our growth brands to deliver quality growth. Our growth brand success builds on our successful portfolio simplification work over the last few years.
Boosted by the step up in investment last year behind our market repeatable model or MRM. All key metrics are significantly improving with volumes up 6.3%, including organic growth, excluding migrations, of 1.6%, a 100 basis point increase overall in share. And contributing to an increasing proportion of net revenue from our asset brands, now at 65%. And this investment behind our MRM is also reflected in our overall share performance in priority markets. We have a clear portfolio focus and have continued investment in equity building, distribution, and customer relationships this year.
This brand and customer focus has been integral to our share success. Shares up in Germany, the UK, France, Russia, Italy, and Japan, driven by our growth brands and the disciplined implementation of the MRM. Russia has been a notable success following some tough calls on portfolio simplification and our subsequent investment, particularly in key accounts. And the UK turnaround continues. Again, a clear portfolio focus and investments in activation and customer relationships underpinning our share growth.
In France, share is up with a great performance from news benefiting from increased focus within a simplified portfolio. Although share will come under pressure in the second half, as we balance share and profitability in a difficult trading environment. Share is up significantly where our portfolio is well positioned given the market dynamics, but mix is significantly negative given the decline in the premium segment post the excise increase last year. Chevron's down temporarily in Australia due to a price disadvantage around an excise increase towards the end of last year, but the spot share has since recovered significantly. And in Spain, share continues to be impacted by the dark segment that our blonde share is on an improving trend.
In the US, we delivered a strong financial performance. Our cigarette share decline is ameliorating. Winston, Cool, and Maverick are all doing well as is mass market cigars, where share was up 14%. Overall, some good share performances to build on in the second half. So volumes are good in the first half, but the overall top line performance was held back by the carryover of some 2017 headwinds.
As we anticipated. For clarity, there's been no investment in 2018 behind our always on price strategy element of the MRM. You'll remember that the focus here is about price parity with relevant competitor brands. Price mix pressures are environment driven, not the result of aggressive price positioning, which merely borrows share. And I mentioned at the beginning price mix is improving as we lap the 17 headwinds, up 4% in Q2 as the trading environment improves.
Our volume performance combined with improving price mix plus additional cost savings underpins our confidence in the second half. Whilst recognizing that markets like France and Saudi will continue to be a headwind. A clear strategic focus sits behind our 2018 delivery. We're prioritizing the brands, products and markets that are central to our strategy. We're driving continued portfolio simplification, active market prioritization, and realizing NGP Growth Opportunities through targeted investment, all supported by a lean operating model and a continued focus on cost and manufacturing optimization.
As we further focus the business behind our priorities, We're also evaluating opportunities for assets that are not central to our growth agenda. A recent small example was the disposal of our US OTP brands. There's more that we can do and today we've announced the initial scale of our thinking. Looking to realize up to 2,000,000,000 of proceeds within the next 12 to 24 months. I should understand I'm not able to provide further details at this stage.
But there are clear strategic benefits for the business. It drives an even sharper execution focus and facilitates further simplification and agility, delivers efficiencies in costs and cash and unlocks capital to redeploy to maximize value. So to conclude, I'm pleased with our progress in the first half. Reflecting a continued focus on our priority markets and strongest equities. And we have improving momentum into H2.
It's exciting times in NGP with launches and progress on new initiatives and that will also add to our H2 revenue growth. Thank you. We'll now take any questions. This presentation is being webcast, so please make sure you use the microphone beside the seat. And give your name and organization before asking your question.
Any question? So, yeah, there's a microphone in the seat I believe. The technical challenges in the morning.
Hi, Owen Bennett at Jefferies. Couple of questions, please. I mean, at year end, you said, you're hoping to do price mix between 4 to 5% for the full year to hit your model. That therefore requires 8% in the second half. I just wondering what are the key drivers of that pickup and particularly how much is vapor contribution accelerating.
Gonna contribute to that in the second half. And then secondly, more NGP related in terms of products, just any commentary on the My Blue rollout in the US and how that's getting on against you from any kind of feedback you've seen already. Thanks very much.
Okay. Jonas, pick up with the U. S. And My Blue.
First.
Yeah. I
mean, we're a couple of months in, and it's going well. We are, the feedback from retailers, the vape channel and from consumers, both directly and through the retailers is very, very positive. You know, it's a lot of people focus on Nielsen data, which we don't, for, for may, maybe obvious reasons given given the challenges that we see with the way that they cover the market. But, but, so it's anecdotal at the moment. I mean, our, the guys are really, really excited about the, the response that they're getting to the product.
So, yeah, it's very positive.
Yeah. And
we've got the next salts addition coming up as well. So that will further drive momentum into H2.
I know, on pricemix, you're right around the 8% and you're right to assume that there is a tick up in the revenues from blue, which obviously contribute to that. And I think Matt referred to that during the course of his presentation. If you look at what we're expecting from tobacco, it's much more in line with our historic norms In fact, the exit numbers of, the 1st, of the second quarter. And actually, the step up is not therefore that dramatic from where we exited Q2. We've got quite a lot of confidence in the ability to deliver that given where pricing currently sits across the market.
Really a really quick question
Yes, they will be going into the U. S. They're going in, in liquid form in the next month or so, and they're going in, in pod form in, in July.
And more on mix, Summer?
On pricemix, I mean, pricing has been broadly speaking in line with our expectations. Here that which are, they're 2nd half weighted, from memory, I think they were around the sort of 2% to 3%. I mean, I'll come back to you on that, Adam, but where we have been more materially impacted is around mix. Where we've seen some element of product mix changes. To some large degree, driven by excise duty and other events that have occurred across the market, so in Saudi, for example, or where we've seen excise duty absorbed across the market in markets like France.
And there's also been an element of geographic mix which is, which is, I guess a feature of the industry, the rates of size decline will change the portfolio, and its contribution period on period. And they're broadly equally weighted in terms of their impact. In the first half.
If you think about how mix is going to go forward, do you think it will as I said, I understand the point where pricing is getting better, that's very clear. And the IP factor drops out, that's very clear. But I'm wondering if you can talk about how you think whether mix will be as negative in the second half as it was in the first half? Or No,
it's ameliorate. I mean, ameliorate is quite consistent from the market 1 and the product 1, actually, Amelia rates quite significantly in the second half.
Yes. Your point about the portfolio, Adam, there's some specifics on portfolio in terms of product mix that come through. So Saudi is the standout example because of the doubling of the excise. Clearly, the premium segments under a lot of pressure, consumes a down trading to to to the value segment. We're well positioned there, so it's a very good share performance for us.
But as everybody in that market, there's a mix hit from that because because of the, of the shift in terms of the consumer. But in most markets, we're very value biased anyway. So it's not going to be a significant mix hit in that sense. It's got to be one off, examples like the one I called out in Saudi that's going to be more significant other than that as Oliver calls out it's a lot to do with some of the market mix impacts in the first half, which will ameliorate into the second half. Yes.
Yes, okay, Charlie. John Landster, Berenberg. Couple of quick ones. On the currency minus 4 to 5, is that just translation or is that does that was that translation and transaction when you give it for the full year?
That's trunk. Quick cord translation. Yeah.
Okay. And secondly, in terms of couple of on the gain on NGP, just to be clear, you obviously got 2nd, 2nd phase trials for heated tobacco. I think previously you'd said you wanted a product launch sort of by the end of calendar 18 or early 19, is that still remain the sort of broad timetable?
Matt?
Yeah, if we if we choose to launch would be the timetable.
Right. Okay. And so on the oral, the sort of non tobacco oral pouches, Is that something developed for the European market, or is that, and if so, is that purely going to go into Scandinavia or are you going to try and launch elsewhere in Europe as well or perhaps even America with FDA approval?
Absolutely. I mean, no, it is broader than Scandinavia, and but you're right. If it was to be the US, it would need, it would need FDA approval. So we're mainly focused on, on non US markets. Maybe put it that way.
Yeah. We think it's an interesting opportunity. Yeah.
Hi, Charles Manso from SocGen. Sorry. Question on your dividend policy, still 10% growth at the interim and the chairman's statement. Supported by saying always under review. Can you just sort of give us a bit more color on what that means?
Does that mean that given that it's so high and growing, you may consider changing it at any time soon or whether actually the board is giving its 100 percent support to the continuance of the 10% growth policy.
I mean, it's really a statement that says what it says on the tin, really, which is any board's responsibilities are, they do keep the dividend policy under review. But as you've seen at the half year, We continue to have very strong cash generation, strong margins. We believe we're putting the investment we need behind the business. And therefore, there's there's nothing further to comment about policy, but under review is really just, you know, a good discipline of a board to keep it under review. I think more than that.
And it's worth noting, Jess, 67.6% payout ratio. It's not high against the peer group. We're producing 1,200,000,000 of debt pay down don't exactly look like a group that's challenged for cash at the moment.
Good morning. It's Alicia Faury with Investec. Just a few questions. I think in a statement you mentioned in H2, that you expect for their share gains, can I just confirm that you're referring to volume share here? And in light of the significant outperformance versus your markets that you've seen on volumes in H1.
I was just wondering if you could talk about a little bit more about what's driving that. Are you taking perhaps less price than some of your peers? Is it just simply a factor of down trading in your markets benefiting your brands? Just trying to understand what gives you confidence on the volume share gain to continue in H2 and possibly even beyond. That's question 1.
Then secondly, on, the US and the recent, FDA letter to JUUL. Just wondering if you've seen any fall out from that or had any change in dialogue with the FDA regarding your My Blue product in that market and, and what the implications are of that development there. And on NGPs, are you planning at some point to break out the financials as some of your peers do? And then finally, sorry for the long list of questions. With regards to the earmarked assets for disposals, appreciate that there's a limit to what you can say, but if you could help us with regards to how you view possible dilution, you know, what what we should, kind of prepare ourselves for.
Thank you. Okay.
So, to kill off the first one very quickly at the volume share we're talking about, but clearly with the improving price mix dynamics, we've got coming through q 2 at 4% as we see that improving through, the second half as well, that clearly moves into into a into a good value performance as well. I'm gonna ask, Dominic and Yorg briefly to comment on 2 markets. I'm thinking Russia and UK, but you pick in terms of what's driving that volume performance, we talk about the market repeatable model, and really it's the disciplined implementation of that. I'll give you some examples. Where, you know, we really driven the share and I highlighted earlier it was around, you know, the brands, the portfolio focus, but also around the whole customer relationship dynamic want to be absolutely clear that the bid around always on price strategy on the MRM is about price parity to competitor brands in market.
There's been no investment behind that part of the wheel in 2018. So this isn't a price driven. I call it borrowing share when you use price to drive share, because it's not sustainable and we're we're driving sustainable focus on share growth. So I'll come back on that shortly. FDA, if you'll pick up on that, that, Matt, and either you and me can pick up on disposal dilution, Guys, do you want to pick up briefly and pick a market?
I'm thinking Russia UK, but it might be worth giving a concrete example, yes?
Yes, I'll speak quickly about Russia and really Russia is an example, but it's pretty consistent with the way we're handling all the markets, which is very clear, very strong execution of the MRM and every aspect of the MRM. So in the case of Russia, we've massively strengthened our position in key accounts We were always strong in independence. Now we're very strong in key accounts and actually a lot of the growth that we've delivered has come from our strong presence in these and of course key accounts are growing very much across Russia at the moment. So we're growing share within a trade channel that's growing significantly. We've simplified the portfolio very much.
We used to have a big tale of quite small brands and we put big focus behind the brands which we see the biggest potential to grow particularly value for money international brands like P and S And as Allison said, we've made sure the price is a point of parity, but it's been nothing more than a point of parity. What's delivered, the growth has been our work behind brand equity and our strength of these trade relations that we've got in Russia. And that's a pretty consistent story across most of the markets where we're growing share.
And we're using that to leverage Blue now as well. Yeah. Exactly. Yeah. Yeah.
And I'm almost afraid that I can't offer a very substantially, strategically different answers to what Allison and Dominic have said because it applies also to the UK. Pricing is not the key driver for the share growth. Our strategy is clearly a parity pricing strategy. We're in a positive position there that a lot of the pricings are now embedded as well. The share growth really has come from our investments in our growth brands, namely Jean Play Special, And we are very well positioned at the market end where consumers are trading into, and in our FCT portfolios.
These are really the key 2 drivers And then plus the sales execution, we have extended our sales coverage extensively, and that's paying back. We're also very excited about the recent My Blue launch the consumer and customer reaction has been very strong. Distribution is in line with expectations and the initial consumer offtake is also strong. Thank you.
Management again? On the on the
FDA, I mean, the the more interesting thing I thought about the the the tonality of the, of the enforcement notice that, that, well, the enforcement, wording that was used by the FDA was actually it was very positive towards vapor as a category. And that's great. From an enforcement perspective, I mean, I don't know any more than you guys do in terms of actually what steps the FDA will take. We have always had very, very strong youth access prevention mechanisms and policies. So it's something that we completely endorse.
And we're looking forward to working with the FDA to lift the standards basically of those that don't meet them currently. But in terms of our dialogue with them, it that there's been, there's not been a change.
And on the disposal program, I think one has to look at the disposals in the context of the strategic framework when which is driving them. I mean, our whole strategy since Allison's appointment has been around simplification focus, focus, focus, focus on key brands, focus on key markets, focus on next generation product opportunities. And the real opportunity for us in profit terms is that that focus, that simplification will drive both top line and bottom line performance. What we're doing therefore with the operations that we will be disposing of is really simplifying to ensure we deliver the stronger earnings profile in the longer term. So there may be some short term dilutions we actually sell bits But the longer term expectation is that that strategy focus, focus, focus will deliver a much better, both top line and bottom line performance.
There'll be no dilution.
For Vikuzov from Goldman Sachs. Just as a follow-up on that comment, I appreciate 12 to 24 months things can change significantly, but if you had 1 to 1,000,000,000 coming in today, what would you be using that cash flow.
It's a
an answer which unfortunately is not going to be very satisfactory because there are clearly there's clearly the uses for cash are around that the debt position of the business, which we're still in a balance sheet rebuild mode following the US, so so that would definitely play a part. There's also clearly investment in the business. But at the moment, as we look at the current year, as we look at what we want to do next year, we're confident with the with the investment opportunities that we have and the funding of those investments. So there'd be nothing incremental. I don't think at this stage that we would highlight that we would that we would want to put more money into and clearly there's there's the aspect in terms of shareholder returns.
So so right here right now yeah, there's there's nothing. Obviously, I do different immediately, because we are adopting a very disciplined investment approach to what we're doing in next generation products. And we do see the way we are looking to unlock this opportunity as something that will be smart and capital light overall. So it's it's not a question of of of looking for more funds for investment in the business currently. So I think initially probably that we would just take a little bit of debt down to make sure we've rebuilt the balance sheet right here right now.
If it was today.
Hi, it's Adam Spielman again. Can you just talk in general terms a little bit more about tobacco heating both in terms of how you see the threat developing in Europe, to the extent you do where, what sort of customers or clients or consumers and also in terms of the opportunity for you. So if you I guess if you can talk about it first of all from a tobacco point of view, the threat but also then the opportunity. And I'm very intrigued by your comment, Matthew, that you said you may not launch a heat not burn product. You implied you still haven't made that decision.
Thank you.
John speaking.
Yeah. So I mean, our focus is vapor. I've been been consistent on that for a while because in our, in our markets, where we have strong route to consumer, vapor is by far and away the bigger consumer category. And, you're looking at the same number of vapers, for example, in the UK or France, very similar number to the numbers of heated tobacco consumers. And so we see the opportunity as being a very, very real one on the vaping side, but we recognize that there may well be opportunities from a heated tobacco perspective, Now, in terms of, in terms of the times, types of consumer, I suppose it's, it's difficult to be stereotypical.
I mean, there's a suggestion that, that heated tobacco consumers in Asia are particularly drawn to a mental experience, for example. On the vaping side, it is, it's broader than that. It's it's flavors play a far broader role. I think you've got, in our view, you've got, you've got vaping sitting as an opportunity that sits almost beyond heated tobacco. Maybe I put it that way.
So I think there's room for both. I genuinely do think there's room for both, but I still think the bigger opportunity for us is, is on the vaping side. So, but we want to have the optionality to, you know, to launch each tobacco if there's a, if there's an, if there's a more effective or realist opportunity to go after. So
I think there's a consumer lens here, which I think doesn't get discussed enough, which is why one of the charts Matt talked to started with that stand out consumer experience. We're beginning to see really good vaping experiences with a product like My Blue with Blue Ace. And really that's not really been in the market today. We've been focused with the assets we've accumulated to really perfect the consumer experience. We'll keep perfecting that consumer experience, but we do see a very real opportunity getting that consumer experience right.
And we've not seen that happen in a, you know, in a in a in a way together in a market yet to see how that plays out with consumers and the choices that they as Matt says, I'm sure there'll be room heated tobacco, but we very much see the opportunity, the biggest opportunity for us in e vapor.
Threat from heated tobacco. I mean, let's be absolutely crystal clear about this. Philip Morris is saying that it's going to grow European market share by at least 2 percentage points coming from IQOS. Now if that's right, that implies the European market will fall 2 percentage points faster, worse than it used to. Now that's a forecast.
It may be wrong. It may be you think it's just complete nonsense. It may be you're quaking your boots. Can you comment on it, please?
We look at the risk, clearly, and we have we're monitoring what's going on with IQOS in Europe. We're looking to understand the consumer behaviors where IQOS does get some traction which interestingly in is I would describe the slightly more premium markets in Europe where it's getting some traction. But we very much are on top of it looking at the triggers where we do something, in terms of our portfolio. Currently, we think EVP is our focus in terms of providing that alternative NGP experience for consumers but, you know, we're working on our heated tobacco offerings. In fact, quite a broad portfolio of NGP offerings, which we believe we've we've got to use should we need to if some of these these risks really come into into play.
But at the moment, we've got my blue going into market we are very focused on the investment behind that. UK market, for example, IQOS has been in for a while, heated tobacco has been in for a while. And and vaping is very much the category that's growing with consumers and and my blue I think has got a very important role to play there and has got a very significant opportunity. Similarly in other markets in Europe.
Is there a long way of saying you don't think Philip Morris will grow IQOS as much as they say they will in Europe?
I don't really want to comment on their predictions. I don't have access to how they're thinking asking things. All I do know is what we keep seeing in markets, the reviews that we're doing in markets, and where we see the opportunities for us with our portfolio. And you have to keep remembering as well for us in many markets. This is very additive for our business.
In some markets, we have very small shares. And therefore we see from a consumer conversion perspective from smoking into NGP a big additive opportunity for imperial which is a different starting point in a number of markets to other players.
Right. A couple more questions. And first of all, with the, collapse of P and H, do you actually see any disruption or costs in the UK market or is there any, consolidation against you in terms of the wholesalers? And secondly, going back to NGP in the way in which it's organized, some of the some of the companies sort of originally set up very separate organizations now seem to be merging it in, just from a general knowledge point of view, how exactly are you doing sort of selling and marketing process. Are you keeping separate teams or are you just you just got it all in with the the rest of the tobacco products?
Okay. On, Parker, not Parker's PAH Rumpy. Mean, I think it's much to
say about that. John, we saw we were working with PNH for some while before they got themselves into the sad position that they've eventually ended up in, we had contingency plans in place that had been worked through by the markets and the disruption was insignificant in the context of our business, they were well executed and outstanding performance from our UK team.
On NGP, the restructuring changes really driven by looking to leverage the strengths of the tobacco business. So when we first started looking at developing adjacencies to tobacco a number of years ago now, We initially set that up as quite a separate entity to make sure it had the space to really evolve and think about how we were going to really win in this space. As we've been stepping up through, 2018, we really want to do is now start leveraging the strengths within our within our tobacco business. So we look at it, from perspective of innovation, of the realization of that innovation, commercialization strategies and execution. Innovation, we keep separate still.
And we incubate that in terms of a business that needs to be away from the distractions of actually how you actually get this thing to market and how you make it. The realization aspects now, we've now got a dedicated piece that sits within our manufacturing operations. Clearly, to back air manufacturing is not identical to to e vapor manufacturing, the little skills and principles, quality management, all those aspects that are very, very pertinent to what we're doing. In the NGP space. The commercial strategy side in relation to Blue, in relation to how we bring the innovations to market, again, that's that's a separate piece, that looks at that commercial strategy away from the tobacco side of the business.
And then in execution, we actually have some different models at the moment. It's one of the areas we're testing out to some degree. The US is standalone leveraging the, the the Salesforce within ITGB, whereas in the UK, it's fully integrated, for example. So we've got some different models that we're playing out also potentially some some models that that wouldn't involve, our own infrastructure, maybe distribution type model as well. So we've got some different models where we're we're we're looking to to learn from and see what works best in the market, but really looking to leverage where we have it, the clear the retail reach and key account reach we have in markets.
So that's broadly the principles around it. It's working well actually in terms of the business. It's, it's really helping leverage the strengths that we have.
Yes.
Thank you for the follow-up. Just a quick one. Are you able to give us your market share within e vapor across the key geographies that you track?
No. No. And that's the only no because I'm not going to tell you. It's because It's at the moment, it's very early days in terms of the launches, but secondly, it's really, really difficult data to get at. All you ever see is a tiny, very inaccurate Nealston view of the world, particularly when it comes to the U.
S, other markets is less inaccurate, which is at best, a third of the market, visibility in terms of online sales, visibility in terms of the VATE channel in particular, which is your other 2 thirds of the market in most markets, very, very hard to get a decent read. So something we're working on, but actually to get to get anything that's very accurate is actually quite quite hard to do.
I mean, we don't really look at it in terms of market share. I know that's a way of measuring things, but we look at it in terms of consumer numbers. So we'll be able to talk more as we go through the year and have the full year about the number of blue consumers that we've bought into the blue franchise.
Mean, the UK U. S, you've got a fairly substantial pre existing market. So, but in a lot of other markets, this is about creating the category, it's about converting smokers. It's not just grabbing a share of an existing great. He see what's happening.
I've come up with a little list. So on coming back to the price mix points, you say 4% in Q2. Can we assume that the exit rates was higher than that and in terms of do you need any more pricing to come through in the markets or with what's already been announced, you have enough to meet guidance. Then down trading, so down trading environment in combustibles given your portfolio SKU that ought to benefit you But until now anyway, historically that hasn't come through for various reasons competition got more aggressive down there. Could you perhaps comment on how you're feeling about down trading starting to benefit you whether competitive intensity at the value for money segment has leveled off.
And general question on NGP, I mean, I think Matt started alluding to it, but, fragmented market at the moment, how does, how does the industry rebuild entry barriers, particularly in vaping in your case?
Quickly on the first 2, yes, it was building through the second quarter in terms of price mix and exit rate. In terms of pricing, vast majority is is done. So there's not not a lot we need to we need to get additionally in H2. On the down trading point, I don't think you can ever be complacent around the value for money category. Everyone has strong brands there.
My point I made earlier to Adam's question was more around that's been the bias of where we are for a long time. So it's not an additional mix push in terms of our portfolio apart from some specifics like Saudi. But everyone's got strong positions in the value for money category. And therefore I'm I'm never complacent around around the bottom end of markets and and some of the competitor activities that can go on which is why we do have our always on price strategy bit of the MRN we will make sure, in priority markets that we do get the parity that we need, unless there's a really, a really good reason why we want to back off that for some reason. Which we have done historically, for example, in the market like Ukraine, when we we refuse to play.
So And then on NGP, I think, Matt, in terms of the barriers to entry.
Yeah. I mean, there's a few. Their, brand is one of them. The innovation capabilities are, and pipe line are a second, be able to keep moving the experience forward. I mean, you've seen, everyone's aware of what jeweler cheap with a relatively simple innovation, which actually moved the market significantly.
So that's another area. I think access to the consumer is a 3rd, a third barrier, if you want to call it that, particularly retail. And if you think about the retail channel, which, you know, we're finding through our, through our experiences now, is a very, very important switching channel for, for consumers from combustible products to, to vaping. There's not that many players that actually have access to to retail. And then the 4th would be, the sort of the science and the know how that's needed to actually back all of that up and alluded to it in the presentation, there are very few people that have got those capabilities to be able to actually meet the requirements of of regulators to be bringing new products to market.
So I've been saying for a while, the barriers, if you want to call them that, the right to play is getting, is getting more stringent, and that's good.
Well, thank you everybody for joining us this morning and for the questions, and have a good day.