Imperial Brands 1H 2025 results and farewell Stefan Bomhard

Imperial Brands announced its 1H 2025 results yesterday, broadly in line with expectations. Revenue growth was slightly better than consensus estimates, while operating profit growth was somewhat worse. For a brief overview of its results, please review this Tobacco Insider article.

While its results are unsurprising, the share price dropped by 7% primarily due to the CEO’s retirement announcement. In the past 5 years, Stefan Bomhard has revitalised the organisation by bringing in top talents from the consumer packaged goods industry, as well as stabilising IMB’s market share in the Top-5 markets (U.S., Germany, Spain, UK, Australia), resulting in improving financial delivery aided by meaningful share buyback program (GBP1.25bn share buyback for the current fiscal year translates to 5.8% of the latest market cap). In hindsight, his legacy reminds me of the success of Toyota.

As the world transitions from gasoline to electric vehicles, Toyota took a more cautious approach to investing in the EV segment. Instead, it continued to fortify its leadership in the gasoline and hybrid vehicles segment. Its strategy was once criticised for being too conservative, but the result speaks for itself. From FY21- 25, its revenue grew from JPY27 trillion to JPY48 trillion, while net profit rose from JPY2.3 trillion to JPY4.8 trillion, increasing at a CAGR of 15% and 21% respectively. When the EV segment becomes too crowded and its competitors reduce resource allocation to gasoline vehicles, why not take advantage to gain a bigger share of the gasoline and hybrid segments?

However, it would be overly simplistic to attribute IMB’s financial delivery improvement to its focus on the combustible segment. Focusing on legacy business can go either way, as we have also seen the epic failure of Kodak, which couldn’t smoothly transition to the digital photography era. Recognising what went wrong deep within the organisation is far more critical. Big corporations can be in a vicious cycle if they keep allocating resources to address the wrong problem. I am a fans of Manchester United, and the pathetic performance of the team in the Premier League since Sir Alex Ferguson’s retirement says it all. Manchester United have spent over £1.6 billion on player transfers since Sir Alex Ferguson retired in 2013, but haven’t won the Premier League championship since then and are ranked 16th in the league right now.

Stefan’s assessment of IMB’s legacy issues from its acquisition history was spot on. He first mentioned this in the Consumer Analyst Group of New York (CAGNY) Conference in 2023, while Alison Clarke, IMB's Chief People and Culture Officer (who joined in September 2020, two months after Stefan), and Lukas Paravicini, IMB’s Chief Financial Officer (who joined in May 2021), provided a more detailed assessment during IMB’s Capital Markets Day 2025.

Alison Clarke - Chief People and Culture Officer

To understand where we're going next, we must reflect on where we've come from. Throughout its modern history, Imperial Brands has always been best when it acts as a challenger. When we emerged as a separate listed company in the late nineties, in global terms, we were an insignificant player, but we went on to successfully challenge businesses many times our size to build the broad portfolio we have today. However, when we were developing our current strategy, it was apparent that rapid growth had created cultural challenges, and our people felt this acutely and they told us so.

The organisation had not invested in consumer capabilities, silos had emerged, and collaboration was sporadic. Accountabilities were unclear and the organisation no longer mirrored the growing diversity of the consumers we served, making it harder to attract talent. And the business prioritised short-term delivery at the expense of longterm planning. So, we listened to our people and alongside our purpose and vision, we developed five core behaviours. Our people created these behaviours to address the cultural gaps that they had identified:

• Always start with the consumer,

• collaborate with purpose,

• take accountability with confidence,

• be authentic and inclusive, and

• together we build our future.

These behaviours defined the performance culture that was required to deliver our strategy.

Lukas Paravicini – Chief Financial Officer

Let me remind you of the organisational context. Our current global footprint was assembled through multiple acquisitions over the last 20 years. However, the scale and pace of these acquisition meant there was limited focus on integrating back offices, process and systems.

As Alison said before, this resulted in multiple legacy platforms and a siloed organisation. We had operated as a confederation of independent businesses where it was hard to leverage our scale or share best practices. There was very limited use of shared service models. The group centre was primarily focused on controlling costs, rather than enabling our markets to grow revenue.

To a certain extent, BAT also faces similar issues integrating its U.S. business, as I highlighted in my previous articles (The real U.S. versus Hollywood movies | British American Tobacco - a closer look into the U.S. business). This contributed to a toxic culture in Reynolds American, where nepotism replaced meritocracy. The London headquarter contributed little to the U.S. business other than setting unrealistic growth, cost control targets and parachuting senior management. To right the ship, Tadeu Marocco appointed David Waterfield as CEO of Reynolds American in July 2023 and Cora Koppe-Stahrenberg as Chief People Officer in November 2023. Only BAT and Reynolds American employees can tell whether there’s a positive change in corporate culture, but over time, their financial performance will reveal the truth.

While the 1H 2025 results are not very surprising, I want to highlight a few numbers that caught my attention.

Tobacco and NGP revenue increased by 3.2% yoy on a constant currency basis, 140 bps higher than the 1.8% consensus estimate. This is contributed by the following factors:

• NGP revenue of GBP187mn, compared to the consensus estimate of GBP173mn, accounting for a 38bp increment in revenue growth

• The total tobacco volume was 87bn sticks equivalent, compared to the consensus estimate of 86.3bn, accounting for an 81bp increment in volume growth. The positive delta mainly comes from the U.S., as it benefits from wholesaler inventory movements (which will unwind in 2H 2025). This further contributes to the positive price/mix, as tobacco pricing in the U.S. is higher than the rest of the world.

Tobacco and NGP's operating profit margin was 40.6%, 74bp lower than the consensus estimate of 41.3%. If we zoom in on its U.S. business, we may know why. Tobacco and NGP revenue in the U.S. grew by 5.6%, while operating profit only grew by 1.0%, implying a 180bps decline in operating profit margin. As IMB pointed out, improved combustible tobacco profitability was partially offset by increased NGP investment behind the continued rollout of Zone. If we assume a 200bps operating profit margin decline to NGP investment (just a guess, as tobacco operating profit margin shall easily expand with +10.1% pricing and -5.2% volume), the incremental loss of NGP may amount to GBP24mn, compared to a GBP9mn increase in NGP revenue. While some sell-side analysts express optimism about the rollout of Zone, IMB’s nicotine pouch product, in the U.S., I remain more conservative. Rapid growth is mainly achieved through distribution push and heavy discounting. I don’t think anyone can be complacent about losing more than 2.5 dollars to reach 1 dollar of revenue growth. Can it retain its customers after Zyn floods the retail channel with normalised supply? Can it retain its customers if it decides to increase its pricing later? How much and how long is it willing to subsidise the retail channel to occupy shelf space? Let’s wait and see.

Finally, I want to give some credits to Barclays analyst Gaurav Jain for asking an interesting question about succession planning during IMB’s Capital Markets Day 2025.

Gaurav Jain – Barclays

Hi. So look, I think the investment case for Imperial is quite compelling, but I think the biggest question that I get from investors is, there is a perception that there is a key man risk, I know Peter has decided to retire, and now everyone, also the question people ask is that, what if you and Lukas, what are your plans and when could you decide to retire?

And the people also have theories that maybe your term is also ending next year. So how should people think about the changes that could be happening at the board level or in the CXO suite?

Stefan Bomhard – Chief Executive Officer

Sure. First, I appreciate, so thank you for making a compliment that you appreciate Lukas and me on this one, it's always a good starting point because it's not always the case.

But on a serious note, let's be very clear. I think one is the things is what hopefully today demonstrates to you is the quality of the management team that has arrived at Imperial in the last four years. And you've seen the quality of the management team, and I also want to be very clear, that it is this management team, not Lukas and me who drives this performance. And I think what you also hopefully took away, and I'll talk with some of you in the breaks, this next five-year plan with some very clear programmes and some very clear commitments has been developed collaboratively by this team.

So, this should give you all the confidence. And you logically see Lukas and me really excited about it, but I want to make this point, I'm a big believer in business as a team sport, and I think it's not about one or two people, it is about the business overall and hopefully this afternoon has demonstrated that to you. And I don't even talk about the 500 other people who sit below this management team.

As Stefan mentioned, IMB’s business is not about one or two people. Let’s not forget that his contribution to IMB also includes building a highly talented management team over the past few years. Given that the new CEO and CFO were recruited shortly after Stefan joined IMB in 2020, I believe it is more likely than not that IMB will continue its current strategy. Still, I will closely monitor potential red flags, such as the rollout of Zone in the U.S. (Wall Street seems less concerned about the risk of profitless growth until a situation spirals out of control).

I added more IMB shares to my existing position yesterday. At around 8.5x FY25e P/E, 6.4% dividend yield, and mid-to-high single-digit EPS growth (accounting for FX headwind), the implied total shareholder return from dividend yield and capital gain could be in the low teens % range, assuming a constant P/E multiple, which is not an aggressive assumption. Provided there’s no change in its fundamentals, I am happy for its share price to go down further, and I will be ready to buy more.