英美煙草 (BTI) 2022 Q2 法說會逐字稿

Good morning, everyone, and welcome to our 2022 interim results presentation. I'm Jack Bowles, Chief Executive of BAT, and with me this morning is Tadeu Marroco, our Group Finance and Transformation Director.

Before I start the presentation, I take it that you have all seen the disclaimers on Slide 2 and Slide 3.

As usual, once Tadeu and I have taken you through the presentation, there will be an opportunity to ask questions.

I would like to take a few moments here to express our deep concerns and sadness for everyone affected by the conflict in Ukraine. While we continue to work towards the transfer of our local Russian business, we remain focused on our 2,500 people we employ in Russia and safeguarding their future employment. This is an extremely complex undertaking and we'll provide an update on our progress as soon as we're able. Thank you.

Turning now to our interim results. I'm proud to say that we are both transforming our business and delivering robust results. At the same time, we are successfully navigating an increasingly challenging macro environment in 2022, while delivering superior shareholder returns with our growing dividend and GBP 2 billion buyback.

In the first half of this year, we have built on an excellent momentum in 2021. I am proud that we are making strong progress transforming the business from cigarettes to lower-risk alternatives for smokers, while at the same time driving our other ESG priorities. We have now reached a milestone of over 20 million consumers of our noncombustible products. We grew New Category revenues by 25% in constant currency, and we have delivered more than a 50% reduction in new category losses, alongside a continued increase in new categories investment to a total of GBP 1.1 billion in the first half alone.

This strong performance has again been driven by all 3 new categories with new product launches in all 3 global drive brands. This demonstrates the importance of a global multi-category strategy with strong brands and great products in the right markets. We also continue to make good progress towards our ESG ambitions and targets with 18 certified carbon-neutral facilities, including 2 added in the first half. And we continue our work towards achieving carbon-neutral operations by 2030 for Scope 1 and 2.

At the same time, we have delivered robust results in the first half with group revenue up by 3.7%, 90 basis points operating margin improvement and adjusted EPS up 5.7% at constant rate.

While we recognize there may be challenges ahead, we are successfully navigating the current macro environment driven by the resilience of our business. This is underpinned by our pricing power with 90% of our full-year plan pricing already achieved. We benefit from high gross margins, and at present, low levels of input cost inflation.

In addition, Quantum is delivering efficiencies and savings ahead of schedule. These results have enabled us to return a total of GBP 3.8 billion in cash to shareholders so far this year through the dividend and our buyback.

Since 2018, we have grown our noncombustible consumer base by a compound rate of over 30%, reaching 20.4 million in June, with 4.3 million added in the last 12 months alone. And excluding Russia, we reached 19 million consumers, adding GBP 3.9 million.

We are confident in our 2030 targets of 50 million consumers of noncombustible products.

Over the last 3 years, we have grown new category revenues by a CAGR of 31%. And in the first half of this year, we grew revenue by 45%. This is on top of the 51% increase we delivered in 2021.

Noncombustible now represents 14.6% of group revenue. This is more than 2 percentage points higher than in 2021. We have real momentum in our new category business and are well on track to deliver on our GBP 5 billion target revenue for 2025. We drove more than 50% reduction in new category losses in the first half. This follows the 10% reduction we delivered last year. Our 3 global brands, Vuse, glo and Velo continue to strengthen, which enables us to increase prices across the portfolio in both devices and consumables.

Importantly, more than 2/3 of the profit improvement came from our increased scale and efficiencies. At the first half year, we already have a total of 9 profitable countries in new categories. While the route to profitability will not be linear, and we'll continue to invest in new launches and geographic expansion, this puts us in an excellent position to deliver new category profitabilities by 2025.

At the same time, we're also continuing to invest in our transformation. We have doubled our R&D spend since 2017, accelerating our pace of innovation. In the first half, we opened an additional global device development center in Shenzhen. Backed by science, we are developing technology and design to address consumer preferences.

Now let me take you through our latest innovations. With our new glo platform, hyper X2, we have significantly improved all key aspects of our successful model, glo Hyper. X2 was developed with consumers at its heart, a smaller, lighter device with induction heating and a dedicated boost button delivering customizable heating options. X2 was launched last week in Japan, our largest THP market, together with an upgraded range of consumables to deliver maximum satisfaction.

We have ambitious rollout plans for glo hyper X2 in the second half.

In Vapour, we launched Vuse Go, our new disposable product in the U.K. in May. Taking just 6 months, this is our fastest speed to market launch yet and a great example of our increased speed and agility.

Vuse Go currently offers 6 flavors at a premium price. Already available in over 10,000 stores, Vuse Go is fast approaching #2 in the U.K. disposable category, just 3 months after launch.

We have a rapid market rollout plan in Europe for the second half.

In addition, we launched Vuse ePod 2+ in May in Canada. ePod 2+ is our first-to-market Bluetooth connected device with its own dedicated app, a device lock to enhance youth access prevention, find my vape and direct subscription options.

While still early days, consumers' feedback and performance to date has been very encouraging, and ePod 2+ is already more than half of all volume devices sold in Canada since launch.

With Velo, we have introduced new-to-the-world recyclable cans further demonstrating our commitment to embedding ESG in our new category brands. This complements the rollout of our recent launches of mini pouches and our MAX range, which are driving higher trial and conversion, respectively. Our accelerated innovation pipeline is fueling our faster transformation. And at the same time, we are delivering on our financial commitments.

Reported results were impacted by a number of one-off items that Tadeu will cover in more detail later. The more significant of this was a near GBP 1 billion impact from an impairment of Russian assets.

Now looking at our adjusted numbers. We have delivered group revenue up nearly 4% despite the current pressure on U.S. industry volumes. Profit from operation up by 4.9%; operating margin of almost 44%; EPS up 5.7%; and strong cash generation. These are robust financial results that benefit from our strong performance in new category and the increased energy in the organization. They demonstrate our ability to successfully navigate the current macro environment.

Through Quantum, we have achieved GBP 1.5 billion annualized cost savings 6 months earlier, and our progress continues. We now expect to achieve in excess of GBP 1.5 billion by the year-end.

With our pricing power and no significant change in global elasticity, we're in a good position to successfully manage inflationary pressure. And by leveraging our increased agility, we're ensuring continuity of end-market supplies. This has driven a 90 basis points increase in our operating margin.

In summary, with our new category growth momentum and further reduction in new category losses, we are transforming BAT at pace. We have strong second half investment plans for both new product launches and further geographic expansion.

While we understand that there is more to do, these results demonstrate the strong progress that we are making in our transformation. We are confident in delivering on our full year guidance.

I will now hand over to Tadeu.

Thank you, Jack. I'm delighted to share more detail on how our first half performance demonstrates our faster transformation in action. Our reported results were impacted by a number of one-off items, including close to GBP 1 billion noncash impairment of our Russian business, which is now classified as an asset held for sale; a provision of GBP 450 million recognized in respect of the DOJ and OFAC investigations into legit historical breach of sanctions; and restructuring charge driven by project Quantum. We expect these to reduce next year following the completion of the current project. Further detail on performance ex-Russia can be found in the appendix.

To better understand the key drivers of our performance, we will focus on constant currency adjusted results unless otherwise stated. In the first half, we delivered revenue growth of nearly 4%, driven by new category growth of 45% and continued strong combustible price mix of 5%. Combustible volume was down 4.2%, impacted by a combination of the sale of our business in Iran in August last year and lower year-on-year industry volume in the U.S. reflecting macro pressures, including high fuel prices and inventory movements. With continued value share growth and robust pricing, our combustible business delivered a resilient operational performance. Profit from operations was at 4.9%, while absorbing a 1.5% headwind from transactional FX. This drove adjusted EPS up 5.7% or 8.6 percentage on a current currency basis.

Our free cash flow before dividends of GBP 2.3 billion was well ahead of last year, illustrating our continued focus on cash conversion. I'm particularly pleased that for the first time, revenue growth in all 3 categories exceeded strong volume growth with the growing equity of our 3 global drive brands enabling us to take pricing in all 3 categories. All this is supported by a clear ESG focus and the substantial body of science for each of our new category brands, which is actively contributing to our group sustainability targets.

Vuse won the gold award at the Transformation Awards Europe 2022 for best use of sustainable packaging. We also have first-of-a-kind clinical studies for glo and Vuse, and based it on over 135 of our own studies and third-party data, the science shows that for Vuse and glo, harmful components are 90% to 99% less than cigarettes with toxicology between 95 to 99 percentage less.

This strong innovation and scientific capability will be further enhanced by our new state-of-the-art innovation hub in Trieste, Italy, where construction continues.

As Jack has already covered, we have reduced new category losses by more than 50% in the first half, whilst at the same time, investing GBP 1.1 billion in the period. 2/3 of this profitability improvement was driven by our increase in scale and efficiencies with 1/3 driven by pricing. We continue to focus on the 3 profitability levers, revenue growth management, COGS reduction and marketing spend effectiveness, and we have made strong progress in the first half.

We have further improved Vuse trade margins, building on the 30% reduction already achieved. We delivered around GBP 120 million of productivity savings, driven by automation and increased scale. Through our Marketing Spend Effectiveness tools, we have further reduced the cost of consumer acquisition and retention across all 3 categories. Having invested significantly in establishing our New Category business, we are now in the growth period where we can continue to invest more and deliver improved profitability. Our new category algorithm is now starting to contribute meaningfully to our results. With strong top line growth and increasing scale, our spend effectiveness is improving, reducing our incremental investment requirements.

The growing strength of our 3 global brands has allowed us to increase pricing on both device and consumables. And as we expected, all of this has driven a marked improvement in new category profitability.

Turning now to our New Category performance in detail. In Vapour, we continue to extend our value share leadership position with views achieving 34.7% value share in the top 5 markets, up 1.2 percentage points despite the rapid growth in disposables. Growth in the vapour category has accelerated, driven by both disposables, which have expanded the vapour category and the continued growth of closed systems. In Europe, our closed system value share, excluding disposables, grew strongly and is now close to 50% across all 3 key vapour markets. Disposables growth in the U.K., France and Germany is reflected in our share of the total vapour market in these countries. We have responded rapidly with the launch of our new disposable offering, Vuse Go, in the U.K. with ambitious rollouts planned for the second half.

In April, we were delighted to announce that Vuse had reached U.S. vapour value share leadership in tracked channels. In Canada, Vuse continue to extend leadership reaching 88% year-to-date value share with the launch of ePod 2+.

More broadly, across the other top 5 markets in Europe, we continue to build on the strong momentum from last year with further value share gains in closed systems. In the U.K., Vuse Go is already fast approaching in the #2 position in the disposable segment with premium price positioning. And we are seeing very little cannibalization of our existing Vuse portfolio.

Vuse Go is expected to drive margin accretion once at scale.

Alongside Vuse Go, we are rolling out a take-back scheme for devices in the U.K.

In addition, we have strong youth access prevention controls in place, including our retailer training and education programs embedding our full governance standards.

In THP, volume share in the top 9 markets was up 1.6 percentage points to reach 19.6 percentage, driven by the continued success of glo Hyper.

Excluding Russia, our share reached 18.9 percentage, up 1.2 percentage points.

In Europe, which represents around half of global THP industry sales, Hyper continues should drive strong momentum with glo revenue growth of nearly 90%.

glo gained the year-to-date volume share of total cigarette and THP in all key markets. In many countries, glo's share of the THP category now exceeds our share of cigarettes at a higher gross margin per stick driving profit growth.

In Japan, glo's year-to-date share grew 60 basis points to 7.4%. Both glo and our combustible business grew volume share with our total nicotine share in Japan reaching 20.7%, up 60 basis points.

We are excited to have launched glo Hyper X2 in Japan last week, and we have rapid rollout plans for the second half.

In Modern Oral, we have maintained our international leadership position outside the U.S. with 69% volume share of this fast-growing category.

In the U.S., Velo volume share was down in a highly competitive environment as we continued our main investment focus on the much larger vapour opportunity.

The U.S. Modern Oral category remains highly competitive, and it still represents only around 2% of total nicotine industry value.

We have submitted a PMTA in the U.S. for our superior international Velo product range. This will ensure we are well prepared for future opportunities in the world's largest New Category market. In the more established markets of Sweden, Norway, Denmark and Switzerland, we remain volume share leaders in the Modern Oral category.

In Sweden, our year-to-date Modern Oral category share was down 1.4 percentage points due to heavy competitor discounting. However, our share of total oral continue to grow reflecting the continued strong growth of the Modern Oral category.

We are also making strong progress with Velo in newer Modern Oral markets. In the U.K., Velo has reached volume share leadership with close to 50% share and was awarded Product of the Year. We continue to see an attractive opportunity for Velo in emerging markets offering an affordable reduced risk alternative to cigarettes.

In South Africa, we launched the city test pilot in Johannesburg at the end of last year. We have now entered the second phase of the test with guided trial and expansion to selected organized retail chains in Johannesburg. We are seeing encouraging early results.

Turning now to combustibles. Cigarette pricing was up nearly 90%. And while consumers are feeling the impact of inflation, we are currently seeing no significant change in global elasticities. Pricing was partially offset by geographic mix, driven mainly by volume growth in Brazil and Pakistan and lower U.S. volume. Combustible volume declined by 4.2%, mainly due to the sale of our business in Iran and lower industry volume in the U.S. And this resulted in revenue up 0.6%.

With a well-balanced portfolio of brands across all key price tiers and the benefits of our revenue growth management tool, we believe we are well placed to navigate the inflationary pressures globally.

Turning now to the regions. In Europe, New Category revenue was up 50%, driving total regional revenue up nearly 10%. Europe is a true multi-category region, and we are rapidly transforming our business. Noncombustible revenue already accounts for close to 20% of the total regional revenue.

Combustible revenue grew 3.5% as volume impacted by the conflict in Ukraine and the decline in Turkey was more than offset by strong pricing. Value share was down 30 basis points, mainly driven by Russia and Germany. Profit was up close to 12%, driven by strong revenue growth and further cost-saving initiatives as a result of Quantum.

In APME, New Category revenue was up 16%, mainly driven by THP with total revenue in the region up 4.7%. Combustible revenue grew over 4% and value share was up 40 basis points. Strong performance in Pakistan, Japan and Bangladesh more than offset the impact from the sale of our Iranian business in August last year.

Profit was down 5%, largely due to the change in excise terms in Australia in 2021 and the disposal of Iran. Recovery in duty-free continues at a very low -- slow pace.

In AMSSA, New Category revenue was up over 70%, driven by the excellent performance of Vuse in Canada and South Africa. This was a strong contributor to regional revenue growth of 6%.

Combustible revenue was up 4% as markets, particularly South African key markets in South America began to normalize post-COVID. Combustible value share was down 40 basis points, mainly driven by Canada, Mexico and Brazil. Profit was up 6.5% driven by revenue growth and the benefit of continued cost savings from Quantum.

Turning now to the U.S. The business is performing well with strong pricing and continued value share growth in combustibles as well as an excellent new category performance. New category revenue grew by 59%, driven by Vuse, up 60%; and Velo, up over 40%. Significant Vapour value share growth for Vuse, up 380 basis points to 36.3% drove Vuse to the #1 vapour brand position in the U.S. This was delivered despite the continued growth of synthetic nicotine disposables.

We have grown monthly combustible volume share sequentially with a year-to-date increase of 40 basis points since January.

Overall, year-to-date combustible volume share is still down 20 basis points versus full year 2021, following a decline in the second half of last year. Combustible industry volume declined by 10%, reflecting the impact of macro factors, including higher fuel prices and a return to more normal consumer consumption patterns post COVID.

Reynolds volume was down 13.4% in the first half. This reflects the industry decline and the net effect of inventory movements in the period. This includes the unwinding of the prior year stock build partially offset by additional inventory in June ahead of our implementation of our global SAP platform. In the second half, we expect results to benefit from a softer comparator, offset by the reversal of the industry -- in the inventory phasing around our SAP rollout.

This means full year results will reflect the full unwinding of the prior year U.S. inventory movements.

Value share in combustible was up 30 basis points, supported by the strength of our premium brands Newport and Natural American Spirit. Continued strong price/mix of around 10% was more than offset by the volume decline. Combustible revenue was down 3.4%. Adjusted profit from operations was up 5.5%, driven by a material improvement in new category profitability, continued strong pricing and efficiency gains from factory and sales force rationalization.

As a result, adjusted operating margin in the U.S. was up 290 basis points to 52.6%. Group operating margin also expanded strongly and was up by 90 basis points on an adjusted current rate basis despite further incremental new category investment.

We also observed a 1.5% transactional FX headwind on profit or a 50 basis point headwind to margin, mainly due to the strength of the U.S. dollar. With the GBP 281 million reduction in the new category losses, new categories supported margin expansion for the first time.

In addition, through Quantum, we have continued to drive further simplification efficiency, delivering savings of GBP 274 million in the first half. This brings total annualized quantum savings to just over GBP 1.5 billion, with further productivity savings expected in the second half. This resulted in group operating margin reaching 43.9%.

Turning now to EPS. We delivered constant currency adjusted diluted EPS growth of 5.7%. This reflects our robust operating performance, the benefit of the recovery in ITC post COVID and the share buyback.

While over 90% of our debt is at fixed rates, net finance costs increased, driven by higher interest rates and the weakening of sterling against other major hard currencies.

As a result, we now expect full year net finance costs to be closer to GBP 1.6 billion with an underlying tax rate of around 25% based on current tax rates. Finally, we expect a transactional FX headwind of around 2% for the full year. And extrapolating current export rates, we expect currency translation to be a tailwind of around 6% on full year adjusted EPS growth.

We delivered strong cash flow conversion of 77% and GBP 2.3 billion of free cash flow in the first half. While cash flow is always weighted towards the second half due to the timing of leaf purchases and MSA payments, this is ahead of our prior year driven by our continued focus on working capital across the business. We continue to expect full year gross CapEx of GBP 700 million, broadly in line with adjusted depreciation and amortization.

Based on current FX rates, we continue to expect to deliver full year adjusted net debt to adjusted EBITDA within our 2 to 3x corridor.

We are well on track to deliver another year of operating cash conversion in excess of 90% and expect to generate GBP 40 billion of free cash flow over the next 5 years. Our strong cash generation has enabled us to return GBP 3.8 billion to shareholders, including GBP 2.5 billion from dividends and GBP 1.3 billion through our share buyback.

Overall, I'm very pleased with our performance in the first half. And while there may be further challenges ahead, we remain vigilant. We are successfully navigating the current macro environment. And irrespective of the timing of the transfer of our Russian business, I am confident that we are on track to deliver our guidance of 2% to 4% revenue growth and mid-single figure EPS growth.

Thank you. And with that, I will hand back to Jack for his closing remarks.

Thank you, Tadeu. So in summary, we are making strong progress. We are delivering on the operational priorities we set 3 years ago, and we are continuing to deliver robust financial results driven by continued strong growth and improving profitability in the new categories, the resilience of our combustible business, continued savings driven by Quantum and strong cash generation.

At the same time, we are successfully transforming our business at pace with great momentum in new categories. Our faster transformation is well underway driven by a multi-category strategy. We are delivering on our purpose. We are building a better tomorrow by transforming BAT to a high-growth multi-category consumer-led CPG with a reduced impact on public health and ESG at its core. I am confident this will create value for all our stakeholders.

Thank you for listening, and I will now open up to questions.

(Operator Instructions) The first question comes from the line of Richard Felton from Goldman Sachs.

I think -- see U.S. volume down 13.4%. So obviously, you've highlighted the impact of inventory phasing. Are you able to quantify what the net impact of those various inventory phasing movements were for H1? Then if we think about the 10% industry volume declines, you're lapping a tough comp base, gas prices are rising, that's obviously weighed on your performance this year. But as you think about industry volumes for combustibles in the U.S. over the next few years, are there any reasons why you don't think it should return to the 3% to 4% volume declines that we're used to seeing historically? That's my first question, and I've got a follow-up on new categories after.

Okay. So I'll take the second part, Tadeu will take the first part. I mean, the industry volume in the U.S., as I always said in the previous calls, you always have to consider a 3-year average in order to see what's happening in the U.S. Of course, there has been some stock movements at the end of last year due to potential taxation and a lot of things that happened in the end of last year. But if you look at the overall trend in terms of the U.S. market on a 3-year basis, you see that, of course, there is the post-COVID impact where the market was much stronger in the -- especially in the 2 years that has passed. And now we are seeing a softer market in the first half of the year. You see a bit of recovery in the July results. But I think that what you have to consider is, one, we have a very strong portfolio. Two, we are growing premium share. Three, our brands are extremely robust in all price points, and we don't see down trading currently in our portfolio or acceleration of down-trading in the industry. So we have to go step by step. We have generated a profit increase of 5% in the U.S. The new category, especially e-cigarettes, is taking more consumers and that's good because we're making money in e-cigarettes.

So I think that the comparator is softer in the second half of the year, but we have to be prudent. We have to consider the numbers as they come. And as we know, we have a very strong position in the U.S. market. We'll continue to grow on that, both on combustible. Value share is growing by 30 bps, which is an extremely good number. And at the same time, we are very strong in terms of new categories in the U.S. Tadeu?

Yes. In terms of the numbers of brands compared with the market, you have to remember that last year, we delivered a number ahead of the market, and we made the point about the stocks that were built at the back of some uncertainties in terms of tax increase, the price increase that happened at the end of the -- at the beginning of the year and so on and so forth.

So we said that there will be some unwind happening this year. This partially happened in the first half of the year. And I would say that between the 13% to 10% of the market, you would consider that half of that was the -- some of the unwinds that happened already in H1. The other half is the fact that we have declined our market share by 20 basis points, like we mentioned although we have already increased month-on-month January, 40 basis points, and so we have been recovering that. But if you take the average of -- compared with the full year 2021, we have a market share down. So I think that half you could attribute to the difference.

So we have, if you want, a 30 bps increase in terms of value share, and there is strong pricing also since the beginning of the year from across the industry. I think that we're in a very good position to continue to perform very well in the U.S. As I said, I mean, we're growing profit by 5%.

Great. My second question is on your New Category business, and thank you for giving us a bit more disclosure on the contribution. It looks like you're making quick progress towards our breakeven target, but my question is on gross margins for vapour. Now if I cast my mind back to your CMD at the start of 2020, you said that you were making about 40% gross margin on vapour, which at that stage is quite a long way below THP or your Modern Oral business. Now since then, you've made good progress on trade margins, you're talking about COGS efficiency, you're taking pricing. Is it possible to give us an update on where those gross margins for vapour are today? Is it in line with your other new category businesses yet?

Yes, yes. I mean, first before Tadeu will give you more details, I think what is important is 3 years ago, people thought that we would not be able to get a strong position in terms of new categories. We have demonstrated that multi-category, new categories was the way to go. And we are demonstrating last year with a growth of 50% in -- 51% in revenue and 45% in the first half of the year with a total number now of consumers of 20 million with a growth of more than 2 million in the first half of the year, which is even better than last year, that we are absolutely capable of driving our growth and that we have very strong brands.

And at the same time, we've reduced the losses by 50% in the first half of the year, GBP 281 million. So I think that this demonstrates that not only we are very effective in terms of our COGS, we are very effective in terms of our consumer acquisition costs, and we are very well able now to take pricing across the board in the 3 categories, making sure that we deliver profitability at pace and that we meet all our targets for 2025.

Richard, we are really pleased with the progress in the new categories as a whole. In terms of our holistic view on that, well, for the first time, like we highlighted in the presentation, we have been seeing revenue ahead of volume growth in all of the 3 categories. We have a 45% revenue growth at the back of 51% when we closed the 2021. So the growth continued at a very accelerated pace. In terms of gross margin overall, the increase in this half compared with the full year is on the likes of 7%. So we have grown gross margin of the 3 categories ahead of the revenue growth as well, which is very pleased.

So we -- in terms of vapour, we have been doing a strong progress at the back of revenue growth management. We are taking price. We are reducing discounts on device. We are working hard on the COGS, the automation that we highlighted in the presentation, the trade margins that we quoted. So we -- if you -- the 40% that you are quoting, you strip out the discounts on device on the consumable side. Today, we are more on the 50%. So we have progress against this 40%. And overall, we have been progressing in all 3 categories, and we are now with a business that has already passed these levels of investment creating the foundations. And we are now in terms of operating leverage and trying to get to a level of scale that will allow us to keep on track on those margin improvements, not just in vapour but across the categories.

And you saw also -- if I may add, you saw also that not only we're taking pricing across the 3 categories. But on top of that, we have a pipeline of innovation for the second half that is extremely strong. And we'll put in place all these new launches in the months to come. And I think that, that pipeline is extremely strong. Consumer based, different categories, different objectives and innovation across the board with the speed in terms of development of innovation that has increased dramatically.

And as Tadeu referred in his presentation, we have doubled the investment in the last few years in terms of R&D, and we're really motoring through our development and getting very, very strong position. So the balancing act between the financials and the consumer acquisition is working very well and we'll continue to accelerate in the second half of the year.

The next question comes from the line of Gaurav Jain from Barclays.

So 3 questions from me. So see, if I look at in other companies which are thought of as NGP leaders in the industry, their EPS growth has been at low to mid-teens over the last 2, 3 years. And if I look at your delivery today, NGPs are now 10% of overall revenue and then you are also reducing losses. You have -- Slide 38 clearly points out the margin improvement, which is happening. Why wouldn't your EPS growth -- once share repurchases are layered in, why wouldn't your EPS growth accelerate to low to mid-teens at some point of time in the next 3 years?

Well, first of all, thank you for recognizing our strong performance in terms of new categories. And I must say that our financials are very robust in terms of the profitability of the business moving forward. And we have scaled up in the last 3 years. And I think that -- I mean, we have a certain number of kickers, but yet at the end of the day, it will take a little bit more time. But the reality is we have a very, very strong business, and we continue to move forward.

Yes. Gaurav, look, we spoke about the capital allocation framework that's back in the year-end result in '21, beginning of the year. And we want to consider on any given year what are the circumstances that we see ourselves. We have clearly recognized the value of share buyback. And this is something we have done in the past. We have now restarted the program. But we also want to create some reserves, so to do some M&A bolt-ons that will be important, mainly on the beyond equity space that you know that we have this ambition to go in that space as well to accelerate the transformation of the company. We also want to keep the dividend growth in sterling base and to pay down debt so we can keep within the 3 to 2x corridor.

So we will have to consider all those effects on any given year, and we have to see how this translates because today the reality is that the kickers of the group not as high as it used to be in the past because Reynolds now is part of the subsidiary. So it's part of the operating profit of the group. And so it's difficult to start to speculate for the future in terms of impact. But we have a very sound business. This transformation that we are now calling faster transformation, this chapter that we are going through our journey of the transformation. It means that the new category will be more relevant to the group results, you're absolutely right. You're going to see and we said that, exactly that, that we will see our group revenue more impacted by the progress we make in new categories. Our bottom line more impacted by the progress we make in new categories. So this is not new news. This is something that we have already said before. And we will continue going ahead, and we see what's happened on the kicker side, considering the capital allocation decisions that we might have to do in the future.

So we have a very high level of cash conversion. And also, I mean, we're doing a GBP 2 billion share buyback as we speak, and we're at GBP 1.3 billion in the first half of the year. Step by step.

Sure. Now my second question is on the dynamics in the U.S. e-cigarette market. So you have given this number on Slide 25, the disposables industry value share of 22%. So is this all synthetic nicotine? And what percentage of this will be flavored? And if we have this clamp down from the FDA on the synthetic nicotine market, could a big chunk of this move to you over the next 6 months to 12 months?

Well, I mean the good thing -- I mean, there are different elements in there. One is, yes, they are all synthetic nicotine because you cannot do flavors without synthetic nicotine. That was the past.

Now the FDA says that synthetic nicotine is in the remits of the FDA. So now they are starting to put in place all their activities in terms of control and implementation. The trade in the U.S. is extremely dynamic and we'll also start to take some positions related to that.

So I think that what is important to consider is that there is more people that are coming to vaping, which is great. That we have a very strong brand with Vuse in the U.S., that we're leaders in more than 34 states in the U.S. that everybody thought that we would not be successful with Vuse in the U.S., and we are the leaders now. We are the leaders and the market continues to grow. There was the EVALI crisis. Of course, the market has recovered. Now it's growing by 3%, 4% since the beginning of the year. And we are continuing to take positions in there. So I would say that the disposable is something that is addressed by the FDA and that brings more people to the category, which is in turn without flavors will benefit to the category where we are leader, and we're continuing to increase our leadership. And we're taking a lot of pricing. And by the way, competition has started to follow us on pricing, which is a very good news also. So it's all an acceleration in terms of the potential of new categories in the U.S. Remember that in the U.S., new categories already represents more than 21% of the market, yes. So it is already a market that is extremely strong in terms of new categories.

And my last question is, again, on the U.S. market and given the strength of Vuse. So look, your cigarette price mixers, plus 11%. You have lost some share. Now if Vuse continues to execute so well, do you really need to take as higher pricing and lose volume share? Or would you rather take less pricing and gain volume share on cigarettes as well and you let Vuse's growth and the EBIT swing from Vuse drive your overall U.S. EBIT growth?

Yes. First of all, thank you very much for recognizing that we have a very strong position on our combustible business. And as I always said, the 3 priorities for the company is value in combustibles, step change in new categories and simplifying the business. On the value of the combustibles, I mean we are growing in the U.S. 30 bps in terms of value share and we are losing a little bit of share. I'm not concerned with that. We look always at the right balancing act in between the 2. Where I'm very pleased is that our premium share is growing, and we have very strong brands at the upper end of the portfolio. And we have now also, with Lucky Strike at the bottom, a very strong brand that is more than 2% of the market now. So I have a good visibility.

But what we said always is that we have a pricing strategy and pricing tools in the U.S. that allows us to go extremely granular.

So when we look at e-cigarettes and when we have the leadership, I'm always going to do the call between the pricing and the competitive situation. I think that the demonstration that we have made in the last 12 months even is that you can continue to grow your position in the U.S. in terms of e-cigarette and increase your profitability through pricing, consumer acquisition, automation, reduce our COGS also. And the competition is following our pricing.

So I think that we're in a very good situation where you have to always adapt and analyze the market. But I think that the trends are extremely positive for us.

The next question comes from the line of Rey Wium from SBG Securities.

I basically have 3 questions. I just want to know in terms -- I mean, I just want to address this improvement in the next-generation product margin. So if we look at it, the losses have been reduced by 55%. So in terms of -- if we can talk about a glide slope, I think you still said aim to be profitable by -- in aggregate by the 2024, 2025. So to me, it looks like if this trend continues, it may be a bit earlier. And maybe just in that, is there a risk of -- that you need to spend more as a result of the growth in the vapour disposables? So that's my first question. The second one, I just...

Sorry, let's start with the first question because then you know I'm French and 3 questions is always difficult for me. So let's go step by step. So your first question is related to?

I just want to know sort of the glide slope.

Yes, yes. Okay, so on -- yes. Thank you. On that one, you have always to consider that this is a very dynamic environment. These categories were not existing even a few years ago. So we have a very good performance related to our different categories. We are taking pricing. But at the same time, we are improving our COGS, we are automating and we're doing much better in terms of consumer acquisition. At the same time, the innovation pipeline costs money, and we're going to spend the money as we go in order to continue to expand our position.

Two years ago, we were nowhere to be seen in THP that is 50% of the market in -- of the total market of THP worldwide is in Europe. We are nowhere. Now we have 18% in average in terms of share. So I will continue to invest the money. But as the base is much stronger, the cost of acquisition of consumer is better. But competition will not sleep. They will continue to do price discounting. They will continue to do launches. And I think that we're very well positioned. That gives me a bit more space to be able to operate and the target is 2025. So we'll take it as we go.

First is about consumer acquisition and the efficiency and the reduction of cost of consumer acquisition and getting more traction in terms of our positions in the 3 categories and have innovations to launch in the 3 categories. But altogether, you saw last year, we reduced our losses by GBP 100 million. And this year, in the first half of the year, we are accelerating quite nicely. This gives me the muscle, the space and the blood in order to be able to grow fast in terms of new categories.

45% growth in the first half of the year, on the back of 51% for the full year last year on revenue growth. I think that that's stellar. And 2.4 million consumers in the first half of the year additional. So we're even breaking results and records of last year.

Excellent. Then just on to the combustible. So I'm just curious, it looks to me you have a bit of share pressure in markets such as Australia, Brazil, Mexico. How do you plan to address that?

Yes. I think that when you look at our position in terms of combustible, first of all, it's a very robust position. What you have on top of that is a portfolio that is extremely strong. And what you see is that the elasticities are playing in our favor. So of course, you will lose a little bit of share here and there and increase your value share. Australia is a specific example whereby taxation was changed in the last year. That has created a bit of vacuum related to the Australia industry as such and there were some scale issues in terms of pricing. We fought back, we recovered market share and we're in a very strong position in Australia now. So I think that we have a very, very strong position in Australia, and we are the leaders there.

In terms of Brazil, our share is still stellar. We are more than 73% share in Brazil. And we have benefited from the COVID environment where the market was closed and the reduction of illicit, that's very normal. Now you are a bit on the back of the post pandemic. So there is a bit of rebalancing, but nothing to be concerned of. The reality is we have a very, very strong business in Australia -- in Brazil. And we have rebalanced our portfolio with Global Drive Brands launches, and we have rearticulated our route to market in terms of sales force, and we have a lot of efficiencies that are coming through in that market.

And I just want to know -- just want to clarify regarding the treatment of Russia and Belarus. You're treating it as a discontinued operation. So I just want to clarify that for modeling purposes, we need to remove Russia and Belarus from the -- well, the whole of 2021 and the first half of 2022, correct?

No, this is not being treated as discontinued operations. We still have control of the operation in Russia. We are in the process of transferring the business. So it means that we are trying to execute options to find a new buyer, local buyer there and that can take over the business and carry on. And so what's happening is as we have the intention or right to transfer the vision that was already communicated based on IFRS 5, we had to put assets on held on sale, and as a consequence, we have to revalue the business, which we are now attributing a new value for that, given the circumstance, the difficult -- because, as you know, it's a very complex environment.

So the impairment that you see is basically us reassessing the value of those assets that are now for sale, but there is no discontinued operation because we still keep control of the business until we transfer fully their business.

Okay. So just to clarify, you will keep the Russian operations in the FY '21 numbers and until it's being sold in 2022?

Yes, until it's been sold in '22, once we sell the business and then we start providing a kind of organic view where we strip them from the base as well. But until we do that, it's part of the numbers.

It's a very big situation and a very complex situation.

By the way, if you see the appendix, in the appendix of the presentation, you will see a kind of picture of how it looks like on the group numbers if you have done that, if we have transferred the business, hence, there will be no rush anymore in the base of '21 and '22. You can see the underlying numbers on the appendix.

Yes. That's actually what triggered my question, whether we need to strip Russia out retrospectively.

It's just a reference for you.

But as you see in that table, I mean the trends are absolutely similar and this was to give more clarity to everybody in terms of understanding with and without.

The final question comes from the line of Jon Leinster from Societe Generale.

Yes, I've got 2 or 3 questions as well, please.

Everybody has 3 questions this morning, so go slowly one by one.

Analysts only do things in 3s. Going back to a sort of previous question, the vape price mix, plus 25% in the period, a very strong number. Is that driven -- clearly, there's been some price increases, but are we seeing a general decline in the level of device and the product discounting from everybody, including yourselves and competitors? Or is that driven a lot by the change in trade margins?

It's a bit of both. I think that when you have products that are more effective, efficient and recognized by the consumer, your cost of acquisition reduces because then your brand is part of the repertoire of the consumers. And then suddenly, you are in a much better situation. Also, there is more pricing, which is good. And we're continuing to grow on all our different positions. Tadeu, you want to add?

Yes. Look, the U.S. in vapour is a major weight for our numbers. And of course, it's a massive market. And in the U.S., we are doing exactly what we said we were going to do. And we are in the phase now of scale. So we don't need all the discount that we used to have in the past on the device. So there is much less discount on device than we used to. And we are also taking pricing because we now we have put in place all these revenue growth digital tools that we have for cigarette also in the new categories in vapour. So we can be very granular in terms of where we increase the price based on the competitive landscape. And we are, as we speak, at 125 index to the second player in the market. So we are taking clearly pricing in the U.S. and reducing discounts, and this all helps in the revenue that you are seeing.

When you go outside the U.S., the strength of our leadership position is allowing us to have a much more strong competitive power in terms of negotiations with key accounts. And this allow us to move, for example, from front margins to back margins that translates into moving away from a specific percentage of revenue as a margin to pay for performance, and this is all reflecting lower trade margins, and that's exactly what is happening at this point in time. It's a combination.

Yes, lower consumer acquisition cost, better margins and more efficiency in terms of COGS, plus more pricing and strong brands. I mean, that's the very good equation we are in at the moment, and we'll continue to move forward.

And just out of interest, what sort of level of trade margins are you moving to? And how would that compare to other fields, particularly cigarettes?

Of course, the trade margins are much higher than on cigarettes. But what we see is that there is a conversion in time that will happen and that will take some time. But we'll see improvements on a regular basis related to that. And you have to remember that also the other element that is very important is you pay much more taxes on cigarettes than you pay on other categories, which is normal because these are reduced risk products. So that works also in the equation in terms of the financial delivery.

I think what's very important is we said 3 years ago that it's multi-category approach, that there are different consumer moments, different geographies and you need different portfolios. It was more complex for us at the beginning to establish 3 categories. But at the end of the day, when you look at it today, last year, we grew 51%. This year, half year, we grew 45%. We're having now 20 million consumers, which is extremely comparable to other companies out there. And we are planning through and we're able to take pricing in the 3 categories and do efficiency in COGS, consumer acquisitions and taking pricing. So I think that we have a well-balanced portfolio that is responding to the consumers, and we can play in full all the tools that we have in combustible pricing to understand exactly how it works and start to reduce discounting, and that's extremely, extremely powerful for us moving forward because we want to do a lot of additional innovation in the next period. And we showed you during the presentation that we have a lot of innovations that are coming through in the second half of the year.

That cost more, yes. But nonetheless, we have a reduction of 50% of our losses in new categories. So that's going really in the right acceleration where we have the momentum and we're accelerating on that momentum. Pivotal year last year, accelerating on the momentum in 2022, 2023.

Just to follow up on that. Just do you expect in the second half that the decline in losses in NGP will be anywhere near the level of the first half given that you -- I think there's a considerable number of launches in the second half.

Well, take it step by step. We're not going to give guidance on that for the second half of the year. Where we give guidance, we'll deliver our financial algorithm and the corridors that we spoke about. And we will make sure that we are actively supporting these new launches in the balanced way in terms of the balancing act with investment and financials.

Okay. And lastly, you clearly made a GBP 450 million charge for the U.S. investigation. Presumably, that will be a cash cost at some point?

We're not -- absolutely not in a position to be able to speak about that matter as it stands for very obvious reasons. We decided that it was prudent to take a provision and we'll take it from there.

Yes. It is a no at this point in time, but the fact is that our corridor of 3 to 2 is kept independent of the impact that this might have.

A prudent accounting approach.

There are no further questions. So I will hand the call back to your host for some closing remarks.

Well, thank you very much for taking the time with us today. I must say that what is extremely important is that these results show that we are transforming the business and delivering robust results. I'm extremely confident in our full year guidance. With the great new category momentum that we have, we are on track for our 2025 targets. And our transformation is well on the way. It's led by the new category growth and our pathway to profitability and also a very strong combustible business. We are migrating the consumers from combustibles to new categories. Last year, we had 1 billion packs that were carrying advertising promotions or information for smokers to move to new categories. This year, it's going to be 2 billion. And I want to continue to migrate the consumers from one category to the other.

The profitability, the margins and the cost of acquisition of new consumers with the new categories that we have. And we're the only ones to be in 3 categories and established in there, demonstrates that BAT is changing rapidly and it's powered by our people, our ethos and the determination that we have to make a very clear commitment to delivering for all our stakeholders, all our stakeholders. We take ESG extremely seriously. We take our business extremely seriously. We are growing at pace, and we'll continue to do that.

So in a nutshell, I'm extremely excited about the future of BAT and that 2022 first half comes on the back of a very strong 2021, where we grew in all the different categories, including combustible, and we'll continue to do so. So it's about value in combustible. It's about step change in new categories. It's about simplifying the business. So we are growing value share in the first one.

As we said, we did in 2021, we'll do in 2022, step change in new category, 51% growth last year, 45% on a bigger base in 2022 and GBP 1.5 billion that is -- was GBP 1 billion, then went to GBP 1.5 billion, and now we say that we will deliver more than that.

So thank you very much for your patience with us in the last 3 years. I think we're getting into a very strong position, of which I would not even call it foundation, I will call it a springboard to move forward.

So thank you very much for listening.

Thank you for joining today's call. You may now disconnect your lines.