Well, good morning, everyone, and welcome to our interim results presentation. I'm joined by Oliver Tant, Chief Financial Officer, Matthew Phillips, Chief Development Officer, and in the front row we have Dominic Brisby, Director for the Americas, Africa, Asia, and Australasia. I don't think I missed anything. Joerg Biebernick, Director for Europe, Richard Hill, Commercial Director for blu, and David Taylor, our Innovation Director. Our purpose is to create something better for the world's smokers, and it defines our focus in both tobacco and NGP. In tobacco, we're focused on our asset brands and our priority markets to drive quality growth. We drive that growth through investments behind our codified market repeatable model with a focus on continuous improvement, evolving our high-quality tobacco portfolio to provide a better experience for smokers. For NGP, it's about providing smokers with alternative products in different categories, all with lower health risks.
Here, our priority is blu. Building blu as the trusted brand that delivers a superior vaping experience. Not just functional delivery, but an emotional brand connection. Here we also have clear market priorities and a blu adoption model which we invest behind to drive growth. We have additional growth opportunities coming on stream with heated tobacco and oral nicotine products. This is about quality growth from tobacco and significant additive growth from NGP, with a continued focus on high margins and strong capital discipline, supporting investment and growing shareholder returns. I'm pleased with the progress we've made in the first half. Net revenue grew by 2.5%, driven by the contribution of blu, complementing a good underlying performance from tobacco, with revenues up both in Europe and the USA by 4%.
We've invested an additional GBP 94 million behind blu in the first half, which has temporarily affected profitability, but has successfully raised awareness and is supporting increasing consumer adoption of blu. We achieved particularly pleasing year-on-year growth with blu, up nearly 250% as we extended its rollout in Europe and Japan, growing the category and achieving retail leadership in many markets. In the USA, we've grown year-on-year despite the category slowdown, and we're growing but we're also learning, as we continue to refine our investments behind our blu adoption model and build a sustainable second growth engine for Imperial. We'll build on these results to realize further growth in the second half. We're delivering against our Tobacco Max strategy with good underlying sales growth and increased profitability, helping fund our NGP investment.
We performed well in the Americas, Europe, Africa, and Australasia, albeit our volumes were affected by shipment timings, but these will reverse in the second half. A strong cost and capital discipline remain a priority focus, including our divestment program, where we're progressing a number of opportunities, including the sale of our premium cigar business. Overall, a good start to the year and on track to deliver our full year expectations. I'm going to hand over to Oliver to take you through the financials.
Thank you, Alison, good morning, everybody. I'm going to start with a summary of our results, which demonstrate good underlying performance in tobacco and significant NGP progress. I should remind you that these results reflect the adoption of new geographic segments announced last September, as well as the implementation of IFRS 15, a new accounting standard which affects net revenue and cost of sales. Prior year financials have been restated to reflect these changes as well. We increased net revenue by 2.5%, driven by growth in NGP and tobacco price mix, which was up 6.5%. Our asset brands outperformed again as we continue to focus our investments behind quality growth. These brands delivered a greater proportion of our financial performance, growing by 280 basis points to 65.3% of our overall revenue.
Tobacco margins improved, partly offsetting the additional GBP 94 million of investment behind NGP, such that adjusted operating profit and EPS declined slightly. As flagged in our pre-closing trading update, first half cash conversion was lower due to the timing of duty payments and other working capital timing differences impacting our stock holding. Excluding these temporary timing differences, underlying cash generation remained very strong. Tobacco volumes declined nearly 7%, reflecting the weaker markets in the second half of last year, exacerbated by shipment timings, particularly in the Middle East, and some distributor disruption in Southeast Asia. In addition, in the U.S., we implemented a price increase in February, a month earlier than last year, which also affected the timing of shipments. The unwind of this phasing will support a stronger second half volume delivery.
The volume reduction has been mainly offset by strong tobacco price mix, benefiting from a carryover of pricing from last year, as well as first half price rises in the higher value markets of the U.S., U.K., Germany and Australia, which will flow through to benefit the second half performance. Around 90% of our expected full year pricing is already embedded within our markets. This strong price mix dynamic has an obvious positive impact on the levels of our underlying tobacco profitability with both good margin and operating profit performance, which I shall talk about further shortly. As regards to the timing differences, U.S. timing differences alone impacted first half group revenue delivery by 0.7%, which would have resulted in a first half revenue growth of over 3% had this not happened. Overall, a good revenue performance, driven primarily by NGP and supported by strong tobacco price mix.
As I've mentioned, we delivered good growth in tobacco profitability, driven by strong performances in the U.S. and Europe. Last year's operating profit benefited from GBP 40 million of profit on the sale of other tobacco assets in the U.S. If we strip this out, underlying tobacco profitability benefited from a strong price mix performance, which has largely fallen through to the bottom line. This price mix performance reflects the underlying pricing dynamic across our footprint, the positioning of our product portfolio in our priority markets, and the strong adherence to pricing strategies in accordance with our MRM, where we retain the relative pricing position of our portfolio. We also stepped up our investment in NGP by GBP 94 million on a gross basis, or GBP 65 million on a net basis after taking account of the margin contribution from the additional NGP sales.
This increased investment has supported first half growth and is building momentum for the second half. It is also worth noting the H1 results are not impacted by any one-offs, but as previously stated, and as a reminder, we do expect the second half to benefit from gains in the region of between GBP 50 million and GBP 100 million. As expected, cash conversion of 66% reflects the timing of various duty payments, including Logista, as well as some working capital impacts principally associated with the implementation of Track & Trace regulations in Europe. As a result, net debt increased by GBP 0.2 billion on a constant currency basis. These are temporary impacts on working capital that will reverse in H2, and therefore, we still anticipate full year cash conversion of just under 90% and further deleverage. Our performance reflects our continued focus on capital discipline and strong underlying cash generation across the business.
Our cost optimization program continues to make good progress. We expect to realize a further GBP 60 million of annualized savings this year. This is slightly lower than our original plan for this year as we have rephased GBP 20 million of savings into next year due to the timing of certain cost initiatives. We remain, however, on track to deliver GBP 600 million of cost savings by September 2020. Our expectations for the full year are unchanged. We will continue to prioritize quality growth and expect our tobacco business to deliver modest revenue growth underpinned by embedded pricing. Together with ongoing efficiencies, this is expected to deliver good underlying tobacco profitability and strong cash flows. In NGP, we expect to deliver further growth in revenues, which will support improving profitability as we exit the year.
In aggregate, we expect to deliver constant currency revenue growth at or above the upper end of our 1%-4% guidance range. Our guidance for constant currency EPS growth of 4%-8% remains in place. Thank you. I will now hand you back to Alison.
Thank you, Oliver. I presented recently at CAGNY and referenced some data from a major consumer study we conducted across seven of our largest markets. Evolving lifestyle choices with changing regulation and increasing innovation continue to shape what consumers buy, where they buy it, and how often. In tobacco, this means smokers today are increasingly moving away from consuming only one product. Just under half of consumers regularly choose two or more products, be they cigarettes, fine cut tobacco, cigars, or reduced-risk products such as vapor, oral nicotine, and heated tobacco. This is a significant change from 20 years ago when over 90% of smokers were cigarette soloists. This represents both an opportunity for smokers to transition to something better, but also an opportunity for us.
As I discussed at our NGP event last September, Imperial Brands's competencies in tobacco have been enhanced over the years as we've developed our NGP business. You see some of these highlighted on the left-hand side of this chart. The starting point, as ever, is the consumer, and our insights work is central to our understanding of adult smokers and vapers, their preferences, and their motivations. We've continued to build the capabilities to leverage these insights across categories to realize more growth. You know, in tobacco, we focus on quality growth with clear brand and market priorities to deliver modest and sustainable growth in our footprint. An element of this growth is about capitalizing on demand shifts through innovation to provide a better experience to smokers.
Vaping is the biggest NGP opportunity in our footprint, our focus is myblu, which provides a great vaping experience in a convenient form. We continue to innovate to improve that experience. We've created optionality in heated tobacco for parts of the world where vaping is not permitted or where smokers prefer heated tobacco. For those occasions, we have Pulze and iD, which I'll come back to later. Consumer interest in oral nicotine is also increasing. We've expanded our oral tobacco products, building on our success with Skruf, and adding tobacco-free and other variants as we've entered new markets. These capabilities also make us well-placed to capture growth opportunities in some targeted adjacencies. As you know last year, we invested in Oxford Cannabinoid Technologies.
This has enabled us to build on knowledge of the science of cannabis and investigate the potential for our technology and innovation capabilities in a category where consumer attitudes and regulations are evolving quickly. Let's now have a brief look at the progress we're making from a category perspective before we look at the regional performances. Our asset brands encapsulate our strongest equities across our consumer categories, supporting quality growth opportunities. In tobacco, we've continued to optimize our portfolio through brand migrations, exits, and divestments, as well as SKU rationalization. We've made a couple of recent reclassifications to our specialist tobacco brands, recognizing a shift in priorities with minimal impact on the financials. In NGP, we have the benefit of starting with a very tightly focused brand portfolio. blu is on track to become one of our largest brands.
It's already in the top 10, it's now classified as a growth brand. We've also further prioritized within our growth brands, recognizing JPS, Parker & Simpson, West, Davidoff, and blu as having broader global potential versus other, more geographically targeted brands. Asset brands continue to outperform, with revenue up 7% year-on-year, and now accounting for two-thirds of our revenues, up from half in 2013. Importantly, investment behind our asset brands in priority markets has delivered a stronger tobacco business, with priority market share up 50 basis points over the period, top-line progress, and growing profitability. In the U.K., Germany, and Australia, given our market positions, we continue to balance share growth and returns. Our position in the U.K. is not only stronger following the investment step-up in 2017, but the market has also returned to growth. We've recently increased prices, which accounts for the short-term share decline.
In Germany and Australia, we consistently achieve strong revenue and profit growth, which has been balanced by some share decisions in Australia. Whilst in Germany, we're working to address some current portfolio pressures, including some further brand migrations. In Spain, we're improving our blond share, whilst in France, we continue to choose value share over volume share and pass on excise increases. We've redirected our focus to blu. I'll cover the U.S. shortly, where our focused portfolio has delivered share gains for the first time since acquisition. In Russia, Italy, and Japan, we continue to deliver share improvements. In essence, our investment focus behind our Tobacco Max strategy means we're well-placed to deliver further growth in tobacco. That means we need to keep evolving the tobacco experience, too.
As a simple differentiation, there's roughly a 50/50 split between smokers who are more conventional in their habits versus those who are more progressive and looking for new experiences. Our portfolio is well positioned to meet the needs of conventional smokers with full flavor products such as those shown on the right. The progressive smokers are interested in demand shifts such as different filter experiences or formats. We're increasingly realizing share opportunities with brands such as Davidoff, West, and Parker & Simpson to launch new products shown on the left. With Davidoff, we identified an opportunity to broaden its appeal to a more progressive set of adult smokers by focusing on four cigarette demand shifts: queen size, crushball, lighter-tasting blends, and new filter technology. We launched Davidoff Reach last February, a queen-size format that taps into each of the demand shifts.
It's now in 19 markets, largely in Eastern Europe and Asia, adding to Davidoff's overall market share, as well as building awareness and share in the Davidoff core brand proposition. The new variants have rejuvenated the consumer base, appealing to different adult smokers with high product quality and a good smoking experience. We expect to build on this success with the king-size version, Davidoff Evolve, which we've already launched in Germany, Czech Republic, and Saudi Arabia. In vapor, we're focused on transitioning smokers to something better using our blu adoption model. Our first half investment has been building awareness and trust in the brand to encourage trial and repeat purchase through an omni-channel approach, mainly with tobacco retailers, but also improving our vape channel engagement and building our online presence. Both awareness and trial are growing, providing the foundations for increasing repurchase and ultimately loyalty.
We've tested a lot and learnt a lot over the past year and continue to do so with a focus on building blu into a strong and sustainable business, a great vaping experience delivered by a great brand. In the second half, we're building on the first half momentum with a continued focus on awareness, trial, and repeat purchase. This will be supported by the ongoing rollout of some product enhancements, such as color devices, and outside the U.S., improved pod design, which also supports lower COGS. We'll continue to leverage our retail relationships, it's where smokers go to shop, with a greater emphasis on best-selling key accounts, particularly in the U.S. We're enhancing our engagement with vape stores and in online channels. Our innovation agenda adds to our growth momentum beyond 2019, with pilots of 3D flavor and our connected device planned for later this year.
Vapor remains our focus, but we've also developed a high-quality heated tobacco product, which delivers a more consistent and uniquely personalized experience. Pulze includes some other features important to smokers, such as continuous use without interrupting the experience, as well as different heating modes to personalize the intensity of the experience. We began a city pilot of Pulze this week, and are anticipating generating additive revenues next year as we extend beyond the pilot. For the smokers among you, we have some available here today and invite you to try it after the presentation. In summary, consumer behaviors are changing with a broader repertoire of categories, driven by an increasing preference for reduced-risk products. We're shaping this category development using innovation and proprietary technology to provide great functional experiences, combined with emotional brand connections to offer adult smokers and vapers something better.
Our investment choices in tobacco and new product categories are integral to the results across our regions. Let's start with the Americas. We've had a very strong start to the year, reflecting good tobacco performances in cigarette and cigar and in NGP, with revenues up 4%. In cigarettes, our focused portfolio strategy has meant we've grown market share in the year to date for the first time since the acquisition. A milestone, given the trajectory of the portfolio at that time. Share was up, but our shipment volumes were down more than the market because of our price increase in February. This temporarily affected shipments relative to last year, but is beneficial to our full-year performance. We achieved good revenue growth with strong pricing and the benefit from the continued growth of our mass-market cigar business led by Backwoods, plus the positive contribution from blu.
Underlying tobacco profit growth was strong, taking into account shipment timings and the OTP profit last year, more than offsetting the increased NGP investment. As you know, there are ongoing developments on a number of regulatory fronts in the U.S., and we continue to actively engage with the FDA and believe we and our product portfolios are well-placed to manage regulatory changes while continuing to develop our business. In NGP, our investment in blu has driven awareness and continued growth in consumer offtake, despite the category slowdown. As a result, we've grown blu revenues by over 50% year-on-year, but with a slower sell-through of our pipeline inventory than originally anticipated. In H2, we have several initiatives to build further consumer offtake and growth, building on the first half activities.
This includes an enhanced key account focus in traditional retail and extending our presence online and in the vape channel. In traditional retail, we've built distribution for myblu, with a presence now in 90,000 stores and growing. You can see we've driven high shares in about 30% of the stores. The focus in H2 is therefore to take the learnings from these stores and apply them in the first instance to the 16,000 stores that represent the highest value opportunity of the balance. At its simplest, it's about targeted ranging, visibility, and in-store communication, backed by appropriate incentive arrangements and supported by local equity investment. It's a clear action plan and well advanced, which coupled with investment behind our blu adoption model, will drive renewed momentum in the second half.
A strong performance overall in the Americas, but also in Europe, with the benefit of strong growth in NGP with blu, as well as in tobacco, mainly from the U.K., Germany, and Italy, with revenues up over 4%. Overall profit grew even after the increased NGP investment, reflecting the strength of our tobacco delivery and ongoing cost optimization. From a category perspective, we're also launching oral nicotine delivery products in more markets, building on the success of Skruf in Scandinavia. We've launched tobacco chew bags in Denmark and Switzerland, and our tobacco-free pouches are performing well in Austria and Sweden, with further European city tests planned for the second half. The main NGP focus has been the continued rollout of blu across our European footprint.
We have achieved retail leadership in France, Germany, Italy, Spain, amongst others, and led the category development of the pod format, all delivering additive revenue growth. In the U.K., we launched the pod category just over a year ago, and it's this category that's the primary driver of growth in what is a relatively mature vapor market, albeit mainly in open systems currently. We've established myblu as the number 2 vape brand in the retail channel. We've been supporting growth by building awareness and trial through above-the-line advertising and direct engagement with adult smokers via brand ambassadors in retail and relevant HoReCa. In Italy, the national rollout of myblu has delivered strong share growth and market leadership and has more than doubled the category in the tobacconist as we build our presence in channels where we can directly engage with adult smokers.
In Germany and France, we're focused on improving availability where smokers buy tobacco. In Germany, we tested our smoker engagement strategies in three cities before going national at the beginning of this year. Since then, we've taken market leadership in retail and more than doubled the category. And we've achieved further growth in France with myblu, responsible for seven out of every 10 closed devices sold. Spain has also been a success story in the first half where we've created the category in tobacconists. In summary, a good performance in Europe with increasing consumer uptake that we'll build on in the second half. In Africa, Asia, and Australasia, our performance was affected by shipment timings in the Middle East as a result of excise increases and other regulatory changes, as well as some distributor disruption in Southeast Asia.
As Oliver mentioned, we expect this to reverse in the second half of the year. Elsewhere, we achieved share growth in Russia and strong tobacco performances in Australia and Africa and by a number of our premium cigar brands, added to by a positive contribution of myblu in Japan and Russia. In NGP, we've been very pleasantly surprised by the success of myblu in Japan, where our zero nicotine version has exceeded expectations following an initial trial in Fukuoka last year. myblu has been rolled out to more cities with growing visibility across key retail chains, coupled with a targeted above-the-line campaign, which has proved highly successful, and we will extend myblu nationally in the second half.
In heated tobacco, we've begun a city pilot of Pulze, which has tested well in smoker trials, supported by a range of hyperlocal brand-building activations, as well as a flagship store, which opens next month. We're also extending the presence of myblu in Russia to broaden our category offering. To summarize, the changes in consumer preferences and our widening repertoire of alternatives to combustible tobacco creates opportunities. We're shaping this category development with the launch of new products utilizing our innovation and technology capabilities. In tobacco, the increased investment since 2017 behind our asset brands and priority markets has delivered improved performances and sustainable value growth. In NGP, our investment behind the blu adoption model is driving awareness, trial, and repurchase across all regions, and we'll build on this momentum in the second half.
Building on the success of Skruf, we're continuing to make targeted launches in Europe of new oral nicotine products. In essence, Tobacco Max is working well and NGP is building and supporting our growth. Before I conclude, a comment on capital discipline, which continues to be central to our strategic agenda, both in relation to our organic and inorganic decisions. Our strategic focus means that there are assets less central to our growth agenda, as we announced this time last year. Last week, we confirmed the sale of our worldwide premium cigar business. It's a business that continues to perform exceptionally well, but is not central to our agenda.
Significant progress has also been made and continues to be made on a number of other divestment opportunities. Recognizing current tobacco valuations, we're working to execute disposals that will realize value and within the two-year horizon we set ourselves this time last year. Proceeds will be used to pay down debt and invest in appropriate growth opportunities. To conclude, I'm pleased with our progress in the first half. With Tobacco Max working and NGP building and delivering additive growth, and there's more to come. The combination of our Tobacco Max and NGP focus is strengthening our top-line delivery, which we will build on for the full year, leading to further profit and cash delivery, funding investments, debt reduction, and growing shareholder returns. Thank you. That concludes today's presentation. We'll now take any questions.
It's being webcast as usual, so please wait for the microphone and give your name and organization before asking your questions. A microphone. We've got a hallmark at the front today.
Richard.
Can you hear me? Hi, Nico von Stackelberg from Liberum. Just a few quick questions here. I was wondering for the premium cigar business, it's quite a rare asset, and I expect this to fetch pretty high multiples. Would you commit to a floor in regards to multiples where you'd walk away from a deal? Also, is a spin-off a potential option on the table for that? Then another question, maybe you could remind me on some of the options you have for getting Pulze and your iD sticks on the U.S. market. Putting Pulze aside and just thinking about the iD sticks, is there any way you could file for a substantial equivalence in relation to your current cigarette businesses, or cigarettes for the iD sticks so that you could get the iD sticks on the market before Pulze? Is that a possibility? Thanks.
Okay. I'll ask Matt to pick up on the Pulze question in a second. On the premium cigar division, it'd be inappropriate for me to comment given the process we're in now on any expectations of the value, as you would understand. I'm afraid that's a bit of a straight bat back, I'm afraid, in terms of no. Matt?
Yeah. On iD, as you know from the PMTA that Philip Morris have just received, the comparison was done to cigarettes. It absolutely does open up the opportunity for substantial equivalence. It's something we're looking at.
Mr. Jain.
Hi. I have a few questions on the NGP business, because I think that is a key focus of investors today, especially the sequential decline in the U.S. business, in a market which has grown quite significantly, if I just compare 1H19 over 2H18. Is there any way you can give us any clarity on your sell-in trends versus sell-through trends in the U.S.? The follow-up question is that, you have seen strong growth internationally. Is there another phase of inventory building happening internationally, which might run into similar issues as what we are seeing in the U.S. right now? Thank you.
Yeah. I'll make a couple of overarching comments, then I think, Richard, maybe some color on the second half would be helpful as well in terms of where we're going from here. The half on half year trends in the U.S. are not very easy to read in terms of the actual sale data, partly because, actually, mainly because there's a chunk of IP that sits within there that we haven't been able to disclose for commercially confidential reasons. We are seeing half on half from a building of the business perspective, progression in terms of the overall consumer offtake. You saw the chart as well behind me just now that showed the continuing increase from an IRI perspective in terms of the offtake of blu pods in the U.S. The business is growing.
We flagged back as early as CAGNY that we saw a slowdown in that growth rate versus our original expectations. That clearly, when you're building a new business, has some impacts in terms of when you're building distribution in the market and how quickly that distribution then pulls through the market. That's something you have to manage with a new business, and we're managing that actively, both from a U.S. perspective, but also as we launch in new markets as well to make sure we balance that correctly. Actually from a U.S. perspective, we are building momentum. I think it's important that maybe Richard comments on how we see that feeding through from a second half perspective, and how that's building in the market.
Thanks, Alison. I think the first thing is to go back to November 2018 and think the impact of the market when the FDA started to announce all the youth access prevention measures. The market just kind of froze. The trade didn't know what was happening. There were producers withdrawing stock, making declarations, then changing their minds. I think what you saw in that November, February period was a decline in the whole category. Now, the good news was that blu was growing every week through that period. You've got IRI, and you look over the last six months and three months, and you see this month on month, week on week growth of blu pods. Just give you a sense, I think your question was a sense of momentum going into the second half.
Based on our IRI data, blu pods were growing at around 7% month-on-month, and that was pretty consistent while the rest of the category was doing that. Our expectation going into the second half is that will accelerate, and the reason is, Alison mentioned on the chart earlier, we have a very important program in the U.S. retail. One of the issues around NGP is there are no category rules for how it's merchandised. What we've done is to go through, and we've spoken to the top 22 accounts, and we've said, "Look, here's the deal. We want real visibility for the product. We want the hero range. We want proper displays." Based on that, then there'll be performance bonuses.
The good news is over the last three months, we've had so far 90% of the customers saying, "We want it." We've had half of them signing up, and already we've got nine accounts already with the new merchandising on shelf. I think the impact of going into store and being able to see the product and being able to pick it up will have a massive impact on blu. Actually, we're pretty confident going into the second half.
If I can just follow up on that. Can we use the 1H 2019 U.S. revenue as a good base in which there is no IP revenue, there is no inventory or nothing like that, and this is the base from which we can forecast growth going forward?
I think the half one U.S. base is relatively clean. It obviously depends on the rotation rates over the next two or three months, depending on how the stocks in trade versus sales out equalize. It feels to me a much more natural base. Yeah.
One last question. Can you disclose or any way suggest what's the split of device versus pods in these sales?
It does depend massively on how the devices are promoted. You look across the category, what you're tending to see is people are promoting devices one month, you get this big spike in devices, the next month it goes away. What we have seen, half on half, that's half 2018 to half 2019, is the pod to device ratio has roughly doubled across the U.S. and the U.K. I think it's really misleading to give actual numbers, because it does depend very much on the denominator.
Adam down here.
Can I ask you. It's Adam Spielman from Citi. Can I ask you a series of questions? Probably the most minor one is you showed a series of market shares for blu, sort of typically 16%, something like that in different countries. What was that market share of? Was that of all vapor in the packs, or was that just closed system, or was it retail? Just a housekeeping point.
It's in retail, it's of all vapor.
All vapor?
In mainstream stores. If you have to sort of try and guess what that means as a percentage of all vapor, including other channels, My guess is that mainstream stores are maybe a third of total vapor. Is that rule of thumb-ish?
That's our rough estimate from historic, you know in some markets, there's actually a lot more going through retail. For example, in the U.S., that's nearer 60% in the U.S., for example, from our estimates. These are all estimated, because the data on online on vape channel is pretty poor in most markets.
Can we turn to the forecast? The forecast is still around 4-ish% organic sales growth. My understanding of how that was made up was it was about +1% from tobacco and about 3%, let's say GBP 400 million, from new products. I was just wondering, does that still stand? Is Pulze contributing perhaps now that maybe not? Equally, can you break down how you expect cigarette volumes to play out over the second half? I really want to get more comfortable. Essentially, cutting to the chase, I was disappointed by the first half organic sales growth, and it seems a big stretch to me to get to 4%. The more detail you can give on that, the better. If you can start off by breaking it down, Alison. Thank you.
I think one of the key things to point to in the first half that maybe helps your thinking is that both in the Americas and Europe in the first half, we delivered 4% net revenue growth. I think that's an indication of how tobacco is performing, despite the fact that, as we've highlighted, this impact of the earlier price increase in the U.S. clearly had a slight drag on the first half, but also how the NGP is providing that additive opportunity. Also, the funds we're generating in tobacco, that's helping to fund this investment as well, so that we're not actually getting a significant impact on the bottom line from this. In terms of going into the second half, we've got the momentum behind blu. We've got about roughly GBP 150 million of sales in the first half.
We're not anticipating significant contribution from IQOS in the second half of this year. Pulze. Yes, IQOS and Pulze in the second half of this year. Definitely nothing from IQOS. Therefore, it is all around the building on that blu momentum to deliver the second half. I think Richard's given you a good insight into how we're thinking about the U.S. and building on momentum there. Clearly, we've also got some good positions in Europe where we've got good shares, we're growing the category, really focusing where smokers are going in terms of growing the category. Also now, one of our learnings from the first half has been vape channel has not been as easy to crack as we thought it would be.
We've done a lot of work on that, therefore, we've got some good initiatives going into the second half with the vape channel as well to grow the business more in that channel beyond retail. I think U.S. performance and Europe performance are very good indicators, really line of sight on volume in tobacco is very clear. We've had shipment timings, largely Middle East, bit of Southeast Asia related. We have visibility to their reversal, as you can see, we've got 90% of pricing embedded going into the second half. The Tobacco Max performance is looking good.
Just following up on that. In Europe, you recorded GBP 73 million this half just gone. How much of that should we think of as being underlying demand, and how much was pipeline filling? How should we project the European bit forward?
There's strong consumer offtake in Europe. I'm going to let Joerg pick up on this in a second, if we've got a mic down there. As I was trying to say earlier, when you're building a business, there's always going to be an element of pipeline into the trade and assumptions around how that offtake is going to then develop. Sometimes you'll underestimate that, sometimes you'll overestimate it, sometimes you'll get it spot on. There's always going to be an element of that when you're building a business. There's good underlying momentum, as you can see by the retail offtake in Europe. Sorry, I've answered it all, have I?
You are.
Okay.
Thank you.
Back left. Thank you.
Thank you. Hi, Robert Rampton, UBS. Three questions, please. The first is looking at that GBP 94 million gross investment. Can you give us a bit of color on which markets that was invested in and what exactly, what kind of spend that was and why you think the sales growth associated with that spend will recur? That's the first question.
Okay. I will let Joerg talk now. In terms of the split of investment, clearly across Europe, across the U.S., but also Japan, we've not given a specific breakdown, and very much behind the blu adoption model. As you've been hearing a bit about the initiatives in the U.S. currently from Richard, maybe you could talk about Europe a bit and how we focused that spend, Joerg.
Yep. Thank you very much. Yeah, we essentially are all about building a sustainable brand, investing in the consumer funnel all the way from awareness, consideration, trial, repurchase, and loyalty, and we measure those over time every month. The good thing is that we're building a very strong funnel for blu across all the markets that we're tracking. The key activities have been on the awareness building size, earned and paid media, not surprisingly. Alison mentioned direct engagement brand ambassadors. We do those where adult smokers are shopping predominantly, but also in HoReCa. On the repeat purchase, we have certain loyalty programs at the point of sale in place, and we're creating a bonding experience as well so that people never want to leave the franchise. It's really an omni-channel approach and going all the way through the consumer journey.
You've seen that those shares obviously are all offtake measures, albeit in retail. We're quite confident that the momentum continues. What's more difficult to say is how the category growth is developing because these categories are still relatively small. You've seen the growth rates there, they're very strong.
On Japan and how we're building in Japan?
Sure. Japan, we've taken a similar approach in terms of making sure we're activating throughout the funnel. Interestingly, in Japan, because it's a non-nicotine proposition, we have far more freedom in terms of how we can communicate to the consumer versus some European or the U.S. market, for example. We've done a lot of TV advertising in Japan, very targeted TV advertising, which has been highly successful, and then has been disseminated through social media and combined with very strong displays at the point of sale and activation at the point of sale. Really, it's been a set of activities which have worked strongly together. As a result of this in Japan so far, the sales of blu are exceeding our expectations.
Okay. Yep.
Follow-up question. In terms of the momentum behind blu, all the comments you've made about the trajectory in the U.S. have been of pod sales, month-on-month pod sales, but obviously the overall revenue is unchanged. It's a similar story in the U.K., where your retail share has increased because of pods, but overall is unchanged. It looks like myblu is cannibalizing blu. Is there a reason we should expect that to change over time? What does that mean for the overall revenue contribution of the segment?
Okay. I think with the U.K., you've got to think about the fact the category is growing, and our share is modestly growing as well. That is additive growth for us in the U.K. as we're moving forward. Also myblu is a very different proposition in terms of the profitability that can deliver us over time as well. From a U.K. perspective, and it's something we found actually interesting enough in markets where vapor is already significantly established, particularly the U.K., a little bit France as well. The progression isn't as fast as some of the areas where we're really establishing the category a lot more substantially. In the U.S., we're very much continuing to grow the pod sales, as you can see from the IRI data. That's very much growing the business for us.
I don't know if anything else you'd add to that, Richard?
Yes, we have a very loyal consumer base on disposables. We see disposables as quite separate really from pod. We don't see much crossover between the two. The focus is to drive the pod systems. That's where we think the growth will come from. That's the natural landing point for a smoker. We'll keep the disposables business, but we don't see any cannibalization really between the two.
The mics at the back.
Just wanted to follow up on the medium term guidance for EPS. Could you discuss some of the drivers that would allow you to get to the mid, even to the high point of the range? What are some of the moving parts there that you see for the second half? Also as you look out to 2020 and beyond, again, can you discuss some of the moving parts there that might give us a little bit more upside, in fact, downside as well? If you could just be a bit more candid about some of those moving parts for these things.
Yeah, I think we've alluded in this results announcement, it reflects, I think, the experience since we began our strategic investment and started to drive growth and market share in our tobacco business. That actually the tobacco model for us actually generates healthy operating profit and cash flow generation. In essence, it's simplistic. We're seeing declining volumes, but we're getting, in the current period, 6% price mix benefit plus, a lot of that is dropping through to our AOP. As you'll have seen from the slide that I presented, the underlying growth in tobacco profitability was about 4.9% in terms of the AOP number. We see as we look forward, a gradual reduction in overall levels of reliance on the profitability of our tobacco business as the NGP category establishes itself.
We've talked about the prospect of that entering into a profitable situation by the end of this year. We expect as we move forward, as we outlined in our December presentations, that the improving margin and the improving volume and size of that business will begin to be significantly additive to our bottom line performance. We go through a journey where we've got improved confidence around the underlying profitability of tobacco, which provides good, strong cash generation, we will have the added fillip as the NGP business begins to grow, where we will supplement that and drive towards the upper end of our earnings range.
Mic check. Can I just also ask about, have you spoken to investors about augmenting the full year dividend with a buyback? Maybe that you still reach as a combined basis, something around 10% growth, if you were to assume it would be all dividend, but to also buy back your stock at this period, given where the share price is today. Also, could you comment whether or not you think the shares are undervalued today? Thanks.
I'm happy to pick up on those. Just to sort of finish off, because you did ask me the question around what are the watch outs in terms of that earnings development. I mean, clearly, the nature of the development of the NGP category and some of the areas that we're going into probably provide the variability, how much we would want to invest, how quickly we develop various markets may change the momentum in that space. We're clearly also looking at the various regulatory initiatives that are taking place. I think probably in terms of the risk to the trajectory, it's principally around the development of that additive component. As regards our sort of shareholder return strategy, we clearly do a lot of work in terms of understanding what our investor appetite is.
There's been a clear direction from investors, which is principally focused on the desire to see us reduce debt and then invest either organically or inorganically in driving the operating performance of the business. That's been a very clear and strong steer. That's not to say there aren't some who would like to see a supplement by way of buyback, certainly the desire to increase the dividend or introduce a buyback has not been strongly advocated by our shareholder base. From a dividend perspective, we obviously, as a board, discuss dividend strategy on a pretty regular basis. That's something which we review at least annually, if not biannually, around what it is that we need to do.
If you look at the underlying dynamic of our two businesses, we've got one which is very stable, produces good, strong cash flows, is naturally supportive of an annuity style return to shareholders. We've got another one where we're investing in the growth of the category and the growth of our business, where the equity contribution at various stages in the early development of that may differ. Therefore, actually the balance between return to shareholders and the need to invest will, to some large degree, depend on how that trajectory evolves over time. That is part of the reason why, as a board, we keep a constant eye on it and reaffirm or look at what we're proposing to do from a dividend perspective.
If no one else wants to ask a question, I'll ask another couple. Once again, it's Adam Spielman with Citi. Can you say what impact you think e-vapor is having on cigarette volumes in the U.S. at the moment? What you sort of see the underlying rate of cigarette decline is in the U.S. at the moment. Are there any markets where you're seeing in Europe any impact from e-vapor on the cigarette market? That's one set of questions. Another one, Oliver, in the past, I think you were very clear in saying you definitely expected NGP to be sort of profit positive at the end of this fiscal year. I just detect a slight greater hesitancy now, a slightly more vague language. Is that right? Anyway, those are two questions for you.
Okay. First of all, on the impact on the U.S. market, we're still very much around that sort of a bit over 0.5% impact from vaping in the market, which I think you'd expect given the category slowdown we saw as well. It's still around that sort of number in terms of the impact on the market. We're very much, I think, aligned with other industry views on the market that it's down 4%-5%. At the moment, we're seeing about 4.5% in terms of the overall market decline in the U.S. It's that sort of level. Europe, I don't think we've seen anything much in the way of impact currently. We've clearly, U.K. it's a bigger business. Yeah, comment if you want.
I think there's other factors that have a much higher impact on the tobacco volume in Europe. In France, we see tobacco volumes under extreme pressure because of the excise increases, our vape category is probably a minor point. Italy is a good example, where actually volumes are up in the category despite the 100% category growth in vape in retail. It's very tough to draw any conclusions between the two. Yeah, that's what I can say. Germany is another good example. We have been doubling the category in retail, yet tobacco volume's I think down 2.5% only. Quite healthy. We know from our own usage that a lot of the smokers we convert are initially dualists, they don't fully switch in the beginning at least. The impact on tobacco consumption initially is rather limited.
I think in relation, Adam, to the issue around when we believe the NGP business will become profitable. I think we still strongly are of the view that we should get there by the end of this year. I think we talked a little about the impact of the FDA, Richard mentioned some of the uncertainty that created through distribution in the first quarter. Actually, the development of the category has slowed a little, although we see it recovering strongly in the second quarter. That's probably changed the underlying momentum in that sector of the business, which versus where we were when we stood up at the prelims, is probably slightly lower level of expectation than we had at that point of time. I think it's there or thereabouts, to be honest with you.
I'd say that the slowing in the U.S. in the first quarter has probably reduced an element of the upside that we thought we might have by the time we got to the end of this year.
Going into 2020, we're looking in good shape.
Yeah.
Yeah.
What happens if the FDA clamps down much harder? You've said again and again, the various tweets that Scott Gottlieb put out in November have sort of disrupted the business. We could have much worse than, or much more effective regulation than talk, which is what we've had up to now, coming later this year. I suppose it's hard for you to say precisely, could that throw your sales growth off track if there is a proper clampdown on pod-based vapor in the U.S.?
The difficulty with this whole topic is that one is responding to an awful lot of rumor and speculation, and it's not particularly fact-based. A lot of the things around pod systems in particular all rely on the FDA's enforcement capabilities rather than rule making, and you'll know the difference between those two things. The enforcement capabilities are straying into uncharted territories, which are a legal minefield. Therefore, there is the potential for the FDA to keep pushing into those sorts of territories. As I say, the legal consequences of that are yet to be played out. Personally, I think the chances of a pod system being banned are extremely low for a whole variety of different reasons. Can I just add on that? I met Commissioner Gottlieb in November, along with Mitch Zeller. We've met him twice since.
The nature of the conversations have been incredibly constructive. These are not confrontational meetings at all. Very much like minds in terms of we stand very much aligned with the FDA on the importance of ensuring youth access doesn't happen with vaping. We found them to be incredibly sensible in listening to the science and the fact behind it. Those meetings just gives me more confidence that we will see sensible and practical regulation going forward.
Hi.
Hi, Chas Manso from Société Générale. Maybe you could just give your latest take on the regulatory things, seeing as we touched on it. Clearly, regulatory risk remains a huge issue for the sector and for investors in the sector. On the minimum purchasing age of 21, what impact might that have on consumption and initiation of consumption, stuff like that? Any kind of timings that you may now know about when the FDA may pronounce things. Moving on from that, generally, on your combustible shares in your priority markets, you've always said you want to balance the market share with the profitability. It feels as if that's shifted a bit away from market share and more towards profitability. Just wondering how fluid that is or whether that's a new priority, less on market share. Finally, on your U.S.
retail program for blu that's starting now, could you say whether there's something similar in Europe, but in the U.S., there's this feeling that there are bigger players around that have their own strong retailer programs. What happens if the larger players come in and simply outspend you on retailer programs? Thank you.
Okay. Right. Let's kick off with the regulatory question, which I think Matt, if we pick up. I think from a contextual perspective, interesting the way you framed the question around this huge regulatory risk, which is clearly how people are seeing it. I have to say, if you look at the FDA as a regulator, particularly from a rule perspective, it's, to my mind, a much better environment than we face in most of the rest of the world. We always spoke a bit about rule and enforcement activities, let's just work our way through those a little bit.
There are so many, as you well know, different things being talked about. Just to give you a flavor of the some of the questions that it opens up. If you look at mass market cigar as an example, can the FDA treat deeming products differently? Can the FDA ban flavors in one product but not in another product? When you start looking at pods, can you solve for the main problem that you're trying to solve for, which is really the conduct of a very limited number of players in the U.S. market by bringing forward category solutions, which also impacts players that have not participated at all in the problem that you're trying to solve. Tobacco 21, as an example, the level of population, I forget what it is, 4% or 5% or something is 18 to 20, I think from memory.
Therefore, the likely impact on the tobacco side of that equation is pretty limited. If you look at does 21 make a difference on the alcohol side, for example, to the problem that you're actually trying to solve, which is youth access, I think the argument would be no. From our perspective, we're not supporters of the whole idea of 21 on principle, because it's using an instrument to try and solve a different problem that has been caused by a different set of behaviors. We're far more about dealing with the causation of the problem through the enforcement powers that the FDA have, rather than these big sweeping blanket attempts which stray into all sorts of legal areas. It's really hard to give you a prognosis in terms of how it's all going to play out.
I think litigation is very likely, is my gut feel on an awful lot of these different topics, which means that the impact of these things are going to be decided down the line. The other big ones would be nicotine reduction and menthol, which are rulemaking, as you know, which there's a long way to go on those sorts of topics as well. In terms of imminent threats, I'm not sitting here feeling that there are imminent threats. I think the FDA will keep trying to move the debate forward, and then it will go into a different forum to be resolved.
On the market share profitability question, we very much do, and it's not one dimension in terms of the metrics we focus on the market, look to balance those metrics, and it's still very much a balance. I try to pick out in the presentation some of the current dynamics that we're looking at. U.K. in particular, we've had some really good share growth in the U.K. We did take a price increase. We know when we take a price increase, there's a share impact from that temporarily, and we rebuild back up from that again. I think Germany is the only one I would call out currently, where we've got some things to sort in terms of the portfolio, and we're working on that.
The others, I think it's always managing a share within a corridor, making sure that we don't fall below that, but also making sure we balance, particularly in Australia, for example, which has got quite price competitive, that we make sure we balance the whole profitability and share piece. There's been no change in terms of the MRM. Our focus on making sure our brands are price competitive in market as we set out a few years ago.
Just as well saying in the half year, we grew our market share in aggregate across our priority markets.
Yeah. It's still moving.
In aggregate.
Yeah.
K said probably wasn't the highest half year period in the context of the rate of growth of that group's market share, it was still growth of market share.
Yeah. Sorry, I'm just. Yeah. Not forgotten. U.S. retail program. Just comment a little bit in terms of the competitive environment. I think just finishing off on the Europe one quite quickly, yes, we've got some strong retailer programs in Europe, which we're already executing against, I think is the short answer on that one. Yeah.
I think what's important to know in terms of our retail purchase partnership program was it was designed at the point in which we knew that Altria were buying into Juul. We also knew that IQOS was coming off the market at some point. We didn't know when. We knew it was really important for us to get a strong position. The trade also wants alternatives. They don't want to have two big players dominating the category. What we've done is sign up long-term programs with retailers designed for the future of the category, rather than where we came from. The fact that Altria tied up with Juul, that was a window of opportunity for us, to open up earlier conversations with retailers than we would've otherwise had. It was an opportunity we took and moved quickly. Mic check.
Nico von Stackelberg here from Liberum. Just a final question, please. Thanks for all your time today. I understand around 20% of your U.S. business is cigars. Is that roughly right? On your latest estimate, what % of your cigars business in the U.S. might be subject to a characterizing flavor ban? In the event that ban does come through, how would you plan to mitigate that? What can you do? Thanks.
Okay.
A large percentage of the entire U.S. MMC business of all players has a flavor element. As I was saying earlier on, whether actually it is possible to treat it the way that they are at the moment. If you look at youth usage of mass market cigar, the FDA have been saying recently, okay, there's no health benefit to mass market cigars, and we can see big uptake in youth usage of mass market cigars. Frankly, that is not the data that we see. It's actually declining in terms of levels of youth usage. That's a fundamental basis and premise for bringing forward a ban like that, needs to play out. If it does, it will go to who has got the grandfathered products, both flavored and non-flavored, that they're able to rely on. We do.
We've got a very strong portfolio of both. It will clear out the market in terms of an awful lot of the proliferation that is there. It brings pricing opportunities, a whole bunch of different things. It's manageable in terms of a dynamic, providing you've got the portfolio, which not many do.
We see ultimately a stronger position for us in the market, particularly with iconic brands such as Dutch Masters and Backwoods, which are, as you've seen earlier, continue to grow strongly in that market. Go ahead. Maybe last question.
Hi. Gaurav Jain from Barclays. There was a comment made that when the FDA came out with its proposals around e-cigarette flavor bans, the market froze in November. There has been, I guess the flavored cigar ban, which was put earlier this year, and we have seen cigar sales taper off throughout this year. Is the retail cigar trade already seeing the impact of the proposed flavored cigar ban?
Okay. The MMC category decline is what you are saying?
Yes.
I am not sure we are seeing it from our data. This is a data issue in the U.S. market, to be honest. I think we continue to see growth in MMC, and particularly growth in our portfolio. I do not think there has been the same read across, because it was a different type of proposal to the one around e-vapor, but we still see strong growth in MMC.
I will just add to that, I think one of the differences between the two is the FDA, in terms of their enforcement on the vapor side, actually started going after retailers and calling out retailers that they felt had misbehaved. I think that introduces a different psychology in terms of the two categories as well.
Sure. A follow-up on U.S. cigarettes. Do you have any plans of implementing impact inserts for blu in your cigarette portfolio, like what Juul and Altria have spoken about? That is one. Do you have any plans to launch a loyalty program around your cigarette brands in the U.S. like some of your competitors have done? Thank you.
Okay. We have no current plans in terms of pack inserts on blu in cigarettes. Loyalty programs on cigarettes, not significantly, I don't think, but we've got a few things we've been working on, I think in terms of the app side of it.
Yeah. There are a number of areas we're working on in terms of creating even greater consumer loyalty behind our cigarette brand. Loyalty programs is one of those, that we're always considering. Having said that, if you look at what we've done so far, we've tended to focus on other activities. It's worth pointing out, though, that the activities we've taken, particularly this year, have meant that we've taken a U.S. business that we acquired, which was that the brands that we acquired were declining at about between 30 and 50 basis points per year before we acquired them. Having acquired them, they were declining at about 30 basis points per year. Now, for the first time, they're growing. We've got quite a comprehensive set of activities behind our U.S. brands to ensure market share growth.
We've always got loyalty programs on the radar, we've seen other activities that we're carrying out have been even more efficient than that.
Okay. All right. Well, thank you for your questions. No doubt we'll pick up with you if there's any further ones to pick up on after the session, thank you. Have a good day.