Good morning to everyone and welcome to our Full Year Results Presentation. For me, it's been great to meet many of you in person for the first time in such a long period of time, after communicating for all the last 12 months in a virtual way. At the same time, I of course want to welcome everyone who is also joining us still online today. Here in the room I have with me our Chief Financial Officer, Lukas Paravicini, and Peter Durman, who you hopefully know for a long time, as our Head of Investor Relations. Today, I will start by explaining how we're working at pace in implementing our new strategy and how this is beginning to translate into operational and financial performance.
Now, Lukas will then take you through the financial results, and then I will return with some insights into the very significant positive change that is now underway through the multiple initiatives at all levels of the business. Then I will conclude with our priorities for fiscal year 2022, and after that, I look forward to your questions. Now, put simply, the goal of our strategy is the transformation of Imperial into a business capable of delivering reliable, attractive returns year in, year out over the long term. A business that is built to last, just like a building, needs strong foundations. This is what 2021 has been about, digging deep and firm foundations to support future growth. This is our strategy wheel that you see here from the Capital Markets Day in January of this year.
Now, understandably, the focus back then was on the top three segments of the chart, what we call the pillars, shown in orange here. However, just as important are the bottom three segments, the enablers. These are the hidden foundations that will support the strategic pillars. In the past year, we've made progress in putting the consumer at the center with the appointment of our first Chief Consumer Officer and the creation of a Group Consumer Office. Now, this structural upgrade leverages the full marketing insights and innovation capabilities of our global organization and has already enabled improvements to our decision-making. We have completed a refresh of our leadership team, which we'll come to in a moment. This has introduced a much more rigorous performance management process and in turn, more targeted allocation of scarce resources.
We have introduced a simpler structure, for example, by reducing the number of market clusters, which is delivering efficiencies in line with our plans. Taken together, these new foundations are already helping us execute on the three priorities we laid out to you in January. You will have all heard about the 80-20 rule. Well, our first priority at Imperial is more like a 70-30 rule. This is our new laser-like focus on five combustible markets out of our 120 markets which deliver around 70% of our profits. These big five markets also generate the highest profitability per stick or per point of share. Therefore, losing share in these markets weakens our financial performance and undermines our sustainability. Conversely, any market share gains create a positive multiplier effect for us.
Later, we'll explain how this new strategic focus is being operationalized on the ground, and the early signs are encouraging, but there's still a lot to do. Our second priority is the creation of a focused next generation product business led by consumer preferences and needs. Now, to be clear, we're more committed than ever to making a meaningful contribution to harm reduction over time. However, as the smallest of the global tobacco businesses, our approach needs to be more focused, to be sustainable, and it needs to build on firm foundations. I will talk later in more detail about the progress we're making here. The third priority, creating value from our wider portfolio, is one you will hear about in future presentations. Here, we've also built the foundations.
This includes the creation of a new AAA region with a strong emerging market focus led by Paola Pocci, who joined us from Procter & Gamble's China business. Now, on this slide, you see a great demonstration of the pace of change and how we have strengthened the leadership team with eight new hires in the past 18 months. We've attracted high quality talent from blue chip organizations to lead our transformation. We filled important gaps in strategy and in people and culture while adding deep FMCG experience to strengthen our sales, marketing, and consumer insights to blend with our existing strong tobacco expertise. It is a truly diverse team now with no fewer than eight different nationalities represented. This diversity is already bringing us a fresh perspective, critically for industries and businesses facing change. These foundations are leading to encouraging improvements in our operational performance.
In particular, our sharper focus on the top five markets is beginning to stabilize our aggregate market share. Now, this follows consecutive years of double-digit basis points decline. In an industry like ours, where volume is declining, long-term market share is perhaps the best indicator of underlying sustainability. For Imperial, the key measure is the top five share as a portfolio of businesses. Now, our ambition is not to necessarily grow share in all these markets. Our first priority is to stop being the number one share donor. In any given year, you may continue to see one or more of these markets report temporary declines because of factors beyond our control, such as regulation, excise, or unexpected competitor behavior. There is no single explanation for this encouraging progress that you see here. This is about many different conscious management actions.
Of course, the hard work of 28,000 colleagues who have been mobilized behind a new focused strategy and who have performed brilliantly in a year still characterized by COVID restrictions. As I said, these are encouraging early signs, but we do not take anything for granted. Now turning to our financial performance. We now manage this business using a balanced dashboard, which measures revenues, cash generation, financial flexibility, and the effectiveness of our capital allocation. It's great to be able to report to you that on this year's dashboard, all lights are green and all arrows point in the right direction. Now, there are of course, some one-offs, as you would expect any business of our size and complexity. However, what's really pleasing is that the positive evolution of our financial is in large measures linked to strategic management decisions and the underlying performance of the company.
The increase in tobacco revenue reflects our strong pricing, maintained at the same time working hard to arrest the market share declines. The increase in adjusted operating profit reflects both this strength in tobacco and our strategic decision to reboot our NGP business on a more sustainable footing. The growth in EPS would have been more closely following the percentage gain in adjusted operating profit were it not for the increased tax rate as previously guided. All of this has translated into strong cash generation, enabling a reduction in leverage, which increases our future financial flexibility and underpins a 1% growth in the dividend. Finally, our more focused strategy is already leading to an improvement in return on invested capital. This reassurance, I hope, of our extremely disciplined approach to the way we put your money to work.
I will now hand over to Lukas to take you through the financials. Thank you.
Thank you, Stefan. Good morning, everyone. It's great to be here with you. Since joining in May, I have been busy getting to know the business, and I might start by sharing my observations of the first six months. I am pleased to report that what attracted me initially to the opportunity at Imperial has been validated by my time within the business. Imperial is a high-quality company with some good brands, with attractive market positions, and the potential to leverage its strong retail partnerships. However, what excites me is the opportunity to transform the business, and I believe the plan the team has set out can unlock significant value in the coming years. It is also a highly cash generative business, which can support investment in improving the business as well as attractive shareholder returns. My priorities are clear, and they start with cash.
My role will be to optimize the sustainable free cash flow generation from the business. The finance team can play a larger role in supporting the delivery of our strategy. Like other support functions at Imperial, we have an opportunity to modernize our ways of working. This will support more effective decision-making. This is not rocket science. It is about adopting new working practices and being a more effective business partner. I'm also committed to promoting a transparent engagement with all our stakeholders. To this end, we have today provided you with the full financial statements to the accounts, so they are available as we meet with investors over the next few weeks. These are key priorities for me as a CFO, as I work myself into the role.
To come back to the key metrics that Stefan outlined, our business has performed well in 2021, with solid growth driven by strong tobacco pricing. These financial results are after absorbing some adverse events this year. Such as the settlement for the U.S. state litigation and the changes in the Australian excise regime. We have delivered slightly ahead of guidance despite these factors and while undergoing significant change program. We have grown organic revenue, profit, and return on invested capital. The improvement in ROIC was driven by the increased profit and a more rigorous approach to managing our capital base, helped by the sale of the Premium Cigar Division.
Our free cash flow of GBP 1.5 billion was after the unwind of favorable working capital movement last year of GBP 0.7 billion, and we made good progress in reducing debt towards the lower end of our target gearing range. Overall, net revenue grew by 1.4% at constant currency. Total volumes declined by 2.9%, slightly better than the level we've been used to in recent years. COVID continues to affect the market size with changes to buying patterns across channels and markets. We have provided some market-level color in the appendices. Tobacco net revenue grew by 1.5%, with price mix of 4.4% driven by strong tobacco pricing and strong growth in our U.S. mass market cigar business. Overall, tobacco delivery was impacted by the excise changes in Australia.
Excluding these, our tobacco net revenue grew 2.7% with an underlying price mix of 5.6%. Our NGP net revenue was broadly stable, driven by our decisions to withdraw from certain markets as we reset our NGP business. Excluding the market exits, our NGP net revenue grew 8.6%. Adjusted operating profit grew by 4.8% at constant currency, with our performance impacted by four main areas. Our underlying delivery was solid, supported by strong tobacco pricing, market share gains, and growth in our U.S. mass market cigar business. We absorbed an GBP 88 million headwind from lower Australia stock profits, and GBP 52 million from the U.S. state litigation charge.
At the same time, we stepped up investment by GBP 40 million behind our five priority markets and in new ways of working. This is about building the foundation for the future. In NGP, we reduced costs as we focused our investment more tightly and versus a comparator that was adversely affected by inventory write-downs. Logista also made a positive contribution. Like other businesses, we make certain adjustments to our IFRS numbers to aid performance comparison over time. I want to be very open about how we approach these adjustments. First, on restructuring, we have announced a restructuring program to deliver our new strategy. The actions we have already taken this year will drive the savings in line with our plans, with a full annualized savings of almost GBP 70 million by the end of fiscal year 2022.
We have further initiatives planned for the coming year to realize the balance of savings in line with our plans. Our overall restructure costs are also in line, and we have completed our legacy cost optimization programs this year. Our NGP strategy included a comprehensive review of our NGP business and its asset. This has led to GBP 180 million of NGP intangible assets impairment, with GBP 73 million included in restructuring costs and GBP 45 million included in amortization and impairment. We will continue to provide transparency of adjusting items and seek a greater alignment between reported and adjusted operating profit where appropriate. We grew EPS by 2.8% at constant currency, reflecting our profit delivery and lower interest charge as we reduced debt levels.
Our confidence in our cash flow, our strong cash flows, provided us with the opportunity to proactively repay early the $1.25 billion July 2022 bond. This reduces gross debt and has no impact on our net debt. As outlined previously, we have continued to face upward pressures on our tax rate and expect this to continue into fiscal year 2022. Our cash performance remains strong with GBP 1.5 billion of free cash flow generated in 2021. This does not include the proceeds from the Premium Cigar sale. As expected, our cash delivery was impacted by the unwind of last year's GBP 0.7 billion working capital upside, largely due to duty collection timings at Logista and the U.K. Our underlying cash conversion remains strong with good progress on working capital management.
Our CapEx was reduced last year as we paused some projects pending our strategic review. I expect CapEx will return this year to our usual levels of around GBP 300 million per annum. As I mentioned earlier, cash will be one of my key priorities. At the end of 2021, our gearing ratio was 2.2 times or 0.5 times lower than the start of the year. This has been driven by three factors as shown here, with about 40% of the improvement driven by our underlying cash generation. Capital allocation is important to me and the company, just as I know it is to our equity and debt investors. It is an essential value driver, and our four capital allocation priorities are designed to do just that. Our first priority is to invest in the strategy to create a sustainable business with growing cash flows.
Second, it is to strengthen the balance sheet, and I met recently with our credit rating agency who reinforced the importance of debt reduction to underpin our investment grade rating. Third, we are committed to providing reliable cash returns through the dividend. Fourth, we will return surplus capital once the balance sheet is sufficiently robust. We are making good progress, as you can see here, and we will provide more color on capital returns as soon as we move closer to our target leverage. 22 will be the second year of our two-year strengthening phase, where we will step up investment behind our priority combustible markets in our NGP trials and our new ways of working. Our outlook for this year is consistent with this five-year plan.
At constant currency, we expect to deliver net revenue growth at a similar rate to the 1.4% we achieved this year. This reflects some mixed pressure as COVID-19 restrictions are lifted. Adjusted operating profit is expected to grow slightly slower than net revenue as the U.S. state litigation settlement cost will not be repeated this year and with the underlying margin held flat by the step-up in investment in line with our plans. We expect performance will be weighted to the second half, reflecting the phasing of investment, the prior year comparator, and timing of COVID unwind. While there is a risk of inflationary cost pressure, as a tobacco company, we are very well placed to manage them through our purchasing strategy, high gross margin, and pricing. A higher tax rate of around 24% will be offset by a lower finance charge.
As I have reflected on 2021, I would summarize three main areas of progress this year. First, we have made a good start to building the foundations for the second phase of our plan, accelerating returns from 2023. Second, we have undertaken work to strengthen our performance with initial promising signs, but more to do. Third, we have made good progress in strengthening our balance sheet, which will give us greater flexibility and a stronger future footing. Thank you very much. With that, I'll hand over back to Stefan.
Thank you, Lukas. I mean, in this section of the presentation, I want to give you more of a granular feel for the distinctive culture we're building at Imperial and how our people are implementing the strategy. Now, first, I would like to remind you that we're now approaching the end of year 1 in a 5-year strategic plan. As you know, it's a strategy of 2 unequal halves. The first 2 years are about foundation building, creating the consumer mindset, enhancing our performance management processes, and creating a simplified, efficient structure. We anticipate the acceleration returns to start in earnest during the subsequent 3-year period from fiscal year 2023. Across Imperial, it has felt really like an extremely busy and purposeful time in the last 12 months.
Now, since I last presented to you in May, still virtual, COVID travel restrictions have been easing in many of our markets, and I have taken the opportunity to meet face to face with consumers, customers, and our people on the ground, both in some of our key combustible markets and in the trial markets for Pulze and the new blu proposition. Now, this is something I have found incredibly energizing, especially after the COVID core period. I love hearing the passion of our consumers for our products. I love hearing from our customers about how they feel Imperial is supporting them. I love to hear from our people about their new ideas and their efforts for the business in what, thanks to the pandemic, clearly still has been a difficult period of time for many of our people.
Our people have a huge energy and a huge hunger to win. When you're on the ground and experience it, you can really feel it. Now, one of the key priorities as a leadership team is develop a stronger common culture, which will enable our people become even more successful. Now, an important fact about Imperial is that while its brands have a deep heritage, as a company, as a global force in tobacco, we are actually quite a young company. Imperial became an independent listed company only 25 years ago, and all our acquisitions have been more recently. This means that Imperial has not had the time to develop a deep common corporate culture throughout all its subsidiaries.
Creating the right culture is, for me, an essential part of this foundation-building phase of our strategy, and a shared purpose and value set will make a reality of the critical enablers I discussed earlier, consumer centricity, simplified operations, and a performance-driven way of working. When we set out our strategy in January of this year, we said we were developing refreshed purpose and vision statements and behaviors. During the year, we've had conversations with people in the business at all levels and in all regions to gather their thoughts, and we got some really great ideas and great insights. Last month at Imperial's first ever all-staff conference, we launched our new purpose, vision, and behaviors, which taken together are our new guiding principles. The conference was highly interactive, and we received really encouraging feedback from our people.
In the coming year, we'll be putting in place a variety of activities to start properly embedding this new culture. On our website in our communications, we now describe our purpose as forging a path to a healthier future for moments of relaxation and pleasure. Our vision is to build a strong challenger business powered by responsibility, focus, and choice. I think there are some important ideas contained in these statements, and I'm really happy to discuss them further in our Q&A section. For now, I would like to highlight one concept that is particularly important for me, our vision to become a strong challenger business. I strongly believe that as the smallest of the big four tobacco players, the only way we will be regarded as the highest quality of the four players is by operating as a challenger.
This means being agile, spotting value pools with the players out to our competitive strengths, acting as a fast follower where appropriate, and creating competition and choice in the markets. Being a challenger business means challenging on behalf of our consumers. There are 1 billion adult smokers in the world, and I think it's important that they are appreciated as active citizens, diverse individuals, and informed consumers who deserve better choices. In a moment, I'm going to talk about some of the newer choices we are offering consumers, both in combustibles and NGP. Now, being a challenger is also about challenging on behalf of our customers from the multinational key accounts to the many small family-run tobacconists that we serve. I know from my visits in the past few months, they want a strong challenger to provide choice in our industry.
Finally, being a challenger means being willing to challenge our own business model. We know that we're never going to be the number one in quantity of in-house R&D spend. Where I think Imperial can be number one is in the quality of our third-party relationships as we build a sustainable NGP ecosystem. This is an area where I intend to provide more color at future presentations. ESG is another area where we're building new foundations. Turning our aspiration of a healthier future into reality is really important to me. We're committed to providing adult smokers with potentially reduced harm products. We'll do this by creating an NGP business which is targeted and consumer-centric and is therefore able to grow sustainably. I will outline our new approach in a moment.
At the same time, we're going to be careful about issuing bold round numbers targets in this area. The NGP market has surprised on the downside in terms of growth rate and as a number four player, the absolute size of the market is not something we can define, and we will develop our NGP business responsibly. Now, Pulze and blu are designed exclusively with the existing adult smoker in mind, and they're only ever marketed to that community, and we will continue to work hard to restrict use access. Our ESG priorities are aligned to the United Nations Sustainable Development Goals, and we've already achieved much in the important social and environmental areas such as energy efficiency, farmer livelihood, and reducing waste. However, we recognize the world around us is changing fast, and the climate crisis is no longer something we speak about in the future tense.
It's with us here and now. When we speak about forging a healthier future, we have in mind not just the health of our consumers, but also the wider health of our people, as well as the health of the planet we all share. As a result, we have accelerated our commitment to be net zero by 2040. We've also recruited a new Head of ESG to lead a strengthened team who are taking a fresh look at our strategy and priorities. They are identifying the areas where we can make the strongest positive contributions, as well as assessing how we measure and report success in this area. We will provide a more detailed update this year. Turning now to our strategic pillars. A key pillar of our new strategy is our greater focus on strength and performance in our five priority combustible markets.
As a reminder, we've identified multiple detailed growth initiatives in each of these markets, which we have grouped together into six categories, as you see here on the chart. Let's look at how are we applying these in our priority markets. First, U.S. Now, the U.S. represents about 35% of our tobacco profit. We also significantly stepped up investments in sales and marketing behind the growth initiatives here. We have recruited 200 extra salespeople, expanding our sales team by around a quarter, and their training is well advanced, and a detailed assessment of sales force coverage and geography by store is informing us how we're deploying these extra resources. As part of our plan to improve our participation in the sub-premium segment, we've begun trials of some new packaging for Winston in Texas, consistent with our consumer-led approach.
Our actions delivered another 20 basis points of share, the strongest performance in recent years and a third consecutive year of market share growth. Now, this has been achieved with Winston and Kool, our sub-premium brands, holding share in their segment, while we have continued to grow our share in the deep discount segment through Sonoma and Montclair. Pricing remains strong over the past year, delivering growth in revenue and profit. Our U.S. mass market cigar business is a great example of Imperial operating as a strong challenger, building brands that give consumers exciting choices and executing with creativity and pace. We have achieved an excellent set of results, with volumes up over 45%. Growth has been driven primarily by the fast-growing natural leaf segment, and Backwoods is the main driver of that success.
We've been leveraging this iconic heritage brand through a complete consumer engagement program, including point of sales promotions, events, and special edition flavors. Some of them you saw outside. These initiatives have delivered more than 500 basis points of share gains, helping us become the number 2 in mass market cigars, up from number 4 only a year ago. Now, looking ahead, we've made investments which will improve the sustainability and quality of leaf supply, so we're well-placed for further growth in the mass market cigar segment. Turning to Germany, we lost share again here this year, but encouragingly, our share performance did improve over the last 4 months. We're investing more here too. Also, we are realistic it may take time for our initiative to stabilize the trend following nearly 10 years of consecutive years of share decline.
Like the U.S., we've upgraded the effectiveness of our sales teams through new hires and by optimizing their distribution across underrepresented channels and geographies. We've also strengthened our key account capabilities, which have lagged behind our peers. The sales initiatives are starting to deliver results, while we know our investments in brand-building initiatives will take longer. However, we have stepped up investments here too, initially with our flagship brand JPS, where we have launched a new campaign under the banner Let the Players Play. You've seen some of the materials outside. It is an encouraging start, but it remains a highly competitive market. By investing smartly and executing well with much more we can do here. Going over to Australia. We made a deliberate choice here to prioritize financial delivery by putting through price increases in September 2020.
Now, this had a significant impact on market share in the first half of the fiscal year. We've since taken steps to address this decline, consistent with our value-led approach in this market. We adjusted prices on specific product lines to ensure their price points reflected their brand equity and competitive positioning on the price ladder. We refocused on building key account relationships and improving trade advocacy, which has been a strength in the past but had lost focus recently. We invested in new crush ball formats for Parker & Simpson in the fifth price tier and behind our Riverstone brand in the fine cut segment to deliver share gains in the second half. Again, encouraging progress in a highly competitive market. We delivered share gains in the United Kingdom and in Spain, which have both been supported by our focus on local jewel brands.
This is an important change in our strategy. Across many of our markets, we are now refocusing on local brands, our national champions, which have historically been neglected in favor of their international stablemates. This neglect has contributed to share losses over quite a number of years, and these same local brands are now key to our long-term recovery. In the U.K., we relaunched Embassy Signature. This has tapped into the latent consumer connection with Embassy. While at the same time leveraging our strong trade partnerships and filling regional gaps in distribution, particularly in the south of the U.K. We have achieved a 1.8% share for Embassy Signature in this first year. A great result, especially in a dark market like the U.K. In Spain, you might not know this, our three largest brands are all local brands.
Nobel, Fortuna, and Ducados had all struggled in recent years through a lack of investment. Nobel has strong equity with national coverage and with revitalized interest through a successful program of limited edition packs. We've also invested in new pack formats with Fortuna, which have performed well. I've highlighted just a few of the investment initiatives in these priority markets. The early progress is encouraging, and I look forward to updating you in the coming year. Our greater focus is on the five priority markets with other attractive markets in the portfolio and regions with the potential to be future growth engines. Looking at the tobacco portfolio, we grew share by 20 basis points worldwide. We've already highlighted the potential of Africa, which as a region represents 8% of our tobacco operating profit.
Now in several Francophone markets, we are the number one player with strong brands and unparalleled route to markets. The region has been overlooked in the past, resulting in underinvestment and a performance that has not matched the market potential. We're using multiple levers. The better application of our global brands, such as Gauloises, in more premium price tiers, leveraging a renewed focus on our local chew brands, filling gaps in the price ladder, and closing our sales coverage gaps. Encouragingly, these initiatives delivered an 8% growth in revenue and 20% increase in profit for the region. Turning now to NGP. As I said earlier, we have an opportunity to build a successful NGP business that can make a meaningful contribution to harm reduction, one that plays to our strengths and is centered around meeting consumer needs.
Our new approach is different from the past and from our larger competitors, and it's another good example of our challenger mindset in action. We will be focused on the markets where an NGP category already has an established presence and where we can leverage our existing combustible route to markets. These will be our strongholds in the United States and especially in Europe. Our role in these markets will be to provide greater consumer choice with a differentiated product offering that meets an untapped consumer need. It's not about having a market-leading product, just one that captures the interest of our target consumers. We have often focused too much on the product and its features at the expense of the total consumer offering.
Now, it's a lot more about the branding, the consumer communication, and the role of our trade partners in providing consumers with a compelling offer. It's also a cost-effective approach which will be disciplined and measured, and most importantly, plays to our strengths, our smaller size, and our ambitions. I am pleased to be here to be able to report that we launched Pulze, our heated tobacco proposition, in the Czech Republic and in Greece in line with our plans. This allows us to start bringing our NGP strategy alive for you and demonstrate what we meant in January. Our choice of pilots was made after careful consideration of available data and based on the assessment of the need for consumers and customers' choice. Heated tobacco has become well established in both markets, having been launched several years ago.
In each country, the category now represents at least 10% of the total nicotine market and continues to grow well. In each country, Imperial has a well-established route to market, with a 15% share in the Czech Republic and a 12% share in Greece. The compact nature of both markets allows a national launch, so we can fully test our proposition. It's early days, and we have had an encouraging initial response from both trials. How do I define an encouraging response, you might ask? First, we have achieved our distribution targets in both markets very quickly. Our customers have welcomed the opportunity to offer consumers an alternative offering in this space. I saw this firsthand when I visited both markets in the past month and met trade partners in 30 different outlets.
Now while we have achieved good trial rates with consumers, the key test will be the consumer feedback and repurchase rate over the coming months. Now, this will be critical in informing our next steps and will be a good test of our new approach. I look forward to updating you on this and our interim results. I'm also pleased we began our trials of a refreshed consumer marketing proposition for blu in the U.S., in Charlotte, in North Carolina. Now, since this is the U.S., we have not changed the product because of the PMTA constraints. The focus again is on the overall consumer offering, the packaging, a new marketing campaign, working with the trade on the point of sales presence, and developing a new online sales platform.
Now, this has been developed with the oversight of Anindya Dasgupta and his team, who we are now starting to leverage with all their capabilities. Again, this is early days. We've made encouraging progress, but we'll wait to see the continued consumer feedback. Overall, I am pleased with the progress made in this first year of our strategy. We're starting to see green shoots emerging as a result of the actions that we've taken. Now looking ahead at 2022, fiscal year 2022, we will continue to focus on building these foundations and to strengthen the key areas of our investment case. Fiscal 2022 is a further step up year in investments in our priority markets to support the revitalization of our core tobacco business.
Our NGP trials will allow us to test our NGP approach and inform our next steps towards making a meaningful contribution to harm reduction and provide options for growth. We're rolling out new ways of working, which will drive operational improvements and strengthen our performance. Our focus on strong cash flow will remain a key priority, as you heard from Lukas, and we will remain highly disciplined in our capital allocation, which we fully recognize as a key part of our investment case. Back in January, we set out a clear five-year plan. Today, we've been able to confirm we have delivered on our first year's objective. This, I hope, gives you the confidence in our ability to continue to deliver for you and to realize the full potential of this business.
The new team is in place to lead the transformation and deliver a stronger, more consistent performance and unlock value for shareholders in the years to come. Thank you for joining me today. Lukas and me would now love to take any of your questions, either here in the room or online. Thank you.
Thanks, Stefan. Stefan said we'd now like to take your questions. We'll start by taking questions from the room first, and then we'll take questions from those who've dialed in over the telephone. After that, we'll come back to the room and so on as required. The dial-in details are available in today's press release. If you're on the telephone and you'd like to ask a question, please press star and one on your keypad. Let's now take the first question from the room, please.
Sorry, Jonathan Leinster, Société Générale. Given the COVID unwind, can you give us an outlook in terms of some of the major markets, notably the U.S., U.K., and Germany, in terms of what you think the volume outlook will be given that unwind, and indeed given the tax increases in the U.K. and the proposals in Germany?
Sure. Jonathan let me answer your question. I think one thing is, as you would expect, it's quite difficult, yeah, to forecast at this point in time the impact of COVID in fiscal year 2022, also that it's still a fluid situation. I think what you will see, and in our European markets, specifically, you will see a certain headwind in the U.K. and Germany, because they have been two of our key markets that have benefited from repatriation of volumes that would have historically, especially in the summer months, would have gone into our Southern European businesses. You will see some of that, but I don't think it will be a huge effect. I think in reality, in the U.S., it's much more difficult to predict at this point in time because you would not have had the repatriation volume.
You just saw a change of consumer behaviors to a certain extent. I do believe it will be a slight headwind in the business as we go into fiscal year 2022. We shouldn't forget there are also parts of the business, primarily our Spanish business, but also our global travel retail business, that actually will be a beneficiary of the repatriation of these volumes into other parts of the world.
There's a question here next.
Clearly, the losses on the NGP side reduced significantly in 2021. Are you expecting those losses to continue to decline in 2022 or with a greater investment, and obviously ignoring the write-offs? Do you expect losses to continue to decline in that operation, or do you think with greater investment coming in, that actually will start to widen out again?
I think the answer is think about fiscal year 2022 for quoted losses or investments to continue at the level what you would have seen in fiscal year 2021. That's a reality. It's a combination also as the testing and the trials and the pilot markets I talk about, you will have a full year effect of these tests where they only were a small part of our investment in fiscal year 2021. The underlying remaining as a business sees an improvement, but we're reinvesting some of that back into our test markets.
Hi, good morning. Gaurav Jain from Barclays. Just focusing on your guidance for, you know, beyond FY 2022 of mid-single-digit EBIT growth. If we go into the history of Imperial, you know, earlier there used to be a guidance of 4%-8% EPS growth, which Imperial really used to struggle to meet. If we look at just what you are guiding for this year and what you did in FY 2021, you know, if I look at essentially the last five years, you wouldn't have done mid-single-digit EBIT growth. What would change from FY 2022? Because the mix of markets is pretty much the same over the last five years. What gives you confidence that between FY 2023 to 2025 we could do mid-single-digit growth?
Gaurav, I think number one, I think what gives us confidence is the focus on the top five markets, because when you compare this strategic plan, there's a very significant focus on the key value drivers of this company. Because what you're comparing is a period of time in the past where we actually consistently lost market share in the five key markets of this company, with the highest value creation. That is the key driver of the delta between the two. The good news is that we developed the strategy and presented in January. Now we have a new finance director on board as well, who has clearly scrutinized the numbers as well. Clearly, we feel quite confident when you look at the level of detail that we put.
What you see, the guidance we provided in January was built on a bottom-up plan, market by market, that gives us the confidence that it is deliverable. I think what is exciting for me sitting here with you is that in year one, we've delivered that ramp-up that we were looking for. We're seeing that improvement in the market shares that is a key part of actually our strategy going forward. In the past, we were the number one share donor in these markets. We're not any longer after year one, and that gives me the confidence the guidance we provided for the outer years is imminently deliverable.
A follow-up question on that is that how confident are you that the market share improvement that you have delivered so far, it will stick as we go ahead? Because clearly there have been market moves related to COVID, and maybe there was a lot of low-hanging fruit around maybe having better coverage with salespeople and which probably is already now in the base. How confident are you that these market share gains would stick as we look ahead?
Yeah. Gaurav, I think I'm quite confident. Simple reason is, A, It's not sitting on one pillar. When you would see the details of the executional plans in place in all these top five markets and also in the markets beyond, there's a level of attention to detail that gives me the confidence. It's not one pillar. It's an investment on the sales side. It's the investment in the brand equity of our core brands. We now have a performance management process that the executive team that you saw in the charts is involved now on a monthly basis. The agility that we need as a challenger company is now clearly there. Now, to be clear, that is helped by the fact that Imperial, if you focus on five markets, you've captured 70% of the value creation in tobacco.
Now, at the same time, I think you shouldn't take away is that we will consistently gain share across all five. That's not realistic in a highly competitive industry. The reality is we have started to turn the direction and have that inflection from being a very significant loser of market share in these markets into actually at this point in time being flat on an aggregate basis. Having achieved that less than a year into the strategy gives me the confidence that we can achieve this going forward. With a lot of the investments on the brand equity building only happening for a full year in fiscal year 2022.
If I could ask one last question on e-cigarettes in the U.K. Recently, I think there was a notification that e-cigarettes could now be introduced in the medicinal channel through the pharmacy channel. Is that something that you would like to explore for blu?
Sure. I mean, number one, as you well know, we are a meaningful player in the U.K. market with blu in the vaping segment. Number one, we definitely encourage the U.K. government's focus now on vaping as a smoking cessation tool. We feel that is absolutely the right direction. Now, we will evaluate once it becomes clear what the specific rules and regulations around this, whether this is something that makes sense for us to participate. I want to reiterate the point that actually we're very encouraged that the U.K. government is one of the most active governments actually recognizing the role vaping and NGP products play in helping consumers on their journey to a smoke-free future.
Thank you.
Thank you. Patrick Folan from Redburn here. I know in the presentation you talked about FY 2022 priorities, the progressive dividend policy. Is that something you guys might move away from in FY 2023 or FY 2024 once you have, you know, leverage kind of in a comfortable, robust position?
Can you just, repeat the question, please?
Just progressive dividend policy seems to be a priority for FY 2022. Is that something you'll move away from in FY 2023 once you feel comfortable with the leverage?
As I mentioned before, thanks for the question. The capital allocation is essential for us. It's this essential value driver for us, and it was actually crafted together with the strategy. It's not disassociated from that. Trust me, one of the first thing as Stefan asked me is to feel comfortable and look at that capital allocation. I do feel very comfortable, and I know it is important to you and to us.
The capital allocation though is an end policy which drives multiple things behind investing, behind the strategy, you know, a strong, robust balance sheet, the dividend and surplus capital return. The dividend, the progressive dividend was implemented last year as part of that capital allocation, and we strive to maintain that progressive dividend at a, you know, 1% growth or the underlying growth that we have in the business. For us, it is not about, you know, benefiting one or the other stakeholders, it is delivering all of them. We have to do it as sustainably. You know, we don't wanna dip in and out. Yeah, we are at 2.2, but if you look at Forex, we actually put 2.3. We're almost there, but we want to get it right.
You know, I took time out to speak to all the credit ratings, and it was very clear, is that what they expect us to keep a disciplined approach to, the balance sheet. We've got the poorest rating of all the peers, and we just need to get that in order. Once we get that in order, and that is at the lower end of 2-2.5 times, we will come back with a capital allocation, maintaining a progressive dividend policy.
I suppose my question really is about would you move towards a stable dividend payout policy once you feel like capital returns become maybe more of a priority?
I would say that we would probably want to maintain the progressive dividend policy rather than the stable one at this stage.
Yeah. I think the only thing I would add here to Lukas is let's also keep things in perspective. I mean, you see a 1% increase in the dividend. I mean, that is GBP 12 million, I think. Yeah. So in principle, that's not gonna make a difference to a share buyback program. I think there's an element, as Lukas says, it's an end-to-end policy, and I think that's something our shareholder are looking for. I think therefore, you probably will see a continued progressive dividend policy.
Just one more question on the AAA strategy. I know you guys said you're looking to focus on emerging markets. Can you provide a bit more color there? I suppose that's kind of all around North Africa and the strong year you had this year. How will that look going forward, and will that become a bit more priority under the new leadership?
Absolutely. I think I appreciate the question because we focus a lot on the top 5 markets, because I think there, a lot of value creation sits in there. Priority number 1 is to turn around share performance. Reality is, as part of our overall portfolio, we are actually in quite a number of attractive markets. We singled out Africa because that's the most visible to you, and that's probably the big, a significant chunk of it. The big decision we've taken in fiscal year 2021, our AAA business, our emerging markets business was grouped together with our U.S. business. Clearly from a priority perspective, the U.S. would always get priority with that team. We've now created a dedicated division or region that focuses on our emerging markets portfolio largely, with a new leader who has deep experience in emerging markets.
Africa is, in our opinion, just the beginning. We do see that as growth engines for this coming down the road. Yeah. I think that is one of the things, the investment in Imperial isn't just about the top five markets. That's where a lot of opportunity lies, but there's a lot of opportunities also beyond the top five.
Thank you.
Okay. I think what we'll do now is we'll just move to calls on the telephone. I'll just now hand over to the operator to line up the first call, if you may.
Thank you as a reminder if you wish to ask a question. Please press star and 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, to ask question, Please press star and one on your telephone keypad. Your first question comes from the line of Alicia Forry from Investec.
hi. Good morning, everyone. I was wondering if we could talk a little bit about Australia and what's going on there. Obviously, it's been a market disrupted by down trading. I was just wondering if you have a view as to how far along we are in that process, what your sort of assumptions are for that market over the medium term, given it's a top five priority market.
Sure. Very happy to take this. You're absolutely right. I think with some of the highest pricing for cigarettes in the world, you would have seen consumers drift in the value change downwards. That's why the fifth price tier has created itself over the last couple of years. At the same time, to be clear, we're not seeing an acceleration in this. One thing we shouldn't forget, and you saw it in Lukas' numbers in the financial negative way, but the Australian government has paused its duty accelerator for the first time in a long period of time, which in reality means cigarettes are not becoming any more expensive as they would have been in the past. That's something we'll need to observe what is the impact on the market.
The other thing I think as we're having this discussion in our context of Imperial, as you will know, we have a good portfolio of value brands in the Australian market. A market that actually goes more value is actually a market that actually favors our portfolio of brands. Yeah. I think an important piece, as we did in fiscal year 2021, therefore, getting pricing right is an important step. Actually, we feel good about the Australian market overall. As consumers make their choices, I think we've seen, especially also in the second half of the year, a marked improvement in our share performance.
Thank you. My second question is on NGPs. Obviously, there's a lot of noise in that part of the business, but I was wondering if you could touch on the performance of your NGP portfolio in markets where you have not been exiting. I think you said the exiting, it was up 8 and 8.6% or something, which is clearly slower than historic rates. Just curious what is going on with the underlying NGP category for you?
Absolutely.
Thank you.
I mean, number one, I appreciate you mentioning the market exits. If you take the market exits out of the numbers and make it a real like-for-like comparison, our NGP business in this year grew 9%. That's number one. It's important because you would have seen, there was a very significant reduction in marketing support to a much more realistic level of our NGP business. But the business did still grow. Overall, we did hold our market share positions in all our core markets roughly in the right place. We haven't seen a very significant erosion of our market share despite a very meaningful reduction of investments from a marketing side.
The only place exception would be the U.S., because in the U.S., as many of you will be aware, there has been a very aggressive pricing drive with $1 devices being a permanent feature of the U.S. markets, where we decided not to participate aggressively in the marketplace, and therefore we have seen a stronger erosion of our market share in the U.S. That's again where our market test in the U.S. is coming in with a new proposition, a remarketing of it to see what is the opportunities that we have in the U.S. market. In summary, I'm actually quite happy with the performance we've achieved in our NGP business, even independent of the test markets.
Thank you so much.
Okay. I think there's no other in the queue at the moment online. Is there any other further questions from the room?
Hi. Jared Dinges, JP Morgan. So I wanted to ask, coming back to the leverage target, you know, I guess 2.2 times is kind of the low end. I know you guys did mention you had an FX benefit in there. Given your guidance for next year, would you consider buybacks at the half year stage, or is this something you wanna take very conservatively, kind of wait for the full year, till you're really towards kind of 2 times net debt EBITDA before you would consider buybacks?
I think, like I said before, we are very committed to that capital buyback, capital surplus buyback or share buyback, but we wanna make it sustainable. Okay? I get the 2.3 is a technicality, but what is more important to us, it has to be sustainable. You know, the starting point is a strong balance sheet or a balance sheet that can support that and not getting in and out. We've given clear guidance when we believe there, where we get there. We've given you metrics to model our cash flow, net revenue, profit, cash flow. I think when we get there, we'll go public, and we'll announce it, and we'll give more flavor. We'll not go into this discussion at this stage of what is the time. Okay? Don't remember.
Don't forget, this is a critical year for us. This is a five years plan, and we're focusing on one element. For us, the second year of building the foundation, we've got lots on. That's the other element why we want to really be sure that when we go out there, it is sustainable, and we will come back when the time is right.
Very clear. Thank you. Just on the sales force and the investments in Germany and the U.S. in particular, you obviously mentioned that you've increased the sales force 25%, 200 extra sales. Say the training is advanced. In Germany, you started to make some investments. Can you give a sort of timeline on that as to when we should expect the additional U.S. sales force to become active and see some results on that, and indeed on the German investments as well, please?
Very happy to do. I mean, the U.S. is a large investment, to be clear. I mean, they, as I stated, the number was about the extra 200 people represents an upweight of 25% to our U.S. sales force. It's a very meaningful increase. Yeah. That sales force is now largely hired. Yeah. And it's in training. Virtually, because we wanna make sure that they're properly trained up. Virtually, you will see the effect in increased coverage in fiscal year 2022. As we speak, these new colleagues are actually now going out on the road, working on our distribution out in the marketplace. You will should see, we will expect an increase. Now they won't be as effective on day one, to be clear, as they will be down in six months time. Yeah.
We should see that increase coming through in our numbers in fiscal year 2022. Now to be clear, also the expense of that will also come through. That's part of the investment that we talked about earlier. I'm quite excited because we've done a very deep analysis. Where's our coverage versus our competitors in the U.S. market? Which outlets? What offtake differences have we seen with consumers based on the investments there? The German story is very similar. Here, there's more of that is a redeployment of our sales force towards outlets that were less in our coverage than before. There's more about reflecting that our shoppers have shifted their shopping behavior in the last five years. Think about the discount channels, for example, in Germany, that we hadn't fully replicated in our sales force.
There, we're also making selective hires to improve our capacity in our German sales force. That will take longer. Yeah, to a certain extent, and that is also a market that's more driven by key accounts than the U.S. market. Also there, we should see an increasing effect during fiscal year 2022.
On the U.S., is, is-
Can you wait for the mic? Sorry.
Sorry, just on the U.S. When you say it's coverage, does that mean there's geographic areas? I mean, clearly the old Lorillard business tended to be focused quite geographically. Is it an issue that you're actually going out into West Coast a lot more? Is it an issue that within the areas in which you have significant presence that you're actually just increasing the level of concentration?
No, I think it's good because you mentioned the old Lorillard. We shouldn't forget we're a nine-share company, and we have two key competitors who have significantly higher shares. What we've done, historically that was reflected. We had a sales force of a nine-share player, yeah, and below. What we've done, we've now gone outlet by outlet and have gone through with the U.S. team, the detailed numbers. What you see is a combination of. It doesn't mean we're going to primarily as a key focus into areas where the brands haven't been represented before. The key sweet spot for us are areas where the brands are actually already quite strong, but they haven't been represented in all outlets in that area where our shoppers go. Yeah?
The other thing, what you will observe, and just to give you another detail, it can mean also an increase in the frequency of visits, because in our industry, on-shelf presence drives consumer preference. When you have an out of stock, because your salesperson hasn't been there and your competitor has been there, that will also drive share. To your final point, yes, there are certain areas, especially as part of our five-year plan, we have identified parts of the country where we do believe we're underrepresented, which we will strategically now invest into. Again, this is an iterative process. We'll have a look whether we get the results we want to get. This is a very performance-driven approach. We will put sales force in. We don't see the return, we'll redeploy the sales force.
That overall should give you the confidence in our strategic plan of delivering that share improvement versus the past that we're looking for. I have been out there in the U.S. with the team understanding what that sales force coverage means, what they do on a daily basis.
Great. We have another question online. I'll just hand back to the operator. If you could.
Just before I introduce the question, another reminder, please press star and one if you wish to ask a question. Your next question comes from the line of Simon Hales from Citi.
Thank you. Morning. Thanks for taking the question. Just one really. Stefan, you highlighted the importance of cultural change in the organization, your presentation, to guys being able to deliver that sustainable midterm sort of growth story. Clearly you've had lots of senior personnel changes in the year that have clearly bought into that cultural change agenda. What can you say about broader employee engagement in this cultural change? Is there any metrics you can point to at this point in time of how things are improving there?
I think, Simon, great question. I think the number one, we're just in the process of conducting a global employee engagement survey, which will include now all employees, not just office-based employees. I think we'll get our read in the next couple of weeks on this one. I can tell you also the feedback from the conference I mentioned to you before, we've gotten some fantastic feedback. To be clear, the majority of people that participated there wasn't a leadership team. It's all the employees throughout the organization. I think the sense of clarity about direction, where we're going, and I don't have to tell you, the majority of our people work in the core combustible business in our company, and we've clearly put some very clear priorities there.
There's actually quite a strong support for where we're going as a culture. The other thing I shared with you, the purpose to behavior, the vision and the behaviors we've now co-developed, and I think that's for me, the key piece that was co-developed with all our employees represented in there. We are getting some very strong feedback about the overall direction where we're going. Yeah? When I'm out in the markets, I have done now with corporate restrictions gone, I do whole town halls in all of them, yeah. The questions I get give me really a sense that people are on board, and they really believe we're going in the right direction.
Good. Thanks.
Your next question comes from the line of Nik Oliver from UBS.
Hey, good morning. Thank you for the question, and sorry to come back to cash returns again, but could you just remind us, in terms of the credit agencies, just any criteria that the Imperial need to deliver, just when we think about potential cash returns going forward?
Thanks, Nik for the question. I think there are multiple buckets. You know, they have different models, credit rating, and they go beyond just the financial metrics. When it comes to the financial metrics, the balance sheet strength is the most important one to manage. It's not the sole one, so it's way more diverse and multilayered. We believe that when we are at the lower end of that 2-2.5, then we are in a place where we can sustainably deliver the full capital allocation, not just elements of it.
Okay, sure. That is just net debt, but that's not including pension liabilities or do some of the agencies take that into account as well?
Credit rating will take a gross, and they will take some of the pension funds into account as well. I'll probably have to come back to you in more detail on the pension treatment.
Okay. No, that's perfect. Thank you very much.
We have no further questions from the phone lines. Please continue.
Thank you. We'll take another question from the room.
Hi, Lukas, on that last question that was asked, I have a follow-up. If I look at the last bond you issued, it is a 12-year bond you have issued at 1.75%. Now, we have seen your key competitor or the other company which is listed in the U.K., they have recently tapped, you know, the high-yield market using a preferred equity issuance. Which is not considered debt by the rating agencies, and I think they have issued it at 3.5% or 4%. Your equity free cash flow yield is whatever, 16, 17. Your bond yield is 1.75%. Why wouldn't you also try to tap into the high-yield market at 4% and retire some of the debt and use it to buy back shares faster?
Thank you very much. I think we are fully aware of that activity of the competitors. You know, we look in our treasury policy. I think what is right for Imperial is not going through the hybrid mechanism. We have looked into this recently, again. The combination of higher costs and actually not the benefit that you would expect for us in the credit rating does not warrant us to go down the hybrid route.
Okay. Thank you.
Okay. I think if there are no further questions. There are no further questions online, and if there are no further questions in the room, I'll hand back to Stefan.
Yeah, I mean, from my side, first, a thank you especially to the people who joined us here physically in London. But also to everybody online. Look, hopefully today gave you the opportunity to get a sense about the progress we're making on building the foundations of the business and the first green shoots that are now really appearing in the business that should hopefully give you the confidence, yeah, that we are well on track on our strategic plan for the company that will deliver really sustainable returns to our shareholders over time. Yeah? Thank you for that. Lukas and me are hopefully looking forward to see you at the half year time, again, face-to-face and give the opportunity to update you on the progress we're making on our strategy. Thank you.