Full Year 2023 British American Tobacco PLC Earnings Call
Investors relations I'll begin with our financial highlights and the progress we have made against our key areas of focus this year job. It will then take you through our financial performance in more detail.
I'll return to talk more about our glide path to building a smokeless vote before we move to the Q&A session.
With that I would like to draw your attention to the disclaimers on slides two.
And three.
Yeah.
So let's begin with athletic twenty-three performers our reported results reflect the impact of the non cash impairment charge taken mainly against our acquired U S brands, we will focus on constant currency adjusted results unless otherwise stated.
I'm pleased.
With a resilient performance in line with our guidance.
Net of our global multi category strategy.
The breadth and scale of our global footprint enables us to consistently deliver balance sheet results.
This is demonstrated by our strong performance in EMEA and up Mir delivering combined double digit revenue growth offsetting the U S.
Overall, we have deliberate.
Revenue up three 1%, which excludes Russia and Belarus from both periods.
Profit from operations up three 1% or three 9% organically.
And diluted EPS up 4%.
Up five 2%.
I'm, particularly pleased with our performance in new categories.
With revenue up nearly 18% and 21% organically with views in vivo delivering strong volume led revenue growth.
Our consumer numbers, Richard $23 9 million, excluding $1 5 million consumers in Russia.
We added over 3 million consumers year on year with $1 1 million in Q4 alone.
At the half year I shared that clear set of objectives to sharpen our execution and build a more modern and agile.
Over the last six months working together with our broader teams. We have made good progress across these six areas of focus.
I will now share some of the highlights.
Firstly I'm delighted that we have reached a new category profitability Chewy is ahead of our original targets.
This has been achieved while continuing to invest an incremental 300 million pounds in 2023 for future growth.
Our new categories are meaningfully contributing to group results as we benefit from increased scale with a strong profitability gains driven by views in PLO.
We have sequentially improved our new category contribution from our peak loss of $1 1 billion pounds. In 2020 shows more profit position 2023, reflecting a 400 million pounds improvement last year.
It is important to note that while we expect the new category profitability continued to improve each year due to the phasing of investments the improvement in contribution year on year, we will not be linear.
We made strong progress in our top 10, new category markets, which generated about three quarters of our new category revenue in 2023.
With category contribution margin now above 20%.
The performance of these markets demonstrates that revenue continues to grow at base.
Garage in country and contribution margins are expanding strongly with scale and absolute margin levels are moving closer to the levels of our combustibles business.
This profitability at scale give us confidence in our direction of travel as we expand our new category footprint.
And it also provides a clear line of sight for our pathway to profitability in large established markets moving forward.
Our second focus area has been to return our U S combustibles business through consistent value growth.
Our commercial right.
Yeah.
So volume and value share recovery.
Our volume share is up 40 basis points since January driven by a 160 basis points increase in the premium segment.
In addition, we are delivering value share ratings up 20 basis points since January driven by a 60 basis point increase in our premium share to reach our highest level in three years, driven by Newport and natural American spirit.
I want to share some more color on the actions we have taken the U S.
In premium we have invested in Newport, Seth softback, creating a ladder portfolio, which has driven an acceleration in Newport share of the premium segment.
We are working through the target execution of these on a state by state basis with a broader rollout planned in 2024.
Let's strike is the fastest growing cigarette brand in the market and just three years after launch reach at 4% National volume share at year end.
In addition, we are sharpening our execution.
Increasing the number of trades reps by around 10%.
Further strengthening and simplifying our route to market.
And upgrading our digital analytics.
We are confident that these actions will further strengthen our portfolio over the medium to long term.
Turning to my third area of focus heated products.
Whereas the permanent to significantly strengthen our portfolio.
Our recently announced global patent settlement is an important step forwards allow us to further improve our products and innovations in the product space over the medium term.
I am excited about our newest hyper lodge, which delivers a total system upgrades.
Our new device glow hyper pro is a more premium offering with new hits technology and longer lasting sessions.
Our new Super thought consumables have been redesigned to significantly improve both taste and flavor delivery.
In addition, we have launched our first to market tobacco frequency most view with urban substrates in 11 European markets.
And while it is still early days, we are seeing some promising results, including volume retention for our heated products in these markets.
These new launches that you're early examples of our improved innovation pipeline.
We have further strengthened our R&D.
And a nuc.
Device engineering and fully integrating our global teams to form collaborative network.
Can we are partnering with the external industry leaders in complementary areas such as battery technologies in electronics manufacturing to accelerate our pipeline.
We continue to execute our product lifecycle management model with discipline.
Enabling us to allowed stronger innovations at speeds.
There is still work to do but I'm confident that we now have the right capabilities in place to drive a more rapid and meaningful innovation pipeline moving forwards.
My next area of focus is to lead responsible new category development.
We need to gain.
A broad acceptance of our tobacco harm reduction agenda and encourage effective base discussion on nicotine amongst key stakeholders.
That's why I reestablish our corporate and regulatory affairs function and added a new management board position.
We are clear that science should guide the development of regulation.
This is why we believe that each smokeless product categories should be regulated differently perhaps.
Social nature to their associated risks and according to the evidence base.
I'm determined to manage our transformation responsibly and transparently.
Through increasing our engagement with regulators policymakers and all the relevant stakeholders.
They responsible marketing practice, we've seen some markets are totally unacceptable and we call for the support of governance and regulators to more effectively distinguish between responsible and a responsible players.
This will create a level playing field addressing important issues such as on the radio access and environmental impact.
We are seeing encouraging progress with new category regulation around the world.
Including recognition of the role of tobacco harm reduction in major markets like the UK and new sealant.
New markets opening up to make us smokeless alternatives assessable for consumers.
And the growing mode category footprint with 55 markets now regulating more than one new category.
I'm proud of our more fruit fronted.
Engagement and advocacy actions taken day, okay. When we allowed to the mood channel media campaign urging for better regulation enforcement around vaping products. So the vaping industry can support making smoke free Britain a reality.
Looking ahead, we plan to launch a refresh refresh of responsible marketing principles and codes demonstrating our commitment to run responsible new category approach.
Effective enforcement is critical to the development of functional new category markets.
We are deeply concerned by the continued proliferation of illicit single use vapor products in the U S, which we estimate represent over 60% of the vapor market.
These are there are multiple levers available to the government agencies as state and local authorities to ensure appropriate regulatory enforcement.
During 2023, we saw a modest escalation inaction against illicit products, including almost 4 million units capture a refused to entry into the U S and about 5 million U S dollars and find as issued by the FDA.
However, it's clear that much more needs to be done.
Our U S teams are actively engaging with government agencies and federal and state law authorities using all tools available to drive better enforcement and importantly, a level playing fields.
With a recent example of progress is Louisiana, which has passed the state law, establishing a directory of vapor products, which have either received or generally have a PMT pending.
Several of the states, having enacted similar loss with mobile spending.
I'm also encouraged that the U S International Trade Commission has sticking up our complaint.
And is investigating the import of illegal single use vapor products.
While we have not seen any meaningful impact from nationally to date, we can clearly see that the pressure report effectively enforcement. These building.
Now moving onto my fifth focus area doing Hayes, our financial flexibility.
We continue to deliver efficiencies through our establish a continuous improvement mindset.
We are on track to generate at least 1 billion pounds of additional savings by 'twenty five with nearly 500 million pounds of red savings in 'twenty to 'twenty three.
This has played a critical rolling offsetting the inflationary pressures.
We continue to seek and evaluate all opportunities to a hasty balance sheet flexibility and.
And as part of this we have regulatory regularly review our stake in ITC.
We recognize that we have a significant shareholding, which offers us the opportunity to release and reallocate some capital.
Our shareholding in ITC has existed in when they when a way or another since the early 19, hundreds and watch subject to numerous share capital change and regulatory restrictions.
We have been actively work on some time on completing the regulatory process required to give us the flexibility to monetize some of our shareholding and reallocate some capital.
We will update you on this.
Opportunity.
In addition, we are further optimizing our geographic footprint and have exit around 35 markets.
This is in line with our plan to exit nonstrategic combustible markets, where we don't see a near term opportunity to execute our new category strategy.
This means we'll be selling fewer cigarettes annually with a limited impact on our P&L and resource are reallocated into higher return markets.
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 26 billion pounds to shareholders over the last five years.
We have made good progress on the leverage ending the year at two six times adjusted net debt to adjusted EBITDA closer to the middle of our two to three times target range.
Over the next five years, we are on track to generate around 40 billion pounds of free cash flow before dividends.
As we continue our transformation.
Our medium term financial model werewolf.
These will give us increased fixed ability to allocate our capital to drive returns and reward shareholders.
And includes continue our 20 year track records.
Our progressive dividend growth.
Once the mid of our leverage targets, Richard we will evaluate all options to return excess cash to shareholders.
Including the introduction of a sustainable share buyback.
Moving onto my last area of focus to develop a more collaborative and inclusive culture.
Guided by our refreshed with corporate values I'm clear that building on our strong foundations of integrity collaboration inclusivity.
We will drive the culture, we need to successfully transform BHG.
As part of this I am delighted to welcome our newest active and no executive senior management members. They all bring diverse high quality industry knowledge and experience.
Soraya Banquette, our incoming CFO will start in may.
And I would like to take this opportunity to express my thanks, and appreciation for a job at for stepping up as entering finance director alongside his ongoing role as director of digital information.
In summary, we have made significant progress on each of these areas of focus.
However, there is more to do.
I'm confident that the choice we have made a building strong foundations for future growth and we deliver sustainable will deliver sustainable value for all our stakeholders, while we continue to reward shareholders with strong cash returns.
And with that I will hand over to your job. It should take you through the detail of our results.
Thank you to deal and good morning, everyone. Our results demonstrate the resilience of our business, we delivered organic revenue growth of three 1% with new category revenue up 21%.
And combustible price mix of 6% at.
Adjusted profit from operations was up three 1% with operating margin up 60 basis points driven by a strong improvement in new category contribution and our continuous focus on efficiencies adjusted diluted EPS grew by 4% or 1.1% on a current currency.
Basis on an organic basis, excluding Russia, and Belarus from both periods adjusted profit from operation was up three 9% and adjusted diluted EPS was up five 2%. These results were delivered despite the absorption of a turn to 5%.
External FX headwind.
We continue to drive strong organic new category revenue growth there.
This performance clearly reflects the strength of our multi category portfolio driven by views and Willow.
As a result, we continue to transform rapidly with smokeless already reaching over 30% of our revenue in 24 markets.
This represents nearly one third of the 76 markets, where we are in currently present in new categories and our transformation is even more advanced in many markets.
<unk> now represents 16, 5% of group revenue up one seven percentage points from 2022, excluding our U S. Combustible business smokeless now represents more than a quarter of group revenue.
I will now share more details on our key category drivers market shares are available in the appendix.
In vapour, we extended our value share leadership with views to 36, 1% in tracked channels in the key vapor markets. We continue to make good progress on driving profitability with vapor now having a positive contribution in four of the five key markets.
The fundamentals of the vapor category as they reduce risk alternative for adult smokers are strongly positive. The total number of vapor consumer is accelerating and vapor is the largest contributor to active new category use it driven by both continued claw system and <unk>.
Single use vapor growth in the U S. R. P. M. T S. Four views altos, two tobacco flavored products remain under FDA review.
These applications further built on the foundational science of our successful tobacco flavored submission for view solo sito and wipe.
We are confident of a successful outcome for the views all tour PMT years remaining under FDA review and consistent with the agencies most recently communicated timeframe.
Expect it to here in the coming months.
We are challenging the FDA market denial order for views Alt, a mental flavor and have recently been granted a permanent stay by the court.
Outside the U S. We continue to approach the growing single use vapor segment in a responsible way in line with that my international marketing principles and underage access prevention guidelines as well as participating in takeback schemes for responsible disposal.
In heated products.
<unk> reported revenue was down two 5% and up four 1% on an organic basis.
While organic volume grew 12% and our share of the combined combustible and heated products category continue to grow glaus heated product category volume share was down 110 basis points to 18, 2%.
Continued category volume share momentum in key markets, including Poland, and Czech Republic was offset by highly competitive markets in Japan and Italy.
As <unk> highlighted we have more to do but I am pleased to say that our newest innovations glow hyper pro and video demonstrates our ability to bring innovative products to the market. This will be further supported over the medium term by a recent patent settlement.
Moving to modern order our portfolio continued to grow with modern oral volume up 33, 6% and revenue up 39% driven.
Driven by further geographic expansion and innovation.
We continue to grow our volume share of total order, while our modern oral category share was down mainly impacted by the U S. We are encouraged by the strong results from our recent Zillow pilot in New York, featuring a more premium brand expression and design and plan further rollout in 2000.
24.
In addition, we remain confident of securing the PMT a four hour Europe, leading zillow 2.0 platform to support our long term competitiveness in the U S.
Outside the U S. We maintained clear leadership of modern oral category I'm delighted to share that in most markets the lowest contributing to increase and category profitability with a fast payback period of less than two years.
We continue to see a significant opportunity for modern oral in emerging markets with strong volume growth in Pakistan and Kenya.
Now turning to combustible our cigarette volumes declined by five 3% on an organic basis.
Adjusted for market exited during the year and our volume declined four 6% compared to an industry decline of three 4%.
This difference is mainly due to lower U S industry volume and shared loss due to our premium position and the impact of significant excise increases in Pakistan.
Combustible price mix remained strong up 6% with pricing offset mainly by geographic mix took.
Together this resulted in a 0.6% increase in organic revenues.
Group volume share was flat with gains in Ami offset by apnea and the U S group.
<unk> value share was down 40 basis points, reflecting the impact of our commercial plans in the U S and losses in apnea, while we held share in Ami.
We are performing very well and combustibles outside the U S where organic revenue increased by almost 7% with re invigorated portfolios refreshed brands and sharpened execution.
This demonstrates the benefit of our global footprint and our ability to deliver in challenging environments.
Turning now to the regions.
In Ami, we saw an outstanding delivery in 2023 total organic revenues was up 13% driven by higher revenue from combustibles, reflecting a resilient volume performance and pricing.
Alongside continued growth across each new category with revenue up 39%.
<unk> is a true multi category region and smokeless products now represent 23% of regional revenue in markets, where we at present at.
Adjusted profit from operations was up 10% driven by the improved financial performance and key markets.
Moving to <unk>, where we saw strong financial delivery.
Total revenue was up over 5% with a robust combustible performance driven by pricing, notably pricing in Pakistan more than offset the impact of excise led volume decline while volume growth continued in Bangladesh.
Paper and modern OLED revenue were both up over 70%.
Which was partially offset by a decline in heated products, mainly in Japan, resulting in 3% new category growth for the region overall.
Smokeless products now represents around 20% of regional revenue in markets, where we are present.
Adjusted profit from operations and apnea was up 7% driven by strong pricing and continued efficiency gains.
In the U S. Total revenue was down more than 4% driven by continued macroeconomic pressure and the impact of illicit single use of apes. Despite this views extended its value leadership of track channels, adding 470 basis points to reach.
45, 6% with revenue up 14% in modern oral velo revenue declined driven by lower volume adjusted profit from operation was marginally higher up 0.4% with operating margin expanding by 280.
Basis points as views profitability and the efficiency gains offset combustible headwinds.
U S combustible industry was down seven 5% or eight 6% on a sale to retail basis, excluding inventory movements.
Beyond market secular decline industrial volume was mostly impacted by a combination of macroeconomic headwinds and the growth of illicit single use waves.
On top of the industry contributors our volume performance was impacted by lower volume share as a result of our more premium school portfolio and the California flavor ban as a result, our combustible volumes declined 11, 3% in the U S. More in line with the industry.
Decline if you exclude the deep discount segment, where we do not participate.
Taking a step back to look at the broader U S context, while U S consumers faced strong macroeconomic headwinds through 2022 and 2023 we are starting to see some very early signs of recovery with gas prices stabilizing and the gap between wage growth.
And inflation narrowing however, consumer confidence is recovering more slowly and does this still significantly below pre COVID-19 levels as consumers continue to be impacted by the cumulative effect of inflation and higher interest rates on elevated levels of debt.
Resulting in lower discretionary income.
Given this macro environment. The premium segment has remained under pressure through 2023.
<unk> highlighted our commercial brands are working and we are starting to deliver volume and value share recovery in the premium segment, driven by Newport and natural American Spirit. In addition, Lucky strike continues to perform well in the value segment as a result, our volume.
Share of total U S market is starting to stabilize.
While returning our U S combustible business to consistent value growth will take time, we are making progress and we will continue to implement our plans carefully carefully and poorly in 'twenty 'twenty four.
It is important to remember that overall elasticity has remained stable.
Compared with pre Covid levels at minus 0.4, and affordability remains high.
With our multi category strategy and strong portfolio of brands, we are well positioned to benefit from macroeconomic improvement and the recovery in legal vapor market. Once there is effective enforcement against illicit products.
As announced at our trading update in December we have taken a noncash impairment charge, mainly relating to our acquired U S brands. Following the completion of our detailed ear and finalization process and adjusting for FX moment that total charge recognized is too.
$97 3 billion pounds.
This recognizes the current macroeconomic pressures impacting the U S combustible industry and change in consumption patterns post COVID-19.
Combined with the growth of illicit single use vapor products and then sat entity around the potential menthol ban.
This approach is also consistent with our vision to build a smokeless world.
Moving forward, our combustible brands will be amortized over a maximum of 30 years.
As a result, our annual noncash amortization will increase by around $1 4 billion from 'twenty, 'twenty, four which will be treated as an adjusting item in line with our accounting policies.
Our acquired U S brands represent most of the group brands and trademarks on our balance sheet and as such we do not anticipate similar combustible brand value revisions moving forward.
Importantly, these charges have no impact on our deleverage or our dividend and capital allocation flexibility.
Returning to the group performance operating project operating margin expanded strongly up 60 basis points, while also absorbing increased inflationary pressure and a 2.5% transactional FX headwind on profit. This was supported by improving.
New category profitability and additional efficiency savings.
Turning now to EPS, we delivered constant currency adjusted diluted EPS growth of 4% and five 2% on an organic basis. This reflects our resilient operating performance.
Continued strong ITC delivery and a lower number of shares.
These were partly offset by increased net finance cost the underlying tax rate was 24, 5% and with existing tax rates, we expect a rate of around 25% in 2024.
Operating cash conversion was strong at 100%, reflecting our continued focus on cash delivery.
As in 2023, we anticipate gross capital expenditures for 2024 to be below adjusted depreciation and amortization and around 550 million pounds and net finance costs of around 1.9 billion pounds.
We continue to reduce leverage towards our target and have.
A manageable maturity profile with 98% of our net debt fixed ever.
Average maturity of just over 10 years and close currency matching.
Looking forward, we are making targeted investment choices to drive our medium term sustainable growth algorithm.
Together with continued macroeconomic pressures in the U S. These investment will impact our 2020 for delivery.
As a result, we continue to expect to deliver low single digit organic revenue and adjusted profit from operations growth, including a 2% transactional FX headwind.
With that performance second half weighted for both revenue and profit mostly driven by the continued impact of macro pressure and elicit single use waves in the U S continued investment in our U S commercial plants, mainly weighted to the first half and the phasing of investment in Ami and.
EMEA.
Extrapolating current spot rates, we anticipate currency translation.
To be a 3% headwind on full year adjusted profit from operations growth beyond 2024, we expect to progressively improve.
Our delivery.
3% to 5% organic revenue growth and a mid single digit.
Profit from operations growth on an organic basis at a cost at a constant rate by 2026.
Finally, as we continue our transformation journey, we are focused on the importance of disciplined capital allocation and strong shareholder return, we remain fully committed to a progressive dividend and announced a 2% increase this year at one.
The middle of our leverage range is east, we will evaluate all opportunities to sustainably return excess cash to our shareholders with that I will hand back to to do.
Yeah.
Okay. Thank you Jeff.
You have a job it I would like to take you away Kilkeel message for one hour presentation. So far this morning.
First we have taken significant actions to sharpen our execution and we are making strong progress.
And second wireless we are facing some challenge our performance remains resilient, reflecting the benefits of our broad portfolio.
I would now like to spend a few moments outlining the opportunity and pathway ahead for BHG.
And why it's going to deliver strong outcomes for our shareholders.
First the nicotine market is growing base.
Based on our estimates using the latest industry data and trends new category revenue will be incremental to combustibles.
And going forwards new category volume will offset the decline in combustibles as smokers continue to switch to smokeless products.
As a result, the quality of our topline growth will be much improved at will be volume driven.
Our moods category strategy is the right way to assess these growing markets.
Consumers are choosing different alternatives to cigarettes.
Markets and consumers are not homogeneous and no single solution is capable of meeting all consumer preference.
In addition.
Data shows that as you move into higher Tar markets for example, Canada and the U S. There is a much higher penetration with vapor.
In heated products stand a greater chance of success in lower cigarette strength markets, Japan is a clear example of this.
Is acuity on most category will deliver on our better tomorrow purpose.
We are committed to our new vision to build a smokeless vote.
And to become a predominantly smokeless business with 50% of our revenue is smokeless products by 2035.
By deploying our global multi category portfolio, we can actively encourage smokers to switch ciabatta.
To enable this we have refined our group strategy to ensure a clear line of sight across the entire organization.
Anchored on three strategic pillars.
While its growth sustainable future and dynamic business.
That support the achievement of our goals.
My six areas of focus for shoppers acuson that I outlined in the earlier I'll read fully aligned to this broader strategic pillars.
And our newly launched values a key enabler for the entire business, forming the core of who we are SBA T.
Our performance will be measured across each strategic pillar.
We will continue to work on refining these measures and targets and to further align our proposals in our remuneration policy review this year.
I look forward to sharing more details at a later date.
I'm confident in the progression of our financial performance.
The drivers of our growth will evolve through time as new categories become a greater percentage of our business.
The range reflects expected cargo growth throughout the period rather than annual targets.
Our adjusted profit from operations growth will be enabler by increasing scale benefits driving new category contribution margin and combustible cost efficiencies driving positive operational leverage.
This will enable enable group margin should remain at a high level.
We will continue to provide guidance on an annual base as with our transformation evolves.
These grow forward supports our 50% of smokeless revenue ambition by 2035, and we expect <unk> revenue to reach around one third of our group revenue by 2030.
In conclusion.
2023, it was a year of resilient financial performance in line with our guidance.
There is no doubt there is more to do.
We are sharpening our execution should navigate our new near term market challenge and set the business up for a stronger future.
The target the investment choices, we are making 2020 for a building the foundations for long term growth and value creation.
There is an exciting opportunity ahead with growing nicotine industry value driven by new categories.
And we are now seeing the evidence of our multi category strategy will deliver long term profitable growth.
We are committed to rewarding shareholders throughout this transformation.
Driven by hasten enhancing financial flexibility disciplined capital allocation and stronger shareholder returns.
So we will now be joined on stage by Victoria for the questions and answer session and Jeff and I will be very happy to take your questions.
Yeah.
Thanks, you today and good morning, everyone. If he joined US via the webcast you can type your questions directly into the online question Bulks or if he joined the call you can press star one on your telephone keypad.
We will first be taking questions from the telephone lines.
Yeah.
Yeah.
Thank you Alan.
Mike <unk> of Goldman Sachs. Please go ahead your line is open.
Good morning. Thank you very much so just a key question for me please.
First one is on the U S vapor category and I appreciate it and maybe just to put a precise number on it but can you share any color on how quickly you think the overall U S vapor category is growing and that's across both EMEA and the track channels place.
And then my second question is on U S combustibles and thanks very much.
Any encouraging data points on <unk> relative performance.
In the market, but overall the category does.
Still remain under a bit of pressure and we're seeing larger volume declines than has been the case historically.
I know, there's lots of meeting policies deliberately not crazy.
First there was some caveat unwind, but as you think about the U S. Combustible market from a medium term perspective, what do you see as the normalized rate of volume declines and then give them.
<unk> commercial strategy your outlook on pricing in that market do you still see use combustibles.
Sources of EBIT growth.
Thank you okay.
Okay. So let me digest their your questions. The first one in the vapor category vapor is growing.
Substantially in the U S market.
We have now around 29 million acres in the U S.
But most of the growth.
Say that have grown something like 40% over the last year or so is concentrate on these illegal modest progress in the first place. We believe that there is currently.
Revenue.
Around 10 billion pounds in a week, 60% of that is related to these illegal products.
So we.
We have yields overtime.
Strong vapor business in the U S.
As you saw in our disclosure we have Richard Moore.
In terms of revenue our level of operating margin now.
Religious secrets.
Not even gross margin referring to the operating margin. So it's a big business in the U S that we have built and we are very proud of the efforts for sure that we are frustrated with the fact that there is no currency level playing field in the U S.
We know that to the FDA is is acting.
True true here too improving for cement, we believe that there is much more that needs to be done on apps.
When they finally finished the conclusion of the PMT as will be our first step because then we can see the what are the legal products that shouldn't be in the market in the first place, but it is encouraging to see that some states are taking the.
They met their own on their own hands and the passing bills to try to certificate P. M T H and and linking that with a with a with a with products that they would be trying to enforce in their own local markets. We are as we disclosed in their presentation doing all we can to work together with the authorities set a federal level state local lab.
Those that were involved with the ITC with stevia, the ITC to shoot that eventually could or should could.
Come to us to a point, where we can see some.
Imports imports.
Level.
Okay.
But.
There is still a lot to do.
But that's where we stand today on the on the vapor in the U S.
Our on the combustible side Youre right. There was a lot of change happening over the last I would say four years. What we came from just as a reminder for offers is a decline of around 45% pretty much secular decline on the U S market and then all of a sudden.
So that's.
One one in the hopper sense across consumers.
In Lockdowns and receiving a lot of support at federal level state level and this whole processors statue will wind down.
In the in the following two years and the and then the and the and then on top of that we have this whole process has been exacerbated by the conflict that start between Russia, Ukraine and the inflation that came at the back of that as well and with a lot of pressure on consumer purchasing power. So what.
We are seeing today in the market is a situation where the macros are playing a heavy weight on that because despite the fact that we have seen early green shoots around the levels of unemployment gets pricing going in the right direction, even inflation now reducing we still see.
A lot of pressure on consumer purchasing power coming from high levels of debt. The cost of debt is still very high mortgage and are in the end. We believe that will take some some time choose to this whole process to unwind. It's a it's difficult to predict we are not giving guidance for 'twenty 'twenty four but it's easy to see.
That's a.
These are macros is ease of use.
Responsible for at least the two on the harp, 3% of the decline in the U S market. So my best guess if you. If you. If you want for example, after we see some normalization of and we will see that because the economic cycles is is always like that and the person who have seen ups and downs. This will not be no difference, we believe that to the market.
It could well be stabilizing around the 5% to 6% decline as it coincides with a recognition that there are more and more is smokers migrate into a pole use of products for sure. That's the unknown in this whole process is the level of enforcement that the FDA needs to do in terms of our modest debt has impact in not just in the vapor business now.
I just spoke about but also in the combustible business.
Yeah.
Yeah.
Thanks.
<unk> of UBS.
Please go ahead your line is open.
Good morning to their jobs it in Victoria, a couple for me as well please.
Can I begin with the stake in ITC could you could you. Please remind us where we are on the approvals to reduce the stake the anticipated timeline.
And importantly, what.
What we should expect <unk> to use the net proceeds for in other words could the proceeds be returned to shareholders.
Through a buyback.
And secondly on heated tobacco.
You have any early readings.
On the market impact from the EU flavor ban.
I think you mentioned that the T was able to retain.
<unk>.
And in the back I think you highlighted.
In Czech Republic, your share has actually grown so could you just maybe give us more color on how speak how speedy shaft bearing as glu has historically being over indexed to flavors. Thank you. Okay. Sure. Let me start with the your question on 19th you know you're going to use that just to give some.
<unk> background and because it is important for us to remind.
Where we are coming from B a T is a very highly cash generative company every single year, we are able to generate more than 80 billion of free cash flow. So.
This means that.
When we consider our growing dividend approach and without.
Any major or material. If you want my M&A on a business as usual base, we are able to deleverage the company around the point to 0.3 times like we just are subject to the effects of the year and we have just demonstrated data.
Through 2023 and.
The reason why we have said that we want to at least reach the mid of the range is for basically two reasons. One is the world has changed and our and we have seen from 2022 and unprecedented increase in interest rates and that culminate with very high levels of.
Of the cost of capital compared with where we have been over the last decade, if you want and and these has you know even if we expect to introduce start coming down we'd probably not never been to the point that were before so the world has changed the cost of capital is a is more expensive than it used to be that's one point.
It's clear the second point is very particular to B E. T. We still have out there are headwinds related to Canada, the WWE and I have been very clear and transparent about that and we have currently something that adds $2 3 billion of cash trapped in Canada, and <unk> and once we and Theyre in the east.
Finally, and I cannot give.
Much information around the process that is going through with the plaintiffs in Canada, but we would expect the cashier to go if we're finally come to an agreement with the plaintiffs and also eventually catch some a material headwind in terms of our earnings moving forward. So just to illustrate the point in a more simplistic way if you.
Strip out kind of on that completely from our numbers, we would be seeing an uptick in terms of the ratio between two to three times. So that's what we need to buffer and a and I think that we have a very good plan to organically continue to drive down the leverage of the company and I have no concerns at all about that now.
For sure that we are trying to find ways to create more flexibility in terms of our capital allocation decision and the financial flexibility comes for with a problem to try to divest some of the assets that we have in the group one of the reasons why we have exit 30 or more.
In 35 markets, mainly in the last two years is also a consequence of that we generate some proceeds on that's not really that material has also the benefits that we are now refocused the group moving forward in terms of resource location for the really growth markets moving forward and this is a very was very good exercise will continue to do.
Debt, but we cannot ignore the fact that the major assets that we have in their balance sheet is the association with the ITC as an associate so that's the reason why we are talking about.
ITC in this release today. We are we are we are we have today.
We want to keep a level of influence in the United C that is transforming itself.
Based on local.
The legislation.
We need to have a minimum of 25% of shareholders to keep your veto rights veto rights, we would like to do in the first phase and are these means better given the fact that we have above 29, there is space for those two to reduce our shareholding now what we need to do and we have been working for some time on that.
At with people on the ground.
Closer with the authorities mainly in the Central Bank is trying and with their help provide she trying to to reconstruct all the history of the shareholder, albeit at that dates back 100 years and through dispute that time as you can imagine we ITC has grown inorganically, so which is another complexity we had.
You know bonds issues, we have shares bleach, we have of subscriptions. So we also have changed in the regulatory environment, mainly on the tobacco front. So.
We had to reconstruct hold out his whole history and Thats, where we are working for some time now very difficult very difficult for me to give you a timeline on that why didn't you say that we are doing all we can to create these flexibilities. So the board can make an assessment in terms of cap.
Our location decision moving forward. Meanwhile, we.
We are very supportive of our shareholding ITC is a fantastic company well run well managed.
Very fast growing company in a very fast growing market with the most populous.
Countering the worlds and contributing a creative for BHG in terms of earnings.
Also in terms of cash because they have a very.
Good policy in terms of dividend payout and the share price actually has doubled in the last three years. So that's where we stand in terms of our ITC holdings.
Second HP ban Yeah. The agency brought yeah, David about in U E U.
Flavor ban.
We were first of all 50 per center around 50% of the cause consumables E in heated products.
In Europe is flavored in our case, we are over indexed to that it's more than 7% of our portfolio that we sell and you hit it broadly and in Europe. Our flavored. So that's why it was important to to launch. These are new oboe product that we did the first in the market and we are very pleased with the.
They have of competitiveness of these this product in these resonate quite nicely with our consumers, we it's up to the European market to set their own timing.
We have seen some markets there has been done so so check like you've quoted is one of them Romanians I want there's another one in those markets that we have seen that the flavor ban has already happening in the market, we manage who to hold and sometimes even grow over a chair with view, which is very pleased to see.
There are some other important markets like Poland, Italy still to come. So this is a process that we expect to come to a conclusion in terms of introduction of these flavor bans by mid of this year and we are well very well places with that because it's not just view is a greater alternative but also at the same time, we are rolling out.
This new device, which is the global Hypo bra, which has a enhancement capabilities are new to the world display also the heating is much brings a higher temperature a handsome more such find months not much that's faction.
The timing of the recession is longer as well. So we are progressing in the right direction.
Another question from the telephone lines.
Okay.
The next question.
Come off gain of Barclays. Please go ahead your line is open.
Hi, good morning, Thank you.
Three questions. So first question is on the New Board rising claims so clearly.
Stabilize share then the share is growing.
Coming at the expense of pricing and there is a concern that what you are doing could lead to the breakdown of pricing discipline in the U S.
Cigarette market. So could you please comment on that.
The second question I have is on new product launches. So you had highlighted the glue new product launch can you also talk of new product launches and the other two segments, a modern oral and E cigarettes.
Third question is on leverage so your comp, but there does that now you know they are all operating at less than two X leverage and that's where there's also guided group.
So is the right leverage for you also closer to two eggs rather than the middle of two X two clicks. Thank you.
Okay great.
On Newport.
It's a we are we are doing are we.
Introducing lateral in the brands and the which is aligned with the commercial products that we have seen the markets. So in that sense. We are not really doing something unique is just a recognition that our when we have an economic downturn, our consumers has absolutely no safeguards chew continuing the brands.
So we introduced a soft back with pilot that in some states in 2023 very successfully as you could see in the numbers that we have demonstrated and we expect to rollout.
This practice for throughout 2024, and it is important to despite the fact that there is a mix impact on that should keep consumers and their families. Because we have seen from the past that when the economic cycle.
Change they consume up to rates and so it's important that we keep them in the family and that's exactly what we want to achieve with the introduction of the ladder in the Newport, specifically for sure. It's not just that we are doing we are also assessing reassessing some channels that we haven't been really present before.
We shoot like for example, a deeper discount channels, one dollar channels that our consumers start migrating Chu and the and we are established some trade practices that can be competitive in those channels to support our brands as well and on top of that like I mentioned that in the during the presentation. We are increasing our trade ramps and all that has a.
Positive consequence in the in the market. So we are very thoughtful in the way we are doing that very measured in the way. We are doing that that's why we said since day. One that this is a process that will not take a moth will take a more than that in the we have carry on doing what we need to do throughout the end to end for the early signs are very.
A positive on that space, it's important just to make it the point around the combustible business.
Good to see that to the U S market. The total nicotine in the U S market in terms of volume and revenue with all the issues that we face in 'twenty, two and three are going I understand the focus on the combustible because it's quite a cash generative, but overall nicotine is.
<unk> space in the U S is still very favorable and are now for sure that a big chunk of that is growing into the illegal product see modest disposals that we expect the enforcement you'll come through and then once it comes through open up these white space and will be better positioned better than anyone because we are the leading brand in <unk>.
Paper as well and and then just making a link with your second questions about the other products.
We do have and in product and improve our product team modern Oro in the U S.
We pilot a.
These are new refresh it I would say.
Offered to consumers in terms of our campaign in terms of communication the few and look of the of the product and the very positively in the in New York, and and and we want to roll it out for throughout the year. We also have a modern aro or the plans are very exciting plans in <unk>.
Of our newer skus that we'll be launching different markets, where we have the freedom not in the U S.
And that will be just supporting the our leading position because we are basically leaders everywhere else other than the U S. In terms of vapor we have a strong pipeline coming from the second quarter of this year on.
On the disposable side on the on the boroughs or in the refill of both sides and with new technologies, and we will be hitting the market very soon and we are very positive around those are innovations that are coming through.
And in terms of the leverage.
Like I said.
The starting point photos Shaw to the two and a half times is basically for us to be considered as a starting point to have a bit more flexibility than we have currently we have been is not to say that we want to stick to and stay there and they are trying to have.
Like I said I don't have major concerns about the leverage because we have this very cash generative company. We can make improvements at about 1.2 0.3 in any given year. So I think that once we get to the two and a half we can have more flexibility than we currently have today. That's my whole point about the middle of the time.
Okay.
And another question from the lines.
Thank you. The next question he was shot Koran of Morgan Stanley. Richard. Please go ahead. Your line is open.
Thank you and good morning, Victoria today on and Jeff and Thanks for taking my questions. Just a couple from me one.
Just to go back on heated tobacco the settlement with PMI can you just explain.
Whether the legal disputes impacted your ability to innovate and how you think this will change your prospects if at all.
In the category going forward in the medium term and then my second question just to drill down a bit more on U S. Combustibles I know you don't want to give 'twenty 'twenty four guidance on the U S. But if I can ask things a bit differently given how you preliminarily guided on 2025 do you expect the level of competitiveness in the marketplace and the down trading that we're seeing.
King.
Continue into next year. Thank you.
Okay.
On the on the air.
The IP deal with PMI was primarily relate to choose to settle all these are pending.
Case that we have are around the globe and we did that and what you say without any.
The compensation of monetary compensation. So photos immediately this reflects into the the case that we had against views out two in Virginia in the U S.
Also a number of litigations that were in dispute around growing in Europe, and the and also views in in Germany to mention some now eh.
With these these these deal also gives us for both companies actually to give peace of mind for borrowers to be focus on.
Developing and accelerating their tobacco harm reduction agenda and innovate our college of debt. So we were going to have a more freedom to do it in the future and this will be very positive.
Not just for <unk>, but also for the English as a whole because I think that Ah Ah we owe the industry once actually true to choose to have a a better prospect of of our with the different stakeholders around today, how important it is the tobacco harm reduction and get our acts.
Salary today in many jurisdictions. So this was a strong point of step forward to I have to say.
The the combustible business, Yeah, Youre right its difficult for me, but are at the end of the day I'm trying to you know and anyone can be doing these type of analogy is a lot of the downsides. We are seeing today is related to the macroeconomics and the the macroeconomics my expectation for next year is to it.
Prove compare with easier because we we are senior Reg discussions around the eventually interest rates start to to reduce we note that there is a correlation between consumer confidence and sales of cigarettes and and once we have seen in the past that once interest rates start coming down the whole sentiment change and eventually.
Confidence can recuperate recover back and this will have a positive impact on on secret. So the assumption is that next year will be bad for sure. One thing that is a big unknown and like I said before is the enforcement around modern disposal, which also impacts the combustible side, but from the macro point of view we would.
The business through which we improved from 25 homes.
I believe we've got another question from the line.
Yes, the next question to John.
Jonathan leaned out of Society Generale, Jonathan Please go ahead.
Okay. Thank you and good morning, gentlemen, two questions if I may.
First of all the launch of the Clos Hype a private I mean, you mentioned that as a premium product does is it does that mean, it's actually gonna be priced differently from previous iterations and other consumables any different. So is this just sort of step up to try and avoid the sort of price discounting we've seen in some of the key markets in two.
So this sort of mainline.
Glue hyper.
Yeah, Jonathan their devices is a red bean price it at a higher price compared with the previous one.
Clearly is a much improved device.
And we have space for that so this is one the consumables will be I'm Pruitt consumables and this this question it depends a lot on the circumstances of each market is.
It's very difficult to give a kind of one size fits so answer to that.
We have something in our hands that we believe there is much improved compare in terms of consumer compared with the past and if we want to reassess always there is a lot of activities in the below Wap as we speak today in tobacco heating products. So it's not just a question of what we want to do it.
How we see the competitive landscape as usual no in this case.
And I'm afraid, we're south of time, Oh, Jonathan sorry, I'll, let you finish your questions insurance another one yesterday.
Yeah, Okay I E. Okay.
Very quickly well, probably not not that quick on the on the vaping markets across internationally, there's been a number of countries.
That sort of formalize the market, having previously been sort of a bit of a gray area.
Is that something that you know is that major markets out there, which you expect to sort of formalize the vaping market, which would represent a real opportunity.
Yeah, well, we are seeing we are encouraging to see some markets are taking the tobacco harm reduction in a in a in a in a in a very preliminary basis.
We just saw for example, New Zealand.
Very supportive of vaping, which is very favorable even the U K they want to regulate further but today. They have all the mines that are it is a it's a very important tool to reduce the incidence of smokers in general Canada is the same is a question of how you fine tune. The regulation, we are seeing more recently accounts like <unk>.
Really where we are expecting a 10 year time them to open up the market for four vapor and we note that there are discussions in big markets like Brazil are.
For example, they have a public consultation ronny as we speak in terms of Ah, if they will regulate or not a vapor.
Turkey is another big market in our current assumptions, we are not expecting any of those are big markets make a bigger moves in the in the short term.
But we expect that these as we as we progress and too and this is one focus area like a Saturday is sustainable sustainable futures about that we expect to have more and more evidence basic science fact base at the points through which we engage with Oh go those are.
Different authority as Gordon mentioned now that you'll be able to unlock the potential that could make a tremendous positive impact for the current smokers in those markets.
Okay. Thanks, Thank you very much.
As I was saying I'm afraid we've run over time that I think we've got one more question on the line, which we will take.
Yeah.
Thank you. The next question go teach our free bleach MLR of Bank of America Merrill Lynch. Jeffrey. Please go ahead. Your line is open.
Thank you very much and thank you for taking your time I have a couple of questions. The first one is on the I T. He is Hertzel D merger I was wondering how you were thinking about your future stake in that company and if you would be immediately disposing. It as you mean that you get the regulatory approvals for it and the second.
Question is on the U S convertibles margins when you discuss about the latter end of the products are and the introduction of the soft patch for example, with Newport as a margin.
At the same level of margin as your regular Newport products. Thanks very much.
Okay. So Jeff is the the first question.
What I have to say to us that there is no strategic intent from V. A teacher be minority shareholder of a hotel in our in the in our in Indian market.
Now you have to bear in mind that a they are floating 60% of their hotel business Cpuc's floating 6% of the hotel business early 222 to know exactly the timing of that we expect to be more towards the end of the year and are in the decision around what to do with this stake will be taken on board by the board.
When it comes to time, and Oh I'm going to leave their question on their hotel. The the second one is a the lottery in Newport, we cannot keep the same level of margins of the price at the very top but a more important when we consider the level of cash.
Anybody's nation that we have and more important the retention of consumers with it there is a very positive move and Thats why we have pilots will have to take our conclusions and then we start to rollout throughout 2024.
Thank you very much today and Javid and many thanks to everybody for all your questions I apologize that we haven't managed to get the questions online, but we the IR team will be responding to days later.
Later on today and with that I'll hand back to today for closing remarks, okay. Thank you all for listening today.
While there is still more to do.
Hence the investment choice.
Right.
Yes.
But long term growth and value creation.
Thank you again for joining us today I look forward to keep you updated as we our progress and we deal with the smokeless would together.
Yeah.