Well, good morning to everyone here, and welcome to our half-year results presentation. Thank you to all of you who've come to join us here in London. It's great to see you, but I also wanna say a warm welcome to all of you who are watching this presentation online. I will just draw your attention to the disclaimer before I introduce you to the rest of the team and outline the agenda for the day. Now, I'm here with, hopefully you've met before, Lukas Paravicini, our Chief Financial Officer, and with Peter Durman, our Head of Investor Relations. Yeah? I will, as usual, give you some introductory remarks about how we are successfully implementing our strategy. Lukas will follow with an explanation of how our strategy is translating into positive financial outcomes.
I will then give you some color on how we're delivering on our key markets and our categories. Finally, as usual, we'll have plenty of time for question and answers. Now, I'm pleased to report that our five-year plan to transform Imperial is fully on track, and our results today demonstrate this good progress. Now, the key headlines are as follows. One, our target investments have driven improved aggregate market share in our top five markets. This is another piece of evidence confirming that we have now stabilized our core combustible business following a long period of relative decline. Two, positive consumer actions to our recent NGP trials have strengthened our confidence in our NGP strategy and enabled us to move to a broader rollout of our new propositions. Three, strong cash generation is delivering further deep leverage.
Four, while the future is always uncertain, we remain on track to deliver full year results in line with our previous guidance. Our strong performance in the first half of the year and our confidence about the future are both a consequence of the way our people are delivering on our strategy, which we launched in January 2021. Now, this strategy was built around six concepts contained in our strategy wheel, which hopefully will be familiar to you. Now, what started life as a set of abstract propositions has, a year and a half later, developed into concrete capabilities, new teams with new skills, new ways of working, and positive financial outcomes. Let's look first at the progress we've made in building our strategic enablers, the essential foundations for building blocks of future success. We said we will put consumers at the center of our business.
I can report to you today that we have completed all senior hires for our new group consumer office. This team, working with partners inside and outside the company, has already built a pipeline of innovation, and the first output of this pipeline is our all-new blu vape device, which is now being piloted. We said we would build a performance-based culture. Since we launched our new behaviors last year, we've put our first 400 senior leaders through a 15-hour training program to help them use these behaviors in their day-to-day working lives. Now, while culture is hard to measure objectively, during my recent visits to our businesses, I have felt a step change in the quality of collaboration, accountability, and long-term planning. We also said we would create a simpler and more efficient business.
The action we have already taken will deliver GBP 90 million of savings by the end of this year. At the same time, we're building an operating model better aligned to delivering our new strategy. These strong foundations are supporting the successful delivery of our strategic pillars. Taken together, these three pillars are all about focus, something which is absolutely essential for a company like ours, which is the smallest of the global tobacco players. We are focused on the top five combustible markets, which account for 70% of our operating profit. We're focused on building a targeted yet material NGP business. We do not seek to be in every category in every market. Our third pillar, driving value from our broader portfolio, is all about focus as well.
We're focusing finite resources and management time on the key market portfolios which we can see that they can make a meaningful contribution to group revenues and profits. Now, the five year strategy is designed to build a more sustainable Imperial capable of growing year in, year out. We divided these five years into two distinct periods. A two year strengthening phase, where we built the foundations for future success, followed by a three year acceleration phase, where shareholders can expect to see improved returns. We are now 18 months into that first two year strengthening phase, and we are exactly where we hoped we would be at this time. Looking at the timeline, you can see the inputs along the bottom part of the chart, including the creation of a new senior leadership team, a new purpose and vision, and the refreshed approach to ESG.
Along the top line, you can see the tangible outputs, including the stabilization of the core and the complete rebooting of our NGP operations. A big achievement of this is down to the energy and focus of our unique team of people. A blend of newcomers bringing fresh perspectives and long service with deep tobacco knowledge. Now, what's even more pleasing is that while delivering on our long-term strategy, our team have also responded nimbly to unexpected events. As we announced last month, we have now delivered on our commitment to exit Russia swiftly. Meanwhile, we've executed a significant operation to safeguard our 600 Ukrainian colleagues and their families, and that great work, of course, is continuing. Within the five-year strategy, our most important early goal was the stabilization of our core combustible business.
In our minds, this was important if we were to build a solid platform from which we can grow. Over many years, Imperial has been the industry's largest owner of market share in our priority markets. That clearly was not sustainable. Today, we can report a 25 basis points improvement in aggregate market share for our top five markets. This is the third consecutive half year period when we have posted stable or positive share numbers. Another important piece of data pointing to the strengthening of our core combustible business. Now, as a reminder, we manage these five markets as a portfolio, so in any given period of time, we expect to see some markets moving ahead in the short term, while others facing temporary declines. During this half year period, we grew share in the United States, U.K., and Australia, which more than offset declines in Germany and Spain.
The U.S. delivered a strong underlying performance, and the team achieved an additional uplift by capturing some of the share made available by KT&G's exit from the market. Now, this was really an agile operation and by our sales and marketing teams, and we estimated it added 20 basis points of share to our U.S. performance. Our recently expanded sales force under the new strategy was a key enabler in delivering this, and it was a one-off opportunity and therefore we expect share momentum to moderate in the second half in the U.S. Now, as we have previously signaled, in Germany, our initiatives are taking longer to take effect than in some other markets. The aggregate market share across the five was again achieved while maintaining strong pricing discipline against a tough environment, particularly in the first quarter.
We faced the final drag of the Australian duty charges, and there was the inevitable product mix impact caused by the KT&G share gains in the U.S. The environment improved in the second quarter with price increases achieved in all our key markets, including Spain, where there had not been a price increase for several years. I'm pleased where we are on share overall. Now, while there's always more to do, we've again achieved our objective of holding our share in these markets with a little bit of outperformance. Before I hand over to Lukas, I want to take a step back and look at the environment through the eyes of our consumers and outline how we are actively managing the business to align with their evolving behaviors and needs. There are three trends I want to highlight to you.
First, as lockdown restrictions ease, consumers are back on the move and buying habits are returning to pre-pandemic patterns. As a result, market volumes are weakening in Northern Europe and strengthening in travel and tourist destinations. We are working with our retailers to make sure these travelers, when they get to their destinations, can easily find their brands and the format they expect. Now, only yesterday, I was in Luxembourg, where I met our team, and it was great to understand how they have geared up now for the shifting consumer needs from the neighboring countries. Second, we're all aware of the high level of inflation and the potential impact on consumer spending. Now, this trend is still at an early stage as the full effects have yet to be felt in people's wallets.
While the future impact of this trend is uncertain, what reassures me is this: across all our major markets, we've been actively managing our portfolio of brands to ensure that we have quality products available at whatever price points consumers will ultimately choose, and we will continue to adapt our offering. Third, consumers continue to seek products which bring them relaxation and pleasure while reducing the risk to their health. Now, this is a long-term trend, less of a sprint, more of a marathon. As I will discuss in more detail shortly, we are committed to playing our part by building a sustainable NGP business led by consumer insights. I will now hand it over to Lukas, who will take you through the financials. Thank you.
Thank you. Thank you, Stefan, and good morning to all of you. When we reported our results for the 2021 full year, we were able to show for the first time in many years positive trajectory for each of the key metrics on our financial dashboard. Six months on, I can again report that all the lights are green, and all the arrows are pointing in the right direction. Stefan said we're exactly where we expected to be at this stage in our strategy in terms of operational delivery, and the same is true about financial outcomes. Our earnings per share growth exceeded expectations. This was driven by our increased operating profit together with lower finance cost due to an early repayment of debt last year and a lower than expected tax rate. I will give more detail on this later.
Our focus on cash generation supported the delivery of GBP 336 million of free cash flow in the seasonally weaker first half of the year. This enabled us to achieve a year-on-year improvement in our leverage to 2.4 x. Capital allocation remains a key value lever, and we are making good progress in reducing debt towards the lower end of our target gearing range. As Stefan signaled, the removal of COVID-19 restriction is leading to market volumes reverting to their historical trends. As expected, year-on-year percentage changes are being magnified by the strong growth recorded in the comparator periods. In the U.S., market declines have been impacted by the removal of temporary fiscal stimulus payments, as well as consumers having fewer opportunities to smoke now they have returned to their workplace.
With open borders and a relaxation of travel restrictions, consumers in Germany and in the U.K. are beginning to travel again and taking advantage of lower pricing in destination markets. This is more advanced in Germany with travel into markets such as Poland weighing on German market size. On the positive side, we are now seeing growth in traditional tourist markets such as Spain, the Canary Islands, and in global duty-free. Overall, net revenue grew by 0.3% at constant currency. Volumes remained strong relative to historical trends, with tobacco volumes declining only 0.7% due to strong performance in the U.S., the Middle East, and Australia, which we will come onto in a moment. As Stefan touched on earlier, price mix, though positive, was lower than historical trends due to price gapping and product and market mix.
We had a good performance from our NGP portfolio, making strong progress across all categories. Breaking down these drivers in a little more detail, we can see that the strong volume growth in the Americas and AAA was offset by weaker growth in Europe, though overall volumes decline remained better than the historical trend. In the U.S., volumes grew as we achieved market share gains in a declining market and wholesalers pulled forward purchases ahead of price increases. AAA volumes benefited from the unwind of COVID-related travel restrictions. Tobacco net revenue was strong in the Americas and AAA regions, balancing out weaker performance in Europe. We achieved positive price mix in AAA, where price mix in Europe was affected by the timing of price increases.
Strong pricing in the Americas was offset by faster growth in the lower priced deep discount segments, which affected our product mix. As a result, price mix was relatively weak in the first quarter, but improved markedly in the second quarter as we achieved price increases in our key markets. Price increases taken in the first half will support improved price mix in the second half of the year. Our NGP portfolio has performed well with NGP net revenue up 8.7% at constant currency. This reflects a strong performance in Europe across heated tobacco, modern oral, and vapor. This more than offset the decline in the Americas, where the continued competitive environment in vaping is leading to greater discounting in the category. Adjusted operating profit grew by 2.9% at constant currency, with our performance impacted by four main areas.
We benefited from the non-repeat of the litigation settlement in Minnesota and Texas in the prior period. This was then offset by the continued increased investment behind our five priority markets and the new ways of working, which Stefan will cover later. This is about building the foundations for future growth. The improved performance in NGP delivered the group the majority of group profit growth as we benefited from exiting loss-making markets in triple A last year. Logista's contribution was broadly neutral. Like other businesses, we make certain adjustments to our IFRS number to aid performance comparison over time. I want to be very open about how we approach these adjustments. First, our decision to exit Russia and associated markets triggered the recognition of charges that have been classified as adjusting items, both above and below operating profit.
At the earnings level, the charges totaled GBP 225 million in the first half. The transaction has also triggered a recycling of FX losses of between 150 and 190 million pounds, which we will recognize in the second half. Second, the lower annual amortization in this period is from certain assets now being fully amortized. Third, we announced a restructuring program in 2021 to reorganize and simplify the business. Unlocking efficiency savings to enable increased investment in our support, in support of our five-year plan. We made further progress and anticipate the remainder of this program will be recognized in this financial year. As Stefan said earlier, actions taken to date are expected to secure annualized savings of around GBP 90 million by the end of fiscal year 2022.
We will continue to seek a greater alignment between reported and adjusted operating profit. Earnings per share growth has been driven by both our increased operating profit and lower finance costs due to the early repayment of a U.S. bond at the end of last year. We've achieved favorable developments in several tax jurisdictions in recent weeks, which have reduced uncertainty for the current financial year and resulted in a lower adjusted tax rate year on year. We anticipate this impact to be greater on full year earnings per share as the lower tax rate is expected to remain at this similar level for the rest of the current financial year and next. Over the medium term, we expect upward pressure on the effective tax rate. Turning to cash, I have a clear priority to optimize the sustainable free cash flow generation from the business.
As you can see, our cash delivery on a 12 months basis remains strong, with cash conversion of 102% driving free cash flow of GBP 2.4 billion. We increased the dividend by 1%, leaving the net cash flow of the dividends of GBP 1.3 billion to support further debt reduction. Active capital discipline remains a key value lever for our strategic plan. Our four capital allocation priorities are designed to do just that. Our first priority is to invest in the strategy to create a sustainable business with growing cash flows. Second, it is to strengthen the balance sheet. Strong cash generation enabled a reduction in adjusted net debt of almost GBP 1.2 billion to GBP 9.2 billion. Third, we are committed to providing reliable cash returns through the dividend.
Fourth, we have committed to return surplus capital once we reach our target leverage. While cash generation is always seasonally weak in the first half of the year, on a 12 months basis, we reduced our gearing to 2.4 x. This is good progress, and it only strengthens our confidence in our capital allocation approach as we move closer to our target leverage. 2022 is the second year of a two-year strengthening phase, and we are stepping up investment behind our priority combustible markets, in our NGP rollouts, and our new ways of working. As COVID restrictions are now largely lifted, we expect volumes declines to increase to historic norms. However, price increases taken in the first half of the year will support revenue growth in line with our previous guidance of 0%-1%.
This already reflects the impact of our exit from Russia. Adjusted operating profit growth is anticipated to be 1% consistent with our five-year plan and previous guidance. We are mindful of the inflationary pressures all businesses are facing across the economy. While we are not immune as a tobacco company, we are all well placed to manage them through the balance of this year through cost initiatives, our high gross margins, and pricing. As I said earlier, we now expect our adjusted effective tax rate to be around 22% for this year and next, compared to our previous guidance of 24%. Over the medium term, we expect upward pressure on the effective tax rate.
Our finance charge will also be lower at around GBP 330 million, reflecting the benefit of the early repayment of a U.S. bond at the end of last year. At current exchange rates, we anticipate translation foreign exchange to be at a 1.5% benefit to full year earnings per share. Thank you, and I'll hand back to Stefan with this. Thank you.
Thank you, Lukas. I mean, in this section, I want to give you more, a more granular feel for the distinctive culture we're building at Imperial and how our people are implementing the strategy. As I said to you earlier, the overarching goal of the strategy is to build a more sustainable Imperial, capable of growing year in, year out. Now, in this first foundation building phase of our strategy, we're seeking to equip the business with the skills and culture needed to play its natural role within our industry, which is that of the nimble challenger. We are the number four player, and we can't match the broad waterfront strategies of our competitors, nor their R&D spend. But if we do our job well, we can outperform them by capturing value that they overlook and by building smart partnerships.
Now, this idea of becoming the strong challenger is a unifying theme for our new vision. What's really encouraging is the way our people have enthusiastically adopted this new mindset. The way the U.S. team moved quickly to capture the share that shook loose when KT&G exited the market is a good example of that agile approach. Now, earlier this year, we held a virtual event for our top 500 leaders to share challenger best practice. We heard how one of our smaller markets, Romania, had grown market share dramatically by identifying that the consumer need for affordable quality was being underserved by our competitors. We also heard from our Australian business how they have successfully launched an entirely new brand in the market, Lambert & Butler, which is quite impressive and quite an unusual achievement in such a dark market.
We also heard from our supply chain colleagues about how they adopted agile ways of working to meet the growing consumer need for mass-market cigars in the U.S. market. As we cover the highlights of our major combustible markets and NGP initiatives, you see some further examples of this challenger mindset in action. As I said earlier, the critical enablers, the bottom three segments in our strategy wheel, are now rapidly taking shape. Now this focus on building capabilities and culture is absolutely essential, and I want to focus for a moment specifically on culture. It's no secret that this company's past missteps were in part caused by cultural issues, and that's why the rollout of our new behaviors is such an important part. We want to create an organization which is more consumer-focused, more collaborative, more accountable, more inclusive, and more focused on the future.
Now, these behaviors are not just about putting words on a wall. We'll do that as well. What is more important is that we're making considerable investments of time to ensure everyone in our business feels confident about how to apply these important ideas into their everyday work lives. So far, over 400 members of our senior leadership team have participated in 15-hour training sessions, and a further 900 will take part in the next 90 days. By the end of this year, all employees will have some familiarization with these new behaviors. Now, the feedback we've received from our people so far has been really positive.
For many, it is the first time they've had proper quality time to reflect on how they work, and they like the new connections they are making with their peers across the global organization, and they do appreciate the need for change. Now, creating a single purposeful culture in an organization as diverse as Imperial cannot happen overnight. We're making good progress. Another facet of this cultural transformation has been the refresh of our approach to environmental, social, and governance, or ESG, responsibilities. Now Imperial has a long tradition of responsible business with a track record of preventing underage access, combating the illicit trade, and continuously reducing its carbon footprint. Our recent ESG review has been focused on prioritizing our activities to ensure they fully align with our new strategy, purpose and vision, and meet the evolving expectation of all our stakeholders.
We undertook a full materiality study, and this has helped us identify eight key areas of focus that we have grouped into three broad categories, all of them shown here on the slide. In some areas, we have already defined targets and begun the work required to meet these goals. In climate change, for example, we've pledged to become a Net Zero company by 2024, setting intermediate objectives to help us track our progress. Now, this pledge is supported by initiatives that are being developed across all our value chain to decarbonize our business at pace. For instance, we made a significant step up in our efforts to source renewable electricity, moving from just 3% to more than 90% in the past year. Our first carbon neutral factory, the Skruf plant in Sweden, set the bar for our other facilities to improve their energy efficiencies.
We are developing detailed metrics and targets for all our ESG focus areas. As I said earlier, a key achievement of our strategy so far has been the stabilization of our core combustible business. In the next few slides, I want to say a little more about how this stabilization has been achieved. As part of our strategic review, we focused on key growth initiatives in each of our five priority markets, which we grouped together into six categories, which are shown here on the slide. We've been selectively applying these in our priority markets to drive improved performance. Now let's start with the U.S. We delivered a strong combustible tobacco performance in the U.S., benefiting from focused investments in our brands and sales execution, as well as our agile response to capture share following KT&G's exit.
In cigarettes, we have grown share in three out of the four price segments, with our largest brand, Winston and Kool, growing market and segment share in premium value. In the discount segment, Maverick has made share gains with further share growth in the deep discount segment. Our investment and training behind our sales capability has enabled us to increase our coverage in under-penetrated channels and regions, all of which has supported this share delivery. In mass-market cigars, our portfolio achieved further market share gains, supported by activation and innovation initiatives, and strengthened our position as the second-largest manufacturer in the U.S. Our recent webinar gave further details on how we are executing on our strategy in this market. In Germany, as expected, increased cross-border travels that Lukas referred to, particularly to adjacent markets like Poland, has driven market size contraction against a strong prior year comparator.
Like the U.S., we are investing behind both sales effectiveness and brand building. However, we still have work to do to stabilize our market shares in Germany. In the premium segment, we've successfully tiered our Gauloises business, supported by a new advertising campaign, which is driving share growth. In our largest brands, JPS and West, we continue to invest in rebuilding their brand equity and establishing their relevance with a new demographic of adult consumers. However, after some years of underinvestment, it will take time to rejuvenate these two brands. So just last month, our Chief Consumer Officer, Andy, and I met with the team in Hamburg to work through the brand plans in detail while talking with our retailers about our on-shelf presence. I believe we are focused on the right initiatives to make a difference over time. Moving to the U.K.
In the U.K., we delivered a strong market share performance, driven by investments in our operational levers with Embassy, which we relaunched last year, part of our local brand strategy, and the brand continues to grow well. Price increases in the latter part of the period for the first time in nearly two years will support a stronger second-half financial performance. Increasingly in tobacco, consumers are looking for value offerings with our brand portfolio in the U.K. very well positioned to capitalize on this trend. In fine cut tobacco, our Players and Riverstone brands have both grown shares supported by investments in new initiatives. Our on-shelf availability also benefited from a strong collaboration between our teams in sales and marketing and manufacturing as we adapted the portfolio to meet new regulatory standards for filters across Europe and in the U.K.
Availability was also enhanced by an agile response to delivery driver shortages in the U.K. We expect to see a temporary acceleration in the normal year-on-year decline of the U.K. Market size in the second half as Britons for the first time really return en masse to the Mediterranean for their summer holidays after two years of limited foreign travel. Spain. In Spain, for the first time in five years, we achieved price increases across key product lines, improving our financial delivery. Now also, this has impacted our share temporarily as we took price relatively early in the period. In a mirror image of the post-COVID trends impact in the U.K., total market volumes in Spain have started to recover. In the vending channel, which is primarily in bars, the trade is close to pre-COVID levels.
Here, we continue to invest in our local jewel brands like Fortuna, Nobel or Ducados Rubio, and the initiatives are targeting building equity and reinforcing their national heritage connections. Now this is a distinctive strategy compared to our competitors who have a primarily exclusive focus on global brands. We're also leveraging our own international brand, West, to meet consumer need for value propositions with targeted Super King Size price motions and relaunching a fine cut range. Now turning to Australia, other side of the world. After recent excise changes created trade volume volatility in the Australian markets, our initiatives and brand portfolio investments is beginning to stabilize our performance in this very high-margin market. As I mentioned earlier, we successfully launched Lambert and Butler in the fifth price tier, creating a clear brand offering in each one of the different price segments in the Australian market.
Now, this is a great example of the type of careful segmentation work we're now doing across all our major markets. It is about providing better choices for consumers and making us more resilient as a business, particularly in times like these, when consumers' wallets are feeling the pinch. Our Australian share recovery was supported by investments in improving our sales force effectiveness and strengthening our overall supply chain to ensure also here great on-shelf availability. Transforming our field sales force is supporting improved distribution while driving further efficiencies. Now these actions are not only leading to the provision of better services for our retail customers, but also supporting our financial delivery with improved cost savings. Now, turning to NGP, we can confirm today that consumers have responded positively to our heated tobacco trials, validating our approach and strengthening confidence in our NGP strategy.
Our market trials, both in the Czech Republic and Greece, have demonstrated that Pulze and our iD sticks can achieve a meaningful, sustainable market presence. In just six months, we've established a heated stick market share of around 3% in both markets. Consumer behavior has confirmed our belief that people looking for potential less risk alternatives to cigarettes remain open to experimentation. Brand loyalty has yet to become entrenched in this new category. Direct feedback has revealed that the Pulze and iD proposition resonates with a meaningful segment of consumers. Now consumers like the features of our current product range, and they have given us actionable suggestions on how we can improve our future propositions. In distribution, we have consistently achieved our coverage targets for Pulze and iD, with demand from our trade partners demonstrating their appetite to broaden the heated tobacco category and offer consumers more choice.
Now armed with these new insights, we're now planning to roll out Pulze and iD to additional European markets. As a reminder, two main factors determine our selection of viable markets for our heated tobacco proposition. A strong penetration of heated tobacco within the market already and an established Imperial presence, which we can leverage to support sales and distribution. Taking these factors into consideration, plans are underway for further market launches in the second half of this fiscal year. We will provide further color on which are these markets once we launch. As with our previous pilots, we will continue to take a measured approach to market entry, with the required investments factored into our guidance already. In parallel, we're already improving our propositions within our existing heated markets.
Now, for example, consumers have strongly indicated to us that there's a demand for a wider range of heatstick flavors. Yeah. In response, we recently launched two new flavors, Forest Purple and Summer Red in the Czech Republic. The early consumer traction has been very positive. Now, the global market for heated tobacco is still developing, and we're increasingly confident that we have a major role to play in the development of this exciting segment. In blu in the U.S., we were disappointed with the FDA's initial order on a number of our myblu products, and we are appealing that decision. We're working through addressing the points raised by the FDA and, while the appeal is ongoing, our product remains on the market.
Results from our recent U.S. consumer marketing trial have been encouraging, and we're taking steps to expand this refreshed marketing approach to new territories in the U.S. Outside of the U.S., blu has been performing really well in Europe, holding its market share. In addition, we have developed an all-new blu device, blu 2.0, which we recently began piloting in selected cities in France. Now this is the first product to emerge from our new innovation team in the group consumer office. We'll talk more about their pipeline of new products in future presentations. In rolling out blu 2.0, we are following the same insight-driven process of test and learn, which we used in our Pulze heated tobacco trials. Overall, I'm pleased with our progress in this first half.
We continue to see green shoots emerging as a result of the actions that we're taking. Phase I of our strategic plan continues to build the foundations and strengthen the key areas of our investment case. We are revitalizing our tobacco business while managing the impact of changing consumer buying patterns as travel increases and the pandemic subsides. In NGP, consumer feedback has validated our approach, providing confidence to move to a wider rollout of our strategy, aligned to our commitment to make a meaningful contribution to the segment. We are implementing new ways of working, which will drive operational improvements, strengthen performance, and support the second phase of our strategy. A key priority of our focus is on delivering strong cash flows and will remain highly disciplined in our capital allocation, which we fully recognize is a key part of the investment case.
We're very conscious that these are increasingly challenging times for all businesses, with the war in Ukraine and global supply chain disruptions creating the highest level of inflation for more than 40 years. However, I am confident that our actions are creating a strong business, better able to navigate these uncertainties, and we remain committed to delivering our plan, realizing the full potential of this business, and unlocking the long-term value that is inherent in this business for our shareholders. Yeah? Thank you to all of you for joining us today, and now Lukas and me would be more than happy to take all your questions.
Thank you, Stefan. We'll take your questions. We'd like to take questions from the room first, if that's okay, and then we'll take questions from the telephone. If you want to ask a question by phone, you'll find the dial-in details in the press release. If you want to ask a question by phone, you need to press star and one on your keypad. That's star and one on your keypad to ask a question by phone. We'll take the question from the room. Please wait for the microphone and state your name and organization before posing your question. Please go ahead.
Good morning, Richard Felton from Goldman Sachs. Firstly, congratulations on the results and the progress on the strategy so far. My first question is gonna focus on one of the markets that's been slightly more challenging, which is Germany.
Mm-hmm.
Now at your Capital Markets Day last year, you laid out a very detailed plan for the initiatives you were taking to improve performance.
Mm-hmm.
From memory, you were gonna have some extra investment on JPS, enhancing your retailer partnerships. You wanted to improve your performance in East Germany.
Mm-hmm.
Now, I know that it takes time to turn things around, but if I asked you to mark your progress against those strategic objectives, where do you think you are today? In terms of what needs to be done, is it just a case of more time, or do you think that strategy needs some tweaks to start seeing better performance?
Yeah. Richard, first, great to see you here with us in the room. On the question on Germany, in simple terms, I was just there a couple of weeks ago with Andy, and Lukas was with us as well. We looked at the progress. One of the things was to really understand, is the program that we implemented as part of the must-win battles for the market, the right one? We all walked away with a clear understanding it is the right plan. Because in principle, the focus on sales activation, especially when we talk about channels and we talk about East Germany, that is clearly progressing well. It's also very clear the focus on building back brand equities, yeah, in the German market is paramount for our long-term success in this marketplace.
What was very encouraging to see on Gauloises as one of our top three brands, we actually, for the first time, are growing share behind a new campaign and the right positioning of it. It's also very clear that the JPS brand, as our largest brand in the German market, has not benefited from brand equity building for quite a number of years, while several competitors have moved around in this marketplace. If we're reinvesting back in new equity, which is now coming behind the Let The Players Play campaign in the German market, is actually the right thing to do. I feel very confident in the plan we've put together for Germany. It's very clear, as we have always flagged, we've always said that Germany, of all five, this is probably the one that will take the longest.
I'm happy with the progress we're making, but it has confirmed our initial hypothesis is that of the top five markets, this is probably gonna be the hardest. Yeah? The only comment I would make up front, just to use the opportunity, we've always said it's the combination of the five because you will know very well, this is a highly competitive industry. We'll never get to the point where all five would grow at the same time. I think what is most encouraging for me, eighteen months in, we're gaining 25 basis points in the combination of the top five.
Great. Thank you. My follow-up is on the broader consumer environment. You mentioned in your presentation that there are pressures on disposable income. Now, we know that tobacco is a defensive category.
Yeah.
Last time we saw a recessionary environment, we did see some accelerated down trading. Now, as you think about moving to phase two of your-
Mm-hmm.
Of your five-year plan, do you see any risk that an acceleration in down trading could make it hard to achieve the guidance that you set out, as part of that plan?
I think the most important thing I look at is we're well on track to put all the foundations into place for an acceleration in the performance of business, and I do not see that changing. Just to reassure you about it. I think we're all dealing with unprecedented times from an inflationary level, but I think as you rightly mentioned, I mean, we are one of the. As an industry, one of the most resilient one in this one, which I think we're holding well. The argument we also shouldn't forget, when you look at our portfolio, that's why I talk specifically about the different segments, and we as Imperial are very well placed, yeah, should consumers downtrade in the marketplace. Because we do have now across all our core markets an offer at every right price point in the marketplace, yeah?
I feel confident as we move in the next phase of our strategy. At the same time, I think I wouldn't be a responsible business leader saying we're all at the world looking at consumer price inflation that consumers have not dealt with in a long period of time.
Great. Thank you.
Thanks for the question. Gaurav Jain, Credit Suisse. You've made reasonably good progress, I would say, in heated tobacco thus far. In light of aggressive promotional activity from a peer, could you highlight the key drivers of this? Secondly to that, could you scope out the level of investment required to launch in other European markets? I think in H1, your NGP losses reached an all-time low of GBP 40 million. How should we think about that in the second half of the year and also in FY 2023, please?
Sure. Yeah. I'm very happy to answer the question. I think, let's start with the end of your question first. I think we've always said as part of our five-year strategy that the investment behind our NGP strategy is covered within the guidance that we've provided to you, yeah? For this year, we've always said about the level of losses will be around GBP 140 million. This includes the investment in these incremental markets, yeah? You would not be surprised about looking at a very different level of investment at the end of this fiscal year, which was always part of our strategy. Responsible investment has a challenger in this industry. Our role as the number four is not to build the category, but to offer consumers and customers an alternative choice, yeah?
Our tests in Czech and Greece have clearly shown that consumer interest is there. I was always sure that the retailers would love to have a challenger, especially the market leader, but it's also very clear that consumers have really appreciated our offer in the marketplace. We're not breaking out the individual investments, but you can be reassured it's all included in our guidance. These incremental markets, the big news for us today is that after extensive testing in two markets that we believe are quite representative for some other European markets, that we feel very confident to actually launch this product into the marketplace.
Okay. I think so at this point, we'll just take some questions from the telephone line, but we'll come back to the room to take further questions. We'll sort of go back and forth, if that's okay. If I could just hand over to the operator, so we can take our first question from the telephone line.
Yes, of course. Thank you. The first question comes from the line of Jon Leinster from Société Générale. Please ask your question.
Hi. Sorry, sir. Jon Leinster from Société Générale. Yeah, a couple of questions, if I may, gentlemen. First one, just going back to Germany. Clearly your sales force in the U.S. is up and running. How far have we progressed in terms of Germany, in terms of actual deployment versus training?
Sure. Stefan Bomhard, on this one, I take you back to the capital markets day. Part of the strategy in the U.S. was a very substantial expansion of the sales force, yeah. In Germany, this was a much more moderate expansion. In Germany, it was much more about a redeployment to our sales force from channels that historically have been important towards channels that actually are important to our consumers and shoppers in the year 2022. In principle, as we were in the market, I was quite satisfied to see that redeployment. To be clear, suddenly you're covering new channels, yeah, so there is some learning curve as they talk with a new set of customers. Overall, I'm quite pleased with the progress we've made here.
Okay, thanks. Secondly, with regards to the sort of second half of the plan as you move towards mid single digit operating profit growth, I mean, does that imply sales? How much of that is from the additional sales growth and how much of that is from the sort of run off of the additional investment? In other words, is the investment a sort of the additional investment, I think GBP 35 million was mentioned in the first half. You know, is that a sort of one-off adjustment and thereafter we should think of Imperial being steady state?
Sure. I think let me give it a first try and Lukas can will jump in. If you step back in reality, the key enabler for the delivery phase, the second phase of our strategy, the primary driver was a significantly more sustainable contribution from our core business, which was primarily driven by the market share improvement. For us to return to holding our share in our top five markets and ideally overall growing it slightly. That is the key driver behind it. There will continue to be investments behind our brands as well as behind our sales force versus the period before we started the strategy. As you will know, the level of profitability in our industry, there is a good flow through the
Just on that, what we see driving the acceleration thereafter, we clearly are confident that our strategy will build a better and stronger businesses. Mainly, as Stefan pointed out, the big contributor will be tobacco. We have three elements or three levers in that business. It's our operational gearing, it's the cost reductions that we have achieved through the restructuring we have pointed out in the presentation and which will continue on till the end of this year, and then also the geographical mix. The fact that we focus on the top five markets obviously gives us a benefit that they are the highest, you know, revenues per stick. These three levers will drive the biggest bucket of the acceleration, which is tobacco.
Don't forget, while we invest further, even in the second half in NGP, even though it is gonna be lower than the losses of last year, towards the end of the period of the five years, NGP will be marginally positive. Therefore, over the period of the next three years, you'll have a reduction of the losses that will contribute to the acceleration phase. Finally, hard to quantify, but I wouldn't want to miss this one, is the investment we are doing in the cultural change. You know, we should not understate the importance of building the muscle to become a true challenger and remain agile to respond, especially to the pressure we see now, but in all the volatilities we see.
That cultural behavior, we believe is gonna be a fundamental driver for the acceleration as well. Hard to quantify.
Just to build on that point, just to Stefan Bomhard's two examples which you can see today of that changed culture. You see it in the U.S. performance behind when KT&G exited. How quickly behind the sales force investment, but also the agility of the team, how quickly we could jump in and talk with retailers and capture the shelf space that was evacuated by the competitor. The other one is the heated tobacco rollout. I think you probably challenged me a year ago about can Imperial play in Europe in a sustainable way in heated tobacco. Well, we've done our homework with a new culture, a new global consumer office. These are key drivers of performance.
There will be more opportunities like the KT&G ones in the next three years, and we're now capable of capturing them, while in the past this would have been a struggle. At the same time, we are now participating in the highly profitable heated tobacco segment in Europe, which we didn't do in the past. Hopefully, just two anecdotes to share with you that should give you confidence in our plan in the next three years.
Thank you. If I could just ask one final question. Apologies for slightly hogging the floor. Just on iD, can you give us the relative price points of the iD sticks versus the IQOS heat sticks?
Sure. Absolutely. Look, it varies by country. Let's talk about the two that we're in. In principle, think about the market leader. We're offering our heat sticks at a slight discount versus the market leader. We are index 90 in pricing, which is very tight pricing. Just to give you a perspective, there's another competitor in the marketplace that remains unnamed that would be at index 75. I would also think it's an important point for you to recognize that it is not discounting that is the key driver of our success in these markets, because that should fill you with confidence on your prior question, Thomas, about the sustainability and profitable growth that we're targeting. What we have to offer to consumers appeals to consumers because of the proposition we have towards them.
Okay. Thank you very much for that.
Thank you. The next question comes from line of Rashad Kawan from Morgan Stanley. Please ask your question.
Hey, good morning, gentlemen, and thanks for taking my questions. Just a couple from me. First on the U.S., obviously impressive results in the first half. You mentioned you estimate 20 basis points coming from the KT&G exit, but how much of the rest of the outperformance you think is driven by, you know, the investment in sales execution and brands that you spoke about versus down trading, versus, you know, wholesalers putting through purchases ahead of price increases that you mentioned, too? I'm just trying to work out how sustainable their gains are. Then you also mentioned you expect share gains to moderate a bit in the U.S. in the second half. Maybe you can elaborate on that a little bit more?
Sure. Absolutely. Overall, I think it's very important to recognize, and that's why I made the point about the four price segments in the U.S. We grew share in three of the four, yeah. Every single segment we have a meaningful presence, we grew share. I think what is very important when we go back to the strategy in the capital markets day, the big challenge to achieve in the U.S. was to turn around the performance of Winston and Kool. Both of these brands make 4% of our 9% share. They are among our most profitable brands, and they've been on long-term decline. In the first half year result, both these brands actually achieved share gains. Yeah.
Not a lot, but I think it breaks the cycle of them actually being shared owners, which is a big achievement for us as a business, yeah? That will require a lot of extra work, and we're just launching and redoing the campaign on Winston as we speak. They fill me with confidence this is a very sustainable share gain, yeah? That's the same. I mentioned Maverick. We're also seeing good share gains there. It's broad-based. This isn't just driven by deep discount. I want to be very clear about it. I think the exciting piece here is we have an offer for all consumers in the U.S. at the right price points, yeah? The share growth will moderate in the second half because clearly the first half was helped by the KT&G activity that we grabbed the opportunity. Yeah.
It doesn't take anything away that we are now turning the U.S. as a meaningful share contributor to Imperial on an ongoing basis.
That's great, thank you. My second question, just around buybacks. Has your thinking around that evolved? I mean, would it be fair to assume that if things kind of hold and the balance sheet continues to strengthen, we could potentially see buybacks restart at the full year results?
As we pointed out before, the share buyback is or the capital allocation strategy that we have is an integral part of our strategy. More importantly, is actually a key value driver for us. We are very focused on that. I think we gain a lot of confidence from the good progress we have made to the half year, and that we are on track to the full year and to the guidance we have given. When we are at the low end, we'll come to the market with an update to when we do the share buyback.
Thank you very much, gentlemen.
Okay. I think what we'll do is we'll come back to the room and see if there's any questions in the room first. Any further questions in the room? Go ahead, Gaurav Jain.
Hi. Good morning. Thank you. I have a question on the U.K. market and following the question on, you know, potential pressure on consumer and down trading. If I look at the slide where you have the U.K. market data, so off a very tough comp of 11.3%, the volumes are down only three and half.
Mm-hmm.
That's when people were obviously traveling to Spain and other countries. I would have thought this would be a number more like -8%, -9%, if I just add in the structural decline of the industry. You know, we saw the wage data right now from, you know, from the statistics, and you know, wage inflation in the U.K. is 7%.
Mm-hmm.
If you have just told us that you haven't taken pricing in two years and wage inflation is 7%, shouldn't I look at this chart and say that actually volume trends are running better because wage inflation is higher rather than worse? Does that then lead to the question that are you seeing signs of up trading in your portfolio rather than down trading?
Mm-hmm. Gaurav, I think the challenge what we're facing together is when you focus in on the travel patterns, yeah, we shouldn't forget that the big travel pattern from the U.K. happens in what is our half two, which is the summer months. All we've seen is the Easter travel that Lukas referred to. I mean, we saw clearly a meaningful uptick versus the year before. This is gonna be the first summer Brits will be able to travel abroad, yeah? I think that's why I'm a bit hesitant to forecast. We'll need to see how that lands, and I think in the spirit of overall very being prudent with you, we wanted to signal that we do expect a reversal of the COVID trends that we've clearly seen. It's too early to tell.
I think it's also, to be fair, also too early to tell how consumers will really behave, because the majority of them haven't yet seen the impact. I've been out in Scotland, a week ago, you know, and talking with lots of consumers. I don't think, U.K. consumers have really felt the brunt in a major way. We shouldn't forget, and I think it's important, one, that we remind ourselves of, we do work in a categories that has increased prices across the board for a long period of time on average. Very different to many other consumer goods sectors, yeah? It is an important category to our consumers, yeah? We need to see what happens, but I think overall, I think we're going well prepared into it.
Sure. My second question is on, you know, there is a deal which was announced last week in the industry, and so even the biggest players want to further scale up and become bigger. How do you think Imperial will operate in this new world of even bigger and even more consolidated companies? Do you think you also need to scale up to compete effectively?
I think hopefully today, Gaurav, when you look at our heated tobacco results in Europe, yeah, it clearly. The reality is our consumers and our retail partners are looking for alternatives that you don't go and make bigger by actually. That opportunity exists. That is the role we want to play in our industry, yeah? When you look at the activities between PMI and Swedish Match, I think in reality, when you look at it gives them the opportunity to operate in the U.S. market where they have no presence at this point in time. I'm not reading into it that they really want to get bigger. I think the important thing, the way we look at it is, it gives them a route to market in the U.S. market.
For us, as you will know very well, we do not compete in the oral nicotine market in the U.S., so it is not the arrival of a new competitor to us.
Thank you.
Sorry, Rashad. Chris West again. We've discussed a lot about your five core markets which account for 70% of profits, but another 15% of profits come from markets such as Middle East, Africa, et cetera, which have historically been run for cash rather than growth. Could you talk about the opportunities you see there and recent developments in some of those markets, please?
Absolutely. You're absolutely right. We talk primarily about top five because that's 70% of the profits in combustibles. One of the three key strategic pillars is also to become very selective in the rest of the portfolio, yeah, and also make strategic investment in these ones. You see it in the numbers because they primarily sit in our AAA region, and you see a very meaningful forward movement, awesome profitability. We've clearly driven by some clear strategic choices we're placing specifically in Africa and in the Middle East, yeah. I've just a couple of weeks ago was with Paula, who is running this region, this newly established region, yeah, to put focus on it. I was with her and the team in Morocco, where we reviewed all the African plans.
I think what is exciting, the logic that I shared with you in detail about must-win battles, is about which trade channels, which brands, what the right set. That work is happening very quietly, less visible to you in the background for these markets as well, and that will drive performance over time. Now, I also want to be clear, some of these markets, by their inherent nature, are more volatile. Like in Africa or in the Middle East. So there will always be some ups and downs, but I think you will see behind this, our new strategy, a stronger focus on selected markets and the broader portfolio that will drive growth for Imperial in the years to come.
Okay. We have another question on the line. I'll pass back to the operator, but just as a reminder for those on the line, if you want to ask a question, please press star and one on your phone. I'll now hand back to the operator.
Thank you. The next question from the line comes from the line of Alicia Forry from Investec. Please ask your question.
Oh, thank you. Good morning, everyone. Apologies if this has been asked. My phone dropped at one point. But just on the U.S. FDA denial of the myblu application. I was just wondering if you are changing how you approach regulatory applications going forward to ensure that this doesn't happen in the future, or what lessons you've taken from that development there? Thank you.
Sure. Alicia, good morning to you. I think, relatively, as you would expect, we are analyzing the feedback, and I want to be very clear, is the feedback was our application didn't have sufficient data in it, yeah. As you will know, our application was filed two years ago nearly, well before we started this new strategy. It's an important piece. We're really looking at it. To your point, absolutely, we would take learnings if there's anything we can do differently here. I think we shouldn't forget, this is definitely something we are focusing as a company on. We also, to be clear, the U.S. Is part of our NGP portfolio. You've seen us clearly focusing more on Europe than we would have done in the past. It's part of our overall portfolio strategy, yeah.
Also, just to share with you, we have now added to the global executive team, a person who will look after corporate affairs specifically, because that is clearly something as we embark on the next phase of the strategy, wanna make sure that we're in the best place in this area.
Thank you very much.
Okay. There's no further questions at the moment online, so we'll go back to the room, if that's okay.
Hi, it's Jonathan Fell from Ash Park Capital. I want to ask about your innovation pipeline, which you've been rebuilding. I mean, you've always had an innovation pipeline, so what's different about it now versus, say, two years ago? How does it split between your traditional combustible products and NGPs? And how much of that pipeline is internally developed versus, say, going to China and finding interesting partners there or external partners generally?
Yeah. There are two key changes. The one you mentioned already, our innovation pipeline, as part of the challenger mindset, is using much more external parties than before, yeah. Especially in, on the NGP side. I mean, there is an enormous amount of partners out there, especially out of Asia, that actually want to partner with company like Imperial, yeah. I think that's really exciting. We're now embracing this much more as part of our strategy. Our technology doesn't need to be developed in-house. There's a lot of people who've invested a lot of time and effort in this one, and I'm really encouraged. The blu 2.0 was largely developed with partners, yeah. The other big change, the partners one and the new team is the second one.
We've now been able to attract to Imperial some really good consumer goods R&D people, yeah. Ex-Reckitt Benckiser, ex-Henkel. We're really building capabilities in-house to actually also work with external partners, yeah. This is something I feel good about. I think, as you rightly mentioned, the primary focus is NGP, but also in our core business. We, at the point in time, had three people in R&D on our combustibles portfolio. That is not enough, let me put it this way. We're now also looking packaging formats and so on. These are things that I think will drive the brand equity for our brands as well.
Thank you.
Okay. We do have another question on the phone now. If I can hand back to you, the operator, take this next question.
Thank you. The next question from the phone comes from the line of Jared Dinges from J.P. Morgan. Please ask your question.
Hi, guys. I just wanted to ask on cigars. Like, I know, like, at this point, it's actually a pretty sizable part of the overall group. But I think sometimes it gets a bit lost in the wider U.S. business. But I just kinda wanted to know, you know, what is your expectations for that business, you know, for the rest of this year and actually over the medium term, given, you know, I know you have tough comps, you had exceptional growth, basically since COVID, but, you know, how are you guys thinking about that business going forward? I think related to that, obviously, we've had the news about the FDA's proposal of a flavor ban.
Maybe if you could remind us or tell us what percentage of your cigars portfolio you think would be affected by the language the FDA has used? Sure. Number one, I think it's definitely a key part of the Imperial story going forward, yeah. It's a piece that behind the new strategy, we have actually moved, as you will know. We used to be number four in the U.S. In the space of a bit more than a year, we've become the number two of the market, driven by the strengths of the Backwoods brand, but also the overall brand portfolio we have, yeah. We have no interest of giving up this number two position in the marketplace.
As you rightly say, some of the comparatives are getting tougher in the U.S., but that doesn't change our focus on the segment, yeah? It is a key part. There's a clear consumer need for this segment in the U.S. that we have the right brand portfolio to actually satisfy, yeah? The question about kind of the potential flavor ban and so on, as you would expect, we've looked through our portfolio. We feel quite confident that we have the right portfolio for our consumers, whatever change, administrative change will happen, because we shouldn't forget, we have some of the most powerful brands, especially with the Backwoods brand, in that part of the market. We feel confident that we have the right propositions with the right brand equities in this important part of the U.S. market.
Okay, fine. Could you give us, like, a rough idea of you know, if the flavor ban were to be implemented, a year from now, like how much of your portfolio would no longer be allowed to be sold?
We don't break this out, but I also want to give you the confidence is when you have a very strong brand equity, they're buying the brands and not necessarily buying a certain flavor variant. There's very strong evidence that we can see. We as a business-
Okay, fine.
We're not too worried much about a flavor ban on the mass market cigar business.
Okay, fair enough. Thanks, guys.
Mm-hmm.
Okay, there's no further questions on the phone at the moment, so I don't know if there's any last questions from the room. If not, I will. No, we're good. I'll hand it back to.
Yeah.
To Stefan.
Sure. I mean, first thank you for your great questions. Hopefully, as we sum up today, I think hopefully today gives you a good sense about the progress we're making in transforming Imperial and implementing the strategy. We're exactly where we wanted to be 18 months in, and I can see, hopefully, you can see also the strong foundations we're building. We're talking a lot about culture, not so much about this today, but I think it's exciting to see the progress we've made in a relatively short period of time on quite a number of fronts, whether that's our core business, but also on the NGP side. Yeah. Thank you and looking forward to seeing or hearing all of you when we talk about our full year results for this year. Thank you.