Imperial Brands PLC

Good morning. Welcome to our 2020 Interim Results presentation. I'm Dominic Brisby, Joint Interim CEO, together with Jörg Bibinick, who will also be presenting today, along with our CFO, Oliver Tant. Since Jörg and I were asked by the board to lead Imperial in early February, we've been working with Oliver on five key areas. Protecting the health, safety and well-being of our people. Maintaining supply to customers. enhancing our focus on our tobacco performance, right-sizing investment behind our next-generation products, and strengthening the balance sheet. Over the course of the presentation, we will outline the progress we've made in each of these areas. Jörg and I will provide an initial overview, before handing over to Oliver to take you through the financials, our revised approach to capital allocation, and the outlook. We will then cover our divisional performance before taking questions. Let me start by talking about how we have managed the business through coronavirus, starting with how we have protected the health, safety and wellbeing of our people. We employ more than 32,000 people around the world. They are the lifeblood of the business and we value everything they've been doing in these challenging times. In all our markets, We have scrupulously followed the advice of governments and public health bodies, and we will continue to do so. Large swathes of the business have been working remotely for some time. Where our employees have to work on site, such as our manufacturing facilities, they are doing so in such a way that prioritises their health and wellbeing, with social distance and hygiene guidelines strictly adhered to. Our manufacturing and supply chain have benefited from its diversified nature, We operate 38 factories, and it is a credit to the manufacturing teams that they have kept the vast majority operating throughout the crisis. We have had temporary closures of some smaller factories, mainly in cigars, but they are now back online, although operating with a reduced capacity, which may affect future supply. To date, we've still been able to supply customers, and we typically have eight to ten weeks of finished goods across most key product lines. Our people have done a remarkable job, and I know many of them will be listening in today. On behalf of the Board, York, Oliver and myself, I would like to say that we are immensely proud to lead you at this time. Thank you for your incredible support and dedication. Turning to our customers and consumers, sales of tobacco in the first half have been pretty stable. International travel restrictions have adversely affected duty free and travel retail sales, although this has been more than offset by some temporary stockpiling we saw in March, with a net upside to revenue and profit of around 1% for the half. Looking forward, it seems inevitable that we'll continue to see a significant reduction in international and cross-border travel for the rest of this year, so we're very unlikely to see this part of the business improve in the second half. We've also outlined a number of risks associated to COVID-19 and the RNS. including the impact on consumer trends and regulation, and we will continue to actively monitor them. Let's now look at how we have reshaped our focus in the first half, and I will hand over to Jorg.

Thanks, Dominic. Although we delivered against our revised expectations in the first half, the results are clearly disappointing. However, what the numbers fail to show is the progress we are making in refocusing the business, in particular through adopting a back-to-basics approach to tobacco. Our enhanced focus on in-market executions has delivered growth in tobacco share for the group overall and in seven of our ten priority markets. Underlying pricing has remained strong, although this has been partly offset by some temporary adverse market mix and the impact of downtrading. The fundamentals of the tobacco business are sound, and we expect it to continue to grow over the medium term with high margins and strong cash flows. In NGP, We've been taking action to right-size our investment and resources to take account for the uncertain environment and last year's disappointing performance. We've reset our plans, which has involved focusing on the most effective investment behind Blue and reducing it in areas which weren't working as well as we would have liked in both the US and Europe. Last month, we submitted PMTAs to the FDA for a range of MyBlue products. We continue to believe that MyBlue has a key role to play in realizing our goal of providing adult smokers with a range of potentially less harmful products. Our priority for this year is to improve returns, to strengthen the foundations of our NGP business, and to maintain a range of options for future growth. We've also taken steps to strengthen the business and its balance sheet, rigorously challenging the cost base around all aspects of discretionary spend to improve profitability. We have taken a similar approach to improve cash delivery. In March, we announced a new three-year credit facility and last month we agreed the sale of our premium cigar business, a major achievement under the current circumstances. The disposal further simplifies the business, with proceeds being used to accelerate debt reduction. Faster deleverage of the balance sheet will also be supported by today's announcement that we are rebasing the dividend by a third. The Board recognises the importance of growing dividends for shareholders and we are committed to a progressive policy growing from the revised base, while strengthening the business for the future and underscoring its defensive characteristics. Oliver will provide some further colour later. Before handing over to Oliver, I'd like to briefly touch on our sustainability strategy, which focuses on three key areas that define the approach we take to managing our environmental, social and governance responsibilities, maintaining a sustainable tobacco supply, developing NGPs that are potentially less harmful to health, and running our operations responsibly, keeping our people safe and providing them with a rewarding environment. Within the current environment, our focus on our people and operations is clearly especially relevant and we continue to ensure that all our people are able to work safely. are monitoring government guidelines closely across all our markets making certain that as lockdown conditions ease our people are fully supported with any return to their normal place of work whether that's in the field an office or factory as we stand today the coronavirus has not affected delivery against our esg kpis however some specific initiatives we had planned for the year have inevitably been affected, including progress on the independent environmental assessment of a blue device. This work is ongoing and we will do our best to get it completed this financial year. We remain fully committed to our ESG agenda and are currently in the process of developing KPIs for all five of our priority ESG issues. Our intention is to get these finalized with the new CEO Stefan Boomhardt in the summer and implemented in the new financial year. Thank you. I now hand over to Oliver.

Thank you, Jörg, and good morning, everyone. From an earnings perspective, these results reflect actions we're taking in 2020 to mitigate the poor returns from the NGP business in 2019. Over 6% of the 8.5% decline in operating profit during the half relates to one-off charges from the write-down of flavoured pods in the US, slow-moving inventory more generally, and an impairment of some vapour intellectual property assets. However, our performance is also starting to reflect the renewed emphasis that we're placing on our tobacco business. Volumes in tobacco benefited from a better performance in the AAA division against a weak comparator, but also reflect the continuing improvement we're making from a share perspective across many of our priority markets. Towards the end of the period, we experienced some COVID-19-related inventory build, though this is expected to fully unwind during the second half. Share for the group as a whole was up 15 basis points over the 12 months to February and 40 basis points in the last six months. Tobacco revenues were 0.9% higher, supported by a relatively strong volume performance and pricing, although this was partially offset by some adverse mix that I will explain in a moment. A decline in NGP revenues reflects destocking and the category slowdown in the US and Europe, although sell-out rates have proved relatively resilient, with Blue maintaining share in several markets. Overall, revenues declined by 0.9% for the period. EPS came in slightly better than we expected, and I will outline the drivers shortly. Cash conversion of 103% over a 12-month period was higher than expected, driven by NGP write-downs which impact profit but not cash, and a benefit from working capital inflows, which will unwind in the second half. The decline in constant currency EPS for the half-year, of just over 9%, was slightly better than guidance. This was driven by a 2% improvement from trading, partially offset by a 1% headwind from a £19 million impairment of NGP intellectual property assets, which was not included in our original guidance. This arose from a review of our IP against our updated product launch plans. We believe that around 1% of trading benefit in the first half was COVID-19 related, being the net of a decline in duty free and travel retail, offset by some consumer and customer stockpiling in March. Tobacco volumes declined by only 0.5% in the half. This was largely driven by the recovery in the Middle East and Southeast Asia, both of which had a weak first half last year due to the timing of regulatory changes and distributor disruption. As a result, tobacco volumes in AAA grew by 4%. US volumes were better than expected, with strong promotional activity in Q2, which supported share gains, as well as some COVID-19-related trade pull and the timing of normal industry inventory movements. Europe was broadly in line with the wider market, with an increase in German private label volumes and some stockpiling in March broadly offset by a double-digit decline in the Ukraine, though this latter point had little impact on revenues or profit. Although underlying pricing was strong, it has been partially offset by several discrete temporary mixed headwinds, which I will explain. Good pricing was driven predominantly by MPIs in the second half of 2019 in key markets, notably the US, UK and Germany. We also benefited from a carryover of Australian stock profit, which wasn't realised at the end of last year. Market mix has been a negative in the period. We grew volumes strongly in the Middle East against a weak comparator, where revenue per thousand is significantly lower than the group average. Conversely, lower volumes in Australia, one of the highest value markets, has been driven by the growth of illicit trade, which has more than offset the benefit of our recent share growth. We also suffered from a product mix headwind during the half. This was predominantly due to downtrading in Australia, with the expansion of the fifth price tier and a decline in sales of backwards in the US, with the latter already seeing some pick-up in the early part of H2. We grew tobacco net revenue by just under 1% for the half. NGP net revenue declined by 43%, reflecting destocking in Europe and the US, partly offset by growth in heated tobacco in Japan. Overall, at constant currency, revenue was down by 0.9% and 1.7% at actual rates after a 0.8% currency headwind. Tobacco profits fell by 12 million, or 0.7% in the half, driven predominantly by cost phasing, something I'll come back to in more detail on the next slide. NGP-related write-downs of inventory and IP assets impacted profit by 95 million. Just over half of this relates to the value of flavoured pods in the US, with a further 28 million provided against slow-moving inventory, reflecting our revised growth expectations for the vapour category in our business. We also had the 19 million impairment of intangible assets I mentioned earlier. Reduced trading income from NGP reflects lower sales and gross profit following destocking. This impact is partly offset by ANP and overheads, which are lower both year over year and sequentially versus the second half of last year, as we reduced less effective investment. This reduction was more significant during the second quarter as we worked through the drag of spend which was committed at the end of last year. The growth of Lehista's operating profit contribution to the group reflects the reduction in eliminations as a result of cycling the MGP inventory build in the first half of 2019 in support of market launch activity. Group adjusted operating profit, including logistics, was down 7.7% in constant currencies and 9.3% at actual rates. I've already talked through the drivers of the growth in tobacco net revenue, which supported an increase in gross profit of 1.3%. This increase hasn't translated into improved operating profit because of an increase in operating costs, which was predominantly timing related. In line with our increased focus on tobacco, we have revisited our investment plans and refocused some initiatives. As a result, we've seen a re-phasing of promotional activity into the latter part of H1, particularly in Europe, resulting in a greater proportion of trade spend in this half compared to last year. Overheads attributable to the tobacco business have also been more first-half weighted this year, reflecting the increased emphasis that's been placed on this part of the business by the sales force as we right-size NGP. Production costs related to EUTPD2 and the new regulations around track and trace have also contributed to this cost profile. Finally, while finished goods stocks meant our ability to supply has been largely unaffected, the disruption to our supply chain caused by government-enforced closures of our cigar sites in Honduras, Puerto Rico and the Dominican Republic has meant some under-recovery of production costs during H1N1. All three sites reopened after only a few weeks, though are unlikely to return to full capacity while new COVID-related safety procedures remain in place. We further increased our focus on optimising cost and cash opportunities across the business, with even greater emphasis on managing investment and working capital. In addition to reducing NGP investment and overhead expenditure, we've also initiated an even greater attention to cost reduction initiatives to improve returns and mitigate the profit impact from inventory write-downs. This has included travel restrictions, recruitment freezes, cancellation of discretionary expenditure and postponement of non-essential capital expenditure. Alongside this, we're continuing to target a more efficient use of working capital to further improve cash generation. Cash conversion for the trailing 12 months benefited from temporary working capital inflows related to changes in production schedules. Looking forward, the COVID-19 situation has caused some temporary changes in working capital as we build contingency stocks to support the supply chain, which we expect to unwind in the second half. We are continuing to closely monitor all aspects of working capital, including the timing of excise payments, which are a fundamental part of the positive working capital inflow we benefit from as part of our cash pooling arrangement with Leicester. Although the effect of COVID-19 in H1 was limited, the situation continues to evolve and we've therefore undertaken extensive stress testing of our liquidity needs and financial resources. We've modelled a range of situations, including recessions with different profit impacts over a span of time periods as well as temporary and permanent reductions in our manufacturing capacity. Our testing demonstrates that we have the ability, from a solvency perspective, to absorb significant systemic shock. We've recently agreed a new €3.5 billion multi-currency revolving credit facility, which is undrawn and have taken further steps to improve liquidity by securing an additional €1.7 billion of committed 18-month bank facilities. of which €1.1 billion was secured after the COVID-19 lockdowns. We've also agreed funding through the Bank of England's COVID corporate financing facility. The liquidity of our business is underpinned by strong operating cash flows from tobacco within our business directly and through our cash pooling arrangement with Lehista. We also have a strong committed financing position with no immediate funding requirements and the actions we've taken to ensure efficient cost and cash management and to improve liquidity have strengthened the resilience of the group. The premium cigars transaction was complex and we're very grateful for the hard work and persistence of our teams which ensured we got it over the line and even greater achievement in the current environment. The multiple of just under 12 times EBITDA recognises the luxury nature of the business and its international growth profile. The sale moves us further towards our ambition of becoming a leaner, more agile organisation. Cash proceeds will be used to strengthen the balance sheet, reducing net debt to EBITDA by around 0.2 times, with full-year dilution of around six pence, equivalent to 2% of full-year 19 earnings. With the transaction now expected to complete in July, I expect dilution in FY20 of around 0.3%. We also expect to realise a non-cash credit to our foreign exchange reserves, which will partly offset the non-cash impairment charge we've taken to date. In accordance with accounting requirements, this will be recognised on completion. We have been focused on a deleverage plan for some time. And while the premium cigar sale moves us closer to our target range for net debt to EBITDA of between 2 and 2.5 times, we've not been able to pay down debt quite as quickly as we'd have liked over the past couple of years. We also recognise investor appetite for debt has reduced over the past year or so. Therefore, while our tobacco business model remains strongly cash generative, we've modified our priorities for capital allocations. to rebalance deleverage and shareholder returns, thereby providing greater balance sheet resilience and flexibility. This is not, and I repeat not, a decision driven by concern over future cash flows or by COVID-19, although the uncertainties created by COVID-19 reinforce the importance of a strong balance sheet. This is about accelerating the pace of debt reduction. In that context, the Board has decided to rebase the dividend by one third, meaning that the total dividend for this financial year will be 137.7 pence per share. We will retain a progressive dividend policy as outlined last year, which will see the dividend grow annually from the rebase level, taking into account the underlying performance of the business. The reduction in dividend amounts to about 650 million per annum, which will be used to accelerate debt repayment. Our intention is to reduce gearing towards the lower end of our 2 to 2.5 times target range, which we expect to achieve by the end of 2022. The revised policy also enables a more flexible approach to shareholder distributions, with the potential return of surplus cash flows through share buybacks or special dividends once our target leverage has been achieved. Our overall objective is unchanged. We will continue to invest in the business to support the delivery of strong and sustainable operating cash flows. This investment will be within clear returns hurdles with a greater emphasis on risk evaluation and mitigation. As a result, we expect any investment to be prioritised behind tobacco in the short term, where the investment risk profile is lower. We will also actively manage the capital base, seeking opportunities to realise value and streamline the business. We will update the market on our investment priorities once our new CEO, Stefan Bomhart, has arrived and had the opportunity to assess his strategic priorities and set out a vision for the future of the business. Our revised priorities for capital allocation continue to recognise the importance of growing dividends for shareholders, with a re-based payout level providing the business with greater financial flexibility to strengthen the balance sheet. Following our updated guidance in our AGM statement in February, analysts' consensus for the full year currently shows EPS declines of 2% at constant currency, excluding a foreign exchange headwind of around 3%. While our underlying business remains broadly stable given the defensive qualities of tobacco, we have identified downside risks to trading in H2. Although the effects of COVID-19 were relatively limited in our first half, we've started to see a more significant impact develop over recent weeks. This is particularly noticeable in our duty-free and travel retail operations, where severe restrictions on cross-border and international movement have resulted in a material decline in the business. With only a small proportion of volume being repatriated into domestic markets, and with the curtailment of both business and leisure travel likely to persist for some time, We're currently not assuming any recovery during the second half. We've also seen some changes to consumption and buying patterns. For example, we saw some down trading during the first half since the lockdowns took effect. This trend has accelerated with a greater demand for value formats such as fine cut tobacco and big box products. Recessionary pressures may exacerbate this effect. though we are relatively well placed with a lower exposure to premium products in our portfolio. Although all of our cigar sites are now reopen following government enforced closures during the first half, social distancing measures and other COVID related restrictions have led to cost inefficiencies and temporarily reduced production capacities. We've assumed a return to full capacity for our cigar facilities by the end of June. we expect to incur increased manufacturing costs driven by the disruptions. We have also assumed there is no second spike in COVID infection rates, which would further disrupt other areas of our manufacturing and supply chain. Although at this early stage it's difficult to assess the extent to which these factors will affect our business, we are currently assuming a low single-digit impact to EPS. In addition, our full year results will now also reflect the impact of the intellectual property asset impairment of 19 million, a 0.6% impact to EPS which has been recognised in the first half but was not included in our previous guidance. We also expect around 0.3% dilution from the disposal of premium cigars. At current rates, we also expect currency to have a neutral impact on our earnings per share. Thank you. Now back to Dominic to take you through divisional performance for the Americas and AAA division.