Expectations ahead of the release:
Sell-side expects +2.9% tobacco & NGP revenue and +4.3% adjusted profit growth in FY24.
Latest guidance:
At the FY24 Pre-close Trading Update (October 8, 2024), Imperial Brands reaffirmed its FY24 guidance: an acceleration in tobacco and NGP net revenue growth (i.e. low single-digit growth; 1%-3%) and close to the middle of the mid-single digit (5%) operating profit growth. Moreover, Imperial Brands confirmed a strong growth in NGP net revenues (in the range of 20%-30% at constant FX) with a further reduction in operating losses.
FY24 Results:
– Tobacco & NGP Net revenue up +4.6% on a constant FX basis to £8.16 billion (vs. +2.9% exp.)
– Operating profit up +4.6% to £3.91 billion (vs. +4.3% exp.)
– EPS up +10.9% to £2.97 (vs. £2.95 exp.) – driven by profit growth and share count reduction
– Strong tobacco pricing / mix (+7.8%) across all key markets partially offset by decline (-4%) in tobacco volume to 190 billion sticks (vs. 187.1 billion sticks exp.)
– Combustible – Top 5 Markets: Aggregate market share gains (+5bps) in five priority combustible markets while delivering strong pricing. Four out of five markets in share growth (all but the UK). Encouraging stabilisation in German market share (+2 bps in FY24 vs. -80bps in FY23) for the first time under the new Management
– Combustible – Others: Strong pricing in wider market footprint. Recovery in AAACE performance in H2 2024 as disruption to shipment timings abated. Net revenue growth in Africa with strong pricing in key markets
– Next Generation Products: NGP net revenue up 26.4% to £335 million with growth from all three regions and market share growth in all three categories. Improved gross margins with adj. NGP losses reduced by +43.0% to £79 million. NGP revenue now represents ~8% of revenue in Europe (up from 3% in FY20).
– E-vapor: New blu vape formats (1,000-puff blu bar, blu box and blu bar kit) launched across several markets. blu present in more than 20 markets (+2 in FY24). +210 bps share and +14% net revenue growth
– Heated tobacco: Growing heated tobacco share in Europe with Pulze 2.0, iD and iSenzia sticks. Present in 8 markets (+1 in FY24). +110 bps share and +49% net revenue growth
– Modern Oral Nicotine: Present in 8 markets with modern oral products. +40 bps share and +61% net revenue growth. Entry to the US modern oral category with targeted launch of Zone brand in 12 metropolitan areas. Present in 42k stores. Reached 1.6% US national SoM (4.3% SoM in footprint)
– Distribution (Logista): Gross profit is up +4.4% driven by strong tobacco pricing and acquisitions. Adjusted operating profit is up +8.6%
– Free cash flow of £2.43 billion. On track to deliver five-year capital returns of ~£10 billion, representing 67% of Imperial’s market capitalisation in January 2021 when the 5-year strategy is launched. Capital returns of ~£2.8 billion underway for FY25 with £1.25 billion in buybacks and £2.55 billion in dividends (up +4.5%)
– Adjusted net debt: £7.7 billion (vs. £8.0 billion at the end of FY23); adjusted net debt to EBITDA at 1.8x and 1.9x at constant FX (vs. 1.9x billion at the end of FY23)
– FY25 to be the final year of 5-year transformation plan with investments made in consumer capabilities, cultural transformation and agile ways of working to accelerate financial delivery and growing capital returns
– Next phase of strategy to be presented at a Capital Markets Day on March 26, 2025
FY25 Outlook:
– Tobacco and NGP net revenue growth at low single-digit constant currency and adjusted operating profit growth close to the middle of the mid-single-digit range at constant FX
– Continued profit growth from combustible tobacco business and a further reduction in operating losses in NGP portfolio with another year of double-digit constant FX net revenue growth
– Performance to be H2 2025 weighted driven by the phasing of combustible pricing and investment; low-single digit operating profit growth at constant FX in H1 2025
– At least a high-single digit EPS growth in FY25
– 1%-2% FX translation headwind on operating profit and EPS at current rates
Our take:
FY24 results are better than expected across the board. Tobacco volume (-4%) held up well despite the strong pricing / mix (+7.8%). NGP revenue growth (+26%) is encouraging at the top-line while not knowing the contribution of different growth drivers (i.e. geographical expansion, portfolio expansion, temporary market share gains – product trial, solid market share gains – product adoption).
It is fair to say that Imperial Management’s 5-year transformation plan (entering Year 5) resulted in the stabilization of the Imperial’s financial delivery and extraction of the maximum value from its waning combustible portfolio. Although, as a cash cow, Imperial Brands will continue to generously reward its shareholders (through dividends & buybacks) at least for another 5 years, the Company is far away from being out of the woods. The core combustible business is dying out and the NGP portfolio generates only 4% of Imperial’s £8.2 billion revenue base. Therefore, the “Next Phase of Strategy” (which will define the roadmap for the next 5 years) is critical for the long-term financial prospects of Imperial’s business. We are looking forward to the Capital Markets Day on March 26, 2025.
