Good afternoon, everyone, and thank you for joining us for today's webinar. I'm Peter Durman, Director of Investor Relations. Welcome to another of our IR webinar series. We use these webinars as a way of providing a deeper insight into different aspects of the business. Today's session will examine our tobacco maximization strategy, and how our increased focus and prioritization of investment has strengthened the business, creating a foundation for future growth.
We'll be focusing on tobacco today, and we're planning a separate event on the 25th September to update you on our growing next generation products business. This event is being recorded and the slides and transcripts will be available on our website. We'll not be providing a trading update or commenting on performance today beyond the update we provided for our half year results. I'll just draw your attention to the disclaimer on Slide 2 before I hand over to Alison to introduce today's webinar.
The objective for today's session is to provide and to demonstrate how this is driving better share performances in our priority markets and underpinning the performance of the group as a whole. Here's a brief reminder of our strategy. You'll be familiar with this slide and our 4 strategic objectives. In essence, we have made clear choices for growth. And these choices and this focus is even more critical in an evolving consumer environment.
Our strategy is about making clear choices about the brands and markets to invest behind. And just as importantly, choices about those we should not invest behind. It's about the right focus to deliver top line growth. For our footprint, it's about winning in the right markets. We've invested in the profit pools where we're well placed to win and it's have good affordability to underpin margin growth.
From a brand perspective, we focus our investment behind our strongest brands prioritize the right SKUs and targeted investment in new formats to meet key demand shifts. And we have a clear codified route to market in our successful market repeatable model, with a differentiated focus on distributor and retailer engagement. We're also making the right choices with a lean operating model
and
a relentless focus on costs and cash. And the whole business is focused on supporting our top line growth agenda with lean ways of working and daily focus on prioritizing spend that drives sales. Capital allocation is also critical in ensuring we have the right assets aligned to delivering quality sales growth. This can include M and A to strengthen our next generation assets and capabilities, as well as divestments or exits to enhance our focus on growth opportunities. So what are the outputs of these choices?
High margin growth and strong cash flows. Maximising shareholder returns from tobacco, while also providing funds to invest in additive growth opportunities, in next generation products. And what are these strategic choices delivering? Our focus on the right markets with targeted investment is delivering improved share trends in most of our priority markets supporting improved group performance. The right brands or growth brands are outperforming including absolute organic volume growth, which is driving a greater proportion of our revenues from our strongest equities.
Our asset brands now represent almost 2 thirds of our revenues, up from a half since 2013. We've also built a great NGP platform with the Blue franchise and a growing pipeline of exciting innovations. Our operating model not only improves the ways of working, but consistently delivers cost efficiencies. The consequence of our footprint focus and this cost efficiency enables us to deliver industry leading margins. Creating the headroom for increased investment.
And our ongoing focus on cash conversion enables us to generate consistently strong cash flows. As we focus on the right assets for future growth, we've also highlighted opportunities to sell assets that aren't central to our strategy. To further simplify the business and redeploy capital more effectively. Today's presentations will again affirm our thinking behind our strategic choices and our investment priorities. As well as how we have actively reshaped our operating model and cost base to support these priorities.
Amaral Pramanek will set out the industry context and current dynamics as well as how we choose where to play and which markets to invest behind. Dominic Bruce will outline how we prioritize our resources across our footprint and how our MRM has successfully provided an investment framework driving out performances in our priority brands and markets. And we'll give some real market examples with Dan Karl from the USA, Michael Kye from Germany and Melvin Rugrock from the UK, who will talk about how the clear choices we've made in these markets have enhanced performance. Oliver will then outline how our portfolio and market focus has shaped our operating model and manufacturing footprint all supporting delivery of high margin growth and strong cash flows. So first, Amal?
Thanks, Alison. The tobacco value creation model has been remarkably resilient over the years, with some year to year variation caused by regulation and excise. And at times by competitor activities. However, it has been fairly consistent when viewed over the medium to long term. Across our footprint over the recent years, we have typically observed annual volume declines of around 3% to 4% with positive pricemix gains of around 5% to 6%.
There's been more variation in these trends recently both positively and negatively. In 2016, the volume trains were better than the recent average. Driven by a range of factors in different markets. In some markets such as the U. S.
And France, they even moved into the positive volume growth for a brief period. We believe the relatively lower volumes and pricing seen in 2017 were driven by a greater incidence of regulatory intervention, such as the EU Tobacco Product directive and a higher level of excise shocks in certain markets, particularly France, Saudi, Taiwan and certain U. S. States. It was also a period of greater competitor activity in certain markets.
For example, in Russia, we saw more value oriented product launches, which had an adverse impact on product mix. We saw a carryover of some of these into early part of 2018, but we are now lapping many of these headwinds. So the key question is whether 2017 is the new norm for tobacco? We don't believe so. It was just a tougher than normal year.
And as we said in our half yearly results, we have already achieved price increases in several of our key profit pool markets. And looking ahead, we are making the right investment choices to deliver growth in the right markets, supporting our drive for high margin and strong cash flows. As we evaluate markets, we take into account a number of factors in our investment choices Evolving regulation and excise our ongoing features of the industry, with an impact that ebbs and flows from year to year. In some cases, regulation can create investment opportunities, and we have demonstrated we are well placed to manage these changes. In markets such as Australia and the UK.
Many consumers are seeking value oriented products and down trading in and down trading is common in many markets and informs how we decide to prioritize and position our brands. Our portfolio is generally well placed to manage There are other prevalent demand shifts within tobacco, such as new filter formats, crushball, and so on. That also influence our investment choices, which Dominic will come into in a moment. And we are prioritizing our investment to the right route to market as the retailer landscape continues to evolve, we are adapting growing channel. And so we've directed our investment to enhance our key account capabilities.
Somewhere also asked if the weaker performance of tobacco can be directly related to the growth of NGP. We think there are a limited number of markets where there has been a disruption, like Japan. However, looking across most of our major markets, the transition appears to be more gradual. We also see NGP as a significant additive opportunity for Imperial. We are a number 4 in tobacco globally with about 14% market share.
So we have 86% of the market to go after with our new And we will provide One of the most important factors determining future value creation is affordability. We have shown you this sort of chart before. It is based on the minutes worth at local average wages to buy a packet of 20 cigarettes at average local prices. The shorter the bar, the more affordable the market is and vice versa. So you can see that cigarettes are still highly affordable in markets such as the USA, Germany and Japan.
While the taller the bar the less affordable a market is. So cigarettes are relatively expensive versus local wages in India, Morocco and Indonesia. The markets highlighted in Orange are markets where we have a reasonable presence and see future growth. And these This chart overlays this affordability data with market profitability. Markets on the right are most affordable versus local wages, and those in the upper half are most profitable.
The size of the bubble is a measure of the market size by volume. You can see that that are relatively affordable with potential for future pricing and therefore further value creation. To give you some idea top of this chart is This is looking at the tobacco market at a point in time, and we regularly reassess the market dynamics with a view to reprioritizing over time. Or to deprioritize or to tap into new opportunities. And of course, Just as we have made choices to invest in the right markets, we have made clear choices to invest behind the right brands, our growth brands.
Which have become the biggest contributor to our top line. The brand simplification process we began 5 years ago has been a great success. Enabling us consistently growing ahead of the market on an organic basis, excluding the benefit of brand migrations. I'll now hand over to Dominic to talk a little more about how we manage our markets and prioritize our investments and resources. Dominic?
Thank you, Amal. As part of the review of our strategy in 2016, we concluded that an increased focus to market prioritization would support enhanced performance, just as it has done with our brand portfolio. We operate across 160 markets, And so we've introduced a market prioritization, which differentiates how we invest our resources and support our markets. You'll be aware of our 10 priority markets, which account for around 50% of our volume and 70% of our operating profit. This is where we're directing the majority of our investments.
We then divide the rest of the markets into 23 key markets and over 100 partner markets. In aggregate, these are still material to our business, and as Amal mentioned earlier, potential future profit pools, and they also provide volumes that generate scale and support cost efficiencies. We have a clear approach to how we manage these different tiers of markets so we can allocate resources most effectively. The 10 priority markets received the lion's share of the investment and resources behind tailored initiatives. This is augmented by additional central and divisional support.
These are large and high margin markets with good affordability, where we either have a strong presence today such as the UK or Germany or where we see an opportunity to build a bigger presence over time, such as the USA, Russia, or Italy. In our key markets, our investment is highly prioritized behind the best opportunities, while there is some divisional support but on a more limited basis. These markets can still be relatively large profit pools or represent future growth opportunities, but over a longer time scale. The partner markets are optimized even further, so we tailor our approach to the opportunity. Here, we may use a distributor to minimize overhead costs and to leverage local expertise.
For example, Serbia is an existing market where we introduced a new mutually aligned partner model, which has allowed both parties to benefit and turnaround market share performance. Making the right market choices is only one aspect Our market repeatable model has provided a robust framework to best allocate our investments in the key brands and SKUs and in the right retail channels. It is a simple and consistent operating framework focusing on the fundamental elements which have delivered successful market execution, while reinforcing a consistent way of working in language so that the learnings can be shared across the business. There are 6 elements that all work together, and I will cover some market examples to bring it to life. Starting with the simple market focused portfolio in the orange segment.
We've simplified and focused our Polish portfolio from 14 brands to 5, with a successful migration behind P and S, achieving a 200 basis point improvement in share over the past 2 years. We're seeing that a simplified portfolio aligned to the market has been a key foundation to our approach across our footprint. We then stepped up our investment behind these brands, represented by the 2nd segment. For example, our sustained brand investments in JPS in Germany has driven a better connection with consumers and delivered share gains. Just as we're focusing behind the right brands, there are also some important demand shifts happening in tobacco at the moment that we're capitalizing on.
For example, modern formats such as queen-size are the fastest growing segments in markets such as Eastern Europe and Russia, and there are similar positive trends with crushball particularly in North Asia and Eastern Europe. Our investment in both queen-size and crushable formats at Parker and Simpson in Russia has supported overall share gains there. Consumers are also favoring lighter tobacco blends and new filter formats. And will cover some market examples shortly. One of the components of the wheel that is often misunderstood is our always on price strategy.
This is not about adjusting price In each markets, we have a clear view of how the equity of our brands compares with the brands of our competitors and what price point that equity will sustain. We can represent these as price ladders, where each brand will be placed within a benchmark on the ladder based on its positioning as a premium brand or discount brand and so on. In each case, we are seeking to maintain a consistent pricing position based on the brand equity, with absolute price growth over time subject to market dynamics. Core range everywhere all the time is all about maximizing the distribution of our strongest equities through our customer networks. We've invested in expanding our sales forces and a new technology to optimize their efficiency and increase our call rates.
In conjunction with this enhanced distribution, we've also invested in tailored customer solutions. There are a couple of examples here. The Ignite program in the UK rewards retailers for their interaction against 3 key pillars: stock it, price it and sell it. There's also been an effective tool to support retailers through legislative and other market changes. In Russia, where the route to market has modernized and evolved significantly over the past few years, A focus on key accounts has been a key driver of our increased share.
The final part of the MRM supports all the others as we take learnings from our experiences in different markets and share them across the group as an all important feedback loop. Bringing all of this together, the combination of our prioritized approach to managing our brands and markets, together with targeted investments, is delivering quality share growth where it matters. This is evidenced in the consistent, progressive share growth in our growth brands and the improving share in our priority from our market managers of 3 of our priority markets. 1st, our biggest investment choice in recent years was our decision to expand our U. S.
Business and Dan Carr, who runs ITG Brands,
will give you an update. Thanks, Dominic. Our acquisition in 2015 transformed our U. S. Business.
It gave us national coverage with a portfolio of much stronger brands, carrying a much heavier weight with our retailers and consumers. With Blue, we acquired not only a strong brand in the U S, but also a platform for innovation and international growth in NGP. And beyond the tangible assets, we acquired an experienced management team, solid infrastructure, and strong retail influence and capabilities to execute in the marketplace to gain additional visibility for our brands We set out a clear strategy to focus our investment and drive profitable, sustainable, share with our focused asset brands Winston and Cool. And we focused on turning around our mass market cigar business, while delivering financial returns. We have delivered on our strategic goals.
Our cigarette asset brands have grown share by 50 basis points. The turnaround of the cigar business has been a huge success with share growing 150 basis points over the same period. And we achieved a double digit post tax return on capital in the 1st year and have consistently delivered strong It's the world's largest revenue pool after China and accounts for about a quarter of the global tobacco profit annually. Although volumes are declining in the market, the rate is generally steady and predictable. There has been a slightly higher rate of decline over the past year.
Which we attribute to the state excise increase in California and rising gasoline prices, leaving less money in our consumers pockets. The U. S. Profit pool has grown consistently over many years, and we expect this to continue. In addition, as Amal said earlier, cigarettes are highly affordable in comparison to other developed countries, which bodes well for future price leverage.
The regulatory environment is also reasonably predictable with a greater reliance on science and evidence based regulation than some other markets. We welcome the FDA's recognition of a risk continuum and the role that risk reduced risk products such as e vapor can play and converting consumers from combustible products. We've been continuously preparing our organization with our significant investments in regulatory science And the industry has shown it will hold the FDA to its mandate as according to the Tobacco Control Act. We are well placed to win with a strong portfolio of assets focused on the key products categories, all supported by an experienced sales team that understands consumers, and has a great relationship with our retailer network. We made some clear portfolio choices and prioritized resources behind Winston in Cool with meaningful investments behind Equity Building And Consumer Activations.
Having a focus on Maverick And USA Gold in the discount segment while deprioritizing investment in our tail. New positioning work has enabled more modern imagery, building on the foundation of our brand heritage. We are currently launching Winston Black, a bold and robust non mental cigarette in the premium contemporary stylish pack. This enables adult smokers to discover or rediscover the Winston brand while enhancing Winston's premium non mental positioning. These have been the key building blocks and have driven sequential brand growth and increased shares in both real flavor and menthol.
The discount segment has been more challenging as it becomes squeezed between the premium deep discount segments. Although we've achieved a better recent share performance from Maverick, In deep discount, we have recently repositioned 2 of our nonstrategic brands. Moncler and Sonoma to capitalize on this growing consumer segment. And we continue to support and grow our distribution network with over 180,000 retail stores on contract. Building shelf presence with our brands and aim on us to gain broad, awareness visibility and range for our portfolio.
The U. S. Acquisition has also enabled us to restructure our mass market cigar business. Where we've made great strides in rationalizing our portfolio, while driving phenomenal growth in the dynamic category, outpacing the industry. In a category that skews pre price, our portfolio is uniquely positioned as we own super premium with Backwoods and premium with Dutch Masters without every day pre priced offerings, while participating with Dutch and Philly's in the highly contested 2 for $0.99 segments.
We've also chosen to invest in the Natural Leaf segment, which has been growing over 2.5 times the category rate over the last three and a half years. Moving from 20% to 30% of total category. This has been our fastest growing and most profitable segment and we are the share leaders. For our range, we are focused on core variance and formats that meet consumer demand with an eye on the regulatory horizon. We continue to compete for space and have leveraged our much larger sales force across a much broader store base delivering the largest distribution gains across all manufacturers.
We see opportunities both in range and new outlets for additional placements for our brands. In summary, our investment in strategic choices have grown share in our focused asset brands. With Winston up 30 basis points since acquisition, Cool up 22 basis points and backward up 350 basis points. We were also improving the quality of our growth in asset brand net revenue up 490 basis points in the first half to 48%. We are taking advantage of key growth segments by either repositioning or leveraging our portfolio strengths to enhance the growth dynamics.
Our decision to invest in in a market with significant potential for tobacco and NGP. Thanks very much. Let me hand it over to Michael who manages Germany.
Good afternoon, everybody. Germany continues to be an important contributor to revenue and profit as one of our priority markets. A consistent record of both political and macroeconomic stability provides a strong foundation. With economic growth supported by rising employment and relatively high disposable income. A consistent regulatory framework and reliable excise structures supports a positive pricing environment and a growing profit pool.
As well as a clear planning horizon. Relative marketing for edoms provide flexibility around how we invest in our brands Similar in many ways to the U. S, the German market is 1, which a broad range of marketing option enables us to invest in traditional above and with those of line marketing activities in order to build brand equity. Volume decline in the market has been pretty stable at around 1% to 2% over the recent years. Although, In 2017, there was a temporary acceleration in volume decline following EOTBT 2 implementation and the introduction of pictorial HealthWines.
The industry volume declines have now returned to the historic trend Market revenue over the same time frame has grown by over 3%, supported by a positive pricing environment. We expect this broad trend to continue going forward with ongoing growth in the profit pool Our strong position, together with our focused portfolio of cigarette and fine tobacco brands, is a sound platform for us to win in Germany, particularly as we invest behind our market repeatable model. In Germany, we made some clear portfolio choices to focus on growth brands and to invest in SKU to capitalize on key demand shift. For example, to meet the growing demand shift for Lager value oriented formats, In both cigarettes and fine cut tobacco, we have recently launched a new larger farm for Golwas, West and JPS. While we are also investing behind lower nicotine variants of with Golarwa's low threat and JPS Blue stream with an innovative filter technology to meet consumer demand.
This relatively bright market gives us the opportunity to sustainably invest behind our brands through the line. A good example is the product and pack upgrade on Golwas, which is being supported by a full above and below the line equity campaign. We improved the distribution and availability of our core range by increasing our distribution points by more than of our own Salesforce, merchandising support partners and our outbound call center have enabled us to have more conversation with more retailers with over 340,000 calls a year, which is an outstanding number of contacts with our customers. We have increased investment in long term contracts with key accounts which are based on a digital communication. This key account partnership approach is generating positive returns with market share consistently above our national share in key retailers such as Germany's biggest hypermarket chain, the most important tobeconist group and one of the biggest petrol station chains.
This is an example For our digital point of sale communication, we've now installed around 20,000 new digital screens in over The digital point of sales allows us to communicate in a more targeted, flexible and efficient way. Coupled with strong shelf visibility that leads to Over the last couple of years, our focus on asset brand has grown asset brand market shares by 90 basis points. Our strongest brands now account excellent progress by focusing on demand shifts, particularly with bigger formats for fine cut, and we are now focusing on delivering a better performance in FMC. This has supported an improvement in our overall share position as we benefit from the additional market investments made in 2017. I'd now like to invite Melvin to talk about the UK.
Thanks, Michael and good afternoon. The UK market is characterized by a large profit pool and a strong market position for Imperial, with over 40% share in both FMC and FCC While there is some political uncertainty, the overall economic indicators are positive with high disposal income low unemployment and relatively good affordability for cigarettes, which has supported price increases. It has been a more challenging market over recent years with some aggressive competitive discounting at the bottom end of the market. And the implementation of EOTPD and standardized packaging. However, we successfully navigated these challenges and we are positive on the outlook for future profitable development for both tobacco and next generation products.
We are well placed to win in the UK with a market leading position and a strong track record of effective customer engagement together with our broad distribution network. Against this challenging environment and ahead of the EUT PD changes, we used a war game style approach to model a number of different scenarios for the UK market. This informed our choices and identified the opportunity to increase our investment to drive market share gains and create a better platform on 3 key areas: a simple market focused portfolio in both FMC and fine cut, aligned to current demand shifts. As well as key account management and improving our distribution. To capitalize on the strong growth in the capsule or crossable segment, we launched new crossable variants in JPS and players.
Innovation in modern fine cut formats is supporting significant share growth with FCT share up around 300 basis points over the past 18 months. Key accounts are important in the UK, and we have further invested in building these relationships In some partner accounts, we've achieved about 600 basis points higher share than our average. We've also increased coverage through improving our core rate. Core to our ways of working is to learn and improve. A good example in the UK is our choice to leverage our strongest equity brands in different price segments.
We recognized the opportunity to have a strong equity presence in the Swift Economy segment. The launch of JPS players accelerated our share of such economy as the brand quickly overtook the role of Carlton in the segments. Reflecting players' stronger brand equity. Overall, we have made great progress in strengthening our brands and have grown our market share to 41.9 percent, driven by excellent performances from JPS players and Gold Leaf. Our asset brands now represent an even greater proportion of our revenues at 74% of total tobacco revenue.
We remain positive about the future of tobacco in the UK and our ability to maintain market share momentum whilst driving growth in revenue. Let me hand over to Oliver.
Thanks, Marvin, and good afternoon, everybody. We are also making very clear choices through a relentless focus on cost optimization and capital discipline. In other words, it's about the right operating model and the right assets. Our portfolio and the prioritization of the right markets and brands has created opportunities to also reduce our cost of goods and simplify our operating model. We've implemented a lean operating model that allocates our overhead resources where they're needed and closer to frontline sales roles.
We have simplified our back office functions and optimized our manufacturing footprint and supply chain. We've deployed shared service centers to leverage our scale for our support functions, including finance and HR. Our brand and SKU simplification has not only driven better top line growth, but has also delivered cost benefits. Product costs are split evenly between leaf, non tobacco materials such as packaging, filters and paper and the conversion costs, which are the labor and overhead costs of running our factories. LEAF complexity reduction has lowered leaf stocks and procurement costs, Our outsourced model means that we only buy the tobacco we need in the locations that make sense for us rather than by being locked into buying the whole crop a specific origin, so we can source leaf at an almost 20% discount to the market.
Brand and SKU complexity reduction as well as careful supplier management helps drive down our NTM unit costs. In this case, economies of scale are important as order sizes are a key driver costs as printed item costs are highly volume dependent. Similarly, conversion costs are the costs of our factory network and have substantially reduced our foot and we have substantially reduced our footprint over in cost of goods over the last few years, more than offsetting inflation and volume declines and reinforcing our manufacturing goal of being best in pertise to support responsive and agile at a lower overall cost to the business. We are progressively simplifying our business and cost structure as this slide demonstrates We operate across 160 markets, but we now manage these as 13 clusters with a simplified management structure and overhead base. Similarly we have moved from 5 divisions to 2 supported by a simplified manufacturing and supply base.
We have also reshaped our costs from a high level of fixed cost structure to variable with an increasing proportion of the costs in sales facing roles. This is all supported by a lean set of group functions that leverage scale through shared services and centralized procurement. We've undertaken a significant restructuring, which has delivered real benefits and there's still more to go for. We've applied the same ruthless focus to our capital base. The simplification agenda has reduced our bill of materials and in turn the inventories in both raw materials and finished goods.
We've also aligned better and creditor payment terms more consistently. Our focus on driving quality revenue in high margin markets coupled with this capital discipline has delivered industry leading operating cash conversion. That has consistently been above 90% over recent years. In the 3 years to the end of our financial year 17, we've generated 1,000,000,000 of free cash after dividends that we've used to repay debt following our U. S.
Acquisition, This also allows flexibility for future investment in our business and in M And A. As we focus the business and make the right investment choices, we naturally deprioritize other assets that are less core to our growth strategy. We've already been reducing our stake in LaHista and recently disposed of our US OTP brands. As we announced with our results, given our focus on the right assets, we're looking to realize up to 1,000,000,000 of divestment proceeds within the next 12 to 24 months. There are clear strategic benefits for the business.
It drives an even sharper execution focus and facilitates further simplification and agility. It also delivers efficiencies in cost and cash, unlocking capital to redeploy in order to maximize value for shareholders. Thank you very much, and I'll hand you back to Alison.
Thank you, Oliver, and, the other members of the team for their presentations. But we believe the tobacco value creation model remains resilient. And for us, next generation products are a positive additive opportunity beyond our tobacco growth agenda, which we focused on today, and we'll give more details on our NGP strategy at the event in September. Our tobacco Mac's strategy is about focus and it's about choices. With our investments and resources prioritized behind the right markets, brands and route to market to deliver success.
This is underpinned by a clear operating model and capital allocation focus. Resulting in high margins and strong cash flows generating tobacco returns and funds to invest in new growth opportunities. Thank you. Lisa?
Thank you, Alison. That concludes the presentation. We'd now like to open the call to Q And A. And I'll hand the call back to the operator who will explain how you can ask questions.
We will take our first question from Owen Bennett from Jefferies. Your line is now open. Please go ahead.
Good afternoon guys. A couple of questions, please. First of all, on the UK, U. K, you speak about, how the challenging market was reset. Was just wondering if you could give an idea of the profit performance during the challenging years and what you see as a possible new norm from here.
And then secondly, just on the strategy, it seems to me it's kind of evolved a little bit from what was communicated a few years ago in terms of it was returned to markets and growth markets, where kind of return to is just main focus on profitability, which includes the likes of the UK and France. And then growth was where you were hoping to take share. And now it appears to be the 10 priority markets where focus is taking share. Then you've got the key markets with more limited investment. And then the partner market, so I was just wondering if you could comment on that and if it has evolved somewhat since what was communicated a few years ago.
I'm sure
Okay. I'll hand over to Melvin in a second just to talk a bit about some of the work we did, in the UK to really reshape the market over the last couple of years following the war games that he referenced. In terms of the overall evolution, it's been, the profit pool has had some pressure over the last couple of years, but as Melvin alluded to, we see that improving, on a growing trend, moderately growing trends going forward. But I think the other dynamic, which is interesting as well is we're seeing nicotine consumption in growth in the UK. And therefore, also as we move on to talking about our NGP strategy more in September, there's very much an additive opportunity for us there as well.
Maybe you
could just give a little
bit more color to the work we did to, to reset the market, Melvin.
Yes. So I think, about 2 years before EOTPD coming at play, we engaged in a war game session, which clearly articulated the need for us and the opportunity for us to leverage our equity at different price points in the UK. And we've, we've, as a result of that repositioned, core brands in both FMC and FGT, which has which has driven share momentum of the pool and our positive outlook of the profit pool in the coming years. We are very positive about the UK market now and in the near future.
Yes. I mean, I think it's clear from what Melvin is saying earlier, it's an out and out focus on the right portfolio. I think a huge focus as well leveraging the distribution and retail capabilities we have in the market, but also as well in terms of the market environment, and some of the work in terms of how sizes managed within the UK as well, which has been helpful too. Yeah. In terms of the strategy overall, in reality, I mean, there's there's not a significant evolution of the strategy, but as I've been highlighting today, it is all about choices.
And as we looked at the priority markets, we saw opportunities with the work we've done on the portfolio and the additional investment we put in 2017 to really improve our share position in a number of those markets. And you're right, there is a distinction. Returns markets, we tend to have larger shares, and therefore, we're balancing the share and profit priorities, but in a number of those markets, we had been losing some share for a period of time, so it was right. We put the focus in, into rectifying that, and there are growth opportunities for us there, but they will never be significant share growth opportunities in the sense of the opportunities we have in the growth markets where we have much smaller shares and therefore we can see more we can deliver from those markets in terms of uplifting market share over time with the right assets. So it's a, it's evolved a little bit, in terms of some of the choices, but the prime focus is still rare.
And then within the overall portfolio, clearly, we have some different ways of managing the less relevant markets to our growth within the business, in terms of prioritizing investment.
Thank you. We will take our next question from Vivian Azir. Please go ahead. Your line is open.
Thank you. Good afternoon. I was hoping, if you could expand please either Allison or on Wall or Allison on, the pricing dynamics in Russia. He noted that as you're anniversarying, some of the trade down petitive activity, things are stabilizing. But could you expand on that?
Does the pricing, the rate pricing, has it improved? And or is there less down trading activity? Thanks.
So focusing in on Russia, sorry, the line wasn't very good at that point in time. The question around the pricing, and what we're seeing from our perspective in terms of pricing in the Russian market, just to confirm?
Yes, please. Thank you.
Okay, thank you. Actually, Dominic is probably best place to answer this one. So, I'm going to, I'm going to pass over to him. But, yes, the dynamics we've seen definitely some improving situation, in the current year.
Yes, that's right. We have seen significant improvements this year, particularly versus what was experienced in Russia last year, which was quite a difficult pricing environment. And of course, we've had 2 benefits this year in Russia. One of them is, one of them is better pricing. The other one is a really significant improvement in our market share in Russia.
Key accounts have been growing very significantly in the Russian market. And as key accounts have been growing, we've been growing with them. So we've significantly strengthened our position in key accounts, which has also given us, a very good, a very good in addition to the pricing.
If I could ask another
separate separate question. Allison, can you comment at all on your now stake in Oxford cannabinoid Technologies, please?
Yes, I think it's just to reinforce, the messaging that we delivered on the day. I mean, so clearly there's a lot happening in, in a cannabis space at the moment. That's something we continue to monitor, and we saw this as a very good opportunity to really improve our understanding in this space. And make a make a small, a small investment, and, and really that's something we'll just continue to monitor, as things progress.
Thank you.
Thank you. We will take our next question from Gaurav Jim from Barclays. Please go ahead. Your line is open.
Thank you. So I have one question for Dan on the U. S. Cigar business. So while Imperial revenue growth has accelerated, I think north of 20% in the U.
S. Cigar business. The overall industry has also accelerated to 10%. What is driving that growth? And is that sustainable as we look out over the next 2 years?
That's my first question, and then I will have a follow-up. Thank you.
So we've been seeing very, very good growth in our mass market cigar business, but clearly, it's also a growing category as well. So comment.
Yes. I mean, we've seen the category grow over the last couple of years, double digits, which has been very promising. And and we view that to continue. I think what's driving that is a little bit of, better retail, better merchandising, from, from the market, and kind of structure in the way that they've, they've, the assortment range sets up And in addition, I think the consumer, is finding more occasions to utilize the product. And that's adding a lot of value overall.
Thank you. And my next question is, on, on the traction with MyBLUE. So I believe that for the second half, the guidance or the indication has been that price mix will be plus 8% of which about 3% is driven by a VIP products, launch for which there is no associated volume. Based on the trends or your success over the last few months, do you think you are trending in the right direction or you are above trend below trend? There can be any comments that would be very helpful.
I mean, we're focusing really with this webinar more on the tobacco max side of the business We have had a number of successful launches of MyBlue in recent months and the U. S. Market, which is of significant importance for My my blue continues to trend well, but I think any further specific comments at this stage, I wouldn't make.
Thank you. We will take our next question from Michael Lavery from Piper Jaffray.
Thank you. Just wanted to give a little more color on the U. S. You mentioned a think you might have used the word repositioning with Montclair and Sonoma. Can you just talk about what's different there?
Is it a geographical expansion? Is it a price cut or is that evolved? And then also, could you just touch a little bit on the price point for Winston Black? Is that parity with the rest of Winston or less just a little bit of that dynamic.
Sure, Michael. I think when you look at the discount, deep discount market, it was a relatively stable segment for a bunch of years. Over, starting in 'seventeen, we saw a little bit of share movement. It's still a relatively small segment. I mean, it's 9% of the total, but it's picked up a share point over the last year.
And due to that, what we, we took a strategic decision to take a couple of our non strategic brands, the quite honestly were declining and reposition them, into the deep discount segment so that we could compete in there. That, that's the segment we, we didn't currently have in our portfolio and, we made the change. Second question?
Winston Black.
Yes, Winston Black. So on Winston Black, it'll be price parity across the market, but we have also identified, some markets where we will have it, below the Winston line. Around 15% or $0.15.
And just a follow-up related to those In the U. S, you've had strong, say, 1st half, especially, 'eighteen margin and price mix momentum. That's been the shifts within your portfolio where Winston and Cool have outperformed.
How long
a runway is there? How much for that? And how much do some of these moves maybe offset it? Or what do you expect as far as how we should think about the look ahead?
Yes. I mean, mean, obviously, we're doing a lot of equity work, as well. I mean, we're the first step when we did the acquisition was to kind of get our pricing where we want to price the brands in the marketplace. And that takes time in the FMC category. So we're seeing nice development.
I think it's progressing, sequentially. And then at the same time, we're doing a lot of work around positioning and building equities and working really on, on consideration and trial, into conversion. So You know, our shares, I mean, we're basically looking at kind of 2 share brands. We see there's a lot of upside opportunity, but it'll take time.
Think it was also fair to say in 70% of the market, the EDLP stores, we're in share growth. So the dynamic we're really sorting with, with this portfolio shift in terms of the deep discount is really looking, to get a share of that, which would be very positive for our overall development in the market.
We'll take our next question from Mr. Adam Spielman from Citi. Your line is open. Please go ahead.
Thank you. I have 2 questions. The first one is a broad one about how the cost savings programs play into the, what you've done in terms of restructuring because, obviously, you've sort of presented very impressively on your course backup business. But I was wondering to what extent this is either enabled by the cost savings programs or somehow, they have slowed you down to some degree, it would have gone even faster without them. And sort of where that whole restructuring is going next.
So that would be my first question, please.
Adam, thank you for the question. It's Oliver here. Well, the things are all interlinked. I mean, the restructuring has been part of what's been driving our overall cost savings across the business. They've been part of what's been delivering our simplification across our business and the ability for us to respond more agile in a more agile fashion, to market circumstance and events.
I mean, what we've been focused on in terms of that program is aspects of simplifying our manufacturing cost base restructuring, creating lean environments, both across manufacturing and across our overhead base. And that has led to both reduced overall costs but it has also given us the headwind to invest behind those brands more fully to drive top line performance as well as enable top line performance improvement by creating much stronger focus on the brands that matter in markets that are critical to us. So it is very much a circular process where the restructuring has been supporting the cost programs that have been driving elements of our ability to perform by increasing the focus both around our brands and around our SKU and market focus.
And how should I, What does it really amount to? You know, some people talk about putting in SAP or some other systems often very expensive. So shall I think in your case, it's really a question of taking headcount out in areas you don't want to focus on, and that gives you the ability to in areas you do. And I guess by having fewer people, necessarily, they focus a bit more sharply
And that is certainly a strong element of it. I mean, it is about simplification, which means removing activities in large parts. And by so doing removing the people, there was always a great danger that if you just take the people out, you end up with the bag bursting at the seams. There's a smaller number of people have to do same activities. So that hence the focus on simplification, creating agility so that we're not essentially overloading a smaller number of people with a more complicated activity.
There's often a great temptation to believe that process enablement is is facilitated by big IT spend. I mean, we don't believe that journey at all is the right way to progress, and we've seen plenty of examples of organizations who've been able to simplify what they do to drive benefits, and that's what we've been doing at imperial?
I think it's also a question of daily challenge of spend as well, around making sure what we're doing is really focused and very choiceful behind spend that really supports the sales agenda, and yes, very critical eye over spend that doesn't directly do that. We've adopted some quite strong principles in terms of daily cost management with cross functional challenges, all those sorts of things going on to really keep us honest around that and keep the focus on a daily basis. So this isn't just about the big scale restructurings. It's a it's a minor as well.
Yes. I mean, she's really concrete about this. If it was a department, you know, I'm making this up here that was focusing on trying to grow a brand like, let's say, moon, in a market, let's say, like Morocco, you would just say it's complete waste of time that, that, that activity is going. And if there are some people involved in that activity, then we'll look to sort of redeploy them elsewhere or if not sort of, you know, let them go. I mean, is that Is that how I should be thinking about it?
Yes. The specific example is, yes, it doesn't quite exist, but the, what you're trying to illustrate, absolutely, Dominic, on want to comment?
It's exactly what we do. So we're very clear about which markets we focus on. We're very clear about which brands we focus on. And in turn, that means we defocus on other things. So if there were a small local brand, it's very likely that in almost every case, we'd stop focusing on that And if there were a department that focused on that brand, we'd probably get rid of that department or deploy them to something that would be more beneficial to us.
Thank you very, very helpful. Meg's more purposefully absurd. So I hope that's clear. I'm intrigued to what extent you believe NGP's are affecting the core existing tobacco market. So this isn't a question about NGP's, your growth opportunities, as to what extent, I mean, clearly ICOS has had a big effect on volumes in Japan.
There's no getting away from that. And I was wondering to what extent you also feel that's been the case either in the U. S. With JUUL or is potentially the case, in Europe or elsewhere. And also, I suppose, what your feelings are about, we've just heard that Jewell is going overseas, what your feelings are about that.
Thank you.
Okay. In terms of the Japan accepted, in terms of the heated tobacco growth in Japan, But in other markets, as we've looked at them and we're looking out across our planning horizon at the moment, we still don't see it's much more of a gradual shift in terms of the shift into NGP. And actually a lot of the time, it's actually also adding to the nicotine consumption in the market. So it's not a question of are shifting to NGP, then that comes straight off of combustible tobacco consumption because we are seeing nicotine, market growth in the UK, for example. And therefore, not only an additive opportunity for Imperial, but there's an additive opportunity, therefore, the staff as well.
I'd still say it's quite small in terms of those overall dynamics. Dan can comment specifically on, on JUUL in the U S. And the impact we think that's having maybe just to put a bit from that perspective.
Yes. But I mean, from the U S, I mean, we really see it sitting around, the SCT impact in California. California is the number one market. We think the contribution to the category decline was close to 2.5% of it. You had some reduced promotion volume in there, about 1.3% of it.
I mean, Juul based on the modeling that we've done, we see that at around half to 1% of the category. So that's kind of how we're looking at it and kind of managing the gasoline impact. I mean, in the U S, I mean, it's gone from $2 to $3 for a gallon. Of gas, that has really impacted the consumer, and we see direct correlation. But I can tell you that since we've We've passed over the California, some of those comps.
We've seen a much more, better category where the last 13 weeks is around, it's declined to 2.2%. And if you look at the latest 13 weeks, it's down 4.4%. So there's definitely been a change in the category.
Thank you. And that's those numbers you just MSCR MSAI data, right? I'm guessing in the Q4.4.
That's right. Yes. And in terms of Juul coming to Europe, I mean, clearly, it's quite a different dynamic in Europe compared to the U S. I think specifically, if you look at the nature of the product delivery, which, as you know, is a 5%, nicotine level in the U. S, and the maximum ceiling is 2 in Europe, So that's going to be a very different proposition from a consumer perspective, accepting that they used to weaken cigarettes anyway, but even so it's not the hit that Jewell has been in the, in the US in that sense.
I think also as well, one of our learnings so far as we've been been working with My Blue is really the importance of retail, and that route to consumer strength that we have, in our markets. And that's a very important part of our model. And, and clearly, that's something that, that dual will we'll need to take time to build and to get to grips with, from a European perspective. So I think it's, you know, we're clearly something we're, we're, we're going to be monitoring clearly something we're aware and prepared for. But the feedback we're getting from the tests we do with consumers with MyBlue comparing that as well, head to head with JUUL as well, very positive in terms of the way MyBlue is perceived.
And as you know, we've got a significant innovation pipeline as well that we can, we can build on that. But as we said earlier, September's about blue, so we'll do that then.
We will take our next question from Nico Von Stackelberg from Liberum.
Hello. Yes. I just want to ask quick questions
on driving cost optimization. And as you are continuing to go through your cost of optimization programs. Do you have any call outs in terms of regions where margins could significantly increase due to planned, whether it's restructuring or cost optimization, generally speaking, that we should be mindful of. Thanks.
Yes, I think a lot of cost optimization opportunities are ones that kind of benefit most parts of the business, but I'll let I'll let some Oliver comment.
As Allison says, I mean, we've got a relatively strong focus on a number of principles, which I think you heard Dominic talk about in terms of the MRM around portfolio simplification and that applies across the whole of our footprint. That, to some degree, has a strong influence over both the cost of manufacture and overhead. So it's relatively widely shared across our geographic territories, and I wouldn't single one out specifically.
Okay. Not, for example, the U. S, there's nothing you can do there in particular?
Well, the U S. Is part of our footprint. We're constantly working on it. You've seen we've performed very, very strongly in terms of profit performance in the U. S.
Over the last couple of years. I'm sure Dan is smiling next to me, would confirm he's felt felt the cost pressure.
I think probably the more we grow backwards, that's going to be the biggest impact on our margins probably. I think there's a lot of levers that drive the U. S. Margin, but cost focus is clearly one of them as well.
Okay. And I have a quick follow-up just, migrations in general and how the cleaning of process goes, I guess, the sort of feel that it's easy to tackle the low lying fruit, but as you continue through the years to migrate brands and to strengthen the right portfolio, it becomes incrementally a bit more difficult. Is that a fair assessment? Why or why not?
No, it's not really. We did try and tackle some of the really difficult ones up front as well. And I think there's only one, migration I can think of that we're rewinding to some degree currently, but it hasn't been successful. 95% conversion of all the other migrations which have been very, very successful for us. I think if I remember right, we've now migrated over 1,000,000,000, 6 over the last few years.
So it's a significant, significant chunk of the portfolio. So we tackled difficult ones along the way. I mean, we've highlighted highlighted one today, which was, migrating Balkan Star with Russian heritage, into Parker Simpson, which wasn't a straightforward one to get our heads around, but we very, very successfully implemented that with, I think, over 100% conversion of consumers, if you can get your head around that one. So it's, it's been a very successful program for us overall. I know we do focus on the fact that we're generating organic growth here as well, but shouldn't overlook, I think the success of those migrations in themselves has been very important.
We will take our next question from Chas Manso from Societe Generale. Please go ahead.
Yes, good afternoon everyone. Yes, could you sort of give us your sort of level of confidence that the tobacco max strategy, will enable you to maintain the improving market share momentum that you've enjoyed recently? And maybe more importantly, could you talk about translating that improving market share into an improving organic sales growth dynamic. Is there any reason why it shouldn't translate directly? Are you sacrificing anything on pricemix to deliver on the volume market share.
So some words basically on the top line part of your growth algorithm, the 1% to 4% not really met in recent times, are you expecting to get in there into that range and with this tobacco Max strategy to get towards a higher end of that range?
So, the guidance we've given back at the half year results, as we very much saw ourselves back in, in the 1% to 4% range in terms of, in terms of the overall model that we're driving. From a market share perspective, we really are generating some really good improvements in market share in the priority market. So I think it's important to stress that the focus is on the right markets and the right brands for that quality share growth, and overall that will support the overall development of the business, but it's not just about a focus on growing share per se, it has to be the right, the right sort of share growth. And from a net revenue perspective, that's clearly supportive of net revenue but as we highlighted at the half year, there's been a number of things in terms of the price mix environment in the first quarter in particular, that held back the numbers and as we've alluded to, we've seen that improving with a number of price increases we've achieved, over the last quarter or so. So definitely improving environment as Amar highlighted earlier.
And, we see very positive, positive dynamic from the work that we're doing from a tobacco Max focused perspective.
Can I throw in a specific one on Germany? I think in the script, I just mentioned that you're sort of turning your focus on to the FMC part of the German portfolio. Could you just give us a bit more color on that and how successful those changes are being?
Yes, so overall in Germany, as you saw at the half year, we're in share growth, that's the prime driver of that has really been our fine cut performance. Just to emphasize before Michael answers, fine cut delivers better profitability than the cheaper end of the cigarette portfolio. So actually, it's really important share growth that we are delivering here in terms of the overall progress in Germany. But maybe talk about how we're doing in FMC. And the actions we're taking there?
Yes. What we've done is the quality upgrade on Golaris, which we support by an equity campaign through the lines. This is the first one. 2nd one is that we focused on demand shifts very much. The 1st demand shift is large up packs and FMC, where we just launched a Golarwa's €10 pack, a West €10 pack and a JPS 9 pack, focusing on that demand shift.
And what we've done as well was a recent price increase. We repositioned West in bigger pack formats to value for money. So we are very well positioned now in the growing value for money segment. That gives us confidence to grow share and to improve our position in share growth in FMC.
Thank you. Our next question is from John Lenster of Berenberg. Please go ahead.
Hi, sorry about that. Yes, I was just wondering, with regards to the restructuring, clearly the cash costs of expenditure, or restructuring seem to be rising, both this year and potentially next year as well, which after 5 or 6 years of of restructuring and considerable number the brand migrations having been done seems a bit sort of counterintuitive. Can you explain why the cash cost restructuring team to be continuing to rise rather than decline?
I'll have a pickup on it, but I think we've got a distinction here between how the P and L is handled and the cash flows work, which is, which is, I suspect, going to the essence of this answer.
To start with, John, there've been 2, we've had 2 legs to our cost optimization program. So we announced one back in 2012, which was a million saving, at a cash cost of 1,000,000, and then we moved last year into announcing a further cost optimization program to add to that. And with the time frame of those programs are over through to 2020. So the second one's actually being conducted over a shorter period of time. And we see in the current year and next year, the vast majority of the expenditure on that second program taking place which is why you see those levels rising over these 2 years because we've done that program very quickly.
There is, as Allison highlights, the difference between the cash cost and the P and L costs, there will be certain items, which don't have a cash impact, which are formed part of any restructuring that we undertake. So there may be losses arising on the assets disposed of, things of that nature. The cash timing isn't always consistent with the point of time of announcement either. So on occasions, we may announce something that we then accrue into the P and L, the cost for, but the cash expenditure goes out over longer periods of time. So you do end up with timing differences.
So the second program was slightly more expensive than the first. Was 1,000,000 of savings, but it was going to cost us 1,000,000, to achieve those rather than the 1,000,000 for the 1st program. But as Oliver highlighted, it's really around the phasing of cash going out the door. The programs are very much on track in terms of the benefits they're delivering and the spend associated with them.
But just to be clear, the actual, the vast bulk of the cash cost of the 2nd program will be covered sort of come out in sort of 'eighteen and 'nineteen? Probably 'nineteen? Yes.
'eighteen and 'nineteen drop.
Right. And just if the brand migrations have been done, is there something obvious that I'm missing that that is on the agenda? Is there a significant factory rationalization yet to do?
There's a number of things that still drive behind that program, but but as you might imagine, with the migrations, but also the broader simplification agenda in terms of the SKUs in the portfolio it takes, it takes, there's a little bit of a lag in terms of how we then, we then look at how we manage supply, and any of the decisions associated with that So there isn't, it's not something you can necessarily always enact immediately. There's a bit of a lag, where we actually then restructure to realize those benefits. But there is still a migration ongoing as well, by the way, we haven't stopped. There are still some further migrations that we're continuing to progress.
Right. Our next question
comes
from Fulvio Catzal of Goldman Sachs. Please go ahead.
My first one is, on France, I think you've mentioned that Australia and the UK are examples of where you've been able to do well on the back of regulatory changes, presumably you also meant plain packaging. So can you give us an update on what you're seeing in France? I know that share for you was up 10 basis points on Slide 17. So can you give a bit more color on the latest there, please? And then I have a follow-up question.
Yes. I mean, in France, the our share is still, overall overall up year on year. Anticipating as I highlighted at the half year for it to come under a bit more pressure, because we, we've taken a decision to pass on the excise and to consumers on most of the portfolio, contrary to some of our competition. Having said though we have seen some price moves from competition in recent weeks. So that may be shifting a little bit.
There's no doubt in France that this is a pretty tough time for both the tobaculists and and the consumers. I think for us therefore, our focus on NGP and other opportunities in that market is also very pertinent at this point in time in terms of the total consumer portfolio. That we're, that we're promoting. So it's nothing very significant to update on since the half year. Apart from the fact that it's, it's a challenging market dynamic, as I highlighted at the time, and Dominic took you through always on price strategy earlier around the price parity that we to focus on with our brand.
It's a market where we've chosen to come off that, and actually move our brands up, regardless of the competitive set because of the dynamics in the market.
Great, thank you. And my second question is on the fact that 70% of your profits are coming from priority markets. And it sounds like these markets could become more important, particularly considering that up to $2,000,000,000 of disposals that you have planned. So how should we think about your dependence to just these ten markets, considering that in the future, we could have significant changes to regulation or tax as we've had. What impact could that have on your business?
Like limited diversification, if you like, geographically, could that be a problem?
With my perspective, I mean, we have been very choiceful about the investments in 'eighty and the we're focused on. And I think that focus is absolutely right in an evolving consumer environment as we've talked about today. I think in these markets as well, as we've highlighted, we're seeing nicotine consumption growing. Overall, we only have 14% share from a combustible perspective over our footprint. And therefore, there's a significant amount of consumers that aren't ours in terms of additive opportunity, both from a tobacco perspective, but also clearly from an NGP perspective as well.
So I think our positioning in those markets combined with the choices we've made around why we want to focus there on the dynamics that we're seeing, I think very much underpins what we're looking to deliver from a growth perspective. So I do think focus is important in this environment, not necessarily just going after, a broad, a broad church of markets.
Thank you.
Thank you. We will take our final question from Adam Spielman of Citi. Please go ahead, sir.
I was just wondering whether you can talk a little bit more about the 2,000,000,000 up to $2,000,000,000 of disposals. Whether we should think of this as something that basically allows another round of cost saves, if you like, or is more sort of necessary part of the cost saves you've already announced.
It's very much around our focus for growth rather than a cost saving agenda item. It's around as we focus behind the assets, the brands, the markets, the products that we see as being critical to our growth going forward, naturally, other things are defocused. So that's really the prime driver for what we're looking at here. Will there be opportunities for increased agility, maybe some increased efficiency and focus as a result of these disposals, yes, I'm sure they will be, but it's not the prime driver of why we're doing it, but it will allow us to focus even more rigorously. Behind the things that matter most to our growth going forward, both in tobacco, but also in next generation products.
Okay. Thank you very much.
Okay. Well, thank you, everybody, for joining us this afternoon. And for the questions. And, I look forward also to catching up with you, if not before, when we do RNGP event towards the end of September as well. Thank you.