Imperial Brands(IMBBY) - 2019 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The tobacco business grew net revenue by 1.1% and operating profit by 2%, driven by strong performance in the U.S. and resilience in Europe, despite challenges in the AAA division and share declines in Germany and the UK [4][9] - Group adjusted operating profit declined by 2.4% due to higher investments in NGP, while EPS benefited from lower interest charges and a favorable tax rate [9][10] - Tobacco volumes decreased by 4.4%, with a recovery in Middle East volumes and resolution of distributor disruptions in Southeast Asia contributing to a better second half [10][12] - Cash conversion was at 95%, slightly higher than initially guided, primarily due to working capital flows [9][23] Business Line Data and Key Metrics Changes - NGP net revenue grew by 48% overall, with trading revenue up 137% after adjusting for last year's IP income [11] - The tobacco valuation model continued to deliver, with price rises in higher-value markets supporting price mix gains despite volume declines [12] - The AAA division faced tougher trading conditions, with profit impacted by lower price mix and increased investment in Australia [13] Market Data and Key Metrics Changes - The Americas delivered strong tobacco performance, with cigarette share growing by 10 basis points to 8.8%, and net revenue grew by 6.8% on a constant currency basis [40][41] - In Europe, tobacco net revenue increased by just under 1%, with profit growth of just over 3%, while NGP revenue grew by around 300% to GBP 131 million [48][50] - The UK and Germany saw share declines, impacted by the timing of price increases, while share growth was achieved in Italy and Spain [48][51] Company Strategy and Development Direction - The company is focusing on a multi-category approach, strengthening its presence in heated tobacco and modern oral nicotine, while adapting its investment strategy for NGP to drive stronger performance [8][30] - A cautious approach is being adopted for 2020, with revenue and EPS expected to grow by low single digits, excluding divestment impacts [55][56] - The company aims to improve brand loyalty and consumer experience in the NGP segment, with a focus on enhancing the blu product line and increasing online consumer engagement [33][36] Management's Comments on Operating Environment and Future Outlook - Management acknowledged a challenging year with mixed results, emphasizing the need for an agile approach in a fast-moving environment [3][7] - The regulatory environment for vapour products has been volatile, impacting market dynamics, but management believes that a clearer regulatory framework will restore confidence and improve returns [37][79] - The company expects a stronger underlying cash performance in 2021, despite anticipated lower post-dividend cash flow in 2020 due to one-off cash outflows [25][56] Other Important Information - The company has reset its investment plans for NGP, focusing on building brand loyalty and enhancing consumer experience [8][30] - A significant impairment charge of GBP 525 million was recorded for the Premium Cigars assets, with expectations of offsetting cumulative FX gains upon completion of the sale [17][63] - The company is actively engaging with regulators to promote higher product and marketing standards for vapour products [37][53] Q&A Session Summary Question: Update on the Premium Cigars sale and potential future disposals - Management confirmed that the Premium Cigars sale is at an advanced stage, with efforts to conclude it shortly, while future asset disposals will be kept under review [58][60] Question: Explanation of cigar impairments and risk of other asset write-downs - The impairment was driven by accounting standards and market conditions, with management comfortable regarding the cash flows of existing assets [61][64] Question: NGP margins and competition outlook - Management acknowledged that NGP margins are expected to improve over time, but the timeline has been pushed out due to increased competition and high consumer churn [61][67] Question: Trends in the U.S. cigarette market and impact of e-cigarette bans - Management noted that the U.S. market has been volatile, with structural declines expected to continue, but the impact of e-cigarette bans is still uncertain [71][76] Question: Guidance on free cash flow post-dividend - Management assured that cash flow will cover dividend obligations, despite lower expected cash generation due to one-off payments [102][105]