Consumer Analyst Group of Europe Conference 29 March 2011
Alison Cooper, Chief Operating Officer
Consumer Analyst Group of Europe Conference 2011 Good morning ladies and gentlemen. I am pleased to have the opportunity to present Imperial to you today.
What Consumers Want I’m Alison Cooper, Chief Executive and with me today is Gerry Gallagher, our Director of Investor Communications. I’ve called this mornings presentation “What Consumers Want”. And I want to spend the next 30 minutes or so looking at how our portfolio is aligned to consumers – where consumer are today and where they’re going – a portfolio aligned to satisfy their needs, wants and demands. It’s an area of our business we call Total Tobacco, an area when combined with our brands is at the heart of our sales growth agenda.
Strategic Focus Let’s start with our strategy, over-archingly our strategy is about delivering shareholder returns. Cost and cash are still very important but at the heart of our agenda is sales growth. Our strategy recognises the strength and balance of the assets we use to drive sales growth: our brands, our portfolio of products, our extensive geographic footprint, and our people. We focus on how we leverage these assets and do so by three means: • by being consumer centric. Applying a consumer mindset and local consumer insights - using them to drive portfolio choices • by leveraging our execution excellence – applying speed, flexibility and quality to all we do. Its about being responsive to consumer and customer preferences, being fast from idea to implementation • Future foundations - delivering today but creating a sustainable future in an industry with regulation and illicit trade. And it is also about getting ahead of where the consumer is going. These 3 pillars are how we leverage our assets – they are not just banners – they are key essentials the business understands. We have two other growth drivers: cost optimisation and cash utilisation. Both are clear Imperial strengths. We employ flat structures and a no frills approach and our cost management skills ensure we avoid unnecessary spend. How we use our cash is critical. M&A? Yes, as long as it adds to our returns. No M&A? We will look to return cash to our shareholders. Let’s focus a little more on our assets.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
Assets, Opportunities, Capabilities In terms of assets ours is a balanced portfolio with lots of opportunities. We have built a great portfolio through M&A over the last decade or so:- • Brands – international, regional and local with a comprehensive price presence • A broad extensive and balanced product range. We are the only international total tobacco company and we focus on it, factory made cigarettes, fine cut tobacco, cigars, snus, and papers & tubes, we cover luxury through to value • Though we have a strong geographic footprint we still have a balance of opportunities • In terms of capabilities clearly our people are key to our delivery, we have added to our bench strength with the recruitment of Roberto Funari as head of marketing from Reckitt Benckiser and Arthur van Bentham from Metro via Coca Cola as head of sales. We have delivered significant value over the last decade and I believe we will deliver significant value over the next, we have the assets, opportunities and capabilities.
Mature & Emerging Market Balance To give you a better feel of our geographical opportunities, we have strong mature and emerging market presences and plenty of EM opportunities. We operate in 160 countries with 60% of our factory made cigarette volume in emerging markets. Our cigar business has had a great first quarter in numerous emerging markets including Brazil, China, Asia and the Middle-East. Despite our successes, as the chart shows, we have significant opportunities in a number of major markets. Mature markets are a great place to be, they are highly profitable with opportunities to grow profit through share, price, and our mix of products. In terms of emerging markets, as you can see we have more to go for in Eastern Europe, Africa and the Middle East and Asia.
Growth Model These assets, opportunities and capabilities underpin the broad financial growth model we work to. We target high single digit EPS growth before we generate further value from our cash flow beyond paying down debt, through the potential benefit of acquisitions and/or share buy-backs. The mix of components will change from one year to the next, we expect volume to be better this year than last with price/mix possibly not as strong, but in overall terms we expect the model to apply from one year to the next. The critical point is we have the levers in volumes (across brands and products), price, cost and cash to create sustainable shareholder value.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
Strategic Focus Let’s now focus in on our total tobacco approach.
Consumer Environment - consumers responding to a changing world In order to understand the advantage of total tobacco we need to understand what is driving the consumer, and there is no such thing as a global consumer. So, what is driving the consumer? The world is changing fast. Key drivers include affordability (due to the economic environment), globalisation, or reaction to it, changing societal roles and values, and the fast paced demands of modern lifestyles. Key trends arising from this are: • True value seeking consumers that are not just after a cheap product, they want added value at an attractive price. • Consumers with international aspirations but also who are attracted to the heritage of where they live, who favour nostalgia and “old” favourites that have stood the test of time. • Authenticity – the need for safe choices that consumers can trust. • But also new experiences that can enrich their lives. • Affordable luxury is still relevant, if not more so, but more emphasis on quality, innovation and connoisseur products.
Consumer Environment - additional tobacco factors Alongside these consumer wide factors there are additional tobacco specific drivers that shape consumer trends, Regulation & Excise, that need to be appreciated to better understand the specifics of tobacco within FMCG. Regulation can impact all aspects of the consumer experience and we actively engage with regulators in order to protect adults’ freedom of choice. This combined with the other general consumer drivers will impact consumer trends, such as the formats of cigarettes, new products and packing to name just a few. Excise clearly also impacts the price consumers pay, which is occasionally unhelpful, but excise in the price is a great buffer for manufacturer price increases and due to consumer loyalty there is overall still relatively low price elasticity in tobacco.
Consumer Trends So there are trends in relation to heritage, authenticity and new experiences but overarchingly there are two key areas of growth. • In value – and this isn’t shorthand for cheap – this maybe a good price but its about more than price. • And at the luxury end of the market – tobacco is an affordable luxury, an affordable pleasure – there are consumers who aspire to luxury – a quality experience through badged products and this trend persists.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
There is a lot of growth at the bottom end of markets but still opportunities at the luxury end – particularly in emerging markets – and frequently it’s the middle that gets squeezed.
Unique Total Tobacco Focus That takes me to the essence of our focus on Total Tobacco, it’s about having more scope:- • More scope to respond to consumer shifts • More scope to create consumer shifts It gives us more consumers, in more markets, over more occasions, whatever the economic circumstances, whether they be a luxury cigar smoker or someone seeking a value roll your own product. One of our favourite internal banners is “there is growth in every market” and we focus on identifying and capturing that growth, or making it happen. And it provides a total solution for our trade partners – a clear advantage for us. Before I look further at our portfolio alignment – an obvious point. To be successful we have to keep understanding what drives the consumer through listening, and I mean listening locally. The winners in a fast changing consumer landscape are not the ones with the loudest voice but the sharpest ears. Listening hard to local consumers is key to our success. And we’ve been listening. Let’s take a further look at the two ends of the dumb bell – our total tobacco approach and what it is delivering.
Aligned with Consumer Trends Consumers aspire to luxury and we have some fantastic luxury brands, Davidoff, Cohiba, Montecristo to name just a few. Our luxury brands are recognised for their superior quality credentials and premium appeal. They have delivered a remarkable performance even during the recession with Davidoff Eastern European volumes up 20 per cent compound over the last five years.
Consumers Aspire to Luxury - Davidoff In cigarette Davidoff continues to build volume momentum through appealing to the sophisticated, aspirational consumer, with its success based on its proposition as the ultimate smoking experience and the best cigarette you can buy, for smokers with excellent taste and style. It’s got momentum and we’re continuing to build on this in 2011 in Asia, the Middle East and Africa as well as Eastern Europe.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
Consumers Aspire to Luxury - Davidoff Davidoff continues to evolve to continually align with consumer trends. With new formats coming to the market, lighter products, slims and superslims, all have been key growth drivers for Davidoff. We have grown in the new emerging segments ahead of the market, improved our share in the key adult smoker under 35 category, while always being consistent in terms of the brand proposition and brand profile offered.
Consumers Aspire to Luxury - the top cigar marks In cigar we have the top luxury marks via our Habanos joint venture. A great array of trademarks, the most prestigious cigar brands in the world including iconic brands such as Cohiba and Montecristo.
Consumers Aspire to Luxury This is also a very active portfolio, on the one hand continually looking to upgrade the offering for the connoisseurs through offerings such as Cohiba Behike. But also recognising that SIPPs bans can reduce the time available for a cigar and being active with mini offerings and reduced ring gauge and/or length offerings, and individual purchases via the tubes range. A portfolio that is continually evolving the offering so it remains impactful and relevant for today’s consumer. Consumer experience is also important here and we continue to invest and work with partners on smoking spaces such as Boisdales here in London in Canary Warf.
Aligned with Consumer Trends Moving onto our value portfolio. Value has been a feature in tobacco for a long time and unsurprisingly value is a priority for a number of post-recession consumers. Value is about price plus. That may be an international prestige brand with premium Qs or a “smart choice” brand. It maybe a local heritage brand offering authenticity and/or naturalness and/or trust. Our portfolio has a great fit with these most prominent consumer trends, covering the full range of these trends and designed to deliver the best value choices across product categories, both in cigarette, fine cut tobacco and cigar. Local tailoring is also key, listening and understanding.
Consumers Demand Value Value has to be supported by attributes the consumer can identify with, as I said it’s not just about being cheap. Consumers want more for less and it is key that brand propositions resonate with consumers – linking into the consumer drivers.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
You can see a number echoed in the brand propositions, essence and values shown here: • Innovative yet trustworthy with West. • Premium on everything but the price with JPS. • Fortuna – Spanish and genuine. • R66 – new perspectives – the open road.
Consumers Demand Value - West West is our leading international value brand – we have rejuvenated the brand and are active in ensuring we have a full range for consumers through: • Slimmer formats: Super Slims, King Size Super Slims. • Aromas - Menthol and other Aroma’s such as West Libre. • Lights - 1mg: West White. • Upgraded quality with a move to round corner King Size packs and more tactile packs. • Greater value through soft packs and big boxes. All with consistent communication building strong brand identity: “Engineered for Quality” leveraging the brands German heritage.
Consumers Demand Value - JPS We are very active with JPS aligning the brand with consumers – building on its “international” heritage and smart choice/premiumness proposition. We have launched queen size in Germany, offering less for less, we have launched slims variants, soft packs, special editions and our big box variant has been a tremendous success in Germany.
Consumers Demand Value – Fortuna and Ducados Rubio Similarly with Fortuna and Ducados Rubio, heritage and authenticity are key, providing options within the brand range. Fortuna Red Line has made a very encouraging start in Spain and Ducados Rubio soft has been a great success.
Consumers Demand Value - global leader in fine cut tobacco Moving to fine cut tobacco, offering the consumer value beyond factory made cigarettes. We are the global leader and are number one in four of the five major markets in the world. These markets are growing, and our volumes are growing.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
Consumers Demand value - aligned with changing preferences Our success in fine cut has been driven by consistently meeting, and exceeding consumer expectations, spotting the opportunity and acting on it. This is about value, heritage, authenticity and new experiences. And we have been innovative in traditional fine cut and make-your-own. We have been able to leverage the success of our value cigarette brands in make-your- own, offering a great value opportunity for the consumer due to the lower excise at a price point where we can still make great margins and capitalise on dualist consumers. Growth in fine cut volumes has meant even though cigarette volumes declined in our first quarter in a number of our mature markets, stick equivalent volumes were flat.
Aligned with Consumer Trends - global cigar leader: value & luxury Turning to cigar, our business is not just about the Cuban and other premium brands. Half our sales are in the value segment, primarily in the US but also in markets such as Spain, the UK, and France.
Consumers Demand Value - mass market cigar We have an extensive portfolio of brands in mass market, and this is a product group where again we can provide value for the consumer – there is a big focus in the US with new formats and packaging as we grow our position post the Federal Excise Tax increase in 2009. And in Spain cigar consumption has not been immune from the effects of the economic downturn and regulation - mini cigars are seen as more affordable and more easily consumed. In addition, this segment has benefitted from cigarette consumers switching to eco- cigarillos as the lower tax rate makes them an alternative value proposition. We spotted these factors and this trend very early and met the consumer need with Coburn in Spain.
What Consumers & Customers Want In terms of Total Tobacco I have taken you through how we see our portfolio aligned with what consumers want. It also provides another key advantage with the trade, giving them a full portfolio offering – enables us to manage their tobacco business in its entirety with them – not just cigarettes, and it’s also what customers want.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
Customer Alignment – a winning portfolio for the trade What is good for the consumer is great for the trade. Our trade marketing activities have clearly been supported by our Total Tobacco and our success with the trade has been regularly recognised for its excellence through customers’ feedback. Here are just a few of the organisations that have given us sales related awards over the last couple of years.
The Results So What? A question often ducked in such presentations with nice brand pictures. It all sounds great, but so what?
Organic Cigarette Volume Growth In cigarettes we have outperformed the peer group over the last 5 years. We have grown our cigarette volumes organically by nearly one per cent on a compound annual basis and slightly higher on a stick equivalent basis. Central to our growth has been the expansion of our products and brands internationally and growth in growing segments and brands, such as lights and superslims and our strategic brand growth in Davidoff, Gauloises Blondes and West together with JPS and local brand successes.
West ex Germany Looking at some of our value offerings. The volume opportunities for West lie outside its home German market. Since 2005 we have grown stick equivalent volumes 6% compound with strong growth in Central & Eastern Europe as we have been able to offer a high quality product at an attractive price – value means offering the consumer more, not selling something cheap, cheap is not value, the consumer is demanding more than just a cheap smoke. West provides an innovative value offering that is resonating with the consumer.
JPS JPS has been a tremendous success for us. We have grown volumes 21% compound since 2005 on a stick equivalent basis leveraging new formats, packaging and geographies.
FCT Volume Growth We have been highly innovative in fine cut tobacco driving growth through new packaging, products and aligning make-your-own with our factory made cigarette brands such as Route 66 and JPS. Post the loss of singles in Germany we have grown our fine cut tobacco volumes by 5 per cent compound.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
Spain – Mini Cigar Segment – Coburn the clear segment leader In Spain, as the impact of the SIPPS ban and the economic situation loomed, we identified mini-cigars as a key growth segment. Coburn, has become the market leader with over 28 per cent share, more than an eightfold increase in one year and well clear of its nearest rival, which holds 8 per cent share.
Luxury Momentum In luxury there is clear momentum in our business, Davidoff volumes have grown 6 per cent compound since 2005 with a strong performance to date in 2011, up 10 per cent. Habanos had a great peformance in 2010, the first full year with a comparator following its acquisition with 2 per cent value growth despite the economic climate, and again it has had a great start to 2011 with sales value rising 8 per cent.
Aligned with Consumer Trends – strong Nordic snus performance And a comment on snus, we offer consumers a premium and value product and our sales in Norway and Sweden have grown 57% compound over the last five years. Our Swedish share has gone from 0.5% to 2.5% and our Norwegian share from 5% to 23%, an excellent performance mainly driven by Skruf. In Norway, Skruf has outperformed the market and gained a strong number two position. In Sweden we see good momentum, both in premium with Skruf and in value with Knox. In 2010 we grew combined volumes of our snus brands by 24 per cent; a great performance on which we will build, and capitalise on further opportunities now our new factory is on line. Smokeless products have an increasing role to play in SIPPs environments and we will continue to actively listen and experiment in this area.
Unique Total Tobacco Focus So in conclusion, consumers are responding to a changing world. There is no such thing as a global consumer but there are a number of key drivers and trends globally and our portfolio is biased to these trends such as value/luxury and international/ local heritage.
And we have number one positions in other tobacco products to meet evolving consumer needs. Our portfolio is aligned to these trends and we will continue to listen and learn and respond to and create new consumer trends.
www.imperial-tobacco.com Information correct at 29 March 2011 Consumer Analyst Group of Europe Conference 29 March 2011
Strategic Focus We have made a good start to the current financial year with the positioning of our portfolio in a number of markets: In Q1 Davidoff volumes rose 10 per cent; Gaolises Blondes was also up 10 per cent; West volumes rose 3 per cent; JPS 24 per cent and Fine Cut 6 per cent. Cigar has had a strong start to the year with growth in Russia, Brazil, Middle East and Asia, particularly China. Imperial has been known for a strong cost/M&A DNA. I believe we have a strong value creation DNA. We have accumulated some great assets and we are focused on maximising the potential of those assets, to deliver sustainable shareholder returns.
Consumer Analyst Group of Europe Conference 2011 Thank you ladies and gentlemen. I am happy to take any questions.
www.imperial-tobacco.com Information correct at 29 March 2011