Half Year 2022 British American Tobacco PLC Earnings Presentation
And good morning, everyone and welcome to our 2022 in terrible results present, they said.
I'm, Jack Bowles, Chief Executive of E D.
This morning, you study all Melco Agua.
Finance and transformation.
Before I start the presentation.
I take it that you have all seen the disclaimers on slide two.
In slide three.
As usual with it one study O N E.
I've taken you through the presentation, there will be an opportunity to ask questions.
I would like to take a few moments here to express our deep concerns and sudden it for everyone affected by the conflict in Ukraine.
Why do we continue to work towards the transfer of our local Russian business.
We remain focused.
While our 2500 people, we employ in the Russia and CIS.
Gelding down future employment.
He is an extremely complex undertaking and will provide an update on our progress as soon as worried but.
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Turning now to our interim results.
I'm proud to say that.
We are both transforming our business and delivering them.
Read but were robust results at the same time.
We are successfully navigating an increasingly challenging macro environment in 2022.
While delivering superior shareholder returns with our growing dividend and 2 billion buyback.
In the first half of this year, we have paid on an excellent momentum in 2020 one.
I am proud.
We're making solid progress transforming the business from cigarettes to lower risk is done that he was supposed to walk us while at the same time driving or their ESG priorities.
We have now reached a milestone of over 20 million consumers of our Noncombustible products.
We grew in your category revenues by 25% in constant currency.
And we have delivered more than a 50% reduction in new category losses.
Alongside our continued increase in your categories investment toward a total of $1 1 billion in the first half.
The strong performance was again being driven by all three categories.
With new product launches in all three global drive brands.
This demonstrates the importance of our global multi category strategy.
With strong brands and great products in the right markets.
We're also continuing to make good progress towards that EOG ambitions and targets with 18 satisfy cowboy new withdrawals by Citigroup.
Including two I did in the first half.
And we continue our work towards achieving carbon neutral operations by 'twenty, It's LTE full scope, one and two.
At the same time wherever they devote the robust results in the first half with group revenue up by three 7%.
90 basis points operating margin improvement.
And adjusted EPS up five 7% at constant rate.
Why did we recognize there may be challenges ahead, we are successfully navigating the current macro environment.
Given by the resilience of our business.
This is underpinned by our pricing power.
With 90% of our full year planned pricing already achieved.
We benefit from our high gross margins.
And at present low levels of <unk>.
Food cost inflation.
In addition, quantum is delivering efficiencies and savings ahead of schedule.
These results have enabled us to reach out a total of $3 8 billion in cash to shareholders. So far this year.
The dividend and a buyback.
Since 2018, we outgrow our noncombustible consumer base by a compounded rate of over 30% reaching.
Reaching $20 4 million in Julien.
With $4 3 million added in the last 12 months alone.
And excluding Russia.
Reached 19 million consumers are being at $3 9 million.
We are confident in our 2030 targets of 50 million consumers of Noncombustible products.
Over the last three years, we have grown in your category revenues by U K Golf's fell two 1%.
And in the first half of this year, we grew revenue by 45%. This is on top of the 51% increase we delivered in 2020 one.
Noncombustible now represents 14, 6% of group revenue.
This is more than two percentage points higher than in 2021.
We have read the momentum you know new category of business and are well on track to deliver on our 5 billion pounds target revenue for 2025.
We drove more than 50% reduction in your category losses in the first half.
This photo was the 10% reduction we delivered last year.
Our three global brands use glue and Zillow continue to strengthen which enabled us to increase prices across the portfolio in both devices and consumables.
Importantly, more than two thirds of the profit improvement came from our increased scale and efficiencies.
At the first half year.
We already have a total of nine profitable countries and new categories.
While the Rudolph to profitability will not be linear and will continue to invest in new launches and geographic expansion.
This puts us in an excellent position to deliver a new category profitability by 'twenty five.
At the same time, we're also continuing to invest in our transformation.
We have doubled our R&D spend since 2017 and accelerating our pace of innovation.
In the first half we opened an additional global device development center in Shenzhen.
Backed by Science, we are developing technology and designed to address consumer preferences.
Now, let me take you through our latest innovations.
With our new low platform Hyperx tool, we have significantly improved all key aspects of our successful model little hypo.
Xtra was developed with consumers at its heart.
Smaller lighter device with induction heating and a dedicated voice button delivering customized separate heating options.
X two was launched last week in Japan.
Our largest CHP market.
Though with an upgrade to the range of consumer base to deliver maximum satisfaction.
We have ambitious rollout plans for global type of X two in the second half.
In vapor.
We launched with you in school.
New disposable products in the U K in May.
They can just six months. This is our fastest speed to market launch yet and a great example of the increased speed and agility.
Jewish School currently offer six flavors at a premium price.
Already available in over 10000 stores views Glu is fast approaching number two in the U K disposable category.
Three months after launch.
We have a rapid though.
Market rollout plan in Europe for the second half.
In addition.
We launched our views people two plus in May in Canada.
You put two plus is all first to market Bluetooth connected device.
With its own dedicated App.
Devicelock to enhance youth access prevention.
I end, my vape and dark subscription options.
While it's still early days consumer feedback and performance to date has been very encouraging.
And you put the two plus is already more than half.
Of all volume devices sold in Canada, It seems foolish.
With Willow, we have introduced new to the world Recyclable times further demonstrating our commitment to embedding EOG in a new category brands.
This complements the rollout of our recent launches of many pouches and Max range.
Wish you all driving higher trial and conversion respectively.
<unk> accelerates our innovation pipeline is fueling our foster transformation.
And at the same time, we are delivering on our financial commitments.
Reported results were impacted by a number of one off items that study we will cover in more detail later.
The most significant of these.
This was a near 1 billion impact from an impairment of a Russian assets.
I'm looking at the adjusted numbers.
Wherever they live our group revenue up nearly 4% despite the current pressure on U S industry volumes.
Profit from operation up by four 9%.
Operating margin of almost 44%.
P S up five 7%.
And strong cash generation.
These are robust financial results did benefit from a strong performance in new category and the increased energy in the organization.
It demonstrates our ability to successfully navigate the current macro environment.
For Quanta, we have achieved one 5 billion pounds annualized cost savings six months earlier and uphold rates continues we now expect to achieve in excess of one 5 billion pounds by the year end.
With our pricing power and no significant change in global elasticity, we're in a good position to successfully manage inflationary pressure.
And by leveraging our increased agility.
We're ensuring continuity of end markets.
This has driven a 90 basis point increase in the operating margin.
In summary, we.
With our new category growth momentum and further reduction in new category losses, we are transforming b E T at space.
We have a strong second half investment plans for both new product launches and followed the geographic expansion.
While we understand that there is more to do these results demonstrate the strong progress that we're making in our transformation.
We're confident in delivering on our full year guidance.
I will now hand over to <unk>.
Thank you Jack I'm delighted to share more detail on how our first half performance demonstrates a faster transformation in action.
Our reported results were impacted by a number of one off items.
Including close to a 1 billion pounds noncash impairment of our Russian business, which is now classified as an asset held for sale.
Our provision of 450 million recognized in respect of the Doj on all fucked investigations into alleged historical reach of sanctions.
And restructuring charges driven by project quantum.
We expect these to reduce next year following the completion of the current project.
What does it tell you on performance ex Russia can be found in the appendix.
To better understand the key drivers of our performance, we will focus on constant currency adjusted results.
Alas otherwise stated.
In the first half we delivered revenue growth of nearly 4% driven by new category grow for 45% and continuing its strong combustible price mix of 5%.
Combustible volume was down four 2% impacted by a combination of.
The sale of our business and you Ronny August last year.
And lower year on year industry volume in the U S, reflecting macro pressures, including high fuel prices.
And the inventory movements.
With contingent value share growth and robust pricing, our combustible business delivered a resilient operational performance.
Profit from operations was up four 9%, while absorbing a one 5% headwind from transactional ethics.
These drove adjusted EPS up five 7% or eight 6% on a current currency basis.
Our free cash flow before dividends of $2 3 billion was well ahead of last year.
Illustrating our continued focus on cash conversion.
I'm, particularly pleased that for the first time revenue growth in all three categories exceeded the strong volume growth.
With a growing equity all of our three global drive brands, enabling us to take pricing in all three categories.
Oh data supported by a clear yet deep focus and the substantial body of science for each of our new category brands.
Which is actively contributing to our group sustainability targets.
Views won the Gold award.
At the transformation Awards Europe 'twenty to 'twenty two.
For best use of sustainable packaging.
We also have first of a kind of clinical studies for Blu and views.
And basically on over 135 of our own studies and third party data. The science shows that four views them below harmful components are 90, 299% less than cigarettes.
With toxicology between 95 to 19, 9% that's less.
These strong innovation and scientific capabilities will be furthering hastened by our new state of the art innovation hub interest to eat.
Black construction continues.
As Jack has already covered we have reduced the new category losses by more than 50% in the first half whilst at the same time investing $1 1 billion pounds in the spirit.
Two thirds of this profitability improvement was driven by our increasing scale and efficiencies.
With one third driven by pricing.
We continue to focus on the three profitability levers revenue growth management Cogs reduction in marketing spend effectiveness.
And we have made strong progress in the first half.
We have further improved the abuse trade margins building on the 30% reduction already achieved.
We delivered around 120 million of productivity savings driven by automation and increase its scale.
Through our market spend this fact limits the effectiveness tools, we have further reduced the cost of consumer acquisition and retention across all three categories.
Having invested significantly established shallow new category of business. We are now in the growth periods, where we can continue to invest more and deeper improving the profitability.
A new category Albert.
Now, it's starting to contribute meaningfully to our results.
With strong topline growth and increasing scale of our spend effectiveness is improving reducing our incremental investment requirements.
The growing strength of our three global threat.
Both brands has allowed us to increase pricing on both device and consumables.
And as we expected at all of this is driven a market improvement in new category profitability.
Turning now to our new category performance in detail.
In vapour, we continue to extend our value share leadership position with views achieving 34, 7% value share in the top five markets up one two percentage points. Despite the rapid growth in disposables.
Growth in the vapor category has accelerated driven by both disposables, which have expanded the vapor category.
And the continued growth of close its system.
In Europe , our closet system value share excluding disposables grew strongly and is now close to 50% across all three key vapor markets.
Disposables growth in the U K, France, and Germany is reflected in our share of the total vapour market in these countries.
We have responded rapidly with the launch of our new disposable offerings views go in the U K with.
With ambitious rollout planned for the second half.
In April we are we were delighted to announce that views had reached U S vapor value share leadership in tracked channels.
And Canada views continue to extend leadership, reaching 88% year to date value share with the launch of it bought the two plus.
More broadly across the other top five markets in Europe , we continue to build on the strong momentum from last year.
With further value share gains and close it systems.
In the U K views go is a red fast approaching that number two position in the disposables segments with premium price position.
And we are seeing very little cannibalization of our existing views portfolio.
<unk> goal is expect to drive margin accretion once at scale.
Alongside views go we are rolling out the take back scheme for devices in the U K.
In addition, we have strong you've assessed prevention controls in place, including our retailer training and education programs.
<unk>, our food governance thunders.
And th be bought Mcshane the top nine markets was up one six percentage points to reach 19.6 percentage driven by the continued success of <unk> HIFU.
Clothing, Russia, our share reached 18, 9% that you're up one two percentage points.
In Europe , which represents around half of global THB industry sales high per container should drive strong momentum with low revenue growth up nearly 19%.
Hello, again at the year to date volume share of total cigarette and THP in all key markets.
Many countries close share of the THP category now exceeds our share of cigarettes.
At the higher gross margin per stick driving profit growth.
In Japan closed year to date share grew 60 basis points to seven 4%.
Both LOE and our combustible business grew volume share without total nicotine shatter in Japan, reaching 27% up 60 basis points.
We are excited to have launched the glow hyper extra in Japan last week.
And we have rapid rollout plans for the second half.
Okay.
In modern oral we have maintained our international leadership position outside the U S with 69% volume share of this fast growing category.
And then in the West Vela wouldn't share it was down in a highly competitive environment.
As we continue our main investment focus on the much larger vapor opportunity.
The U S more than auto category remains highly competitive and it still represents only around 2% of total nicotine industry veteran.
We have submitted a P M T. A in the U S for our superior International Bulow product range.
This will ensure we are well prepared for future opportunities in the worlds largest category market.
And the more established markets of Sweden, Norway, Denmark, and Switzerland, we remain volume share leaders in the modern oral category.
In Sweden, our year to date, the modern oral category share was down one four percentage points due to heavy competitive discounting.
However, our share of total auto continues to grow reflecting the continued strong growth of the modern oral category.
We are also making strong progress with vivo in newer modern the auto markets.
In the UK Zillow has Richard volume share leadership.
With close to 50% share and was awards product of the year.
We continue to see an attractive opportunity for veeva in the emerging markets.
Offering an affordable reduces risk alternatives to cigarettes.
And so that's why we launched the city test pilots in Johannesburg at the end of last year.
We have now entered the second phase of the test with Guy to try on the expansion to selected organized retail changes Johannesburg.
We are seeing encouraging early results.
Turning now to combustibles.
Cigarette pricing was up nearly 90% and while consumers are feeling the impact of inflation. We are currently seeing no significant change in global elasticity.
Pricing was partially offset by geographic mix, driven mainly by volume growth in Brazil, and Pakistan and lower U S volume.
Well most of our volume declined by four 2%, mainly due to the say Oh boy E business in Iran, and lower industry volume in the U S.
And this resulted in revenue up.
0.6%.
With a well balanced portfolio of brands across all key price tiers and.
And the benefits about revenue growth management tool.
We believe we are well.
Well placed to navigate the inflationary pressures globally.
Turning now to the regions.
In Europe , New category revenue was up 50%.
<unk> total revenue revenue regional revenue up nearly 10%.
Europe is a true multi category region.
And we are rapidly transforming our business.
Noncombustible revenue already accounts for close to 20% of the total regional revenue.
Well most of our revenue grew three 5% as volume impacted by the conflict in Ukraine, and the declining Turkey was more than offset by strong pricing.
Value share was down 30 basis points, mainly driven by Russia and Germany.
Profit was up close to 12% driven by strong revenue growth and further cost savings initiatives as a result upfront.
No not me new category revenue was up 16%, mainly driven by THB with total revenue in the region up four 7%.
But what's the revenue grew over 4% and value share was up 40 basis points.
Strong performance in Pakistan, Japan in Bangladesh more than offset the impact from the sale of our Iranian busyness in August last year.
Profit was down 5% largely due to the change in excise thumbs in Australia.
2021 and the disposal of Iran.
Recovery in duty free continues at a very low slow pace.
And I'm, sorry, new category revenue was up over 70% driven by the excellent performance of abuse in Canada and South Africa.
This was a strong contributor to regional revenue growth up 6%.
Combustible revenue was up 4% that's markets, particularly South African market in South America began to normalize post COVID-19.
Combustible rather share was down 40 basis points, mainly driven by Canada, Mexico and Brazil.
Profit was up six 5%.
Driven by revenue growth and the benefit of continued cost savings from quantum.
Turning now to the U S. The business is performing well with strong pricing and contingent value share growth in combustibles as.
As well as an excellent new category performance.
Category revenue grew by 15, 9% driven by views up 60% in PLO up over 40%.
Significant vapor value share growth for views up 380 basis points to 36, 3% drove views truth. The number one brand position in the U S.
This was delivered despite the continued growth of synthetic nicotine disposables.
We have grown monthly combustible bond Michelle sequentially with a year to date increase of 40 basis points since January .
Overall year to date combustible volume share is still down 20 basis points versus full year 2021's.
Following a decline in the second half of last year.
Combustible industry volume declined by 10%, reflecting the impact of macro factors, including higher fuel prices and a return to more normal consumer consumption patterns post COVID-19.
Great News volume was down 13, 4% in the first half.
This reflects the industry decline and the net effect of inventory movements in the period.
These include the unwinding of the prior year stock builds.
Partially offset by additional inventory in June our head of our implementation of our global SAP platform.
The second half, we expect results to benefit from a softer comparator, though offset by the reversal of the industry and the inventory phasing around our S&P rollout.
This means full year results will reflect the unwinding of the prior year U S inventory movements.
Rather Shang combustible was up 30 basis points supported by the strength of our premium brands, Newport and natural American spirits.
Continued strong price mix up around 10% was more than offset by the volume decline.
Combustible revenue was down three 4%.
Adjusted profit from operations was up five 5% driven by a material improvement in your category profitability.
Continued strong pricing and efficiency gains from factory and sales force rationalization.
As a result of just the operating margin in the West was up 290 basis points to 52.6 percentage.
Group operating margin also expanded strongly and was up by 90 basis points on an adjusted recurrence rates basis, Despite further incremental and you've got the reinvestment.
We also absorbed a 1.5 transactional FX headwind on broth.
Or a 50 basis points headwind to margin, mainly due to the strength of the U S dollar.
With the 281 million reduction in the new category losses.
Categories supported margin expansion for the first time.
In addition through quantum we have continued to drive further simplification and efficiency delivering savings of 274 million in the first half.
This brings total onto our lives quantum savings to just over $1 5 billion pounds.
With further productivity savings expected in the second half.
This resulted in group operating margin, reaching 43 point to 9%.
Turning now to EPS, we deliberate constant currency adjusted diluted EPS growth of five 7%.
This reflects a robust operating performance the benefit of the recovering 90 see post COVID-19 and the share buyback.
While over 90% of our debt is at fixed rates.
Net finance costs increased.
Given by higher interest rates and the weakening of Sterling against all the major hard currency.
As a result, we now expect fully in that finance cost should be closer to $1 6 billion pounds.
With an underlying tax rate of around 25% based on current tax rates.
Finally, we expect Upfronts section of FX headwind of around 2% for the full year.
And extrapolating current current spot rates, we expect currency translation to be a tailwind of around 6% on full year adjusted EPS growth.
We delivered strong cash flow conversion of 77% and $2 3 billion pounds of free cash flow in the first half.
While cash flow is always weighted towards the second half due to the timing of live sports is an MSA payments. This is a hands off our prior year driven by our continued focus on working capital across the business.
We continue to expect full year gross capex of 700 million pounds broadly in line with adjusted depreciation and amortization.
Based on current FX rates, we continue to expect to deliver full year adjusted net debt to adjusted EBITDA within our two to three times corridor.
We are well on track to deliver another year of operating cash conversion in excess of 90% and expect to generate 40 billion pounds of free cash flow over the next five years.
Our strong cash generation has enabled us to return $3 8 billion pounds up to shareholders, including $2 5 billion from dividends and $1 3 billion through our share buyback.
Overall, I'm very pleased with our performance in the first half.
And while there are there may be further challenges ahead, we remain vigilant.
We are successfully navigating the current microenvironment.
And irrespective of this time of the thrust of our Russian business.
I am confident that we are on track to deliver our guidance of 2% to 4% revenue growth and mid single figure EPS growth.
Thank you and with that I will hand, it back to Jack for his closing remarks.
Thank you.
So in summary, we are making strong progress.
While delivering on the operational priorities, we said three years.
And we are continuing to deliver robust financial results.
Driven by continued strong growth and improving profitability in the new categories. The resilience of our combustible business continued savings during a driven by quantum and strong cash generation.
At the same time, we're successfully transforming our business at space.
With great momentum in new categories, a faster transformation is well underway ruined by multi category strategy.
We are delivering on our purpose, we're building a better tomorrow by transforming the 18th to a high growth multi category consumer led CPG.
With the reduced impact on public health and yes, it's cool.
I am confident this will create value for all our stakeholders. Thank.
Thank you for listening and I will now open up to questions.
Sure.
If you would like to ask a question. Please press.
Star one on your telephone keypad.
Ladies and Joe Your line is on mute you'd likely as you will be advised to ask your question.
So once again Thats star one if you would like to ask a question.
The first question comes from the line of Richard Felton from Goldman Sachs. Please go ahead.
Yeah. Good morning, Thank you for taking my question.
U S volumes down 13, 4%. So obviously you've highlighted the impact of inventory stays Inc.
Are you able to quantify what the net impact of these various inventory staging these mid sweat. So H. One then if we think about the 10% industry volume declines.
Youre lapping a tough comp base gas prices are rising that's obviously weighed on your performance this year, but as you think about industry volumes kick in Boston, who is in the U S. Over the next few years are there any reasons why you think it should return to the 3% to 4% volume declines that we're used to seeing historically.
My first question and then I've got a follow up on the on your categories. After.
Okay. So I think the second thoughts that it will take the they always take the first part you know what I mean, the industry volume in the U S. As I always said in the previous cores.
Always have to consider a three year average in order to see what's happening in the U S of course Ah Theres been some stock movements at the end of last year due to potential taxation in a lot of things that happened in the in the end of last year, but if you look at the overall trend in terms of the U S market on a three year basis.
You'll see that of course, there is the post.
Covid impact where the market was much stronger in the especially in the two years that has passed and now we're seeing a softer market in the first half of the year you see a bit of recovery in the July results, but I think that what you have to consider is one where we're very strong portfolio to where our growing premium chefs three all blends out.
Extremely robust in all price points, and we don't see down trading are currently in our portfolio or acceleration of down trading in the industry. So we have to work step by step we have a generator the prostate increase of 5% in the U S. The new categories, especially E cigarettes is thinking more consumers in that.
Good because we're making money in the any cigarettes. So I think that the composite door is softer in the second half of the year, but we have to be prudent we have to consider are the are the numbers as they come on and as we know we have a very strong position in the U S market will continue to go on that both on combustibles value share is growing by 30 bps, which is an extremely good.
Number and at the same time, we are very strong in terms of our in terms of our new categories in the U S study.
Oh in terms of the numbers all brands compared with the market I have to remember that last year, we will deliver on about half of the market and we made the point about the the stocks that were built at the back of some uncertainties in terms of the tax increase the price increase that happened at the end of the at the beginning of a b and so on so forth. So we set that there would be some of them.
Lines happening in D C or these are partially happened in the first half of the year and our I would say that between the 13th with 10% of the market you would consider that half of that was there some of their own wine, that's happening or writing H. One the other half is the fact that we have a decline all of our market share by 20 basis points of that can be mentioned although.
We have already increase month on month since the January 40 basis points and so we have been recovering that but if you take the average of compared with their full year 'twenty 'twenty. One we'll have a a market shut down so I think that's how profitable the attributes for the difference.
So we have a if you want a it does he bps increase in terms of value share and there is still pricing or so it seems at the beginning of the year from across the industry, but I think that we're a very good position to continue to perform very well in the U S. As I said I mean, we're growing profit by 5%.
Great. Thank you.
My second question is on your in your Cat Street business and thank you for giving us a bit more disclosure on the a or the contribution it looks like you're making quick progress towards that breakeven target. But my question is on gross margins of data now if I caught my mind back to Yossi M. D. At the start to 2020, you said that you were making about 40% gross margin on data.
Which at that stage is quite a long way, but like THP or your modern oral business now.
Progressive trademark James you talked about Cogs efficiency, you're taking pricing is it possible, we could give us an update on where those gross margins today are at today and is it in line with your other new touch screen businesses yet. Thank you.
Yeah, I mean, our first before that it gives you more detail as you know I think what is important.
Three years ago people were told that we would not be able to get to a short position in terms of new categories. We have demonstrated that our multi category in new categories was the way to go and we are demonstrating last year with the world of 50% in the 51% in revenue and 45% in the first half of the year with.
The total number and all of the consumers over $20 million with the growth of more than 2 million in the first half of the year, which is even better than our than last year that we are absolutely capable of driving our growth and that were very strong brands and at the same time, we reduced the losses by by 50% in the first half of the year.
281 million. So I think that these demonstrates that know not only where are very effective in terms of our cogs were very effective in terms of our consumer acquisition costs and we are very well are able now to take pricing across the board in the three categories, making sure that we deliver a profitability at pace.
And how do we meet all our targets for 2025.
We said we are really pleased with the progress in the new categories as a whole in terms of our holistic view on that.
For the first time like we highlight in the presentation. We have been seeing revenue our heads of volume growth in all of the three categories. We have a 45% revenue growth at the back of 51%. So when we close the 2021 so the court with growth continuing at a very accelerated pace in terms of gross margin.
Or all the increase in this half compared with the full year is a is that on the likes of 7%. So we have grown gross margin you. All the three categories are ahead of the revenue growth as well, which is very pleased.
So we in terms of vapor we have been doing extremely progress at the back of our of our revenue growth management. We are taking price we are reducing discounts on device. We are working hard on the Cogs formation that we highlighted in the presentation.
The margins that we quoted so we if you if you like the 40% that you are quoting you strip out the discounts on device on the consumables side today, we are more on the 50%. So we have progress against this 40% and and overall are we have been progressing in all three categories.
And we are now with the with a business. That's has already passed there's a level of investment creating their foundations and we are now in terms of operating leverage and trying to to get through to a level of scale that will allow us to keep on track on those margin improvements not just in paperboard across.
The economy and you all saw if I may add is also that not only we're taking pricing across those three categories, but on top of that we have a pipeline of innovation for the second half that is extremely strong and our will put in place. All of these are new launches are in the the.
The months to come but I think that the pipeline is extremely strong consumer base, though different categories different objectives and innovation across the board with the speeds are in terms of development of innovation that has increased so dramatically and that study will referred to in his presentation. We have doubled the investment in the last few years in terms of R&D and were really more.
Arena through all development and are getting very very strong position. So the balancing act between the financials and consumer acquisition is working very well and will continue to accelerate in the second half of the year.
Thank you very much very clear.
The next question comes from the line of Gaurav Jain from Barclays. Please go ahead.
Hi, Good morning, Jack Good morning, Todd you.
So three questions from me.
Good morning, So if I look at that.
Companies, which have taught us as and you believe doesn't the industry.
Their EPS growth has been at low to mid teens over the last two three years and if I look at your.
Delivery today and GPS are now 10% of overall revenue and then you had also reducing losses you have.
Slide 30, it clearly points out the margin improvement which is happening.
Why wouldn't you already be as growth one share repurchases are layered in vibrant Dr. EPS growth has led to low to mid teens at some point of time in the next three years.
Well so first of all thank you for recognizing our strong performance in terms of our in terms of new categories, and I must say that the financial resolve very robust in terms of the the profitability of the business moving forward and we have a scaled up in the law.
Last three years I think that are you know I mean, we have a sudden number if it goes up but at the end of the day it will take a little bit a little bit more time, but the reality is we have a very very strong business and we continue to we continue to move forward.
Yeah.
Look we we we spoke about the capital allocation framework, that's a backing.
Yeah and result in 'twenty, one at the beginning of the year and we we we we we we want you to consider all night in any given year, what where are the circumstance that we are we see ourselves we have clearly recognize.
Recognize the value of share buyback and this is something we have done in the past we have now restarted the program, but we also want you to create some reserves so to do some M&A bolt ons that would be important mainly on the beyond nicotine space that you'll note that we have this ambition to go at in that space as well to accelerate the transformation of the <unk>.
Company, we also want to keep that dividend growth Stony base and the pay down debt. So we can keep it within the 322 times corridor. So we will have to consider all of those are effects on I O N.
In any given year and we will have to see how this translates to date. The realities that are the keepers of the group are not as high as it used to be in the past because radar now as part of the the subsidiary. So it's part of the operating profit of the group and so it's difficult to start to speculate.
For the future in terms of a impact, but our we have a very sound business. This transformation that we are now falling faster transforming this chapter that we're going through our journey of the transformation. It's a maybe it means that the new categories will be more relevant to the group results are your absolute.
Right. So you Wouldnt see and we've said that's exactly that that's where you'll see our group revenue more impacted by the progress we're making you categories. Our bottom line more impacted by the progress we were making you've got so they're just not new news. This is something that we have read the said before and and we will continue are going ahead, and we see what's happened on their own.
Kickers sides are considered the capital location decisions that we might have to do in the future.
We have a very high level of cash conversion and and also I mean, no. We're doing 2 billion share buyback as we speak at all and we're at $1 3 billion in the first half of them step by step.
Sure. Thank you and then my second question is on the dynamics in the U S. E cigarette market. So you know you have given this number on slide 25, the disposables industry value share of 22%. So is this all synthetic nicotine and what percentage of this will be flavored and if we have this clamp down from them.
FDA under synthetic nicotine market could.
A big chunk of this move to you.
The next six months to 12 months I mean, the good thing I mean, there are different elements in there. One is yes. They are all a synthetic nicotine because you cannot do a flavor is oh without synthetic nicotine that was the past now the FDA says that the synthetic nicotine in their image of the FDA. So now they're starting to.
Put in place all their activities in terms of controlling limitation. The trained them in the U S is extremely dynamic and would also start to take some positions related to that so I think that the.
What is important to consider is that there is more people that are coming to vaping, which is great. So that we have a very strong brand with our views in the U S that we're leaders in a more than 34 states in the U S. That's everybody thought that we would not be successful with our with our viewers in the U S.
And where are the leaders now where are the leaders in the market continues to grow there was a dee valley crisis of course, the market does recover now is growing by three 4% since the beginning of the year and we're continuing to to take positions in there. So.
I would say that the the disposables.
That is addressed by the FDA and that brings more people to the category, which is in turn a without a flavors will benefit the category, where we're a leader and we're continuing to increase our leadership and that we're taking a lot of pricing and by the way of competition that has started to follow us on pricing, which is a very good news.
Also so it's all a you know an acceleration in terms of the potential of our new categories in the U S. Remember that in the U S. New categories already represents more than 21% of the market.
Yeah. So it is already a market that is extremely strong in terms of in terms of in your categories.
And my last question is again on the U S market given the strength of views. So look you just cigarette price mix of plus 11% you have lost some share knowledge reuse continues to execute so well.
Do you really need to take as higher pricing and lose volume share or would you rather big.
Take less pricing and gain volume shed on cigarettes, as well and we would let you use growth and EBIT swing from US drive your overall U S growth.
First of all thank you very much for recognizing that we have a very strong position on the combustible business and Oh as I always said you know what are the three priorities for the company either valuing combustor Motors step change in your categories and simplifying the business on the value of the combustor bonus I mean, we're growing in the U S O T. A bps in terms of.
In terms of value share and we're losing a little bit of share.
Not a concern with that we look always at the right balancing act between the two where I'm very pleased that our premium share is growing and we have very strong brands at the upper end of the portfolio and we have no. So with lucky strike at the bottom of a very strong brand that is more than 2% of the market now so I have a good visibility but what.
We said always is that we have a pricing strategy and pricing tools in the U S that allows us to be extremely granular.
So when we look at E cigarettes, and when we have the leadership I'm always going to do the Dakota between the pricing and the the competitive situation I think that the demonstration that we have made in the last 12 months. Even is that you can continue to grow your position in the U S in terms of.
E cigarettes, and increase your profitability through pricing or consumer acquisition automation reduce our Cogs also and the competition is following our pricing. So I think that we're in a very good situation, where you have to always adapt and annualize the market, but I think that the trends are extremely positive for us.
Thanks, a lot Jack.
Thank you very much.
The next question comes from the line of Rea from SPG Securities. Please go ahead.
Hello, Jack Todd as well.
Just.
Yes.
You have three questions.
I just didn't know insurance I mean, I just wanted to address this improvement in it in the next generation product.
Margin.
So if we look at the losses have been reduced about 55%.
So I just wanted to in terms of if we can talk about a glide slope I think you still said.
I'm too to be profitable by in aggregate by the 'twenty 'twenty four 'twenty 'twenty five.
So to me it looks like you know if if this trend continues it might be a bit early yet and then maybe just in that is there a risk off united that you'd need to spend more.
All of the you know the the grass in the the Viper disposables.
So that's my first question the second one I just sorry, let's start with your first question because I didn't even know what I'm French and three question. It's always difficult for me. So let's go step by step. So your first question is related to.
I just want to know.
Ah, yes, the clogging sluggish yes, okay. So on the.
Yes. Thank you.
One you know you have always to consider that this is a very dynamic environment. You know what these these categories were not existing even a few years ago. So we have a very good performance related to related to all different categories. We are taking pricing, but at the same time, we are improving our cogs were automating and where do we.
Much better in terms of consumer acquisition at the same time, the innovation pipeline costs money.
And we're going to spend the money as we go in order to continue to expand our positions.
Two years ago, we were nowhere to be seen in THP that is 50% of the market and you are.
Of the total market of GH be worldwide is in Europe . We're in no way and now we have 18% in average in terms of share. So I will continue to invest the money, but as the base is much stronger the cost of acquisition of consumers better but competition will not sleep. They will continue to do a price discounting. They will continue to do launches and I think that we're very.
Position, we're very well positioned that gives me a bit more space to be able to operate.
And the target is a 2025 so what do you think it is we go first is about consumer acquisition and the efficiency and the reduction of cost of consumer acquisition and are getting more traction in terms of our position in the three categories and now have innovations to launch into three categories, but altogether you saw last year.
Where would you sell those shows are by a 100 million and this year in the first half of the are we accelerating quite nicely. These gave me the mushrooms the space Center blood in order to be able to grow fast in terms of new categories.
So that growth in the first half of the year on the back of 51 for the full year last year on the revenue growth I think that that's a that's stellar and a 2.4 million consumers in the first half of the year. Additionally, so we're even breaking results and recalls over last year.
It makes sense and then just I'll answer the combustible so I'm just curious.
It looks to me you have a bit of share pressure in markets, such as Australia, Brazil, Mexico.
How do you plan to address that.
I think that though when you look at the Oh position in terms of how much the very first of all it's a very robust position. What you have on top of that is a portfolio that is a that is extremely strong and our what you see is that our the elasticities are playing in our favor so of course.
She will lose a little bit of share here and there and increase your value share Australia is a is a specific example, whereby a taxation was changed in the last year that has created a bit of vacuum are related to a return to the Australia industry as such and.
There were some scammy shows in terms of pricing, we fought back where he covered market share anywhere into a very strong position in in Australia. Now. So so I think that we're a very very strong position in Australia, and where are the leaders there in terms of Brazil, all Sharon's still a stellar no are we are more than.
73% share in in Brazil, and we have benefited from the Covid environment, where the market was closed and a reduction of illicit that's very normal and now you are a bit on the back of the post pandemic. So there's a bit of rebalancing, but nothing to be concerned all of them. The reality is weather.
Very very strong business in Australia, or in Brazil, and we have rebalanced, our portfolio with global drive brands launchers, and our we have a realistic related a route to market in terms of sales force and we have a lot of efficiencies that are coming through are in that market.
And I just wanted to just want to clarify regarding the treatment of Russia and Belarus.
Yes.
You you're treating it as a discontinued operation. So I just want to clarify that just for modeling purposes, we need you to move Russia.
In Belarus from there as well.
All of 2021, and the first off of 2022 correct.
Not being treated as discontinued.
We still have control of the operation in Russia, we are in the process of transferring the business. So it means that we are trying to.
To execute.
Options to choose to find a new buyer a local buyer there and that that can get they can take over the business and carry on and so what's happening is as we have the the intention to transfer the business that was already communicated the base on the Ifr S. Five we have to put the assets on held on.
Sale and ER and that's a consequence, you'll have to revalue the the business, which we are now at the beauty on new value for.
For that given that the circumstance that difficult because as you know is a very complex environment.
So the impairment that you see is basically always reassessing the value of those assets that are now for sale, but there is no discontinued operations, because we still keep control of the bids until we transferred the 40 the business.
Okay. So just to clarify do you you you will keep the Russian operations in FY.
It was 21 numbers and until it's being sold in 2022.
Yeah until it's been sold in 'twenty that you once we've sold once we sell the business and then we start providing a kind of a granular view, where we strip them from the base as well, but until we do that.
It's part of the numbers.
Okay excellent duration in a very complex situation by the way if you'll see the appendix in the appendix of the presentation, you will see a kind of picture of how it looks like on the group numbers. If you will have read are done that if we have restaurants, where they've been enhanced there would be no.
Rush anymore in the base of 'twenty, one and 'twenty two you can see the underlying numbers on the appendix.
Yes, that's that that's actually what triggered my question you know, whether we need district, Russia out.
Retrospectively it was just a reference for you.
I mean, the trends are absolutely similar and and this was to give more clarity to everybody in terms of understanding with and without.
Thank you very much.
The final question comes from the line of John Stephens Society Generale. Please go ahead.
Hi, Good morning, gentlemen, hi, Yeah, I've got a.
Two or three questions two or three questions as well. Please. The first question everybody has three questions. This morning, and I'll go one by one.
Analysts suddenly do things it's rice.
Yes.
The.
Going back to a sort of a previous question.
Price mix, you know plus 25 in the period.
Very strong number here is that driven clearly has been some price increases, but it's all we seen a general decline in the level of <unk>.
Device and that product discounting from from everybody, including yourselves and competitors or was that driven a lot by the change in in trade margins.
It's a bit of both I think that when you photos that are more effective efficient and are recognized by the consumer your cost of acquisition reduces because then your brand is part of the hip after all of the consumerism and then so the knee or in a much better situation also there is more pricing which is a.
Which is good and we're continuing to work on all different positions yeah.
Yeah, we look the U S. E vapor has a is a major wait for our numbers.
It's a massive market and then the U S. We are doing exactly what we said we were going to do it and we are in the phase now of scale. So we don't need all the discount that we used to have in the past on the device. So there is much less discount on device than we used to and we are also taking pricing because we know we have put in place.
These are revenue growth for digital tools that we have for cigarettes also in the new categories and vapor. So we can be very granular in terms of our where we increased the prices based on the competitive landscape and we are as we speak are at 125 index to the second player in the market. So.
We are taking clearly pricing in the U S and reducing discounts and these all helps and the revenues that you are seeing when you go outside the U S. The strength of our leadership position is allowing us to have a much more strong competitive power in terms of negotiations with key accounts and this allow us to.
Moved for example from fronts modules you back module that translates into great moving away from a specific percentage of of revenue as a margin to pay for performance and these all reflecting lower trade margins and that's exactly what is happening at this point in time, so some combination of lower.
Our consumer acquisition costs.
Our margins are and more efficiency in terms of in terms of Cogs.
Plus a more pricing and strong brands I mean, that's a very good question where are in the moment and we'll continue to we'll continue to move forward.
And just out of interest.
What sort of level of trade margins.
Are you moving to and how would that compare to what you.
Cigarettes.
Right.
Trade margins are much higher than on cigarettes, but what we see is that there is a convergence in time that will that will happen and that will take some time, but we see our improvements are on a regular basis related to that.
And you have to remember that also the other element that is very important is you pay a much more taxes on cigarettes and you pay all the other categories, which is normal because these are reduced risk products.
It works out that works also in the equation in terms of the financial delivery I think you know what's very important is we set three years ago that its multi category approach that they are a different consumer more months different geographies and you need a different portfolios.
It was more complex for us at the beginning to establish three categories, but at the end of the day. When you look at it today last year, we grew 51% this year and a half year. We grew 45%, we're having now 20 million consumers, which is extremely comparable to other companies are out there.
And we're planning through and we're able to take pricing in the three categories and do Oh, you know what.
You shouldn't see a in a in Cogs or <unk>.
Tumor acquisitions, and taking pricing. So I think that we have a well balanced portfolio that is responding to the consumers and we can play in food all the tools that we have in combustible pricing to understand exactly how it works and you start to reduce discounting and that's extremely extremely powerful for us.
For them, because we want to do a lot of additional innovation in the next in the next periods and we showed you during the presentation that we have a lot of innovations that are coming through in the second half of that question more yes, but nonetheless, we have a reduction of 50% of all ourselves in a new category and so that's going really in the room.
Acceleration, where we have the momentum and we're accelerating that momentum the hotel yeah last year accelerating on the momentum in 2022 'twenty two 'twenty three.
Just just to follow up on that.
Do you expect in the second half that's the decline in losses, and then GP will be anywhere near the level of the first half given that I think there's considerable number of launches in the second half.
Well, let's take it step by step you know, we're not going to give a guidance on that for the second half of the year, where we gave guidance that we will deliver our financial algorithm in the corridor that we spoke about and are we will make sure that we are actively supporting these new launches in a balanced way in terms of the balancing act.
Our with our investment in <unk> and and financials.
Okay, and then lastly, you.
<unk> made a 450 million charge for the for the U S investigation, presumably that would be a cash cost at some point.
The where we're at we're not absolutely not in a position to be able to speak about that matter as it stands for very obvious reasons, we decided that it was prudent to take a provision that I was thinking from them.
Okay.
No at this point in time, but the fact is that our our corridor of 322 is kept in.
Independent of the impact that this might happen.
Right. Okay. Thank you very much prudent accounting approach.
Okay.
Okay.
Thank you very much.
There are no further questions. So I'll hand, the call back feel hey for some closing remarks.
Well. Thank you very much for taking the time with US today I must say that what is extremely important is that these results show that we are transforming the business and delivering robust results.
I'm extremely confident in our full year guidance with the great New category momentum that we have a we are on track for our 2025 targets and our transformation is well underway. It's led by the new category growth and I'll start with the profitability and also a very strong combustible business we're migrating.
The consumer is from from combustible to to new categories last year, We had 1 billion packs that well you know carrying advertising promotions or informations for smokers to move to new categories. This year, it's going to be 2 billion and I want to continue to migrate the consumers are formed.
From one category to the other the profitability the margins and the cost of acquisition of new consumers.
Are the new categories that we have and we're the only ones to be in three categories and established in their demonstrates that'd be it is changing rapidly.
It is powered by our people our ethos and the you know the determination that we have to make a very clear no commitment to delivering for all our stakeholders. All our stakeholders. We think he is extremely seriously we take our business extremely seriously.
Growing at pace and will continue to do that so in a nutshell I'm extremely excited about the future of B a T and that's 2022 first time comes on the back of a very strong 2021, where we grew in all the different categories, including combustible and we'll continue to do so.
So it's about <unk>.
While U in them or most of it is about a step change in your categories is about simplifying the the business. So.
So we're growing value share in the first one is we said that we did in 2021, we do in 2022 step change in your category 51 for Sungard last year, 45% on a bigger base in the 2022 and a $1 5 billion that is was $1 billion. Then went to 1.5 and now we say that we will deliver more.
And that so thank you very much for your patience with us in the last three years I think we're getting into a very strong position, which I would not even call. It foundation I wouldn't call. It a springboard to move forward. So thank you very much for listening.
Thank you for joining today's call you may now disconnect your lines.