Earnings Transcript for IMB.L - Q4 Fiscal Year 2021

Stefan Bomhard: Good morning to everyone and welcome to our Full-Year Results Presentation. Now, for me, it's been great to meet many of you in person for the first time in such a long period of time after communicating over the last 12 months in a virtual way. At the same time, I, of course, want to welcome everyone who is also joining us still online today. Here in the room, I have with me, our Chief Financial Officer, Lukas Paravicini; and Peter Durman, who you hopefully know for a long time, as our Head of Investor Relations. Yeah. Now today, I will start by explaining how we're working at pace in implementing our new strategy, and how this is beginning to translate into operational and financial performance. Now, Lukas will then take you through the financial results and then I will return with some insights into the very significant positive change that is now underway through the multiple initiatives at all levels of the business. And then I will conclude with our process for fiscal year 2022, and after that, I'll look forward to your questions. That put simply, the goal of our strategy is the transformation of Imperial into a business capable of delivering reliable, attractive returns

Lukas Paravicini: Thank you, Stefan, and good morning, everyone. It's great to be here with you. Since joining in May, I have been busy getting to know the business, and I thought it might -- I might start by sharing my observations of the first six months. I am pleased to report that what attracted me initially to the opportunity at Imperial has been validated by my time within the business. Imperial is a high-quality Company with some good brands with attractive market positions and the potential to leverage its strong retail partnerships. However, what excites me is the opportunity to transform the business. And I believe the plan the team has set out can unlock significant value in the coming years. It is also a highly cash-generative business, which can support investment in improving the business, as well as attractive shareholder returns. My priorities are clear and they start with cash. My role will be to optimize the sustainable free cash flow generation from the business. The finance team can play a larger role in supporting the delivery of our strategy. Like other support functions at Imperial, we have an opportunity to modernize our ways of working. This will support more effective decision-making. This is not rocket science. It is about adopting new working practices and being a more effective business partner. I'm also committed to providing a transparent engagement with all our stakeholders. To this end, we have today provided you with the full financial statements to the accounts, so they are available as we meet with investors over the next few weeks. These are key priorities for me as a CFO, as I work myself into the role. So, to come back to the key metrics that Stefan outlined, our business has performed well in 2021, with solid growth driven by strong tobacco pricing. These financial results are after absorbing some adverse events this year, such as the settlement for the U.S. State Litigation and the changes in the Australian excise regime. We have delivered a slightly ahead of guidance despite these factors and while undergoing significant change program. We have grown organic revenue, profit, and return on invested capital. The improvement in ROIC was driven by the increased profit and a more rigorous approach to managing our capital base, helped by the sale of the Premium Cigar division. Our free cash flow of £1.5 billion was after the unwind of favorable working capital movements last year of £0.7 billion and we make good progress in reducing debt towards the lower end of our target year-end range. Overall, net revenue grew by 1.4% at constant currency. Total volumes declined by 2.9%, slightly better than the level we've been used to in recent years. COVID continues to affect the market size with changes to buying patterns across channels and markets. We have provided some market level colors in the appendices. Tobacco net revenue grew by 1.5%, with price mix of 4.4%, driven by strong tobacco pricing and strong growth in our U.S. mass market Cigar business. Overall, tobacco delivery was impacted by the excise changes in Australia. So, excluding these, our tobacco net revenue grew 2.7% and with an underlying price mix of 5.6%. Our NGP net revenue was broadly stable, driven by our decisions to withdraw from certain markets as we reset our NGP business. Excluding the market exits, our NGP net revenue grew 8.6%. Adjusted operating profit grew by 4.8% at constant currency, with our performance impacted by four main areas. Our underlying delivery was solid, supported by strong tobacco pricing, market share gains, and growth in our U.S. market mass cigar – mass market cigar business, sorry. We absorbed an £88 million headwind from lower stock in lower Australia stock profits and £52 million from the U.S. state litigation charge. At the same time, we stepped up investment by £40 million behind our five priority markets and in new ways of working. This is about building the foundation for the future. In NGP, we reduced costs as we focused our investment more tightly and versus a comparator that was adversely affected by inventory write-downs. Logista automate a positive contribution. Like other businesses, we make certain adjustments to our IFRS numbers to 8 performance comparison over time. I want to be very open about how we approach these adjustments. First, on restructuring. We have announced a restructuring program to deliver our new strategy. The actions we have already taken this year will drive the savings in line with our plans, with a full annualized savings of almost £70 million by the end of fiscal year '22. We have further initiatives planned for the coming year to realize the balance of savings in line with our plans. Our overall restructuring costs are also in line. And we have completed our legacy cost optimization programs this year. Our NGP strategy included a comprehensive review of our NGP business and its asset. This has led to £180 million of NGP intangible assets impairment, with £73 million included in restructuring costs and £45 million included in amortization and impairment. We will continue to provide transparency of adjusting items and seek a greater alignment between reported and adjusted operating profit where appropriate. We grew EPS by 2.8% at constant currency, reflecting our profit delivery and lower interest charge, as we reduced debt levels. Our confidence in our cash flow -- our strong cash flows provided us with the opportunity to proactively repay early the US$1.25 billion July 22 bond. This reduces gross debt and has no impact on our net debt. As outlined previously, we have continued to face upward pressures on our tax rate and expect this to continue into fiscal year '22. Our cash performance remains strong with £1.5 billion of free cash flow generated in 2021. This does not include the proceeds from the Premium Cigars sale. As expected, our cash delivery was impacted by the unwind of last year's £0.7 billion working capital upside, largely due to duty collection timings at Logista and the UK. Our underlying cash conversion remained strong with good progress on working capital management. Our CapEx was reduced last year as we pulled some projects pending our strategic review. I expect CapEx will return this year to our usual levels of around 300 million per annum. As I mentioned earlier, cash will be one of my key priorities. At the end of '21, our gearing ratio was 2.2 times or 0.5 times lower than the start of the year. This has been driven by three factors as shown here. With about 40% of the improvement driven by our underlying cash generation, capital allocation is important to me and the Company just as I know it is to our equity and debt investors. It is an essential value driver. And our four capital allocation priorities are designed to do just that. Our first priority is to invest in the strategy to create a sustainable business with growing cash flows. Second, it is to strengthen the balance sheet. And I met recently with our credit rating agency who reinforced the importance of debt reduction to underpin our investment-grade rating. Third, we are committed to providing reliable cash returns through the dividend. And fourth, we will return surplus capital once the balance sheet is sufficiently robust. We're making good progress as you can see here. I will provide more color on capital returns as soon as we move closer to our target leverage. '22 will be the second year of our two-year strengthening phase, where we will step up investment behind our priority combustible markets in our NGP trials and our new ways of working. And our outlook for this year is consistent with this five-year plan. At constant-currency, we expect to deliver net revenue growth at a similar rate to the 1.4% we achieved this year. This reflects some mix pressure as COVID-19 restrictions are lifted. Adjusted operating profit is expected to grow slightly slower than net revenue, as the U.S. state litigation settlement costs will not be repeated this year and with the underlying margin held flat by the step-up in investment in line with our plans. We expect performance will be weighted to the second half reflecting the phasing of investment, the prior-year comparative and timing of COVID unwind. While there is a risk of inflationary cost pressure, as a tobacco Company, we're very well-placed to manage them through our purchasing strategy, high-gross margin, and pricing. A higher tax rate of around 24% will be offset by a lower finance charge. As I have reflected on 2021, I would summarize three main areas of progress this year. First, we have made a good start to building the foundations for the second phase of our plan, accelerating returns from 2023. Second, we have undertaken work to strengthen our performance with initial promising signs, but more to do. And third, we have made good progress in strengthening our balance sheet, which will give us greater flexibility and a stronger future footing. Thank you very much. With that, I'll hand over back to Stefan.

Stefan Bomhard: Thank you, Lukas. I mean, in this section of the presentation, I want to give you more of a granular feel for the distinctive culture we're building at Imperial, and how our people are implementing this strategy. First, I would like to remind you that we're now approaching the end of year one in a five-year strategic plan. And as you know, it's a strategy of two unequal halves

A - Peter Durman: Thanks, Stefan. So as Stephan said, we’d now like to take your questions. We'll start by taking questions from the room first and then we'll take questions from those who've dialed in over the telephone. And after that, we'll come back to the room and so on as required. So the dial-in details are available in today’s press release. [Operator Instructions] So let's now take the first question from the room, please.

Jonathan Leinster: Sorry. Jon Leinster, Société Générale. Given the COVID unwind, can you give us an outlook in terms of the major -- some of the major markets, notably the U.S., UK, and Germany, in terms of what you think the volume outlook will be given that unwind and indeed, given the tax increases in the UK and the proposals in Germany?

Stefan Bomhard : Sure. Jon, let me answer your question. I think one thing is, as you would expect, it's quite difficult, yes, to forecast at this point in time the impact of COVID in fiscal year '22. Also, that it's still a fluid situation. But I think what you will see in our European markets specifically, you will see a certain headwind in the UK and Germany because they have been two of our key markets that have benefited from repatriation of volumes that would have historically, especially in the summer months, would have gone into Southern European businesses. You will see some of that, but I don't think would be a huge effect. I think in reality, in the U.S., it's much more difficult to predict at this point in time because you would not have had the repatriation volume, you just saw a change of consumer behaviors to certain extent. So, I do believe it will be a slight headwind in the business as we go into fiscal year '22, but we shouldn't forget, they’re also part of the business, primarily our Spanish business, but also our global travel retail business that actually will be a beneficiary of the repatriation of these volumes into other parts of the world.

Peter Durman: So there’s question here.

Jonathan Leinster : Going on clearly on the losses on the NGP side reduced significantly in 2021. How are you expecting these losses to continue to decline in 2022 with greater investment and obviously ignoring the write-offs? Do you expect losses to continue to decline in that operation? Or do you think with greater investment coming in that actually will start to widen out again?

Stefan Bomhard: Yes. I think, here, the answer is think about fiscal year '22 for quarterly losses or investments to continue at the level of what you would've seen in fiscal '21. And that's a reality is a combination also as the testing and the trials and the pilot markets talk about. You will have a full-year effect of these tests, where they already were small part of our investment in fiscal year '21. So, the underlying, the remaining of the business sees an improvement, but we're reinvesting some of that back into our test markets.

Gaurav Jain: Hi, good morning. Gaurav Jain from Barclays. So just focusing on your guidance for beyond FY2022 of mid-single-digit EBIT growth. So if we go into the history of Imperial; earlier, there used to be a guidance of 4% to 8% EPS growth, which Imperial really used to struggle to meet, and if we look at just what you are guiding for this year and what you did in FY2021, if I look at essentially the last five years, you wouldn't have done much single-digit EBIT growth. So, what would change from FY2022, because the mix of markets is pretty much the same over the last five years. So, what gives you confidence that between FY2023 to FY2025 we could do mid-single-digit growth?

Stefan Bomhard: Gaurav, I think, number one, I think what gives us confidence is the focus on the top five markets because when you compare this strategic plan, there is a very significant focus on the key value drivers of this Company. Because what you're comparing is a period of time in the past where we actually consistently lost market share in the five key markets of this camp of the highest value creation. So that is the key driver of the delta between the two. And the good news is that we developed a strategy and presented it in January. Now, we have a new Finance Director onboard as well, who's clearly scrutinized the numbers as well. Clearly, we feel quite confident when you look at the level of detail that we put. So, what you see, the guidance we provided in January was built on a bottom-up plan market-by-market, that it gives us the confidence and it is deliverable. I think what is exciting for me sitting here with you, is that in year one, we've delivered that ramp up that we were looking for. We're seeing that improvement in the market shares that is a key part of actually our strategy going forward. In the past where we're the number one share donor in these markets, we’re not any longer after year one. And that gives me the confidence the guidance we provided for the outer years is imminently deliverable.

Gaurav Jain : Then a follow-up question on that is that how confident are you that the market share improvement that you have delivered so far, it will stick as we go ahead because clearly there have been market moves related to COVID and maybe there was a lot of low-hanging fruit around Maybe having better coverage with salespeople And which probably is already now in the base. So how confident are you that these market share gains would stick as we look ahead?

Stefan Bomhard: Yes. Gaurav, I think the -- I'm quite confident. Simple reason is, A, this doesn't -- it's not sitting on one pillar. When you look -- when you would see the details of the executional plans in place in all these top five markets and also in the markets beyond, there’s a level of attention of detail that gives me the confidence. It's not one pillar, it's the investment on the sales side, it's the investment in the brand equity of our core brands. And we now have a performance management process at the executive teams that you saw in the charts is involved now in a monthly basis. So, the agility that we need as a challenger Company is now clearly set. Now to be clear, that is helped by the fact that Imperial, if you focus on five markets, you've capped 70% of the value creation in tobacco. At the same time, I think you shouldn't takeaway that we will consistently gaining share across all five, that's not realistic in a highly competitive industry. But the reality is, we have started to turn the direction and have that inflection from being a very significant loser of market share in these markets, into actually at this point in time being flat on an aggregate basis. And having achieved that less than a year into the strategy gives me the confidence that we can achieve this going forward with a lot of the investments on the brand equity building only happening for full year in fiscal year '22.

Gaurav Jain: If I could ask one last question on e-cigarettes in the UK. So recently, I think there was a notification that e-cigarettes could now be introduced in the medicinal channel and through the pharmacy channel. Is that something that you would like to explore for blu?

Stefan Bomhard: Sure. I mean, number one, as you will know, we are a meaningful player in the UK market with blu in the vaping segment. And number one, we definitely encourage the UK government’s focus now as vaping, as a smoking cessation tool, and we feel that it's absolutely the right direction. Now, we will evaluate once it becomes clear, what -- there are specific rules and regulations around this, whether this is something that makes sense for us to participate. But I wanted to reiterate the point that actually we're very encouraged that the UK government is one of the most active governments actually recognizing the roll of vaping, and NGP products play in helping consumers on their journey to a smoke-free future.

Gaurav Jain: Thank you.

Patrick Folan: Thank you. Patrick Folan from Redburn here. I know in the presentation you talked about FY2022 priorities, progressive dividend policy. Is that something you guys might move away from FY2023 or '24 once you have a leverage kind of in a comfortable robust position?

Lukas Paravicini : Can you just repeat the question, please?

Patrick Folan : Yes. Progressive dividend policy, it seems to be a priority for FY2022. Is that's something you'll move away from in FY2023 once you feel comfortable to leverage?

Lukas Paravicini: I think what - as I mentioned before, thanks for the question, is the capital allocation is essential for us. It's an essential value driver for us, and it was actually crafted together with the strategy, so it's not disassociated for that. And trust me, one of the first thing Stefan asked me is to you feel comfortable and look at that capital allocation, and I do feel very comfortable and I know it is important to you and to us. The capital allocation though is an end policy, which drives multiple things behind investing, behind the strategy, a strong robust balance sheet, the dividend, and surplus capital return. So, the dividend – the progressive dividend was implemented last year as part of the capital allocation, and we strive to maintain that progressive dividend at 1% growth or the underlying growth that we have in the business. So, for us, it is not about benefiting one or the other stakeholders, it is delivering all of them. But we have to do it in sustainably. We don't want to debate it now. Yeah, we are at 2.2, but if you look at Forex, we actually at 2.3. So, we're almost there, but we want to get it right. And I took time out to speak to all the credit ratings, and it was very clear is that what they expect us to keep a disciplined approach to the balance sheet. We've got the poorest rating of all the peers and we just need to get that in order. Once we got that in order, and that is at the lower end of 2 to 2.5 times, we will come back with the capital allocation, maintaining a progressive dividend policy.

Patrick Folan: I suppose my question really is about would you move towards a stable dividend payout policy once you feel like capital returns become maybe more of a priority?

Lukas Paravicini: I would say that - we would probably want to maintain the progressive dividend policy rather than the stable one at this stage.

Stefan Bomhard : Yes. I think the only thing I would add to it to Lukas is let’s also keeps things in perspective. I mean, you see a 1% increase in the dividend, I mean, that is £12 million I think, yeah. So, in principle, that's not going to make a difference to a share buyback program. I think it is an element as Lukas says, it's an end-to-end policy. And the thing that something our shareholder are looking for. And I think, therefore, you probably will see a continued progressive dividend policy.

Patrick Folan: Just one more question on the AAA strategy. I know you guys said you're looking to focus on emerging markets. Can you provide a bit more color there? I suppose that’s going to revolve around North Africa and the strong year you had this year, how will that look going forward? And will that become a bit more priority under the new leadership?

Stefan Bomhard : Absolutely. I think -- and I appreciate the question because we focus a lot on the top five markets because I think there - a lot of value creation sits in there. Priority number one is to turn around share performance. But the reality is, as part of our overall portfolio, we are actually in quite a number of attractive markets. We singled out Africa because that's the most visible to you and it's probably the big -- a significant chunk of it. But the big decisions we've taken in fiscal year '21, our AAA business, our Emerging Markets business was grouped together with our U.S. business. So clearly, from a priority perspective, the U.S. would always get priority with that team. We've now created a dedicated division on reaching that focuses on emerging markets portfolio largely with a new leader with deep experience in emerging markets. And Africa is, in our opinion, just the beginning. So, we do see that as growth engines for this coming down the road. Yes, so I think that is one of the things the investment in Imperial isn't just about the top five markets, that's where a lot of opportunities lies and there's a lot of opportunities also beyond the top five.

Patrick Folan: Thank you.

Peter Durman: Okay. I think what we'll doing now is we'll just move to calls on the telephone. So I'll just now handover to the operator to line up the first caller, if you may.

Operator: Thank you. [Operator Instructions]. And your first question comes from the line of Alicia Forry from Investec.

Alicia Forry: Hi. Good morning, everyone. I was wondering if we could talk a little bit about Australia and what's going on there. Obviously, it's been a market disrupted by down trading. I was wondering if you have a view as to how far long we are in that process, what you're sort of assumptions are for that market over the medium-term, given its top five priority market?

Stefan Bomhard : Sure, very happy to take this. You're absolutely right. I think with some of the highest pricing for cigarettes in the world, you would have seen consumers drift in the valley change downward. That's why the fixed price tier has created itself over the last couple of years. At the same time, to be clear, we're not seeing an acceleration in this. And one thing we shouldn't forget, and you saw it in Lukas' numbers in the financial negative way, but the Australian government has paused its duty accelerator for the first time in a long period of time, which relatively means, cigarettes are not becoming as more expensive as they would have been in the past. So that's something we'll need to observe, what is the impact on the market. The other thing I think as we're having this discussion in our context of Imperial, as you will know, we have a good portfolio of value brands in the Australian market. So, a market that actually goes more value is actually a market that actually favors our portfolio of brands, yeah? I think an important piece as we did in fiscal year '21, therefore getting pricing right is an important step, but actually, we feel good about the Australian market overall. As consumers make the choices, I think, we've seen, especially, also in the second half of the year, a market improvement in our share performance.

Alicia Forry : Thank you. My second question is on NGPs. Obviously, there's a lot of noise in that part of the business, but I was wondering if you could touch on the performance of your NGP portfolio in markets where you have not been exiting. I think you said ex -- the exiting. It was up to 8 and 8.6% or something, which is clearly slower than historic rates. So just curious, what is going on with the underlying NGP category for you?

Stefan Bomhard: Absolutely.

Alicia Forry: Thank you.

Stefan Bomhard: I mean, number one, I appreciate you, you mentioned the market exits. If you take the market exits out of the numbers and make it a real like-for-like comparison, our NGP business in this year grew 9%. That's number one, and it's important because you would have seen that was a very significant reduction in marketing support to a much more realistic level of our NGP. But the business did still grow. Yes. Overall, we did hold our market share positions in all our core markets roughly in the right place. So, we haven't seen a very significant erosion of our market share, despite a very meaningful reduction of investments from a marketing side. The only place exception would be the U.S., because in the U.S., as many of you would be aware, there has been a very aggressive pricing drive with $1 devices being a permanent feature of the U.S. markets, which we have not -- where we decided not to participate aggressively in the marketplace. And therefore, we have seen a stronger erosion of our market share in the U.S. But that's again where our market test in the U.S. is coming in with a new proposition. Our remarketing of it to see what is the opportunities that we have in the U.S. market. But in summary, I'm actually quite happy with the performance we've achieved in our NGP business, even independent of the test markets.

Alicia Forry: Thank you so much.

Peter Durman: Okay. I think there's no other in the queue at the moment online. Are there any other further questions from the room?

Jared Dinges : Hi, guys. Jared Dinges, JPMorgan. So, I wanted to ask coming back to the leverage target. I guess, 2.2 times is kind of the low-end. I know you guys did mention you had a FX benefit in there. Given your guidance for next year, would you consider buybacks at the half-year stage? Or is this something you want to take very conservatively, kind of a wait for the full year until you're really towards kind of 2 times net debt to EBITDA before you would consider buybacks?

Lukas Paravicini : I think like I said before, we are very committed to that capital buyback -- capital surplus buyback, or share buyback. But we want to make it sustainable, okay? I get that 2.3 is a technicality, but what is more important for us is it has to be sustainable. And the starting point is a strong balance sheet or a balance sheet that can support that and not getting in an out. We've given clear guidance what we believe there, where we get there. We’ve given you metrics to model our cash flow, net revenue, profit, cash flow. And I think when we get there, we'll go public and we'll announce it and we'll give more flavor. We'll not go into this discussion at this stage of what is the time, okay? Don’t remember - don't forget, this is a critical year for us, this is a five years’ plan. We're focusing on one element. For us, the second year of building the foundation, we've got lots on. So that's the other element why we want to really be sure that when we go out there, it is sustainable. And we will come back when the time is right.

Jared Dinges: Okay. Thank you. Just on the sales force and the investments in Germany and the U.S., in particular, you always mentioned that you've increased the sales force 25%, 200 extra sales, say, the training is advanced. And in Germany, you've started to make some investments. Can you give us a timeline on that as to when we should expect the additional U.S. sales force to become active and see some results from that and indeed on the Germany investments as well, please?

Stefan Bomhard: I'm very happy to do. I mean, U.S. is a large investment to be clear. I mean, as I stated, the number was about the extra 200 people represents an upgrade of 25% to our U.S. sales force, so it's a very meaningful increase, yes? That sales force is now largely hired, yes, and it's in training, virtually, the -- because we want to make sure that they're properly trained up. So virtually, you will see the effect in increase coverage in fiscal year '22. So, as we speak, these new colleagues are actually now going out on the road, working on our distribution out in the marketplace. So, you will -- should see, we will expect an increase. Now they won't be as effective on day one, to be clear, as they will be down in six months’ time, yes? But we should see that increase coming through in our numbers in fiscal year '22. Now to be clear, also, the expense of that will also come through. That's part of the investment that we talked about earlier. But I'm quite excited because we've done a very deep analysis, where is our coverage versus our competitors in the U.S. market, which outlets, what off-take differences have we seen with consumers based on the investment there. And the German story is very similar. Here is there's more of that, is a redeployment of our sales force towards outlets that were less in our coverage than before. So, there's more about reflecting that our shoppers have shifted their shopping behavior in the last five years. Think about the discount channels, for example, in Germany, that we haven't fully replicated in our sales force. But there we're also making selective hires to improve our capacity in our German sales force. That will take longer, yes, to a certain extent, and that is also a market that's more driven by key accounts than the U.S. market, but also there, we should see an increasing effect during fiscal year '22.

Jared Dinges: Just on the U.S. when you say --

Peter Durman: Can you please raise the mic? Sorry.

Jared Dinges: Just on the U.S., its - when you say its coverage, does that mean you're not the geographic area as we clearly deal -- roll-off business was tend to be focused quite geographically. Is it an issue that you are actually going out into West Coast a lot more? Is it an issue that within the areas in which you have significant presence that you're actually just increasing the level of concentration?

Stefan Bomhard : I think it's good because you mentioned the old laurel [ph]. We shouldn't forget, we’re a nine share Company and with two key competitors who have significantly higher shares. So, what we've done -- so historically, that was reflected, we had a sale force of a nine-share players, yeah, and below. So, what we've done, we've now gone outlet to outlet, and have gone through with the U.S. team, the detailed numbers. So, what you see is a combination of -- it doesn't mean we're going into primarily as the key focus into areas where the brands haven't been represented before. The key sweet spot for us are areas where the brands are actually already quite strong, but they haven't been represented in all outlets in that area where our shoppers go, yes? The other thing what you will observe, and just to give you another detail, it can mean also an increase in the frequency of visits because in our industry, on shelf presence drives consumer preference. So, when you have an out-of-stock because your salesperson hasn't been there and your competitor has been there, that will also drive share. To your final point, yes, there are certain areas, especially as part of our five-year area. We have identified parts of the country where we do believe we're underrepresented, which we will strategically now invest into. But again, this is the reiterative process, we'll have a look whether we get the results we want to get, this is a very performance-driven approach. We will put sales force in. If we don't see the return, we redeploy the sales force. That overall should give you the confidence in our strategic plan of delivering that share improvement versus the parts that we're looking for. And I have been out there in the U.S. with the team understanding what that sales force coverage means, what they do on a daily basis.

Peter Durman: Great. We have another question online. I’ll just hand back to the operator, if we could.

Operator: [Operator Instructions]. Your next question comes from the line of Simon Hales from Citi.

Simon Hales: Thank you. Good morning. Thanks for taking the question. Just one really. Stefan, you highlighted the importance of cultural change in the organization in your presentation with regards to be able to deliver that sustainable mid-term sort of growth story. Clearly, you have had lots of senior personnel changes in the year that have clearly bought into that cultural change agenda. But what can you say about broader employee engagements in this cultural change? Is there any metrics you can point to it at this point in time of how things are improving there?

Stefan Bomhard: I think, Simon -- great question. I think the number one, we're just in the process of conducting a global employee engagement survey, which will include now all employees, not just office-based employees. So, I think we'll get a read in the next couple of weeks on this one, but I can tell you also the feedback from the conference I mentioned to you before. We've gotten some fantastic feedback. And to be clear, the majority of people that participated there wasn't a leadership team, it's all the employees throughout the organization. And I think the sense of clarity about direction, where we're going and that don't have to tell you the majority of our people work in the core combustible business in our Company and we clearly put some very clear priorities there. So, there's actually quite a strong support for where we're going as a culture. The other thing, I shared with you the purpose, the behavior -- and the vision and the behaviors was now co-developed. And I think that's for me the key piece that was co-developed with all our employees, but represented in there. So, we are getting some very strong feedback about the overall direction where we're going, yes? So, when I'm out in the markets, I have done that with COVID restrictions gone. I do hold town halls and all of them, yes, and the questions I get give me really a sense of people are onboard and they really believe we're going in the right direction.

Simon Hales: Thanks.

Operator: Your next question comes from the line of Nik Oliver from UBS.

Nik Oliver: Hey, good morning. Thank you for the question, and sorry to come back to cash returns again. But could you just remind us, and in terms of the credit agencies, just any criteria that the Imperial needs to deliver just when we think about potential cash returns going forward?

Lukas Paravicini: So, they are -- thanks, Nik for the question. I think there are multiple buckets. They have different models, credit rating, and they go beyond just the financial metrics. But when it comes to the financial metrics, the balance sheet strength is the most important one to manage. It's not the sole one, so it's way more diverse and multilayered. But we believe that where we are at the lower end of that 2 to 2.5, then we are in a place where we can sustainably deliver the full capital allocation not just elements of it.

Nik Oliver: Okay, sure. And that is just net-net debt. That's not including pension liabilities or do some of the agency take that into account as well?

Lukas Paravicini : So credit rating will take a gross and they will take some of the pension funds into account as well. And I’ll probably have to come back to you in more detail on the pension treatment.

Nik Oliver: Okay. No, that's perfect. Thank you very much.

Operator: We have no further questions from the phone lines. Please continue.

Gaurav Jain: Hi, Lukas, on that last question that was asked, so I have a follow-up. So, if I look at the last bond you issued, it is a 12-year bond you have issued at 1.75%. Now we have seen your key competitor at the other Company, which is listed in the UK, they have recently tapped the high-yield market using our preferred equity issuance, which is not considered debt by the rating agencies and I think they have issued at a 3.5% or 4%. So, our equity free cash flow yield is whatever 16%, 17%. Your bond yield is 1.75%. So why won't you also try to tap into the high-yield market at 4% and retire some of the debt and use it to buy back shares faster?

Lukas Paravicini : Thank you very much. I think we're fully aware of that activity of the competitors. We look in our treasury policy. I think what is right for Imperial is not going throughout the hybrid making us. We've looked into this recently, again, the combination of higher cost and actually not the benefit that you would expect those in the credit rating does not warrant us go down the hybrid route.

Gaurav Jain: Thank you.

Peter Durman: Okay. I think if there are no further questions -- so no further questions online and if there are no further questions in the room, I'll hand back to Stefan.

Stefan Bomhard: Yes. I mean, for my side, first, I thank you, especially to the people who joined us here physically in London; but also, to everybody online. Look, hopefully, today gave you the opportunity to get a sense about the progress we're making on building the foundations of the business. And the first green shoots that are now really appearing in the business that should hopefully give you the confidence, yes, that we are well on track on our strategic plan for the Company, that we'll deliver really sustainable returns to our shareholders over time, yes? So, thank you for that. And Lukas and me are hopefully looking forward to see you at the half-year time, again, face-to-face and give the opportunity to update you on the progress we're making on our strategy. Thank you.

Lukas Paravicini : Thank you, everyone.