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Earnings Transcript for IMB.L - Q4 Fiscal Year 2015

Executives: Alison Cooper - Chief Executive Officer & Executive Director Oliver Tant - Chief Financial Officer David Taylor - Chief Executive of ITG brands Matthew Phillips - Chief Development Officer Peter Corijn - Group Marketing Director
Analysts: Erik Bloomquist - Haitong Adam Spielman - Citi Chris Wickham - Whitman Howard James Bushnell - Exane Stephanie D'Ath - Bank of America Fulvio Cazzol - Goldman Sachs Owen Bennett - Nomura Chas Manso - SocGén
Alison Cooper: Well, good morning, everyone, and welcome to our 2015 Results Presentation. I'm joined by Oliver Tant, Chief Financial Officer; David Taylor, CE of ITG brands; and a number of other members of the senior management team including our Chairman; and also Matthew Phillips, the Chief Development Officer. I'll start with a brief reminder of the priorities we set for last fiscal year. They were about strengthening our portfolio by increasing the contribution from Growth and Specialist Brands, building momentum behind Fontem Ventures and developing our footprint through a focus on share and profit performance. Our cost optimization program and stronger capital discipline were also key focus areas. So, let me update you on our progress against these priorities. It's been another good year with progress against each of our priorities, improving the quality of our growth and continuing to strengthen the business. We generated excellent results from our Growth Brands which, supported by our successful brand migration program, outperformed the market again, growing volumes and share. Together with our Specialist Brands, these now account for 57% of group revenues. In addition, Fontem ended the year with an enhanced portfolio of assets, a great brand in blue, a stronger technology base and improving performances both in the UK and the U.S.A. From a footprint perspective, we delivered a positive performance from our returns market and continue to realize opportunities in many of our growth markets. Most significantly, we expanded our U.S. footprint through this year's acquisition. The integration has gone very smoothly and the market shares of our U.S. brands have held up well since completion. David Taylor will provide a brief update later in the presentation. We delivered about £85 million as part of our cost optimization program this year. At its heart is an extensive simplification agenda in respect of our brand portfolio, market focus, processes and ways of working. Our continued focus on capital discipline is driving working capital benefits with a further improvement in cash conversion to 97% such that are net debt before the cost of the acquisition fell significantly, and we successfully refinanced $4.5 billion of bank debt in the debt capital markets in July. Our performance underscores our commitment to deliver sustainable returns to shareholders. And this has been reflected in the further 10% increase in the dividend. People across Imperial have worked together to deliver these results while continuing to successfully progress our transition agenda. Many of them will be watching today, a great job and a big thank you. And I'll hand it to Oliver to take you through the financials.
Oliver Tant: Thank you, Alison, and good morning, everybody. The business is, again, performed well this year, making further progress against all aspects of our strategy with a good set of results from both a P&L and a balance sheet perspective. We grew tobacco operating profit by 3% or 7% on a constant currency adjusted basis, with growth in net revenue on further margin enhancement. Adjusted group profits and EPS increased by 2% and 4%, respectively, with growth in constant currency terms of 7% and 8%. We've made further progress on working capital and cash conversion which contributed to another year of improved capital discipline. Before the cost of the U.S. acquisition, we've reduced net debt by £1.1 billion. I will come on to talk in more depth about cash and debt shortly. In line with our commitment to deliver returns to shareholders, we've announced a 10% increase in the dividend which will be £1.41 for the year. Volumes for the year were 285 billion stock equivalents down 3% on a reported basis or 6% on an underlying basis. Iraq and Syria accounted for around 10 billion sticks over half of our underlying volume decline which also includes a 2% positive impact from the acquisition in the U.S. which added 5 billion sticks. The effect of last year's stock optimization was a 3% benefit to volumes. Overall, like-for-like volumes declined by 4% in line with our market footprint with market share stable across the group. The impact of Iraq and Syria on group revenue has been less significant than on volume given the lower relative sales value in those markets. The U.S. acquisition added around 4% to net revenue. David will cover the U.S. in more detail shortly and will talk you through the pleasing start we've made in the first few months. The impact of a 4% volume declined has been more than offset by 5% price mix which as expected was stronger in the second half of the year. Excluding Iraq and Syria, this resulted in organic revenue growth of 1% at constant currency. Adjusted EPS for the year was up over 8% in constant currency terms. This is largely driven by operating profit increases with a small benefit from finance cost and a marginally lower rate of group tax. In FY 2016, we expect our average cost of debt to remain flat with a tax charge coming down to nearer 20%. Movements in foreign exchange translation had a 4% impact on the bottom line with adjusted EPS for the year of £2.125. Based on current rates of exchange, we expect a translational currency impact in FY 2016 of around 2%. We've made further progress on strengthening our portfolio. Share of Growth Brands is up by over 100 basis points, and they're demonstrating an improved volume trajectory on a like-for-like basis. Our strongest equity brand is also generating a higher proportion of the top line with Growth & Specialist Brands net revenue up 57% of the total. Volume and revenue from the new U.S. brands for 2015 is all within Portfolio Brands which has had a 2% dilutive effect on the overall revenue percentage. For FY 2016, Winston will be added as a Growth Brand, replacing USA Gold while Kool and blu have joined our Specialist Brand portfolio. Our growth in Specialist Brand revenue, excluding the decline in Jatan in Iraq and Syria has been driven by scruff premium cigars and modern variants of Gold in Virginia. In our Growth Markets, our focus is on realizing opportunities both now and for the longer-term success of the business. Excluding Iraq and Syria, our underlying revenue was up 5% and profits were up 80%, reflecting positive momentum in the division with particularly strong growth in Russia, Norway and Taiwan. Our overall market share was slightly down with gains in Saudi, Italy and Japan, offset by decline in Vietnam. The quality of our share improved with over half our share now, represented by Growth brands. We continue to make positive progress in returns where there has been some improved market volume declines albeit in instances - in many instances, not reflected in improved market value. In this context, we've grown revenue and profit benefiting from improved price mix in the second half. Profit performances have been notably strong in Germany and Australia, offsetting continued weakness in Morocco and the impact of investment decisions in the UK. Market share reflects our returns market strategy and is broadly stable, with share gains in the north offsetting share losses in the south mainly due to Morocco. Again, the quality of growth improved with Growth brands now over half our revenues in the division. In the U.S., our strategy for USA Gold has continued to generate share growth in our focus states, resulting in a stable national share. The acquired brands have also maintained shares since completion and are performing as expected, contributing 5 billion sticks and £242 million net revenue in the three-and-a-half months since completion. In mass market cigars, the competitive environment shows no signs of abating, so we've taken advantage of our new national distribution capability to revise our MMC strategy, an area David will share his thoughts on shortly. We've taken the opportunity in the light of the reshaped U.S. business to review stock levels, resulting in a reduction to net revenue of just under £14 million in the year. As a reminder, we expect the U.S. will represent more than 20% of group profit on a fully annualized basis, further increasing the proportion of profits that we derived from markets with a better-than-average level of affordability. We remain firmly on track to deliver our target of £300 million of annualized cost savings by 2018 with 60% delivered so far. The evolution of a simpler business with more consistent process is supporting cost efficiencies across the group. Many of these stem from streamlining our portfolio. Fewer SKUs and a clearer brand hierarchy drives a more consistent investment approach across a focused group of brands and markets. This is enabling increased standardization and a reduction in manufacturing complexity. This in turn supports a reduction in working capital, a tighter supplier base and economies of scale. For example, we've reduced the number of suppliers by 10% this year, aligning terms and leveraging our scale which has driven an ongoing improvement in working capital. Reduced complexity also improves effectiveness through smarter ways of working. For example, the restructuring of our sales force and the use of bespoke customer relationship technology reduces time collecting data, enabling enhanced customer engagement. There are many other examples across the business helping to deliver our cost and cash objectives whilst also supporting top line investment and development of margin. We have continued to place great emphasis on capital discipline, seeking to embed cash consciousness throughout every part of the business. As well as focusing on working capital, we have continued to look closely at capital allocation to ensure we are maximizing value from our assets. As regards to uses of cash, dividend growth of at least 10% over the medium term and continued deleverage of the balance sheet remain our priorities. Once again, cash conversion was strong at 97% for the year. This continues to reflect improvements and inventory management particularly leaf as we better align to market demand and realize improvements to working capital from a simplified and more focused portfolio. There are also helped by the favorable working capital position within ITG Brands. Into 2016, we will continue to benefit from the working capital position in the U.S., although they may also be a temporary working capital impact in the first half of the implementation of EUTPD. Overall, we still expect to maintain a level of cash conversion above 90%. Our strong operating cash performance supported a £1.1 billion like-for-like reduction in net debt before taking into account a cost of our U.S. acquisition. It has successfully refinanced £4.8 billion of our acquisition facilities with a £4.5 billion termed out across four tranches in the dollar markets at an average maturity of around seven years. The remainder was financed with a bilateral term loan facility. We're taking the opportunity to repay facilities as they come due and although we have £2 billion of bonds maturing in FY 2016, headroom created by remaining bonds and bank facilities to ensure that we do not have any further refinancing requirements over the medium-term. The average interest charge for the group in FY 2015 was 4.3% and we don't anticipate a material deviation from this level in FY 2016. In summary, the results we have achieved this year provide evidence of continued delivery against the strategy. Revenue growth and improved margins had driven positive earnings momentum while working capital management has supported enhanced cash conversion on $1.1 billion reduction in like-for-like debt. This underpins a 10 % increase in the dividend. Looking to the year ahead we will continue to implement our new commercial and portfolio plans in the U.S. The expanded business is performing in line with our plans and we look forward to a full years' contribution. In returns, we see further pricing opportunities, although there will be some challenges from negative mix, investment driven by EUTPD and the conclusion of the PMI distribution contract. These have all been factored into our planning assumptions. In Growth Markets we still expect a headwind from Iraq and Syria but this will start to lessen during the second quarter. Overall, we see continued portfolio and pricing opportunities in Growth Markets as we target share and profit growth. Complexity reduction and simplified ways of working will continue to support our cash and cost objectives. I should remind you that last financial year we delivered a much stronger volume performance in the first half coupled with a very positive price improvement in the second half; whereas, we expect the trends to be reversed this year. This trend will be particularly notable in the first quarter with volumes affected by the continued impact of Iraq and Syria at a strong comparative period. Overall, we're well placed to meet expectations for the coming financial year. Thank you. Allison.
Alison Cooper: Thank you, Oliver. Following on from all of these comments on cost optimization and capital discipline, I will now focus on how we're strengthening our portfolio and developing our footprint. Starting with the portfolio. Our brand migration program continues to plan a key role in simplifying and strengthening our portfolio. It supports more targeted investments and is improving the quality of our sales. Migrations accounted for majority of our Growth Brand volume gains in the year, and we continue to retain close to 100% of consumers across the program so far, a fantastic endorsement of the quality of the planning and execution that has gone into this initiative. We have now completed 21 migrations with Portfolio Brands being migrated into a range of Growth Brands, including Parker & Simpson in Poland and Taiwan, JPS in Spain and UK, and News in France which you can see here. So, the 20 migrations underway and more are planned. This has resulted in the market share of Growth Brands increasing in almost all of our markets, and the overall share of our Growth Brands increasing by 110 basis points in the last year. The brand migration strategy is enhancing the quality of our revenue growth. Growth and Specialist Brands now account for 57% of group revenues compared to 50% two years ago. Migrations continue to be a key part of our strategy to remove complexity, but there's more to go for. As we focus on reducing brands, stock keeping units, builds and materials, the objective is not only about reducing costs but, more importantly, driving more growth from our strongest equity assets. Migrations in organic growth are both supported by our marketing campaigns and new product initiatives, and I've highlighted a few here. West is the last of our key [indiscernible] campaigns to be finalized, and this is being executed alongside new pack rollouts over the coming year. Vive le Moment campaign for Gauloises has improved awareness in Germany, scoring number one for brand relevance and number two for recall. Davidoff sales in the Middle East are benefiting from the launch of a new Davidoff digital platform and fresh look format, while Davidoff Absolute has exceeded our expectation since its launch in Taiwan in June. A new marketing campaign and pack execution has been rolled out across the JPS footprint and is supporting key brand migrations in Spain and Poland. And a new pack design and equity campaign for Golden Virginia called Roll and Rock will go live shortly. In 2016, our focus is on supporting further migrations whilst building momentum behind our key equities in our key market. As you know, we're also strengthening our portfolio by investing in new consumer experiences. Following the U.S. acquisition, we have integrated the Blue team with Fontem Ventures and are working on further developing the Blue brand and e-vapor technology. We have a great set of assets in the e-vapor space. A strong equity in Blue. Enhanced technical know-how to complement our current intellectual property. And we're building our presence in the current four key e-vapor markets globally, a strong platform from which we will continue to develop new opportunities for growth in 2016 and beyond. We're investing for future growth both in e-vapor and in our growth market. I've summarized here some of our key market performances in 2015. Not only building presence in these markets, but we're doing so with our strongest brand equities. In Russia, consumer choices continue to be influenced by the economy and the evolution of excise and regulation. Positive pricing has been beneficial. But we've also led the market with portfolio initiatives, enabling us to capture our predicted increase in down trading. We've been successful with big box and queen size propositions in Maxim in particular such that our overall share is stable with a strong improvement in revenue and profit. In Taiwan, we grew profit driven by the success of Davidoff supported by the new Hunter's campaign, and also new launches, such as Absolute, that I mentioned earlier. West held back our overall share with new initiatives over the coming months to address this. Norway and Scandinavia overall keeps improving. [indiscernible] is adding to our share gains and strong profit growth in the region. In Japan, our investment focus on growing our sales capabilities and distribution and we're making share gains with West. Italy is similarly progressing but with share gains in JPS which is our priority brand. I also want to mention the Saudi Arabia where our investments in Davidoff, as well as contributions from West and Gauloises are driving positive financial results and supporting share growth in one of the few growing tobacco markets in the world. In Returns Market, the quality of our market share continues to improve with over 50% of net revenue in growth brands. As Oliver mentioned earlier, share gains and returns north were offset by decline in south particularly due to further market share erosion in Morocco largely due to illicit trade. It's a highly competitive environment in the UK. We've invested to gain our fair share in the growing subeconomy segment which has helped stabilized our cigarette share with a focus to - on improving our portfolio now more concentrated in our JPS and Lambert & Butler brand families. Our Australian team has had another great year further improving profitability, growing share and now the proud parents of number one brands in both cigarettes with JPS and fine cut with Champion. Germany has had another successful year with excellent financial results in what continues to be a pretty stable volume environment with good pricing opportunities [audio gap] (21
David Taylor: Alison, thank you. I'm delighted to be here this morning, and I'm also pleased to say that the start of Imperial's newly-enlarged U.S. presence is all going according to plan. The acquired brands, Winston, Salem, Kool and Maverick, performed well in the fourth quarter, maintaining stable market share since completion in June. You may now that Reynolds made some changes to their promotional programs for Winston and Kool in late 2014 and early 2015 which were aimed at stemming share losses for those brands. We've made no substantial changes to those programs since closing. And combined with the efforts to protect retail visibility as provided in the route-to-market agreement with Reynolds, market shares for these acquired brands have stabilized. Remember that these brands had suffered market share declines for many years. In addition, overall market share for USA Gold held steady during fiscal 2015 while gaining nearly 20 basis points in focus states, which is an encouraging trend. Looking forward, we will implement our new portfolio strategy based primarily on four brands
Alison Cooper: Thank you, David. I'm delighted with how well the U.S. is performing. We've got an excellent team on the case and an exciting year ahead of us. There are some key things that run through today's presentation. We talk a lot about simplification. Simplification of the portfolio of stock keeping units, the bills of materials, and of all processes. And we've talked about focus, our investment focus behind our key brand equities, a clear strategic focus across our footprint on cost allocation and on cash and capital discipline. And the reason, simplification and focus, I've talked about at length in Imperial is because we're committed to becoming even more effective across our operations, further improving the returns we're generating from our assets. We're changing our ways of working and getting more effective through the value chain. We're generating savings from increased global procurement, driving consistent operational excellence across our factory footprint, realizing the benefits of markets clustering, and continuing to implement a differentiated approach to customer engagement. These are examples amongst many other initiatives, so we'll take some time next year at the Investor Day to talk you through these in more detail. These things are captured within the four strategic priorities. And it will, therefore, be no surprise that our focus for the coming year will follow the same four priorities. We'll continue to build the contribution from our Growth and Specialist Brands. This will be supported by further migrations which, in turn, supports our ongoing program of portfolio simplification. We'll also continue to develop opportunities for Fontem Ventures. From a footprint perspective, the focus is on building momentum across our growth markets whilst driving profitability in Returns Markets. The U.S. will clearly be a key feature as we progress the plans for our ITG Brands portfolio. Effective cost and cash management support our investment choices and margin progression, and a key element will be the further rollout of our new operating model. We've made excellent progress on cash conversion, instilling a great capital discipline across the business. And this will remain a key focus to further underpin our debt reduction and our dividend growth commitment. We're building a stronger business. We have the right strategic agenda and we're making excellent progress to improve the consistency and quality in our performance, all supporting high returns to shareholders. Thank you. That concludes today's presentation. We'll take any questions, usual form. And Erik got the mic.
Q - Erik Bloomquist: Thanks, Alison. Erik Bloomquist, Haitong. Two questions. Firstly, could you discuss the outlook for the UK in 2016 given the TPD2, the implementation of plain packaging, Philip Morris with its own distribution? And then, if maybe Matthew could comment more broadly on plain packaging challenges as those are [audio gap] (30
Alison Cooper: Okay. First of all, picking up on the UK. A lot of what we're doing in the UK in 2016 is building on what we've done in 2015. So, I've talked about the quality of growth, strengthening of portfolio in the market. And I mentioned in my script earlier around the fact that we're now much more focused on L&B in the UK market and also on the JPS franchise as well. There's a lot of work with the portfolio in 2015, a lot of work to invest to get our fair share of the subeconomy segment in the UK that we see that as an important dynamic going into 2016. In 2016, I expect a lot of the current dynamics to continue. It's going to continue to be a competitive market. We've got EUTPD, as you say, coming in which is going to involve some consumer churn in the market most definitely. And also, we've got the question mark over plain package which I'll let Matt comment on in a minute. So, there's a lot going on in the market. What we've done is exactly what we've done when we're seeing significant change in markets before, the classic example being Australia and that is we've been preparing for this for the last couple of years. We're focused on our sales growth driving capabilities in the market, getting the portfolio right, getting our pricing right, and most importantly as well getting customer engagement lines in the market, and those were all activities we'll be laying in the ground work for over last few years to get us in a great position going into 2016 in the UK market. So, I'm not saying it's going to be an easy year, but it's a sort of challenge we love. So, that's where we are on the UK. But there were uncertainties at the moment. It's what we're playing within 2016, and Matt will comment on where we were with the EUTPD and plain pack. Matthew Phillips Just to give you a flavor of the complexities that the guys are trying to deal with from an operational perspective. The legal challenge against the UK government starts from the 10th of December and is due to finish about a week later. That's about the same time that we get the result to the EUTPD challenge. So, we will know early January where we are in terms of what regulation is going to apply in the UK for - from May 16 onwards. So, operationally, they're preparing for a scenario which is an EUTPD scenario but it also maybe a UK plain packaging scenario. So, they're trying to cover both or they are covering both basis. So, we're prepared for either eventuality and we think we got very strong arguments in the UK Kool case, but we won't know the results until January. So, if you're right, the FDA has put up a large number of hurdles in terms of real product innovation for new cigarette introductions in United States but that does not limit us to the remainder of options available to us. It also include price promotions which you'll see aggressive price promotions on - aggressive price promotions on Winston rollout here shortly. Placement in the - in retail stores. Winston and Kool especially will benefit from better retail visibility in retail channels and there'll be a significant amounts of direct consumer marketing as well as advertising which is still permitted in certain publications in the United States. That combined with other innovations that we might be able to accomplish on pack design and other areas of recognition for adult consumers in the United States provide us with a number of leverage to restore the historic significance of Winston in particular. If you will recall many years ago, maybe before you were born, Winston was the largest brand in the United States and we aim to recover a large portion of that lost equity.
Alison Cooper: It's definitely before you were born Erik actually.
Erik Bloomquist: That's supposed to be a compliment.
Alison Cooper: But I think what's encouraging is you're seen the shares hold up already as the brands that we've acquired and there's been no further intervention from up at this stage apart from a little bit of additional visibility on shelf and the price promotions that Reynolds put on and before the deal completes in Mid-June. And I've always been keen to point out with this deal that actually, yeah we got a lot of levers here to pull. This is not just a pricing equation although it's important clearly in the U.S. market and our focus is very much on profitable share growth. That's what we're abound. And that's what David and the team are very much geared up to deliver. Adam?
Adam Spielman: HI it's Adam Spielman from Citi. If I can I'd like to follow up both those questions. First of all David, you said there'd be an increase price promotion on Winston rolling out shortly. I was wondering if you could be a little bit more specific on that. Allison shaking her head.
Alison Cooper: [indiscernible]
Adam Spielman: But Alison, maybe you can say, the previous guidance was basically any cost savings you got from, let's say, manufacturing et cetera would be - in SG&A, would be invested in the top line. And I'm wondering if there's any change to that. So that's, I suppose, the U.S. question.
Alison Cooper: Yeah.
Adam Spielman: A little bit more specific on pricing, cost savings, et cetera. Secondly, in the UK, you've pointed out that it's become a more competitive market. I guess, the two follow-on questions for that, sort of questions, one is to what extent would you be concerned if you lost market leadership? How - it's clearly important. How important is it? And secondly, why has it become a more competitive market? This thing used to grow profit incredibly regularly. A skeptic might say you're now earning too much or the industry is earning too much, prices are too high, you've got to the natural limit. Would you share that? And then, if I can sneak in a third question...
Alison Cooper: Yeah.
Adam Spielman: A little bit of detail about Morocco please.
Alison Cooper: Okay. David, would you like to comment further on our price [indiscernible]?
David Taylor: Well, apparently not.
Alison Cooper: No.
David Taylor: I can't. I will not give you the real specifics of exactly what the new [indiscernible] programs are. It's a little bit more complicated than I could explain here. But those - you'd expect to see those in store later this month. But it is not all about price. Alison mentioned it before, it's about profitable share growth. We can grow share very, very fast by reducing prices dramatically...
Alison Cooper: Yeah.
David Taylor: ...which is not what we're about. We're about growing share profitably. And we need to have a right price point with the right visibility to induce trial. That's the very first point for consumers. And from there, we can engage on a lot of the other brand-building initiatives to build long-term brand stability in the premium category. Remember Winston and Kool are our premium offering, and we do not want to price these products out of the premium category. Although, in the United States, as you know, price points are not quite specifically defined.
Alison Cooper: And I think he was asking about the cost savings being reinvested behind the top line. That's still the intention, yes. Yeah. On the UK, in terms of losing market leadership per se, I think that back to our strategies on returns markets in that we're continually evaluating the share profit equation in those markets. We wouldn't want to see our share eroded substantially in the UK and you've seen this year an investment decision because of the growth in sub-economy for us to invest back into sub-economy to get our fair share to protect our overall share in the market. So, we will make the right decisions around the longer term sustainability of profit growth in the market. But as you'll see in any one year, share could go up, share could go down within margins basically in the UK aligned with the returns market strategy. I think the reason for the increased competition is a very attractive profit pool. And as we do and as I'm sure our competitors do around the world, people look for attractive profit pools to grow share in. And the UK is absolutely one of those, and I don't think it's anything more complicated than that to be quite honest. Pricing too high, I think, if you look at our lovely affordability chart, which I need to dig out again - we should always have it to hand - I mean, UK is still not up there in terms of one of the most expensive markets in the world. There's still affordability headroom. You can see also across the price side that there's still lots of opportunity for consumers to pay different prices in this market within cigarette and within fine cut, and that's something we actively manage when we look at price increases in the market. On Morocco, you do talk about one of the markets and one of the - one of the most least affordable in the world, and there you've got very high illicit trade. Because of our presence in the market which is broadly the marquees brand in the market is our biggest element of our share that is getting very adversely impacted by list of trade, therefore our shares are decreasing, and that's impacting all our financial metrics in that market.
Adam Spielman: Can you say what the share was?
Alison Cooper: Our share is currently in the high 60s. Yeah. Might as well pass the mic [indiscernible] to your left, please. Have gone already.
Chris Wickham: Thanks. Hi. Chris Wickham, Whitman Howard. Just a couple of things. What in terms of like the final quarter obviously went more and particularly in the growth brands you went for more pricing, a little bit easier on the volume. When we go into 2016, what's the sort of the sensible run rate to be thinking of in terms of pricing and in terms of volume and especially given you're quite happy with where expectations of for the full year. And the second one, I was just wondering, obviously you look at U.S. and you look at the brands in menthol, that's a very competitor space. You've got some very big brands out there like Marlboro menthol. You've got Newport. Where does the sort of strategy fit in with that of having running the two different menthol brands?
Alison Cooper: Okay. [indiscernible] first, David?
David Taylor: Sure. Kool is our - is a menthol brand. It's all it is. It's a menthol brand and it does have certain pockets of strength in the United States with reasonable market shares. And so our promotional strategy will be geared toward promoting that brand where it has market strength currently and aim to exploit them. Certainly, Newport is a formidable competitor. I know. As well as the other menthol brands and it is highly competitive but Kool does have a good bit of historical brand strength particularly in various different pockets in the United States. So, we aim to exploit that. We've stated quite clearly of actually what we're going to experience in the first quarter as a sort of invertible appearance in the first quarter of last year where we have very strong volume and relatively weak price mix, this time around for a variety of reasons we're expecting to come with us which is very strong pricing and relatively weak volumes. Half of what is driving that is our experience in Iraq and Syria when we haven't yet lapsed the full effect. We're looking at some volumes being sort of broadly speaking against the comparable down by 10%, but the vast majority of that is Iraq and Syria which will be broadly speaking 4% of that number. From a pricing perspective, the pricing environment remains very, very strong, and we're expecting that to be more than compensated for by a stronger price environment in the first quarter which is largely driven by the fact that we have a relatively weak pricing in the first quarter of the comparable year. So, we're lacking a period where we put through where there was a more attractive pricing environment in the second half. We are realizing the benefits of that but with some timing differences also impacting the first quarter of FY 2016 in terms of when the prices are coming through in FY 2016.
Alison Cooper: Okay. James?
James Bushnell: James Bushnell here from Exane. Two questions please. Firstly, and partly related to Chris' question there. [audio gap] (42
David Taylor: Hi. We have talked about minus 4, plus 6 in broad terms as the algorithm and we remain fairly committed to the view that that plus 2 net impact is, broadly speaking, what we would expect to see. And I can talk through how that then runs down to profit, but let me give you a bit of confidence around why we're sort of comfortable with that algorithm given an underlying plus 1 net revenue implicit within these numbers. If you actually look at the trend that we're seeing, we're seeing some very positive moves. So, for example, in Returns division North, we are actually beating our benchmark as things currently stand today. In Returns South, we're not, which means that in overall terms, we're slightly underperforming across Returns. But South is significantly influenced...
Alison Cooper: By Morocco.
David Taylor: ...by the situation in Morocco which Alison's already referred to. Actually, what we're seeing in a number of other markets is an improving market and environment which some of our competitors have been referring to and which gives us [indiscernible] for hope around potential momentum, although we wait to see how that pans out. In our Growth division, by the time you remove the impact of Iraq and Syria, we're at plus 5. And in fact, there are some significant reasons for being relatively confident about the revenue momentum across a whole series of markets within the Growth division. If you add to that some of the issues that we talked about in Indochina or in Vietnam, you can see that the underlying momentum across many of them is strong. So, we still remain committed to that algorithm and with a reducing volume and strong price pressure, the impact on operating profit gives us the potential to achieve the types of profit before tax numbers that we need in order to sustain our 10% dividend profit promise by funding through accretion of profits year in, year out to a level that supports that 10% dividend increase.
Alison Cooper: And I think also it's worth highlighting the margin improvement in the year which clearly also supports the overall profit development. And I think we highlighted during the presentation how that's really linked to what we're doing in terms of strengthening the portfolio, improving the quality of growth and how that's, therefore, running through around the opportunities for cost optimization as we simplify the portfolio. But that's through a lot of aspects in the value chain where we get benefit there as well as also then the focus at our point of sale with the retailer and with the consumer, getting more focused investment behind those brands. So, the whole piece fits together in order just reinforce the opportunities we have to grow the bottom line as we further strengthen the business in line with the strategy.
David Taylor: Yeah. As Alison says, I mean, our margins gone from 43.7% to 46.3%, and there are a number of drivers of that. But that's a very healthy directional trend for us in the context of committing to our dividend price.
Alison Cooper: Yes.
James Bushnell: Okay. Thank you. My second question was another follow up on Winston, so apologies for that. But talking about it being a premium brand, we've touched on this where does premium starts and stop in the U.S. At least from what I can see, it's about halfway between mainstream premium, i.e., Marlboro, and discounts, L&M, Pall Mall. So, two questions on that is how far can you effectively cut the price through promotions? And secondly, how carefully do you have to manage the potential response of the main competitors you have in the U.S.?
David Taylor: Okay. The question is how far can we cut the price and continue to be a premium brand? It's a bit of an art, not a science, so I'm not sure that I can answer it in specifics. But there is room to expand the level of promotions currently for Winston on a national basis that should give us better brand momentum heading into fiscal 2016. And we will constantly measure what our competitors do with respect to their promotional programs and our competitive space that combined with trends for Winston, trends for Kool and our other brands upon which were addressing our portfolio strategy. We do this constantly. And so, we will keep an eye on what our competitors do vis-à-vis their volumes and share trends compared to our volumes and share trends, state by state, region by region in the United States. It's just the way our team manages the business but, remember, Winston is a 2-share and not a 45-share. And so, we have not seen any competitive response at this stage because we haven't rolled out our new promotional values yet, but we will keep a weather eye out.
Alison Cooper: And just remember what David said earlier, you can cut price and grow share very rapidly if you want to, but this is about sustainable, profitable share growth. And that would probably keep a [indiscernible].
James Bushnell: Thank you.
Alison Cooper: [indiscernible]. Are you finished, James?
Stephanie D'Ath: Hi. Stephanie D'Ath, Bank of America. You used to be, in terms of next-generation products, more of a follower than a leader in terms of innovation. With the acquisition of blu, could you please elaborate on where you stand and how - if you expect to increase investments relatively for next-generation products? My second question relates to brand migration. So, there are 20 brand migration in progress. How many more do you think there could be and would they already start next year? And then my final question was on for the mass market cigar, could you please elaborate a bit more on your new revised strategy, please?
Alison Cooper: On the strategy - new strategy...
Stephanie D'Ath: Mass market cigar.
Alison Cooper: Yeah. Sure. Certainly. Okay. Let's kick off - maybe, Matt can talk about what we're doing from a Blue investment perspective. Peter, then do you want to talk briefly on the migration program on where we are? Peter Corijn, our Group Marketing Director is here as well, so - and then David onto MMC. Thank you.
Matthew Phillips: So, from a Blue perspective, we continue to take a very measured approach. We've said that from the beginning that we don't see that the time is right yet to be putting huge bets behind the technology because we don't think the technology is ready to do that yet. So, we continue to be measured. We are really delighted with the assets that we've now got in e-vapor. We've got an absolutely fantastic brand. As you saw from the presentation, we think we're focused in the right markets. We have got fantastic innovation opportunities as a result of putting together the pipelines of both Fontem and the Blue. And we've got the underlying intellectual property which we're in the process of licensing to third parties. So, we think we've got a fantastic hand of cards but we are taking a measured approach to the way we're investing behind that.
Alison Cooper: Okay. Peter?
Peter Corijn: Yes. Hi. Good morning. Indeed, migrations continue to be a very important part of some of the areas that Alison has highlighted because it leads to a stronger consumer proposition because we move consumers to our best and strongest equity brands, but it also leads to massive simplification, so - which then, in turn, helps to fuel investment and you create like a positive cycle. Now, I cannot tell you more about what we're going to do in the future for a very simple reason beyond 2020 that have been identified. That's because we look at every migration as a stand-alone case. And so, every migration has to prove itself. And so far at everything we've done has been successful and the reason why we do that is obviously sometimes you - there's also a risk elements. [indiscernible] Spain is a big brand. We're successfully moving it for [indiscernible] France it's a big brand. We're successfully moving it and they're all created in a different way and very often the execution are done in a different way, but it's obviously something that we all want to continue to look at because it works, and it leads to very good results as you've been able to appreciate today.
Alison Cooper: [indiscernible]. We will keep looking opportunities though, but so far we haven't got any more beyond the 20 that we've already got in track.
Peter Corijn: And in terms of the mass market...
Alison Cooper: [Inaudible] (51
Peter Corijn: Cigar business, the Commonwealth Altadis mass market cigar business have been under pressure over the last couple of years. Its lost a - lost some points of market share and now with ITG Brands national sales force visiting hundreds of thousands of retailers it give us a capability to change the way the business is conducted such that more the promotional investment and price investment actually makes it to consumers and so we - we have an opportunity to change the way that business works, changing it more from a push sort of a model. Pushing it a through our wholesalers to retail and changing the investments so that it's more pulled from retail through the wholesalers. But it's a complicated process that - that's the primary change in the way we're looking at the business, but there is SKU rationalization cost saves, pricing strategies, manufacturing changes so it's a pretty broad spectrum of initiative in place for revitalizing that mass market cigar business.
Alison Cooper: Okay. [indiscernible].
Fulvio Cazzol: Good morning. Fulvio Cazzol from Goldman Sachs. A couple of questions. One on the Cuban cigar business [indiscernible] you set up an operation in the U.S., tropical area U.S.A. are presuming preparation for potentially the opportunity on Cuban cigars. If you can just highlight what your ambitions are for this particular market and segment. And then, my second question on Australia, you highlighted that you've got the leading brand in Australia. I was wondering if you can tell us what your latest spot share is for JPS and also what your corporate share is in Australia. And then, secondly, on Australia, I know that excise duties have gone up in September. I was wondering if you can just give us a bit of color on the latest pricing dynamics, i.e., has the industry passed on more than just the tax to the consumers? Thank you.
Alison Cooper: Okay. Firstly on the Cuban business, it's - we are continuing to prepare in the expectation that at some point, the embargo will be lifted, ask me when, it's still be pretty vague, to be quite honest. There's a lot of machinations here and need to be worked through, substantial politics, and it's very hard to predict. Though I can say is there continues to be some positive signs that this may be moving in the right direction. There's few things we therefore need to actually get prepared for, some of that's clearly in relation to our Cuban partner and how we get prepared with them, but also in relation to our end market presence in the U.S. Now, we already have an extensive premium cigar business in the U.S. mainly based on brands from the Dominican Republic, but with most of the key markets that you'd recognize. So, Romeo y Julieta is a key brand for us in the U.S. as in Montecristo. But they're Dominican origins currently that we have in the States. We also have a retail business in the States called JR Cigar which we're refocusing down purely on tobacco. So, it used to do all sorts of other stuff. Christmas shops you name it, [indiscernible] to be in that business. We've shrunk it back now to really be a tobacco-focused business to support or prepare to support what we see as an even bigger premium cigar opportunity in the U.S. going forward. So, we're working on it. There's a lot we can do. The business is delivering some great results overall in the U.S. currently. We're going to build on our momentum going into 2016 with our existing portfolio, but clearly, there may be opportunities at some point to add the Cuban into that mix and add to that business. I wouldn't say it's going to be a huge ticket for the overall business, but it will be nice uptake, significant uptake for the Cuban business. And Tabacalera is a nice spot. If we change the name in preparation again, the old branding actually from the original Spanish cigarette business from 17 or something. So, that's quite a nice bit of heritage reappearing in the States. On Australia, our overall share now is around, I think, 34% of which the lion share of that is JPS. It's over 20% of the market. In price terms, September was largely around excise. I think you can be careful in Australia market to look at what's on the headline level in the market because actually that's what happens in Retail that actually matters in terms of price to the consumer. We continue to be attractively priced with JPS in the market, but were a good $1.50 of any floor prices in the market. So, continuing to build profitability and seeing some great results in 2015, both in terms of revenue growth, share growth, profit growth. It's going very well for us.
David Taylor: It's worth noting, I think JPS's market shares [indiscernible] so it continues notwithstanding the other activity in the market to be a strong and growing brand.
Alison Cooper: Yeah. [indiscernible]. Microphone over here, please. Thank you.
Owen Bennett: Thank you. Owen Bennett, Nomura. I just wanted to come back to the margin performance quickly and in terms of the key drivers of that and how much of that was underlying mix and how much of that was the Iraq and Syria? And if you could, expectations from margins going into fiscal year 2016. And then secondly, just going back to the U.S. again in blu and I'm just wondering that share trends are for blu [indiscernible] have they stabilized or are you taking share and when can we expect an announcement around the deeming regulations? And is there any indication now in terms of how they're play substantial equivalents to [indiscernible] or you just not know it yet? Thank you.
Oliver Tant: I'd kick off with margins. So the margins are up 2.6%. There a whole variety of things that have driven that margin development and I'll try and simplify an explanation. Firstly, there is clearly an element which relates to the strength of our brands and our ability to price ahead of cost per sales inflation which is impacting and driving both the strength of our portfolio and our ability to enhance that margin across our business. Then secondly, in a footprint point and the point that you allude to. We went in essentially losing relative volume in Iraq which is a substantially lower margin business and replacing it with U.S. volume which is a relatively high-margin business. We enhanced our average market and so, at Iraq and Syria business is half our growth market average whereas the U.S. businesses above our average as a business as a whole, and that contributes. It's also versus our margin benefits from the fact that our profit had a rise in markets which from a forex perspective are relatively strong more so than our revenue. So we're actually getting a margin benefit from the fact that we make our money in markets that have a relatively stronger foreign exchange position versus Sterling's than the footprints across our population of markets from a revenue perspective. And indeed, that's one of the strengths of our business that we are invested heavily from a footprint perspective in markets with relatively strong currencies. And then, we've also driven some benefit from cost savings as well. So, our levers are really working for us. Just - in simple terms, what I think the U.S. has contributed, because I think it's relevant to looking forward, we probably got less than 1% of that 2.6% as a result of the mix impact to bringing the U.S. business in. We expect, however, our margin to continue to grow not by the same relative magnitude in FY 2016, but I would expect it to continue to grow over the course of the next 12 months.
Alison Cooper: Then to Blue next, Matt.
Matthew Phillips: So, Blue performance in the U.S. Since July, we've been focused on removing the old technology products within the U.S. market and getting consumer focus on Blue Plus. And it was clear that there was consumer confusion between the two products in the market at the same time. So, it's difficult to give you a precise view in terms of market share. I mean, our view is that removing the old products has led to increased sales at the Blue Plus products, and therefore, we'll be expecting to be growing market share as a consequence. In terms of the deeming regulations, our understanding is that the FDA sent the deeming regulations to the Office of Management and Budget, the OMB, last month. And they've got 30 to 60 days, I think, it is in order to be able - in order to revert to the FDA with their view. So, we would expect, I guess, some kind of clarity this side of Christmas. A personal opinion, [indiscernible] was talking at a conference last month and he said that it's tar that causes the problem not nicotine which hopefully indicates a different mindset as one would hope because I think they recognized the potential benefits of the e-vapor category. And also that the FDA had effectively been forced to regulate a cigarette almost against their wishes. So, I'm hoping that the some of the kind of fears from any e-vapor perspective may not turn out quite as bad as been portrayed.
Owen Bennett: Okay.
Alison Cooper: Okay, Chas.
Chas Manso: Chas Manso from SocGén. I've got two questions. One on the U.S. which is could you address the concern that once your large competitors revamp their retailer contracts and get new brought in that will place a lot of market share pressure on yourselves. What is your defense? What is protection against that once the stand-still agreements totally expire? And the second question is a more so general group market share question. I think, over the year, you're saying, your market share across your footprint is flat, 13.3%. Could you sort of give some more color on the momentum behind that? Is it improving or was it deteriorating and how you see that trend progressing? Thank you.
Alison Cooper: [indiscernible] kick off with the retailer contract.
Matthew Phillips: Sure. I described briefly what the principles were surrounding our new ITGB retailer contracts as to make it simple and achievable and profitable for retailers. That's the key. We've seen the new retail contracts that Reynolds is selling in. And, frankly, the retailer response to our contract is really what I'm most worried about. And it's being accepted very well, better than what our projections were in terms of numbers of acceptances of retailers. And so, I expect that our retail visibility will not be impeded by changes to Reynolds or Altria's retail contracts. I just don't see it based on the feedback we've gotten so far.
Alison Cooper: [indiscernible] comment briefly on the Reynolds and Altria contracts.
David Taylor: Sure. I haven't seen any revisions to the Altria contract, although Reynolds is in the process of also selling new retail contracts into the environment just like we were during this [indiscernible] period. Theirs will go active at the same time that ours will. And they've made some changes to their programs, taken out some of the share requirements and others. But, frankly, we don't see that the changes as being real threats to us selling our contracts in.
Alison Cooper: And reemphasize again is the cocktail of things we're doing in the U.S. around pricing, the retail piece and how we're going to push the equity, the database mailing that David mentioned, is all of that is going to be important to us rather than just the retail contract piece. But as you know at Imperial, we see the customer engagement piece is a very important part, and there's a very shared view of that with our new ITG business in terms of how [indiscernible] historically approached in customer engagement. And the ratings they have with retailers are ones that we admired significantly as [indiscernible], and that's what we're looking to replicate around that superior relationship with the retailer as we operate with them. So, the overall market share, yeah, it's broadly flat. What I'm keen to get you to understand is the quality of that share because the significant churn we've had in a number of markets through the overall migration program that we've done, we've got a lot more share in our higher quality equities. And that's really the story of 2015, what we've done with the share. As you can imagine within the overall market mix there is some market that are pretty stable as I highlighted, Russia for example, with Maxim improving share, and therefore, stabilizing our overall position which you might remember was declining slightly previously at a very high profitability as well versus the business. In other markets, we're seeing share growth in Australia. We talked about Algeria, Ukraine. There's a number of markets where we're seeing share growth across the business. And then the [indiscernible] market, where we know we've got some issues and I've talked about Morocco today. I've talked about investing in the UK to get our fair share of subeconomy. I also mentioned the fact that we've lost a tiny bit of share in Germany this year. We'd like to pull that back next year in line with the strategy for those returns markets, but I think given the year that we had in terms of the significant degree of migrations we've done in the business. What we see, the tick in the box for Imperial, what we set out to do at the beginning of the year, was improve the quality of that market share and that's what we've done in the space. [audio gap] (01
Chas Manso: Just following on that - from that point. Once you've migrated your brands. Depending about Europe let's say ex UK, because it's difficult, my impression has always been you've been losing market share when you take that group as a whole, when you include your Dark cigarettes in Spain and France. When your migrations are done, do you think you can be in a position where you're actually growing market share?
Alison Cooper: Well, the strategy in most of our returns markets of which most of those are the ones you're referring to in the EU is to broadly hold market share and maximize profitability sustainably over time, basically. So, it's not an aggressive share growth strategy but we will look to grow share where we see opportunities to do so and where we maybe need to - we've lost a little bit of share. We want to grow. But again, Germany, we had a number of years of actually growing cigarette share. We've lost a little bit this year. We actually think we need to recover that back in 2016, for example. But it's not a strong share growth strategy in those returns market. A little bit of share is good but it's not - it's not the prime focus. Share growth in growth markets is where we really are looking to grow share.
Chas Manso: But I guess the point is if you have Growth Brands in these returns market...
Alison Cooper: Yeah.
Chas Manso: ...you keep on saying the quality of our portfolio is better even in these markets. And therefore, one might make the argument that frankly, for quality of - if you just consist of Growth Brands, then you should be gaining market share.
Alison Cooper: Yeah.
Chas Manso: But that seems to be wrong. And I guess the worry is as you migrate weak brands, let's say, old consumers into your good brands, you actually dilute the good brands. I guess that's what I'm asking is how much are you diluting the good brands by migrating?
Alison Cooper: Diluting the good brands by - or you mean the Growth Brands?
Chas Manso: Yes.
Alison Cooper: Yeah. Let me talk you through where the strategy sits from here because it's quite an important point for us in 2016 in a number of markets. There are very few markets where we're at sort of 80%, 90% Growth Brands position. It's handful, but not so many in the one or two. So, if you take a market where we say we got 50% Growth Brands, we are focusing on driving the growth of that market share. Inherently, the strategy with the portfolio brands is to say, we're either migrating, we might be pushing for cash a bit more with those brands or otherwise we might be delisting. And then, what we're shifting to - there's been a bit of an offset to where the Growth Brands are growing in terms of overall share but higher quality share. If you got the better brands in terms of that share also, it's better from pricing perspective in the market as well. But then, what we really want to boost now is actually what we call internally growing ahead. So, you want to cut the tail. You want to lose the brands that you don't want to focus on, migrate this to list them, cash them, whatever you're doing with them. And then the focus is absolutely on growing ahead and putting investment and support behind how you grow the key brands that you want to grow in market. But for now and for a while longer in most market, that's going to be offset by some of the decline in the Portfolio Brands. It's higher quality of share, and that's going to knock on through the value chain as I highlighted earlier through cost optimization opportunities, reduced SKUs, reduced bills and materials which is absolutely great for the business and the strength of business overall. We developed necessary results immediately in growth of share. Does that make sense? Yeah.
Oliver Tant: I think importantly strong Growth Brands in markets gives us a choice. So, hey, we've got strong equity. We've got the choice. Do we want to pull or grow a market share a lever or do we want to pull the profitability lever? And you can see two of the markets where we're probably most developed in terms of our Growth Brands strategies would be Germany and Australia. And we've talked about what the Growth Brands is achieving for us in Australia. It gives us a choice. When we're sitting on our Portfolio Brand, portfolio substantially, we have less choice because the inherent equity is weak.
Alison Cooper: Any more questions? Well, thank you, everybody. Have a good day.