Imperial Brands: FY23 Results

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Top-line & Bottom-line results1

Adjusted: at constant currencies, excluding Russia

– Volume: -7.1% (-10.4%, including the Russia exit; weakness in US mass market cigars and against a stronger prior year comparison)

– Robust combustible pricing: +11% (partially offset by -3% in product mix, driven primarily by mass market cigars and deep discount cigarette growth in the US; total price/mix: +8%)

– Revenue: +1.4%

– NGP revenue: +26.4% (driven by launches across categories in the EU: +40.4% )

– Adj. Operating Profit: +3.9% (Tobacco operating profit: +4.1%, reflecting strong pricing & cost control)

– Adj. Operating Margin:+150bps (tobacco only)

– NGP losses: up +48.3% to £135Mn (new product and market launches => higher investment)

– NGP’s weight in total (tobacco) revenue: 3.4% (vs. 2.7% in FY22)

– EPS: +4.3% to £2.76 (higher finance costs and increased minority interests more than offset by the reduced share count and improved operating results)

– Adj. operating cash conversion: 92%; Free cash flow: £2.4Bn

– Adj. net debt: £8.0Bn (FY22: £8.1Bn); debt/EBITDA: 1.9x (FY22: 2.0x)

Key Highlights

 – Combustibles: +10 bps aggregate SoM growth in top-five markets (accounting for 70% of the operating profit). SoM gains in US, Australia and Spain more than offsets declines in Germany and UK

– Combustibles: -5% revenue decline in Americas (strong pricing more than off-set by volume decline and product mix deterioration). Strong, broad-based pricing improvements in all key markets

– NGPs: New innovation hubs in Liverpool, Hamburg and Shenzhen. Partnership-based innovation with disciplined market entry. New product launch timeline halved. Credible propositions across all three categories (vape, heated tobacco and oral nicotine). Now present in more than 20 European markets as well as the US

– Heated tobacco: Net revenue +72%. Launched iSenzia, flavored non-tobacco sticks. Pulze 2.0 is now available in Italy, Poland, Czechia, Greece, Portugal, Bulgaria and Hungary (7 markets).

– E-vapor: Net revenue +42%. blu 2.0 is now available in nine markets. Disposable blu bar is available in 11 markets.

– Modern oral: Net revenue +20%. Developed and launched new flavor range for Zone X. Plan to launch nicotine pouches in the US in 2024

FY24 Guidance

– On track with 5-year transformation plan (entering the final two years)

– Low single-digit revenue growth

– Operating profit growth: Close to the middle of the mid-single digit range in FY24. Low single-digit in H1 2024 (performance to be H2 2024 weighted due to the phasing of pricing and NGP investments)

– 0-1% FX headwind to revenue, operating profit and EPS in FY24

Our Recollection

Imperial Management is pulling off a good job in extracting the most out of a dying combustible business. But, is this sustainable in the long-run?

Imperial’s key markets are at a tipping point in terms of cigarette volume decline and transformation to NGP/RRPs – putting Imperial under immense volume pressure. Actually, only Altria (operating exclusively in the US) is reporting worse volume decline than Imperial.

Imperial’s financial delivery is almost solely based on pricing improvement (+11%) more than offsetting the volume decline (-7%) and mix deterioration (-3%). This is an outdated modus operandi – belonging to the pre-transformation era. NGP revenue is up +26% (mainly, through geographical expansion); however, NGPs still make only 3.4% of the total tobacco revenue. And, even if the Management is doing the bare minimum in NGPs (in order not to derail the delivery of the 5-year financial plan), NGP losses are widening (+48%).


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