1, and welcome to Blue American Tobacco's 2018 interim results presentation. I'm Nicole De Duventi, chief executive of British American Tobacco and with me this morning is Bernie Stevens, Finance Director. As always, a warm welcome to those of you who are listening on the conference call or listening via our website, bet.com. As usual, after taking you through the results presentation, there will be an opportunity for you to ask questions. Before I start the presentation, I'll take it that you have all seen and read the disclaimer on page 2 and 3, And it's clear that these interim results have benefited significantly from the inclusion of Reynolds as a fully owned subsidiary.
Given these, volume of revenue and profit from operations will be presented as though the group has all the acquisitions made in 2017 for the whole of that year. We referred to comparable results on this basis as performance on a representative basis. This comparison will provide shareholders with a better understanding of performance. Moving now to the interim results. Overall, we have another good year in 2018, with the group performing well.
Once again, we have delivered on our commitment to high single figure earnings growth. We've adjusted diluted EPS up over 10% at constant and 2% at current rates. Our strategic portfolio, which covers our key combustible, all of tobacco and NGP brands has grown strongly. In the first half with revenue up over 8% on a representative constant currency basis. You see over the next few slides that our combustible business, which remains 94% of our business, continue to perform strongly and industry fundamentals are robust.
The U. S, remains a great opportunity and railroads is performing well. And finally, that we have a great opportunity in next generation products. And it has been demonstrated that our multi category strategy driven by consumer needs is the right strategy. And we have the capabilities and products to win.
Turning now to the results highlights. Reported volume, revenue and profit from operations obviously benefited from the inclusion of rentals as a wholly owned subsidiary and were up 11%, fifty seven percent 72% respectively. On a representative basis, volume was down 2.2%, again, outperforming the industry. We expect the industry volume to be down around 3% to 4% this year. Constant currency adjusted revenue was up 1.9% on a representative basis.
However, 2017 revenue in the U. S. Benefited from a number of one off items recognized by Reynos prior to acquisition, principally the sales of Natural American Spirit Inventory to JT as part of the disposal of the international brand rights. Excluding these, adjusted revenue would have grown by 2.6% on a representative constant currency basis. Tobacco price mix was the robust 4% which reflects improved pricing held back by the negative mix effects of strong volume growth in Pakistan following the excise change in mid-twenty 17 and down trading in the GCC.
Excluding a 1 off effect of NAS inventory sale, price mix would have been close to 5%. We continue to expect a stronger second half with full year pricemix ahead of last year. Despite the recent slowdown in the THP category in some markets, excluding Japan and South Korea, we remain confident of exceeding NGP revenue of 1,000,000,000 pounds in 2018 as we expect a range of new launches to reenergize NGP category growth in the second half. As we said at the full year, we expect profit growth to be weighted to the second half, driven by improved price mix continued share growth and strong growth in NGPs. Foreign exchange was a headwind of 8% in EPS for the 6 months of the year and is estimated to be a headwind of 6% for the full year assuming rates stay where they are today.
I am very confident of another good year of adjusted earnings growth at constant currency, driven by strong underlying profit growth, with the benefit of the U. S. Tax Reform, enabling us to accelerate investment behind our NGP business. Group market share grew 40 basis points, driven by a lot of strong performance for non strategic brands. Kents, Lockey Strike, Palma, and Ruffmers all grew share globally.
Don't heal, held up very well in the premium segment and share was down only 10 basis points. Record share in South Africa and growth in Brazil were offset by decline in Malaysia, South Korea and the GCC due to and down trading. Katz grew 50 basis points. The brand had a strong performance in Japan, driven by THP, and grew share in Russia, Brazil and Turkey, where Kent is the fastest growing brand in the market. Lug strike was up 10 basis points, driven by Indonesia, Colombia and Japan.
Palmar grew 30 basis points with strong results in Pakistan and the GCC. Where the brand was launched ahead of the significant tax size increase last year to address the needs of down trading consumers. Roughmost continues a strong performance and was up 80 basis points, driven by good results in Russia, together with an excellent performance in Malaysia where the brand grew 260 basis points. The brand also benefited from migrations in Poland, Brazil and Colombia. In the U.
S, This strategic brands continue to perform well. Natural America Spirit and new port share were both up 10 basis points. While Kano declined by 10 basis points following the gains made last year. Parman was down 10 basis points, reflecting some increasing competitive discounting. Overall, The strategic brands had announced steady performance, growing share by over 160 basis points.
In the U S, industry volume decline remains within their historical range and Reynos is performing well. Looking at sales to retail, which are a good measure of consumer trends first half industry volume was down 5%, mainly due to the impact of state excise increasing California, in April 2017 and high U. S. Gasoline prices. We expect U.
S. Industry volume to be down around 4.5% to 5% for a full year. Vapor category growth appears to be driven largely by new consumers and new behaviors. And you continue to see limited impact on U. S.
Cigarette industry volume. Rainal shipment, volume to wholesale was down 5.5%. Broadly in line with the industry. Revenue was 1000000 to 1000000 which was flat on a constant currency representative basis. However, this was against a comparator, which benefited for a number of one off items, principally relate to the sale of NES inventory to JT of approximately $100,000,000.
Excluding this, revenue would have grown 1.8%. Pricing the U. S. Is robust and despite some increasing competitive discounting, the price environment remains good. Deliver of the cost synergies is ahead of plan, which we've analyzed cost save is now running at almost 100 $40,000,000 at a half year point.
While we're on track to deliver at least $400,000,000 in cost synergies by the end of 2020. We have submitted our comments to the FDA on its ANPRMs on nicotine flavors. There is a land diverse quantity of material and this is likely to take some time for the FDA to digest given the complexity of the issues. As we have said, these are the first steps in a lengthy process as to whether the FDA issues a product standard on these issues. Our new product applications for the FDA also progress you well.
And we are very pleased that clearance for the SE application for the improved eclipse our carbon tipped tobacco hitting product has now been received. The scale of the protein for tea been the U. S. Remains uncertain and heated tobacco products will attract full cigarette excise. However, we'll be testing the potential of the improved eclipse in the U.
S. During the next 12 months. We filed the SE application for Glow in February. The application is currently under scientific review with the FDA potentially completing its review by the end of 2019. We must continue work on plan to submit a MRTP application for Glow.
The kernel is news MRTP application is also proceeding well and the TIP SAC as it is meeting in September, we review the application. In auto tobacco, the business continued to grow strongly. Total first half revenue grew over 11%. On a constant currency representative basis, driven by strong performance in the U S, Sweden and Norway. In the U.
S, auto industry volumes were broadly flat in the first half, with America's new company volume in line on a representative basis. Grizzly saw a strong first half revenue and profit growth driven by good pricing. Market share was down 30 basis points, I guess, a comparator, which benefited from gains made during the U S ST product recall in Q1 2017. Outside the U. S, the white pouch market is the fastest growing auto tobacco segment.
In the first half, the category grew by more than 120 basis, against last year. And now accounts for 3.5 percent of European auto tobacco care with margins up to 2 times debt of premium cigarettes. Across the Nordics, what epoch is the fastest growing premium auto brand. VAT continues to grow share. We've got a 12% share of the market in Sweden and a 8% share in Norway.
In Switzerland, Apple has grown to 14% share of the total oral tobacco category just 10 weeks after its launch. This is a profitable growing business with very attractive margins. In tobacco hitting, Glow continues to perform well, In Japan, below national share is 4.3%, up from 3.3% at the end of December. Having added a full share point over the year to date. Our share of the total tobacco market in Japan is now 16.2%, up 80 basis points since December, benefiting from share growth in both THP and Syrance.
We are the fastest growing company in Japan across both categories. However, it is clear that the THP category has plateau over the last 4 months as the spends into more conservative consumers, barriers to adoption at higher and growth naturally slows. We know that one of the greatest barriers to consumer adoption is the price of the device. We have been focusing on driving down the production cost of the current blow device and have been passing this onto the consumers through increased service devices counting. In the coming months, we'll be launching different device and consumables at different price points.
For example, We have recently launched NIO, a new premium price range of consumables with higher nicotine and different flavors. The second half will benefit from these initiatives and from new consumer activation plans, including our consumer hyper care conversion program. In South Korea, the THP category has grown to 12% of the tobacco market in June, although This has plateau as well over the last 4 months. Grow continues to grow national share and now has a share of 0.7% and a category share of 6%. Following the successful launch of 2 capsule variants in mid April, We are now relaunching the brand with a revised marketing mix and upgraded device.
Outside the Japan and Korea, South Korea, category growth has been mixed. However, Glauce presence has continued to grow with Italy joint existing markets of calendar Russia, Switzerland and Romania. We are now unconstrained on device supply and have a strong pipeline of activity. We have together with a significant uplift in activity in Japan. We maintain our view that the category could represent 30% of the Japanese market by 2020.
We remain confident in gross potential and as new offers enter the category and products improve growth should return. On this basis, we remain confident of exceeding £1,000,000,000 in NGP revenue in 2018. In Vapor, on a representative basis, volumes were up over 16% And after excluding the impact of U. S. Vibe product recall, revenue grew by 8%.
In the UK, the market grew by almost 26% and B it is Vapore, retail share grew by 20 basis points in value to 41.1 percent. We remain market leading traditional retail enclosed system. Earlier this month, EPN3 was launched in the UK after extensive pilot program with excellent results. EPN3 represents the cutting edge of current vaping technology, provide a more intense and satisfy vape experience. While it's still very early days, initial indications are very positive in our VIP Vapor stores, EPEN3 has achieved their highest rate of sale for any VIP device to date.
With higher margins than EPEN2, are a few purchase rates that the highest achieved for any white product to date. The early signs are encouraging. In the U. S, the category has continued to grow up rapidly and is up over 20% in the first half. Driven by a significant increase in the size of the consumer base.
Vapor revenue was down 4% but up 12% after adjusting for the impact of use via the recall. The overall use family, which has featured nicotine salts technology since 2012 continued to grow volume and value. However, share was down 10 percentage points to 21% due to the growth in the vapor category. In Q2, views, VIP recall volumes were absorbed as negative sales, However, both view 0 and view solo have captured a significant proportion of the volume lost by the recall. Recall costs have not been material.
In August, we'll be launching Vuz auto in the U. S. Our first pod mod product. This will be available for variants, a new feature, an innovative ceramic week. Like order views products, auto has a 5% nicotine concentration liquid and is an nicotine salt products.
Our research shows that auto rates significant higher than any other nicotine, South Broadmod products. On a number of key consumer attributes and purchase intent. We continue to perform well in our other markets remained a market leader in Poland and in Germany in closed systems. We also recently launched ePEN3 in Canada and VIP in Greece. The opportunity to cater will remain significant.
When you look at total nicotine consumption, We continue to see a growing market for nicotine with new consumers and behaviors driven by the growth in the vapor category. With a strong product pipeline, we are well positioned with our multi category approach to be a winner. So in summary, we are continuing to deliver our commitment to high single figure earnings growth. Our combustible business is outperforming the industry and we are generating strong revenue growth for the strategic portfolio. In the U S, the business performing well and synergy delivery is ahead of plan.
Our potentially reduced risk products continue to grow strongly. We have significant additional investments, NGP's, plant as well for the 2nd I continue to believe we can deliver in excess of 1,000,000,000 in NGP revenue this year, more than doubling the size of our business over the course of 2018. We are on track for another good year of earnings growth at constant currency driven by strong underlying profit growth and with the benefit of the U. S. Tax reform allowing us to accelerate our NGP investments.
Overall, the business is performing well. I'll now hand over to Ben who'll take you through the details of the results.
Thank you, Nikandra, and good morning, everyone. As Nikandra said in his opening, reported volume revenue and profit from operations were up 11%, fifty 7% and 70 2%, respectively, benefiting significantly from the inclusion of rental as a wholly owned subsidiary. As we said earlier, for clarity, I will now focus on the adjusted representative results which are all against a comparative base that assumes full ownership of rentals and other acquisitions throughout 2017. This doesn't affect comparisons made on an EPS basis. Representative volume was down 2.2%, This was mainly driven by trade inventory movements in the GCC and industry volume decline in particular in Ukraine, Brazil and Russia, partially offset by growth in Pakistan and THP volume, which reached 1,000,000,000 sticks in the first half.
Adjusted revenue was down 6.4% at current rates, but was up 1.9% on a constant basis as higher pricing across the majority of our markets was partly offset by negative geographic and portfolio mix of around 3%. Adjusted profit from operations was up 2.4%, excluding the impact of currency translation. On a current basis, it was down 5.4%. Adjusted diluted EPS was up more than 2% at current rates and over 10% on a constant basis, exceeding our high single figure EPS growth objective. Turning now to the regions.
Revenue in the U. S. Was in line with the prior year on a constant currency representative basis. Good pricing in both the cigarette and oral tobacco categories and higher views consumable volume was offset by the reduction in cigarette volume and the impact of the Vibe recall. Excluding the one off items in the revenue comparator, which principally related to the NAS inventory sale in 2017, revenue grew 1.8%.
Operating margin of 41.4% or 46.2% on an adjusted basis benefiting from comp synergies achieved since acquisition and the timing of expenditure. As a result, adjusted profit from operations was up 5.6% on a constant currency representative basis. In APME, adjusted revenue on a constant rate, representative basis grew strongly and was up 5.6%. This was driven by pricing, volume growth and the benefits of higher revenue, THP volume, which more than offset the negative mix effect of down trading in GCC and the growth of illicit in Malaysia. Volume was up 3.5% with strong growth in Pakistan, Bangladesh and THP outperforming the industry, which was down around 3%.
Market share in the region grew strongly and was up 110 basis points. On a representative constant currency basis, Adjusted profit from operations was down 5%, driven mainly by the impact of inventory movements and down trading in the GCC and increased investment behind THP. Australia continued its good performance. Profit was up and share grew driven by Rothman's. In Japan, revenue grew, but profit was down due to decline in industry cigarette volume and investment in NGP.
In Malaysia, the duty paid industry declined by 5.5% and illicit trade increased to reach 67 percent of total consumption. This impacted both profit and revenue. The strategic brands had an excellent performance with volume up over 15%. Share was up 90 basis points mainly driven by Palmao in Pakistan and Saudi Arabia as well as good performance from Lucky strike in Indonesia. Revenue in AMSA was down 9% to 1,000,000 due to a significant translational foreign exchange headwind of 12%.
However, on a constant currency representative basis, adjusted revenue grew by 2.9% to 1000000. Good pricing across the region, notably in Canada, Chile and Nigeria more than offset lower volume. Volume in the region was down 5.9%, mainly driven by industry decline in Brazil, South Africa and Mexico. Adjusted profit from operations on a representative constant currency basis grew by 4.1%, driven by Canada, Nigeria and Chile, partly offset by the continued difficult trading conditions in South Africa. In Brazil, although there are signs of improvement and no new excise increases currently planned, the weak economy continues to affect industry performance and drive further growth in illicit trade.
While pricing was good, and premium share was up aided by a good performance from Dunhill, revenue and profit declined impacted by lower volume. In South Africa, revenue and profit were also lower as volume was down due to the continued growth of illicit trade and VAT and petrol price increases. Strategic brands performed well, driven by share gains for Rotman's and Dunhill, which reached a record share of 15.7%. Canada posted another strong performance with revenue and profit growth driven by continued good pricing. Strategic brand volume was up nearly 30% driven by growth in Mexico as well as migrations in Brazil, Colombia and Nicaragua.
In ENO adjusted revenue, our constant, represented basis was up 1.3%, driven by improved pricing and mix in Germany, Romania and Russia, partly offset by the impact of lower volume and continued excise absorption in France. Volume was down 3.9%, driven by Russia, Ukraine, France, Italy, which offset good performances in Turkey and North Africa. Adjusted profit from operations at constant rates on a representative basis was up 2.2% with good performances from Germany, Ukraine and Romania. In Russia, volume declines was offset by good pricing and cost savings. Rotman's and Kent both grew share and Kent remains the number one premium brand in the market.
In Germany, P80 is the fastest growing total tobacco company volume was down, but constant currency revenue and profit grew driven by pricing and improved mix. A good performance in the Ukraine saw revenue and profit increase driven by improved pricing and share growth. Rotman's is the number one brand in the market with a 17 point 3% share. In France, share was stable despite aggressive competitor pricing activity. Strategic brand volume was up 11% with strong performances from Rotman's in Russia, Ukraine and Poland, Palmao in Egypt and Kent in Turkey and Russia.
The first half also saw a great performance from our oral tobacco business in the region. Volume grew 29.6 percent driven by EPOC outperforming the industry, which was up 6%. Turning now to operating margin. On a reported basis, margins were up 340 basis points, benefiting from the inclusion of rentals as a fully owned subsidiary. Underlying margin improved by 180 basis points This was driven by pricing, cost savings and synergies with rentals.
This was offset by higher NGP investments, which represented a headwind of 130 basis points. Adjusted operating margin on a representative basis increased by 50 basis points. We will continue to make good progress on an underlying basis and remain confident in our ability to deliver 50 to 100 basis points of margin improvement on average over the years.
Adjusted
diluted EPS of 137.2p was up 2.1% despite a currency headwind of 8.3 percentage points. On a constant basis, EPS grew 10.4 percent, driven by growth in operating profit, the contribution from rentals, the benefit of U. S. Tax reform, and an improved result from ITC. Net finance costs were up mainly as a result of the rentals acquisition and the financing of the transaction.
We continue to expect Despite profit growth from ITC, the contribution from associates was down due to the removal of Reynolds as an associate company. Our effective tax rate was lower at 26.9 percent, mainly driven by the impact of the US tax reform. I would continue to expect a tax rate of around 20% 27% for the full year. Non controlling interests were marginally higher as profit growth in Bangladesh, Sri Lanka and Pakistan, was partly offset by decline in Malaysia. On currencies, if rates were to stay where they are today the translational FX impact on full year results would be a headwind of around 5% on operating profit on a rep sensitive basis and a headwind of around 6% Overall adjusted cash generated from operations was 1,000,000, which is 1000000 higher than last year.
This is mainly due to the benefit of higher adjusted operating profit driven by the 6 months contribution from Reynolds and the early MSA payment of one point or 1000000000 made by the group in December 2017. As a result, operating cash flow conversion was up 27 percentage points to 97%. Excluding this early MSA payment, operating cash conversion would have been approximately 68% which is in line with the prior period. Depreciation is the main component of non cash items, excluding the MSA payment, working capital outflows, of 1,000,000 was significantly higher than 2017, which was an outflow of 1,000,000 This is primarily due to nonrecurring stock bills. As always, I'd like to caution that the timing of working capital movements tends to absorb cash in the first half largely due to the timing of leaf purchases.
Net capital expenditure was 1,000,000 higher than 2017, largely due to investments in NGP. We continue to expect gross CapEx in 2018 to be around 1000000000. Net interest paid was higher at SEK23 1,000,000 due to the financing arrangements of the acquisition of Reynolds. Tax outflows were higher at 1,000,000 now include tax outflows related to the Reynolds business. Dividend payments to minorities were slightly lower compared to 2017 This delivers adjusted cash generated from operations of 1000000 Turning now to financing.
We are targeting net debt to EBITDA of around 3x by the end of 2019 with further deleveraging thereafter returning to the higher end of our historic net debt to EBITDA target of 1.5to2.5 times. Closing net debt was 1,000,000,000 30th June 2018. Our target credit rating remains BBB plus Baa1 with S and P and Moody's with the rating currently standing at BBB plus Baa2. This rating is driven by our net debt to EBITDA ratio and we are focused on managing this down with no share buyback programs or significant debt financed M and A until leverage returns to appropriate levels. So in summary, the business has performed well in the first half.
On a constant representative basis, adjusted revenue grew 1.9%, profit 2.4% and adjusted diluted EPS 10.4% exceeding our high single figure earnings growth target. We continued to outperform the market and have once again grown share powered by the continued strength based on our previously announced annual dividend growth rate of 15% in 2017 backed by EPS growth, we have demonstrated our continued commitment to growing shareholder returns over the long
Thank you, Ben. So in summary, our combustible business, the fundamentals are strong, and we are outperforming the industry. Reynolds is performing well in the United States and our multi category NGP strategy with the consumers at its heart is the right strategy. Looking to the second half, we expect stronger profit growth driven by improved price mix continuous share growth and strong growth in NGPs, offset by increased investments in NGP's rollouts. I am confident we are on track for another good year of constant currency earnings growth.
I will now open up two questions. So we'd like to start.
You.
And our first question comes from the line of John Lenster of Berenberg. Please go ahead. Your line is now open.
Thank you. Good morning, gentlemen. A couple of questions, if I may. First of all, the U. S.
Market, obviously, your market share experienced a slight decline, which is quite a marked shift from where we've seen it in the past. Is that because you are concentrating more just on 2 or 3 brands and let in some of the Hail Brands decline at perhaps a faster rate? Or has there been a perhaps a more noticeable shift or deceleration in market share growth of Newport and an AS?
Well, the, John, the answer for this question is that we are coming from a very strong growth in 2017, our market share. The market share in is slightly down around 10 basis points, but, the strategic brands, the 2 truly premium brands in U. S. Market, that they are new port natural American spirit. The share is up.
We expect to have a very strong second half And you expect that to have a much better performance, but we are against a very strong comparator against the first half of next year, last year. But the full year we expect to have a different performance. But the share is 10% down. You'll see the low priced brands, the teo brands declining. But the strategic brand is growing.
So the performances, I think that's quite good in the current environment. But the full year, as I said, we expect some improvement because we expect the second half much stronger.
Okay, thanks. Secondly, I wasn't quite sure on the carbon tipped cigarettes within the U. S. Market. Are you saying that the SE application is now being cleared with the FDA, or does that mean that actually the whole thing has been cleared and therefore, you can launch onto the market as an as and when you want?
We are delighted to be the 1st tobacco company to be able to launch a THP proposition in United States. So have a clearance to launch the product. But as I said before, a word of caution We don't know the size of this category of United States. We will pay full excise financials are not going to be as good as in some other markets. But yes, we are looking at.
We have plans to test market this in the next 12 months to understand a little bit better the potential. But yes, we have clearance to launch. So we are delighted with that.
Right. Thank you. And lastly, with the Alto products, just to be clear, therefore, again, with that one, it's clearly been launched. So this is not a new product. This is something which has already got clearance with the So when you say you'd laud this product, this is not something that requires a pre market approval from the FDA.
This is something you can launch straight straight onto the market, including nicotine salts variant. So this is you're suggesting therefore that this is a a sort of variation on an existing product in the market prior to August 16. Is that the correct interpretation?
John, this product has been grown further in August 16, but they were not widely available in the United States. There are a lot of products that were grown farther than time. And I can't say that they were not widely available because to be their own father, it could be in a market in one store, 2 stores, only the whole country. So it was going farther. Now is the time to launch the product in scale.
And I think that, is going to be a fun time. We are going to launch 2 pod mods in the next 12 months, even before the end of the year. The first one is going to be the alto that you're going to launch now in August, consumer testing, the results are really good in several consumer attributes the product has rated superior to other pod modes in the markets, 5% nicotine with, nicotine salts, So we are very optimistic about the launch, but with any launch, we'll have to wait and see You take some time, but you're going to launch this in August. And the second one, towards the end of the year, probably towards the end of the year, in different price points, by the way. This is going to be more of a premium proposition.
We are discussing the second one where this is going to be positioned.
Okay. Well, thank you very much.
Thank you. Our next question comes from the line of Fulvio Kazole of Goldman Sachs. I've
got 2
on pricemix. I know you highlighted that geographic and product mix had a negative 3% impact in 1H18. I was just wondering if you can give any comments on how you expect that to moderate in the second half given that you will be lapping the key anniversary dates for events in Saudi Arabia, Pakistan, and also the U. S. Volume trends have also improved So that's my first question.
And then my second question is on pricing. You highlighted that 70% of the price increases that you had budgeted so far in 2018 has been implemented. Can you remind what the comparable figure was in 2017, please?
It's Ben here. Yeah, that we expect price mix to improve in the second half. As you say, we'll be lapping some of the more difficult markets from the first half of the year. So we believe that the pricing is improving in the industry, and we expect a higher pricemix in the second half. I'd remind you also that the the 4% pricemix that we've reported is actually 5% if you exclude the NAS, net turnover because that was a 0 margin.
So decent pricemix in the first half improving in the second half. And in terms of pricing, we're broadly the same as we were last year in terms of the percentage of pricing that's gone through.
Thank you. Our next question comes from the line of Michael Lavery of Piper Jaffray.
Good morning. Thank you. I was wondering if you could just touch a little more on Natural American Spirit back in the U. S. What's driving the declines there?
That's obviously historically had very strong positive growth, even typically double digits. Can you just touch on what's different that's driving that negative now?
Well, there's nothing negative in natural American speed. We are growing market at 10 basis points. The volume is probably, consequence of the industry decline. So in the first half of the year, volume is 4% up in an industry that was declining 5% So the growth is against the interest is 9%. So it's a fantastic performance and fully look at the historical numbers for natural American spirit, the size of share growth that you have experienced is similar than the past.
So the brand is growing very strong, We had extremely strong first half of last year. We are still growing 10 basis points. Is the most premium brand in United States And if we consider all of these, I think that has been a great performance for the brand. So nothing wrong with that.
So can I
just clarify on I'm looking at the release and it says that the share momentum continues? That is up, but then it says with volume lower by 4%. On a representative basis, is the volume actually down?
Well, I
can come back to you on that, Michael, but the numbers that I have here is that, the number is up and the market share is 10% basis up. But can I get back to you?
Yeah, sure. Thank you. No problem. And could you just touch on Korea with the Korean FDA, I think creating a little bit of confusion for consumers around the risk reduction for tobacco heated products how significant of a challenge have you seen that in the market for consumers? And what if anything do you feel like you can do to counter that?
Well, honestly, there are, there are a lot of reasons that, why, Korea has, has stabilized of around the 12.5 percent. To be honest, I think that the main reasons for stabilization career is because the dynamics of Korea and Japan that they are the 2 biggest THP markets are completely different. For example, In Korea, you have different touch points with the consumers. We cannot do sampling. You have different hyper care needs the way that engagement with consumers requirements and restrictions on 1 to 1 engagement with consumers, we have the number of so users in Korea is much higher than, sorry, the growth of so users we don't see this happening in Korea, the same proportion that you see in Japan.
And when you have a higher percentage of dual users, and we always have a higher percentage of dual users, in Korea, there is a tendency that the because of product satisfaction, there is a higher percentage of people going back to the combustible cat So I think that these are the main reasons for not for stabilizing in the range that it has. It has grown very fast to 12%. But, honestly, I think the category will go back to growth because one of the main reasons for the category not growing is product satisfaction. There will be a lot of launches in the second half, from VAT and a lot of competitor activity, to be honest, We are launching new device. We are launching GLOW 2.0.
We are launching many at the end of the year. In terms of device, We have capsules in the market. You have, for example, in Japan now. We are just launching new, a premium, consumable with a higher nicotine with different flavors because of the new launches in the market, I expect the category go back to growth.
That's very helpful. Just one last follow-up on John's question. Any sense of how soon I think you said that the carbon tipped launch test launch in the U. S. Would be in the next 12 months.
Is it the sooner end of that or when might we expect to see that?
Oh, the, as I said, we are going to test market the product in the next 12 months because the size of the category in the west is unknown. And as I said, there will be 4x size in the category. So you have to understand the category a little bit better before a full launch. So we will test market in the next 12 months and dependent on the test market we're going to expand this, but I cannot be precise to you in terms of time. Cities or states that you're going to do that because we are just working on this now.
We have plans and we are discussing the finalization of those plans.
Okay. Thank you very much. Thank
you. Our next question comes from the line of Owen Bennett of Jefferies.
A couple of questions, please. First of all, one for Ben. I was hoping to get a bit more detail on margin expectations for the year and specifically the impact of the NGP investment. So you said there was an impact of 30 basis points in the first half. But I'm guessing this will be much greater in the second half.
And then secondly, just coming back to the U. S. With the recent recovery in industry volumes, I was a bit surprised that you're guiding down to 5% for the year. I was just wondering, what is that be driving this assumption for the 5%?
Look, I'm not going to give a prediction on margin for the full year, but we are confident we can grow operating margin as I say 50 to 100 basis points over time. Whilst the investment goes up in the second half of the year, remember, we've also said that results will be biased towards the second half of the year as well. So I'm expecting a good performance on margin for the full year.
In terms of U. S, we are talking about 5% for the first half of the year. And I said the 4.5 to 5% in the for the full year. So I do expect that the second half is going to be better than the first half. I'm talking about the industry because, from the Reno's perspective, I think that we are going to outperform the industry in the second half because we expect share growth.
And the reasons for that is, as I said, the main reason for this decline of the index in the first half was a disposable income in U. S, because gasoline prices went up big time. There is a huge influence in terms of consumption. You have the SCT excise increase in California. Those are the two main reasons for the decline in the first half.
And the gasoline, for example, you'll be is the same reason for the full year. But I think that the second half of the year, Owen, I think that's going to be better than first half. And I think that Reynolds, as bet, in the 2nd half, we have a very strong 2nd half, we outperformed the industry.
Okay, cool. Please press 1 on your telephone keypad. There may be a further pause while questions are being registered. And our next question comes from the line of Adam Spielman of Citi. Please go ahead.
Hello, thank you.
Thank you very much. So my question comes back to this thing about pricemix. If I understand it correctly, pricing must have been about 8%, because I think you said that pricemix was 5%, but you have negative, 3% mix leaving a percentage point of price. Is that correct?
Yes, that's correct, Hannah.
And as we look, can you sort of say geographically where mean, because that's a huge number more than you've done before.
And I
was just wondering sort of geographically, particularly as you didn't take pricing, my understanding is in Russia, where the biggest movements from that is?
Alan, this is not a number that is much higher than the previous years because the price mix last year Why is 3% this year was even higher last year? I think that, if we look at the price mix, Excluding geography and portfolio mix, I think that the 1st half of this year was lower than last year. So I don't think that 8% is much higher than it was the first half of last year. It's lower. Look at the first half last year price mix, including geographical portfolio that was higher than this year, you see that is a little lower.
Okay. And Fine. Okay, fine. Can you just talk about in terms of volumes, you had a positive surprise. I don't know if it's the right way, but you had a positive one off in Pakistan and a negative one off in GCC.
Can you say which one is bigger and how much can you give any sense of a scale of those 2 movements?
Alan, to be honest, to do the math is now about the impact of each market in terms of volume. Not going to be easy. I'll be more than happy to come back to you later with the answer for this question. But in the case of South Arabia. We had the industry declining almost 40%.
And if you look at Pakistan, first half against first half of last year, We have the interest declining probably less than that. So I think that there is a huge impact in the case of the Arabia in the numbers. But if you do the math about the impact of each specific market in the total volume numbers, we can discuss this later, if you don't mind. I'll go ahead back to you.
Of course. And the final thing is, terms of pricing in the U. S, you obviously had a very strong pricing in the first half. Do you expect it to be equally strong in the second half?
Alan, we don't talk about prices going forward. What I can say to you is that we have a very good price environment in United States I haven't seen anything changing in the last, 18 months, 12 months, 6 months. So it's a very solid pricing environment, but not talk about price increases going forward as we expect that I couldn't. So but it's a good price environment. I don't see this changing.
But we'll have to wait and see.
Our last question comes from the line of Raven of SBG Securities.
Good day. It's Nick Andres, Ben. Yeah, I just wanted to start off by just saying, you know, complements on the improved disclosures. It really helps. I just want to quickly just come back to the next generation product investment into the second half.
I mean, if I'm calculations are correct, it looks like based on that margin chart, it was about GBP 116 odd million that you spent, which was the hit on the margin. And correct me if I'm wrong, but I think the guidance is above $500,000,000 for the full year. That's just my first question.
Yes, it wouldn't be a million miles away with those numbers, Ray. But remember, the combustibles business will improve in the second half as well. So that will give a offsetting effect on the operating margin.
And then I just want to just touch on pan or the target of GBP 1,000,000,000 for the next generation products, I mean, in the first half for 27 on a constant currency basis. Just correct me if I'm on this, but as far as I have it, the capacity constraints, have now come to an end in terms of your production. So is it fair to assume that market share of yours that have been sort of stable around about the 4.2% in Japan could probably now get a benefit from the improvement in your capacity issues.
Well, we have grown market share from, 0.9% mid last year's, and since we went to national, In October, we came from 0.9to4.3. In December, we were 3.3. It has been stable in the last 3 months. The last reading that I have with me is May. That's true.
But we have seen strong growth. We became unconstrained in June, as I had said before, So we start shipping July to see the impact of this and the impact of the new launches in the market. We have just launched a new device. They grow 2.0. We have a much better, premium device.
We are launching new variants we are launching new consumables at a higher price point, new flavors, highnic, plus the constrained device, we expect to grow market share, we'll be doing all of this, if you're not expecting significant growth in market share, And you are right, Japan is extremely important for us to grow in our NGP because I have said before, If we look at the THP category, we have, Japan and South Korea, the 2 biggest markets. So you have to make any roads in Japan to meet our numbers. We are very optimistic about our, our portfolio of launch We are very optimistic that you're going to grow market share in a growing market because all these competitors activity should drive, volume. But In order to that you have not talking about VPN off. The launch of auto United States is something quite important for us.
We, as I said, the brand, the product has, performed extremely well in our research against comparable pod mod products and also, the launch of EPEN 3. Epentry, we have test market pain during the 1st 6 months of this year. And the results have been quite, great. Just to have an idea, in the case of VPN III, one of the change that you have not never been able to to go through being big tobacco is the VIP stores. In the 2,500,000 VIP stores in UK, during the first half of the year, we provide a product for testing and we had a call, to buy in 2.4 out of 2.5 vaping stores, which you scale up as soon as production allows during the second half of the year.
So all the indications, if, ePentry, auto, and then beginning of next year, we've, I switch, that's what we used to or Raptor, we have developed the mix of our vaping portfolio, developed the mix of our, THP portfolio, And that's why you're optimistic that you can reach our targets. Long answer, but
Good. And maybe just a quick little final question. Just on Australia, it's surprising. I mean, I think you indicated I don't know if its share and revenues or profits are up, but, as far as I have, the mark was sort of down 10% in the 1st the year. So I'm just curious about your performance in Australia.
The main reason for that twofold. First of all, in Australia, we have done quite well in terms of market share. So we have been growing market share in the last couple of years. We grew in the first half of this year, 30 basis points in Australia. So it's quite important.
We have a very strong position with our portfolio there. 2nd, price has been quite solid in Australia in the last 18 months. We remember that 2 or 3 years ago, we saw a lot of down trading in the market. We discussed this several times in past. Now the market has stabilized.
We see very good price coming through, and we have a very strong portfolio. And those are the two main reasons for our performance in Australia. We are quite, confident about, the business. And the declining volume, as you know, you have the Zetta Hawks excise increase. And when you pass the excise increase, significant excise increase, through pricing, you have a declining consumption.
And unfortunately, in Australia, illicit trade now is almost 15% the market. This is what drives significant excise increase is growth of illicit rates. So this is the downside of the Australian business. But on the other side, there are so many upsides. Thank
you. As that was our last question, I'll return the call to Nickandro Duranti. Please go ahead.
We'll have a question. Okay, guys. Thank you very much for joining this conference call. Looking forward, we look forward to see you again to talk to you again in February. Junif Fouias presentation.
Thank you.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.