Half Year 2023 British American Tobacco PLC Earnings Call
<unk> results presentation.
With me. This morning is Jive at Iqbal entering finance director.
Once we have been through our presentation, Victoria Buxton, Our group head of Investor Relations will join us on stage to enable us to take your questions.
Both over the phone and through the webcast facility.
I'll begin with our financial highlights for the half year. The progress we are making our transformation and the and outline my key areas of focus as chief executive.
[noise] Javid will then take you through our financial performance in more detail.
With that I would take it that you have all seen the disclaimers on slide two.
Entry.
I'm pleased with how <unk> performance in the first half of this year.
Delivering growing revenue profit from operations and earnings per share.
Our reported results reflect the impact of one off items in the prior periods include the impairment of our business in Russia, and Belarus. The U S. D O J O fab provision restructuring charge relating to quantum and positive FX tailwind.
We will now focus on constant currency adjusted results unless otherwise stated.
One of the important strengths of our company is the breadth and the scale of our global footprint.
Enabling us to consistently deliver balanced and sustainable results.
In the first half this is demonstrated by our strong performance in the Ami and atmosphere offsetting the U S.
Overall, we have delivered an increase in revenue up two 6%.
Brought her operations up three 6% and EPS up five 3%.
I believe this is a resilient performance in today's environment and we are on track for our full year guidance.
I'm, particularly pleased with our performance in new categories.
With revenue up nearly 27% driven by good volume growth and pricing.
Consumer numbers up over 1.5 million year to date.
And encouragingly, we are now very close to breakeven.
As a result, we continue to transform rapidly with noncombustible sell red reaching over 30% of our revenue in 23 markets.
This represents nearly one third of this 71 markets, where we are currently present in new categories.
And our transformation is even more adversity in many markets.
No combustibles as a percentage of revenue is already over 30% in France and more than 50% in the U K led by views.
Over 50% in Japan, Poland, and Kazakhstan led by Glu.
And over 70% of our revenue in Sweden is now in oral tobacco driven by our success with vivo.
Notably, Sweden is on track to become the first to smoke free market in the EU with the smoking incidents approaching 5%.
With a longstanding history of oral tobacco consumption in the fast growing more than auto category, Sweden is a powerful example of the positive impact of tobacco harm reduction inaction.
As you know I have been in my new role for 10 weeks now.
During this time I have been focused on examining how we can sharpen our execution.
As a first step last month, I announced that the refresh of the management Board.
I would like to highlight two important change Johan.
<unk> new role as Chief operating officer focus on delivering growth with accountability for driving business performance operational excellence and best in class execution.
In Kingsley <unk>, new role as chief of strategy and growth officer focuses on enabling growth with accountability for strategic development and sharper consumer focus through an integrated approach to brands.
This new structure supports my commitment to build an agile modern and progressive B E T.
With a collaborative and inclusive culture, enabling some with venues performance and transformation.
As part of this we must operate to the highest ethical standards and these most remain a priority for both our employees and our business partners.
So let me share some of what I have been doing in my first 10 weeks.
One of my immediate priorities has been to visit a number of our key markets with my management team.
I have to tell you that those visits has been humbling and reassuring in equal measure.
The it is a company with a great heritage.
Our two biggest assets have always being our people and our brands.
I have spent time with our people in these markets and I have taken the time to listen.
What is clear to me is that through the writer neighbors. Our organization is ready our people are excited about the transformation journey ahead.
With the opportunity to drive real change both for BHP and society more broadly.
I'm clear that <unk> has a unique set of strengths and capabilities already in place.
However, we can and must do better in order to evolve and accelerate our transformation.
While my management team and I agreed that our multi category strategy is right.
We are also fully aligned on the areas that need greater focus sop.
Supported by a more collaborative and inclusive culture.
Firstly, recognizing our diverse global footprint, we must set out their organizational focus and priorities in a clear way to ensure we execute flawlessly across all our markets.
Sharpen the execution is central to our market archetype model.
Enabling battery social location around fewer bigger priorities.
That can be measured and for which the markets are accountable.
I understand this may seem a little theoretical.
So let me bring the model to life with two markets.
Each representing a different archetype.
In Bangladesh, we have actively focus on invest on continuing to grow value share revenue and profitability in combustibles, while we await clarity on new category regulation.
And in Poland, where over 50% of our revenue is now in new categories. We continue to grow share driving strong new category revenue growth and improve its contribution along sized value thrown our combustibles business.
Every smoker, we convert Chihuahua, new category brands in Poland is margin accretive to our business.
This benefit is further amplified as our share of the market and your categories exceeds that of combustibles.
These two markets are clear examples of where the model is working by making better resource allocation decisions and delivering strong results.
We will replicate this as a cushion of insights and ways of working across our footprint.
Secondly, we have further improved our new category contribution reducing losses by 200 million pounds in the first half.
Having invested significantly in debates new categories are meaningfully contributing to group results.
As we benefit from our increased scale.
We are now profitable with new categories in 20 countries.
More than doubling the number from the first half of last year.
It's important to note that we do not expect our pathway to profitability in your categories to be linear.
We are making active choice to continue to invest in our transformation with levels of investment, reflecting our hatred innovation cadence.
Further geographic expansion and market openings.
With our strong progress to date I am confident that we will achieve new category profitability in 2024.
Views as a key driver of our performance with our progress driven by our continued focus on three levers of profitability.
Revenue growth management Cogs reduction in marketing spend effectiveness.
April margins have historically been much lower than combustible CHP in modern oral.
But we have made great progress over recent years to build a commercially sustainable model with views.
Our vapor gross margins fast approaching combustibles at a group level.
And the more established markets, we have read they've levering me a meaningful category contribution.
I'm proud of the strong process progress, we are making and I'm confident that our transformation will deliver long term boot category growth and returns.
My third area of focus is theyre, all important U S combustibles market.
In the U S. We are sharpening our execution with new leadership and he hated focus and by activating commercial plans through our broad digitally enabled revenue growth management capabilities.
I G. M is a dynamic approach to revenue optimization powered by big data and analytics, enabling a granular view of elasticity curves.
It brings together our consumer occasion, driven portfolio pack price architecture joint customer business plenty optimize pricing highly targets trade activation and tailored retailer assortment strategies.
Ensuring that our portfolio is well positioned to face competitive challenge and deliver profitable growth through all economic cycles.
And our commercial plans I'll read starting to deliver early signs of U S combustible volume share recovery.
Our volume share is up 60 basis points since January driven by a 100 basis points increase in the important premium segment.
Wireless our progress is encouraging we will continue to implement our plans carefully and thoughtfully.
As a result, it will take time for these to deliver consistent combustibles value growth and returns.
Turning to my fourth area of focus THP.
Where I'm determined to significantly strengthen our consumer offering.
To enable this we are expanding our capabilities through increasing our investment in people and building new innovation hubs, including a global device development Center in China should drive in a hasty innovation pipeline.
As a top priority, we have a red reengineering, our internal innovation processes.
In addition, we are developing our Giro innovation ecosystem through external partnerships.
And in doing so increasing the pace of our transformation to drive better returns.
Global Hyperx Joya, which are currently rolling out is the first step in an exciting accelerated medium term heated tobacco pipeline.
There's a history of innovation pipeline processes enabled by our for the model.
We are well positioned to leverage across category insights and fore sight, meaning we sharply define and prioritize consumer opportunities.
We leveraged this consumer understanding through our focused discovery phase two validated the consumer proposition.
We then developed the commercial offering at an accelerated pace through our internal and external capabilities network before finally, leveraging our global scale and the capabilities to fully deploy.
This dynamic model is underpinned by our revamped product lifecycle capability and portfolio management discipline.
Which enables us to adopt adapt to the economic conditions and competitive environment.
Overall, this means better innovations and faster development generating higher returns on investment.
My next area of focus is to lead responsible new category development.
I'm determined to manage external risks, so artfully and transparently by increasing our engagement with regulators policymakers and relevant stakeholders as well as leverage our science.
Given these with do we need to have a louder voice.
We have now created a new management board role to drive more proactive corporate and regulatory affairs.
Our activities will follow our science based approach to regulation should drive a level playing field in our markets.
Regulation is a significant barrier to entry across new categories.
While navigating regulations is not neutral we must now focus on developing a more front footed external approach.
Led by our science.
Finally, my six focus area is Sri Hayes, our financial flexibility.
We need to be more agile in the near term to make the right active choice that will deliver long term sustainable value.
I am clear that we will not compromise our commitment to accelerating investment in our transformation.
And as I have set out today I'm also clear on my near term priorities.
To enable a more agile flexible.
Where we will leverage our global portfolio to continue to grow profits and cash.
Deliver 1 billion pounds of efficiencies over the next three years to further fund our transformation.
And reduce debt to strength our balance sheet.
In addition, we will seek and evaluate opportunities to optimize capital location.
We have significantly increased our free cash flow generation with four consecutive years of at least 100% operating cash conversion.
This has enabled us to return a total of 21 billion pounds to shareholders within the spirit.
While also making good progress on the leverage.
We remain committed to continue our 25 year track record of consistent dividend growth.
Rewarding our shareholders through all economic cycles.
And over the next five years, we are on track to generate around 40 billion pounds of free cash flow before dividends.
As we continue to execute on our transformation, our medium term financial model for growth will evolve and.
And we will have more flexibility to allocate our capital to drive returns and reward shareholders by sustainably returning cash through dividends and share buybacks.
And with that I will hand over to a job it to take you through the detail of our results.
Thank you to do and good morning, everyone. When I started my journey would be 80 2070 years ago as a management trainee in finance in Pakistan I never thought I would get the opportunity to present <unk> financial.
Sales to all of you as interim finance director Firstly, it is a very humbling and a proud moment for me, but more importantly, it is a great Testament to <unk> commitment to develop and grow a very diverse global talent pool when.
When I joined beauty, what fascinated me the most was our international footprint and truly multi cultural working environment, where everyone gets an equal opportunity to learn develop and grow in their careers.
As a business leader I am always focused on creating a culture of respect and empowerment oriented deals words inclusive and collaborator and this has helped me in having a successful track record of developing high performing teams and delivering strong and sustainable commercial results.
In my role as interim finance director I'll be working with the deal and members of the management Board to continue to drive the transformation journey of beauty.
Some of the areas, which will be in my primary focus at resource allocation using tools like marketing spend effectiveness and IGN and leveraging our digital hub capabilities and global business services footprint, we will continue to invest in technology and move further on our digital transformation, making be it.
<unk>, a digitally connected organization and of course capital allocation and a sharper focus on cash generation will always be a high priority.
Now moving to first half results.
Our first half results demonstrate continued delivery and the resilience of our business. We delivered organic revenue growth of two 8% with new category revenue up nearly 27% and combustible price mix of 6%.
<unk> from operations was up three 6% without operating margin up 90 basis point at current FX and 40 basis point at constant FX driven by the investment in new category contribution and our continuous focus on efficiencies there.
Diluted EPS grew by 5.3% or eight 5% on current currency basis.
We continue to drive strong new category revenue growth and are well on track to deliver on our 5 billion revenue target by 2025. This was enabled by progressively building our consumer base together with capturing consumption moment and growing fully use it.
Noncombustible now represents 16, 6% of group revenue 1.8 percentage points higher than in 2022.
I will now share more details on our key category drivers full market share across our key markets are available in the appendix.
In vapour, we extended our value share leadership with views achieving 38, 3% in the key vapor markets up two four percentage points in the U S. The largest global vapor market view strengthened its number one position view share grew five 7% eight <unk>.
<unk> to reach 47% in tracked channels and we remain confident in our PMT a submission for views all Tau.
We welcome the recent FDA actions with regards to illicit syntactic nicotine disposables in the U S, which we estimate to be more than 50% of the total vapour market and we continue to engage with the stakeholders to enforce the removal of unauthorized products.
In Canada, France, the UK and Germany, we maintained value share leadership in Chlor systems with the modern disposable segment continuing to accelerate total category growth.
This drove strong volume and revenue growth in Ami.
Outside the U S. We continue to abroad. The modern disposable segment in a responsible way with ongoing commitment to Andre to excess prevention takeback schemes and marketing practices.
We are making good progress on driving profitability and vapor with a positive contribution in three of the five key markets driven by increased scale and marketing spend efficiencies.
In tobacco heating Glo reported revenues was up 10% or 12% on organic basis.
You'd category volume share momentum in key markets, including Poland, and the Czech Republic was offset by highly competitive markets in Japan and Italy.
As a result glass THP category volume share was down 110 basis points to 18, 2%, while our share of the combined combustible and DSP category continued to grow.
As <unk> highlighted we have much more to do on strengthen our THP offering, but I'm pleased to say that our newest innovation blue hyper X to air is delivering positive early results.
Our modern oral portfolio continued to grow with Vela volume up 33% and revenue up 42% driven by geographic expansion and innovation, we continue to grow our volume share of total orders, while our volume share by modern oral category was mainly impact.
It by our continued prioritization of vapor in the U S. As we await the outcome of our PMT a submission for a new wheel product.
Outside the U S. We maintained leadership of the modern oral category and I'm delighted to share that Wheeler is now the largest oral nicotine pouch brown in Sweden.
We continue to see a significant opportunity for modern oral in emerging markets.
With strong growth in Pakistan, and a national rollout ahead of plan in Kenya.
Now turning to combustibles, our volume declined by 5.8%, mainly due to significant excise increases in Pakistan lower U S industry volume and shared loss due to our premium positioning so.
That price mix remained strong up 6% with price offset mainly by geographic mix together. This resulted in 0.2% increase in revenue.
Group volume share was up 10 basis points driven by gains in Ami with stable share in apnea, partially offset by the U S group value share was down 40 basis points as the impact of our commercial plant in the U S and losses in apnea more than offset grow.
And Amy.
We are performing very well in combustibles outside the U S with the reinvigorated portfolio refreshed brands and sharpen execution. This demonstrates the benefit of our global footprint and our ability to deliver in the challenging environment.
Turning to regions in the Ami total revenue was up 9% driven by higher revenue from combustible with a resilient volume performance and a favorable pricing environment offsetting some geographic mix headwinds.
Alongside continued growth across each new category with revenues up nearly 37%.
Adjusted profit from operations was up nearly 8% driven by improved financial performance in key markets, including Germany, Poland, Brazil, and Mexico in apnea total revenue was up nearly 10% driven by a robust combustible performance led by pricing and combustible.
Volume growth in Bangladesh alongside continued growth across each new category with revenue up 15%.
Adjusted profit from operations and apnea was up 9% driven by strong performances in Australia said Lanka and a continued recovery in global travel retail.
In the U S combustible industry volume was down eight 4% in the first half.
Beyond market secular decline industry volume was pressured by a combination of macroeconomic headwinds driving reduced average daily consumption and down trading together with increased fully use it importantly, elasticities remain stable at around 0.4.
On top of the industry contributors our volume performance was impacted by lower volume share as a result of our board premium skilled portfolio.
Lapping the benefits of S&P related inventory facing in the comparator and the California flavor ban.
As a result of our combustible volume decline 12, 4% in the U S.
As <unk> highlighted our commercial plans are starting to deliver at least signs of sequential volume share recovery.
This is supported by the industry's premier segment starting to stabilize.
Without share of the premium segment growing to its highest point in three years, driven by strengthening performance from Newport and natural American Spirit. In addition, Lucky strike continues to perform well in the value segment and now has more than 3% share of the total market in vapor.
Views continues to expand its leadership position driving revenue up 23%. Despite the challenging environment. We have continued to expand our operating margin by 280 basis point driven by further improving views profitability and continued efficiency savings.
In California, the long term impact of the flavor ban continues to evolve mental products are reportedly still being sold illicitly due to lack of enforcement and we have also seen elevated flavored volume and surrounding states. Despite the industry's best effort to avoid this.
Due to our mental skew 45% of our portfolio has to be delisted at the end of last year in California, our combustible volumes declined around 25% in each one as many consumers moved to our non flavored variants and our new FDA authorized.
Skus are performing well.
Adjusting for a 13% pre band rate of decline our underlying retention rate in California. As a result of the flavor ban has been above 85%.
Views has performed very strongly in California, with 100% retention, despite mental representing 60% of volume prior to the bad.
Driven by the strength of our brand equity views as retained all of its pre ban volume as consumers switched to our tobacco parts.
As a result views gained 8.7 percentage point value share in tracked channels versus pre ban.
Overall nicotine consumption was broadly stable and that's one due to accelerated growth of the illicit modern disposable segment as consumers continue to excess elicit flavored nicotine product. We continue to believe there are more effective ways to achieve tobacco harm reduction than restricting access.
Flavors that can play an important role in encouraging others to switch to reduced risk products at the same time, we will continue to advocate for and support enforcement activities against illicit products to help ensure that available products adhere to HEICO.
Human safety standards and sport a level competitive playing field.
Returning to group performance operating margin expanded strongly up 90 basis points at current rates and 40 basis point at constant rate.
Absorbed headwinds of 2% from both increasing inflationary pressures and transactional FX on profit. This was supported by our strong progress improving new category profitability and additional efficiency savings.
Turning now to EPS, we delivered constant currency adjusted diluted EPS growth of five 3%. This reflects a resilient operating performance and the benefit of continued strong ITC delivery, which more than offset increased net finance.
Cost and tax.
Our cash flow conversion of 72% in the first half puts us well on track for another year of cash conversion in excess of 90%.
Due to the timing of leaf purchases and MSA payments, our cash flow is always second half weighted the.
We expected full year gross capex of 550 million below adjusted depreciation and amortization.
And we continue to make good progress on deleverage.
As guided earlier this year, our average cost of debt is four 3%, which is well below the current market rates and we continue to expect to see the impact of higher rates in our net finance costs in 'twenty, two or the three <unk>.
And moving forward as a result, we expect full year net finance cost to be around $1 9 billion subject to board ethics at interest rates volatility.
Over the next five years. This business is on track to generate 40 billion pounds of free cash flow before dividends.
With cash conversion in excess of 90% and leverage moving towards in the middle of our two to three times net debt to EBITDA corridor. This will provide greater business resilience, while continuing to support future financial agility.
The study will outline we remain fully committed to further invest to better execute and deliver our strategy. While also rewarding shareholders throughout we remain fully committed to our 65% dividend payout ratio over the long term and growth in Sterling terms once.
Our leverage target is reached we will review how to sustainability ton gas to shareholders with that I'll hand over back to to do thank you.
Thanks, good job at looking forward, we are on track to deliver our full year 'twenty to 'twenty three guidance driven by strong new category growth a further reduction in your category losses are resilient combustible performance and continued efficiency savings and strong cash generation, we expect to deliver.
Organic revenue growth of three 5%, excluding Russia, Belarus, and digested diluted mid single figure EPS growth, reflecting an incremental new category investment continued investment in U S. Combustibles higher net finance costs of transactional FX headwind of around 2%.
And these were all depend on the timing of the transfer of our business in Russia and Belarus.
Extrapolating current spot rates, we expect currency translation should be a 2% headwind on full year adjusted diluted EPS growth.
So in summary, I'm pleased with our resilient to deliver it in the first half and the renewed sense of energy in the business and I'm confident we are on track for our full year guidance I'm, particularly proud of our ability to perform and transform simultaneously while consistently rewarding our shareholders through growing cash.
Cash returns I'm clear that there is much more to do and together with my management team. We are energized to deliver on our focus areas outlined today in order to accelerate our transformation.
Finally, I want to take this opportunity to thank everyone.
For their continuous strong support and for delivering these results I'm excited about the opportunities ahead, and I'm confident that we will deliver long term multi stakeholder value.
We will now be joined on stage by Victoria for the question and answer session.
Yes.
Thank each day.
And good morning, everybody.
He joined US via the webcast you can type your question directly into the online question box or if he is joined by the cool Decompress Star one on your telephone keypad.
While we wait for questions from the say 90 day I can see that we've already got one.
And feed.
And.
Given your 30 year career at the a T and four years of finance, Jack Sir what will be different now Youll chief executive.
Well first of all I would like to start saying that I'm very honored to be dry being appointed chief executive and the as you call. It could see and I have outlined that in my presentation. There is a lot of a single set of strange thing in D T already.
And.
And there have been always clear since I took over as CEO that we have the right strategy. So we cannot ignore the fact that they rolled out there has changed substantially the landscape. We operate is much more complex the microeconomics of much more challenging and this will require a.
<unk> execution. So one on my focus areas clear focus area is how we would take a much more measures in terms of doing with SASSA location across geographies across the categories. That's why the market archetype is a very powerful example, I addressed some of my key.
Roku is immediate actions, which relates to try to increase our resilience in our U S. Combustible business from the economic cycle point of view, but our own the regulatory cycle view as well so.
Ovations, we are start to change the way we innovate in the group, we want to improve that substantially and then address the gaps that we have around THB so and.
For sure return of investment is will be a major focus photos and moving forward when we make those calls in terms of execution.
So the second leg is related to two I would like to tour. The groups should be much more outward looking we need to have a more sustainable engaging our agenda with the stakeholders policyholders regulators policymakers and not a true.
Making sure that we have an informative debate about.
The landscape, where we operate.
We referred to that in the presentation, we have two to create a level playing field and there is a.
A lot of desire for many governments.
Two to improve in some elements of the new categories that we agree with and it's a question of us choose to have their right. The discussion I would like to sharpen up the narrative or B, a T and be much more outspoken out there and being the food through our in the in the front foot means that I have created a new role in the management Board.
And corporate affairs exactly that Youll give me the backing to which you'll be able to do that into two.
Articulate the whole organization towards that goal and thirdly is about the culture is a I genuinely have progressed in the group.
With that you know trying to promote them much more cooperative or inclusive culture, and that's what I want to see everywhere in beauty I really believe that this can be very powerful and the and I haven't read the early signs that I think that the vast majority of the BHP employees agree with me so that would be my to the area of focus.
Thank you today, so we'll nowadays St line sale I'll pass back over to the operator.
Thank you Richard Felton from Culp from Goldman Sachs. Please go ahead.
Thanks, Good morning, everyone.
My first question is going to be only a U S combustible market and selected there you've reached preference early signs of improvement and for your business that it still remains under quite a lot of pressure and so my question is you know you've changed leadership of that business about a month ago and what do you think Dave.
It's going to be doing differently to improve performance going forward for U S. Combustible business and then my second question and.
So in the U S, but on your data business, where volume declined by six 5% in the first half and I'm sure that as a result.
You and the team are not satisfied by and how do you think about restoring volume Grace for U S data and I guess within that how do you think about the balance between margin and volume growth for that part of the business specifically thank you okay.
Thank you Richard Luca.
I'm really excited to have David come in as a as a new.
Our new CEO of our railroads.
David came with a massive experience on on the combustible side. He was the head of our of marketing looking after their GDP is the global drive brands that we have in the group for many years four five years before he move on and there is driving today one of the key areas.
Within Europe and under his leadership he was able to put those in a very leading position in vapour in the key markets in Europe , and although modern oral so David that brings are a mix of experience.
Which is quite unique and not just in combustible what also in new categories and he's a style of management is pretty much talks and the way I see the company moving forward. So I'm very excited to have him there and I think that you will do it together with the railroads deemed a fantastic job.
As you point out is.
The situation in the U S is is difficult because of the and we had the the secular decline and the elasticity normal declines that was exacerbated by the macros democracy combination basically of the incentives that came in the federal and state levels that was withdraw.
After post Covid and at the same time with massive inflationary pressures that put a lot of pressure in terms of consumer purchase power and an earth being is skewed in the premium segment, which suffered most and these are these for sure. There was some other elements to explain our our volume declined like a sub.
S&P rollout, but in essence, we were exposed that's true to a segment that was struggling given the circumstance that we were facing the U S. The good news is that we are seeing for the first time early signs of stabilization of the premium segment. So at the industry level, which is a very positive for us and.
And also the action of the commercial plans that we have put in place is the rates that you're showing up the improvement that we have seen is quite encouraging.
Encouraging in there from January to now in terms of all of our market share improvement in Newport in particular, but also natural American spirit to the premium segment as a whole and the group as a whole so.
For sure that to those economic cycles come and go we what we want to ensures that when this one finish we came out of this much stronger when we came in and that's exactly why we are working with all these commercial plans.
Across our brands and the and I think that David there will be a greater additive for what we need to put them in place in the U S. So that's the about David in the U S or the U S.
Paper market, you're absolutely right is quite frustrating to be honest youll see the whole Inc.
The increase in these are not announced horizon products synthetic nicotine products. We believe that they are well ahead of 50% of the vapor markets today in the U S. Well ahead of that what is in this for sure is putting pressure on the on the overall consumption of the tracked channels when you'll see the reader.
And of a as a group as a as an industry are 15%. So there'd be a T perform better and then we had a reduction in volume of six but you'll see that this is just as a consequence of these explanation growth of these disposable nicotine device disposable if you add that to the to the mixer is a completely different ballgame and.
He will be nowhere near the 15% reduction that we have seen because we are seeing a lot of traction of our smokers actually using this type of products. What is encouraging is that the latest movements around the FDA in terms of trying.
Trying to issue for example M deals for some of those manufacturers and been very explicit that they they are illicit products and and even raising our penalty fine final. So on a panel so.
We will be supporting this initiative from them from the FDA for sure. There is a massive wide space for every single percentage point that they are able to reduce and in there and we are we are quite I would say.
I'm optimistic that these will.
Materialize because a.
We note that a lot of the problems that we have in vapor in terms of are you farfetch assets is coming from the use of these type of products are naturally so I think that there'll be a lot of our mobilization from different agencies in order to tackle. These are the problem. The U S and we'll be in a waiting to see.
These are happening.
Okay.
Thank you very much.
Gaurav Jain Barclays. Please go ahead.
Hi, good morning.
And Gary.
Three questions from me.
A loud the first one is it.
Definition of leverage that you have and I think a lot of investors are very confused about what does the two X two <unk> net debt to EBITDA is that the way you are reporting an adjusted net debt and adjusted EBITDA.
To make various adjustments like the more Canada, EBITDA and net cash.
Then put restructuring charges in more Russia, let Doug add in hybrid so.
How are you how should we be independent to extra kleenex quite at all.
Okay.
So yes. So I think this is how we are reporting them right. Now. So this is how they are reported in our numbers and we are moving towards the mid of the corridor of two to three of net debt to EBITDA as they are reported in our numbers and as you see we have made a good progress from above three last year to now reaching two six in the middle of.
For the year. So we remain on track towards moving towards that target. So it is as they are reported in our numbers not without adjustments.
And due to <unk>.
So I'm sorry continue.
Please go to the second question.
She has a shake English I know you know this.
The E cigarette growth, which is happening in the U S and a lot of.
Market is moving towards disposable highlighting.
In your view like including disposable to legal everything how much has the E cigarette market in the U S. Dollar one H 'twenty one 'twenty two.
Well, we have is very very difficult to have a full assessment of valuation in the the U S. Because you'll note that most of these products are sold in non tracked channels. They are independent stores, mainly vapor stars for example, the e-commerce.
There do you still can buy these products in the U S Y E. Commerce, so it's very difficult to to have a view on that but if.
If you think for example that the valuation of the vapor markets in the U S is around 5 billion.
Or is it slightly even higher than that the vast majority of like I said more than 50% should be now it's clearly a occupied by these products.
Sure. Thank you.
And I'll ask one question on this ITC Hotel has been also which has been announced and you will learn about 18 or 19% del Webb Spinoffs company.
We're looking to monetize that stake.
Demand in Western Canada.
Yes, Luca we were made aware actually yesterday.
About the decision of the I T C boards to propose these are these.
These the structure of our you know releasing keeping 40% of shareholders of their hotels.
And then given there are the 6% for the current shareholders. We will know more details about that in the in the board meeting that will be held in mid August and and then we're going to make a decision around that and the and as we move alone will make a call in terms of Ah.
What we decided to do specifically after making the decision in terms of are these these are shareholdings that you are referring to.
Sure. Thank you so much.
Nik Oliver of UBS. Please go ahead.
I guess it today.
Two for me.
One on U S.
You talked about the sequential improvement and which is nice to see.
But as we look forward do you still think in a down four to five is the right algorithm and the U S market.
In total.
And then secondly, and more group level.
Used to kind of modeling it.
A high single digit constant FX company, obviously more recently, it's been lower.
And get investments and GPS.
And Ukraine et cetera, and as they go forward.
Shut down high single digit constant effects, EPS and still be the right algorithm.
Okay.
Look on the on the U S.
The question. The first question was the industry volume, yeah, the Washington value, how it will evolve look the U S. A.
For sure that's the macros like I said this is cyclical by nature, and though and the good thing about the U S. Instead elasticity is still very benign at point for and you would imagine that once the economy starts recovering the these elements of macro that we have pointed out during our presentation.
<unk> is basically gone this will bring us back to the likes of.
5% now it's more.
Four to five five to six this will depend a lot in terms of the poly users.
Moving forwards, but I would say that at this point in time there is a.
Nothing major to suggest that we cannot hold at that level of 5% on a normal circumstance without economic pressures given the fact that there is this is still very benign like I said, which means that there is still a lot of pricing power in the U S. So the circular furloughs the elasticity will probably lead you to this law.
Level that will be around there to more or less depending on their part to use it for a moment that we see moving forward now.
Now.
In terms of the.
The future of financial Algar in future for the group.
Who we are what we have phases.
Challenging times, because we and this was one of the reasons why we highlight this in the presentation today, the net finance costs.
We have today is much lower than what we are seeing in the market. So we have all these maturity coming due in the next coming years and this will mean higher.
Net finance costs. It is as simple as that which means that the the kickers on the EPS will we will be not be counted on that final cost if anything we'd probably be a drag. So you have to take those things. It in consideration when you start talking about it.
And those short term high single digit type of a few group. The other thing in the short term debt neutral bear in mind is that despite the fact that there the macroeconomic pressures has faced down substantially there is still a big impact coming next year the back of a leaf because some of the leaf cost that we'll see D. C. At most.
It impacts the P&L of next year is it because of the nature of it. So this goes from your balance sheet and then start to hit your P&L.
Months later, so we will have to face this pressure and as I said also in the in my presentation. We don't no. We don't think that the fix in the west that we want you to think combos would be a quick one this would take some time and we will do it properly because we want to create a more resilient portfolio that for the sake of generate sustainable value over.
Time.
Now, saying all that.
We cannot.
We can all the fact that we have a massive cash generative company.
He is doing extremely well in new categories.
We are reducing.
The loss on a very accelerated pace, hence our comments about these will not be linear because this will depend a lot in terms of our plans for our geo expansion markets that can open new platforms that we launch, but one thing is very clear the direction of travel is very clear these will be accretive for the results of the group has been since 'twenty one.
There is nothing to prevent those who continue to be that way moving forward and our combustible business outside the U S is performing extremely well so with all the difficulties in the west with our price mix is still 6%. So there is a very very very strong company in our hands moving forward for the for the and the point that we eat.
Try to make today for all of you is how resiliency as this company we are having difficult times in the combustible business in the U S. Specifically and this is more than offset by the performance that we are having now in the other categories other than combustible as well in the other geographies. So windows all of those things.
Get a line will be in a much stronger position. So I hope that I gave you a kind of a perspective I don't want to make a commitment of these in the short term if you understand where we are in the short term, but there but the future is important sure she'll give somewhat prospect for you moving forward.
So all of that we were really clear.
Yeah.
That was great.
Jacob to Clark from Redburn. Please go ahead.
Thanks for taking my question and the additional details.
I have a couple of questions on the new category performance.
The overall traditional or category not just purchase portfolio of brands in the U S seems to be affected by the growth in modern oral nicotine pouches is this a fair assessment to make on the overall auto market in the U S and do you see this trend continuing.
And then just secondly.
All three new categories are growing revenue strongly can you maybe give us a sense of the performance. It is mainly coming from new market Rollouts like success of modern oral in Pakistan or existing market is driving most of it paper in the U S.
Modern or in the U S is a is is performing in line with other traditional auto markets that we see across the world the likes of Sweden, and Norway. We are seeing more than auto gaining traction in terms of total auto consumption and the difference is that in the U S. The average daily.
Consumption is really low is between one to two bouts as opposed to you know six seven pilots that you see.
In the Nordics for example, and this has to do with the product itself.
The product has a level of moisture that is not a really satisfying consumers as we can see outside one of the difficult that we have SBA T. In our own offer in the U S is the fact that we couldnt bring this product that we have in Europe . These excellent and leading product that we have in Europe to the U S. Yet we have.
Apply for PMT, a while waiting for the outcome of the of the P. M. T in order to be able to launch this product in the market and I think that once these type of projects reach the U S. We will see a big attraction, let's put it that way.
In that particular market so it's definitely a.
One area of focus for us and and we feel very confident.
With the all our offer outside when we can be able to use it in the in the U S.
Itself. So that's one theyre starting with modern Oro to answer. Your question. This is a fantastic performance, we have a fantastic product in our hands is a we have just reached their all time high leadership.
In the in the share in Sweden, and Sweden has dominated by our competitor for more than a 100 years as you'll know is a very traditional auto markets and the vivo took leadership of the whole not modern Oreo the whole oral tobacco segment in Sweden.
In terms of share and and this has been reflected at wherever wherever we are in terms of leadership. So we are leading in several markets and the other thing that we're seeing is that even markets, where there is no oral traditional this product is gaining traction here in the UK for example, and that was no transition at all.
<unk> the incidence of modern or is already getting close to a 2% was a 1.5 is getting traction now and we have seen this phenomenon happening in your other markets for example in Poland. We start with this product like two years ago and now we have volumes that are really you know getting to <unk>.
Significant level and <unk> and the beauty about are these products that their margins as you probably saw in my presentation are even higher than than cigarettes. So it was a product that has not even tobacco niche so there.
Risk profile is really low and.
And it can be a way to implement tobacco harm reduction as we've seen Sweden, Sweden used to have an incidence of combustible of 30% in the seventies today like I said in my presentation is about to be the first to use smokefree market at the back of promoting traditional auto.
With the incidence of cancer, reducing dramatically or in the spirit of time and and their energy and their margins that we're making in auto are higher than the ones. We make a secret. So this is a win win for everyone and thats exactly the model. The powerful models that we have so more than or is a combination of all of us expand.
Geographically and is still doing quite well in the markets that we are establishing vapor.
We have a we have a rollout to our views go our modern disposable we decided to enter in this category because we clearly see a lot of smokers migrating towards this type of product.
Paper.
Is the level of conversion of a cigarette smokers to vapor is similar to THP and if anything in the markets, where vapour THP our presence with the a higher retention of vapor than we've seen THP in market, where both of them are present. So is a is a category gaining more and more traction I'm very pleased.
Pleased with the performance that we are making in terms of the margins. So the margin performance come at the backlog for sure the scale of it but also the fact that we are now with a leading brand able to renegotiate trade margins.
And reducing it for example, and also taking price. So the revenue improvement that you see is a consequence of our expansion, but also was working on the margin side of vapor that is now getting close to 6% then who have placed a red like France, where if you take the gross margin equivalent per mill of cigarettes, we make more money.
Selling views than we do selling our own products of secrets in France in the U S. We are we have margins are readily equivalent to Pall mall in cigarettes. So we are really really happy with the performance. We are making there and THP is there is there is the category where.
We are highlighting of one area of focus for us in terms of the need to stream for our our our offers I think that the glow hyper to go in the right direction is it a game change is not a game change is is a it's an improvement because our dress some of the issues are pinpoints that we have within the offer heavier Morris.
Leak in tiny in the and though in a very light device, but there is some more exciting ideas coming along in the next few.
The months ahead okay.
Thank you very much.
Jonathan Leinster from Societe Generale. Please go ahead.
Hi, good morning, gentlemen.
Few questions if I may.
Paul.
Given the recent rationalization of some of the companies.
Transfer assets in Russia has that changed your plans in any way it is all steel.
Essential transfer in Russia.
Okay.
When I ask Jonathan this one Luca we are determined to leave the country would have said that last year. As you can imagine is a very very complex situation to deal with and we are following Oh international and local laws and the and the and the end of it.
This means all the procedures that the authorities locally in Russia has defined and and also cloud with a closed loop just sanctions for sure and but I cannot comment much on that at this moment in time it would be inappropriate for me to make here for the comments on that.
Okay.
Secondly on the U S.
Sorry.
<unk> access.
Accelerating debate.
Is that primarily driven by differences in pricing structure or is that driven by the sort of mix shift towards lucky strike or a combination of the both the trade it.
Yeah, we are putting in place commercial plans in the U S. We are using our revenue growth management to as a as a as a as an area of a of a you know insights for us. So we can be very granular in terms of how we make our brand more competitive in.
In different geographies within the U S. Not you know it.
Can go is now is true consoles or key accounts and all that so and this is the pricing element that you'll see is a reflection of those commercial plans in place. We also are taking some initiatives and some leather and.
Some of our brands to make it more resilient in terms of these economic cycles and these are all reflected in the in the in the top line that Youre seeing.
Has the sort of correct that lucky strike.
Just counter that I talked about.
Quite a big game.
I would say it is an element to that for sure. It looks strike. We are very pleased with the performance of it look strike at one of the most successful launch in the U S. EVAR has just reached above 3% of our total market share in their mind in the U S and for sure that the mixing in the it will be very different from the ones of Newport and natural American.
But we.
We I would say that most of the impact on the prices coming from the commercial plans that we're putting to improve our competitiveness on the more important premium segments that where we were suffering most.
Right.
Yeah.
Just on the vaping side again price mix.
Strong in the period.
That reflected.
As we do it.
Reflection again.
Actual underlying strong pricing, particularly with Europe . So the other regions is it just the difference with the sort of mix with the introduction of the disposables is of course the sort of.
Rice mixture, apparently shift quite quite rapidly with with the introduction of those disposable wipes Jonathan.
Do you want to add all of this is in pricing vapor in the U S. They keep in consideration.
A number of things there revenue growth manage is also being applied in vapor. So for example, we considered the price of modest which is not a cheap in the west by the way we consider the price of cigarettes, we can consider our main competitor pricing as well in the in tracked channels. The fact that we have a board that has more than double.
All the liquid off our main second competitor in the U S is another factor. So we put all those things into consideration and the elasticities and the understand the consumers we have been working in different types of.
Product architecture in terms of Opex with one pods two pods for boards more recently, even a Bob that like six boards and then we with all that we have are in order.
The consolidated view of the price mix Youre seeing now in our results, but there is no one single element to point out is a combination of all those different elements.
I didn't see in the will be keeping and these are for sure now in the in the on the under review and taking immediate actions to that.
And they've actually Australia fare increase.
So because I mean.
That's why you've launched solar.
The disposable vape. So I was just wondering whether that is of course sort of quite such a shifting mix and a higher value in the sort of areas, where disposable bags have been launched outside the USA. So that's what I was trying to add that the views performance as a brand is a strong brand performance and that is why the growth of the revenue and price.
Thing is driven by both the element, which is the views claw system and the views go which is the disposable AG part of the brand. So the overall brand pricing is being driven positively and mainly driven by both the element. So you've got to distribute outside the U S. So that's why I wanted to tackle the point of outside the U S that outside the U.
We still see a strong growth in pricing, which is mainly driven by the strong brand momentum in both of these things in the close systems and also in the introduction and expansion of views go.
Okay. Thank you very much.
Thank you I'd like to hand, the call back over to Victoria, Tony Web questions. Thank.
Keith will now go back to the web and well we've received a question and I think this is see Janet you.
Hospital volumes were down five 7% versus the industry down three point T y has.
Under performed the industry.
So I think this one is very simple two points. One is the biggest impact is coming from the highly driven excise driven price increases in Pakistan, So excise driven volume decline in Pakistan.
And then also the overall industry decline in U S. But if I just take Pakistan. For example, if you deduct Pakistan out of industry and beauty volumes. We're looking at a volume decline of 2%. We are a beauty actually starts doing better and given our very strong presence in Pakistan that is why you see us.
Strong decline, but these are the two elements that is.
Very minor changes, but these are the two things excise driven volume in Pakistan and also overall industry decline in U S.
I think that it's important to just to add to what her job. It is saying that we.
We don't adjust their volumes to their markets, where we are.
We're phasing out their lifestyle for example, Egypt, which is still part of that.
And if you if you consider that for example will be together with Russia, which you know we don't manage basically and this would be 1% out of the $5. Seven. So what is left is basically what's her job. It has explained.
In those two markets.
Thank you well we didn't appear to have any further questions on the web. If there are any outstanding questions. Please don't hesitate to contact the IR team and but with that I'm now going to hand back to you Dave for closing comments. Okay. So thank you for joining us today and for your participation in our Q&A session. As you can see we have deliver a reserve.
<unk> performance in the first half I'm delighted that we are on track for our full year guidance and I Hope you can all you can see the renewed sense of energy across the organization, which I feel around me everyday so while there is much more to do I'm confident that together, we will accelerate our transformation and deliver long term move stakeholder Val.
We look forward to update you again in December at our peak close trading update thank you very much.