Imperial Brands(US:IMBBY)2020-05-19 15:45Financial Data and Key Metrics Changes - The operating profit declined by 8.5%, with over 6% attributed to one-off charges related to the write-down of flavored pods in the US and slow-moving inventory [24][36] - Earnings per share (EPS) decreased by just over 9% in constant currency, slightly better than guidance, driven by a 2% improvement from trading [28][59] - Overall revenues declined by 0.9% for the period, with tobacco revenues up by 0.9% supported by strong volume performance and pricing [26][35] Business Line Data and Key Metrics Changes - Tobacco volumes declined by only 0.5%, with growth in the Middle East and Southeast Asia contributing positively [30] - NGP (Next Generation Products) net revenue declined by 43%, reflecting destocking in Europe and the US, although sellout rates remained resilient [34][78] - The tobacco business saw a net revenue growth of just under 1% for the half, while NGP-related write-downs impacted profit significantly [36][34] Market Data and Key Metrics Changes - The company experienced a decline in duty-free and travel retail sales due to international travel restrictions, which is expected to continue [10][60] - In the US, market share grew, with a cigarette price/mix increase of over 5%, although this was offset by lower Backwoods revenue [68] - European markets showed a decline in tobacco volumes by 3%, but revenues grew by 0.5% due to positive pricing in several markets [78] Company Strategy and Development Direction - The company is focusing on a 'back to basics' approach to tobacco, enhancing in-market execution and prioritizing high-margin products [13][84] - A strategic shift has been made to right-size investments in NGP, focusing on effective investment behind blu and reducing spending in less effective areas [15][53] - The board has decided to rebase the dividend by one-third to strengthen the balance sheet and accelerate debt reduction [18][54] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by COVID-19 but emphasized the resilience of the tobacco business, which remains broadly stable [59][60] - The company expects continued downtrading in the market, particularly towards value formats, but is well-positioned due to lower exposure to premium products [62] - Future performance is expected to be impacted by the ongoing effects of COVID-19, particularly in duty-free and travel retail operations [60][64] Other Important Information - The company has secured a new €3.5 billion multi-currency revolving credit facility and additional bank facilities to improve liquidity [47][48] - The sale of the Premium Cigar business is expected to strengthen the balance sheet and reduce net debt to EBITDA by around 0.2 times [49][50] - The company is committed to its ESG agenda and is developing KPIs for priority ESG issues [22] Q&A Session Summary Question: Concerns about downtrading to illicit products post-2008 - Management noted a reduction in illicit trade during COVID-19 due to closed borders, and they are adapting offerings to consumer demands to mitigate downtrading risks [88][90] Question: US volume guidance for FY 2020 - Management refined the guidance to expect total market volumes to be down around 5%, while focusing on growing market share [94][97] Question: NGP losses and investment focus - Management indicated a focus on OND (Oral Nicotine Delivery) while moderating investments in heated tobacco and EVP (Electronic Vapor Products) due to varying consumer loyalty [98][100] Question: Dividend reduction and potential for buybacks - The board emphasized prioritizing debt reduction over share buybacks in the short term, with a review of shareholder returns expected in 2022 [111][115] Question: Impact of duty-free sales transition to local markets - Management expects a slight positive impact on price mix despite lower volumes, as consumers will purchase in home markets where margins may be higher [120]