Full Year 2022 British American Tobacco PLC Earnings Call
Okay.
Good morning, everyone and why they come to our 2022 full year results presentation.
And Jack Bowles, Chief Executive M. B, a T and we made this morning is Daniel Marco.
Our group finance and transformation director.
I am proud to share with you today that we have reached an exciting inflection point in our transformation.
Over the last few years in your categories have rapidly become a significant part of our business and I'll now a strong contributor to our financial performance.
As a result last week, we announced a new regional structure and management team morale element to drive us through the next phase of our transformation journey.
Our presentation today will take on a new format.
First I will give some highlights of the progress.
That they all will take you through the details of our results highlighting how in 2022, we continue toward transforming the business deliver on the strong financial results and successfully navigated a challenging macroeconomic environment.
Then I will talk about how we are thinking Betsy strategy to the next level and why we are confident in bringing forward a new category profitability target by one year to 'twenty 'twenty four is that true.
<unk> formation accelerates.
As usual the one study Oh and I I've taken your through the presentation, there will be an opportunity to ask questions.
Before we start I would like to take this opportunity to give you an update on the progress of the transfer of our businesses in Russia and Bureau of Russia.
As we have already shared we are working as quickly as possible to transfer the business is in compliance with international and local laws.
We are now in advanced discussion with a joint management distributor consortium with a view to completing the transfer in 2023.
Our priority remains supporting our employees in the affected areas and safeguarding Dow employment.
Upon completion, if you will no longer have a presence in Russia and Belarus.
With that I take it that you have all seen the disclaimers onsite in slide two and slide three.
I am delighted to share with you today, our progress in delivering against the three priorities. We set out in 2019, we are delivering a step change in your categories, enabling us to bring forward our profitability target.
Driving value from our combustible business and at the same time, though significantly simplifying our.
Our structure processes and ways of working to drive greater efficiency.
Since 2018, we haven't grown our noncombustible product consumer base by 30% on the CAG al basis.
Reaching $22 5 million in 2022.
With again more than $4 million added in the last 12 months.
Anywhere I remain confident on our target of 50 million consumers of Noncombustible products by 2030.
Over the last four years, we have grown new category revenues bag out was 33%.
And we're confident in achieving our 5 billion revenue target by 2025, regardless of the transfer of our business in Russia, and we had hours.
Non combustible revenue as a percentage of group revenue has more than doubled from 7% in 2018% to 15% today.
And grew by over two percentage points in 2022.
So in just a few years with views any law, we have built two 1 billion pounds of global brands.
This is an enviable performance relative to any global CPG brand.
In 2022, if you have further built on its market leadership position in vapor and delivered the third consecutive year of over 40% revenue growth.
Growth continues to outpace global.
THP category growth delivering in excess of 25% revenue growth.
In modern oral velo has delivered another year of over 40% constant currency revenue growth and maintain its leadership position in Europe .
Yes gene.
He is at the center of our strategy.
All this is supported by a clear environmental focus.
Underpinned by science for each of our new category brands and he's actively contributing to our group sustainability targets.
We continue to develop and publish a substantial body of scientific evidence.
And we are investing in the R&D of products that have lower environmental impact and improve circularity.
This means we are seeking to design products that are easier to dismantle at end of life.
Improved ways to enhance Reusability and Recyclability.
It comes out to more sustainable packaging.
More broadly.
As we reduce the health impact of our business. We must also drive progress across all of them out there and ESG areas.
And in 2022 were appointed Mike 19, Gail as our first Chief Sustainability Officer.
<unk> implemented a new double materiality led approach to inform on sustainability agenda and continue to embed sustainability across beauty.
While we recognize we have a lot more to do we are making very good progress.
In 2022, we achieved our renewable energy use targets three years early.
Which is why we have increased our target by 50% to 50% by 2023.
By 2030, sorry.
In addition.
We're on track to reach our gender representation target across a wider workforce with women in management roles at 41% and we are delighted to be included in the 2023, Bloomberg gender equality index.
Alongside this our continued efforts have been recognized with the CDP a rating and climate change.
An inclusion in the Dow Jones sustainability index for the 21st consecutive year.
Central to our purpose is reducing the health impact of our business.
In our established markets, we continue to transform at speed now with Noncombustible already representing over 30% of our revenue in a total of 11 markets.
Well, we have been most active with our multi category strategy.
And we expect more markets to exceed the 30% level in 2023.
As we take our transformation to the next level.
I am, especially proud that since 2020, we have improved new category contribution by nearly 700 million pounds.
While also investing over $4 5 billion.
A new category model is now meaningfully contributing to group results and our progress today. It makes us confident that we will achieve group profitability in 2020 for one year early.
Our transformation continues to be fueled by combustible value growth.
Over the last four years, we have delivered robust revenue profit and value share growth, while significantly reducing complexity to drive further efficiencies.
We have also deliver a total of $1 9 billion of annualized cost savings over the last three years through quantum.
Nearly doubled our initial 1 billion target.
Project quantum as enable new ways of working that now now fully embedded within BHP.
In addition, our strategy has enabled us to materially increase our free cash flow generation with four consecutive years of at least 100% operating cash conversion.
As a result, we have been able to return a total of $19 2 billion pounds to shareholders through dividends alone.
Over the last four years, which is around 30% of our current market capitalization.
We know that innovation and transformation is fed by a broad diversity of views and experiences.
Over the last four years, we increasingly attracted new talent to be 18 with over 3000, new capabilities hires focused on areas of science innovation, ESG digital and data analytics.
While at the same time, we have accelerated the diversity agenda with 47% of our new hires being female.
We have also improved our new Ohio turnover to a level well below market norms.
I'm proud that our achievements are being recognized externally.
<unk>, most recently being certified a global Tam per player for the sixth consecutive year.
So we have come a long way on a better do more Germany and I'm proud of what we have achieved.
Strong momentum has continued in 2022.
I will now hand over to <unk>, which will take you through the details of our 2022 financial performance.
Got it.
Thank you Jack I'm delighted to share more details on how we have delivered on our guidance in 2022.
I am proud to say is Zack has highlighted that we are accelerating the transformation of our business and delivering robust financial results, while successfully navigating an increasingly challenging macro environment as we move it through the year.
Our reported results were impacted by a number of mostly noncash one off items, including a full year noncash impairment of our business in Russia and Belarus.
Revision recognize in respect of the Doj on all five investigations and restructuring charge driven by project quantum.
These were partially offset by V. A T credits in Brazil relating to prior periods.
To better understand the key drivers of our performance, we will now focus on constant currency adjusted results unless otherwise stated.
In 2022, we delivered revenue growth of two 3% driven by new category growth of 37% and the strong combustible price mix of nearly six 5%.
Profit from operations was up four 3% driven by a reduction in your category losses of nearly 600 million pounds and continued quantum savings.
Altogether, we achieved a 150 basis points increase in our operating margin at current rates.
This drove adjusted diluted EPS up five 8% at 12, 9% on a current currency basis.
Turning to new categories.
We delivered strong revenue growth.
With all three categories growing in excess of 25% driven by share growth innovation and <unk> expansion.
This demonstrates the importance of our global multi category strategy with strong brands and great products in the right markets.
I will now share more details on our key category drivers.
<unk> market shares across our key markets out available in the appendix.
In vapour, we extended our value share leadership position with views achieving 35, 9% in the key vapor markets up two five percentage points.
In the U S views of strengthening its number one position, reaching 49% that value share up eight four percentage points.
We further X. We further we expect further upside in the west going forward driven by existing vapor consumers switching chip products that received marketing authorization from SBA together with increased the enforcement.
In addition, given the exercise advantage of vapor our combustibles, we see a strong runway of growth as consumers can benefit from significant savings.
In Europe , our closest system value share excluding disposables grew strongly and is now over 64%.
In Canada, we extended our value share leadership position growing eight nine percentage points to around 90%.
We launched the grow the group's first connected vapor device views reports two plus drive increased import consumption.
Through our growing scale, we are making continued progress on driving profitability and vapor reaching a positive contribution in three of the five key markets in 2022.
Growth in the global vapor category has accelerated driven by more than disposables, which have expanded the category.
With larger or more than disposable views go with a premium price positioning and volumes, which are accretive to our <unk> platform.
We have rapidly rollout views go and already the value share number chew in the UK, France, and South Africa and Germany.
In addition, we are starting to see some accelerating poly usage with more than disposables coming from THP, which creates a significant opportunity for us.
We are approaching more than disposables in a responsible way supported by our wowing bad debt marketing practices, including age verification process for retail and take back schemes.
In THP growth sequential revenue growth accelerates in the second half consumable volume growth outpaces the industry one seven times.
The continued momentum of glow hyper drove category volume sharing key THP markets up one four percentage points to reach 19, 4%.
Oh key European markets continued to grow strongly in Japan lowest volume share of the total nicotine market reached seven 4% up 60 basis points with a record low share in December .
Hello, Hi, packs juice, delivering any hastily product experience with positive early results in Japan.
We brought in the hour price lettering with new look strike consumables complementing our existing brands.
We have also expanded our multi category offering with a velocity pilots delivering attractive margins.
This further demonstrates the strength of our consumer centric approach with module come in 2023.
Turning to modern Oro, where revenue grew strongly at 46% in Europe , we remain the market leader in 50 markets with aggregate European volume share broadly stable at 16, 9%.
The U S. The market remains small at around two 5% of total nicotine value and highly competitive.
Revenue was up as we prove that people thought should drive value, reducing promotional support for the brands and prioritize investment behind views.
In order to be well positioned for the future. We have submitted our PMT for a new filler product. We are also excited about the significant opportunity for modern oral in emerging markets.
We are particularly proud of <unk> performance in Pakistan now, our third largest modern auto market by volume.
Enabled by powerful digital Activations and innovations with local flavors Zillow has reached a monthly volume of over 40 million pouches.
In 2022, we've rapidly scale up our business and move it to localize production end markets driving the lowest cogs across the pillow brands.
As a result villas gross margins improved significantly during the year two.
Together with our with the other pilots this progress gives us confidence in our ability to unlock future emerging marketing opportunities.
Alongside significant investments in our new category transformation, we continue to explore opportunities beyond nicotine, notably in the fast emerging wellbeing and stimulation space.
<unk> has completed 22 investments since launch.
In 2022. This included five new investments and two exits.
We are building World class R&D together with our partners at organic ground.
And we continue to explore opportunities to expand our cannabis ecosystem.
This included a non controlling minority stake in <unk> group and then investment in Charlotte's web in 2022, as we continue to monitor changes in the regulatory environment.
Our approach providers with evolving capabilities for the future across both new categories and beyond nicotine.
Turning now to combustibles.
Our volume declined by five 2%, mainly due to the lower U S industry volume exacerbated by the partial unwind of inventory in 2022.
And the sale of our uranium business in 2021.
Cigarette pricing remained strong up 10, 4% offset mainly by geographic mix.
Together these resulted in a 6% decrease in revenue.
Group value share was flat with the continued strong performance in the U S Army offset by lower value share in Europe and answer pardon.
<unk> share was down 20 basis points.
Wireless our USB, otherwise impacted mainly by macroeconomic headwinds our target portfolio of brands across price tiers enable the delivery of a robust financial performance across up my answer in Europe .
Turning now to the regions.
In Europe , New category revenue was up 43% of driven total revenue up 7%.
Europe is a true multi category region non.
Noncombustible revenue already accounts for around 20% of total revenue and continues to grow fast.
Combustible revenue grew one 2% driven by strong pricing, partially impacted by the reallocation of the North Africa area to Acme.
Profit was up over 7% with improving new category contribution and further cost savings as a result of quantum.
In <unk>, new category revenue was up 10% with total revenue up seven 7%.
Combustible revenue grew nearly 8% while with resistant resilient volume benefiting from the emerging market recovery post COVID-19.
Broth was up 3% with a robust combustibles performance, partially offset by negative mix and the disposable of the Iranian business.
And set new category revenue was up 48% and was a strong contributor to the revenue growth of around 5%.
Combustible revenue was up nearly 4% driven by strong pricing and resilient volume.
<unk> was up over 4%.
Turning to the U S. Our total nicotine value share was up 40 basis points to over 37% driven by views.
New category revenue was up 52%.
Views continue to extend value share leadership and this is the fastest growing brands in total nicotine in the U S.
Combustible industry volume was down around 10%, mainly reflecting post COVID-19 normalization of consumption consumption patterns.
And macroeconomic deterioration through the year.
Our volume was down 15, 5%. Additionally, reflecting the partial unwind of our prior year inventory movements.
Share loss and lower retailer inventory levels across the industry at year end.
Over the last three years industry volume wise declined in line with historical levels at around 5% cargo.
The Premier industry segment remained resilient with volume share declining by only 50 basis points.
As a result of the increasing impact of macroeconomic headwinds the low end segment grew volume share by 90 basis points.
In this challenging environment, our value share grew 10 basis points, despite volume declining by 30 basis points.
Value share growth was driven by the continued strength of our natural American spirit of Newport, which together drove premium value share up 20 basis points.
In addition look strike was the fastest growing combustible brand in both volume and value share terms in the U S, reaching an exit share of nearly 3%.
This more than offset losses in promo at the total industry level.
In 2022 hour U S pricing remains strong up 10%.
The consumer retail level, our average price in the year was up five 6% lower than key industry peers and significantly low elevated consumer price inflation as we activated target commercial plans should support our consumers.
Despite the more challenging macroeconomic backdrop, our profit was up three 5% with operating margin up 330 basis points to 53, 7%.
This was driven by continued improvement in new category contribution for both views and Zillow alongside cost savings initiatives.
Taking a step back to look at the broader U S context.
U S consumers face a strong macroeconomic headwinds in 2022 with rapid inflation seven interest rate hikes and high gas price, resulting real disposable income falling by nearly 7%.
Looking into 2023, we are starting to see some very early signs of recovery with gas prices stabilizing levels of unemployment remains low and the gap between wage growth and inflation narrowing.
Most not to believe elasticity remained stable at point for a comparable to pre COVID-19 levels and affordability remains high.
Through revenue growth management, we have targeted investment in specific brands channels and states with price lettering across all brands.
We expect the U S economy to stabilize as we progressed through the year and together with our remaining unwind of our 2021 inventory movement, we expect outperformance should be second half weighted.
With our multi category strategy and strong portfolio of brands, we are well positioned to benefit from macroeconomic recovery.
Group operating margin expanded strongly up 150 basis points on an adjusted current rate basis.
We successfully absorbed the increasing inflationary pressure in the one 5% transactional FX headwind on products.
This was supported by our strong progress towards new category.
<unk> savings.
Our improved new category contribution was largely driven by increasing scale, leading to operating leverage and further automation reducing cost of goods.
With all three new categories in all regions contributing.
In addition, our growing brand equity has enabled us to increase pricing on both device and consumables supported by insights from our digital tools.
We have reached an inflection point in our new category model.
Having invested significantly in the base. We are now in a growth period, where we can invest more in delivering improved profitability.
In 'twenty to 'twenty, three we will capitalize on our momentum and further invest in our in our transformation to accelerate our innovation cadence and drive faster geographic expansion and with that we expect to continue to improve new category contribution 2023, and our confidence in delivering our.
Target of profitability ahead of plan in 2024.
Alongside $1 9 billion savings delivered through quantum we continued to drive further simplification.
Moving forward, we will deliver efficiencies through our established continuous improvement mindset to offset inflationary pressures and fuel our transformation.
In addition, we are committed to reporting no further significant P&L impact from adjusting items related to restructuring programs in the medium term.
Turning now to EPS.
We delivered constant currency adjusted diluted EPS growth of five 8%.
This reflects our robust operating performance the benefits of the continued recovering 90 see post COVID-19 and the share buyback, which more than offset the increase in net finance costs and tax.
The underlying tax rate was 24, 8% and with existing tax rates, we expect a similar rate of around 5% in 2023.
Operating cash conversion was strong at 100%, reflecting our focus on cash delivery.
As in 2022, we expect gross Capex for 'twenty to 'twenty three to be below adjusted depreciation and amortization at around 600 million pounds Capex, we continue to reduce leverage within the church to try them corridor and have a manageable maturity profile with 97% of our net.
Fixing the average maturity of around 10 years and closed currency matching.
Bat's sheltered from the unprecedented interest rates rise, but it is not immune.
Why are the majority of our net debt to fix it we have an approximately 18% exposure to fluctuating interest rates when you consider cash holdings and refinancings.
Our average cost of debt is 4%, which is below the current market rates.
We expect to see the impact of higher rates in our net finance costs in 2023 and moving forward.
As a result, we expect 2023 full year net finance costs should be around $1 9 billion pounds subject to both FX and interest rate volatility.
The board actively reviews, our capital location priorities, taking into account macroeconomic factors and potential regulatory and litigation outcomes.
Our framework includes continuing to grow the dividend with an average payout ratio of 65% over the long term.
Maintaining leverage within our target corridor of two to three times or just net debt adjusted EBITDA potential bolt ons M&A opportunities and share buybacks.
At this time the board has decided to take a pragmatic approach given our incremental investment plans in 2023 to further accelerate our transformation and in light of the uncertain microenvironment high interest rates outstanding litigation and regulatory matters. The board has decided to prioritize strengthening the balance sheet.
This will provide greater business resilience, while continuing to support future financial agility as we aim to reduce leverage more quickly towards the middle of our targeted two to three times corridor.
We strongly believe that share buybacks have an important role to play within our capital allocation framework.
And we will continue to keep it under review as we progress through the year.
Yeah.
Finally in line with our long standing commitment to dividend growth. We are pleased to announce a dividend of $230 90 for 2022 with growth in line with our constant currency earnings.
Looking forward 2023 results I expect to be driven by another year of strong new category growth and a further reduction in losses alongside a resilient combustible performance supported by continued efficiency savings and the strong cash generation.
We expect to deliver organic revenue growth of 325%, excluding Russia Belarus.
Adjusted mid single figure EPS growth second half weighted.
Reflecting incremental new category investments higher net finance costs transactional FX headwind of around 2% in the second half way to the U S performance.
When we think about the corridor for adjusted mid single figure this year, it's a little wider than usual at three 5% to six 5%.
It is because it is impacted by both the volatile macroeconomic environment at the time and the timing of the transfer of our business in Russia and Belarus.
Extrapolate current export rates, we expect currency translation to be broadly neutral on the full year adjusted diluted EPS growth.
And finally as already mentioned, we expect to continue to progress towards the middle of our two to three times leverage corridor.
In summary, we have a clear momentum behind our new category transformation, which is now a significant contributor to the group financial delivery.
The current challenges we face in the U S are mostly macroeconomic related and we expect stabilization from the second half of 2023.
In 2022, our results have enabled us to return a total of $6 9 billion pounds in cash to shareholders.
In 2023, we are taking a pragmatic approach and prioritize strengthening the balance sheet share buybacks will be kept under review as we progress throughout the year and with that I will now hand, you back to Jack.
Yes.
Thank you Italo.
At the start of the today's presentation I have highlighted the significant progress <unk> made since the launch of our purpose led a better tomorrow strategy in 2020.
Building, a new category of consumer base growing powerful global brands and developing capabilities for the future.
The speed of our transformation over the last three years means that now is the time to take beauty strategy to the next level.
In 2022, we have shown that our multi category model is working.
Earnings that we can both continue to invest and deliver improved profitability.
In this final section I will share how we are getting fit for growth with our new operating model.
This means that alongside investing more.
We'll also be investing smarter.
Enabling us to accelerate new category profitability and reach our target one year early.
While also preparing the business for sustainable long term profitable growth.
First.
Let me remind you of the opportunity.
Total nicotine industry revenue is growing with a three 5% expected kick out to 2025. This means an additional 11 billion revenue at industry level.
75% of it is industry growth is expected to come from new categories with a forecast of 15% growth CAGR.
This is supported by the growing number of new category consumers, increasing from around 80 million today to an estimated $130 million by 2025.
The percentage of smokers interacting with their new categories is growing fast, especially in established new category markets.
Creations between markets are largely driven by regulatory environment alongside different consumer tastes and the pricing relativity.
Sustainable New category growth is also supported by consumer demographics.
In established new category market solar usage is now above combustible levels among adults on the 45.
This shows the clear potential to make a significant positive impact on public health.
And deliver sustainable high quality growth.
Alongside an accelerated decline in cigarette soloists usage and establish market poly usage within your categories is growing fast.
This means that we are consumer centric multi category strategy, we are well positioned to capture factor world.
So the opportunity is big.
Given the significant variation in your category developments or cross market, we must prioritize our investments smartly and focus our activities and resource allocation to maximize the return.
We must be fit for growth.
Following our comprehensive strategic review, we have taken the decision to further simplify the group to enable greater collaboration and faster decision, making.
Our new organizational design will be based on fewer larger business units.
Using the number of regions from four to three and business units from 16 to 12.
This led to the senior management changes and the realignment announced last week.
And we are further optimizing our footprint.
Phased over the next two years, we plan to exit around 30 smaller markets.
We don't see a near term opportunity to execute our new category strategy.
When completed this means that we'll be selling at least 20 billion fewer cigarettes annually with a limited impact on our P&L.
This will enable us to increase profit and return of cash through resource allocation into markets, which generates higher returns.
Should the conditions and the opportunity for new category products materially change then we will reconsider our presence in these markets.
In addition, we have identified six different six different market archetypes to gain strategic choices and resource allocation.
We understand that markets vary significantly by category maturity, driven both by a consumer taste and preference and more importantly by different regulatory environment.
We continue to work hard to engage with regulators across the world to help inform them of the science that supports the potential benefits of smokers switching to reduced risk products.
New category already represent a significant percentage of the revenue.
And growth in a number of architects.
And we expect these are good times to be dynamic over time.
Overall, we're getting fit for high quality sustainable growth.
Together these projects and initiatives will deliver a reduction of over 3000 roles in the next couple of years with the majority of this effort opening in 2023.
Moving forward, we will leverage the foundations created by quantum will keep delivering efficiencies through our established continuous improvement mindset.
With an ambition to generate at least 1 billion additional savings over the next three years.
These savings will help the business continued to offset inflationary pressure fun, new category investment and improve new category profitability.
We are committed to build a better tomorrow as our transformation journey gather space, where our further sharpening our operating model enhancing our agility and continuing to build new capabilities were.
We are transforming <unk> into a high growth multi category consumer led CPG.
With a reduced impact on public health and ESG at its core.
I am confident this will create value for all our stakeholders. Thank you for listening I will now open up to questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please take note that pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure. Your mute function is turned off to allow us to reach our equipment well pause for just a moment to allow everyone an opportunity to take no follow up question.
We will now take our first question from Nik Oliver from UBS. Your line is open. Please go ahead.
Hey, good morning. Thank you question, Hey, good morning, guys.
Two from my side.
First one on the U S.
<unk>.
Eight 5% at combustible performance.
Both the disentangle, how much of that was industry the inventory loops and then some.
The share losses that you mentioned and then I guess as well.
Forwards, it's the better way to think about the U S. In terms of total nicotine shell and <unk>.
Posed to focus all of them could possible that's question one.
And then question two on the pipe.
We start we have yeah, so and then.
First of all are we are having a very strong portfolio in the U S and as you know we've grown in the last three years value share volume share and profit and operating margin. So our position in the U S is extremely strong now related to the to the 15% versus the 10 of course you saw that we.
Have lost a little bit of share, but the premium the premium is very resilient only losing 50 bps and the law is not growing more than than 90.
<unk> 90 bps at the same time the price elasticity is point fall. So I think that the market is very resilient when you see the average over the last three years.
See very clearly that the average reduction in terms of volume.
<unk> has been around 5%. So you saw that we lost a little bit of market share.
Okay. That's fine and then we said the last.
Last time.
We had around $200 million in terms of stock that we would have to unwind and now we are doing that at pace and we are at the halfway through the the G&A related to that so I think that we're going to do a.
Further enhancement of our performance in 'twenty.
23.
The second part of your question is related to looking at total nicotine and that I think you're absolutely right. I mean, the reason why our performance in the U S is strong is because we have a very resilient combustible business. The macros are not improving so you will see improvements are related to the macros in the U S that will benefit to the size of the market.
And the second thing is our performance in terms of new categories is just stellar.
I mean remember three years ago, everybody said that we will never take our position related to E cigarettes, now where not only.
The leader, but we're the leader in the U S with the price index to competition at 140, So we're doing extremely well and we're continuing to grow in terms of new categories. So I think that looking now holistically at the total market is something that makes total sense moving forward.
That's right and just to be clear about the $15 five and the 10% most of the gap is related to the unwind of the stocks. This shouldn't be a surprise because we have flagged that a year ago.
So I'm confident in them.
In the progressive recovery of the U S market and our strong position.
In terms of our portfolio I mean, we have one at the upper end of the market.
You have American spring there is super premium if you want to call. It. This way that is growing share in value share and you have the most successful launch in.
In the <unk> with Lucky strike, which is now.
Reaching three points of share that's the most successful launch in the last at least 15 years in the U S. So we have a very well balanced portfolio and now we have to do price led the ring through the different brands.
Our brands in order to make sure that we had to consumers to navigate also always remember you know the U S is a very large market and I spoke about price elasticity at point fall you have to remember that some prices in some states are $11 and some odd six so there is a lot of damage of different markets and you see that the price elasticity.
In our range is four so I think that we have a very strong business over there and that has grown share and value share in the last three years and the operating margins are going in the right direction. We are delivering three 5% profit growth in 2022 and we are confident in the <unk>.
U S business.
Great. Thank you Jack.
And then just one final one from me and then I'll handle Shaw.
I see.
No new buyback this year was kind of got quite topical with investors. This morning, but I guess in the press release, you mentioned that would be reviewed and during the year and maybe if the data are just a few words on the full process of 191, now and then what would need to change for.
That's happened later in the year.
Yes, Nick.
We have been focused on cash generation at least for the last three or four years in a very intense way that's the reflecting our conversion being consistently at a 100% and we managed to deleverage the company to the corridor of 3% or two but we are still in a comfortable position to be at the high end of the.
Of this range and in the World has changed we have a very high.
Levels of cost of capital today after seven interest hikes in the U S alone throughout 2022, our cost of capital is much higher than before and we are still seeing a lot of volatilities.
In that environment. So one thing that we would like to observe more clearly is where this will stabilize for sure. When the board takes decision in terms of capital location. It's always looking ahead and from the regulatory side. The litigation side. You'll note that we have provides for investigations that we have around Doj or <unk>.
And we still have to pay for those.
Don't know exactly when these get concluded.
We expect to be in 2023, but it's not completely up to us and and also we have the <unk> that there is a mediation processing in place I cannot comment further on that but in the medium term we have to prepare the company for that so the reason why we want to accelerate the to land in the mid of the range.
Is to create this space. So we can have a more resilient balance sheet and a much more financial agility and moving forward and this is a benefit for us in the in the medium long term of the company.
To speak to.
To speak clearly.
Since three years, we have done a lot of transformation, we're ever done a lot of exploration in terms of our business now we have the possibility to decide last.
Last year, we did $2 billion of share buyback and the interest rates are going up deleveraging.
As important taking care of our balance sheet and what we want to be in that corridor of 322, and two accelerates faster to the middle of that corridor. That's the the.
Pragmatic way of looking at it and frankly, a share buyback were convinced with share buyback, we did $2 billion last year and we will review in the course of the year and we will make the decisions as we see them.
Pragmatic to do so and continue on the or continue on that journey I like share buyback.
Great. Thanks, a lot to say Jack is that not really clear okay. Thank you.
Thank you for your questions next step next.
Next we have Richard Felton from Goldman Sachs. Your line is open. Please go ahead.
Thanks, Good morning, Jack good morning today.
My first question is.
My first question is a follow up on U S Combustibles and your relative performance say the number that you've given.
In your prepared remarks, 10% industry decline at 15, 5% decline in your portfolio.
<unk> is on a full year basis, if I think about the second half specifically it does look like that gap versus the market.
It has got a little bit larger. So my question is what has sort of driven that where are you seeing the relative weakness in your portfolio and what actions are you taking.
To narrow that gap into 2023.
The first question Okay.
Just sure to make the more clearly because it's difficult to analyze by half, but there were a lot of movements in the U S. We mentioned the unwind of stocks, but remember thats in the first half of <unk> to ensure we also introduced our Tau system, we rollout the pulse system. So we had to build up stocks just before that.
So your first the unwind of stocks in reality materialized more towards the second half of the year. So that's why you'll see a different picture in the second half as compared with the first and in this also.
Explain the reason why we expect to be more second weighted this year, because we are lapping a first half of last year that was impact by this stock built from the introduction of the power system in the U S. So I just want to make this point clearly in terms of the <unk> as the macro it became much more feasible throughout the second half of the year.
We stopped taking commercial initiatives relate to that as we presented in the presentation. We have much more being much more active in terms of revenue growth management.
Granular in terms of pricing decisions at a state level channel levels will have been lettering now in different price points. So we are we are aimed in the year 2002 in a much more competitive basis and we saw red that's in terms of our share performance in Q4, compared with Q3, where we see some stabilization of that and we continue.
These strengths will grow in 'twenty three as we approach 73 in the end.
The big players.
In the low I mean, you saw that we are.
We defended share much better than the competition and we have a.
Pricing environment, where you always have to remember that the pricing that has been taken by the industry even.
In Q3, Q4 was far less than Cpg's and genuine yeah. So we had a much more linear pricing activity in.
The second half of the year, then cpg's that give us some runway in terms of pricing in 2023, So I think that the overall market I suffered in terms of size. The consumers you know, we always speak about the price of oil, but it's not only the disposable income is also the Americans go less to the shops and even.
Our goal is to the shops with the product that they buy everyday or every second day, then you have a bit of reduction in terms of the total market, but I think that with the performance that we have in premium where we're growing and the.
Down trading there has been a very reasonable in that environment and the price velocity elasticity at point fall in the portfolio that we have I'm confident on the U S. For 2023, when it's going to be more geared towards the second half of the stock issues and for the recovery of the macros are moving forward.
One <unk>.
And always remember I think that the point that was made before is very important total nicotine.
In total nicotine, including E C grandson.
See that the performance is extremely good in that environment cost of access to E. Cigarettes is lower for consumers in the U S than in cigarettes.
So I'm confident.
Thank you that's very helpful and my follow up is is going to be on E cigarettes in the U S.
So, they're obviously very impressive performance on views on a topline basis and an increase in profitability.
My question is on the volume performance of U S data.
Looking at the numbers on the second half it looks like volume growth did decelerate a little bit say my question is how to think about the growth drivers <unk> in the U S meeting forward I mean should we expect it today.
King ETB pricing that grace or are there more investments you need snake reaccelerate the volume performance of <unk>.
He then asked to pay Gabriel category as a follow up. Thank you. Yeah. I think that's important to consider is first there has been a new category that has emerged in the U S which is the.
The disposable balloon synthetic nicotine, okay, and you saw that it grew very fast and especially in the non organized trained so that has taken some consumers in terms of the in terms of the year.
<unk> business that have moved to these kinds of categories, but in any rally teach an additional pool of consumers that have been greater than the FDA now wants to regulate in that environment and that will allow us to have even more oxygen soy in just in the transition, but it was very.
Interesting to see is that the vapor traditional vapor with pods as continue to grow it did not replace one.
Now the traditional is continuing to grow there will be more regulation in synthetic nicotine a.
Products. So then that will be greater in additional expansion.
Bob If you want for us for the next few years to come so I think that not only we have the best brand in the market. We have as I said before price index of 140 to the nearest competitor.
And we're continuing to grow the market has continued to grow at those smaller space and we have the debt additional bubble of oxygen that is coming our way with regulation related to the FDA. So I think that we're on for something very good in terms of in terms of.
E cigarettes in the U S and at the same time you showed the profitability.
The numbers speak for themselves if.
If I may say so.
Thank you very much.
You.
Next up we have raised the young from SPG Securities. Your line is open. Please go ahead.
Good morning could I check in charter hi, good morning.
So those are just two questions from my side I just want to quickly focus on the combustible market share.
You mentioned it was down 20 basis points. So it's a bit of a reversal of what we've seen in prior years and I know you mentioned that as the U S but in Europe .
You also state that the market share was lower than Amazon in Europe . So I was just curious about.
We are aware you've seen market share declines and what you can do to reverse that in the combustible side.
Yeah, I think that the first thing to consider is that the Ah <unk>.
1022 has been has been a year, where there were more tension in terms of pricing across the globe, let's put it. This way then also you had.
Macroeconomics that we're hunting the the.
The consumers in the second half of the year. So I think that what we start to see in the last quarter is a is that resilience transforming again into growth in terms of in terms of volume and there is more benign pricing environment I E. The pricing is coming through as I said earlier always remember you know a lot of.
S. Mcg CPG company took a lot of pricing in Q4 then.
It's different for US, we took a reasonable pricing because consumers buy everyday and we can continue to take that pricing. So we see the volume and the pricing in a good environment for 2023.
Just want to compliment above I think that we have what we signed 22 is a very resilient combustible business to start with.
We've referred to a one 2% FMC THB worldwide decline. If you. If you will see combustible alone is around 2% in the PUC emerging market was pretty much flattish we saw volume growth in places like Brazil, which we are very strong.
Well as Bangladesh, Malaysia, Vietnam, So a lot of markets.
Sorry.
In places.
Like Italy, Spain, and Europe . So we had a number of markets where without the macroeconomics headwinds inflation, we still saw.
Volume growth in terms of our performance in market share, we're not really concerned about that this is very specific some program specific markets for Brazil. For example, we had some pricing scheme issues, there and we prioritize some value and we have for our pricing.
In Turkey because of this macroeconomic situation, we saw a lot of increase illicit trade and we are more exposed of course, we are strong on the low end of the market. So we lost some share there and it has a big weight, so, but it's not something is very specifics for some countries, but I think the key messages that we we are seeing very resilient.
<unk> business across the world.
Excellent and then just a question for you about the the interest guidance of $1 9 billion pounds.
It looks a bit high to me.
So I just wanted to know I mean its sort.
Workshops special my calculations like an average coupon rate of about 5% now is it an issue of that you probably expect you'll free cash flow to be a bit lower this year.
Because I just want to tie the two ends together yeah. Okay now its not that is while we had a.
Our starting point would be a $1 6 billion in terms of interest cost in 2022, and then what we are seeing and Thats why I referred to 18% in terms of our.
The exposure for 2023, we have some refinance to do it. So we used to refinance at four four and a half and this is higher than that and the.
And I don't think that is as high as we saw in October because the market has come down a bit more to this.
But can be much higher than the average cost of capital and we also have needs in terms of working capital CP markets bilateral and those rates were very very minimal backing early stage of 2022 and now went up substantially. So that's why you see this.
When you see the gap between where it was not where it is now plus the commitments that we have in terms of our other finance costs and.
In terms of maturities that adds up to something closer to 18% of our our needs.
To this number off of $1 nine and there is important you flagged that because we will be seeing this annualized impact in 2023, it's always one off that we've seen 23, and then we create a new base moving forward and in terms of our cash conversion you know what I mean, you saw that we had a 100%.
In average in the last three years and we are we have a number of 95%.
And so I mean, we are very dedicated to that and after that.
Free cash after dividends and what you see is that last year. It was $2 1 billion last year in 2021 2020 towards $2 7 billion and we continue to make a lot of efforts also you saw that we had the program.
Quanta OMA that was $1 billion originally three years ago, we delivered one nine and we just said that we're going to do another 1 billion in the in the few years to come. So I think that you know, it's we're getting to a position where I find insurance make a lot of sense, where our business is making a lot of sense, where we are accelerating our transformation.
Where on the midterm to long term. So it's about now at the moment you know the balance sheet. The corridor two to three and we will review during the year. So I'm very confident in the quality of the business that we have we take some decisions because we have the possibility to take decisions and we have no choice and we exercise that choice.
Because it's for the good of the growth of the company and the sustainability of moving forward.
Okay. Thank you very much. Thank you. Thank you.
Thanks, Scott we have Jeremy <unk> from Jpmorgan. Your line is open. Please go ahead.
Hi.
Yes, hi, guys.
First to come back to the U S.
Impact do you expect from the California flavor Bend.
Across your portfolio and maybe if you could talk a bit about.
Maybe some very early signs if you have data from from there. So far yeah. Good question I mean Kelly.
California represents around one 5% of the total market in the U S and it's a.
A market that we are looking at of course are very very carefully.
It is very difficult to read the early signs in the California market because you had a lot of stock movements in December as you know.
The band came in a 21st of December there were still a lot of stock that was available in the shops in January so youll have to wait.
April and May in order to read all of this.
If you look at the size of the market and the way the market is sparing at the moment, it's robust, but you have to offset all these movements in terms of stocks. Our brands are doing well, we've launched U S. Skus and E. Cigarettes is doing very well also so we'll have to navigate all this and it would be too early or too confident from my side.
To say that the job is done is growing too.
In the next the next few months and I'm I'm optimistic in terms of the solidity of the business remember in all.
All the different geographies, where are you at that kind of things that happened in Canada in Europe in Turkey or in other places the retention rate was around 95% and more and then on top of that you add related to.
New categories are another increase in terms of in terms of retention rate. So the jury's out but the start is very good but very mixed in terms of numbers you would not be able to two.
To find new ducklings in there because it's all stock movements trade availability and trade there is.
The key accounts, they're organized trade that has been a more a more speedy in terms of stopping these products generally trade is very important in California and that is less measure accurately so give it a bit of time, but I think that is going to be.
That is going to be a good outcome for us.
Got it and then maybe.
Switching gears over to THP.
It was another good year, but I noticed in the second half of the year, especially the price mix was weaker especially in Asia.
Can you talk maybe a bit about what's what's driving that especially given that you had the launch of <unk> two and good device sales.
I mean, I would've thought that you would have had a mixed boost from from that yes.
As you see I mean, we have now close to $3 billion in terms of a new category of venues.
To a point that represents 50% of the total company.
And you saw that in the different categories of vapor grew very very fast and the.
The percentage of growth of THB has slowed down a little bit and there is more price competition within the different segments.
You have a different competitors that have come in at different price points different product offerings. So I think that there is a bit more internal competition in the segment I must say that we're very happy with.
With our performance and we continue to plow forward, we're only 50% of the markets that are carrying THB as we speak today. So we still have a lot of geo expansion to do and we're improving our pricing.
As we go along a price index as we go as we go along so I think that we have a very good start with low X two in Japan. It has reached a record share in December .
And we grew during during the year, so theres more intense competition, but we have a lot of space to grow in and when you look at for instance, Europe that is the nearly 50% of the total market I mean, we're doing extremely well and growing fast overall in new categories. As we said in the presentation in urban markets, where we are already at 30%.
<unk> of our revenue that is down.
For the total company. So we are we are strong and we have an innovation pipeline that is strong not only in 2023, but also in 2024. So we have more launches that are coming and we're doing the rollout of <unk> to that is a very well accepted by the consumers. It's smaller is lighter delivers more.
And we've done a lot of improvement also in terms of the consumer loans. So I'm I'm I'm confident just to complement that in Japan and is not different in Europe . Every single product, we sell in THP has higher margins than our combustible products. So even the newly launched their look strike that we did to complement our range in.
The market has higher margins than the combustible and so photos is is.
<unk> is a financial opportunity to strength our business in all of those locations. We are very pleased with the to be honest through the progress that we have made in all categories throughout <unk> to ensure margin wise, we have already in THP on the consumables side.
Margin that is higher than combustible the same is happening more than auto and in vapor.
Richard worldwide, a 50% gross margin compared with the cigarettes, which is around the 68% and in the U S alone is even higher than that so.
<unk> is a big improvement that's what is really driving the reduction in loss as well and we are really heading towards a very sustainable business, where we're being different between your selling cigarettes or selling one of these products.
We took.
The view three years ago to do multi category and Thats starting to pay off because you have more interaction between the different categories that you were speaking about the fact that there is now a relations between between THB users in modern oral for instance, or in other markets THB with.
Vapor just remember that the number of consumers in vapor is close to the.
Close to the double of the ones in THP and.
This is a this is interesting to see that increase the interaction between the categories, so being truly multi category as well now.
And having done that for three years gives us a head start in terms of being able to serve better the consumers and we have now a profitability that is coming through in vapor. So all these put together gives us a very strong position, where again I insist. We said we will invest in 'twenty three and in 'twenty.
Paul and we will prioritize that because as we so we can grow.
Volume and our.
Revenue faster and reduce our losses by 600 million Guy. He is not a small thing you know when we send them a few years ago that we will be profitable in 2025 people said haha.
Now, we're saying we're going to be profitable in 2020 fall and we're going to continue to invest more because we have the brands. We have the capabilities. We have reorganized the company three times in a row not redoing everything every time no. It's blocks of transformation that we did Q.
Quantum one quantum two <unk> three to be able to do what with what we're doing is a transformation today in order to accelerate the delivery. So we.
We were on big gains I mean, we really believe that the strategy not only is paying off but he's putting really the company for one in terms of delivery of our transformation and accelerating the delivery of course at the same time, you have a net debt to EBITDA to take care of that your balance sheet and everything.
So we continue to invest harder and continuing to plow through I'm on the mid to long term value and myself, we see you know these.
These numbers all the time and of course, we want to do.
To do the best for the business and you will see us for some time.
Uh huh.
Okay, great. Thank you.
Okay.
James from Barclays. Your line is open. Thanks go ahead.
Good morning. Thank you I have three questions. So first for you on the restructuring charge and the comment you said, so last year had restructuring of $790 million and over the last 12 years at this 400 million on average and now youre, saying going forward. It will be zero. So if I had assumed a 400.
The restructuring charge for next year, the adjusted EPS growth with high single digit is that the right way to think about.
Well look good one yeah first of all just some color on this 772 are referring to we as we highlight in the in the announcements. We we think that we have a factory closure.
<unk> been very costly locations knowing that that's there we have a pool out of all we are closing operations. Some markets as we saw in the place like Egypt, <unk> and the Com also with the some tax liabilities that needs to be settled. So this is in there as well and we have like Jack said with all the.
The archetype sub markets.
And the closure of factories, we have almost 2000 employees, leaving in the next coming.
Yields in the end and most of it in 'twenty three so it's also provide there. So what we are referring you're absolutely right in the sense that we our we believe that with the conclusion of bundle now we are not incurring in there in the restructuring.
Adjusted the items anymore. This would be a positive for the cash to be honest because when.
When you see adjusted numbers without taking these out but on the cash is still cash outflow. Some of that to know there are some other elements that are noncash items, but this will be helping us more I would say 24, because a lot of this provision will result in some cash outflow happen in 'twenty three but from point before.
While we expect that major benefits coming from the cash side.
Sure.
My second question is on the MVP breakeven guidance for the slide 24, and a lot of people are concerned about U S. E cigarette business because people are sort of in GP in the U S. E cigarettes, where FDA has given to offer you lose menthol very incentive deal and they're also commented that we use the second ranked and slide 22.
Prevalence of it so most likely we use auto menthol will also get an M deal and maybe a tobacco product also gets an M deal. So.
With all this regulatory unsold entity household 10 out of you.
And if you breakeven in FY 'twenty four.
Sure.
To be blunt we were.
Not saying that we're accelerating the profitability of <unk> and <unk> two.
Through 2024, and we would not have looked at all these things, but it's a very valid question I think what you have to see is the consumers are increasingly coming to our.
Portfolio into our brands and we have now a $22 5 million consumers that are there, which only represents you know.
A small portion of the $18 million in our existing at the moment. So we have a lot of space to grow and to grow against competitors. The second thing Asia <unk>.
<unk> is of course doing all the regulatory work, but it has slowed down dramatically because they are a lot of things to do which I understand so I think that the speed at which a regulation and new regulation will come in and regular mentation related to all this is going to be slow and I think.
We have adapted very well in the past all the regulators and we know that we have very strong brands. So we have space to grow and we know that we have very strong brands. So I'm I'm confident in our in the way forward. These things are multi years things with a lot of litigation regulation discussions.
And all this will all of this will take time, we have these kind of debenture is now five years and it's only starting to move slowly and there is not even a definitive view in terms of what is going to happen. So you know.
I will take the time, they will make sure that we do the right thing for the business and we reiterate I reiterate the fact that whether it be profitable in new categories by 2024, I could even be profitable sooner, but I want to invest the money in order to make sure that we grow the base of the business and that's what we're doing in the right way.
Already last year, we reduced the losses by 100 million this year and so another $600 million.
It's all about continuing to grow we are 40.
Sorry, we have 80 million consumers that are out there already I said that is going to grow to 130 million consumers.
With a lot of available income were $22 five at the moment I have seen a lot of space to grow so yes.
It's always a complex market if it was not a complex market, we would not be so you know.
So much benefiting because we have widened the organization to be not only much better in terms of combustible and we've done a great job income was stable in the last three years, we have appointed now a board member in terms of combustible in order to make sure that we extract the value and we are going even to take out around 30 markets yeah.
Which were the first ones to those shares.
And so reducing the number of our cigarette users and at the same time, we're going to.
I have another 1 billion a reduction of cost in terms of our structure. We are reorganizing our structure in a way that is geared towards category management, and we're making sure that our final insurance are sound in order to make sure that we continue to invest.
We're making money and we're investing that money. So that's what we do there.
The only add to what I would say to your question is that the FDA has embraced the risk continuum.
So you the belief that all the decisions they will take it.
Actually align with that and not incentivize consumers, who go back to cigarettes.
I think it is a very important point of the fact that they give PMT as to E. Cigarette. It means that instead of less risky product recognized yeah. So it stops a day or so that gives you a lot of traction also in the rest of the world.
Okay and my last question is on.
You will have a new competitor next year entering the market in the U S with the.
Heated tobacco product.
You have filed for the glow hype up the MTA in December 'twenty, one if I remember correctly. So when can we expect that PMT to comment would you launch soon after in the U S market.
First of all you have to take it piece by piece first.
Combustible business is extremely important in the U S. Yeah, even if you don't like cigarettes, if pays your bills everyday that gives you the resources to be able to invest that's number one. The second thing is there is already 20% of the market that is in new categories, mostly.
E cigarettes, yeah, that's already there and that is getting very very interesting in terms of our margins per thousand.
The second thing is there is a lot of.
Things that have been said in terms of in terms of THB in the U S. It has been on the market for two years. It has not worked.
And the high tier levels and everything but at the end of the day. What is important is what position you have in new categories in the U S and we have a presence in the three categories. We have <unk> that are in progress and this is going to be more in two years from now or at least so you'll have to take your time and look at what.
Is there what is growing and then that's for the mid to long term and I'm confident that.
When you see what has happened in Europe between THP and E. Cigarettes. There has always been a very strong space for E cigarettes.
In high power markets in Japan. It is different because there is very low tar and Nick.
Consumers that are already there so the satisfaction gap SAR law.
And you have always in the process of PMT as now you have to have the science that goes with it. So you don't have the latest product that comes to the U S. You have the products that where they have three or four years ago, where you have the science that you have to take the time for making the science and then you can come with the to the market with a product that has been there.
Theyre long time ago in other markets. So that show an iteration process, where new categories. I'm very pleased to say is growing in the U S and where there will be more opportunities in the three to five years to come.
Okay and as you see in our results in the U S. Now in the new categories. The E. Cigarette is having a major part in terms of our profitability and our financial numbers, which we are very pleased with.
Okay. Okay.
Sure. Thank you so much thank you very much.
It appears that there are no further question at this time I would like to teleconference back to Mr. <unk> for closing remarks.
So thank you very much for joining us today.
I'm very proud of our performance in 2022, our results show that we are transforming the business at speed and delivering strong results in a challenging macro environment.
We expect 2023 to be a stronger year with organic revenue of between three and five led by new categories and stronger combustibles.
While higher interest costs, and our exit from Russia and below us. It means that we're are gaining mid single figure EPS for this year, we're also making active choices.
As a new category growth model continues to accelerate and deliver.
This means that we will invest more and achieved new category profitability in 2020 for one year early we have made choices and this is the right thing for us to do.
I'm excited that building on the strong progress that we've made today will continue to transform driven by our brands our capabilities and determination to drive long term value creation for all our stakeholders. So thank you very much for listening and have a very good day.
Yeah.
Okay.
Yes.