Good day, and thank you for standing by. Welcome to the Imperial Brands conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stefan Bomhard. Please go ahead.
Good morning, everyone, and thank you to all of you for joining us this morning for the announcement of our pre-close trading update. Before I start, I will draw your attention to the disclaimer set out in our trading update, which also applies to the remarks we will make on this call. I'm joined here by our CFO, Lukas Paravicini, and by Peter Durman, our Head of Investor Relations. I'm first going to cover the news about our share buyback before coming onto the trading update, where we announced earlier today we continue to trade in line with expectations. First, the buyback, which represents an important milestone in the delivery of our five-year strategy.
Now, you will all recall that the first two-year phase of our plan has focused on strengthening the business, investing to build the foundations for the next three-year phase of our plan.
The P hase I has also been about strengthening our balance sheet, managing towards a clearly defined leverage target to underpin our commitment to an investment-grade credit rating. Capital allocation is a very integral part of our strategy and a key value lever for shareholders. In this context, I'm delighted to announce that having now reached our target leverage at the end of September, we're now able today to announce a GBP 1 billion share buyback to be implemented over the next 12 months. It also complements our existing progressive dividend policy. This means that total capital returns in fiscal year 2023, including ordinary dividends and share buybacks, are expected to exceed GBP 2.3 billion. This represents around 13% of the company's current market capitalization based on last night's share price.
Furthermore, our confidence in the future and the highly cash generative nature of this business mean that we are today able to commit to an ongoing multiyear buyback program. Imperial has the potential to meaningfully and systematically reduce its capital base over time. Now, this buyback is also possible because of the continued progress we're making with our strategy to transform Imperial Brands. I'm pleased to report that trading for the year has continued in line with expectations, with constant currency net revenue and adjusted operating profit growing at around 1%. The key headlines here are, first, our target investments have driven a further improvement in aggregate market share in our top five markets. This is another important piece of evidence confirming that we have now stabilized our core combustible business following a long period of relative decline.
As expected, we've delivered an improved price/mix in the H2, which has helped offset an anticipated increase in volume declines as borders have reopened and there's a return to pre-COVID purchasing patterns. Second, we continue to make good progress in implementing our refreshed NGP strategy. We have achieved further share gains with Pulze and iD, our heated tobacco offering in Greece and the Czech Republic.
This good progress validates our new, more consumer-centric approach and has given us the confidence to launch the proposition into Italy, Europe's largest heated tobacco market. I personally recently attended the launch event, and it was great to see the team there using the learnings we've gathered from our two pilot markets. Our consumer trial on vaping on blu 2.0, a new pod-based vapor device in selected cities in France, has been well received by consumers and the trade.
This is further consumer endorsement of our new NGP launches and has strengthened our confidence in our NGP strategy as we prepare for a broader roll out of our new propositions. We look forward to updating you on the progress as they occur. Finally, we remain on track to deliver an acceleration in performance for the next three-year phase of our plan. The additional investment and the actions we have taken during the initial two-year strengthening phase has built strong foundations and enhanced our resilience as we face a more challenging macroeconomic environment.
Over the next three-year phase of our plan, we continue to expect low single-digit constant currency net revenue growth, with constant currency adjusted operating profit growth accelerating to deliver a mid-single digit CAGR over the three years. As this suggests, this means an average over the three years and is in line with the expectations we set out in January 2021 at our Capital Markets Day.
We're confident our investments and initiatives will continue to gain traction, particularly over the next year or so, and therefore, we expect the growth rate of our adjusted operating profit to improve within this mid-single digit range over the three years. We're conscious these are increasingly challenging times for all businesses, with rising interest rates and high inflation. We won't be immune from these pressures, but I'm convinced that our actions are creating a strong business better able to navigate these uncertainties.
We remain committed to delivering our plan and to realize the full potential of this business and to unlock long-term value for shareholders. Thank you for joining us today. Lukas and I would now like to take your questions, and I will now hand it over to the operator to moderate your questions. Thank you.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile a Q&A roster. We will now take the first question. Please stand by. The first question comes from the line of Rashad Kadian from Morgan Stanley. Please go ahead. Your line is open.
Hi, good morning, Stefan, Lukas, Peter, thanks for the time this morning. A couple questions from me, one on the buyback and one on the U.S. On the buyback, you're also committing to a multi-year program here. How are you gonna think of buybacks in relation to dividends going forward? Do you think the GBP 1 billion figure will be a good proxy for outer years, or will you be looking for a progressive increase at the buyback amount as well? Just some clarity on how you think of that going forward would be helpful. Then on the U.S., can you talk about what you're seeing in the cigarette market there?
I mean, clearly it looks like momentum is continuing from a share perspective, but how do you expect your price/mix to develop given the level of downtrading we're seeing in the market today? Thanks again.
I would suggest that Lukas, he, goes on the first question, and I will come back to you on your second question, Rashad.
Rashad, good morning. Thank you very much for the question. Yes, we indeed have committed to a multi-year and ongoing, as we have always said. When you go back to our capital allocation framework, we were very clear that we had four integral pillars to that capital allocation. We have now reached that lower end of the leverage, and that allows us to keep that leverage, which is very important to us going forward, but also into the share buyback. As we have said always, this is part of our model. This is part of our capital allocation, and therefore it is a commitment and an ongoing process, a multi-year commitment.
We are focusing on the next year in terms of what we can afford, what makes sense in our capital allocation, and that is the GBP 1 billion. We will review that every year as part of our ongoing capital allocation strategy to see what will be the next year's allocation to come. That is what you should look at in that sense. It's a meaningful, systematic approach to that. From a dividend point of view, for us, it is an integral part from the capital allocation as well, and we believe it is important that that dividend continues to flow.
We have made it very clear that it is a progressive dividend, and progressive in this sense means that it is progressive in line with our underlying performance, and so you would see that continue as well over the years.
To answer your second question about the U.S., I mean, it's a great time because actually yesterday I came back from the U.S. West Coast, spending time with our team there and attending the national conference of the convenience store operators of the U.S., which happens once a year, and had therefore the chance to speak with the CEOs of several of our top customers. The interesting thing and what they were telling me, for the time being, they see limited downtrading, but they do see some downtrading starting. I think that plays to our strengths, because if you look at it, as you would be well aware, of the three major players in the U.S., we clearly have the most complete brand portfolio with a good presence in the deep discount segment.
In principle, should you as consumers start to downtrade in a more meaningful form, our portfolio at Imperial is very well placed to accompany their needs. Yeah? I feel quite comfortable whatever the situation in the U.S. will develop to, we are in a good place.
Thank you very much, gentlemen.
Thank you. We will now take the next question. One moment please. It comes from the line of Gaurav Jain from Barclays. Please go ahead, your line is open.
Hi, good morning, Stefan, Lukas, Peter. A couple of questions from me. First is on your e-cigarette strategy. Clearly you're talking a lot about heated tobacco, but could you also talk about how you are thinking about e-cigarettes when you haven't yet launched disposable in the EU? In that context clearly a lot of focus on the disposable e-cigarette market in the UK right now in the media. Could you just help us understand what really is happening, and is it leading to increased cannibalization of cigarette sales in the UK market?
Sure. Gaurav, good morning. I mean, if you asked about the disposable market, the vaping overall, I mean, number one, clearly we are very committed to the vaping market because we've always said that we are gonna be consumer led, yeah. Therefore, this launch of heated tobacco in Europe, which clearly the big decision about going to the largest heated tobacco market in Europe and Italy. At the same time, our test market in France, we have blu two point zero, which is an all-new device for us, it's going very well. Like you mentioned, we are clearly also observing that a significant growth of the disposable vaping market. In the majority of the markets, interestingly, we are observing that for the time being, the disposable vaping market growth goes on top of the pod-based systems, yeah.
We actually see an acceleration, when you look at, for example, Spanish market acceleration of our pod-based, market overall. At the same time, we will clearly also study, the disposable vaping market. Some of you will hopefully remember, we do have a disposable vaping product in the U.S. It's part of our lineup on the blu brand. It's a market that we're very familiar with. Yeah.
Sure. If you know what exactly is happening in the U.K. market, if you could comment like are you know this accelerated growth in e-cigarettes because of disposables, is it leading to an accelerated cannibalization on cigarette volumes?
No. I mean, Gaurav Jain, what we've seen is I mean, again, this is a very dynamic development, as you rightly point out. It's the growth of disposable is something that has accelerated very significantly very recently. However, at the same time, we are not seeing an acceleration in the decline of the cigarette market in the U.K. The only caveat I would have, the U.K. market is quite difficult to read because you are now out of the COVID effects and the return of travel back to markets like Spain. Yeah. We don't see an underlying decline acceleration of the U.K. market of cigarettes.
Okay. A second question, just on the Australian market it was clearly a bit profit headwind in some of the past few years, but now excise taxes haven't gone up or not going up at the same pace. Do you expect a big profit recovery now beginning to happen, in on that side of the market?
I mean, Gaurav Jain, you're absolutely right. The government has chosen not to continue with its duty escalator. That is good news for the industry. At the same time, I think I wouldn't count on significant profit growth out of Australia. Our focus as a company has been to make sure that we participate market share-wise in the right way, in the market, and you would have probably picked up that our market share has grown in Australia, and that would be also the expectations when we report the end numbers. We'll make sure that we participate in the right way in the market. I wouldn't count on a profit recovery in the Australian market because the underlying volume decline in Australia does continue for the time being.
Sure. If I could sneak in one last question. Look, clearly you will have a big translation FX benefit next year because of where pound is. Could you also remind us what's the transaction benefit that happens at Imperial? Because clearly a lot of your costs are in pounds, so there should be some transaction benefit as well.
Gaurav Jain, we will have to come back to you. I mean, our transactional effect is very small, and it's covered in our normal forecasting. We would have to come back to you with the details, but I would assume that it is a minor effect in our overall business.
Okay. Well, thank you.
Thank you. We will now take the next question. One moment, please. It comes from the line of Faham Baig from Credit Suisse. Please go ahead. Your line is open.
Good morning, Stefan, Lukas, and Peter. Thanks for the question and hosting this call this morning. Could I firstly double-click on top line growth? Because I believe at the half year stage you were guiding to 0%-1%, but now expect around 1%, so that would imply a slightly better H2 performance. Is that driven by market share performance? If so, where? I believe the two markets you were losing share at H1 was Spain and Germany, the situation there. Or is it the price point? Has pricing stepped up meaningfully better than you expected, which should continue going into next year? My second question is probably just a quick housekeeping one for Lukas.
I believe the debt at the H1 stage was around 64% fixed and therefore the remainder floating. I know there's been a few changes in purchasing and raising debt over the last few months. How should we see that fixed versus floating ratio right now? What sort of interest costs are you expecting for next year? Thank you.
Okay. Let me deal with the first question, then as you rightly say, second one goes to Lukas. You're absolutely right. Top-line performance has slightly improved versus the half year. You also touched what is the key driver of that. That is pricing. We've always said at the half year that we would expect pricing to improve in the H2, and it did. That is the number one driver. As you touched on market share, and I think it's. We haven't gotten final market share that you would expect not to have on at the early October, so, but what absolutely will be the case, which we can confirm, is that 2022 will be the first year in quite a number of years that Imperial will have grown market share in its top five markets.
That it's a very material turnaround of market share performance versus where we were before. We need to see where the individual markets then end on this one. What we can see through period 11 of the year, we will, for the first time in many years, report market share growth in our top five markets.
Excellent. Just on the technical question, on the floating versus fixed. I mean, a few months earlier in the year, in the Treasury Committee, which I chair, we reviewed the situation and we adjusted the policy to more a 80%-100% fixed given the environment for the first 3-6 months. We have instructed also Treasury to make sure that we are within and, if not, at the higher end of that policy. We are going to a more fixed environment, given the policy. We will keep monitoring that and see what the requirements are. Regarding the interest costs, obviously over the last few years, we have had the benefit of lower debt through our efforts to deleverage, and a very beneficial interest rates.
It will reduce now in both senses. We will expect increased interest rates, and we have reached our target leverage, and that leverage is where we want to be, and therefore you can expect, next year, the interest rates to slightly increase over what we have this year.
Thank you.
Thank you. We will now take the next question. One moment, please. The next question comes from the line of Andrei Condrea from UBS. Please go ahead. Your line is open.
Hi. Good morning, Stefan, Lukas, and Peter. Thanks very much for taking my question. Just one from me, please. On the recent Florida settlement agreement payments decision, I assume you plan to appeal, and did you by any chance factor this in your three-year operating profit CAGR guidance? Thank you very much.
Okay. Sure. Good morning. I mean, you're absolutely right. We will appeal that decision. Yeah. I think it's also important to know that the underlying Florida court case, if you may, that was between Morales and ourselves, that we're not making any payments in Florida at this point in time. You're absolutely right. We'll appeal the decision in Delaware, and we feel quite confident that we'll be successful on this appeal. Again, will be down to the judge.
Thank you very much.
Thank you. We will now take the next question. It comes from the line of Richard Felton from Goldman Sachs. Please go ahead. Your line is open.
Thank you. Good morning, gents. First question on Germany, please, which I know has been a slightly more challenging market to fix. I appreciate we'll have to wait until November to get the final market share numbers. More broadly, have you started to see any signs of trends getting less bad in Germany? That's my first question. Then my second one, but you sound like you're very pleased with the progress you're making on Pulze in Greece and Czech Republic. As you do start to feel confident to roll that out to more markets, how should we think about the level of investment required for that rollout? I think previously you had spoken about losses in your NGP business narrowing to break even.
Should we still expect you to be on that trajectory, even if you're investing more as you're expanding into more markets? Thanks.
Okay. Sure. Let me deal with Germany first, then Lukas Paravicini will take the question on UK. So Richard Felton, on Germany, as you rightly say, I mean, final shares for Germany will only be available in November. In reality, I can answer your question. I think when you look at it, we, I don't think you will see the trajectory dramatically change for Germany. At the same time, we do see some green shoots. We've always said from the beginning, Germany would take the longest to turn around. I also want to just remind ourselves when we said we're looking at stabilizing our aggregate market share in our top five markets. It's a highly competitive industry. I don't think you will ever see all five markets reporting market share gains.
On Germany, what I'm pleased to see in Germany is that we are seeing some green shoots on some of our brands, specifically the Gauloises brand, and lest the market share in period twelve would have turned in a very different direction. It's the first time we'll see Gauloises, which is one of our top three brands, that we will grow share. Yeah. That is a big improvement in Germany. That doesn't mean that the German market share overall will turn right. There's still JPS, there's still West. But overall, I'm satisfied with the progress we're making in the market that we knew from day one would be the hardest one to turn around on market share. Yeah. I give it over to Lukas on NGP.
Yeah. Richard, good morning. Thanks for the question. Yeah, indeed. We're really very pleased with the results of Pulze in Greece and Czech Republic. I think it underpins also that we are going to be very thorough in the year-long tests and trials we have done, and the learnings we have taken now allow us to go into the largest market in Europe. That underpins also our real strong commitment in making a meaningful NGP business in the next few years. We will do so. I wanna bring you back to how we look at NGP. We will do that in a cost-effective way. It's in markets where there is an established NGP business, where we have a presence, and we can win or carve out a fair share for us in that market.
You know, it is important that Italy is a good example of that next step and how we build that. Now, to your questions. Yes, we are committed to reduce the losses of NGP by 25. You know, we're gonna end up this year roughly around GBP 100 million, which is a good progress. I think we should be very clear, and as I said, it's a tough year as well. It's not a linear progression. You want us to invest in a cost-effective way in those markets where we're launching that. We have announced Italy. I will not surprise you that's not the last market you hear from us. Therefore, you will see us supporting those launches in a measured way, but a cost-effective way.
Next year, you might expect the losses to go slightly up or go up again, around GBP 130-GBP 140, though expected to be higher than last year. Well on progress to build a meaningful business and to reduce the losses to zero by 2025.
Richard, just to reiterate a point from Lukas. I think hopefully what you get also from today's announcement and also our guidance for fiscal year 2023, where we will step up our profitability as a total business meaningfully versus this year, and we will increase our investment in NGP. That hopefully is. It should give you a sense about the confidence we have in our plan.
It does. Thank you. That's very clear. Congratulations on the good results.
Thank you.
Thank you. We will now take the next question. As a reminder, it's star one one for questions. The next question is coming from the line of Alicia Forry from Investec. Please go ahead. Your line is open.
Hi. Good morning, everyone. Thanks for taking the question. The first one, I just wanted to, since we are on the topic of Pulze, your heated tobacco product, just a little bit more detail, please, on what gave you the confidence to enter Italy, what you learned about that brand in your test market, its differentiating factors, et cetera. Secondly, how concerned are you about downtrading in Europe, with recessions looming and cost of living crisis, discussions? I noticed cigarette pack prices are over GBP 14 in a local shop. Are you taking this into consideration at all in your medium-term guidance? Thank you.
Sure. Alicia, good morning. The Pulze first, I think. We will, as you would expect, at the full year results, we'll give a much more detailed update on where we are also, because then we have the final data in for the full fiscal year. I think to answer your question as much as I can today, in principle, what our now one, more than one-year test markets in Greece and Czech Republic really show us that it's against some very well-established competitors. Our Pulze product actually attracts a meaningful number of consumers, primarily because our proposition is different to our competitors. Our device is a lot about lasting through the entire day on one charge. Like a phone, you only have to charge it in the evening.
That is, for a meaningful number of consumers, a very important feature, yeah. The other thing is also that our product, our flavor portfolio is attractive to consumers. I think what is important, we've always said about our ambition is not to be the market leader in NGP. Our ambition is about carving out our share in the market, and we clearly see that evidence strong enough out of the Greek and the Czech markets, which are big markets for heated tobacco with nicotine consumption out of heated tobacco being well above 10% of total nicotine consumption. That takes the signal that we're now launching into the largest market in Europe for heated tobacco, which is Italy, as that we are feeling very confident that we have a proposition that actually will work with consumers. Yeah.
To answer your second question about downtrading trends in Europe. Number one, I think like across all categories, the cigarette category is not gonna be immune towards the inflationary pressure that we'll see. At the same time, I think it's fair to say, and past experience would prove that the category, that tobacco is a more resilient category, yeah, when there is a high level of inflation and consumer pressure. I would add the point, when you look at our portfolio as Imperial, I think we have a portfolio of brands that is highly advantageous for the current environment.
We have an offer, a brand at every price point in the marketplace that will mean should consumers choose to downtrade and look for cheaper brands, Imperial is very well placed to have a good offer for them.
Stefan, I think it's probably also a good point to raise here that we are still in many of our markets, in an environment of very affordable products. You know, the affordability in the U.S., in Germany, in Spain is very good. This is a product that is consumed daily multiple times. It is you're constantly exposed to and desiring that product. As Stefan said, it is an industry where we have constantly done pricing, and you will see in the H2, actually, pricing will come through very strongly. That shows that we have a regular cadence of pricing, which the industry and the trade is well accustomed to.
Thank you very much.
Thank you. There are no more questions at this time. I would like to hand back over to Stefan for final remarks.
Sure. Thank you. Look, I want to thank all of you for attending this morning and for asking your questions. For us, it's been good here to share the progress we've made in transforming Imperial, and particularly in reaching this important milestone of our share buyback today. Yeah? Lukas and me and Peter, we're all looking forward to updating you on the progress at our future meetings. Yeah? Thank you, and have a great day.
That does conclude our conference for today. Thank you for participating. You may all disconnect.