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. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, 26th of 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 at relatively short notice. I am joined this morning by Oliver Tant and Matthew Phillips. We have issued a statement this morning revising our current year revenue and earnings expectations. We are clearly very disappointed that we have needed to do this. What has changed? In essence, there are two key factors that have impacted our expectations. Firstly, there is NGP, where our delivery is below expectations in the U.S. 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. 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 businesses continue 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 Alison mentioned, the main factor which has driven the need to revise our expectations has been a change in our results phasing in Australia. To provide a little background, the Australian market has experienced the rapid growth of a highly competitive value segment over recent months. The evolution of what is called the fifth 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 NGP, which we anticipated would be funded by a 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 FY19 into FY20. Our investment behind NGP has resulted in it achieving over a 6% share in its first 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 a lower level than originally anticipated. From an NGP perspective, we now expect revenues to grow by around 50% compared to the FY18 revenue of GBP 187 million. 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, an 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 substantial competitor discounting and consequently higher levels of consumer churn. Although our actions have delivered improving consumer offtake for blu, sales have been lower than expected, reflecting the category slowdown and competitor discounting, and this has impacted NGP revenues and profitability. We've continued to deliver good year-on-year growth in NGP revenues in markets outside of the U.S., particularly in Japan, where our zero nicotine variant of myblu is now available nationally.
We've made good progress with our heated tobacco brand, Pulze, following the city pilot, which began in May. In Europe, we've successfully launched new oral products in several markets and consolidated strong share positions in vaping, following the successful build-out of myblu 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 NGP 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 GBP 50 million and GBP 100 million. I now expect our results will benefit from around GBP 30 million of other gains this year, GBP 50 million lower than the GBP 80 million of other gains recognized in FY15. 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. 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. We must 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. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Gaurav Jain. Please ask your question.
Hi. Thank you for taking my question. I have a few. First of all, on the NGP EBIT, you had earlier the guidance that exiting FY 2019 it will be break even. Could you just suggest, where are we right now, and how much of the shortfall that we are seeing in EBIT is happening because NGP EBIT is running below prior expectations? The second is that, is GBP 50 million of this miss happening because of lower one-time gains, which Oliver was mentioning that last year it was GBP 80 and this year it is going to be GBP 30, while the earlier expectation was GBP 50 to GBP 100. The third is that should we just add the miss which is happening because of Australia to FY 2020 numbers? That's the message I heard from Alison. Thank you.
Thank you. 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 break-even 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. As we go through 2020, we're going to be moving much more towards a break-even position next year, as we really look to drive the profitability in vaping as well as clearly the top-line opportunity, that's a very important focus for the business as we're moving into 2020. On the one-offs, we mentioned them just in terms of making sure the updated guidance was complete in terms of the update.
It's not the driver of the miss. It's the two recent events that we're communicating today are in relation to U.S. NGP and Australia. It's important to note it. I think as Oliver just mentioned, we indicated at the half year our expectation was at the lower end of that guidance anyway. It's not a main element in terms of the earnings miss. Australia, yes, there will be the benefit in 2020 and the opportunity there for an uptick potentially. 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. 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? Just looking granularity, what was the mistake that was made on your side, and when did you learn about it? Thank you.
Well, it was a forecasting error that arose as a result of, I guess, an over-optimistic assessment of the level of pre-duty increase stock that we would sell through by the end of the year. It was in essence the assumption that we would be able to sell more of it through before the 30th of 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. Therefore, actually we're sitting with, if you like, a pregnant gain sitting in our balance sheet, which we should be able to realize in FY20.
Okay, great. 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.
Well, we mark to market. We have a number of assets which are financial assets. Essentially under accounting practice, we have a series of minority interests, which are regarded essentially as financial assets. Our requirement is to mark those to market, which is what we do. Those gains come from increases in the value of those assets. The largest component of this at the moment is Oxley.
Okay. Thank you.
Your next question comes from the line of Alicia Forry. Please ask your question.
Hi. Good morning.
Hi.
I was wondering. Yes, hello. Can you hear me?
Yes, I can. Yes.
Okay, great. Sorry, the line's 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. 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, et cetera?
Okay.
That one.
All right.
Two, can you remind us what % of your U.S. blu sales are in flavors, please?
Yeah, certainly. The line is going in and out, I'm afraid, with the first question, but I took it as broadly a question around the U.S. outlook from a vaping perspective. Is that fair?
Yes, that's correct.
Okay. All right, fine. 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. Just to look at the overall category and what's gone 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. It is affecting, clearly the category quite considerably. I think until we see the regulatory impact starting to kick in in the U.S. as the FDA starts moving, as the PMTA process, which has been accelerated, starts to kick in.
I do think it may be a bit bumpy over the coming months. You've seen, I think news flow-wise, I think almost hear something every hour out of the U.S. at the moment in terms of a state doing something, or something happening with a retailer or wholesaler. It is a volatile environment currently. There may be some short-term pain, 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, we'll 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. It will actually therefore be a much better competitive environment from our perspective, in the future.
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 blu investment differentiating myblu from that original blu 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. 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 $ offers, but really around driving the stickiness and the loyalty of consumers as well in that market.
I think we know what we're doing in that market much better now with the things we've implemented in the second half. What we really now need to do is get the environment fixed, and that's what we're working on. We've got some people speaking at the Global Tobacco & Nicotine Forum today, really outlining our thoughts around how that needs to work in the U.S. and elsewhere. Then your other question in terms of blu. We have two sorts of nicotine formulations in the U.S. market. The main one, which is our initial portfolio, is very much focused on freebase. From a freebase perspective, non-flavored is around three-quarters of our portfolio. Our biggest SKU is actually our tobacco flavor, which is 45% of our portfolio.
We also have some intense products on the market, which is the Nic salts products that have a higher SKU to flavors. Only 30% of that portfolio is non-flavored. That gives you a feel for the split.
Thanks.
Your next question comes from the line of Sanam Bagga. Please ask your question.
Thanks for the question, guys. Good morning.
Hi.
Can I also ask two 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. Are you able to just give us the market dynamics in your key markets in Europe, be it vaping, modern oral? That would be very helpful. Whether you're seeing sequential improvements in Europe as well. That's my first question. Second, if you can comment, I'd love to hear any further increments on your GBP 2 billion disposals target. I know cigars you're progressing well with in the statement, but you probably still need other disposals assets in the next six months to hit your GBP 2 billion target by May 2020. Some more detail on there would be very helpful. Thank you so much.
Okay. We'll come to the disposals question in a second. First of all, yes, on the EU. From our perspective, in terms of consumer offtake, we continue to see very good progress in consumer offtake from an EU perspective. 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. The share overall for blu 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. 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.
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 U.K., 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 very different situation. We've very much created the category in a market like Germany and Italy for that matter as well, and we still see opportunities in terms of the category growth.
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 concerns about an 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. From a category perspective, I think it's still a very good opportunity, but we need to see what we can do to actually move the category forward. As I say, our performance within the category continues to be good in Europe and growing. On disposals, Matt?
Yeah, on disposals, our target was up to GBP 2 billion by May 2020. You'll recall that we've already generated around GBP 300 million from the sale of an OTP business, plus also from Logista. The premium cigar process is working well now, and will deliver a very significant chunk of the balance. There's nothing further to update at this stage. We will obviously do so as soon as we can. The interest in the asset has been very strong.
Sorry, just quickly back to the Europe opportunity. I think you asked about oral nicotine as well. 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 launch 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 too on rapid share growth. 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. 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. All right.
I may be asking something that's already been asked. This time last year, though you did a presentation where you effectively said that the world was gonna move pretty rapidly to e-vapor and that blu was gonna be a very effective competitor, both because it had a very good brand and it was a technically good product. As I think about both the massive turbulence that's hit the U.S. visible in JUUL, 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 blu is a really good product that can sail through this new world of tobacco is completely under question. I wonder whether you, to what extent you accept that view. 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? While doing that, obviously focus on maximizing profit and cash from the conventional product. Do you invest much more heavily to try and create, frankly, much better products? A double-barrel question. Do you accept that the vision that you outlined this time last year has turned out to be wrong, particularly on the capabilities of blu? 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? I hope that question is straightforward.
Yeah. No.
You haven't already covered it.
No, it's not been covered, Adam. First of all, around the buildup of the vapor category, I think was the first point as well. There's no doubt, as I've talked about from the 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. 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 onto that need thinking about in terms of open and closed systems in particular. From a blu perspective, I think two learnings around blu.
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, though, 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 levels that smokers are looking for. That's a deliberate choice. We have a very competitive product, but I think it's fair to say that it sits within a repertoire in terms of consumers. Therefore, the opportunity to differentiate is something we're very much focused on, which I'll come back to. In terms of the brand, blu is a good brand.
It's a well-known brand in markets such as the U.S. and the U.K. Increasingly now where we've launched it, we've invested significantly behind its awareness in markets, for example, such as Germany and Japan. Where we've had blu on the market previously, we've had to do, I think, some harder yards to actually get myBlu awareness increased. That was one of the things we did specifically in the U.S. as we moved into the second half as well. Because blu was known, myBlu needed some higher awareness. As I look forward in terms of the opportunity, I've mentioned blu, and how we're thinking about the brand. 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. By product, I don't just mean the device.
I think this is something that's missing in the thinking in the category. It's got to be about the total experience around blu, and that's partly why we are now shifting our focus, not only behind retail, but also increasingly behind the blu.com channel. The reason for that is not just to drive e-commerce, it's actually to drive the stronger relationship and build the blu experience with consumers as well. 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. To be honest, it's more effective from an investment perspective going into 2020. That will be also linked with a better product, which we are targeting for launch during next year.
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. I think the other aspect to mention is we have already clearly taken a step to have optionality in other NGP products. We've got optionality in heated tobacco. We've got an excellent product there, getting great feedback from the trial in Fukuoka. We'll be building on that next year. I've already mentioned OND again, where we have innovation behind the oral nicotine delivery products, the tobacco-free products in particular, and those are starting to pick up for us quite nicely as well.
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.
I suppose the implication of that answer is that Well, previously you were guiding obviously to sort of margin inflection at this end of this year. I suppose I was implying in my question that you're going to have to really step up your investment in Next Generation Products, reduced-risk products. I think the implication from that answer is actually you're pretty happy with the progress.
Yeah
you're making, and therefore investment plans aren't going to need to change dramatically, even if results were slightly disappointing in fiscal 2019.
Yeah. I think the point I would make is that we are optimizing investment behind the level of spend we're making. 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. 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. 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. 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.
You equally said, I'm just repeating what you said, but anyone who argues that blu 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. 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 on the line of Robert Rampton. Please ask your question.
Good morning. I have three questions.
Yep.
The first is where you say good progress in consumer offtake. Could you give us a bit more detail on that? What kind of sequential monthly growth are we talking about, and how has that changed? I feel like every update we get, it's good progress in consumer offtake. My second question is you previously stated that 1H U.S. NGP revenue of $60 million was a clean base. How do we get from that to the 2H implied sequential decline? The gap seems very large in terms of expectations, and at the end of the day, September is just one of six months. My third question is can you give an update on how U.S. volumes are trending versus your previous update? You said that MSAi data, the four weeks to May 19, were down 6.4%. Those are my questions. Thanks.
Okay. From a consumer offtake perspective, I think the best data we've got is the shares that we quote and how they're evolving. I mentioned those earlier. Germany, in terms of the market share, we're up at around 29% in Germany. Italy, we're off a little bit just because we established 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 three-quarters of the market. We've got very big share positions, and that consumer offtake is continuing to evolve. Those are the numbers that we quote from the market data. In the U.S. also, you can see our offtake's increasing and our share is increasing in the U.S. through the IRI data.
Of the $60 million in the first half with the U.S., if you compare to H2, you've got to remember that in the U.S. in H2 last year, we had quite a significant IP settlement. 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 talked about at the end of last year and at the half year as well.
Apologies.
And then from-
Just on that point.
Yeah.
I was talking about in reference to the 1H $60 million number rather than the year-on-year.
Oh. Versus which number then? Sorry. The GBP 60 million versus?
The 2H 2019 U.S. NGP number versus the 1H 2019 number.
Yeah. Okay. Sorry.
Sorry, Robert, just to understand the question. What you're asking is that you're implying H2 U.S. NGP, based on the overall guidance, must be down on H1.
Yeah
to what extent was all of that in September, because it seems implied to be quite a large number. I think that was the question, Robert. Yes?
Yes. I'm trying to understand. If there is a sequential decline, what's driving that? I may be wrong in my slide number.
Yeah. We're looking at similar numbers in H2 to H1 for the U.S. What you saw was a pick-up through the half. 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. 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. 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. 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. 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. We estimate we're up about 10 basis points.
Apologies, if you could give us some more color on U.S. industry volumes. If your share is up.
Yeah. U.S. industry volumes are down just over 5%, we estimate, for the year.
Sure. Thank you very much.
Your next question comes from the line of James Edwardes Jones. Please ask your question.
Yes, morning. I'd like to understand your previous expectations a bit better, in that the sales shortfall for the group is going to be something like £150 million. As the previous question said, you did $61 million of sales of NGPs in the U.S. in the first half. 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 sort of three or four times in the U.S. in the second half compared to the first half.
James, I don't think it was that much. If you look at our guidance, the guidance we gave, we said at the upper end of our one to four range, and about 1% of which was going to be tobacco. If you roughly derive a number, you were talking about something around GBP 400 million. 50%, as I think some people have already latched onto, would imply that we're closer to GBP 300. You've got a chunk of it which relates to that, and then the other element obviously is the rephasing of Australia. Australia is a high-value market for us, and the volume therefore, in terms of the net revenue, can be quite substantial if we see rephasing elements to it. We did have quite a sizable, given the change in regime that happened in Australia, revenue opportunity. The balance of it is principally Australia.
I'm just almost trying to think about this philosophically. With hindsight, obviously, your expectations were over-optimistic. Are you going through any sort of thought processes to how you set your guidance in future and whether it would be appropriate to take a 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.
Okay.
Your next question comes from the line of Mark Haden. Please ask your question.
Good morning. Two questions. September, you talked about U.S. vape 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 $0.99 devices. I assume that's NJOY and then some competitors reacted. Did you react and recover share sequentially, or is there a sequential issue here?
The negative piece in September is around the overall category development. It's IRI data. It's only clear we haven't got all of September in yet, because we've done some extrapolation clearly from how we see this happening. Yes, that was actually for the overall category. It wasn't our data in terms of the blu performance. In terms of blu, 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 a dollar. 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. The out-of-pocket was nearer at the minimum $10, depending on the outlet. In other outlets it was around the $18 mark.
We made sure that we had sufficient out-of-pocket from the consumer in terms of driving repeat purchase. 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 in terms of them sticking with the device going forward. 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 Sana Suderson. Please ask your question.
Hello, good morning. Thanks for the questions. Two from me. One, you actually reiterated on 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? The second question basically is on your confidence on the outlook you initially provided on NGP growth of 35%-150% medium term, 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? Thank you.
In terms of nicotine market overall, there's a number of dynamics we're seeing. I think one of the things that we talked about, and what 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. That's very often two if not three products. Depending on those products, they may be substituted, or they may be additive in terms of consumption. As we know, heated tobacco tends to be a substitutive experience. You either have a heat stick or you have a cigarette. Vaping and oral nicotine tends 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 than 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. 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. That particular category has not grown as fast as we anticipated. 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 EUTPD round as well.
That's how we're seeing the nicotine market overall. 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 target range for the LTIP. That was just the LTIP guidance. 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.
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. 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&L, and that's still the model we're very much looking at going out over the next few years.
Thanks, Alison. Just one follow-up on that, on the first part of it.
Yeah.
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?
A couple of things there. 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. From a vaping perspective, we've 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.
Yeah. Thank you very much.
Your next question is a follow-up question from Gaurav Jain. Please ask your question.
Hi, thank you. We had some estimates about your NGP revenues and costs from your annual report. Clearly there is a shortfall in NGP revenues, which is going directly to the bottom line here. It's almost like you are losing GBP 200 million of EBIT on your NGP side of things. 1H 2019, you had GBP 100 million 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. Is it fair to say that you are going to reduce your investments in NGP in U.S. vapor next year, which should actually then improve your profitability?
Yeah, I think it's a good point around the U.S. at the moment. In total, in the plans, we're maintaining but reallocating the investment. 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. We currently have some ATL running in the U.S. We clearly have investment in retail programs and promotions. Those are being regularly reviewed to see whether or not they still make sense in the current environment. It's a very active situation in the U.S. currently. Clearly the PMTA process itself is absolutely critical. We're confident in terms of our position in terms of getting through PMTA.
As we get to the latter part of 2020, it may well be that we have a much clearer situation to invest behind. We will reallocate funds and optimize investment as appropriate at that point in time.
Okay. You have mentioned that in September or August, September, the vaping market has slowed down in the U.S. I don't know, but I would think that it will be certain states like Massachusetts, New York, Michigan, where even the governors are talking of implementing flavor bans or outright e-cigarette bans. 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. 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. 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-vapors are a really bad thing for them, and we really drew 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 Sanam Bagga . Please ask your question.
Thanks, guys. Thanks for the follow-up. Two very quick questions.
Yep.
Just to understand the magnitude of the decline in earnings. I guess 2% is coming from your top line, and 2% is circling, coming from profitability, which works out to be about GBP 70 million. Am I right in assuming that half of it is related to Australia, that GBP 70 million, and the other half is related to incremental NGP investment that you spoke about in the second half with regards to advertising, promoting, et cetera? That's the first quick question. The second quick question is to Oliver's earlier point around evaluating the effectiveness of the NGP supply chain. What sort of number could we potentially be looking at that could potentially hit your P&L and cash flows?
Okay. Yeah. I'm going to get Oliver to answer both of these. The first one I think is better looked at in terms of just discussing what's gone on with the 4% EPS rather than assuming the 2% from revenue, if you see what I mean.
Yeah.
I think it's easier to explain that way.
I'd say the answer pretty simplistically is it's sort of the majority of it is NGP. Smaller proportion is tobacco related and Australia related, basically. In answer to your question, that's the simple high level answer. In answers of the second question, 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 are building this business. 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. That's what we're doing in this particular area. We're talking tens. We're not talking smaller amounts.
Yeah. GBP lower tens of millions. Yeah.
Still, we feel we should flag it because it is relevant. The timing will depend on when we conclude on some of these arrangements.
Yep.
It's a combination of things that are impacting those judgments.
Thank you.
Your next question is a follow-up question from Robert Rampton. 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?
Yeah
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 break even in 2029. Thank you.
Yeah. Yes. We are. 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. 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 Nico von Stackelberg. 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 bans coming through, and you're a tobacco manufacturer, and you need to be monitoring quite closely how volumes will uptick in light of vapor bans. I'm just wondering, surely you have a number that you're thinking about in terms of consumers switching back into tobacco and what that means for your own volume. 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 to respond to this ban. I saw a number in the 60s from Reuters, 62% of people said that they think that vapor is more harmful than tobacco now.
Can 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 all I'm saying. I 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 that a dualist uses, or if they're using more than two products, I'm not sure what we'd call them, but anyway. It's something that they use very often on occasions when they can't smoke. Even though I think there may be some uptick, a small uptick, I would say, in terms of the cigarette market, I don't think it's going to be that significant. 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.
Maximum is probably that sort of % in terms of decline, but I think it's going to be way off that.
Okay.
Yeah.
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.