Imperial Brands PLC (OTCQX:IMBBY) Q4 2020 Earnings Conference Call November 17, 2020 4:00 AM ET
Company Participants
Stefan Bomhard – Chief Executive Officer
Oliver Tant – Chief Financial Officer
Peter Durman – Investor Relations Director
Conference Call Participants
Owen Bennett – Jefferies, Inc.
Gaurav Jain – Barclays Capital
Alicia Forry – Investec
Adam Spielman – Citigroup
Patrick Dolan – Redburn
Jonathan Leinster – Société Générale
James Edwardes Jones – RBC
Sanath Sudarsan – Morgan Stanley
Stefan Bomhard
Good morning everyone and welcome to our presentation. Thank you for joining my first results presentation as Imperial CEO. I’m sorry, we cannot meet in person today, but I very much look forward to doing so in the future. I’m joined today by Oliver Tant, our Chief Financial Officer and Peter Durman, our Investor Relations Director.
And before we get started, I suspect some of you might be asking why I took the role and what I think I can bring to Imperial. I’ve spent the majority of my career in consumer goods. I started in Procter and Gamble, and have had a range of senior sales and marketing and general management roles across a diverse range of consumer facing businesses, Burger King, Unilever, Cadbury, and Bacardi. So I believe I bring many years of sales and marketing experience.
And as Imperial’s first external CEO, I bring a fresh perspective to test and challenge the business. And I’m determined that we’ll deliver our full potential for all our stakeholders. I’m also someone who’s passionate about delivery. I firmly believe a commitment is a commitment. And have always been focused on making sure we do our best to deliver against our promises. So that’s a bit of background about me and my approach.
Now, why did that take the job at Imperial? There were a number of attractions. Firstly, Imperial is a good business with some good assets and people. The problem is, it has been underperforming for several years and having the opportunity to turn that around is very appealing to me. I’ve also always enjoy being in business and sectors that are going through change. And that is certainly the case for Imperial and Tobacco.
My role as CEO at Inchcape allowed me to lead the business through the evolving automotive industry, and to reshape the organization to play to its strengths. My time at Bacardi brings experience of working in the highly regulated spirits industry, where you have to navigate the challenge of marketing products in dark markets as well. I also enjoy being in businesses, which are not the market leaders. And when there is a real opportunity to move the business forward, companies where you often need to work harder and smarter to identify the competitive point of difference and what gives you the right to win.
For example, Burger King was a distant number two to McDonald’s. And Bacardi, like Imperial was the global number four in its industry. So Imperial has many attractive qualities for me. And from day one, I’ve been focused on addressing the issues that need to be resolved in order to enable us to deliver a stronger and more consistent performance over time. Today, I will give you my initial observations on the business and outline my timeline for our strategic review. But I want to be clear, while this review is advancing well, this is still work-in-progress, and our plans, the building blocks to create a stronger business are still being finalized.
However, I’ve already identified a number of areas for improvement and changes underway. I will detail some of these areas to you this morning. I will also provide some context for this set of results, including an assessment of the impact of COVID-19 and how is it influencing consumer behavior. I will then touch on our progress in managing our ESG responsibilities, before handing over to Oliver, who will take us through the results himself. I will then share our outlook and priorities for 2021. We’ll then conclude as usual with your questions.
So let me start with my priorities over my first four months. My first priority has been to visit our markets to learn about the business because of the coronavirus most of these had to be virtual, but I did manage to physically visit all of our most important European markets. Over the past few months, I’ve met with all 12 of our cluster teams, and all of our major functions hosting around 300 virtual or physical meetings. Wherever I had meetings, I’ve held online employee channels, which enabled me to reach thousands of employees around the world to hear their views, their challenges, and answer their questions.
I also made a point of meeting a range of our stakeholders, consumers, retail partners, competitors and shareholders in order to build a clear view of the business and how are we perceived. I’ve also been focused on gathering and understanding as much data as I can, a lot of it. It is important we base our decisions on real data and insight.
In order to begin addressing the performance and execution issues, I’ve already implemented monthly business reviews with the divisions and our top five markets, to embed a much more rigorous approach to tracking performance. I’m already instilling a greater sense of discipline in the way we monitor progress, and deliver against our commitments.
One of the areas colleagues have raised with me is accountability for delivery. This is one of the key elements I’m now looking to improve as part of the change in the culture at Imperial. And a scene, I will come back to you shortly. I recognize that some areas like culture take time to change. But I’m already seeking to deliver better outcomes by placing a greater emphasis on performance management, and revising incentive structures.
One of my biggest focus areas has been leading the complete strategic review of the business with the support of my colleagues. This will continue to be our key focus over the coming months. And as you may have seen in our Trading Update last month, I’ve been working to strengthen my Executive Team with a number of new senior leaders joining from outside the industry. I believe it is critically important for us to introduce new ways of thinking, particularly given our industry is undergoing such change, with plenty of tobacco expertise in the organization, which is important.
But we’re now adding to that by bringing in new skills, capabilities and experience developing other consumer goods businesses. For example, Javier Huerta, will bring more than 20 years of experience at Nestle and Unilever at reconfiguring supply chains to adapt to changing consumer needs, and developing new supply chains for new product segments important for addressing our NGP strategy. I worked with Alison at Inchcape, so I’ve seen firsthand how she can help drive the necessary organizational and cultural change to support our strategic objectives. Murray McGowen is the First Head of Strategy of Imperial with a strategy consultancy background having worked at McKinsey, but as well as with extensive FMCG experience.
In a similar way, Therese has taken steps to strengthen our Board, recently appointing two new NEDs who both bring a wealth of international business experience. So, also, I am not yet in a position to fully share all of my thoughts with you today, I would like to take a moment to provide you with some initial observations about the business. I should say at the outset that I recognize the disappointment around performance and valuation. We will address this over time. And my first four months have reinforced my view about the future value creation potential of Imperial.
For example, Tobacco is proving its resilience in these uncertain times. And while there always be some regulatory uncertainty, I’m confident that tobacco pricing model is intact and can support increasing returns, going forward. We have a solid business with good brands, high margins, and strong operating cash flow, all of which underpin the opportunity to deliver a stronger and more consistent performance over time. I recognize that there is a debate as to whether these brands are underinvested. But it is also important to recognize that marketing spend in the tobacco sector is relatively low percentage of revenue compared to other consumer sectors. So adjustments to spend are unlikely to be significant over time in the context of our high margins.
With exposure to some highly attractive markets, such as the U.S. and Germany, both are large profit pools where consumer affordability is good, which supports future pricing opportunities. I believe that our manufacturing supply chain operations provide us with a really core strengths in the tobacco business. The team has delivered consistently and coped admirably, for example, with the challenges of the coronavirus, with the vast majority of our factories operating throughout with minimal disruption. I also believe they’re run relatively efficiently despite the complexity of the business.
Our approach to customer engagement is also a real strength. I have spoken personally, many of our customers at length, which has provided real insight. In talking to customers, they really value the insight around the product and support that Imperial brings on areas such as regulation, helping to build solid retail and wholesale relationships. I believe this strength is critical in tobacco, given the role that retailers play in influencing consumer brand and product choices, particularly in dark markets.
With Imperial typically being the number two or number three play in that country, I found customers like to partner with us to provide good competitive tension on shelf. I think we can build on the strengths going forward. In the U.S., for example, our sales force coverage varies significantly by state. So there is an opportunity to allocate resources more effectively. Well in Germany, our sales team need to be better aligned to the fastest growing channels and outlets. One of our big German retail customers also comment to me that he has not met with a senior Imperial leader in many years. I’m determined to make sure we stay close to all our customers.
This is my DNA, and has critically build a strong and competitive business. I’ve also been impressed with the commitment and passion of our employees across the business, and also the warm welcome I’ve received. Our people have done a great job in embracing new ways of working in these uncertain times. For example, our sales force adopted their approach to meet and serve customers. And when I was out with our sales force in Madrid, they described to me how we were the fastest at that outlet coverage to the changes caused by COVID.
In general, I found good people on the ground, who we need to empower and give greater accountability. I’d also like to be candid in talking about some of the issues I think we have to address. In Tobacco, the market share performance has been mixed over the last five years, we’ve often grown share in markets that make a relatively small financial contribution, like Russia or Saudi Arabia, while losing share in some of our larger contributors, such as Germany and UK. We need to deliver a more consistent result particularly in the market that drive our overall financial delivery.
This is such a priority. I’ve already changed the way market share is incentivized in our bonus structure to improve alignment with this objective. It’s important to recognize that we operate in competitive market and it will take time to change the share performance. But there is scope to improve our consumer insight to better inform our marketing programs and deliver stronger results. As part of improving performance management in our major markets, we’re now reviewing the marketing initiatives in detail against their KPIs, every quarter.
With NGP, we’re starting with consumer preferences, where it’s clear that many adult smokers are choosing reduced risk alternatives to combustible tobaccos. As a consumer goods company, we have an opportunity to meet that consumer demand, and therefore NGP needs to be part of our offer to consumers, where we can make a meaningful contribution to harm reduction. However, it has been challenging with uncertain regulatory backdrop, low barriers to entry and the highly competitive environment. While these factors have played a part, our NGP business has underperformed and our investment decisions have not delivered the anticipated returns.
We’ve already taken steps to address this by cutting investments to reduce the losses, while we assess our assets and capabilities. The NGP team and the markets have raised areas with me where we can improve our execution, for example, by ensuring we develop products that are sufficiently different and thoroughly tested before we scaled them up widely. We will also continue to be more disciplined with our investments in this context. The real positive here in my view is that no company has found the NGP solution that truly meets the needs of adult smokers across the world.
So there’s more to play for and with a more proven and disciplined business model, I’m confident I can build a stronger NGP business that provides returns to our shareholders. As I mentioned earlier, there’s a need to manage performance more closely. I’ve already begun to make change to lever this through detailed monthly business reviews. This will enable us to be more agile and responsive to changing circumstance and to course correct when investments are not delivering. This must be supported by a more rigorous analysis so that decisions can be informed by consumer insight.
I found that we have plenty of detailed brand level market share data that’s often not being meaningfully used to drive decision making and planning. All of this needs to be supported with the right culture, with a greater sense of accountability and better ownership of results, all supported with collaborative teamwork. We should be more outward looking, embracing new thinking and learning from others. We must also embed greater discipline around returns that reflect the inherent risk of different business areas. It was often the case that tobacco investments had to pay back within a relatively short period of time, even though their risk profile was well understood and low.
However, NGP investments did not face the same returns requirements despite the greater uncertainty. We need to implement a more disciplined return focused framework. I’m also encouraging everyone to have the confidence to be more transparent, and to challenge accepted wisdom, while being much more open in the assessment of performance. I’m determined that our communication should also be balanced and open. We’ve already taken steps to improve these results – in these results. And we’ll strive to do better.
In summary, there’s so much things that we can achieve and I see Imperial as having great potential. With clearer focus, better execution, we will over time be able to create long term shareholder value. I will be able to share much more of my thinking after concluding a strategic review. As you might expect, I’m looking at all aspects of the business to explore options to create value. I’m approaching this with an open mind, recognizing the current strategy and business model have not been delivering.
We need to put the consumer at the center of our thinking and planning, recognizing their freedom of choice. In Tobacco, we’re looking at what gives us competitive advantage across our footprint of markets, how brands are perceived by customers and consumers, and what gives us the right to win in the market. I’m looking at the role that NGP can play in terms of providing consumers with reduced risk alternatives to combustible tobacco. I want Imperial to be able to play a meaningful role in harm reduction, which means having a successful NGP business, one that is more focused and better managed.
On organization capabilities, as I’ve said, we’re exploring how we strengthen the team and build our capabilities in certain areas, and making sure with the right organization structure to deliver the strategy. Alongside the strategy, we’ll need to ensure our capital allocation supports the strategic delivery with the right mix of funding sources, the right investment levels, and the appropriate returns to shareholders. We come out of this process with a clear strategy and priorities that will define what Imperial needs to do in the next couple of years and how we are facing up to the challenges and capitalize on the opportunities ahead.
We will provide you with an update on the – of the review on the 27th of January in more detail. I know lots of you have lots of question on these future plans, but you will understand today I will be limited what I can talk with you about.
So, now let me provide you with my perspective on this year’s results. This has been a challenging year, and I recognize these results fall short of original expectations. Encouragingly, consumer demand for tobacco has proved resilient, and we grew net revenue while the business adapted well to a rapidly changing environment caused by the global pandemic. COVID-19 continues to affect and shape all our lives, requiring flexibility and resilience. I’ve been really impressed with the commitment demonstrated by all our people to keep the business going.
Our tobacco volume declined by 2.1%, reflecting some temporary COVID related changes in consumer behavior. We delivered share gains for the Group overall, also, much of the improvement was in low value markets and products, leading to a weaker than expected gross profit contribution. Our profit delivery has also been affected by some additional COVID-19 related costs in manufacturing, as well as some increased provisions following a cautious assessment of further risk, given the ongoing uncertainties.
We also had some additional regulator expenses and investments in overheads which weighed on our tobacco profitability, which Oliver will explain in more detail. While the NGP results are disappointing, we’ve delivered against our revised expectation and is encouraging, we’re seeing some sequential improvements in sales progression in the second half. A more disciplined approach has substantially reduced investments, which has supported a significant reduction in losses during the second half. Also somewhat delayed, we’ve now concluded the sale of the Premium Cigar business, which was a major achievement in the current environment. Proceeds of €1.2 billion will be used to support deleverage.
It is clear that COVID has impacted consumer and market dynamics, influencing how and where consumers are purchasing and using our products. With more time spent in the home and restrictions meaning fewer discretionary spending opportunities, it would appear that some consumers allocated a greater percentage of their income to tobacco. This has been reinforced in some markets like the U.S. where consumer wallets were boosted by stimulus payments.
From a market and channel perspective, it was clear from the start of the pandemic that travel restrictions would severely limit sales in the duty-free channel in Horeca outlets and in markets which traditionally benefit from seasonal holiday travel. The UK, Germany and France have benefited from the repatriation of some tourist volumes and the reduction in illicit trade. The pandemic has caused some minor disruption to our manufacturing supply chain, resulting in some inefficiencies, which Oliver will talk about. It is clear we will be living with the virus for some time yet. And while I believe our business will be resilient, we’re taking a cautious assessment of the potential risks.
Finally, I would like to touch on ESG. I firmly believe that effectively managing is ESG response is important to our future success. And also as the pandemic affected some of our plant activities in the year, we’ll make further progress against all five of our priority focus areas here. The establishing of an ESG Steering Committee chaired by Thérèse Esperdy and comprising senior figures from around the business, highlights the importance of ESG to the Board, as does the fact we insist our auditors assure our ESG KPIs.
If there’s one area where it could be stronger, is on the metric for some of the priorities such as climate and energy, we have very robust KPIs, but for some others, we need to do better. That will be changing this fiscal year. The Steering Committee has been working with the business to identify and agree appropriate KPIs for all of our main ESG issues. That work is complete. And once they have been validated against the new strategy, we will make them available to you.
I will now hand over to Oliver to take us through the numbers.
Oliver Tant
Thanks, Stefan. And good morning, everyone. This has been a difficult year. While our Tobacco revenue was somewhat better than we originally expected, this has not translated into better profits. Our NGP revenue was also fell short of our original expectations. But the steps we’ve taken to cut costs have significantly reduced the losses in the second half, creating a better platform for the future.
In Tobacco, we grew our total market share across our footprint by 50 basis points and delivered further growth in the majority of our priority markets. Much of the gain however, was in lower value markets leading to adverse mix and lower gross profit contribution. Overall, our Tobacco net revenue was up 1.8% benefiting from a strong second half performance in the U.S. and a return to growth in our AAA division,
In NGP, revenue was down 27% as we destocked trade inventories in the first half and as we scaled back investment, particularly in the second half. Profits and EPS reflected NGP losses and a decline in Tobacco profits, which I’ll come on to in a moment. EPS declined by 5.6%, more than the decline in operating profit, which reflects the slightly higher tax rate in the year.
As previously guided, I expect the upward pressure on our tax rate to continue at around 23% for FY21. Dividend per share of 137.7p was 33% lower, reflecting the Board’s decision to replace the dividend, which we announced back in May.
Our headline cash conversion of 127% includes a 20% temporary benefit from a change in the timing of excise duty collections. Our underlying cash conversion of 107% was ahead of our expectations, driven by working capital improvements.
Tobacco volumes declined by 2.1%, better than the level we’ve been used to over recent years. In Europe, volumes were down 3.5% with slightly better than expected market size trends, offset by the significant impact of COVID, on our duty-free business. As a reminder, our global duty-free business is all reported within our Europe division. We’ve also seen a benefit to market size from border closures, particularly in Europe, where a reduction in the level of illicit product has supported duty paid volumes in markets like the UK.
In the Americas division, our volumes declined 3.3%. Within the U.S. market specifically, we saw a decline of 2.5% compared to a market size decline of 1.8%. Adjusting for the year-on-year impact of inventory movements in the U.S. of 700 million sticks, our volumes outperformed the market, reflecting 10 basis points of market share gain. Volumes in the AAA division grew 0.4%, reflecting stronger sales performance in the Middle East and Africa, which more than offset weaker volumes in Australia.
Stefan mentioned there have been winners and losers as a result of COVID. For example, Spain and the Canaries and the duty-free channel have suffered whereas markets in Northern Europe and the U.S. have benefited. Coronavirus is clearly on the rise again, creating further uncertainty about how consumer behavior and channel shifts may develop going forward. I’ll talk about how we’ve chosen to provide for this risk shortly.
As I mentioned earlier, Group share was up 50 basis points and although we grew in seven of our 10 priority markets, including the U.S., we’ve continued to lose share in the UK and Germany. Our position is however improving in the UK with sequential growth supported by the launch of Lambert & Butler fine cut tobacco together with several large value offerings across a number of our cigarette brands.
In Germany, we are continuing to reshape our portfolio led by JPS and West, with a focus on value formats in both fine cut and cigarettes. This has delivered a better second half, but we’re still down for the year as a whole.
In Spain and France, we delivered share gains for the first time in many years, with gains in blond now offsetting the drag from dark formats. Our share in Italy came under pressure as we increase prices on JPS ahead of our peers. In the U.S., cigarette share was up for the second year. This was primarily driven by continued success with Sonoma and deep discount, while Winston and Kool maintained their position in the declining premium segment.
Mass market cigars gained 70 basis points led by backwards. Overall market size decreased by 4.3%, with some stronger performance in H2, such as the UK and U.S. offset by accelerated declines in markets such as Australia and Spain.
Overall net revenue grew by 0.8% at constant currency. We grew Tobacco net revenue by 1.8% supported by the lower rate of volume decline. Price mix of 3.9% was weaker than normal, reflecting adverse market and product mix, which I will come to in a moment. Our NGP revenues declined 27% driven by destocking of the supply chain and lower investment levels.
If we look at price mix in Tobacco in more detail, we’ve seen a pretty consistent level of gross pricing across the year, as the whole list is shown here. Overall price mix was held back by negative market and portfolio mix, particularly in the first half. Market mix has been a story of two halves with stronger sales in lower value markets such as the Middle East and weaker sales in Australia creating a drag during H1. A stronger mix of market volumes in the second half was driven by increasing sales in higher value markets in Northern Europe, and stronger volumes in the U.S. offsetting the impact of adverse market mix in AAA.
Adverse product mix was driven by a stronger performance from our lower priced formats in the UK, Australia and Germany, with the private label brands in the latter adding over a billion sticks to our volumes but with very little revenue. The improvement in product mix in H2 was driven by the turnaround in backward sales, which were up over 30% in the second half.
Looking at the divisional performances in more detail, our Tobacco net revenue improved in the second half across all divisions except Europe, which was impacted by reduced sales in global duty free. Tobacco net revenue in the Americas grew 1.9% benefiting from the robust market volumes, continued strong pricing and further share gains in both cigarettes and cigars.
In AAA net revenue grew by 5% against a weak comparator with strong volume performances in the Middle East and Africa and an improved pricing environment in Russia. We also benefited from greater stock profits in Australia, which as you’ll recall, is a carryover from 2019. Looking into 2021, we expect that this will be a headwind of around £15 million to revenue and profits year-on-year.
Our NGP revenue performance has been affected by the reduced investment levels in H2 and first half trade destocking. Encouragingly, following the destock, we’ve seen revenue improve sequentially in the second half in both Europe and the U.S., with actual consumer off take remaining broadly stable. In AAA, the second half decline reflects a pause in our expansion of Pulze and blu in Japan, the former pending our assessment of the heated tobacco category as part of the strategic review.
Adjusted operating profit was down 4.8% at constant currency. We’ve restated the prior comparator by £10 million to strip out the benefit of our Auxly revaluation last year. This is as a result of changes to our adjusted performance measures we announced last year. Tobacco profits were £118 million lower. I will provide further detail on the drivers of this decline on the next slide.
Our NGP losses increased by £84 million, driven primarily by, inventory write-downs which more than offset the benefits in underlying profitability from cost and investment reductions. Our Tobacco profits were impacted by four main drivers. Despite strong pricing across the year, price mix was below par affected by the negative product and market mix, I referred to earlier. I estimate the adverse mix represented about a £50 million drag on profit
COVID-related costs of £90 million include around £25 million of manufacturing inefficiencies as a result of disruption to our normal working practices. We expect that many of these manufacturing cost increases will continue into FY21. We’ve also taken provisions of around £65 million against potential stock and debtor risks relating to COVID-19. For example, in the case of stock this relates to certain SKUs, where we are experiencing much lower levels of consumer off take, and so stock durations have increased dramatically, for example, with duty free.
As regards these risks, we have deliberately adopted a more cautious approach against a rapidly evolving environment. Regulation costs were around £50 million higher than usual, driven by the implementation of track and trace as part of a EUTPD II and inventory write-downs following the menthol ban in Europe.
We also had some industry fines relating to competition authority cases in the Netherlands and Ukraine, which we are appealing. We expect about £20 million of regulation costs will continue next year, relating mainly to track and trace. Tobacco overheads were also higher as we allocated more investment towards the tobacco sales force. In NGP, we had a further £29 million of write-downs in the second half, bringing the total for the year to £124 million. These additional write-downs also relate to slow moving inventory and IP.
We significantly reduced operating losses in the second half as we cut costs, reduced investment and renegotiated trade margins with retailers. Cash conversion benefited from a 20% temporary benefit to our working capital from the timing of duty payments in the UK on Logista. Excluding this benefit, which we expect to unwind in 2021, underlying cash conversion of 107%, was driven by working capital improvements and lower CapEx.
As a reminder, we benefit from a daily cash pooling arrangement with Logista. Over the year, the daily average cash balance under the Logista cash pooling arrangement was £1.9 billion, with movements varying from a high of £3.9 billion to a low of £0.5 billion. At the year end, the loan position was £2.4 billion.
Our reported net debt-to-EBITDA including temporary benefits from the timing payments was 2.7 times. Excluding this benefit underlying gearing was 2.9 times. Including the proceeds from the premium cigar sale, which completed post the year end our pro forma net debt-to-EBITDA is closer to 2.7 times.
As a reminder, the sale of Premium Cigars will dilute next year’s EPS by around 3% as detailed in a slide in the appendices where you will also find guidance on a range of finance items for the coming year.
I would now like to hand back to Stefan.
Stefan Bomhard
Thank you, Oliver. So as we now look forward, I’m expecting a stronger operational and financial performance in 2021. On an organic basis, excluding the impact of the Premium Cigar sale, we expect to deliver a low to mid single-digit growth in adjusted operating profit at constant currency.
We’re conscious that COVID continues to impose restriction across our markets and against this uncertainty we’ve been deliberately cautious in forecasting for the year ahead. Underlying tobacco pricing is expected to remain strong. Also ongoing mix headwinds are likely to persist, coupled with lower level of stock profits from Australia and the UK. We expect tobacco consumption will trend back to more normalized levels, particularly as the benefit of fiscal stimulus reduces and potential recessionary pressures takes effect.
Given the outlook for travel, we’re not assuming any recovery in our duty-free business this year. We also expect the COVID-19 restrictions will cause further manufacturing inefficiencies in the coming year. And similarly, the regular costs related to track and trace will continue. We expect the NGP losses will continue but at the moderated level achieved in the second half. A high tax rate will have a 2% impact on earnings with constant currency earnings per share, expected to be slightly ahead of the prior year.
Turning to my priorities for the coming year, they are about three things, the right strategy, the right team, and the right performance. My immediate priority is to complete the strategic review and implement the right strategy to unlock the Group’s full potential overtime. I look forward to providing more details in January. It is also about the right people by combining the strengths of our existing people with the fresh perspective of new hires. The people in the business have impressed me and this reinforces my confidence.
Recognizing that many are watching today, I would like to thank you for your support so far. It is also about the right performance. I’m already taking steps to improve accountability to strengthen performance with more rigorous data led oversight. I’m confident that with a more disciplined focus on execution, we can begin to deliver better and more consistent results. I’m excited about the future and truly believe that over time, we will deliver a stronger performance and unlock long term value for shareholders.
Thank you very much for listening today. I would now like to take questions. I’ll hand you back to the operator to start the Q&A session.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Owen Bennett from Jefferies. Please ask your question, your line is now open.
Owen Bennett
Good morning, guys. Hope you’re well. And the first question is, I was just hoping maybe you could comment on the trends on blu in the U.S. and what you’re going to do to try to improve market share trends? I guess more specifically, obviously little that can be done by way of innovation anytime soon, with new products and due to PMTA. So do you think that the current blu product in the U.S. market is good enough? And how do you start to drive some improved momentum there? That’s my first question. Thank you.
Stefan Bomhard
Owen, good morning, it’s Stefan speaking. So nice to meet you at least in the virtual world. On blu, in the – your question on market share in the U.S. In principle, we’ve seen what is quite encouraging, we’re seeing a flattening out of the market share in blu in the last couple of months. So we are clearly seeing that the business is quite resilient in the current environment. On the second part of your question, as you will know, the future of our NGP strategy, that is what we’re currently still working through in preparation for our overall strategy. So on that one, I’m sorry, but that is probably some – that is something we’ll share in the 27th of January, Capital Markets Day.
Owen Bennett
Okay, thank you. And I think your next answer will be similar. And but I was just going to ask and maybe talk about possible, the divestiture of non-core assets? And is this something you’re looking at and specifically, would you look at potentially selling the mass markets cigars in the U.S. or even part of the emerging market cigarette business? Thanks.
Stefan Bomhard
Owen, I think you got it right. I mean, in principle, this is not a question that I think would be right to answer ahead of the completion of strategic review. I mean, what I can reassure you is that we are taking a very rigorous, very disciplined and detailed review of the business, unit-by-unit, brand-by-brand, country-by-country. So we will look at our footprint assets and the performance and the execution against it. So that is truly something we’ll come back to you at the end of January. But I can reassure you, we are looking at all options inside the business.
Owen Bennett
Okay, great. Thanks very much. Appreciate your time.
Operator
Thank you. Your next question comes from the line of Gaurav Jain from Barclays. Please ask your question. Your line is now open.
Gaurav Jain
Hi, good morning. So a few questions from me, one of the biggest concerns investors have had is there’s a margin reset at Imperial. And you are giving an EPS guidance today, and you will have a CMD in January. So should we assume that the guidance you are giving today you will retain in January as well, so if you could just comment on that?
Stefan Bomhard
Sure. Good morning Gaurav. Gaurav, in principle, I think the key point you’re picking up here, I think one thing to keep in mind is when you compare the levels of marketing investment specifically in our industry versus other consumer goods industries, we’re talking about single digit level of investments versus many other consumer goods industry in double digit. So I think, overall, well as I have looked at the last four months and just based on today’s knowledge, I think we’re reasonably invested in our brands in the right way. We are clearly also looking about how do we spend that money today about driving performance? So it’s pretty fair to say, based on our knowledge that you shouldn’t expect a major margin reset won’t be coming at the Capital Market Day.
Gaurav Jain
Sure. You mentioned in your comments that you are having monthly business reviews with your top five markets. But I think you have 10 key focus markets. So could you share what those top five markets are? And those other five markets, are they no longer a focus?
Stefan Bomhard
Now, Gaurav, I think the most important – the broader comment is very clearly and in my first couple of months, I had to clearly focus my attention. And it’s very clear that five of our top markets make a very disproportionate impact to our business performance. So once the changes are implemented, I have my monthly direct reviews with these top five markets together with the two divisions we have. So I’m not just relying into two divisions to look at the business, but as a CEO of this company, I feel it’s very important to really have a direct grip on the business.
We’re also seeing, just to share with you one detail, it isn’t just with the Managing Director of the Market, it’s with the entire management team, the Head of Sales, the Head of Marketing, the Head of Consumer Insights, because these are clearly the market that are driving the best value creation. And the five markets you could figure out when you look at this time, you will have seen in our release. We call out the profitability and the revenue impact of these key markets. So probably, pick the top five markets from a revenue and a profit perspective, and you are in the right place.
It doesn’t mean the other ones are not important, to be clear. But I do believe focus in this space is one of the key messages I’m sending, which are the market that will move the needle in this company.
Gaurav Jain
Sure. And last question, just a technical question, maybe on the excise tax scenario. So Australia and France, have been difficult markets in the last few years because we had these very steep excise tax hikes. And it seems that in both those countries, those excise tax cycles are at an end right now. So first of all, is that assessment correct? And does this imply that Australia and France can improve for you as well as for everyone over the next couple of years?
Oliver Tant
Gaurav, if I can take that one? Hi, good morning, it’s Oliver here. I think one factor you need to reflect in Australia is the fact that we’ve also benefited from and we referred to it at the end of last year, duty windfall is a part of those excise changes. And those have benefited our stand in the market over the last couple of years to the tune of about £50 million. So I think you actually, we’re expecting that to largely unwind as we move forward. So we’re starting from a lower base. So I would say with Australia and say, actually, that’s likely to be a headwind for the business in the context of the outlook for FY21 and beyond. And France is progressing in a measured way is the way I think I would probably describe where we are in France.
Gaurav Jain
Okay. Well, thanks a lot.
Operator
Thank you. Your next question comes from the line Alicia Forry from Investec. Please ask your question, your line is now open.
Alicia Forry
Hi, good morning, Stefan and –
Stefan Bomhard
Good morning, Alicia.
Alicia Forry
Hi. You talk a lot about changes happening in your industry and I think most of that is aimed at NGPs. But I noticed, a couple of years ago in 2018, at an Imperial company presentation 70% of profit was derived from the top 10 markets. And now in a couple of years’ time that’s concentrated into the top five markets contributing 70% of profits. So I’m just curious if you can talk about some of the changes in profitability in your main markets that are behind that, that shift and that consolidation, I think that would be interesting to understand more about. That’s the first question.
Stefan Bomhard
Alicia, I mean, on the – to be honest, it’s because I haven’t been here in 2018, so quite difficult for me to comment on profitability development over time. I think what is clear and I think one message I’m sure you’re taking away is about the – it’s a very important, yeah, that a significant chunk of our profit gets generated by a group of countries, which I think that I’m focusing management’s attention on these ones. At the same time, I would just be mindful as well, that the rest of the market still make a very meaningful contribution in this company. It’s we are in the privileged position of a good level of profitability in this company. But I think it’s also very clear that a lot of our markets make still some very significant contributions to the overall profitability. Oliver, anything to add from you side?
Oliver Tant
Yeah, I had – just had a couple of points. So I think we have actually seen quite strong growth in profitability from the five that we’re currently focused on over that period of time. But also, it would be fair to say that the – that there was a big difference between the larger ones and the smaller ones and therefore disproportionate. The increases in the larger ones have a much more impactful contribution in overall terms. So if we take the U.S., for example, which has always been pretty transparent in our numbers, because we’ve talked about the Americas, and it’s been a large portion of our business, the profitability of that business has grown pretty strongly over the last three or four years, and much stronger than the average for the Group as a whole. So it shouldn’t entirely come as a surprise. And it’s, I guess it drives the comments Stefan’s making about the need to be very focused on that group, because they make a massive difference if we get them wrong. And, anyway that’s where a lot of the focus, time, and attention will be as we’re moving forward.
Alicia Forry
Understood, thank you. And then secondly, you talked about becoming a more agile, is this a matter of reorganizing where accountability lies within the organization or is it a question of, more investment is needed in systems to monitor data? Is it a structural, organizational issue or more of a capabilities and investment issue?
Stefan Bomhard
I think – let’ say, it’s a great question. One thing, I can reassure you it is not – the primary answer is that it’s not a structural investment in IT. I think it’s more, we’ll talk more about the Capital Markets Day once we’ve completed our work. It’s a combination of on the one side about kind of how do we focus our attention from the top down on the core markets and the core decisions. It is also logically a question how we operate from a cultural perspective. I mean, you’ve seen I’ve appointed, Alison Clarke as the Head of People and Culture. There’s a cultural opportunity here. And for example, introducing what you could call skip level management meetings with the top five markets, is one of these examples. That makes us significantly faster, so give you an example from these ones, in these meetings last month, we could very quickly take price decisions in a couple of our markets, because we suddenly had all the leadership team together of the company and we do this now on a monthly basis. And becoming more agile is going to be a combination of many things, but I feel very comfortable that we as an organization can become faster in our decision-making process.
Alicia Forry
Thank you. And if I could just get one last question through, please. Could you talk about how the crisis has impacted trends in fine cut tobacco in the last few months? Just curious how the consumer is either moving more towards that product or away from it?
Stefan Bomhard
Yeah, I mean, number one, interestingly, fine cut tobacco has an important position in some of our markets and it is a relatively small part of our – of the business or the industry in some other markets. So we haven’t really seen a major shift there. I think the one I would probably call out specifically is in some markets as borders shut, what you see in the United Kingdom, a large part of the market growth reported has actually occurred in fine cut tobacco.
However, when we look – when I look at the deeper data, it doesn’t look like consumers have down-traded to find cut tobacco. Our hypothesis at this point in time, a lot of illicit trade, consumers who were buying illicit products have actually switched into fine cut tobacco. So we’re not, so it’s an interesting tendency, and we’ll need to see whether that is something that will continue over time or whether that will revert back at another point in time.
Alicia Forry
Thank you.
Operator
Thank you. Your next question comes from the line of Adam Spielman from Citi. Please ask your question, your line is now open.
Adam Spielman
Thank you very much and looking forward to meeting the new top two. So my first question, I’m trying to ask a question in a way you can answer it, right? And I suppose that, as I listened to what you said very carefully, a lot of what you’ve talked about is more intense management, particularly of the top five markets. And that’s quite a big contrast to what we used to hear about under Alison Cooper. But the main strategy or a low talk was about streamlining Imperial, which I suppose meant asset sales. And I guess I thought personally, potentially buybacks. So here’s the question. The question is, am I right to assume that you think there’s more value to be gained through intense management of existing business, particularly the most profitable elements of it, relative to restructuring and streamlining the overall company?
Stefan Bomhard
Adam, as you say – I mean, first welcome and I absolutely look forward to meet you in person as well. And trying to answer the question today in November, I mean, logically, the key answer is, that’s one of the key focus areas for the Capital Markets Day. But trying to give an idea and I think you are rightly reading into that, I do believe there is more opportunity for managing core markets in the right way. I think there is some low hanging fruits in this company, which give me confidence, because I see the underlying assets of this company are in a solid base, especially as we talk about the tobacco side.
And so I think that is clearly one of the opportunities I see. And I think that is in the interest of our shareholders because that is clearly going to give us a relatively good return on this one. More details, we’ll – I’m happy to share that at the end of January, when the strategic review is really complete, where I think it would be more appropriate to give you the fuller picture.
Adam Spielman
All right. And again, I’ll try and ask questions that you can answer.
Stefan Bomhard
Yeah.
Adam Spielman
Clearly, the share price is sort of very disappointing. Valuation is very low. And you obviously and everyone’s acutely aware of that. And I guess, do you think that’s something you can address directly, most obviously, through buybacks or in your mind is it something that will just and with good operations, will just sort itself out over time? And your view is, give me three, four, five years, and hopefully the operations will improve to such a degree, the share price will go up? Or I guess is it the balance between those two things?
Stefan Bomhard
Adam actually, let me answer it two parts. I think, number one, it is very clear and when you look at our relative share performance, it’s clearly as you will all know very well, there is a secondary rating has clearly occurred in the last couple of years, which impacts us as many of the other players in the industry. But it’s also very fair to say, I’m candid that within the sector, we as a company have underperformed and the primary driver of that is that we have consistently not delivered against the expectation that we set before. So to certain extent, what you hopefully and I’m sure you read into these results, and also outlook for fiscal ’21, there’s a clear strategic imperative from my side that we make promises that we can keep. You heard me talk earlier about a commitment is a commitment. So I think it is important. That is clearly one of the elements I have myself with the team here want to get Imperial to a better place.
Secondly, it’s about you are asking, logically the question about capital allocation. I think on this one, I think we should start with the strategy first. That’s the effort that is clearly on the way, making sure that we are having the appropriate level of funding to actually allow Imperial to be properly in this market for the – all the years to come. I would have said logically and that’s why I put it on the chart very explicitly, in the end of January, we will share with you the capital allocation policy of the company. My last five years at Inchcape, we had a very clear capital allocation policies that we adhered to in that period of time. So we’ll give you clarity, how based on the strategy, we would like to allocate capital going forward.
Adam Spielman
Okay, thank you. And, I presumably, that – one of the things about capital allocation is the leverage you want to have in the company. And historically, there’s been this target of between two and two and a half times net debt-to-EBITDA. Presumably that is something that you are at least thinking about whether that’s the right level again or that’s the right level going forward?
Stefan Bomhard
Adam, it’s part – absolutely. It’s part of the capital allocation model, absolutely. And it’s going to be is that – that combination of like, what is the right level of leverage for this company? What is the right level of dividend of the company and what, as you’ve mentioned before, is there an element of share buyback as we look at our capital allocation policy? So as I said before, all things are on the table as much on the strategy side as well as on the capital allocation side.
Adam Spielman
Okay, thank you very much. That’s very helpful.
Operator
Thank you. Your next question comes from the line of Patrick Dolan from Redburn. Please ask your question, your line is now open.
Patrick Dolan
Good morning, gentlemen. Two questions for me. First, within Germany, specifically, you look at the share performance of last few years, I mean struggling quite a bit. And this year, you had some favorable aspects with less [losses] but you’re still not where you want. In your view, Stefan, why has the German performance been underwhelming and are there any insights you have into the channel and what that means for Imperial? And then secondly, on the mass market cigar business, good performance in H2, how should we think about performance into 2021? Now we have the benefit of people staying at home over the last few months, and how should we think about the category over next year? Thank you.
Stefan Bomhard
Okay. And Patrick, good morning. On German performance, now, I’m in the business four months. I’ve spent – one thing I made sure I’ve given the importance of German market. I actually was in Germany, on the ground, out with our sales force, with our management team, talking with customers. Now, and I think would be inappropriate today to kind of share already kind of thoughts about Germany. I think it’s the direction of travel that we want to get to a better position there, it’s clear.
And I think I – put it this way, I’ve looked after German markets for a long part of my career. I’ve known the German trade for a long period of time. I think there are some levers we can pull over time to get ourselves to a better position. And there is logically we – as you will know, a lot of value creation in our industry in the German markets. One of the most highly attractive markets and we actually have a very strong footprint in the German markets, which actually is quite interesting and good for Imperial. But we do need to generate a better performance from a market share perspective out of the German market. That will take time, that won’t happen overnight. But being on the ground reviewing the plans with the team, I do believe there is an opportunity to get to a better place.
On the mass market cigar question – on that you asked about the U.S. Clearly, we – obviously, that is an opportunity that we for Imperial to grow. I mean, with the backward brand that we hold in that market, that is clearly a consu – that is a brand that has a very strong consumer preference. So interestingly, we’ve been in fiscal year ’20, handicapped by supply constraints, because it uses a very high-quality leaf.
And therefore, as a result, we couldn’t actually produce as much as we wanted. We’re working very hard to improving our supply situation to be clear that has wholesome costs of goods implications. But to be clear, there is a consumer demand, a consumer preference for our brands, and therefore our job has to do to get these products into the hands of the consumers.
To be clear, when you look at the half effects, we clearly have these supply chain shortages, primarily in half one of fiscal ’20. So we already saw an improved situation in half two. So as we carry now into half one fiscal year ’21, the year-on-year, like-for-like comparison would actually be quite positive for us. So I’m quite – you get the sense that I’m quite excited by our mass market cigar opportunity in the U.S.
Patrick Dolan
Great, thank you.
Operator
Thank you. Your next question comes from the line of Jon Leinster from SocGen. Please ask your question, your line is now open.
Jon Leinster
Hi, good morning. And again just to reiterate Adam, looking forward to meeting you in person at some point. And couple of questions, if I may. First of all on your outlook, you said volumes will become more normalized. Could you give a bit more detail on what do you expect the U.S. and EU markets to look like in terms of volumes going into FY21, please?
Stefan Bomhard
Yeah, it’s a great question. I have to say it’s difficult to predict. To be honest, I think what I would say is that we will – I think if you look at the U.S. and Europe, we clearly saw an improvement of underlying market volumes behind COVID. I think relative from a volume perspective in these markets, COVID has been a tailwind. I think it’s fair to say in our fiscal year ’21, I think some of that tailwind will unwind. I have to say, I find it difficult to say by how much, because to be honest, that will depend on when is the effect of COVID going to reduce itself. And to be fair also, what is going to be the recessionary impact that we’ll see from COVID.
I think so I feel quite confident that we will see some unwind of the tailwind. But it’s quite difficult to say how much will really happen in fiscal year ’21. And I personally have – you probably get the sense, I’d rather go forward with a prudent forecast versus actually leaning forward in an optimistic way here. If the world turns out to be better, fantastic for all of us. But I don’t want to build my forecast around kind of a very optimistic outlook.
Jon Leinster
Okay. And perhaps put it – put the same question in a slightly different manner, if I may. How much do you think illicit trade or lack of illicit trade impacted some of the major markets? And are you assuming that illicit trade comes back into the market at the sort of more normalized rate?
Stefan Bomhard
I think it’s quite a difficult question, to be honest because as you will know, illicit trade is very difficult to track at this point in time. Would – to answer your boarder question, would I believe if border situation normalizes, then you will see some recovery of illicit trade. Yes, I think we will. Will it recover to its prior levels? I think that’s difficult to say at this point in time.
Jon Leinster
Okay. And on the NGP side, I mean, it looks like – I mean, the sort of run rate cost base is about £400 million a year. How much of that is, would you say is fixed and how much of that is sort of marketing and variable? Is that something that you can flex going forward?
Stefan Bomhard
I mean, at this point in time, I wouldn’t kind of go in the different lines of the P&L of the NGP business. I think – I think you’re rightly said, lots of moving parts here in the past. So that honestly is one of the ones I would like to come back at the end of January as we’re still working through our plans. But what you will see it’s a more focused and a more rigorous approach. The one thing I would volunteer to you, it has been historically quite a fragmented approach, as we have driven our EVP business separate from our heated tobacco efforts. For example, and one of the steps I’ve taken here my first months to actually bring that business much closer together. So removing duplication of market research costs, as an example, because an NGP consumer is an NGP consumer, we don’t need to do the research twice between heated tobacco and EVP.
Jon Leinster
Right. And lastly, if I may, I mean, you mentioned again, on the capital allocation that you’re investing more particularly in the in the tobacco sales force, is that – I’m not assuming, is there a sort of low hanging fruit? Is there – is that something where you can improve the market share trend in some of the key markets just because there’s perhaps been not enough sales force?
Stefan Bomhard
I think the – as I said, I spend – I’ve run sales forces for a significant amount of my life. When I’ve been out there with our people, looked at coverage of different channels and so on and I think there is an opportunity for us to actually improve our coverage of the most attractive channels. Now, when we come to Capital Markets Day, we’ll give you more detail, but I do believe that is one of the leverages that we have to actually run the business – our business better. And exactly as you say, ultimately, that is one of the levers we can pull to actually drive market share as well.
Oliver Tant
So it might be worthwhile just to be clear on the point. I mean, what’s actually happened in FY20 is that we had, – we have a lot of investment going in behind our NGP business in FY19 and into the early part of ’20. It was the sales force in part, so the sales force was tasked with a series of initiatives to support NGP. What we did during the course of ’20, is pull back the amount of time they were spending on NGP and ask them to spend more time on tobacco. So although that shows up as an increase in our tobacco costs, obviously the counter is that it’s reduced our NGP costs. We’ve not put on additional overall costs of £26 million.
Jon Leinster
Right, okay. So I mean, but okay, so it’s an allocation issue.
Oliver Tant
Yeah, well, it’s an allocation of time. You see that’s –
Stefan Bomhard
For fiscal ’20.
Oliver Tant
For fiscal ’20.
Jon Leinster
Yeah. Okay. Well, thank you very much.
Stefan Bomhard
Thank you.
Operator
Thank you. Your next question comes from the line of James Edwardes Jones from RBC. Please ask your question, your line is now open.
James Edwardes Jones
Good morning. Stefan, you said that it’s important to base decisions on real data and insights, I think was your phrase. And it was pretty clear implication that this hasn’t been the case historically. Can you give some examples of what’s or what needs to change?
Stefan Bomhard
Yeah, I think they are two [indiscernible]. I think that the most obvious one is on NGP. I think it’s very clear that with the best intentions in the past, some of our roll outs on the NGP side happened too fast and too broad. And in the desire to capture what was especially on the EVP side, a very fast-growing market and also in heated tobacco, sometimes, decisions were made without the full data being available at that point in time. And the products were scaled into markets without really having all the data in hand, so not fully tested proposition. That kind of would be the one.
And the other one I would volunteer is, when you look at it, I’ve come through hundreds of pages of consumer data on our tobacco business. And what you would – what I would observe was lots of data but for example, some of how we look at the data is not consistently the same across the company. And it’s about mining that data in decision making process that is something where I think we have a real opportunity to improve. That gives me confidence about that over time, we can also improve our tobacco performance.
James Edwardes Jones
Got it, thank you.
Operator
Thank you. Your next question comes from the line of Sanath Sudarsan from Morgan Stanley. Please ask your question, your line is now open.
Sanath Sudarsan
Hello, good morning, everyone. And good to hear from you, Stefan. Two questions from me today.
Stefan Bomhard
Good morning.
Sanath Sudarsan
Yeah, good morning, two questions from me today. The first one, you seem to have looked at all the options inside the business and much of the comment seem to suggest going for improving operation performance, speed, accountability, for example. But the tobacco industry is changing quite a bit, especially in some of your key markets. So how do you tie up your internal assessment of the business with the external market with your current brand and geographic footprint? And secondly, probably just related to that, do you think Imperial can transform into a business which adds more users to the portfolio in a sense, the canvas transforming to a growth business over the medium to long term? Thank you.
Stefan Bomhard
Sanath, I think the – logically my starting point has to be the business of what I have today. So my strategic review has to start with the business of today. But logically, we’re doing this in the context mode, what will the industry looks like in the next five years? So you have to trust me that we are looking at all options, and we’re considering that. But to be clear, I think there is clearly an opportunity to generate more growth and more profitability from our existing portfolio, but we’re not going to close our eyes to other opportunities that are there. But to be clear, I think our starting point always has to be our own business. And we’ll give you more details on this once we have completed our strategic review at the end of January.
Sanath Sudarsan
Great, and can I just press on one more question on culture changes you’ve actually touched upon. And obviously culture changes are always like the transformation story of companies. Could you just also maybe touch upon a few more examples of how, the traditional versus new model of culture can help deliver a bit more robust earning to the business?
Stefan Bomhard
I think the – I do believe culture can play a key element. I mean, in my last five years of CEO, it definitely made a difference. And I think one thing you can take as a signal of me putting for the first time in quite a while achieve people and culture office on the Executive Committee, take that as a signal that I do see that as one of the key levers of improved performance at Imperial.
And I think the other thing when I went through all the employee engagement service, read through all the verbatims that were of a survey that was done before I arrived, it’s very clear that there is an observation from an employee that we work too much in silos. And when you hear the word silo, that’s a very clear signal, we’re wasting resource because people do not work together enough. And therefore you have duplication in the organization.
So that is clearly, I see a more collaborative culture throughout the business. And also with more shared objectives as an organization, that’s one of the levers to pull in this context. And I’ve done this before in my career. I do believe there is actually going to be a very high correlation between driving a more collaborative and more focused culture, in the organization to actually making a contribution to a more consistent performance of the company. But you will hear Alison talk about this when we come to the end of January.
Sanath Sudarsan
Thank you very much.
Operator
Thank you. We have no further question at this time, please go ahead.
Stefan Bomhard
Okay. So I wanted to say a big thank you for a high-quality set of questions. And as I said before, hopefully we’ll have the chance to meet face-to-face again. And I’m very much looking forward to hopefully, at least probably in a virtual way see at the end of January, where we – I’m sure many of the questions that you couldn’t ask today, we’ll be able to answer that. Thank you.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may now all disconnect. Thank you.
