IMPERIAL BRANDS PLC (IMB) September 2026 Conference Transcript

Good afternoon, everyone. Thank you for being here. I'm Pallav Mittal, head of Global Tobacco at Barclays. I'm thrilled to have Lucas Paravichini here with me, CEO of Imperial Brands. Thank you so much, Lucas, for giving us the opportunity to host you. Without wasting any time, we'll go straight into questions. So, Lucas, you have been in the CEO seat for now almost a year. Can you just help us understand what things have worked, what hasn't, what have been your main priorities over the last year or so?

Firstly, thank you very much for your attendance, and good afternoon to all of you. It's a pleasure to be here and have this fireside chat with Paula. Indeed, this is my first year as a CEO, and it has been a very interesting, to say the least, year. I enjoyed it, and I think for me it is important that whatever I do, I do with passion for the sake of our consumers and our shareholders. You know, we started off the year also with the evolution of the strategy 2030. It is a continuation of what we have done with Stefan in the first five years. So it was also that opportunity for me to travel the organization, meet more of the people, discuss the strategy. And really what was very pleasing is to see the energy of our talents who are highly motivated to deliver again in these five years. It was also a year where, let's say at least, it was quite an interesting year with, unfortunately, wars, tariffs, lots of things. You see my gray hair. It is not the first year. Over the last 40 years, I've never seen an easy year, but this was especially an interesting year to say that. So I'm really proud on the organization that, again, we will deliver again. Probably the fourth year in a row of positive net revenue growth, of high single-digit EPS on the back of a profit growth, and again, our commitment to a healthy cash flow in our guidance today is above $2.2 billion. So we are fully in line with that guidance, and we stand to that guidance to the full year. it is also important that not only are we performing and overcoming hurdles here and there but we also make sure that while we perform we transform and we had a good start to the transformation as well you know my work is not just to perform today with the organization to make sure that this organization can perform for the next 10 years and make it a future proof We have announced at the CMD that we are embarking on a transformation that will deliver £320 million of savings, and we are well on track. We exited Langenhagen, we sold Taiwan, those are two big factories, that alone will deliver an annualised savings of £100 million once it is completed in July 27. We have also communicated that by the end of the year, our manufacturing excellence, which is actually focusing on the seven strategic factors we have, will deliver another benefit of $25 million on an annual basis. Our joint venture, our partnership with Capgemini, is delivering good results as well. We kicked off in February. We already transferred 400 people, and we are progressing nicely on that journey. I just want to make one point. In a company where every $100 you sell, $50 goes straight into profit, savings are very important. As an ex-CFO, as a CEO, I will never leave money on the table. But the real nugget of the transformation is actually the fact that we can improve revenue by focusing on what matters, which is our consumers, by building those capabilities and infusing AI into this equation. Capgemini will be a big partner in that. All right? I also want to recognize, and I'll finish, and not all my answers will be as long as this one. I also want to finish to recognize that there's more work to be done. You know, as a CEO, I can be proud of the performance. I can be proud of many things. But when I look at the share price, there's more work to be done to convince the market that whatever you see in the U.S. and Germany, we will deliver, and, you know, we look at this beyond this year. And so, you know, I also need to reconfirm our confidence in what we can do going forward.

Right. We'll go into those details around U.S. and Germany in a bit. But if you could just start with, I mean, a key question that people right now have is on market share. So over the last five years, Imperial was gaining market share in their priority markets. But in the first half this year, Imperial has lost some market share. So how should we think about market share over the next few years, and how do you think about market share versus, say, value creation?

Yeah, a very good question, and obviously a very hot topic over the last few months. I just want to start with one thing and reconfirm that if you're a consumer company, if you start with a consumer, market share will always be important for us. All right? In fact, if you look at the U.S., we gained 185 basis points over the last five years. We lost 20 basis points at half a year. Why? Because we gained market share at the bottom of the value ladder. We've been very successful. We've been the sole player there. Very successful when KTNG left. But we always knew that at some stage, our competitors will want to participate from the market. Because right now, some of our competitors, when they down trade, naturally down trade, They will not have an option to serve that consumer. So it was a matter of time for those competitors to come in. That's not a price aggression. That's not being more aggressive. That's just entering a market. They were not there. Also benefiting that our volume declines in the U.S. have improved significantly, and those consumers will come in at the bottom. Guess what? They don't find those products from our competitors. They want to be there. I understand that. So our strategic rationale was, okay, we gained 185 basis points. In one year, to lose 20% to maintain the structure is not such much as a bad loss if you then continue going forward. So those decisions were made not just tactically short-term. These were made when we look at how we progress in the U.S. over the next few years. And I remain confident. The U.S. is an attractive market. It is a market where we have options in all price ladders and where we have just launched Malibu to replace Crown, which has now priced up. We are in 40,000 stores and we have 50 basis points price share. So I remain confident that the U.S., while it's more competitive, will still be a big, big engine for us going forward.

Just to follow up on that, in the U.S. market, cigarette volumes this year, surprisingly, have been pretty strong. So it's around minus 5% decline versus minus 8, minus 9 over the last three years. Can you just help investors understand what is driving that cross-category movement, illicit a wave crackdown? And how are you planning in terms of your Malibu distribution expansion? Yeah.

So I think, also, we always have a lot of comments on the FDA. I also want to appreciate the work they have done and by, you know, going in the right direction in the regulation, but also helping the law enforcement agencies to enforce better existing laws and curb the illicit market. You can clearly see that the illicit vape has been retained better in the last few months, and that has had a positive effect. Remember, the consumers downtrade, and then they have an option to go into vape, which is a cheaper offer and readily available with attractive products because they are technologically advanced, which we can't compete on the PMTA restrictions. Now that it is harder to get to the illicit vape, now that the bottom end has attractive offerings on that price point, the consumer doesn't need to leave that category. In fact, they will come back. So we clearly see a correlation between the illicit or the better management of the illicit with the volume increase. And for us, we will always be where the consumer is. and so with Malibu we have now the option to replace what crown was to play together with our competitors at that bottom end and as we always do use the escalator to slowly start to price up again Before we move on to some other markets can you just remind what are the one-offs or the headwinds that we saw in OneEdge specifically on tariffs which won't repeat in the second half because clearly U.S. is a significant part of the growth story.

So just remind us of one of the headwinds that you saw in OneEdge and what drives the growth in Edge 2 to achieve the full-year guidance.

I have a long list of things that happened in the first half and the second half from wars and tariffs. But I think what we said at the half year, there is a significant effect mainly on the tariffs in MMC and a significant effect on the market size reduction in Australia. While Australia will always remain a profitable market, the step-down has been significant, very significant, and especially at the first half. We see that now lapse, and so you'll see that improve in the second half. The tariffs also have improved. That has gone away, or let's put it that way. We have stabilized at the level which is better, and so that will improve. Now, naturally, we always had a second half impact because of the way we invest at the beginning of the year and especially on how the pricing comes. So that's why we are confident that we will deliver the guidance for this year.

Right. So moving on to Germany, which is the second largest sort of profit market for you. Over the last couple of years, you have been gaining share, but I think over the last few months, again, IMB has lost some share. So can you just talk a bit about that? What did you change which was driving the market share gains and now what has changed again in the market. Plus, I think there is a big sort of German excise tax coming. So how do you view that and what the impact could be as we think about 2027?

So again, I just want to reinforce the importance of market share. But if you look at, and to your point, sorry, the way we looked at the playbook for all of these markets and not just the top five, all the markets, is you need to invest in your brand equity. You need to maintain that brand equity, and you need to invest in your sales force. You need to professionalize your sales force. That took long in Germany. You know the reasons for that, but that ultimately delivered the benefits. That has not changed, that we continue to do that. But I also want to go back to the point I made before. We don't look at the year only. We look at the longer perspective. Germany lost between 80 to 100 basis points of share every year up to two years ago where these meshes kicked in. But like in Spain, where every year we gain share and then we monetize, we drop share, we gain share, we drop share, you will see the same behavior in Germany. We gained 40 basis points and we lost or we were flat. And so we will continue to be managing that over a longer period of time, that does not change the importance of market share, nor that it is a robust state we're in in terms of market share in Germany. Again, the same discussion we had before. We have done extremely well in Paramount. We're doing very well in Goldwals at the top and Davidoff. And so we'll continue to manage those segments in accordance to how we best deliver the value and maintain that share very stable over time. The excise tax, I think that's been a little bit of a sort of a lot of noise around the excise tax. You know, as a Swiss German, one of the attributes and virtues of Germans are that they are very structured. Germany has a tax calendar, which they issue every five years and is valid for the next five years. They're very rational about that. The next tax calendar is due on the 1st of January, 2027. We knew that five years ago. Now, in May, the news came out of that excise tax. And unfortunately, one of a very eager politician who realized that Germany had a big gap in their funding thought it would be a good idea to tax sugar, tobacco, and alcohol and front-load the tax so they can get quicker cash. Now, in Europe, sometimes you see these proposals coming out being quite aggressive, because that's the way they negotiate to a level that is acceptable. So when they came out with what is a proposal to increase the tax by two euros, rather than the sort of 40, 30 to 50 cents every year, and start the taxation on the 1st of September, rightly, everybody was concerned. But we worked on it. We worked with the government. We worked with the ministry. We worked with the industry. Today, there is no tax increase in September. That's off the table. There will be a tax increase in January. The tax increase we're talking now is not €2. It's now €0.50 to €1. I do not know, honestly, where we're going to end up. That's still in dispute. There might be a point that they get to €1. euro it might well be 50 cents which is very close to what we do every year as a side effect they're also going to raise the minimum taxation which closes the gap between your value price to the private label which is the only market where there's a private label and there's a significant gap between those two prices by raising that minimum tax faster that gap will close i'll be very transparent, that gap will still be very relevant. But it will close.

It will be smaller.

So, you know, does that change the fundamental strength and power of Germany? No. Will it have an effect short term on some of the volume if we go up a euro? Most likely because no consumer is immune to these changes. Will the industry all behave rationally and at some stage transfer that to the pricing? That's my assumption. So, you know, these are things that are part of our life. We manage them. We work through them. But it doesn't undermine the huge size and power of the German market for all the industry.

All right? Right. So as we think about next year, are there any other markets which you would just like to flag in terms of any significant excise tax shocks? any particular markets where you operate?

No. So there are three areas. Let me go back, three areas. You have the European tax, the UTP tax, the European Tax Directive. That's well progressed. I think, again, the original proposal from the European Commission has been worked through and it is now in a state which is much more acceptable to us like everything you know there's a trade-off some are better some are worse but it's something we can live with it's also something that interesting for us it is a longer perspective you know we can work through that that gives us lead time to to work through that and you know the beauty of of european union is you need everybody to agree and so that there's a lot of negotiation but we're getting to a point where i think we we are in an acceptable position You have Africa, where you obviously have always these changes, etc. But again, that is in a manageable situation. Don't get me wrong. You know, our corporate affairs team has a lot of work. I mean, they spend a lot of time also explaining to finance ministries that it is not so easy to increase taxes. You know, you lose them on illicit. And so we actually had a very interesting exchange with, I think it was the Ivory Coast Ministry, where we showed them the Australian case, not to increase taxes. Taxes are part of that, but to increase it in a rational way so that we work on them to what you shouldn't do and what you can do. The interesting case is Australia. I mean, those who have read the Australian news, we now hear, which you have never heard in the past, the opposition proposing an 80% slash of the excise tax. You know, okay, if you're in the opposition and you still have to wait two years, you could say a lot of things, but you would never have heard that in the past. And very interesting, illicit enforcement has made a huge impact to the volumes of Australia. Will it grow again? No. But it will still be a profitable business, and it does show you how important enforcement is and how important reasonable taxation is.

Right. So just to follow up on this, you have touched upon Australia, which I think volumes were down almost 50% in the first half. If I look at UK, volumes were down almost 15%, 16%. And these are two important markets, probably 10% of the total profit pool for you guys. So how should we think about UK, Australia, Spain, for example? What is the strategy in these markets going forward?

So, by the way, just over on taxation, you know that the UK taxation comes into force on the 1st of October on Vape. And so that is one more of the taxation I missed to say before. The beauty of Imperial is that, yes, we have two strong engines, Germany and Europe. And they have to hum, and they will deliver their share. Then we have another eight to nine clusters that we can play with. Yes, you pin on UK. I would actually add Benelux to it, which is a smaller market, and Australia. Just to give you an idea, Australia's land less than 1% of our volume nowadays. It's the smallest of all 11 clusters we have. And it is highly profitable, it's just the smallest. UK is very interesting because, yes, it loses volume, and it might continue to lose volume because of the taxation that comes in next year. But actually, the value you extract from that market is significant. In no means is the profit evolution anywhere close to that volume evolution. And we are growing the NGP business. We are now above 10% in vape, and we have launched Zone, the pouches, very successfully. But we always knew these markets were tough. For those who remember Stefan and I, he was a CFO. Five years ago, we told you that the UK is not the tobacco model, but we could extract value. And over the last five years, it still remains one of the top five profitable markets. But you also have to reflect on, we have another five clusters which are growing rapidly. Among them, Iberia, huge potential, good affordability, low pricing, quite open regulation still. You have Africa growing ahead of the group, 10% of the group's AOP. You have Southeast Europe with Italy, Greece, Romania, not just in NGP doing very well, but in tobacco. You have Middle East doing very well, not just because we went back into Syria in January this year, which is actually contributing a significant change or value contribution. So you have quite a few additional clusters which are very promising. And so, yes, I have UK, I have Australia. That's not a surprise. We always have them. We have five clusters which are doing very well, and we have two engines which are humming well. It's quite a nice portfolio to have.

If I can just ask on your stake on Loista, so you have maintained it at slightly north of 50% for the last 10 years or so, 12 years or so. Is a stakes sale on the table because if I exclude Logista, then probably IMB will be a higher growth company? So is that something that you would consider at some point?

So Logista is a distribution company we have that distributes mainly tobacco, solely tobacco, no, excuse me, does tobacco originally in southern Spain, especially southern Europe, Spain, France, Italy. and we acquired it through the acquisition of Altaris, which was the Spanish-French combination of the state monopoly. Since then, Logista has been part of the group. We have control over it, but the real benefit of it is the cash pooling with us. They keep around $2 billion cash with us on an average basis. Just to be honest, people think this is for free. We pay for that cash. Logista is a nice company. They still want some revenue for that. But it obviously has helped in the leverage in the past. It is a very good thing. And so is it strategic? We've been very transparent over the last three, four years that it is not a strategic investment. Is it a headache right now? Absolutely not. Their share price is growing very nicely. They contribute to the profit.

Some years better, some years less. they have a very strong management team and they're diversifying out of tobacco quite nicely so will we keep them forever most likely not is this my first priority probably not either moving to ngps and if i just start high level i mean over the last uh few months we have seen a couple of bolt-ons uh black buffalo in the u.s and then earlier this week helvet in sweden so can you just help us understand what is the ngp strategy and uh what growth expectations should we have over the next few years yes i mean a lot of people talk about imperial because it is such a

interesting uh cash return yield proposition which is right this is our proposition and i think the other element to our proposition is that ngp optionality and i think we we are very adamant that we are continuing to work on that pathway to become a relevant player in the NGP. And we do it our way. So, you know, we're not going to be the leaders in this domain. We're the fourth largest. We know our place in the industry. But we spend an enormous amount of time with our consumers. We survey 220,000 consumers on a monthly basis. We meet consumers on a regular basis. Every time I visit a market, I spend an hour with consumers. And so we do understand our consumers well. We innovate for our consumers. We have an interesting innovation pipeline, but we are very disciplined because it is not up to Imperius or for its largest to create the market. But when the market is created, when there is an interesting share of the nicotine market in the NGP space, we will enter there if we have a route to market. And we will continue to grow in those markets. And so you can tell us, yes, we are small, et cetera, but we have grown double-digit for the last three years. We have grown share in all three categories, including last year, in all three categories of the NGP products. It requires a lot of discipline, trust me. A lot of our market heads would ask, can we not launch in this country? Can we not launch in this country? I had a discussion the other day, I think it was Italy, it doesn't matter which market, where we wanted to launch because you see a lot of exposure, you hear a lot of our competitors there. When you look at the data and you see only 2% of the nicotine market being sold in pouches, the rational behavior is you wait until the market is gone. We will continue to be very rational in our capital allocation, which does not mean that we are not poised to grow double-digit and create more market share where the profit pools are, where it matters. So that's how we look at NGP, and we will continue to do that.

Right. Starting with the U.S. nicotine pouch market, clearly with the FDA guidance in May, the categories become very competitive. We are seeing a lot of innovation, new SKUs coming into the market. But how are you thinking about the U.S. nicotine pouch market, long-term sort of growth expectations? And, I mean, what is your strategy to gain some market share there?

Like many things in life, you know, when it comes to the U.S., you always talk about the biggest market. There's no doubt. The U.S. market is a highly attractive market when it comes to O&D. I would even add that vape in the long term is going to be very attractive in the U.S. Some of our competitors will add another category. You know, we'll see where that ends up. That might well be. And so, you know, I welcome, as anyone in the industry, the FDA's sincere effort to simplify the process of the PMT. And I think we've come a long way in getting more reasonable regulation that really helps consumers to remain safe, to make the right choices, but also make sure they get the innovation they deserve, to get the experience they deserve. So we very much welcome that. I'll be very honest. We need to see more follow-through on that. We need to make sure that this is codified in the right way so that it is endurable over time, not that when the next administration comes in, wherever that is, might have a different view and changes back because a PMTA takes up to four years. You know, we have to do a lot of studies. So you need to continue that effort to follow through on that effort. And so that is important for us, but clearly we're going in the right direction. Now, for us, it is interesting. I mean, you know, in zone, in the short term, because we have grandfathered rights, we still have an innovation pipeline that we can use, strengths and flavors. This regulation obviously now opens our interest in seeing how quickly can we bring innovation we have in Europe or brands we just acquired in Europe to the U.S. markets. That's something we are looking into it and to see whether this new openness allows us to do this faster than in the past. That would be great. We'll see. In the short term, in the medium term, we have still enough innovation pipeline to give different experiences to our consumers.

Right. And you have, on the vaping side of things, exited the U.S. market. And given more enforcement, the FDA guidance change, is it a possibility at some point in the near future you plan to reenter the market? And then just to add on to this, what is your strategy with vapes in the European market?

So absolutely. You know, we always said that we follow the consumer, and so if there is a consumer in the U.S. and the vape regulation is improved, the vape illicit market is contained, you know, you might see us come back. And you shouldn't be surprised that we are, the PMTA take years. It's highly unlikely to say that we are not working in our innovation center on something. But the reason we exited vape is independent of any FDA changes. Our vape product we had in the market is 10 years old. If you really respect your consumer, you don't try to lure them into a product that is 10 years old. is competing with illicit products that have the latest gadget. So, you know, I can't compete with these products. I'm wasting shareholders' money trying to compete on this. I exit the market until I have a better product until the market is more attractive for us to enter. I mean, it is becoming more attractive, but the margins are not anywhere close to where we would like them to see yet. So as a challenger, where we focus, we have to make the choice that we have a much bigger opportunity on O&D. The market is growing fast. We have an innovation pipeline. The margin structure is more attractive. We will focus on that and we'll see at what age to say might see us come back to the US market with vape.

Europe is booming.

I mean, Europe, our vape business is profitable. It's growing. What you see in Europe is more of a switch from disposable to pot-based, which has had an impact on net revenue. But we have a good basis there. We are growing. It is an interesting market for us. And we'll continue to do that.

Going back to the U.S. market, the two largest peers are engaging in this double-duty drawback mechanism. And Imperial so far hasn't participated in that. So can you just give us an update where you are and when we should expect that benefit to flow into your P&L?

So, I mean, you know, the benefits are all the same for everyone. It's a percentage of your excise tax if you export and import the same quantity. It's a bit of a complicated regulation, but it's all the same. So, yes, we have always said that we will pursue that opportunity. And we have committed already a few months ago that you will see the duty drawbacks start significantly in the second half. and it will obviously complement fiscally at 28 with a full year of duty drawback assuming that no changes in the legislation and I would always expect that 28 is even an increase because we're going to see how much more we can do I also, you know, I get a lot of questions why are you so late and why etc. Listen guys we have a setup which we produced our combustible products in the US for the U.S. market. That's historic. It's the way we acquired these products. Some of our competitors, they had, for years, factories in Mexico they could use, so they had that set up. Other competitors had historic credits which they could use. You should say, okay, you just produce somewhere else and you export import. You can do that tomorrow. Well, it takes a long time. So we had to identify the factory. We identified a factory in Morocco. We're going to invest there. We have invested in machinery that takes six months to deliver. We need to install them, train the people. And most importantly, we are producing brands in the U.S. for Africa and in Africa for the U.S. Even though you use the same recipe, everything is the same. It's a natural product. You want to make absolutely sure that the consumer is happy with the product and they don't perceive a change. So, you know, we will do everything as fast as we can. But we have to do it right, and we have to take care of our consumer, and we have to make sure we meet all the FTA regulation and the authorizations. So that takes time, but good news is second half, you're definitely going to have the benefit of... Second half of 27. Yes, sorry, apologize for clarification.

So if I can, I think in the interest of time, this one last question. Given the shares are trading at seven times P, how should we think about share repurchases as we go into 2027? And can you just talk broadly about your capital allocation priorities?

I mean, the silver line for a CEO when you have the share price, perhaps not where I had hoped and expected it to be, is you get more shares back for the money. And so for us, the share buying is an important lever. And so if you look at our capital allocation, we were always transparent, and I think I've been repeating this for the last five years, we will firstly invest in our business, because I can only commit to an evergreen share buyback for this strategic period if we make sure that the underlying engines work. So we have to invest in the business, and that includes $350 million of capex, that includes a bolt-on acquisition, opportunities, et cetera. We will always want to be doing share buybacks or capital returns in an environment where our balance sheet is very strong. We are there. We have a leverage which is at the lower end of 2 to 2.5, so you wouldn't expect any difference And then, you know, it's how we return that excess capital and the excess cash. We have a loyal base of investors who enjoy a progressive dividend growth, and we will continue to do that. But no doubt that in the environment we are today, share buyback has a bigger impact. And so we will continue to do the share buyback. And in fact, I'm not sure you all know that by June this year, we actually retired 20% of our shares if you compare it to where we started in 2021. So, and we only started the share buyback in 23. So, you know, in those three years, we retired 20% of share. This year alone, with the share price where it is, we're probably going to do another 6%. So it is material what we are doing, and we'll continue to do that. We have committed to an evergreen share buyback for the strategic period. Every year we will define the value. We have never committed to a progressive value. But what we commit is to a significant, meaningful share buyback, which you have seen over the last few years. We will decide that together with the board, considering the environment, the cash generation, any potential needs we have. We have to pay Delaware, et cetera. But rest assured that it's not going to be different for next year.

With that, we are running out of time. Thank you so much, Lukas, for giving us this opportunity.

Thank you very much, Paas. Thank you very much to you all.