Afternoon, everyone. Thank you for being here. I'm Pallav Mittal, Head of Global Tobacco at Barclays. I'm thrilled to have Lukas Paravicini here with me, CEO of Imperial Brands. Thank you so much, Lukas, for giving us the opportunity to host you. We'll go straight into questions.
Sure.
Lukas, you have been in the CEO seat for now almost a year. Can you just help us understand what things have worked, what hasn't, what have been your main priorities over the last year or so?
Yeah. Firstly, thank you very much for your attendance, and good afternoon to all of you. It's a pleasure to be here and have this fireside chat with Pallav. Indeed, this is my first year as a CEO, and it has been a very interesting, to say the least, year. I enjoyed it. I think, for me, it is important that whatever I do, I do with passion for the sake of our consumers and our shareholders. We started off the year also with the evolution of the Strategy 2030. It is a continuation of what we have done with Stefan in the first 5 years.
It was also that opportunity for me to travel the organization, meet more of the people, discuss the strategy, and really what was very pleasing is to see the energy of our talents, who are highly motivated to deliver again in these 5 years. It was also a year where, let's say at least, it was quite an interesting year with, unfortunately, wars, tariffs, lots of things. You see my gray hair. It is not the first year. Over the last 40 years, I've never seen an easy year, but this was especially interesting year to say that.
I am really proud on the organization that, again, we will deliver probably the fourth year in a row of positive net revenue growth, of high single-digit EPS on the back of a profit growth, and again, our commitment to a healthy cash flow with, in our guidance today, is above GBP 2.2 billion. We are fully in line with that guidance, and we stand to that guidance to the full year. It is also important that not only are we performing and overcoming hurdles here and there, but we also making sure that while we perform, we transform. We had a good start to the transformation as well. My work is not just to perform today with the organization, to make sure that this organization can perform for the next 10 years and make it future-proof.
We have announced at the CMD that we are embarking on a transformation that will deliver GBP 320 million of savings, and we are well on track. We exited Langenhagen. We sold Taiwan. Those are 2 big factories. That alone will deliver an annualized savings of GBP 100 million once it is completed in July 2027. We have also communicated that by the end of the year, our manufacturing excellence, which is actually focusing on the 7 strategic factors we have, will deliver another benefit of GBP 25 million on an annual basis. Our partnership with Capgemini is delivering good results as well. We kicked off in February. We already transferred 400 people, and we are progressing nicely on that journey. I just want to make 1 point. In a company where every GBP 100 you sell, 50 goes straight into profit, savings are very important.
As an ex-CFO, as a CEO, I will never leave money on the table. T he real nugget of the transformation is actually the fact that we can improve revenue by focusing on what matters, which is our consumers, by building those capabilities and infusing AI into this equation. Capgemini will be a big partner in that. I also want to recognize, and I will finish, and not all my answers will be as long as this one. I also want to finish to recognize that there is more work to be done. As a CEO, I could be proud of the performance, I could be proud of many things, but when I look at the share price, there is more work to be done to convince the market that whatever you see in the U.S. and Germany, we will deliver. We look at this beyond this year.
My also need to reconfirm our confidence in what we can deliver going forward.
Right. We will go into those details around U.S. and Germany in a bit. But if you could just start with, a key question that people right now have is on market share. Over the last 5 years, Imperial Brands was gaining market share in their priority markets. In the first half this year, Imperial Brands has lost some market share. How should we think about market share over the next few years, and how do you think about market share versus, say, value creation?
A very good question, and obviously a very hot topic over the last few months. I just want to start with one thing and reconfirm that if you are a consumer company, if you start with the consumer, market share will always be important for us. All right? In fact, if you look at the U.S., we gained 185 basis points over the last 5 years. We lost 20 basis points at half year. Why? Because we gained market share at the bottom of the value ladder. Been very successful. We have been the sole player there. Very successful when KT&G left. W e always knew that at some stage, our competitors will want to participate from the market. Because right now, some of our competitors, when they naturally downtrade, they will not have an option to serve that consumer. We do.
It was a matter of time for those competitors to come in. That is not a price aggression. That is not being more aggressive. That is just entering a market they were not there. Also benefiting that our volume declines in the U.S. have improved significantly, and those consumers will come in at the bottom. Guess what? They do not find those products from our competitors. They want to be there. I understand that. O ur strategic rationale was, okay, we gain 185 basis points. In 1 year to lose 20% to maintain the structure is not such much of a bad loss if you then continue going forward. So those decisions were made not just tactically short-term. These were made when we look at how we progress in the U.S. over the next few years. And I remain confident. U.S. is an attractive market.
It is a market where we have options in all price ladders, and where we have just launched Malibu to replace Crown, which has now priced up. We are in 40,000 stores, and we have 50 basis points price share. I remain confident that the U.S., whilst more competitive, will still be a big engine for us going forward.
Right. Just to follow up on that, in the U.S. market, cigarette volumes this year surprisingly have been pretty strong. It is around -5% decline versus -8%, -9% over the last 3 years.
Yeah.
Can you just help investors understand what is driving that cross-category movement, illicit vape crackdown, and how are you planning in terms of your Malibu distribution expansion?
Yeah. I think, we always have a lot of comments on the FDA. I also want to appreciate the work they have done, and by going in the right direction in the regulation, but also helping the law enforcement agencies to enforce better existing laws and curb the illicit market. You can clearly see that the illicit vape has been retained better in the last few months, and that has had a positive effect. Remember, the consumers down-trade, and then they have an option to go into vape, which is a cheaper offer and readily available with attractive products because they are technologically advanced, which we can't compete on the PMTA restrictions. Now that it is harder to get to the illicit vape, now that the bottom end has attractive offerings on that price point, the consumer doesn't need to leave that category. In fact, they will come back.
We clearly see a correlation between the illicit and, or the better management of the illicit with the volume increase. For us, we will always be where the consumer is. With Malibu, we have now the option to replace what Crown was to play together with our competitors at that bottom end. As we always do, use the escalator to slowly start to price up again.
Before we move on to some other markets, can you just remind what are the one-offs or the headwinds that we saw in H1, specifically on tariffs, which won't repeat in the second half, because clearly U.S. is a significant part of the growth story. Just remind us of the one-off, the headwinds that you saw in H1, and what drives the growth in H2 to achieve the full year guidance.
Listen, I have a long list of things that happened in the first half and the second half from wars and tariffs. I think what we said at the half year, there is a significant effect mainly on the tariffs in MMC and a significant effect on the market size reduction in Australia. While Australia will always remain a profitable market, the step-down has been significant, very significant, and especially at the first half. We see that now lapse, and so you see that improve in the second half. The tariffs also has improved. That has gone away, or let's put it that way, we have stabilized at the level which is better. That will improve. Naturally, we always had a second half impact because of the way we invest at the beginning of the year, and especially on how the pricing comes.
That's why we are confident that we will deliver the guidance for this year.
Right. Moving on to Germany, which is the second largest profit market for you. Over the last couple of years, you have been gaining share, but I think over the last few months, again, IMB has lost some share. Can you just talk a bit about that? What did you change, which was driving the market share gains, and now what has changed again in the market? Plus, I think there is a big German excise tax coming.
Yeah.
How do you view that and what the impact could be as we think about 2027?
Yeah. Again, I just want to reinforce the importance of market share. If you look at and to your point, the way we looked at the playbook for all of these markets and not just the top 5, but all the markets, is you need to invest in your brand equity. You need to maintain that brand equity, and you need to invest in your sales force. You need to professionalize your sales force. That took longer in Germany. You know the reasons for that, but that ultimately delivered the benefits. That has not changed, that we continue to do that. I also want to go back to the point I made before. We don't look at the year only. We look at the longer perspective.
Germany lost between 80 to 100 basis points of share every year up to 2 years ago, where these measures kicked in. But like in Spain, where every year we gain share, and then we monetize, we drop share, we gain share, we drop share, you will see that same behavior in Germany. We gained 40 basis points, and we lost, or we were flat. We will continue to be managing that over a longer period of time. That does not change the importance of market share, nor that it is a robust state we are in terms of market share in Germany. Again, the same discussion we had before. We have done extremely well in Paramount. We're doing very well in Gauloises at the top, and Davidoff.
We will continue to manage those segments in accordance to how we best deliver the value and maintain that share very stable over time. The excise tax, I think that has been a little bit of a lot of noise around the excise tax. As a Swiss German, one of the attributes and virtues of Germans are that they are very structured. Germany has a tax calendar, which they issue every 5 years and is valid for the next 5 years. They are very rational of that. The next tax calendar is due on January 1, 2027. We knew that 5 years ago.
In May, the news came out of that excise tax, and unfortunately, one of our very eager politician who realized that Germany had a big gap in their funding, thought it would be a good idea to tax sugar, tobacco, and alcohol, and front-load the tax so they could get quicker cash. In Europe, sometimes you see these proposals coming out being quite aggressive because that is the way they negotiate to a level that is acceptable. So when they came out with what is a proposal to increase the tax by €2 rather than the 30 to 50 cents every year, and start the taxation on September 1, rightly, everybody was concerned. But we worked on it. We worked with the government, we worked with the ministry, we worked with the industry. Today, there is no tax increase in September. That is off the table.
There will be a tax increase in January. The tax increase we are talking now is not €2. It is now 50 cents to €1. I do not know honestly where we are going to end up. That is still in dispute. There might be a point that they get to €1. It might well be 50 cents, which is very close to what we do every year. As a side effect, they are also going to raise the minimum taxation, which closes the gap between your value price to the private label, which is the only market where there is a private label, and there is a significant gap between those 2 prices. By raising that minimum tax faster, that gap will close. I will be very transparent, that gap will still be very relevant, but it will close. It will be smaller.
So, does that change the fundamental strength and power of Germany? No. Will it have an effect short-term on some of the volume if we go up a euro? Most likely, because no consumer is immune to these changes. Will the industry all behave rationally and at some stage transfer that to the pricing? That is my assumption. These are things that are part of our life. We manage them, we work through them, but it does not undermine the huge size and power of the German market for all the industry. All right?
Right. As we think about next year, are there any other markets which you would just like to flag in terms of any significant excise tax shocks, any particular markets where you operate?
No. There are 3 areas. Let me go back, 3 areas. You have the European tax, the ETD tax, the European tax directive. That is well progressed. I think, again, the original proposal from the European Commission has been worked through, and it is now in a state which is much more acceptable to us. Like everything, there is a trade-off. Some are better, some are worse, but it is something we can live with. It is also something that is interesting for us, it is a longer perspective. We can work to that. That gives us lead time to work through that. The beauty of European Union is you need everybody to agree. There is a lot of negotiation, but we are getting to a point where I think we are in an acceptable position. You have Africa, where you obviously have always these changes, et cetera.
But again, that is in a manageable situation. Don't get me wrong. Our corporate affairs team has a lot of work. They spend a lot of time also explaining to finance ministries that it is not so easy to increase taxes. You lose them on illicit. We actually had a very interesting exchange with, I think it was the Ivory Coast ministry, where we showed them the Australian case, not to increase taxes are part of that, but to increase it in a rational way. T hat, we work on them to what you shouldn't do and what you can do. The interesting case is Australia. Those who have read the Australian news, we now hear, which you have never heard in the past, the opposition proposing an 80% slash of the excise tax. Okay.
If you are in the opposition and you still have to wait 2 years, you can say a lot of things, but you would never have heard that in the past. Very interesting, illicit enforcement has made a huge impact to the volumes of Australia. Will it grow again? No, but it will still be a profitable business, and it does show you how important enforcement is and how important reasonable taxation is.
Right. Just to follow up on this, you have touched upon Australia, which I think volumes were down almost 50% in the first half. If I look at U.K., volumes were down almost 15%, 16%, and these are 2 important markets, probably 10% of the total profit pool for you guys. How should we think about U.K., Australia, Spain, for example? What is your strategy in these markets going forward?
By the way, just on taxation, you know that the U.K. taxation comes into force on the 1st of October on vape, and that is one more year taxation I missed to say before. Listen, the beauty of Imperial Brands is that, yes, we have 2 strong engines, Germany and Europe, and they have to hum, and they will deliver their share. Then we have another 8 to 9 clusters that we can play with. Yes, you pin on U.K. I would actually add Benelux to it, which is a smaller market, and Australia. Just to give you an idea, Australia is less than 1% of our volume nowadays. It is the smallest of all 11 clusters we have. Okay? I t is highly profitable. It is just the smallest.
U.K. is very interesting because, yes, it loses volume, and it might continue to lose volume because of the taxation that comes in next year. A ctually, the value extract from that market is significant. In no means is the profit evolution anywhere close to that volume evolution, and we are growing NGP business. We are now above 10% in vape, and we have launched Zone, the pouches, very successfully. But we always knew these markets were tough. For those who remember, Stefan and I were here as a CFO. 5 years ago, we told you that the U.K. is not the tobacco model, but we could extract value. O ver the last 5 years, it still remains one of the top 5 profitable markets. But you also have to reflect on, we have another 5 clusters which are growing rapidly. Among them, Iberia. Huge potential.
Good affordability, low pricing, quite open regulation still. You have Africa growing ahead of the group, 10% of the group's AOP. You have Southern Europe with Italy, Greece, Romania, not just in NGP doing very well, but in tobacco. You have Middle East doing very well, not just because we went back into Syria in January this year, which is actually contributing a significant change or value contribution. Y ou have quite a few additional clusters which are very promising. Y es, I have U.K., I have Australia. That is not a surprise. We always had them. We have 5 clusters which are doing very well, and we have 2 engines which are humming well. It is quite a nice portfolio to have.
Right. If I can just ask on your stake on Logista. You have maintained it at slightly north of 50% for the last 10 years or so, or 12 years or so. Is a stake sale on the table? Because if I exclude Logista, then probably IMB will be a higher growth company. Is that something that you would consider at some point?
Logista is a distribution company we have that distributes solely tobacco. No, excuse me, does tobacco originally, in Southern Europe, especially Southern Europe, Spain, France, Italy. And we acquired it through the acquisition of Altadis, which was the Spanish-French combination of the state monopoly. Since then, Logista has been part of the group. We have control over it, but the real benefit of it is, the cash pooling with us. They keep around GBP 2 billion cash with us on an average basis. Just to be honest, people think this is for free. We pay for that cash. Logista is a nice company. They still want some revenue for that, but it obviously has helped in the leverage in the past. It is a very good thing. Is it strategic? We've been very transparent over the last 3, 4 years that it is not a strategic investment.
Is it a headache right now? Absolutely not. Their share price is growing very nicely. They contribute to the profit, some years better, some years less. They have a very strong management team, and they're diversifying out of tobacco quite nicely. Will we keep them forever? Most likely not. Is this my first priority? Probably not either.
Got it. Moving to NGPs, and if I just start high level, over the last few months, we have seen a couple of bolt-ons, Black Buffalo in the U.S., and then earlier this week, Helvoet in Sweden. Can you just help us understand what is the NGP strategy and what growth expectations should we have over the next few years?
Yes. A lot of people talk about Imperial Brands because it is such an interesting cash return yield proposition, which is right. This is our proposition. I think the other element to our proposition is that NGP optionality. I think we are very adamant that we are continuing to work on that pathway to become a relevant player in the NGPs. We do it our way. We are not going to be the leaders in this domain. We are the fourth largest. We know our place in the industry, but we spend an enormous amount of time with our consumers. We survey 220,000 consumers on a monthly basis. We meet consumers on a regular basis. Every time I visit a market, I spend an hour with consumers. We do understand our consumers well. We innovate for our consumers.
We have an interesting innovation pipeline, but we are very disciplined because it is not up to Imperial Brands as the fourth largest to create the market. When the market is created, when there is an interesting share of the nicotine market in the NGP space, we will enter there if we have a route to market. We will continue to grow in those markets. You can tell us, yes, we are small, et cetera, but we have grown double digit for the last 3 years. We have grown share in all 3 categories, including last year, in all 3 categories of the NGP products. It requires a lot of discipline. Trust me, a lot of our market heads would ask me, "Can we not launch in this country?
Can we not launch in this country?" I had a discussion the other day, I think it was Italy. It does not matter which market, where we wanted to launch because you see a lot of exposure, you hear a lot of our competitor there. When you look at the data and you see only 2% of the nicotine market being sold in pouches, the rational behavior is you wait till the market is grown. We will continue to be very rational in our capital allocation, which does not mean that we are not poised to grow double digit and create more market share where the profit pools are, where it matters. That is how we look at NGP, and we will continue to do that.
Right. Starting with the U.S. nicotine pouch market, clearly with the FDA guidance, in May, the category has become very competitive. We are seeing a lot of innovation, new SKUs coming into the market. How are you thinking about the U.S. nicotine pouch market long-term sort of growth expectations, and what is your strategy to gain some market share there?
Like many things in life, when it comes to the U.S., you always talk about the biggest market. There is no doubt. The U.S. market is a highly attractive market when it comes to OND. I would even add that vape in the long term is going to be very attractive in the U.S. Some of our competitors will add another category. We will see where that ends up. That might very well be. I welcome, as anyone in the industry, the FDA sincere effort to simplify the process of the PMTA. I think we have come a long way in getting more reasonable regulation that really helps consumer to remain safe, to make the right choices, but also make sure they get the innovation they deserve, to get the experience they deserve. We very much welcome that.
I will be very honest, we need to see more follow-through on that. We need to make sure that this is codified in the right way so that it is endurable over time. Not that when the next administration comes in, and whoever that is, might have a different view and changes back. Because a PMTA takes up to 4 years. We have to do a lot of studies. You need to continue that effort to follow through on that effort. That is important for us, but clearly, we are going in the right direction. Now, for us, it is interesting. In Zone, in the short term, because we have grandfathered rights, we still have an innovation pipelines that we can use, strengths and flavors.
This regulation obviously now opens our interest in seeing how quickly can we bring innovation we have in Europe or brands we just acquired in Europe to the U.S. markets. That is something we are looking into it, and to see whether this new openness allows us to do this faster than in the past. That would be great. We will see. In the short term, in the medium term, we have still enough innovation pipeline to give different experiences to our consumers.
Right. You have, on the vaping side of things, exited the U.S. market.
Yeah.
Given more enforcement, the FDA guidance change, is it a possibility at some point in the near future you plan to reenter the market? Then just to add on to this, what is your strategy with vapes in the European market?
Absolutely. We always said that we follow the consumer. If there is a consumer in the U.S. and the vape regulation is improved, the vape illicit market is contained, you might see us come back. You shouldn't be surprised that we are The PMTA take years. I t's highly unlikely to say that we are not working in our innovation center on something. T he reason we exited vape is independent of any FDA changes. Our vape product we had in the market is 10 years old. If you really respect your consumer, you don't try to lure them into a product that is 10 years old, that's competing with illicit products that have the latest gadget. I can't compete with these products. I'm wasting shareholders money trying to compete on this. I exit the market.
Till I have a better product, until the market is more attractive for us to enter. It is becoming more attractive, but the margins are not anywhere close to where we would like them to see yet. As a challenger, where we focus, we have to make the choice that we have a much bigger opportunity on OND. The market is growing fast. We have an innovation pipeline. The margin structure is more attractive. We will focus on that, and we'll see at what stage you might see us come back to the U.S. market with vape. Europe is booming. Our vape business is profitable. It's growing. What you see in Europe is more of a switch from disposable to pod-based, which has had an impact on net revenue. W e have a good basis there. We are growing.
It is an interesting market for us, and we'll continue to do that.
Right. Going back to the U.S. market, the 2 largest peers are engaging in this double-duty drawback mechanism, and Imperial so far hasn't participated in that. Can you just give us an update where you are and when we should expect that benefit to flow into your P&L?
Yeah. The benefits are all the same for everyone. It's a percentage of your excise tax if you export and import the same quantity. It's a bit of a complicated regulation, but it's all the same. Yes, we have always said that we will pursue that opportunity, and we have committed already a few months ago that you will see the duty drawback start significantly in the second half, and it will obviously complement fiscally at 2028 with a full year of duty drawback, assuming that no changes in the legislation. I would always expect that 2028 is even an increase because we're going to see how much more we can do. I get a lot of questions around why you're so late and why, et cetera. Listen, guys, we have a setup which we produced our combustible products in the U.S. for the U.S. market.
That's historic. It's the way we acquired these products. Some of our competitors, they had for years factories in Mexico they could use. They had that set up. Other competitors had historic credits which they could use. You should say, okay, yeah, you just produce somewhere else and you export, import. You could do that tomorrow. Well, it takes a long time. We had to identify the factory. We identified a factory in Morocco. We're going to invest there. We have built the plant. Sorry, not the plant, but we have invested in machinery that takes 6 months to deliver. We need to install them, train the people. Most importantly, we are producing brands in the U.S. for Africa and in Africa for the U.S. Even though you use the same recipe, everything the same, it's a natural product.
You want to make absolutely sure that the consumer is happy with the product and they don't perceive a change. We will do everything as fast as we can, but we have to do it right, and we have to take care of our consumer, and we have to make sure we meet all the FDA regulation and the authorizations. That takes time, but good news is second half, you're definitely going to have the benefit of-
Second half of 2027?
Yes. Sorry. Apologies.
Right.
For clarification.
If I can, I think in the interest of time, just 1 last question. Given the shares are trading at 7x P, how should we think about share repurchases as we go into 2027? Can you just talk broadly about your capital allocation priorities?
Yes. The silver line for a CEO when you have the share price, perhaps not where I had hoped and expected it to be, is you get more shares back for the same money. For us, the share buyback is an important lever. If you look at our capital allocation, we were always transparent, and I think I've been repeating this for the last 5 years. We will firstly invest in our business because I can only commit to an evergreen share buyback for this strategic period if we make sure that the underlying engines work. So we have to invest in the business, and that includes GBP 350 million of CapEx, that includes a bolt-on acquisition opportunities, et cetera. We will always want to be doing share buybacks or capital returns in an environment where our balance sheet is very strong. We are there.
We have a leverage which is at the lower end of 2 to 2.5, so you wouldn't expect any difference to that. Then, it's how we return that excess capital and the excess cash. We have a loyal base of investors who enjoy a progressive dividend growth, and we will continue to do that. No doubt that in the environment we are today, share buyback has a bigger impact, so we will continue to do the share buyback. In fact, I'm not sure you all know that by June this year, we actually retired 20% of our shares, if you compare it to where we started in 2021. We only started the share buyback in 2023. So, in those 3 years, we retired 20% of shares. This year alone, with the share price where it is, we're probably going to do another 6%.
It is material what we are doing, and we'll continue to do that. We have committed to an evergreen share buyback for the strategic period. Every year, we will define the value. We have never committed to a progressive value, but what we commit is to a significant, meaningful share buyback, which you have seen over the last few years. We will decide that together with the board, considering the environment, the cash generation, any potential needs we have. We have to pay Delaware, et cetera. But rest assured that it's not going to be different for next year.
Sure. With that, we are running out of time. Thank you so much, Lukas, for giving us this opportunity.
Thank you very much, Pallav. Thank you very much to you all.