Half Year 2024 British American Tobacco PLC Earnings Call
Tadeu Luiz Marroco: to rewarding shareholders with strong cash returns. And I'm pleased with our progress in enhancing financial flexibility, enabling the initiation of a sustainable share buyback. This year is a key moment in our transformation journey as we sharpen our execution, enabling us to navigate near-term market challenges and drive our sustainable transformation. Turning to the drivers of 2024 delivery. As we have previously guided, 2024 is an investment year for BAT.
With a strong cash returns.
And I'm pleased with our progress in enhancing financial flexibility, enabling the initiation of a sustainable share buyback.
This year is a key moment in our transformation journey as we sharpen our execution, enabling us to navigate near term market challenges and drive our sustainable transformation.
Turning to the drivers of 'twenty 'twenty four delivery.
As we've previously guided 20 to 24 is an investment year for B E T.
Tadeu Luiz Marroco: In the first half, we have invested to strengthen our U.S. business, accelerate innovation momentum, and enhance capabilities that support our strategic delivery. This, together with Lapping, a tough comparator in APMEA, means we expect an acceleration in our second-half performance. I'm encouraged that our new category launch and our first half U.S. investments are gaining traction, together with the expected unwind of U.S. wholesale inventory movements related to the year-on-year timing of our first half price increase.
In the first half we have invested to strengthen our U S business accelerate innovation momentum and enhanced capabilities that support our strategic delivery.
This together with lapping a tough comparator in that mirror means we expect an acceleration of our second half performance.
I'm encouraged that our new category launchings.
And our first half U S investments are gaining traction.
Together with the expected unwind ws wholesale inventory movements related to the year on year timing of our first half price increase.
Tadeu Luiz Marroco: I'm confident that we are on track to deliver our full year guidance. This time last year, I shared a clear set of objectives to sharpen our execution and build a more modern and agile BAT. Over the last 12 months, working together with our broader teams, we have made good progress across the six areas of focus. We will touch on some of these highlights in more detail as we go through today's presentation.
I'm confident that we are on track to deliver our full year guidance.
This time last year I shared a clear set of objectives to sharpen our execution and build a more modern and the J O B E T.
Over the last 12 months working together with our broader teams. We have made good progress across these six areas of focus.
We will touch on some of these highlights in more detail as we go through todays presentation.
Tadeu Luiz Marroco: While there is still more to do, we are making good progress, and I am confident that the choices we have made and actions we are taking are the right way forward for BAT. And with that, I will hand over to Soraya to take you through the details of our results. Thank you, Tadeu, and good morning, everyone.
While there is still more to do we are making good progress and I'm confident that the choice. We have made and the actions. We're taking are the right way forward for beauty.
And with that I will handover to Soraya to take you through the detail of our results.
Soraya Benchikh: I'm Soraya Benchikh, CFO of DAT, and before I take you through the results, I would like to introduce myself. I'm Lebanese, and having started my career in finance at Gillette and GE, I then spent many years working at BAT in Europe, Russia, Africa, and the Middle East.
Soraya: Thank you Tyler and good morning, everyone, I'm, sorry, I, a N chic CFO J T.
Soraya: And before I take you through the results I would like to introduce myself and.
Soraya: And revenues and having started my career in finance at your Latin G. I then spent many years working at the 80 across Europe, Russia Africa, and the Middle East.
Soraya Benchikh: I have spent the last 12 years in general management, and my last four have been at Diageo, culminating in my role as President for Europe. Now, after two months back at BAT, I'm excited to join Tadeu and the team to work on the next stage of our transformation. As CFO, my focus will be on supporting BAT's transformation with financial stability and effective resource allocation. This includes driving quality growth by balancing top and bottom line performance and targeting investments to deliver better returns and consistent cash generation.
Soraya: I have spent the last 12 years and general management and my last fall has been at the agile, culminating in my role as President of Europe.
Soraya: Now after two months backup VA T I'm excited to join today and the team to work on the next stage of our transformation.
Speaker Change: As CFO my focus will be on supporting Bat's transformation with financial stability and effective resource allocation.
Speaker Change: This includes driving quality growth by balancing top and bottom line performance and targeting investments to deliver better returns and consistent cash generation.
Soraya Benchikh: I will do so by prioritizing understanding market trends and consumer needs, investing in innovation and R&D, streamlining operations for efficiencies, while managing organizational change effectively and aligning with our sustainability goals. I am passionate about transformative leadership and committed to fostering creative, inclusive, and empowered teams.
Speaker Change: I will do so by prioritizing understanding market trends and consumer needs investing in innovation and R&D streamlining operations for efficiencies.
Speaker Change: One managing organizational change effectively and aligning with system our sustainability goals.
Speaker Change: I am passionate about transformative leadership and committed to fostering creative inclusive and empowered teams.
Soraya Benchikh: Maintaining transparent and consistent communication with stakeholders is also key for me, and I really look forward to sharing insights into our performance and future outlook with you. Now, moving on to our first half result.
Speaker Change: Maintaining transparent and consistent communication with stakeholders is also key for me.
Speaker Change: And I really look forward to sharing insights into our performance and future outlook.
Speaker Change: With you.
Now moving to our first half results.
Soraya Benchikh: Our reported results reflect the impact of our exit from Russia and Belarus in September last year, higher amortization and impairment charges following the decision to start amortizing the US-acquired combustible brands from January 2024, and a gain recognized in respect of the partial sale of the group's investment in IT. Now, to better understand the underlying performance of the business and present a like-for-like comparison, excluding Russia and Belarus, we will focus today on organic, adjusted, constant currency results, unless otherwise stated. Our group revenue was down 0.8%, while new category revenue grew over 7%. Profit from operations was down 0.9%, and diluted EPS was up 1.3%.
Speaker Change: Our reported results reflect the impact of our exit from Russia, and Belarus in September last year higher amortization and impairment charges. Following the decision to start amortizing. The U S acquired combustible brands from January 2024.
Speaker Change: And the gain recognized in respect of the partial sale of the group's investment in ITC.
Speaker Change: Now to better understand the underlying performance of the business and present, our like for like comparison, excluding Russia, and Belarus, We will focus today on organic adjusted constant currency results unless otherwise stated.
Speaker Change: Our group revenue was down 8%, while new category revenue grew over 7%.
Speaker Change: <unk> from operations was down 9% and diluted EPS was up one 3%.
Soraya Benchikh: While our group results have been impacted by continued macroeconomic headwinds in the U.S., we have also made targeted investment choices, and these have included continued investment in our U.S. commercial plans with related wholesaler inventory movements and investment in new category launches globally in order to strengthen our portfolio and drive sustainable growth and value creation. As you can see, our wholesaler inventory movements in the US significantly impacted our first half delivery. Excluding these, our group revenue would be flat, and profit from operations was up 0.5%.
Speaker Change: While our group results have been impacted by continued macroeconomic headwinds in the U S. We have also made targeted investment choices and these have included.
Speaker Change: Continued investment in our U S commercial plans with related wholesaler inventory movements.
Speaker Change: And the investments in new category launches globally in order to strengthen our portfolio and drive sustainable growth and value creation.
Speaker Change: As you can see our wholesaler inventory movements in the U S significantly impacted our first half delivery.
Speaker Change: Excluding these our group revenue would be flat and profit from operations was up <unk>, 5%.
Soraya Benchikh: We expect these movements to unwind in the second half and have no material impact on our full year delivery. Now, I will dive into some of the key drivers of our performance. We delivered 4.3% combustible price mix, with pricing up 7.2% offset by a negative geographic mix mainly driven by the US. In addition, we achieved a flat operating margin, driven by improvement in our new category contribution and our continued focus on efficiencies, despite absorbing a 1.8% transactional effects headcount.
Speaker Change: We expect these movements to unwind in the second half and have no material impact on our full year delivery.
Speaker Change: Now diving into some of the key drivers of our performance, we delivered 4.3% combustible price mix with pricing up seven 2% offset by negative geographic mix, mainly driven by the U S.
Speaker Change: In addition, we achieved a flat operating margin driven by improvement in our new category contribution and our continued focus on efficiencies despite absorbing a 1.8% transactional FX headwind.
Soraya Benchikh: Excluding the US, which I will discuss in more detail later, in the rest of the world, we delivered 4% revenue and 4.6% profit from operations growth in line with our medium-term guidance. This reflects the resilience of our multi-category portfolio and the benefit of our global footprint. Our new category revenue growth in the first half was driven by an excellent performance from Velo in all three regions. We expect an acceleration of new category performance in the second half driven by the phasing of our innovation launches, which we will touch on in more detail later in the presentation. I will now share more detail on our key category drivers. As usual, market shares for our top markets are available in the appendix. Starting with vapour, the fundamentals of the vapour category are strongly positive.
Speaker Change: Excluding the U S, which I will discuss in more detail later and the rest of the world, We delivered 4% revenue and $4, 6% profit from operations growth in line with our medium term guidance.
Speaker Change: This reflects the resilience of our multi category portfolio and the benefit of our global footprint.
Speaker Change: Yeah.
Speaker Change: Our new category revenue growth in the first half was driven by an excellent performance from Vela in all three regions.
Speaker Change: We expect an acceleration in your category performance in the second half driven by the phasing of our innovation launches, which we will touch on in more detail later on in the presentation.
Speaker Change: I will now share more detail on our key category drivers.
Speaker Change: As usual market shares for our top markets are available in the appendix.
Soraya Benchikh: The total number of vapour consumers is accelerating, and vapour is the largest contributor to active new category usage, capturing 65% of consumers. Views revenue was up nearly 3%, delivering a continued positive category contribution. There was strong revenue growth in Europe and Latvia, which was partly offset by the impact of illicit single-use vapor products in the US and Canada. Views maintains global value share leadership and also remains the number one brand in the US.
Speaker Change: Starting with vapor the fundamentals of the vapor category a strongly positive.
Speaker Change: The total number of vapor consumers is accelerating and vapor is the largest contributor to active new category usage, capturing 65% of consumers.
Speaker Change: Hughes revenue was up nearly 3% delivering a continued positive category contribution.
Speaker Change: There was strong revenue growth and I think in Europe in Nokia, which was partly offset by the impact of illicit single use Facebook products in the U S.
Speaker Change: In Canada.
Speaker Change: Views maintained global value share leadership and also remains the number one brand in the U S.
Soraya Benchikh: While we are losing share in the U.S. due to the continued proliferation of illicit products, we are actively working to drive more effective regulation and enforcement at the state and federal level. In June, we submitted the age-gated VUZE Pro PMTA, and last week, we received a marketing authorization order for our VUZE Alto device and tobacco flavors, confirming that the continued marketing of these products is appropriate for the protection of public health.
Speaker Change: While we are losing share in the U S. Due to the continued proliferation of illicit products. We are actively working to drive more effective regulation and enforcement at the state and federal levels.
Speaker Change: In June we submitted the age gated Jews Pro P. M T E and last week, we received our marketing granted order for our views alto device and tobacco flavors confirming that the continued marketing of these products is appropriate for the protection of public health.
Soraya Benchikh: Outside the US, we maintain value share leadership in AME at 32%. Although our regional performance was impacted by the flavor ban in Quebec province and Canada, where volume has shifted to the illegal market due to lack of enforcement, our value share in Europe grew 120 basis points. We are excited about the developing opportunity in APMEA, with our revenue growing 48% driven by South Korea, New Zealand, and Indonesia. However, in heated products, industry growth is slowing with growing poly-use. Glow's revenue was down 4%, mainly impacted by price repositioning in Japan and Italy in mid-23, and VO Pipeline build at the end of 23 in certain AME markets ahead of the flavor ban on tobacco consumers.
Speaker Change: Outside the U S. We maintained value share leadership in Miami at 32%.
Speaker Change: Now all of our regional performance was impacted by the flavor ban in Quebec Province in Canada, where volume has shifted to the illegal market due to lack of enforcement of.
Speaker Change: Value share in Europe grew 120 basis points.
Speaker Change: We are excited about the developing opportunity and atmosphere with our revenue growing 48% driven by South Korea, New Zealand and then the Nisha.
Speaker Change: And he just products industry growth is slowing with growing polices.
Speaker Change: <unk> revenue was down 4%, mainly impacted by price repositioning in Japan, Italy in mid 'twenty three.
Speaker Change: And V O pipeline build at the end of 'twenty, three and certain amine markets ahead of the flavor ban on tobacco consumables.
Soraya Benchikh: Glow has started to deliver sequential category volume share improvement in key markets since December and is stabilizing share, being down 20 basis points year-to-date at 16.8 versus 110 basis points in 2020. This has been driven by the encouraging early consumer response to our new innovations, HyperPro and Improved Consumer. As part of our innovation pipeline, HyperPro is an important first step into the premium HP segment.
Speaker Change: Glo has started to deliver sequential category volume share improvement in key markets since December and is stabilizing share being down 20 basis points year to date at 16.8 versus 110 basis points and 2023.
Speaker Change: This has been driven by the encouraging early consumer response to our new innovations hyper pro and improved consumables.
Speaker Change: As part of our innovation, our hyper pro AR of our innovation pipeline hyper pro is an important first step into the premium H B segment.
Soraya Benchikh: As a result, we are seeing an improving performance, with our June volume share up 60 basis points in Japan and up 70 basis points in Italy versus December. This is especially encouraging as we also raised consumables pricing in both markets during the period. All together, we drove a strong improvement in total category contribution. With the majority of HyperPro rollouts completed and VO, our tobacco-free consumables range now launched in 19 markets and outperforming competing products, we expect an acceleration in our second half performance. Now moving on to modern oral.
Speaker Change: As a result, we are seeing an improving performance with our June volume share up 60 basis points in Japan, and up 70 basis points in Italy versus December.
Speaker Change: This is especially encouraging as we also raised consumables pricing in both markets during the period.
Speaker Change: Altogether, we drove a strong improvement in total category contribution.
Speaker Change: With the majority of hyper pro Rollouts completed anvil, our tobacco frequency levels range now launched in 19 markets and outperforming competing products, we expect an acceleration in our second half performance.
Speaker Change: Now moving on to modern oral.
Soraya Benchikh: The fastest growing new category, where new markets with no oral tradition now account for one quarter of industry volume. In H1, revenue was up 49%, with growth across all regions and a growing category contribution. Our market share continued to grow, with our volume share of Modern Oral up 30 basis points. In AME, we maintain clear leadership of the modern oral category with 65% volume share and VLOW capturing the majority of the category growth. Velo's continued performance is driven by achieving the highest consumer acquisition and conversion scores and the strongest brand power in key markets.
Speaker Change: The fastest growing new category, while new markets with no oral tradition now account for one quarter of industry volume.
Speaker Change: And he chuang revenue was up 49% with growth across all regions and the growing category of contribution.
Speaker Change: Our market share continued to grow with our volume share of modern oral up 30 basis points and Ami we maintained clear leadership of the modern oral category with 65% volume share and velo, capturing the majority of the category growth.
Speaker Change: Vilas continued performance is driven by achieving the highest consumer acquisition and conversion scores and the strongest brand power and key markets.
Soraya Benchikh: Importantly, an AME VLO's gross margin per ml is over two times that of combustibles, driving a strong increase in category contributions. In the U.S., we are encouraged by results from our New York pilot featuring a refreshed Velo brand expression. In H1, we rolled out nationally, returning our U.S. performance to strong growth, with revenue up 120% and reaching 7.6% of volume share in June, up 3 percentage points versus December. In addition, following positive consumer testing, we started the U.S. national rollout of grisly modern oral injuries.
Ami: Importantly, an Ami is vilas gross margin per mill is an army villas gross margin for Mel is over two times that of combustibles driving a strong increase in category contribution.
Ami: And the U S. We are encouraged by results from our New York pilot, featuring a refreshed velo brand expression and H, one we rolled out nationally returning our U S performance to strong growth with revenue up 120% and reaching seven 6% of volume.
Ami: Sure in June up three percentage points versus December.
Ami: In addition, following positive consumer testing, we started the U S national rollout of grizzly modern oral in June.
Speaker Change: Uh huh.
Soraya Benchikh: One of my key priorities is to ensure that as we transform, we balance top and bottom line delivery. This is demonstrated with our new category contribution now driving our contribution margin higher whilst we continue to invest for our future growth. New categories are now meaningfully contributing to group results as we benefit from increased scale and efficiency. Building on this momentum, we expect to deliver a strong year-on-year improvement in new category profitability in 2024. Now turning to combustibles, volumes declined by 6.9% on an organic basis.
Speaker Change: One of my key priorities is to ensure that as we transform we balanced top and bottom line delivery.
Speaker Change: This is demonstrated with our new category contribution now driving our contribution margin up whilst we continue to invest for our future growth.
Speaker Change: New categories are now meaningfully contributing to group results as we benefit from increased scale and efficiencies.
Speaker Change: Building on this momentum we expect to deliver a strong year on year improvement in your category profitability in 2024.
Speaker Change: Now turning to combustibles volumes declined by six 9% on an organic basis.
Soraya Benchikh: This was driven by wholesaler inventory movements in the U.S. 2023 market exits and supply chain disruptions in Sudan. If we exclude these one-offs, our volume was down 4.7%. Our volume share was up 30 basis points, driven by strong momentum in key combustible markets such as Brazil, Bangladesh, and Pakistan. However, value share decreased by 10 basis points, with the impact of our US commercial actions in the US more than offsetting value share gains in AME and APMEA, which delivered a combined increase of 20 basis points.
Speaker Change: This was driven by wholesaler inventory movements in the U S 2023 market exits and supply chain disruptions and.
Speaker Change: In Sudan.
Speaker Change: If we exclude these one offs our volume was down four 7%.
Speaker Change: Our volume share was up 30 basis points, driven by strong momentum in key combustible markets, such as Brazil, Bangladesh and Pakistan.
Speaker Change: Value share decreased by 10 basis points with the impact of our U S. A commercial actions in the U S more than offsetting.
Speaker Change: Value share gains in Ami and apnea, which delivered a combined increase of 20 basis points.
Soraya Benchikh: Revenue was down 2.6%, driven by the U.S., partially offset by resilient performance in AME and APMEA, delivering combined revenue growth of 2.6%. Now turning to our regions. In the U.S., total revenue was down 7%, mainly driven by combustible performance and the impact of illicit products on the vapor.
Speaker Change: Revenue was down two 6% driven by the U S, partially offset by a resilient performance in Ami and apnea delivering combined revenue growth of 2.2.
Now turning to our regions.
Speaker Change: In the U S. Total revenue was down 7%, mainly driven by a combustibles performance and the impact of illicit products on the vapor category.
Soraya Benchikh: As previously discussed, we have continued to actively invest in strengthening our portfolio, with the majority of our previously announced investment in commercial initiatives now completed in the first half. Tadeu will share more detail on this later in the presentation. Adjusted profit from operations was down 5%, driven by declining revenue, partially offset by efficiency gains, enabling us to expand our margins by 100 basis points. Adjusting for wholesaler inventory movements, revenue was down less than 5%, and adjusted profit from operations was down 2.6%. U.S. combustibles industry volume was down 10% or 9.5% on a sales-to-retail basis, excluding inventory movement.
Speaker Change: As previously discussed we have continued to actively invest in strengthening our portfolio with the majority of our previously announced investment in commercial initiatives now completed in the first half.
Speaker Change: I will share more detail on this later on in the presentation.
Speaker Change: Adjusted profit from operations was down 5% driven by declining revenue, partially offset by efficiency gains.
Speaker Change: Enabling us to expand our margins by 100 basis points.
Speaker Change: Adjusting for wholesaler inventory movements revenue was down less than 5% and adjusted profit from operations was down two 6%.
Speaker Change: U S combustibles industry volume was down 10% online on a half percent on our sales to retail basis, excluding inventory movements.
Soraya Benchikh: Beyond secular market decline, industry volume was mostly impacted by a combination of macroeconomic headwinds and increasing poly usage, particularly driven by the growth of the illicit single-use vape. Our combustibles volume declined by 13.7% ahead of industry decline, mainly driven by wholesaler inventory movement. If we exclude the deep discount segments where we are not present, industry decline was nearly 11% in line with our volume decline when adjusted for inventory movements at 11.4%.
Speaker Change: Beyond secular market decline industry volume was mostly impacted by a combination of macroeconomic headwinds and increasing.
Speaker Change: Holly usage, particularly driven by the growth of the leases single use bags.
Speaker Change: Our combustibles volume declined by 13, 7% ahead of industry decline.
Speaker Change: Mainly driven by wholesaler inventory movements.
Speaker Change: If we exclude the deep discount segment, while we are not present industry decline was nearly 11% in line with our volume decline when adjusted for inventory movements at 11, 4%.
Soraya Benchikh: While our volume share is down year-to-date by 10 basis points and value share is down 30 basis points, I am pleased that our commercial plans are delivering signs of volume and value share recovery. Our volume share is up 10 basis points since the last half year, driven by a 90 basis point increase in the premium segment. In addition, we have started to recover value share, with a 20 basis point decline since last half year, led by a 20 basis point increase in our premium share, reaching our highest level in four years. Driven by this progress and adjusted for inventory moves, our combustibles contribution has recovered versus the last half year. Now looking outside the U.S., AME is a truly multi-category read.
Speaker Change: While our volume share is down year to date by 10 basis points and value share is down 30 basis points I am pleased that our commercial plans are delivering signs of volume and value share recovery.
Speaker Change: Our volume share is up 10 basis points since the last half year, driven by a 90 basis point increase in the premium segment and.
In addition, we have started to recover value share with a 20 basis point decline since last half year led by a 20 basis point increase in our premium share, reaching our highest level in four years.
Speaker Change: Driven by this progress and adjusted for inventory moves our combustibles contribution has recovered versus the last half year.
Speaker Change: Now looking outside the U S.
Speaker Change: Me as a truly multi category region smokeless products now represent 25% of regional revenues in markets, where we are present in over 50% of revenue in 11 markets.
Soraya Benchikh: Smokeless products now represent 25% of regional revenues in markets where we are present and over 50% of revenue in 11 markets. This drove continued strong regional delivery. Revenues grew 5% driven by higher revenue from combustibles, reflecting a resilient volume performance and pricing, alongside continued new category revenue growth driven by an excellent modern oral performance, which was up 47%. Excluding Canada, vapor revenues in AME were up 15%.
This drove continued strong regional delivery.
Speaker Change: Revenues grew 5% driven by higher revenue from combustibles, reflecting a resilient volume performance and pricing alongside continued new category revenue growth driven by an excellent modern oral performance, which was up 47%.
Speaker Change: Excluding Canada vapor revenues in Ami, we're up 15%.
Speaker Change: Adjusted profit from operations was up 5% as we continue to offset the impact of inflation with continued efficiency gains.
Soraya Benchikh: Adjusted profit from operations was up 5% as we continue to offset the impact of inflation with continued efficiency gains. And at MIA, we saw resilient performance against a very strong prior year comparison. Total revenue was up 2%, with combustibles revenue up 1%, driven by higher prices, partly offset by the decline, the industry decline in Australia, and supply chain disruptions in Sudan. Vapor and modern oil revenue are both up strongly, driven by geographic expansion and continued progress in emerging markets. HP's revenue was impacted by our price repositioning in Japan last year.
Speaker Change: And at <unk>, we saw a resilient performance against a very strong prior year comparator.
Speaker Change: Total revenue was up 2% with combustibles revenue up 1% driven by good pricing.
Partly offset by the decline the industry decline in Australia, and supply chain disruptions and Sudan.
Speaker Change: Vapor and the modern oral revenue were both up strongly driven by geographic expansion and continued progress in emerging markets.
Speaker Change: Fee revenue was impacted by a price repositioning in Japan last year.
Soraya Benchikh: Smokeless products now represent 18% of regional revenue in markets where we are present, and adjusted profit from operations was up 4% driven by strong pricing and continued efficiency gains. Now returning to our group performance.
Speaker Change: Smokeless products now represent 18% of regional revenue in markets, where we are present and adjusted profit from operations was up 4% driven by strong pricing and continued efficiency gains.
Speaker Change: Yeah.
Soraya Benchikh: Our operating margin was flat as we successfully offset high single-figure inflation and a nearly 2% transactional FX headwind with improving new category profitability and continued efficiency gains. Inflation was mainly related to LEAF, which we expect to ease in the second half. Turning now to EPS, we delivered Organic Constant Currency Adjusted Diluted EPS of up 1.3%. Our performance benefited from lower net finance costs, tax, and share count, which was partially offset by our reduced share of ITC profits. Our underlying tax rate was 24.4%, and we continue to expect a rate of around 25% for the full year with existing taxes.
Speaker Change: Now returning to our group performance, our operating margin was flat as we successfully offset high single figure inflation and a nearly 2% transactional FX headwind with improving new category profitability and continued efficiency gains.
Speaker Change: <unk>.
Speaker Change: Inflation was mainly related to leaf, which we expect to ease in the second half.
Speaker Change: Turning now to EPS, we delivered organic constant currency adjusted diluted EPS up one 3% outperformance.
Speaker Change: Our performance benefited from lower net finance costs.
Speaker Change: <unk> and share count, which was partially offset by a reduced share of ITC profits.
Speaker Change: Our underlying tax rate was 24, 4% and we continue to expect a rate of around 25% for the full year with existing tax rates.
Soraya Benchikh: BAT is a highly cash-generative company. Our cash flow conversion of 78% in the first half puts us well on track for another year of cash conversion in excess of 90%, enabled by our continuous improvement mindset and further resource optimization. Due to the timing of lease purchases and MSA payments, our cash flow is always second half way.
Speaker Change: P. T is a highly cash generative company, our cash flow conversion of 78% in the first half puts us well on track for another year of cash conversion in excess of 90% enabled by our continuous improvement mindset and further resource optimization.
Speaker Change: Due to the timing of leaf purchases and MSA payments, our cash flow is always second half weighted.
Soraya Benchikh: We now expect full-year growth capex of around £600m below adjusted depreciation and amortisation. This is above our previous guidance of £550 million as we expand production capacity in the fast-growing modern oil. We are making good progress on leverage and expect to be within our narrow target range of 2 to 2.5 times at year-end. We have seen some improvement in the interest rate environment with lower rates and tightening credit spreads. This, together with the cash we received from the ITC asset sale, has resulted in lower than expected net finance costs.
Speaker Change: We now expect full year gross capex of around 600 million pounds.
Speaker Change: Below adjusted depreciation and amortization. This is above our previous guidance of 550 million pounds as we expand production capacity in the fast growing modern oral category.
Speaker Change: We are making good progress on the leverage and expect to be within our narrow target range of two to two two to two and a half times at year end.
Speaker Change: We have seen some improvement in the interest rate environment with lower rates and tightening credit spreads. This together with the cash we received from the ITC asset sale has resulted in lower than expected net finance costs. As a result, we now expect full year net finance costs to be around 1.7 Bill.
Soraya Benchikh: As a result, we now expect full-year net finance costs to be around £1.7 billion, subject to both FX and interest rate volatility. As we continue our transformation journey, we are focused on the importance of disciplined capital allocation and strong shareholder return. We are committed to a progressive dividend, and we are making good progress on the leverage. We are committed to a sustainable share buyback, and in March, we re-initiated a share buyback starting with 700 million pounds in 2024 and 900 million pounds next year, enabled by the monetization of a portion of our ITC stake.
Speaker Change: <unk> pounds subject to both FX and interest rate volatility.
Speaker Change: As we continue our transformation journey, we are focused on the importance of disciplined capital allocation and strong shareholder returns.
Speaker Change: We are committed to a progressive dividend and we are making good progress on the leverage we are committed to a sustainable share buyback and then March we initiated a share buyback starting with 700 million pounds in 2024, and 900 million pounds next year innate.
Speaker Change: Enabled by the monetization of a portion of our ITC stake.
Soraya Benchikh: Looking forward, we are making targeted investment choices to drive our medium-term sustainable growth algorithm. As expected, our first-half performance was impacted by continued macroeconomic pressures and investment in our commercial actions. We are confident that our second half will accelerate, and we remain on track to deliver low single-digit organic revenue and adjusted profit from operations growth, including a 2% transactional FX headwind for the full year. Extrapolating current spot rates, we anticipate currency translation to be a 4% headwind on full-year adjusted profit from operations.
Speaker Change: Looking forward, we are making targeted investment choices to drive our medium term sustainable growth algorithm.
Speaker Change: As expected our first half performance was impacted by continued macroeconomic pressures and investment in our commercial actions. We are confident that our second half will accelerate.
Speaker Change: And we remain on track to deliver low single digit organic revenue and adjusted profit from operations growth, including a 2% transactional FX headwind for the full year.
Speaker Change: Extrapolating current spot rates, we anticipate currency translation to be a 4% headwind on full year adjusted profit from operations growth.
Soraya Benchikh: Now beyond 2024, we expect to progressively improve our delivery to 3 to 5% organic revenue growth and mid-single-digit adjusted profit-from-operations growth on an organic, constant-currency basis by 2022. And with that, I will hand over to Tadeu. Thank you, Soraya.
Speaker Change: Now beyond 2024, we expect to progressively improve our delivery to 3% to 5% organic revenue growth and mid single digit adjusted profit from operations growth on an organic constant currency basis by 2026 and with that I will hand.
Speaker Change: Back to today.
Speaker Change: Yeah.
Tadeu Luiz Marroco: I would now like to spend a few moments outlining the opportunity and pathway ahead for BAT and why we are confident we can deliver an acceleration in our second half performance. There are four clear accelerators that we expect to drive our second half performance. Improving U.S. performance and innovations in all three new categories driving double-digit revenue growth for the full year. In addition, we are lapping a softer comparator in APMEA and expect a continuous strong performance in AME.
Speaker Change: I think it's what I Oh.
Speaker Change: Now like to spend a few moments helped line the opportunity and pathway ahead for beauty and why we are confident that we can deliver an acceleration of our second half performance.
Speaker Change: There are four clear accelerators that we expect to drive our second half delivery.
Speaker Change: Improving U S performance innovations in all three new categories driving double digit revenue growth for the full year.
Speaker Change: In addition, we are lapping a softer comparator in the mirror and expect a continued strong performance he Amy.
Tadeu Luiz Marroco: As a result, we remain confident in delivering our guidance for 2024. Looking at the U.S. premium segment, we can see a clear correlation between consumer sentiment and premium segment volume trends. Historic and macroeconomic shocks have had a significant impact on consumer sentiment, and this, in turn, has driven an accelerated decline in premium volume.
Speaker Change: As a result, we remain confident in delivering our guidance for point to point before.
Speaker Change: Looking at the U S premium segment.
Speaker Change: We can see a clear correlation between consumer sentiment and premium segment volume trends.
Speaker Change: Historically microeconomic shocks have had a significant impact on consumer sentiment and these in turn has driven accelerated declining premium volumes.
Tadeu Luiz Marroco: However, over time, as consumer confidence levels improve, premium volume decline typically stabilizes, returning to a more normalized level. Although the U.S. market continues to evolve, we believe this further supports our outlook for improving U.S. delivery over the medium term. A key feature of our industry in recent years has been the strength of the deep discount segment as consumers looked to make the dollar stretch further. However, we are now starting to see deep discount volume growth slow dramatically, with market share remaining broadly flat since the third quarter of last year.
Speaker Change: However over time as consumer confidence levels improve premium volume decline typically stabilize returning to a more normalized level.
Speaker Change: Although the U S market continues to evolve we believe this further supports our outlook for improving U S delivery over the medium term.
Speaker Change: It keeps feature of our industry in recent years has been the strength of the deep discount segment as consumers look to make a bet dollars stretch further.
Speaker Change: We are now starting to see deep discount volume growth slowed dramatically with market share remained broadly flat since the third quarter of last year.
Tadeu Luiz Marroco: At the same time, the branded value segment has grown volume share, with BAT increasing its segment share, led by Lucky Strike. While we have not assumed a macro-improvement in our full-year guidance, we believe this early indication of low-end consumer recovery could provide a tailwind in the medium term. I want to share some more color on the portfolio actions we have taken and why we are confident these will drive improved performance moving forward.
Speaker Change: At the same time, the branded value segment has grown volume share with beauty, increasing its segment share led by Lucky strike.
Speaker Change: While we have not assumed the macro improvement in our full year guidance. We believe these early indication of low end consumer recovered could provide a tailwind in the medium term.
Speaker Change: I want to share some more color on the portfolio actions we have taken.
Speaker Change: And why we are confident these will drive an improving performance moving forward.
Tadeu Luiz Marroco: In the premium segment, we have invested in Newport SoftPak in key investment states and created a Leather Portfolio, which has driven a recovery in Newport's share of the total premium segment. This has enabled us to drive a 30% reduction in smokers switching out of the Newport brand family, resulting in an 80% reduction in low-end growth in the 19 states where Newport SoftPak has been deployed.
Speaker Change: In premium we have invested in Newport, Softbank and key investments states.
Speaker Change: Create a leather portfolio.
Speaker Change: Which has driven a recovery newport's share of the total premium segments.
Speaker Change: This has enablers should drive a 30% reduction in smokers switching out of the Newport brand family.
Speaker Change: Resulting in an 80% reduction in LOE and growth in the 19 States, where Newport Softbank has been deployed.
Tadeu Luiz Marroco: Taking a step back, we have a balanced portfolio of brands across all price points. Through our commercial initiatives, we have driven consistent value-share gains in both the premium segment with Natural American Spirit and in the branded value segment with Luck Strike. Natural American Spirit's distinctive brand positioning in the super premium segment benefits from a highly loyal consumer base, while Luck Strike, relaunched three years ago, remains the fastest-growing cigarette brand in Denmark
Speaker Change: Taking a step back we have a balanced portfolio of brands across all price points.
Speaker Change: Through our commercial initiatives, we have driven consistent value share gains in both the premium segment with natural American spirit.
Speaker Change: And in the branded value segments with look strike.
Speaker Change: Natural American Spirit's distinctive brand positioning in the Super premium segment benefits from a horror highly loyal consumer base.
Speaker Change: Why it looks strike Relaunches three years ago remains the fastest growing cigarette brand in the market.
Tadeu Luiz Marroco: A key element of our commercial investment has been expanding our contractor distribution universe over the last 12 months to reach 88% coverage. This has significantly improved our competitive position by offering more of our retailer partners increased sales force support. This has driven a 2.3 percentage points increase in volume sharing in these newly contracted outlets, with share gains across our brands. In addition, this has led to a 1.6% decline in the deeper discount segment as a result.
Speaker Change: A key element of our commercial investment has been expanding our contractor distribution universe over the last 12 months to reach eight eight percentage coverage.
Speaker Change: This has significantly improved our competitive position by offering more of our retailer partners increased its sales force support.
Speaker Change: This has driven a two three percentage points increase in volume sharing these newly contracted outlets.
Speaker Change: With share gains across our brands.
Speaker Change: In addition, this has led to a one 6% decline in the deeper this golf segment in these outlets.
Tadeu Luiz Marroco: All together, with these previously announced commercial initiatives now in place, we are confident that our actions will drive a better second half performance in the U.S. and further strengthen our portfolio over the medium to long term. Turn to regulation. We continue to advocate for more appropriate regulation and enforcement of new categories, especially in the U.S. vaping. During the first half, we saw an increase in enforcement action from the FDA, with increasing fines, import refusals, and seizures. In addition, the U.S. Justice Department and FDA recently announced the creation of a task force designed to harness the enforcement capabilities of multiple federal agencies to combat illicit products.
Oh together with this previously announced with commercial initiatives now in place. We are confident that our actions will drive a better second half performance in the U S and further strengths our portfolio over the medium to long term.
Speaker Change: Turning to regulation.
Speaker Change: We continue to advocate for more appropriate regulation and enforcement of new categories, especially in U S vapor.
Speaker Change: During the first half we saw an increase in enforcement action from the FDA with increasing finds import refusals and seizures.
Speaker Change: In addition, the U S Justice Department, and FDA recently announced the creation of a task force there.
Speaker Change: Designed to harness the enforcement capabilities of multiple federal agencies to combat illicit products.
Tadeu Luiz Marroco: However, the success of legal products is dependent on the FDA doing more to tackle illicit vaping. To support this, we continue to advocate for the publication of a PMTA list, which would provide clarity to all market participants. I'm pleased that just last week the US International Trade Commission announced it will investigate our patent infringement complaint against the manufacturers, distributors, and retailers of single-use illicit products. In addition, the ITC continues its investigation of our complaint against the unfair import of this illicit product.
Speaker Change: However, the success of legal products is dependent on FDA doing more to telco elicit vapor.
Speaker Change: To support this we continue to advocate for the publication of our PMT leased.
Speaker Change: Which would provide clarity to all market participants.
Speaker Change: I'm pleased that just last week the U S International Trade Commission announced that it will investigate our patent infringement complaint against them on the fracture as distributors and retailers of single use illicit products.
Speaker Change: In addition, the ITC continues its investigation of all complain against the unfair import of these illicit products.
Tadeu Luiz Marroco: Clearly, the pressure for enforcement is building. However, much more needs to be done to drive a meaningful impact over the medium term. At the state level, vapor directory or enforcement legislation has now been passed in 13 states.
Speaker Change: Clearly the pressure for enforcement is building.
Speaker Change: However, much more needs to be done to drive a meaningful impact over the medium term.
Speaker Change: At the state level vapor directory or enforcement legislation has now been Pasadena 13 states, meaning.
Tadeu Luiz Marroco: Meaning, once implemented, 31% of the tracked vapor industry volume will be covered by state directories. In Louisiana, the first state to implement a vapor directory with significant enforcement in October 2023, we are starting to see illicit product volume decline, with views out to capturing the majority of the volume flow back into the legal segment. As a blueprint, Louisiana is a powerful example of what can be achieved. However, it's important to note that the scope of vapor directories and regulation differs materially by state and that much more needs to be done to ensure effective enforcement of these regulations.
Speaker Change: Meaning once implemented 31% of the tracker vapor industry volume will be covered by state of directories.
Speaker Change: In Louisiana, the first states to implement a vapor directory with significant enforcement in your October 'twenty to 'twenty. Three we are starting to see Lisa product volume decline with views out of capturing the majority of the volume flow back into the legal segment.
Speaker Change: As a blueprint, Louisiana is a powerful example of what can be achieved.
Speaker Change: However, it is important to note that the scope of vapor directories and regulation differs materially by states.
Speaker Change: And that much more needs to be done to ensure effective enforcement of these regulations.
Tadeu Luiz Marroco: Turning now to Heated Products. As Soraya shared, we are starting to see a turnaround in low performance driven by HyperPro. With the majority of our launches now in place in the first half, we are confident we can build on this momentum through the rest of the year. The step change in performance is clear, with volume share gains in key HP markets. In Japan, Italy, and Poland, our professional device has a premium price position, and the launch of our upgraded consumables has enabled us to take price increases in key markets.
Speaker Change: Turning now to a heated products.
Speaker Change: That's what I have shared we are starting to see a turnaround in low performance driven by hyper Peru.
Speaker Change: With the majority of our launches now in place in the first half we are confident we can build on this momentum through the rest of the year.
Speaker Change: The step change in performance is clear.
Speaker Change: With volume share gains in key H B markets.
Speaker Change: Japan, Italy and Poland.
Speaker Change: Our pro device.
Speaker Change: Has a premium price positioning and the launch of our pre grated consumables has enablers should take price increase in key markets.
Tadeu Luiz Marroco: Importantly, since December, our value share in these key markets is now growing faster than our volume share, reflecting the strength of our innovations and commercial actions. So what has driven this turnaround? I have been very transparent that we needed to do more to strengthen our HP performance.
Speaker Change: Importantly, since December our value share in these key markets is now growing faster than our volume share, reflecting the strength of our innovation and commercial actions.
Speaker Change: So what has driven these turnarounds.
Speaker Change: I have been very transparent that we needed to do more to strength our HB performance.
Tadeu Luiz Marroco: And it all begins with better products. Leveraging our consumer insights, Glow Hyper Pro and consumables are responding strongly with consumers across key attributes, such as brand equity and perception. This is also driving an increase in average daily consumption amongst global consumers. These launches are the first step in our enhanced innovation pipeline for heated products and are a significant driver in the progress we are making to improve GLOW's category contribution. In Vapor, we have started to roll out exciting innovation, with significant launch plans for the second half. ViewsGo 2.0, our newest single-use vaporizer, delivers improved sensory experiences with superior heating technology.
Speaker Change: And this all begins with better product.
Leverage our consumer insights will hyper, Peru, and consumables are resonating strongly with consumers across key attributes such as brand equity and perception.
This is also driving an increasing in average data consumption amongst local schumer's.
Speaker Change: This launch the first step and that will enhance our innovation pipeline for heated products.
Speaker Change: And that a significant driver in the progress we are making to improve gloss category contribution.
Speaker Change: In vapour, we have started to rollout exciting innovations.
Speaker Change: With significant launch plans for the second half.
Speaker Change: Views go 2.0, our newest single use vapor believers in proven censorious with superior heating technology.
Tadeu Luiz Marroco: Importantly, this is our first device with a removable battery, which, together with the device lock, directly addresses key sustainability and safety concerns. We continue to upgrade our rechargeables experience with our new ViewsGo Reload device, which pairs with our improved Views flavor. Views Go Reload provides the flexibility and convenience of single-use products with a rechargeable device.
Speaker Change: Importantly, this is our first device with them, a removable battery, which together with a device look directly addresses key sustainability and safety concerns.
Speaker Change: We continue to upgrade our rechargeable was experience with our new views go reload device.
Speaker Change: Which bears rebel improving abuse flavors.
Speaker Change: Views go reloads provides the flexibility and convenience of single use products with a rechargeable device.
Tadeu Luiz Marroco: And earlier this month, in the US, we entered the emerging zero nicotine space with the launch of SENS. Putting all this together, we are confident these innovations can drive an improved view performance in the second half. In modern order, we are reviving our U.S. portfolio. I'm delighted by the performance of our refreshed Willow brand expression in our New York pilot, which has driven volume share up 7.2 percentage points to June versus pre-pilot levels reaching 16.5%. As a result of this success, earlier this year, we commenced a national rollout of refreshed villages.
Speaker Change: And earlier this month in the U S. We entered the emerging zero nicotine space with the launch of sensor.
Speaker Change: Putting all these together we are confident these innovations can drive and improve the views performance in the second half.
Speaker Change: In modern oral we are reevaluating.
Speaker Change: Our U S portfolio.
Speaker Change: I'm delighted by the performance of our refresh Zillow brand expression in our New York pilot.
Speaker Change: Which has driven volume share up seven two percentage points through June versus pre pilot levels, reaching 16.5 percentage.
Speaker Change: As a result of this success earlier this year, we commenced a national rollout of refresh at Villa.
Tadeu Luiz Marroco: Utilizing our consumer insights, we continue to innovate to broaden our offering and appeal to both traditional oral consumers through Grizzly Modern Oral and internationally by enhancing our flavors range. As you can see, we have exciting new innovations in markets, in each new category, to drive our second half acceleration. I am encouraged that our new category launches and our first half commercial investments to strengthen our U.S. combustible portfolio are gaining traction, which, together with the unwinding of U.S. wholesaler inventory movements, I'm confident will drive an acceleration of our group performance in the second half. As a result, we are on track to deliver our full year guidance.
Speaker Change: Utilizing our consumer insights, we continue to innovate to broaden our offering and the appeal to both traditional oracles tumors through recently modern oral.
Speaker Change: And internationally by enhancing our flavors range.
Speaker Change: As you can see we have exciting new innovations in markets in each new category to drive our second half acceleration.
Speaker Change: I am encourage that's our new category launches and our first half commercial investments to strengthen our U S. Combustible portfolio are gaining traction.
Speaker Change: Which together with the unwinding of U S wholesale inventory movements I'm confident with drive and will drive an acceleration of our group performance in the second half.
Speaker Change: As a result, we are on track to deliver our full year guidance.
Tadeu Luiz Marroco: In conclusion, 2024 is an investment year for BAT. We are sharpening our execution to navigate near-term market challenges and set the business up for a stronger future. We will continue to reward shareholders throughout our transformation, driven by consistent cash flows, disciplined capital allocation, and strong shareholder return. While there is more to do, our focus on quality growth is building momentum. And I'm confident this is the right approach to ensure we deliver long-term growth and value creation.
Speaker Change: In conclusion 'twenty 'twenty four is an investment year for beauty.
Speaker Change: We are sharpening our execution to navigate near term market challenge and set the business up for a stronger future.
Speaker Change: We will continue to reward shareholders throughout our transformation.
Speaker Change: Driven by consistent cash flows disciplined at disciplined capital allocation and strong shareholder returns.
Speaker Change: While there is more to do our focus on quality growth is building momentum.
Speaker Change: And I'm confident this is the right approach to ensure we deliver long term growth and value creation.
Tadeu Luiz Marroco: Thank you for listening. We will now be joined on stage by Victoria for the question and answer session. Thank you, Tadeu, and good morning everyone. If you've joined us via the webcast, you can type your questions directly into the online question box, or if you've joined the call, you can press star 1 on your telephone keypad.
Speaker Change: Thank you for listening.
Speaker Change: We will now be joined on stage by Victoria for the question and answer session.
Thank each day and good morning, everyone. If you've joined US via the webcast you can type your questions directly into the online question Bulks or if you joined the call you can press star one on your telephone keypad.
Unknown Executive: Tadeu and Soraya will be very happy to take your questions, and I will now hand over to the conference call operator. Thank you. And our first question today comes from Rashad Kawan from Morgan Stanley. Please go ahead.
Speaker Change: Today, that's why we'll be very happy to take your questions and I will now hand over to the conference call operator.
Speaker Change: Thank you and our first question today comes from Russia carbon from Morgan Stanley. Please go ahead.
Rashad Kawan: Hey, good morning, Soraya and Tadeu. Thanks for taking my questions and congrats on the results. A couple for me, both from the U.S., please.
Rushabh Kapadia: Hey, good morning, how are you today on I'm sorry. Thanks.
Russia carbon: Thanks for taking my questions and congrats on the results a couple for me both on the U S. Please.
Rashad Kawan: On the combustibles market, if I compare 2021, where you laid out the impacts on the markets, what you had in the full year, the key deterioration is coming from higher elasticities. Is that purely from increased poly usage, you think? Or is it just less volume of smokers that are cutting back, given the pricing environment and weak sentiment overall? I guess, have you seen a material change in consumer elasticity in U
Speaker Change: B combustibles market compares to the 21, where you laid out the impacts to the markets. What you had in the full year. The key deterioration is coming from higher elasticities.
Speaker Change: Is that purely from increased poly you said, you think or is it just less volume of smokers are cutting back given the pricing environment and we kind of an overall I guess have you seen a material change in consumer elasticity in English Combustibles and then my second question is on modern oral again in the U S. I mean, the acceleration we're seeing.
Rashad Kawan: And then my second question is on modern oral again in the U.S. I mean, the acceleration we're seeing is a bit of a surprise, to be honest, given you still don't have your more superior, obviously, European product in the US. Is it just about the brand refresh you've done?
Speaker Change: If it is a bit of a surprise to be honest given you still don't have youre more superior obviously European product in the U S.
Is it just about the brand refresh you've done are you benefiting a little bit from the shortages back by one of your peers there.
Tadeu Luiz Marroco: Are you benefiting a little bit from the shortages by one of your peers there? Any more color on what's going on in US oral? Thanks. Thanks again.
Speaker Change: Any more color on what's going on in U S. Modern oral I think.
Speaker Change: Thanks again.
Tadeu Luiz Marroco: Okay, Rashad, look, on the US combustible, we are not seeing a massive deterioration in terms of elasticity in the cigarette. What is impacting us in the industry as a whole is a combination of a very difficult micro environment. Remember that we came from a time of a lot of support from state and federal levels to consumers that was really reversed completely and taken out completely. And at the same time, consumers got hit by very high levels of inflation and very high levels of interest rates as well, which put mostly low-income consumers under a lot of stress financially.
Speaker Change: Hey, Raj look on the U S. Combustible. It's a we are not see a massive deterioration in terms of elasticity in the cigarette what is impacting us.
Speaker Change: And the industry as a whole is a combination of a very difficult macro environment remember that we came from the pandemic.
Time to solve a lot of support from the state federal level to consumers that was really reverse completely was picking out completely.
Speaker Change: And at the same time, the consumer got hit.
Speaker Change: Hit by very high levels of inflation, and very high levels of interest rates as well and put a mostly low income consumers under a lot of stress financially. So this clearly has an impact and this reflect any consumer sentiments. That's why we show in our presentation. The correlation now there.
Tadeu Luiz Marroco: So this clearly has an impact and is reflecting consumer sentiment. That's why we show in our presentation the correlation. Now, the other obvious driver for that is the proliferation of illegal vapour, single-user vapour products in the US. And the category continues to grow, despite the fact that the legal part of it is actually diminishing now. All the growth is more than compensating for the reduction on the legal side and going into those illicit sectors, and this is putting more pressure on them.
Speaker Change: Are the obvious driver for that is the proliferation of the illegal vapor.
Speaker Change: Single use it vapor products in the U S and are the category continues to grow despite the fact that the legal part of it is actually reducing now is oh the growth is more than.
Speaker Change: Compensated the reduction on the legal side and going into those illicit and this is putting more pressure on that so these are the major drives that's why we are seeing these high single digit industry decline in the U S is good to note that we are seeing some first our green shoots in terms of the.
Tadeu Luiz Marroco: So these are the major drivers that are why we are seeing this high single-digit industry decline in the US. It's good to note that we are seeing some early green shoots in terms of macroeconomics. The inflation is coming down. Weight inflation is catching up and narrowing the gap with overall inflation. We are seeing a small uptick in consumer sentiment more recently, and this, combined with a potential Fed move in terms of reducing interest rates by the end of the year, could all be positive for 2025 and 2026.
Speaker Change: Macroeconomics are there.
Speaker Change: Inflation is coming down.
Speaker Change: The weight inflation is catching up <unk> <unk> and narrowing the gap with the overall inflation, we are seeing a small uptick in consumer sentiment more recently and these are and these are combined with a potential fed move in terms of reduced interest rates by end of the year could all be positive more towards 20.
Speaker Change: 25, 2026 now your question about Pall users. This is a is a is a is the right one because at the end we are seeing more poly users <unk> dynamic in the U S market. So remember that's a before the pandemic we used to see secular decline in the west around 4% to 5% I think that these.
Tadeu Luiz Marroco: Now, your question about poly-users is the right one because, at the end, we are seeing more poly-users in the US market. So remember, Tetsa, before the pandemic, we used to see secular decline in the US around 4 to 5 percent. I think that this high end of the range now will, as soon as things stabilize on the macroeconomic side, become the low end of the range, a new range, around 5 to 7 percent.
Speaker Change: High end of the range now will be as soon as things stabilize on the microeconomic side become the low end of the range, our new range around 5% to 7% I would say that is the best the guests that he will have moving forwards when things start to stabilizing and we'd see at least a minimal there Bobby.
Tadeu Luiz Marroco: I would say that is the best guess that I have moving forward when things start stabilizing and we see at least a minimal level of enforcement on illegal products. Now, the modern oral question that you are referring to.
Speaker Change: Horsemint on the illegal product now the modern oral question.
Tadeu Luiz Marroco: Look, I think that most of the driving force for the improvement has had to do with our new expression of the brand because we piloted it in Q3 last year in New York, and we were already seeing some traction there before seeing any type of distribution issues with competitors in the market. So obviously, this more recent case is probably also helping to drive some growth in our offer. But you have to remember that we were already growing in New York at the end of last year, and that's the reason why we decided to do the national rollout in the first quarter of this year.
Speaker Change: You are referring to.
Speaker Change: We look at.
Speaker Change: There I think that most of the driver of the improvement in our <unk> has been has had to do with our our new expression of the brand.
Speaker Change: Because we pilot since our Q3 last year in New York, and we were already seeing some traction there before seeing any type of a of a of a distribution issues with competitors in the markets. So obviously these small recently case, probably is also helping to drive.
Speaker Change: Some growth in the in the in the in the in the in our offer and the but you have to remember that we are ready to grow in New York at the end of last year and Thats. The reason why we decided to do the national rollout.
Tadeu Luiz Marroco: And for sure, we have now grown Grizzly also in a new offer; it's early days, but we saw a lot of consumers of Grizzly actually move our interest in this new emerging segment, and we are trying to contemplate this within a very strong brand power, which is Grizzly in the US. Thank you very much.
Speaker Change: In the in the first quarter of this year.
Speaker Change: And for sure we have now.
Speaker Change: Grow our.
Speaker Change: Grizzly Ozal in a when a new offer is early days because we saw a lot of consumers of grizzly actually moving our interest in these new emerging segments and we are trying to two two contemplated these with our within our very strong brands.
Speaker Change: Power, which is a grizzly and in the U S.
Speaker Change: Thank you very much.
Gaurav Jain: Thank you. And we now move on to a question from Gaurav Jain from Barclays. Please go ahead. Hi, good morning. I have three questions. The first one is for Soraya.
Speaker Change: Thank you and we now move on to a question from Gaurav Jain from Barclays. Please go ahead.
Gaurav Jain: So if I look at your FX guidance, there is a 4% headwind, and that has been a structural issue with BAT given your presence in so many emerging markets. It was an issue for a lot of other FMCG companies, and we are now hearing from several companies, including Philip Morris, Unilever, and Coke, that they're targeting dollar EPS growth or pound EPS growth. So is that something which BAT would also like to move to, instead of just a constant currency EPS growth, actually try to have meaningful pound EPS growth? [inaudible] Sorry Gaurav, apologies, I didn't hear the last part of the question. If I understand correctly, are we confident that we can drive EPS growth on constant terms? Was that the question? and the current time?
Gaurav Jain: Hi, good morning.
Gaurav Jain: I have three questions. The one is the first one is for sure.
Speaker Change: So if I look at your FX guidance, there is a 4% headwind and that has been a structural issue would be given your presence in so many emerging markets because the issue for a lot of that FMC is you're going to be then we're now hearing from several companies, including Philip Morris Unilever cool.
Speaker Change: The other thing dollar EPS.
Speaker Change: <unk> grown total pound EPS growth.
Speaker Change: Is that something which.
Speaker Change: Wed also like to move to that instead of just a constant currency EPS growth.
Speaker Change: Actually tried to have meaningful bound EPS growth.
Speaker Change: Alright.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: On a constant basis.
Going forward, yes.
Speaker Change: Sorry, Gaurav apologies I didn't hear the last part of the question. If I understand correctly are we confident that we can drive EPS growth in constant terms is that was that the question.
Gaurav Jain: No, look, I think, you know, clearly, you have guidance that you can grow EPS on a constant currency basis, but it has not. I mean, it has been a struggle to drive pound EPS growth, and that is because FX has been a structural headwind. And we are seeing some of your peers, including Philip Morris, now talk of, [inaudible] So is that something which BIT should also do? I'm trying to understand, and maybe Tadeu can also chime in there. Yes, I am confident, Gaurav, that we can drive EPS growth on current. Do you want to add anything to that? Yeah, of course. Gaurav, look...
Speaker Change: And current.
Speaker Change: Look.
Speaker Change: I think it'll be a bit.
Speaker Change: Clearly you have a guidance that you've been growing EPS on a constant currency basis, but it does not not.
Speaker Change: I mean, it has been a struggle to drive bounds you'd be as growth.
Speaker Change: Because FX has been a structural headwind.
Speaker Change: And we are seeing some of your peers, including Filip modest amount.
Speaker Change: Olive garden's EPS growth.
So is that something that should be a decent also do.
Speaker Change: And what I'm going to stop.
Speaker Change: Maybe you can also chime in there.
Yes, I am confident gaurav, we can drive our EPS growth on current terms.
Speaker Change: Do you want to add.
Speaker Change: We're in look.
Gaurav Jain: Remember that our numbers have a transactional effect on this now some of these companies you are referring to come with numbers that are constant numbers that actually exclude transactions, which makes an even bigger distance between constant and current. Let's put it that way. So for sure, in years like the ones that we are facing now, with a lot of devaluations coming, mainly in emerging markets, it's difficult to imagine that you can offset all that. But like Soraya said, in the medium term, on a current basis, we should be able to deliver that. Sure, thank you.
Remember that our numbers, we have a transactional FX on this now some of these companies you are referring to they come with numbers at constant numbers that actually exclude transaction, which makes a very deep.
Speaker Change: Even bigger distance between constant and current let's put it that way so for sure in years like the ones that we are facing now with a lot of the evaluations coming mainly emerging markets is difficult to imagine that you can offset all that but like I said in the medium term on a current base we.
Should be able to be able to deliver that.
Gaurav Jain: The second question I had is, you know, on your NGP revenue and volume and how it has planned out in one edge. Their heated tobacco volumes organically are down, and they were down in Japan as well. And you had a lot of price repositioning in 2H23. And your e-cigarette business is also down. So do you think it makes sense to direct more of the investments into e-cigarette and away from heated tobacco? Otherwise, both segments are down.
Sure. Thank you.
Speaker Change: Military English and I had as you know on year and you'd be better than new and more lumen and know how it has panned out and run edge yes.
Speaker Change: If we could go after volumes organically are down.
Speaker Change: And they were down in Japan, as well and you had a lot of pricing repositioning into H 'twenty three.
Speaker Change: Use of led business is also down.
Speaker Change: So do you think it makes sense to direct more of their investments into E cigarettes and away from heated tobacco.
Speaker Change: Otherwise board the same.
Speaker Change: When her though.
Tadeu Luiz Marroco: Look, the situation in AME is impacted, and we refer to that in our presentation, by some stock movements that we did at the end of last year to prepare for the flavor ban in tobacco-heated products because we have to, in some markets, start selling veal, our non-tobacco flavor product, and if you adjust for that, AME, I think, that had a revenue of 2%, a volume of 7%, the So I'm very pleased, actually, with the progress that we are making. If you go to a place like Poland, for example, we have a 34% market share in the category. And in a difficult place like Italy, we are starting to see some improvements. The same is happening in Japan.
Speaker Change: Luca.
Amy: This situation he Amy.
Speaker Change: It is impacted then we referred to that in our in our presentation by some stock movements that we have done end of last year to prepare for the flavor ban in tobacco heating products, because we have to in some markets start selling view, our non tobacco flavor product.
Speaker Change: And if you adjust for that.
Amy I think that had a revenue up 2% of volume up 7% the volume will be double digits adjusted for that.
Speaker Change: So I'm.
Speaker Change: I'm very pleased actually with the progress that we are making you go to a place like Poland. For example, we have already 34% market share in the in the in the category and the and in difficult places like Italy, we start seeing some improvements the same happening in Japan, you have to remember that last year, we and I was very clear.
Tadeu Luiz Marroco: You have to remember that last year, and I was very clear and transparent about that. So when I came in as a CFO, I said that we didn't have a really competitive THP product. And we are focusing on improving our competitiveness in that segment. We managed to sign an IP agreement with PMI early in the year. And we also managed to get a product that is well superior. You saw some of the statistics that I presented today.
Speaker Change: Transparent about that so when I I came as a CFO I said, the we don't have a really competitive THP product tender, we have focus in improving our our our competitiveness in that segment, we manage who choose to sign an IP agreement with Pierre.
Tadeu Luiz Marroco: And if you consider that penetration of these devices is on average just 15%, all these improvements that you saw in my slide about everyday consumption, conversion, and retention, these will just grow from now until the end of the year. Not to mention the other platforms that we are now building in our pipeline. So I think the answer is yes, we should be investing. I think that we are going through a difficult period, mainly because of a lack of competitiveness, but I'm quite confident that we have started to have turned our competitive position in THP. Sure. Thank you so much.
Speaker Change: My early in the year and the <unk> and <unk> and we also managed to get in place product that is well superior you saw some of the statistics that I present today and if you consider that that penetration of these devices on averages 15%. All these improvements that you saw in my slide about average daily consumption.
Speaker Change: Conversion retention. These will just grow from from now until the end of the year not to mention the other platforms that we are now building our pipeline. So I think the answer yes, we should be investing I think that we are lapping a difficult period, mainly because of lack of competitiveness in the bud.
Speaker Change: I'm quite confident that we start having start you have turned the our competitive position in THP.
Gaurav Jain: And my last question is on, you know, e-cigarettes. Clearly, you know, very nice to hear that you have received the PMTA. Could you just remind us what your PMTA pipeline is now for e-cigarette in the US? And clearly, views go, it's doing pretty well internationally.
Speaker Change: Sure. Thank you so much and my last question is on <unk>.
Speaker Change: E cigarettes.
Speaker Change: Very nice to hear that you have received the PMT here.
Speaker Change: Could you just remind us what's your PMT it by playing now on E cigarettes in the U S and clearly views.
Speaker Change: It's doing pretty well internationally.
So how should we think about future P M tiers.
Speaker Change: Well.
Tadeu Luiz Marroco: So how should we think about future PMTAs? Well, Yeah, PMTAs, what we have already approved are basically the tobacco flavors of Alto, Vuze, Zero, and Solo, which as you know, are the largest combined PMTAs received in the US so far. We are disputing, as you know, the mental version of why we still keep selling because we believe that we have the data that is necessary for the FDA to take into consideration. So we received this day, and we are hopeful that this can be reviewed in the future. We have just submitted last month the PMTA for our age-gated device. This includes not just flavor but also some true fruit flavors as well, and menthol as part of this.
Speaker Change: Yeah. The PMT is well what we have already approved the it's basically the the tobacco flavors of Alto views zero in solar as you know is the largest.
Speaker Change: Combine it.
Speaker Change: PMT has received the U S. So far we are disputing as you'll know the mental version.
Speaker Change: Why are we still keep selling because we believe that we have the data that is necessary for the FDA to be to take into consideration. So we received this day and we are hopeful that this can be reviewed in future. We have just submitted our <unk>.
Speaker Change: Last month, the PMT for our age gated to device. This includes not just flavor, but also some true fruit flavors as well and mental.
Speaker Change: As part of this and <unk> and this is their most pressing P. M T. As a I have to say that we are now expecting.
Richard Felton: And this is the most pressing PMTA, I have to say, that we are now expecting. We are very hopeful that, given the fact that it is age-verified, with age verification technology, the FDA can, as they said, expedite the approval of this PMTA because this will probably be one tool that they will be considering in trying to bring back flavors that are so critical to move all the smokers out of cigarettes towards vapor in a responsible way. Thank you so much, you and, as a brief reminder, that is star number one for your questions over the telephone today. And up next, we have Richard Felton from Goldman Sachs. Please go ahead.
Speaker Change: We are very hopeful that given the fact that he is an age verify it with age verification technology beep if FDA.
If they can as they said to expedite the approval of these pay MTA because these will be probably one tool that today, they will be considering too.
Speaker Change: Trying to bring back in our flavors that is so critical to to to move our adult smokers out of cigarettes towards vapor in a responsible way.
Speaker Change: Thank you so much.
Speaker Change: Yeah.
Speaker Change: Thank you and as a brief reminder, that is star one for your questions over the telephone today.
Speaker Change: Next we have Richard Penson from Goldman Sachs. Please go ahead.
Richard Felton: My first question is on vapour outside of the US, where I think volume was down almost 10% in H1. Is there any color or detail you can share on the drivers of that, and whether those drivers are one-off in nature, or there's more structural headwinds that we should be aware of?
Richard Felton: Thank you good morning key questions for me. Please and my first question is on data outside of the U S, where I think volume was down almost 10% in H, one and is there any color or detail you can share on the drivers of that and whether those drivers are one off in nature or there's more structural headwinds that we should be aware of.
Tadeu Luiz Marroco: Then my second question, also on new categories. Look, I'd really like to understand how you're thinking about growing revenue versus improving profitability from here. Because if I take a step back and reflect on your performance over the last few years, you've missed your guidance on revenue, but profitability has improved much better than you had been previously guiding for. So looking forward, how do you think about managing your P&L for that part of the business, and how do you balance investing in further growth with also improving margin? Thank you. Soraya will take the second question.
Speaker Change: Then my second question was sort of new categories and they could relate to understand how youre thinking about growing revenue versus improving profitability from here because if I take a step back and reflect on your performance over the last few years, you've missed your guidance on revenue, but profitability has improved much better than you had been previously guiding for.
Speaker Change: And so looking forward how would you think about managing your P&L for that part of the business and how do you balance investing in further growth, but also in creating margin. Thank you.
Speaker Change: Okay, sorry, I will take the second question in regards to our vapor question outside the U S is pretty much impacted by Canada.
Soraya Benchikh: In regards to your vapor question, outside the US, it's pretty much impacted by Canada. This is basically Quebec that introduced new legislation limiting the amount of ML for 2 ML and banning all flavors other than tobacco without any force. So what we saw the following day was these proliferations of all these illegal products, bringing back big tanks full of flavors, and for sure, there is no level playing field. And that's the consequence that you are seeing there in Canada.
Speaker Change: These are basically kept back that introduce a new.
Speaker Change: Relation limiting the amount of email for two ml and AR and the banning all flavors other than tobacco and without enforcement. So what we saw in the falling day was this proliferation of all these illegal products are bringing back big banks full of flavors in.
Speaker Change: And for sure there is no level playing field and that's the consequence that you are seeing there in Canada. So in a way it's a one off until the regulators wake up and trying to.
Tadeu Luiz Marroco: So in a way, it's a one-off until the regulators wake up and try to enforce properly or review the regulatory element of that. That's why when you see the second pillar of our strategy, it's all about tobacco harm reduction, it's about having evidence, scientific evidence, points of discussion with key stakeholders, regulators, and policymakers to avoid this type of very misleading regulations being put in place without proper enforcement.
Speaker Change: Enforce properly or review the regulatory element of that that's why when you see the second pillar of our strategy is all about tobacco harm reduction is about having evidence science evidence points of discussion with key stakeholders regulators policymakers to avoid this type of a of a.
Speaker Change: Uh huh.
Speaker Change: Very nice leading regulations should be put in place without a proper enforcements now. So if you if you strip out Canada in reality, Amy has as a region grew 15% for revenue and are in the end. These without any impact of all these products that I show in my slides that view.
Tadeu Luiz Marroco: So if you strip out Canada, in reality, AME has, as a region, grown 15% in revenue, and this without any impact of all these products that I show in my slides. The views go 2.0, the views go reload, these are all reaching the market now in May, have not had any time in terms of the shares or performance that you saw in the performance this early today, and there are other markets that we are quite excited about, markets like New Zealand, which has now moved to a more sound regulatory environment and is allowing us to properly compete in the market. And we are gaining a lot of traction with our offers in New Zealand and also Korea. That is quite exciting.
Speaker Change: Glo go to zero the views go reloads. These are all reaching the market now in May has not anytime in terms of the share. So our performance that you saw in the in the in the performance a visa or early today and the <unk> and the other markets that are we are quite excited about.
Speaker Change: Markets like New Zealand that has now moved to a more well sounded regulatory environment and allow us to to to properly compete in the markets and we are gaining a lot of traction with our offers in New Zealand and also Korea that is quite exciting we are read market leaders in a very short period of time in Korea.
Soraya Benchikh: We are red market leaders in a very short period of time in Korea, and we also have prospects in markets like Indonesia. So overall, it's basically a consequence of the regulatory impact in Canada. In terms of balancing revenue growth and margin expansion, as you might recall, I mentioned that our priority is really to balance top and bottom line growth, and we're really looking to do this by continuing to invest, but more so targeting our investments in all the categories that have momentum, but also where there is more value, be it in categories or in geographies.
Speaker Change: And we also have prospects of like markets like Indonesia. So overall, it's a it's basically in summary, a consequence of our of the regulatory impacting in Canada.
Speaker Change: Okay I'll take the second question.
Speaker Change: In terms of balancing revenue growth and margin expansion.
Speaker Change: As you might recall I mentioned that our priority is really to balance top and bottom line growth and we will we're really looking to do this by continuing to invest but more so targeting our investments and all of the categories that have momentum, but also why we let where there is more value.
Speaker Change: Be it in categories Orient geography, so with targeting investment what what you will see is we'll continue to to balance both top and bottom line and this is evidenced by the fact that in the first half we showed the we've increased our category contribution by more than I think that was around 167 million.
Soraya Benchikh: So with targeting investment, what you will see is that we'll continue to balance both top and bottom lines. And this is evidenced by the fact that in the first half, we showed that we've increased category contribution by more than, I think it was around 167 million. And that expanded category contribution by 10 margin points, or 10 percent.
Speaker Change: And that's expanded category contribution by 10 margin points 10 percentage. So as we go forward and into the full year, we will continue our targeted investments and as Dan mentioned, we are very.
Soraya Benchikh: So as we go forward and into the fall year, we will continue our targeted investments. And as Tadeu mentioned, we are very strongly second half focused in terms of innovations coming to market. So we will have quite a lot of investment in the second half.
Speaker Change: <unk> half leaning in terms of innovations coming to market. So we will have put a lot of investment in the second half, but you will continue to see our category contribution increased year on year.
Mirza Faham Ali Baig: But you will continue to see our category contribution increase year on year, and this will be a really big priority for us going forward to target our investments and create our market. Great, thank you. Thank you. And from UBS, we have Farhan Beya with our next question. Please go ahead. Good morning, team. A couple from me as well, please.
Speaker Change: And this will be a really big priority for us going forward to target our investments and create our margins.
Speaker Change: Great. Thank you very.
Speaker Change: Very clear.
Speaker Change: Thank you.
Speaker Change: And from UBS behalf.
Speaker Change: With our next question. Please go ahead.
Mirza Faham Ali Baig: Could I go back to the increased poly usage that you're seeing? I think one of your competitors mentioned that the consumer conversion rates on vapor are lower than that seen in heated tobacco. I just wanted to get your perspective on what you're seeing in the conversion rates between the two categories and how you generally see the prospects of the two categories. And the second question goes back to US vapor. I know you've previously quantified the growth of the overall category and the impact on cigarette volumes; if you could just remind us of that, please.
Speaker Change: Good morning team a couple for me as well please.
Speaker Change: Can I go back to the increased poly usage that you're seeing I think I think one of your competitors mentioned that the consumer conversion rates.
Vapor or lower than that seen in heated tobacco I just wanted to get your perspective on what you're seeing.
Speaker Change: On the conversion rates between the two categories and how you generally see the prospects.
Speaker Change: Of the two.
Speaker Change: Categories and the second question goes back on to <unk>.
Speaker Change: S. Vapor are you I know you've previously quantified the growth of the overall category and the impact on cigarette volumes. If you could just remind us on that and and by when do you assume that the increased enforcement efforts.
Mirza Faham Ali Baig: And by when do you assume that the increased enforcement efforts by the FDA could negatively impact the development of these disposable products? And if you can touch on that, you've highlighted some benefits in Louisiana as well. What about the other two states that have implemented the registries, Oklahoma and Alabama?
Speaker Change: By the FDA.
Speaker Change: Could negatively impact the development.
Speaker Change: Of these disposable products and if you can touch on this you've highlighted some benefits in Louisiana as well.
Speaker Change: What about the other two states that have.
Speaker Change: Implemented the registries, Oklahoma, and Alabama, maybe what Youre seeing there, which would help as well.
Tadeu Luiz Marroco: Maybe what you're seeing there would help as well. Yeah, OK, on the polyusers, I think that we mentioned, we gave some statistics about vapor compared with HP in a conference that we attended last year. And we don't see a massive material change amongst those two categories in terms of conversion, so we don't agree with this comment that one has a much stronger conversion than others in the first place.
Speaker Change: Yeah.
Speaker Change: Okay on the on the poly users.
Speaker Change: I think that we mention that we give some statistics about vapor compared with H B in a conference that we participate a last year and we don't see a massive material changed amongst those two categories in what conversions related.
Speaker Change: So we don't agree with his comments about one is a has a much stronger conversion than the others are in the first place and it's good to remember that our vapor is 65% of consumption in this new space of no combustibles.
Tadeu Luiz Marroco: And it's good to remember that vapor is 65% of consumption in this new space of non-combustibles, to start with. And it's growing fast as well, different from PHP, which is, if anything, slowing down as a category, mostly because of the phenomenon of polyusers, that it's not just because of vapor but now a very accelerated growth in terms of modern oil. In terms of U.S. vapor, what we quoted before is a number around 2% of decline that is linked directly to the proliferation of these illegal products. However, if anything, we haven't seen any type of reduction in terms of growth.
Speaker Change: To start with and is there is there is growing fast as well.
Speaker Change: Different from Th beer, which is if anything is slowing down as a category.
Speaker Change: Mostly because of the phenomenon of poly users that's not just because of vapor, but now a very accelerated growth in terms of our modern oral.
Speaker Change: In terms of our U S vapor.
Speaker Change: What we quoted before is a is a is a number around 2% of decline that is linked directly with the proliferation of these illegal product.
Speaker Change: If anything we haven't seen any type of a reduction in terms of growth.
Tadeu Luiz Marroco: I cannot be here in a position to say all these headlines that you read have reflected positively in the market because we don't see this to be the case. Actually, the slight loss of share that we had in vapor was exactly for these illegal products in the track channels, mostly, so they are still continuing to grow. There is, it's very difficult to answer a question of when we expect to see enforcement because we were expecting to see a conclusion of the PMT vapor process from the FDA perspective end of June. Well, originally it was end of December last year, but now it has been moved to end of June. So we still haven't seen that.
Speaker Change: I cannot be in a position to say Oh. These are.
Speaker Change: The headlines that you read has reflected positively in the market because we don't see these should be the case.
Speaker Change: Actually the the Theres likely loss of share that we had in vapor.
It was exactly for these illegal products in the tracked channels are mostly.
Speaker Change: So.
Speaker Change: There is still continued to grow.
Speaker Change: There is a is very difficult to to answer a question of when we expect to see enforcement because the we we were expecting to see have a conclusion of the PMT of vapor process from the FDA perspective end of June well. Originally it was end of December last year now moved to end of June so.
Speaker Change: We still haven't seen that that's why in my my presentation was make a reference to two to the needs of the FDA to really conclude this process and be able to clearly publicly state what is allowed what its not allowed because these can help tremendously enforcement at least on this track channels that we are continue.
Tadeu Luiz Marroco: That's why in my presentation, I made reference to the needs of the FDA to really conclude this process and be able to clearly publicly state what is allowed and what is not allowed. But this can help tremendously with enforcement, at least on these track channels that we are continuing to see growing the participation of illegal vapors. Now, Louisiana is the state of the art in terms of regulation, so we are seeing big progress in terms of the reduction of illegal products there, and which has benefited substantially as a major beneficiary with a reduction in illegal products.
Speaker Change: You'll see growing the participation of illegal vapors now.
Tadeu Luiz Marroco: And the other two are not at the same level because, as I mentioned, they are not the same type of regulations. But it's a good starting point because what you could do is to improve the regulations as soon as you start that. But in the other two states, although there are some reductions, not at the same level of Louisiana because Louisiana is more complete because they have just introduced an exercise.
Speaker Change: Louisiana is the state of the art in terms of regulation. So we are seeing a big progress in terms of reduction of our illegal products, there and which has benefits substantially views as a major beneficiary with a reduction on the legal products and are the other true or not.
Speaker Change: At the same level because as I mentioned they are not the same type of regulations, but he is a good start point because what you could do is to improve our.
Speaker Change: The regulation as soon as you stop that but in the other two states are although there are some reduction not at the same level of Louisiana, because Louisiana is a more complete because they have just introduced solves an exercise. They use these two funds the proper enforcement in the legislation and they have.
Speaker Change: And if you'll see the details around the the the legislation is much more I would say comprehensive than the other two states.
Speaker Change: Thanks for that.
Speaker Change: Thank you.
Tadeu Luiz Marroco: They use this to fund the proper enforcement of the legislation. And they have, if you see the details around the legislation, it is much more, I would say, comprehensive than the other two states. Thanks, Tadeu. And we now take a question from Damien McNeela of Deutsche Bank. Please go ahead. Hi, good morning, everybody. Two for me, please.
Speaker Change: And we'll now take a question from Damian Mcneilly After CIT Bank. Please go ahead.
Damien McNeela: First of all, on the US combustibles business, you've indicated that contracted coverage has moved from 82% to 88%. I'm just wondering what a reasonable level of coverage would be for the US and how long it would take you to get there. And then just more generally on how happy you are with the progress that's been made in the commercial organization in the US and whether there's any more that can be done to drive an improvement in performance there.
Damian Mcneilly: Hi, good morning, everybody.
Damian Mcneilly: For me. Please just firstly just on the U S combustibles business.
Damian Mcneilly: You indicated that contracted coverage has moved from eight 2% to 88% I was just wondering what a reasonable level of coverage would be for the U S and how long it would take you to get there and then just more generally on how happy you are with the progress that's being made.
Speaker Change: In the commercial organization in the U S and whether there's any more that can be done.
Speaker Change: To drive an improvement in performance there.
Speaker Change #100: Second question is just on I'm sorry.
Damien McNeela: And then the second question is just on this, Soraya indicated an incremental £50 million going into modern oil capacity. I was just wondering if you could give us an indication of how much headroom those investments give you going forward. On the coverage, it's always an assessment of the investments and the return that we get on those retailers. We are coming to a point where we are very satisfied where we are. That's why I'm always referring to most of the commercial plans have already been concluded.
Speaker Change: So I have indicated an incremental $50 million going into modern oral capacity I was just wondering if you could give us an indication of how much headroom.
Speaker Change #103: Those investments gave you going forward.
Speaker Change #102: Okay, Yeah on the on the coverage we are it's a its always an assessment of.
Speaker Change #101: The investments and the return that we get on those retailers, we are coming to a point that we are very satisfied where we are that's why I'm I'm was referring to most of the commercial plans has been already concluded we did that at the back of increasing our sales force by 150, new reps and the so we expand our sales force.
Tadeu Luiz Marroco: We did that on the back of increasing our sales force by 150 new reps. And so we expanded our sales force in order to do that. We also invest heavily, even more, in terms of data analytics, revenue growth management systems, in general. And these are part of the commercial plans, together with lettering and price adjustments and so on.
Speaker Change #104: I'll, let you do that we also invest heavily even more on terms of data analytics and revenue growth management systems.
Speaker Change #101: Systems in general and the and these are part of the commercial plans together with lottery and price adjustment. So on so so we are pretty much there in terms of our what we need to do you saw some of the improvements that will have been achieving recently in terms of our board machine in terms of value share in terms of premium segment and the <unk>.
Tadeu Luiz Marroco: So we are pretty much there in terms of what we need to do. You saw some of the improvements that we have been achieving recently in terms of volume sharing, in terms of value sharing, and in terms of the premium segment. And so I think that we are in a very strong position now to benefit from when the markets start to improve at the macroeconomic level and from the enforcement levels on illicit products. But it's important to note that nicotine consumption in the US is still pretty stable.
Speaker Change #105: So I think that we are in a very strong position now too to benefit from and when the market start to improve from the macroeconomic level and thrown the enforcement levels on the on the illicit products causes is important you'll notice that our nicotine consumption in the U S is still pretty stable. The problem is that it's growing well.
Tadeu Luiz Marroco: The problem is that it's growing where we are not able to participate nowadays because these illegal vapor markets are accounting for, and I mentioned this before, more than 60 percent of the vapor category, which means around 60 billion pounds of revenue that will be up for grabs as soon as we have some minimum enforcement in that space. More than oral is a category that is growing everywhere, and I probably noticed in our comment that 25 percent of the markets are outside or are in places outside of the industry, are in places where there was no oral tradition before.
Speaker Change #106: Yeah, we are not able to to participate nowadays because these illegal vapor markets are accounting too and I've mentioned this before more than 6% of the vapor category, which means around 6 billion pounds of revenue that would be up for grab as soon as we have some minimal enforcement are in that space not too.
Speaker Change #106: Mention the emergency of a modern aro as well as a category that's where we are now despite the fact that we don't have our.
Speaker Change #106: Winning products that are you still in the west called subject to PMT approval as you'll know we are being able to start making some inroads to the progress that we have currently after some adjustments in the that we have done more recently modern nor is a category that is a is a is a is growing.
Speaker Change #106: Everywhere and I know you have probably noticed in our comment that a 25% are rather of their markets are outside or are in place that are of the industry are in place where there is there was no oral tradition before.
Speaker Change #107: And and these materializing much of our growth and the and the NBA T with our product via Lou is of being able to absorb more than 7% of this growth happening Iain me.
Tadeu Luiz Marroco: So we are really, really well positioned and have a truly powerful brand that consumers love and are very well activated. And hopefully, together with some improvements we are doing in the West, and especially when we are really able to have this from the West, this will be a fantastic opportunity for the group moving forward. I will leave it for Soraya to ask about the topic and to answer about the topic. In terms of the CapEx, yes, we're always enhancing. As you can see, the trajectory of modern oral has been very impressive.
Speaker Change #107: Outside the U S. So we are really really well position and having a truly powerful brands that consumer loves and being very well activated and are hopefully together with some improvements we are doing day, Wes and mostly when we'd really be able to have these from the west this would be a fantastic opportunity.
Speaker Change #108: It's four four the group moving forward I'll leave phosphate I had to ask about the capex to answer about the capex.
Speaker Change #109: In terms of the Capex, yes, we're always enhancing as it as you can see the trajectory of modern oral has been very impressive I mean on the first half alone. We grew 47%. So we're always looking to further invest.
Soraya Benchikh: I mean, in the first half alone, we grew 47%. So we're always looking to further invest to enhance capacity, both in the US and in Europe. So we've revised our CapEx investment this year from 550 to 600 million. Okay, thank you.
Speaker Change #109: To enhance capacity both for the U S and in Europe. So we have revised our capex investment this year from $550 million to $600 million.
Speaker Change #110: Okay. Thank you.
Soraya Benchikh: And with that, I'd like to hand the call back over to you, Victoria, for any questions via the webcast. Thank you. We do have a couple of questions from the web. Soraya, this one's probably for you.
Speaker Change #111: Thank you.
Speaker Change #111: With that I'd like to hand, the call back over to you Victoria for any questions via the webcast. Thank you. We do have a couple of questions from the web and at try this sounds probably fee.
Soraya Benchikh: How much of the raw material increase was leaf costs versus FX? And how much do you expect this to unwind over the next six months and over the next year? Okay, we had a significant increase in leaf costs. I think it was the raw materials increase was around 9 to 10 percent, and the leaf was around 14 percent.
Speaker Change #112: How much of the room material increases leaf costs versus FX and how much do you expect this one wind over the next six months and I think the next year.
Speaker Change #113: Okay. We we had significant increase in leaf costs I think it was the raw materials was around 9% to 10%.
Soraya Benchikh: This is coming down sharply in the second half, and we expect most of it to unwind by next year. But it has been a drag on the overall operating margin or the gross margin in terms of combustibles, which hopefully will be an upside for us next year. The next question is, will the FIGLO payments impact our buyback plans next year? Okay, so the FIGLO payments, which are £0.8 billion over four years, the amounts yearly have been well known to us, and they have been fully taken into account in our forecast when we actually announced our buyback resulting from the sale of our ITC stake. We committed to £700 million, which we started in March, and we will be doing the buyback of the remaining £900 million to make up the £1.6 billion from the ITC stake.
Speaker Change #113: And then leaf was around 14%.
Speaker Change #113: And this is coming down sharply in the second half and we expect most of it to unwind by next year.
Speaker Change #113: But it it has been a drag on the overall operating margin on the gross margin in terms of combustibles, which hopefully won't be an upside for us next year.
Speaker Change #114: Our next question is will the fight late payments impact all buyback plans next year.
Speaker Change #115: Okay. So the final payments, which is <unk> 8 billion pounds over four years. These the amounts are yearly have been well known to us and they have been fully are taken into account in our forecast when we actually announced our bye.
Back, resulting from the sale of our ITC stake and we are we committed to 700 million, which we started in March.
Speaker Change #115: And we will be doing the buyback of the remaining 900 million.
Speaker Change #115: To make up the $1 6 billion from the ITC Stakes Huh.
Speaker Change #115: Okay.
Soraya Benchikh: So, apologies, we don't appear to have any more questions from the web. If you didn't manage to ask a question, then please don't hesitate to contact the IR team, and we'd be delighted to help you. So, I now hand it back to Tadeu for some closing remarks. Okay, thank you for listening today and for your questions. I hope you can all see that this year is a key moment in our transformation journey. I'm confident that the target investment choice we are making and the right decisions to deliver long-term growth and value creation.
Speaker Change #116: Hey, apologies, we don't appear to have any more questions from the web and if you didn't ask a question then please don't hesitate to contact.
Speaker Change #117: The IR team and we'd be delighted to help me answer I'd now hand back to today for some closing remarks, okay. Thank you for listening today and for your questions. I Hope you can all see D. C is a key moment in our transformation journey I'm confident that the targets investment choice, we are making and the right decisions to deliver long term growth and value.
Speaker Change #117: Creation I look forward to keep you up to date on our progress and I hope to see many of you at our capital markets day being held that all our innovation center in Southampton on the 16th of October here, you have the opportunity to see firsthand how our teams are focused on reducing the health impact of our business.
Soraya Benchikh: I look forward to keeping you updated on our progress, and I hope to see many of you at our Capital Markets Day being held at our Innovation Center in Southampton on the 16th of October. Here, you will have the opportunity to see firsthand how our teams are focused on reducing the health impact of our business and enabling BAT to deliver long-term sustainable value for all our stakeholders. Thank you very much.
Speaker Change #117: And enabling <unk> to deliver long term sustainable value for all our stakeholders. Thank you very much.
[music].
Speaker Change #117: Yeah.
Speaker Change #117: [music].