Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Imperial Brands Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, 26th September.
I would now like to hand the conference over to your speaker today, Alison Cooper. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us at relatively short notice. I'm joined this morning by Oliver Tance and Matthew Phillips. We've issued a statement this morning revising our current year revenue and earnings expectations. We're clearly very disappointed that we've needed to do this.
So what has changed? In essence, there are 2 key factors that have impacted our expectations. Firstly, there's NGP where our delivery is below expectations in the USA. We stepped up our investment in brand, retail contacts and consumer promotions in the second half, and our performance has been improving as a result. However, the highly competitive environment and a marked slowdown in the growth of the U.
S. Vapor category in recent weeks, following U. S. Media reports and increased regulatory uncertainty has impacted our performance. And we now anticipate delivering around 50% growth in overall group NGP revenues.
This is not what we wanted for the current year. But going forward, I believe that NGP provides the opportunity for us to deliver additive profitable growth to complement our tobacco growth. In tobacco, we're delivering good performances in Europe and the Americas, but trading conditions have remained tough in our Africa, Asia and Australasia division. Our expectations for the second half have been particularly affected by a timing issue in Australia, where we have rephased the current year benefit of duty paid inventory gains. This has resulted in a negative impact on our numbers for 2019, but with the benefit now arising in 2020.
Overall, our tobacco business has continued to perform well and will deliver modest revenue growth and improved profitability, notwithstanding the revised Australian phasing. Oliver will now provide a bit more detail around this morning's announcement before we open the call for your questions.
Thanks, Alison. From a tobacco perspective, we expect good financial performance across both our Europe and Americas divisions, with the latter also benefiting from U. S. Shipment timings. However, our AAA division has been more challenging, with tougher trading in Russia, the Middle East and Australia.
As highly competitive value segment over recent months. The evolution of what is called the 5th price tier has negatively impacted the industry pool profit this year with lower margin brands now at around 20% of the overall market. Within this context, we increased our investment behind P and S, which we anticipated would be funded by benefit from duty paid inventory around the annual excise increase in September. We overestimated the level of benefit that we would realize in the current year, resulting in a rephasing of profit from FY 2019 into FY 2020. Our investment behind P and S has resulted in it achieving over 6% share in its 1st year in Australia, which positions us well in a dynamic market going forward.
At a group level, we still expect pricing to more than offset volume declines in tobacco, delivering modest revenue growth, albeit at the lower at a lower level than originally anticipated. From an NGP perspective, we now expect revenues to grow by around 50% compared to the FY 2018 revenue of $187,000,000 And this revised expectation has been driven mainly by the U. S. Market. Growing regulatory uncertainty, including individual U.
S. State actions has prompted a marked slowdown in the growth of the vapor category in recent weeks and increasing number of wholesalers and retailers not ordering or not allowing promotion of vaping products. As highlighted in May, we've stepped up our retail engagement programs during the second half allied to more targeted brand investment at both a store level and through a new media campaign. We also increased consumer promotions given the substantial competitive discounting and consequently higher levels of consumer churn. Although our actions have delivered improving consumer offtake for Blue, sales have been lower than expected, reflecting the category slowdown and competitor discounting, and this has impacted NGP revenues and profitability.
We continue to deliver good year on year growth in NGP revenues in markets outside of the U. S, particularly in Japan, where our 0 nicotine In Europe, we successfully launched new oral products in several markets and consolidated strong share positions in vaping following the successful build out of MyBLUE distribution in markets like Spain and Germany during the early part of the year. Consumer offtake has continued to build, albeit second half NGP sales are expected to be at broadly similar level to the first half. As mentioned in the statement, given the evolving environment, including factors such as Brexit, tariffs and regulation, we're currently evaluating the effectiveness of our MGP supply chain, and this may result in contract termination costs, which are not yet currently reflected in our revised expectations. Just a few additional guidance areas I'd like to mention before handing back to Alison.
As I mentioned at the half year, we were expecting other gains to be at the lower end of our guidance range of between $50,000,000 $100,000,000 I now expect our results will benefit from around $30,000,000 of other gains this year, dollars 50,000,000 lower than the $80,000,000 of other gains recognized in FY15. And translation FX at current rates of exchange is expected to benefit earnings by around 2%. Underlying cash conversion remains strong and I expect the full year will be slightly below the 90% number in line with previous guidance. Alison?
Thank you,
Oliver. While there's no doubt this has turned out to be a challenging year, particularly given the evolving environment, It's also clear there are areas where our execution can be improved, and we're taking on board the learnings of 2019 to drive stronger delivery in 2020. As we've highlighted, today's announcement has been driven by predominantly two factors: profit phasing in Australia and NGP in the U. S. The impact in Australia is expected to reverse next year, benefiting our 2020 delivery.
And overall, tobacco is in good shape and delivering in line with our strategy. The NGP situation in the U. S. Is harder to call. We've improved our execution in the U.
S. Focused on sustainable growth, but the environment is clearly volatile and we'll need to continue to monitor and adapt. What's needed in our view is a clear regulatory framework, which supports high product standards and responsible sales and marketing behaviors. We need to be able to freely communicate the potential benefits of NGPs and address any misconceptions among consumers. And we would find a way to differentiate between the responsible and irresponsible players in the industry.
A faster PMTA process could provide the opportunity to achieve that. As we move into 2020, we are better placed to deliver additive NGP growth with a broader portfolio and stronger execution across our markets, all focused on building a sustainable and profitable business. Now I'd like to open the call to questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Gaurav Jain. Please ask your question.
Hi. Thank you for taking my question. So I have a few. First of all, on the NGP EBIT, you had earlier the guidance that exiting FY 2019, it will be breakeven. So could you just suggest like where are we right now?
And how much of the shortfall that we have seen in EBITDA is happening with all the EBITDA is running below prior expectations? Then the second is that, is €50,000,000 of this miss happening because of lower one time gains, which Oliver was mentioning that last year it was €80,000,000 and this year it is going to be €30,000,000 while the earlier expectation was €50,000,000 to €100,000,000 And then the third is that should we just add the miss which is happening in the call of Australia to FY 2020 numbers because that's the message I heard from Alison. Thank you.
Thank you. So first of all, as you might imagine, given the additional investment we've put into the U. S. And the associated slowdown in our top line delivery well associated, but the slowdown in our top line delivery, we aren't reaching a breakeven exit rate in 2019 as originally anticipated. As we look into 2020, we're very much looking to reshape the investments behind NGP across the business, not only in the U.
S. And as we go through 2020, we're going to be moving much more towards a breakeven position next year, as we really look to drive the profitability in vaping as well as clearly the top line opportunity. And that's a very important for the business as we are moving into 2020. On the one offs, I mean, we mentioned them just in terms of making sure the guidance, the updated guidance was complete in terms of the update. But it's not the driver of the miss.
It's the 2 recent events that we're communicating today are in relation to U. S. NGP in Australia. So it's important to note it. And I think as Oliver just mentioned, we indicated at the half year, our expectation was at the lower end of that guidance anyway.
But it's not a main element in terms of the earnings miss. And then Australia, yes, there will be the benefit in 2020 and the opportunity there for an uptick potentially. But I think we need to take that into the overall shape of our 2020 guidance, which we'll come back to at the end of October. But yes, there's some good uplift there.
Okay. Thank you.
Thank you. Your next question comes from the line of Nico Von Stackelberg. Please ask your question.
Hi. Can I please learn more about the error relating to the overestimated stock profit in Australia? So just looking granularity, what was the mistake that was made on your side? And when did you learn about it? Thank you.
Well,
the it was a forecasting error that arose as a result of, guess, an overoptimistic assessment of the level of pre duty increase stock that we would sell through by the end of the year. So it was in essence an assumption that we would be able to sell more of it through before the 30th September than we've been able to do. We still sit with that stock having been acquired before the excise duty increase, and we can sell it at prices that incorporate excise duty in part. And therefore, actually, we're sitting with, if you like, a pregnant gain sitting in balance sheet, which we should be able to realize in FY 2020.
Okay, great. And just secondly, on some of these adjustments that you're putting through, could you tell me what are the nature of some of these one offs? What do they relate to in particular?
In terms of what's in the 30 or
Yes. It's below the 3
to 5. Well, we mark to market. We have a number of assets, which are financial assets, essentially under accounting practice, where we have a series of minority interests, which are regarded essentially as financial assets. And our requirement is to mark those to market, which is what we do. And those gains come from increases in the value of those assets.
So the largest component of this at the moment is Oxley.
Okay. Thank you.
Your next question comes from the line of Alicia Khouri. Please ask your question.
Hi, good morning. Hi. Yes. Hello. Can you hear me?
Yes, I can. Yes.
Okay, great. Sorry, the line has been a bit in and out. I was wondering about the run rate of NGP situation persists, which it seems likely to do for at least the near term. Kind of is there a baseline number that you think your business can generate? That would be sort of the first question.
What factors really
in light
of the health scares and FDA government etcetera. That's 1. And then 2, can you remind us what percent of your U. S. Blue sales are in flavors, please?
Yes, certainly. The line is going in and out, I'm afraid, with the first question. But I took it broadly a question around the U. S. Outlook from a vaping perspective.
Is that fair? Yes, that's correct. Okay. All right. Fine.
I mean, clearly, there are a number of factors here at the moment in terms of the environment, which, as you were mentioning, make this quite volatile in terms of predictions for the market at the moment. And just to look at the overall category and what's going on, when we announced our half year results, we were looking at sort of roughly early teens, 12%, 13% growth in the closed system category. And that deteriorated to a mere 2% growth by the time we hit August. And the current month is actually running negative. So it is infecting clearly the category quite FDA starts moving, as we the PMTA process, which has been accelerated, starts to kick in.
I do think it may be a bit bumpy over the coming months. And you've seen, I think news flow wise, I think I almost hear something every hour out of the U. S. At the moment in terms of the state doing something or something happening with a retailer or wholesaler. So it is a volatile environment currently.
And there may be some short term pain. But I think as we move forward through into a regulated environment, as the FDA really kicks in, in terms of the regulation of this space, it will come out the other side, in an environment that will be about responsible players. There will only be a few of us, I think, who will actually properly get through that FDA process. And it will actually, therefore, be a much better competitive environment from our perspective in the future. But to be precise on numbers right here, right now, I think is quite difficult to do.
I am confident though that we have addressed some of our execution issues in the U. S, particularly around the brand with the Blue investment differentiating MyBlue from that original Blue investment and awareness. We've done a lot around the ATL advertising. A lot of work as well with retail that we highlighted at the half year, which has really moved us forward well. A lot of work too in terms of working on the environment with regulators.
But I think the key thing also is just really refocusing our spend, not just behind trial, which is why I don't like the promotion levels in the market and the dollar offers, but really around driving the stickiness and the loyalty of consumers as well in that market. So I think we know what we're doing in that market much better now with the things we implemented in the second half. But what we really now need to do is get the environment fixed and that's what we're working on. And we've got some people speaking at the Global Tobacco and Nix Team Forum today, really outlining our thoughts around how that needs to work in the U. S.
And elsewhere. And then your other question in terms of blue, we have 2 sorts of nicotine formulations in the U. S. Market. The main one, which is our initial portfolio, is very much focused on Freebase.
And from a Freebase perspective, non flavored is around 3 quarters of our portfolio. Actually, our biggest SKU is actually our tobacco flavor, which is 45% of our portfolio. We also have also some intense products on the market, which is the Nixolts products that has a higher SKU to flavors. So any 30% of that portfolio is non flavored. That gives you a feel for the split.
Thanks.
Your next question comes from the line of Salveen Berg. Please ask your question.
Thanks for the question guys. Good morning. Can I also ask 2 questions please? Firstly on NGP, I guess it's quite clear the U. S.
Environment is challenging, But I also expected Europe to see a bit of a sequential improvement in NGP sales. Could you are you able to just give us the market dynamics in your key markets in Europe, be it vaping, modern oral, that will be very helpful and how you're expecting whether you're seeing sequential improvements in Europe as well? That's my first question. And second, if you can comment, I'd love to hear any further increments on your €2,000,000,000 disposal target. I know cigars you're progressing well with in the statement, but you probably still need other disposals assets in the next 6 months to hit your €2,000,000,000 target by May 2020.
So some more detail on that would be very helpful. Thank you so much.
Yeah. Okay. We'll come to the disposals question in a second. So first of all, yes, on the EU. So from our perspective in terms of consumer offtake, we continue to see very good progress in consumer offtake from an EU perspective.
And in retail, we've effectively got number 1 positions in Germany, Italy, Spain and we're joint number 1 in France. U. K, we're still, I think, number 3 in the U. K, so not so good in the U. K.
But the share overall for Blue is very good in terms of the category position in each of those markets. What we're working on though is how that category develops because the category growth has not been as rapid in recent months as we would like. And therefore, there's different factors for that, which I'll come back to, but we're very much looking at how the category evolves going forward. So as I look at it, you've got some markets in the EU. We've got very big open systems, such as France and the UK.
And in those markets, I think it's very important that we continue to focus on the benefits of the closed systems and also work on product standards in those markets as well, which will help promote the closed systems over time. In Germany, I think we've got a much a very different situation. We very much created the category in a market like Germany and Italy for that matter as well. And we still opportunities in terms of the category growth. But again, we could do with some better product standards in the market and to make sure taking, if you like, the learnings of the U.
S. And some of the unregulated market, we're going to take the opportunity to really drive better product standards in that market even harder over the coming months as well. So from a category perspective, it's still a very good opportunity, but we need to see what we can do to actually move the category forward. And as I say, our performance within the category continues to be good in Europe and growing. On disposals, Matt?
Yes. On disposals, I mean, our target was up to CHF 2,000,000,000 by May 2020. We you'll recall that we've already generated around GBP 300,000,000 dollars from the sale of an OTP business plus also from Lojista. And the premium cigar process is working well now and will deliver a very significant chunk of the balance. So we there's nothing further to update at this stage.
We will obviously do so as soon as we can, but the interest in the asset has been very strong.
And sorry, just quickly back to the Europe opportunity. I think you asked about oral nicotine as well. And it is true, we're now looking at a broader portfolio in terms of the Europe NGP opportunity. We've had some fantastic success in terms of initial growth in Austria, clearly small in relation to the overall business, but even so a very important learning environment for us and have launched in Germany as well with some really good initial success to rapid share growth. So it's something we're very much building on and see a good opportunity for us in 2020 and beyond.
Thank you so much.
Your next question comes from the line of Adam Spielman. Please ask your question.
Hello. Thank you very much. Now when I ask a question, please be aware that I've been on an airplane and therefore missed frankly the press release and most of this conference call.
Okay. So maybe obviously
that's already been asked. This time last year, though you did a presentation where you effectively said that the world was going to move pretty rapidly to e vapor and that Blue was going to be a very effective competitor, both because it had a very good brand and it was a technically good product. And as I think about both the turbulence the massive turbulence that's hit the U. S. Visible in dual, but also in what you said today and the progress or relative slow progress in Europe, it seems to me that frankly, the idea that this is a good Lebloux is a really good product that can sail through this new order of tobacco is completely under question.
And I wonder whether you to what extent you accept that view? And furthermore, if I'm right, it seems to me that you have really quite a profound choice. Do you basically continue with the portfolio as it is and make the sort of progress that you're currently making? Or do you invest and while doing that, obviously, focus on maximizing profit and cash from the conventional product, Or do you invest much more heavily to try and create frankly much better products? And so this is a sort of double barrel question.
Do you accept that the vision that you outlined this time last year turned out to be wrong, particularly on the capabilities of Blue? And secondly, do you also or to what extent do you accept that? And to what extent do you think you've now got a really profound question about whether you double up on investment or quadruple up? So I hope that question is Anne.
It's not been covered, Anne. So first of all, around the buildup of the vapor category, I think was the first point as well. Most of the things we talked about when we talked about it last year was over a longer period of time, but there's no doubt, as I talked about from an EU perspective and then more recently and very recently to be honest in the U. S. Because that has been growing as a category, we've now seen a tip down in that growth.
But we actually globally still do have a very big vaping opportunity even without extensive additional growth happening in terms of vaping. It's just the shape of it, which I'll come on to and need to think about in terms of open and closed systems in particular. From a Blue perspective, I think 2 learnings around Blue. One is, I think, we said last year we had a good product. We do have a good product.
It's very competitive with the other products in the market when we test it with consumers. I have to be very clear that we do not do a product with the nicotine strength of Juul in the U. S. Deliberately, because we don't see that as a product that's for smokers, because it's at a level of nicotine that's beyond the nicotine level that smokers are looking for. But that's a deliberate choice.
So we have a very competitive product, but I think it's fair to say that it sits within a repertoire in terms of consumers. And therefore, the opportunity to differentiate is something we're very much focused on, which I'll come back to. In terms of the brand, Blue is a good brand. It's a well known brand in markets such as the U. S.
And the U. K. And increasingly now where we've launched it and we've invested significantly behind its awareness in markets, for example, such as Germany and Japan. Where we've had Blue on the market previously, we've had to do, I think, some harder yards to actually get My Blue awareness increased. And that was one of the things we did specifically in the U.
S. As we moved into the second half as well, because BLUE was known, but MyBLUE needed some higher awareness. As I look forward in terms of the opportunity, I've mentioned Blue and how we're thinking about the brand. But when it comes to the experience and the offering, it is absolutely something that we have actions that are being significantly progressed to build more differentiation into the product. And by product, I don't just mean the device.
And I think this is something that's missing in the thinking in the category. It's got to be about the total experience around Blue. And that's partly why we are now shifting our focus not only behind retail, but also increasingly behind the blue.comchannel. The reason for that is not just to drive e commerce, it's actually to drive the stronger relationship and build the blue experience with consumers as well. So that's a very important aspect of the work we've been doing over recent months and will be very much part of the focus.
And to be honest, it's more from an investment perspective going into 2020. And that will be also linked with a better product, which we are targeting for launch during next year. And we're very actively progressing at the moment all aspects of the design of that product in terms of its functionality, but also in terms of its look and feel in terms of the device. And then I think the other aspect to mention is we have already clearly taken the step to have optionality in other NGP products. So we've got optionality in heated tobacco.
We've got an excellent product there, getting great feedback from the trial in Focal Worker. We're building on that next year. And I've already mentioned O and D again, where we have innovation behind the all nicotine delivery products, the tobacco free products in particular, and those are starting to pick up for us quite nicely as well. So overall, I think there's a lot of learnings to take into 2020. But as I look at our portfolio and our execution of that portfolio moving into 2020, I feel that we've got something there that can really work for us.
And I suppose the implication of that answer is that you don't well, previously you were guiding obviously to sort of margin inflection at this end of this year. But I suppose I was implying in my question reduced risk products. But I think the implication from that answer is actually you're pretty happy with the progress you're making. And therefore, investment plans aren't going to need to change dramatically even if results were slightly disappointing in fiscal 2019?
Yes. I think the point I would make is that we can we are optimizing investment behind the level of spend we're making. So I'll give you an example. I have a huge frustration with the level of trade take on vapor products because of the history of their evolution. And that's something we are actively addressing.
We have been actively addressing, but we're tackling even harder now because it's not money that works for us. And therefore, I see a significant reduction in those trade margins going into 2020, which we can reapply to some of our more consumer facing activities and particularly around some of the online engagement and work with consumers. So there's definitely a reshaping of that investment, but it's not that I'm sitting here thinking we need to increase that investment. It's substantial already.
And you're equally said, I mean, I'm just repeating what you said, but anyone who argues that blue just isn't good enough is thinking about it in the wrong way and that would just be the wrong takeaway from this morning.
It would be the wrong takeaway from this morning. I think particularly you need to look at our leading positions in the European vaping markets, in Germany, in Spain, in Italy, in France that indicate that we've got a good product. So it's definitely a competitive product. What I want it to do is move ahead and be more differentiated.
Okay. Thank you.
Your next question comes from the line of Robert Rempton. Please ask your question.
Good morning. I have three questions. Yes. First, firstly, you say good progress in consumer update, self take. Could you give us a bit more detail on that?
What kind of sequential monthly growth we're talking about and how has that changed? I feel like every update we get, it's a good progress in consumer uptake. Then my second question is, you previously stated that 1H US NGP revenue of $60,000,000 was a clean base. How do we get from that to the kind of 2H implied sequential decline? The gap seems very large in terms of expectations and at the end of the day, September is just 1 of 6 months.
And then my third question is, can you give an update on how U. S. Volumes are trending versus your previous update? So you said that, I think, MSAI data, the 4 weeks to May 2019 were down 6.4%. And
percent? Okay. From a consumer offtake perspective, the best data we've got is the shares that we quote and how they're evolving. So I mentioned those earlier. Germany, in terms of the market share, up at around 29% in Germany.
Italy, we're off a little bit just because we've reestablished the market effectively, but we're still in the mid-50s in terms of share. And the category continues to move forward. Spain, we're around 3 quarters of the market. So we've got very big share positions and that consumer offtake is continuing to evolve. And those are the numbers that we quote from the market data.
In the USA also, you can see our OpEx increasing and our share is increasing in the U. S. Through the IRI data. Of the €60,000,000 in the first half with the U. S, if you compare it to H2, you've got to remember that in the U.
S. In H2 last year, we had quite a significant IP settlement. So there's still progress in H2 from a U. S. Perspective, but it's not evident at the top line numbers because of the significant IP settlement, which we've talked about at the end of last year and at the half year as well.
That's probably the one I
was talking about in reference to the 1H €60,000,000 number rather than the year on year.
The 60 versus which number then, sorry? The €60,000,000 versus?
So the 2H19 U. S. NGP number versus the 1H19 number.
Yes. Okay. Sorry.
Sorry, Robert. Just to understand the question. So what you're asking is that you're implying H2 U. S. NGP based on the overall guidance must be down on H1.
And I think your question was that was what extent was all of that in September, because it seems implied to be quite a large number. I think that was the question.
Rob, yes?
Yes. I'm trying to understand. If that there is a sequential decline, what's driving that? I may be wrong in my slide number.
Yes. So I mean we're looking at similar numbers in H2 to H1 for the U. S. And what you saw was a pickup through the half, but we did anticipate a significant ramp up towards the back end of the half because that's when all the different investment activities were coming on stream. As I mentioned earlier, there was a slowdown in the growth of the category that was quite marked in August, which already impacted that.
But then the lion's share of this impact has come through in September, where it's not just market dynamics in terms of the category and the share position that are impacting. But also, clearly, we've got wholesalers and retailers who are just not taking stock either, which is a very significant part of that because as we're ramping up our share, we would expect clearly to be selling that through and it's not happening. Last question was on the U. S. Share.
Again, on the U. S. Share data, I think we've got some improving data when it comes to the total market size when you look at Nielsen. But when it comes to our market share, it's still way off and our share is increasing year on year contrary to the externally disclosed data. So we estimate we're up about 10 basis points.
And apologies if you could give us some more color on U. S. Industry volumes, so if your shares up, then it's
Yes. Yes. U. S. Industry volumes are down just over 5% we estimate for the
year.
Your next question comes from the line of James Edward Jones. Please ask your question.
Yes, good morning. I'd like to understand your previous expectations a bit better. The sales shortfall for the group is going to be something like GBP 150,000,000 As the previous question said, you did GBP 61,000,000 of sales of NGPs in the U. S. In the first half.
So how if NGPs are the only real reason for the sales shortfall, what were you budgeting to do in the second half? Because on that evidence, you must have been budgeting for your sales to go up to 3 or 4 times in the U. S. In the second half compared to the first half?
James, I don't think it was that much. I mean, if you look at our guidance, the guidance we gave, we said at the upper end of our 1% to 4% range and about 1% of which was going to be tobacco. So if you sort of roughly derive a number, you were talking about something around the €400,000,000 50% as I think some people have already latched onto would imply that we're more we're closer to €300,000,000 So you've got a chunk of it which relates to that. And then the other element, obviously, is the rephasing of Australia. Now Australia is a sort of high value market for us.
And the volume, therefore, in terms of net revenue, can be quite substantial if we see rephasing elements to it. And we did have quite a sizable, given the change in regime that happened in Australia, our revenue opportunity. So the balance of it is principally Australia.
Good. So I'm just I was trying to think about this philosophically. With high side, obviously, your expectations were overoptimistic. And are you going through any sort of thought process as to how you set your guidance in future and whether it would be appropriate to take more sort of prudent stance?
We are looking at the basis for our guidance and we will give you a little more color around this when we get to the prelims.
Your next question comes from the line of Mark Holden. Please ask your question.
Yes, good morning. Two questions. September, you talked about U. S. Freight being negative.
I think that was an imperial point, not an industry point, but forgive me if I've misunderstood. I'm curious as to what share is doing sequentially. You talked a little bit about the 99% devices. I assume that's Enjoy and then some competitors reacted. Did you react and recover share sequentially?
Or is there a sequential issue here?
Okay. So the negative piece in September is around the overall category development. I mean, it's only it's IRI data. It's only clearly we haven't got all of September in yet because we've done some extrapolation clearly from how we see this happening. But yes, that was actually for the overall category.
It's not it wasn't our data in terms of the blue performance. In terms of blue, we are seeing a growth in share. It's continued to make progress in terms of share because ultimately, we did respond with a device offer at $1 but it's only what we call a dry kit with no pods associated with it. So therefore, the consumer has to buy the pods with it as well. So the out of pocket was near at the minimum $10 depending on the outlets in other outlets.
It was around the $18 mark. So we made sure that we had sufficient out of pocket from the consumer in terms of driving repeat purchase Because our history, when we tried a dollar offer with a full wet kit, historically was that we just didn't drive that consumer loyalty. It was too cheap terms of them sticking with the device going forward. So we have done the dollar offer and that has helped from a dry kit perspective the overall progress of our share in the market.
Extremely clear. Thank you very much.
Your next question comes from the line of Sanath Sudarsan. Please ask your question.
Hi good morning. Thanks for the question. 2 from me. 1, you've actually reiterated in the call quite a few times that your pace of growth has actually been better than most categories or markets. Does this imply that you are saying or suggesting that the overall nicotine market has actually slowed versus your expectations earlier?
And the second question basically is on your confidence on the outlook you've initially provided on NGP, growth of 35% to 150% medium term. And also on the tobacco growth algorithm on revenues and profits over the medium term, how do you see this evolving? Or are you still confident of maintaining this over the medium term?
Okay. In terms of nicotine market overall, I mean, there's a number of dynamics we're seeing. I think one of the things that we talked about or I talked about in various presentations earlier in the year with the research we did with consumers is there's no doubt that consumers are now using a repertoire of nicotine products. And that's very often 2, if not 3 products. And depending on those products, they may be substituted or they may be additive in terms of consumption.
So as we know, heated tobacco tends to be a substitutive experience. You either have a heat stick or you have a cigarette, whereas vaping and oral nicotine tend to provide opportunities for additional occasions of using nicotine because you can use them when you can't smoke. Clearly, vaping, you have more opportunities in oral nicotine. There's really no constraints at all as to when you can use oral nicotine, which is one of the attractions of the product for consumers. So overall nicotine market wise, there are various areas that are growing currently and we do still see nicotine markets in growth overall.
I would say though the specific point I was making was around the closed system vaping category, which that particular category has not grown as fast as we anticipated. And some of the reasons for that are around the prevalence of open systems in markets. Sometimes it's around affordability. And therefore, there are actions we're looking at in terms of shaping that environment going forward, particularly in relation to product standards and regulation, which we're working with governments on and will clearly get picked up as well, we believe, in the next EU TPD round as well. So that's how we're seeing the nicotine market overall.
But I would say if you're looking at that now versus just looking at combustible tobacco market a couple of years ago, there are a lot more opportunities in terms of growth products within that. From an NGP outlook in terms of growth, I've been very clear all along that the LTIP guidance that we gave around compound growth rates was just our LTIP. They're not baked into our plans in terms of the upper end of that actual guidance not guidance, target range for the LTIP. That was just the LTIP guidance. And the LTIP guidance was set with clearly a huge ambition behind it at 150% compound end, but also recognizing the volatility in this space in terms of delivery at the lower end.
So with the results for this year, we're clearly going to be within that overall range, but clearly not at the upper end of it next year, unless something very significantly different happens. And then finally, on tobacco growth, we're still very much seeing a tobacco market that's very resilient from an Imperial perspective. I've been talking about modest top line growth, which then multiplies down into better operating profit growth lower down the P and L. And that's still the model we're very much looking at going out over the next few years.
Thanks, Allison. Just one follow-up on that on the first part of it. Yes. From what I understand is, it's actually for Imperial, the problem currently is the mix of the brands in the portfolio you have in NGP rather than actually doing better within the categories you're already exposed in. Is that a fair comment?
I think a couple of things there. I mean, yes, we are actually looking at driving the optionality we created in heated tobacco and in oral nicotine. We're seeing, as I mentioned earlier on in the call, some success, particularly with oral nicotine at the moment in Europe. The beginnings of, I think, quite a nice category for us. And we're getting the learnings out of Japan at the moment as we look at how we take heated tobacco forward.
But from a vaping perspective, we still got some really good shares in terms of our progress with the closed category. But we just need to work, as I say, on moving that forward more in terms of the category growth, which I think we can do.
Okay. Thank you very much.
Your next question is a follow-up question from Gaurav Jain. Please ask your question.
Hi, thank you. So we had some estimates about your NBP revenues and costs in your annual report. And clearly there is a shortfall in NBP revenues, which is indirectly to the bottom line here. So it's almost like you're losing $200,000,000 of EBIT on your NGP side of things. And 1 ish 2019 you had $100,000,000 extra investment on NGP.
We know that e cigarette market in U. S. Is going to slow down because the FDA has not even put the flavor bans in place. So then is it fair to say that you are going to reduce your investments in LGP in U. S.
Wafer next year, which should actually then improve your profitability?
Yes. I think it's a good point around the U. S. At the moment. I mean, in total, in the plans, we're maintaining but reallocating the investment.
But I think at the moment in the U. S, we're having to just be very much on top of what's going on and making those investment calls as we see the market evolving. So we currently have some ATO running in the U. S. We clearly have investment in retail programs and promotions, but those are being regularly reviewed to see whether or not they still make sense in the current environment.
So it's a very active situation in the U. S. Currently. But clearly, the PMTA process itself is absolutely critical. We're confident terms of our position in terms of getting through PMTA.
So as we get to the latter part of 2020, it may well be that we have a much clearer situation to invest behind. But we will reallocate funds and optimize investment as appropriate at that point in time.
Okay. And you have mentioned that in September or August, September, the vaping market has slowed down in the U. S. And I don't know, but I would think that it will be certain states like Massachusetts, New York, Michigan, where the governors are talking of implementing flavor bans or outright e cigarette bans. So in those states or those cities where e cigarette bans are coming in, are you seeing any improvement in cigarette volumes?
I think it's too hard to call at this point in time. I mean, I've seen yes, we've talked about this as a hypothesis. It could have some impact on the cigarette volumes. And I think maybe not so much because of bans necessarily, although clearly that would have an impact. But also, I think what's concerning me is there's a lot of consumer misinformation out there at the moment, that consumers are now thinking that e cigarettes are a really bad thing, e vapor is a really bad thing for them.
And we really do some conclusions out of these recent respiratory disease issues and deaths coming out to reassure consumers around vaping products made by responsible companies because otherwise we're really missing out on a potential public health benefit here.
Sure. Thank you.
Your next question is a follow-up question from Farhan Bagh. Please ask your question.
Thanks guys. Thanks for the follow-up.
2 very quick questions. Just to understand the magnitude of the decline in earnings. So I guess 2% is coming from your top line and 2% is coming from profitability, which works out to be about €70,000,000 Am I right in assuming that half of it is related to Australia, that €70,000,000 and the other half is related to incremental NGP investment that you spoke about in the second half with regards to advertising, promoting, etcetera? That's the first quick question. And the second quick question is to Oliver's earlier point around evaluating the effectiveness of the NGP supply chain.
Now what sort of number could we potentially be looking at that could potentially hit your P and L and cash flows?
Okay. Yes. I'm going to get Oliver to answer both of these. But the first one, I think, is better looked at in terms of just discussing what's going on with the 4% EPS rather than assuming the 2% from revenue, if you see what I mean. Yes.
If you could just explain that way. Well, I've
got to say that the answer pretty simplistically is sort of the majority of it is MGB, smaller proportion is tobacco related and Australia related basically. So I mean that's in answer to your question, that's the simple high level answer. In real answer to the second question, we obviously there's a whole lot going on in the context of regulation, in the context of macroeconomic trading relationships between differing parties, that basically is influencing our judgment around what is the best supply chain structure to have. We're also we are building this business. I mean, we shouldn't forget, we've seen 50% growth in it.
And as it builds, we're getting the opportunity to drive effectiveness by developing new relationships with people who are able to perform better on our behalf. So that's what we're doing in this particular area. We're talking tens. We're not talking more
Yes, that was lower tens of 1,000,000, yes.
So but still, we feel we should flag it because it is relevant. The timing will depend on when we conclude on some of these arrangements. But we are it's a combination of things that are impacting those judgments.
Thank you.
Your next question is a follow-up question from Robert Brampton. Please ask your question.
Thank you for taking my follow-up. Are you profitable with NGPs in any market or close, I. E. Those EU markets where you're number 1, are you close? I'm asking as I'm trying to understand the basis for your comments that you'll reach breakeven in 2020.
Yes. Yes, yes, we are. And particularly in markets where we haven't got the trade margin issue to the same extent, as we have, for example, in the U. K. And in the U.
S. So Germany, for example, Japan, we've got profitable models in those markets.
Great. Thank you.
Your next question is a follow-up question from the line of Mikko von Sokolberg. Please ask your question.
Well, a previous follow-up did ask the question, but I just want to dig in a bit more detail on with the vapor bands coming through and you're a tobacco manufacturer and you need to be monitoring quite closely how volumes will uptick in light of vapor bands. And I'm just wondering, surely you have a number that you're thinking about in terms of consumer switching back into tobacco and what that means for your own volume. So I'm just kind of confused that it's too early to call. Surely, you guys are looking at this very closely and have some sort of a clue about how consumers are going respond to this ban. I mean, I saw a number in the 60s from Reuters, I think it was 2% of people said that they think that vapor is more harmful than tobacco now.
So that's just yes, could you just explain why is it too early to call and how are you thinking about it right
now? We can hypothesize, but there's no decent data as yet on it basically is what I'm saying. I'll go back to a comment I made earlier as well, which you've got to bear in mind, which is vaping is very often part of a repertoire The dualist uses or there are more than there's more than 2 products, I'm sure we call them, but anyway. But it's something that they use very often on occasions when they can't smoke. So even though I think there may be some uptick, small uptick, I would say, in terms of the cigarette market, I don't think it's going to be that significant.
And if you look at the data that disaggregates the market size declines in the U. S. Currently, just over 1% of that is related to the vapor effect on the market. So maximum is probably that sort of percent in terms of decline, but I think it's going to be way off that.
Okay. Thank you.
There are no further questions at this time. Please continue.
I'll just say thank you for joining us today and for the questions.
Thanks.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.