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Imperial Brands aims to convince smokers to switch to vaping products

For most of its life as a quoted company, since it demerged from the old Hanson Group in 1996, Imperial Brands (LSE: IMB.L - news) - formerly Imperial Tobacco - has had a fairly straightforward appeal to investors.

The number one player in the UK tobacco market, with brands including Lambert & Butler, Regal, Superkings, Embassy, Golden Virginia and John Player Special, used its prodigious cash flow not only to pay a handsome dividend to shareholders.

It also diverted that cash flow into mergers and acquisitions that, under its former chief executive Gareth Davis, took it from being the world's 15th largest quoted tobacco company to the fourth largest.

The aim was to reduce dependence on the UK market and deepen its exposure not only to the fragmented European market but also further afield.

Along the way, it added an impressive array of brands including Gauloises, Gitanes, Rizla, Cohiba and Montecristo to a portfolio already boasting 'power' brands like West and Davidoff.

By the time Alison Cooper succeeded Mr Davis as chief executive in 2010, though, things were changing. The decline in the rate of smoking in developed markets like Britain showed no sign of abating and so the strategy evolved.

Part of that involved 'migrating' customers from one cigarette brand to another just as other fast-moving consumer goods had done.

Just as Mars moved consumers of its UK bar Marathon into Snickers, or Unilever (NYSE: UL - news) persuaded consumers of its Radion washing powder was actually Surf by another name, so Imps - as everyone in the industry knows it - got its consumers to switch to some of its better-known brands. This not only reduced costs but also simplified the business and made it more efficient.

Ms Cooper also expanded the company's business in the United States with the $7.1bn acquisition of Lorillard Tobacco, giving it ownership of the Kool, Winston and Salem brands and more than doubling the company's market share to more than 10%.

That deal also, crucially, gave Imps another brand that is now central to arguably the most critical part of the company's strategy - the e-cigarette brand blu.

The growing importance of this brand and other so-called 'Next Generation Products' (NGP) was highlighted by Ms Cooper in her presentation of today's full-year results to the City.

Full-year sales rose by just under 1%, to £30.5bn, but pre-tax profits fell by 2% to £1.823bn. The increase in sales actually represents quite an achievement since cigarette volumes during the year fell by 3.6% as more people in developed markets give up smoking - less than the 5% seen right across the market - but the company more than made up for it with price increases.

There were also pressures in individual markets where there were big increases in excise duty, notably in France, where the Macron government is aiming to push the price of a packet of cigarettes up to €10 (£8.75) by 2020 and Saudi Arabia, where excise duty doubled during the course of the year.

But it is clearly NGP where Imps sees the real excitement.

As Ms Cooper put it today: "The NGP potential is big. We expect the global retail sales value of vaping to grow significantly, supported by a growing public health agenda in favour of these reduced risk products. We are initially prioritising markets that together have a retail value of over $30bn. And for Imperial, this is easily additive [to sales and profits] given our relatively small global tobacco share. We have around a 14% share in our tobacco footprint. So 86% of smokers aren't currently smoking our brands."

NGP is not yet making a profit for Imps, even though sales in the category doubled during the year to £200m, although Ms Cooper expects them to be profitable by this time next year.

To date, the company has largely sold vaping products, which involve heating a liquid that generates a vapour that is inhaled. This differs from rivals such as Philip Morris, the owner of Marlboro, whose NGP strategy is based on a product called IQOS that heats tobacco but does not burn it.

Imps is developing its own heated tobacco product, called Pulze, but clearly regards the vaping market as holding greater appeal.

Ms Cooper added: "We are delivering a compelling proposition for smokers - a satisfying, less harmful experience, endorsed by a trusted brand in blu and available where smokers want to buy it."

That proposition, she hopes, will also be equally compelling for investors. One of the most interesting slides Ms Cooper showed them today highlighted that in several of the company's key markets, including Britain, France, Germany and Japan, a 1.5 ml pod sold for a vaping product is more profitable than a traditional packet of 20 cigarettes.

Roll out a faster take-up of blu and other next-generation products and it could well breathe some life back into Imps shares which, during the last 12 months, have fallen by 15%.

Imperial Brands chief executive Alison Cooper is a guest on Ian King Live on Sky News at 6.30pm tonight