Good morning, everybody, and welcome to BAT at the DB Consumer Conference in Paris. It is my pleasure to welcome Tadeu Marroco, Chief Exec of BAT, on stage. He's gonna start with a few introductory remarks, and then we'll move into Q&A.
Thank you, Damian. Thank you for invite me to be here today, have the opportunity to talk to you all about, BAT's, transformation. Before we get to the Q&A, I have just, want to spend some few minutes just to outline some of the, journey that we have been on and, and some key points of the trade statements that we have issued yesterday. First of all, BAT is very committed in building a smokeless world, and, as part of that, we have set a very, a very ambitious target to become revenue smokeless more than 50% by 2035. We believe that we have the right strategy.
We have a multi-category strategy since the onset, and we are well equipped to be able to give the choice for smokers who prefer otherwise to carry on smoking smokeless products that have a very, very different and very lower risk profile compared with cigarettes. Also, this provides a commercial opportunity for the group. With that said, I would like to call your attention to the disclaimer in this slide. Then basically, at the back of the revised strategy that we have done more recently, we are sharpening our execution, and we are also making more targeted investment decisions.
Over the last few months, we have been very focused on sustainably strengthen our U.S. business, also accelerate innovations momentum, and also being able to enhance our capabilities in order to allow us to deliver our strategic, vision. We said yesterday, we are pretty much on track to deliver our full year guidance of low single-digit revenue and profit in 2024. We expect to have H1 delivery in line with the expectations. The points that I would like to highlight from the statement yesterday, I'm very pleased with the performance in the combustible business. We have grown market share by 30 basis points year to date. I'm particularly pleased with the results of our commercial plans in the U.S. that we have put in place since 2023.
We have basically stabilized our market share position in the market and also grow premium share at the back of some interventions that we have to do in our Newport brand, and also the strength of Natural American Spirit. We are pleased with the performance in glo. We are at the back of new innovations. We have a new device; we have new consumables. We were the first to introduce a non-tobacco heated product in Europe, and as we speak, we are rolling out those innovations, and at the back of that, we were able to pretty much coming close to stabilize our category share. We have reduced by 110 basis points category share last year.
Year to date is 20 basis points, so a much improved performance at the back of what we are already start seeing with the rollout of these innovations. Vuse continues to be market leader in vapor globally and also outside, in the U.S., and we are very excited about some new innovations that are hitting the market and will be constant from the second half of the year. VELO is doing extremely well, with strong growth on volume, on revenue, on profits. This is very supportive of new category contributions, the new categories contribution. We expect, again, in the first half of the year and also in the second half of the year, to make improvements in terms of, overall category contributions.
As you know, we have reached breakeven two years ahead of targets in last year, and we will carry on now improving our contribution in the years ahead, and this will be no different from the first half and the second half. We expect to see an acceleration of our performance in the second half of this year. This is at the back of unwind wholesaler inventories. That is depressing the H1 results, so this will be unwind in the second half of the year. But also, we expect to see the impact of all those new innovations in all three categories hitting the market fully in the second half of the year.
We expect to continue to see strength in our AME region, and we expect the APMEA region to have a more soft comparator in the second half that will also be supportive. So I'm very confident that we will have a stronger H2 to allow us to get back to the guidance in the full year for 2024. In terms of the revised strategy, one of the first pillars of the strategy is the quality growth. Quality growth, just to be clear, what we mean about quality growth is basically to have a focus, not just on the top line, on the new categories growth, but also how it flows through to the bottom line. So it's a more balanced view in terms of how we target invest, how we do resource allocation to get the best return possible.
We are very clear that a sustainable future is about to have a proper regulatory environment, and not just the regulation, but also proper enforcement, in order to be able to provide consumers of smokers of cigarettes with the new products and address some of the pain points that we know that exist in the category. i.e., the environmental impact and mostly the youth access. There are ways to address that via regulation and via enforcement, and we have been adopting a more front-footed position on that. And I'm very pleased with the performance that we... With the financial flexibility that we are generating the group at the back of a strong, continuous strong cash conversion.
We have monetized partially our ITC stake early in the year, and this allow us to get back to the program of share buyback. We have announced GBP 700 million this year, GBP 900 million next year, and this will be supportive, as well to our trajectory to narrow the targets now of leverage for 2x-2.5x, that we expect to achieve by the end of the year. So in summary, before we start, I'm very confident that our focus investments decision will continue to drive this positive momentum that we already start seeing in the group, and deliver our midterm guidance as we continue to transform and build, a smokeless world. So I'm going to stop here and give the chance for Damian to articulate some of the questions.
Okay. Thank you very much, Tadeu, for those introductory remarks. You've been in your role as chief exec for just over a year now, and I was just wondering if you could sort of talk about the purpose around sort of achieving or building a smokeless world, and what do you think the key assumptions are behind getting to 50% of revenues from non-combustibles by 2035?
Yeah, our start point, if you go back to now, where we stand today, is around 17%, and we have, give or take, a decade to get us to the ambition of 50%. We have to bear in mind, the backdrop of that is that nicotine revenue is growing globally. So it's growing, and, so we are in a growing industry on revenue-wise, and, this is the first point I would like to make. The second point, there are over 1 billion of smokers in the world today. There are just 100 million of non-combustible users today, but this 100 million is growing exponentially. So we, as I said in my introduction remarks, we have adopt this multi-category approach since the onset.
This puts us in a very well position now, to be able to address the growth of this segment of consumers that are more interested in those lower risk profile products, establishing very strong global brands. We have now leadership in vapor. We have a very strong leadership in modern oral, in nicotine pouch, outside the U.S. We are in a strong position, second strong position in tobacco heating product and getting more momentum behind now. So we believe that we have all it takes now to be able to get more traction moving forward. And if anything, the strategy that we have to give more emphasis and more targeted investments in terms of better returns of investments should allow us to get this momentum through and be able to achieve our ambition.
Yeah, and just on that sort of the refined strategy, I think you articulated when you started last year, that the refined strategy. Can you just sort of outline the sort of key priorities within that refined strategy?
Mm-hmm.
-to drive the multi-category growth?
Yeah, the first priority that we call the quality growth is basically a recognition that in tandem with the growth of revenue coming from the new categories, we also need to make sure that we are tuned to the margins improvement. Because at the end of the day, what we want is to make those products to mimic in terms of margins that we have in cigarettes, and making it indifferent. If you sell a stick of cigarette, or if you sell a consumables in heated products, or a pod in vapor, or a pouch in nicotine pouches. So that's our focus and we are very encouraged to see where we are standing today in terms of gross margin.
The operating margin that we have just reached by Q1 last year will be a consequence of that as we move forward. But it's also about being cautious about being very disciplined in the way that we manage the transition in the combustible business. The combustible business is the one that pays the bill at the end. We have to ensure that we extract the best value out of it. That's why areas like SKU rationalization, but also markets of rationalization. BAT has pulled out of more than 35 markets over the last two years. It's exactly at the back of being more focused where we invest and where we get the best of return, and this is part of this pillar as well. So is the foundations that we are start establishing to move beyond nicotine at a certain stage.
We have created an ecosystem investments around cannabis, for example, stakes in companies like Organigram in Canada. But also we have a wellbeing stimulations, some experiments, and some organic developments there that we are pilot now in Australia, in Canada, in short, and we are start to rolling out in the U.S. as well. So this is more for the medium to long term. So the medium category, the pillar, is about sustainable future, is the recognition that we have to have scientific evidence based in order to be able to engage with regulators, and have a proper regulation that could address those pain points I was referring to, i.e., youth access and having the proper enforcement to make it sustainable over time.
And the third pillar is about the dynamic business that we call, is all about operational excellence, is all about having the capital and financial flexibility, and even more important, to have the right culture across the organization. I have been putting a lot of emphasis since I took over as CEO, in terms of creating a more diverse, a more inclusive, and more collaborative organization, 'cause I understand that this is fundamental, the building block for what we want to achieve.
Well, that leads nicely onto my next question about culture, 'cause I think, about this time last year, you sort of said you wanted to build a much more collaborative and inclusive organization. Obviously, changing culture takes time-
Mm-hmm.
How far or how well have you progressed in changing the culture, and are you able to provide any sort of tangible evidence of where that culture's come through?
Yeah, well, I'm very... I can see that it has been resonating quite nicely. What we have done, we have revised the values of the company, which are behaviors that we would expect to see across the organization. These values actually was shared across with a number of our employees across the group, so they can feel part of building this together. So we established six values, which I have been in my... I have been visiting a lot of markets. I have been doing town halls, and we have a program called internally Let's Talk, where I address the whole population of BAT, and on an unfiltered basis, they ask questions, and then we have a more transparent debate. And we are already seeing this resonating across the organization.
People are more motivated, more driven, more positive about the future, and, and, it's creating the momentum that I was expecting. But like you said, this takes time. This doesn't happen from night to day, and, but this is- we are definitely in the right, in the right, way.
Perhaps sort of one of the things that sort of you can see from BAT in the last sort of year has been a step change in the NPD that's been launched.
Mm-hmm.
Can you talk? Is that sort of linked to the cultural change that you're driving, or are there other things that you've explicitly put in place to sort of behind, sort of, glo Hyper maybe, or some of the stuff you're doing on Vuse?
Yeah, look, the culture is important because I do believe that the world is very complex today. Yeah? So this whole era of having an individual that has all the answers is gone. Far gone.
Mm.
The world has changed substantially on the technology side, geopolitics, and so on. We ourselves in our industry is changing dramatically. Our company is going through a massive change, so I want really people that can contribute. We are going more and more outside and bring more resource to fulfill capabilities that we need to develop, that we didn't need in the previous hundred years. Areas like IPs, science, technology, we didn't need necessarily to be successful. Innovation, like you referred to, is a critical enabler for growth moving forward. So the focus on innovation and brand building is massive. So we have been out and recruit and bring in new capabilities. We have reeducating our own people.
So with all that, we need to create the space for them to have the freedom to speak their mind, without any fears and in a collaborative way. So one thing is linked with another-
Yeah
... but the emphasis that you are referring to in the innovation is the recognition that for us to be successful in this new world, we have to be more innovation-obsessed organization. So, and we have been working tirelessly around that, and we'll start seeing the outcome of that hitting the markets mainly in the second half of the year.
Yeah. Well, you're doing a really good job of leading me into the next question, but so the next question was around sort of guidance. We had the sort of trading statement yesterday-
Mm-hmm
... and you're sort of still on track to deliver sort of low single-digit growth for full year 2024, but that implies an acceleration in the second half.
Mm-hmm.
I'm just wondering, could you sort of talk a bit around what are the drivers of that acceleration that we should expect to see in the second half to give you confidence in-
Yeah
... hitting?
First of all, the guidance is exactly what we expect to see early in the year. 'Cause we had these movements in inventory, wholesale inventory movements in the U.S. This is equivalent to something like 2%-2.5% of U.S. sales. That will be worse in the first half. So if you strip this out, which will be the case in the second half, 'cause we will unwind that, our revenue will be pretty much flattish in the first half of the year, as opposed to be a, a-
Yes
... loss of low single digits that we referred yesterday. But this is all linked with these movements in inventory. So if you are in a full year of low single digits, and we said since day one that will be second half weighted, that's the type-
Yeah
... of performance you would expect in the first half. The-
Yeah.
There's nothing strange, let's put it that way.
Yeah.
So it's completely aligned with our expectation. The second point is that we are seeing improvements on the commercial plans in the U.S., that I expect the combustible business in the U.S. be better in this year than the previous year. Remember, that we start to do the commercial plans back in 2023, and this generate a decline in profit and revenue in combustible in the U.S. This will still be the case, will be the case in 2024, because the carryover from 2023, 2024 end up impacting the year, but will be better compared relatively with 2023. The issue in the U.S. specifically is on the vapor side because of the illegal, and we can talk more about that on the vapor. 'Cause vapor was a big driver of the profitability of Reynolds in 2023.
That will not be repeating itself for obvious reasons, because of the lack of enforcement in 2024. But the improvement in the combustible side will be happening in 2024, in the second half, mainly on the back of inventory movements and the commercial plans results. The second point is about our rollout of innovation. So we're clearly seeing some of this uptick in terms of category share performance in heated products coming along at the back of the innovation. That, if anything, will be solidified in the second half. But also the performance that we expect to achieve in vapor and in VELO. In terms of revenue for the whole new categories, we expect to grow single digit in the first half.
We expect to grow double digit as a consequence of the innovations, rollout in the second half. So this also will be supported for the second half. And finally, we expect to see the strength in AME, as I said, that is doing extremely well, has been doing extremely well since last year, continue to happen in second half. And APMEA, that have a tough comparator in the first half, will have a more softer one the second. So these are, for me, the key drivers that will lead us to have a better performance in the second half vis-à-vis the first, and allow us to deliver the guidance.
I think there's multi-year guidance delivered mid-single digit-
Yeah.
so we're implying a further acceleration.
Yes
... into 2025 and 2026.
That's right.
Are they the similar sort of characteristics that underpin that, so those assumptions?
Yes, we for moving forward, for sure that with a better second half, you get better momentum for 2025.
Yeah.
So 2025, most of the commercial initiatives in the U.S. is done by now. Okay, so I shouldn't have the likes of headwinds that I had in terms of carryover that I was referring to in 2024, going to 2025. If anything, I get a better momentum in 2025. On top of that, we expect to see some improvements on the macros, which was never in factoring in our guidance for 2024, but the macros in the U.S. has been difficult, and we hopefully see some, you know, green shoots, mainly at the end of the year, if interest rates start to come down. And also, we expect to see some levels of enforcement in the illegal-
Yeah
... vapor market in the U.S. in the wake of a variety of measures that have been announced and taken, that will come to fruition more in the beginning of 2025. So these all should be supportive for us to go towards our final targets of 3%-5% revenue growth, mid-single digits operating profit growth by 2026.
Yeah. Thank you. As U.S. has come up quite a bit, it's been one of the challenging markets for you. I think overall volume's down in the period about 9%.
Mm-hmm.
But you're seeing an improved performance from Newport, Natural American Spirit, and Lucky Strike. Can you just talk about the improvements that you've made, or the incentives and the changes that you've put in place on those brands, and the sort of confidence that you can see coming through?
Yeah. Well, first we need to understand the consumer dynamic in the U.S. markets. We came from a period of a lot of fiscal stimulus at the back of Covid, massive fiscal stimulus, probably the highest in the world in terms of state and federal stimulus, and this was taken completely out two years later, and at the back of that, exacerbated by very high level pressures of inflation and interest rates high. So our consumers were hit badly by, and stretched by, a lot of price increase in utilities, in foods, and on top of that, credit cards, mortgage at the back of interest rates. As a consequence of that, consumer confidence that was in the high nineties pre-pandemic, went all the way down to 60% in 2023.
So for sure that this has a reflection in terms of the cigarette business in the U.S. Now, what we are seeing is unemployment still low. We are seeing that we knew that real wage inflation takes time to catch up with the inflationary pressures, and this is, as we go along, start happening. And hopefully, when the Fed start to reduce interest rates, that seems to be a kind of of consensus that will happen more to us, the, the more in the second half of the year, this could reflect into consumer confidence start to rebalance. We are already seeing it up to 69% as opposed to 60% at the end of 2023, which is positive, and get some extra momentum.
For sure, the 9% decline is not just about the macros, but it's also about the proliferation of these illegal vapor products, that we believe accounts to something related to 2% out of these 9%, in terms of decline. And this one, at the back of the announcements that the FDA, but also these measures that have been taken by states, give us some, you know, hope that we are gonna see some enforcement finally coming to fruition next year.
Yeah. Well, let's go, let's-
The, the, yeah-
Yeah.
The brands itself, we had to adjust the brands to this reality.
Yeah.
So Newport, for example, we didn't have any safeguard for consumers. So when this economic cycle hit consumers in Newport, they reacted in two ways. One, reducing everyday consumption, the other, moving away completely from the brands. So what we have done is not something, you know, creative, 'cause this has already been done in the past, in even in the U.S. market. We create different price points. So we launch a price laddering for Newport with a 80% index in 19 states, so we haven't done this one-size-fits-all. And but this was a very, very good measure to retain consumers within the family... and this has helped us a lot to stabilize the share of Newport.
So we are very pleased with the results that we have achieved, 'cause the 8% index is not that high compared with what we saw already in the market, and it's fulfilling its promise, let's put it that way. And we activate when needed, at the back of a lot of insights that we have with the data analysts that we have implemented in the U.S. in terms of revenue growth management. The other brand, Natural American Spirit, is a fantastic brand. This brand has never seen any discount in life, and continues, if anything, to grow. It's like immune to economic cycles, if you want. And these are the drivers behind our performance in the premium segment that has increased 40 basis points.
Now, one thing is encouraging is that the pace of growth of the deep discount has stabilized, and this is also supportive for the premium segment as a whole, and also for the, what we call the brand, the value segment, where Lucky Strike is.
Yeah.
And the Lucky Strike today is the fastest growing cigarette brand in the U.S., so has grown 80 basis points, year to date. So we are very pleased with the... And that's the whole idea about the commercial plans, for sure, that we haven't just addressed the brands, but also we, we increase our sales force, we increase our coverage, we invest even more in terms of data analytics and revenue growth management. And, because the whole purpose has always been to create a more resilient cigarette portfolio in Reynolds. And not just resilient in terms of macroeconomic cycles, but also in terms of regulation. So we are taking a lot of learnings from California introduction of menthol ban, which, if anything, should be well seen by authorities before they come to any conclusion on a federal level.
Because it's a bad experience that's happening already in the U.S. in terms of, in terms of, illegal products coming from Mexico borders, in terms of self-mentholation, in terms of, you know, and, and, proliferations of even more of these illegal vapor products, and so on, so forth. So anyway, but we are trying to use these as these insights from California to also adapt our combustible portfolio in case this regulation comes one day. It's a bad regulation, it's a ill-thought regulation, and there is no need for that. We know that there is a... Whenever this has been implemented outside the U.S., it's ineffective. We go to Canada, 99% of retention of consumers just migrate for no menthol. We go to Europe, 93%.
The other 7%, 70% move to vapor, so it's still using nicotine. So at the end of the day, it's an ill thought that has a lot of unintended consequences, as has now demonstrated in California, and there are much better ways to address the problem with cigarettes through embracing tobacco harm reduction.
Yeah, very clear. If we switch now to sort of NGP and profitability, you managed to sort of achieve breakeven two years ahead of the plan.
Mm-hmm.
Can you talk about the things that sort of underpin that sort of better-than-expected performance, and then how we should expect the development of NGP profitability going forward?
Yeah, look, the major drivers behind that is basically, first, the scale. You scale, you translate into lower cost of goods sold. You can automate, for example. You can do, you know, stronger negotiations with your suppliers, and this all reverts in a better cost of goods sold for you. So this definitely is one area, and we have done a lot as well in terms of footprint and trying to maximize a lot the reduction in costs. So this is clearly one. The second one is, when you have strong brands, you actually have a better negotiation power to deal with your partners and customers.
For example, trade margins, and it's particularly in vapor that is very elevated, for example, has been mitigated through instead of moving, moving away from a percentage of revenue, for example, towards a back margin of a front margin that is paid for, for performance-
Yeah
... and so on, so forth. So a lot of that comes from, from a better management of trade margins. And obviously, as you go along, you learn a lot in terms of marketing spend effectiveness, and that's how, you know, you optimize your investment. And now, if anything, with the focus in the new strategy of resource allocation, having a more targeted investment, we'll be continuing improving our profitability in new categories. We are very pleased with the margins that we have been seeing so far. Gross margin of cigarettes as a whole is around 68%-69% at group level. When you go individually by category, we have heated tobacco or heated products already there. We have pouch, if anything, is slightly up, and even consumables of vapor now is above 60%.
So it's going all in the right direction, and, and so we are very pleased with that. But for sure, we have investments below the gross line in terms of market investments that... And some discounts to attract consumers, and this is what impacts the operating margin, that we reach breakeven, like we said, two years before, and we are gonna continue to progress as we roll out all these new, more attractive and competitive products.
Okay, that's very clear. And you sort of—you've touched on it, sort of, the illicit trade problem around vapes in the U.S. Can you just sort of remind us of the scale of the problem, and then we've also sort of seen improved or proposed improved enforcement from some of the U.S. states.
Mm-hmm.
Is that sufficient to stop the problem? Should we be encouraged or, and what else would you like to see happen?
Well, so far it hasn't been sufficient, this clearly, no, 'cause this is a category of GBP 10 billion revenue. More than 6% is on these illegal products. So where we basically compete is 20% of the category today, which is the illegal market. The other 20% is open device that is still there as well, waiting for the definition of PMTA. So, and we have more than half of these, the legal markets in terms of revenue, because we have the leadership of vapor legal in the U.S. I think that the milestone that needs to be achieved is the FDA clearly concluding the process of PMTA assessment, and publicly announce what are the products that, they gave the marketing granted order-
Yeah
... MGO, and as a consequence, what are the ones they gave the MGO. Because we still see key accounts in the U.S. selling some of these products that shouldn't be there in the first place.
Yeah.
At the back of the argument from the manufacturers that are waiting for the PMTA-
Yeah
... to be assessed from the FDA. So once the FDA produced finally this consideration, and put in place, penalties that can demotivate even not just the 'cause I don't have any doubts that the key account will comply with that as soon as they announce the list, and this is something like 20% of where these products can be found.
Right.
But they also need to put in place penalties to address the likes of vape stores, where these products also are being sold. So I have no doubts that this will be a turning point. The other turning point that we are now encouraging to see is what the states are taking the problem on their own hands, and legislating by themselves, creating a depository of a type of PMTA certification to prove actually what are the products that are actually waiting for the FDA or not.
Yeah.
So, if you are retailing those states, you have to go through this database and buy through a wholesaler that just can sell the products that are authorized in that database. Louisiana has already implemented that since November last year. We have already seen a reduction of double digits in terms of illegal. So instead of continuing growing, like is still the case today in the U.S., they have reversed that trend and are now declining, and most of the decline has been absorbed by Vuse in the, in the legal markets. So this is encouraging, but just three out of these 20 states has already implemented.
Yeah.
The vast majority is coming in early next year. So a combination of PMTA finally being concluded by the FDA, hopefully at some point in time this year, and the states implement those measures, give us encouragement to see some of those enforcements happening from next year onwards.
Yeah. Yeah, hopefully that comes pretty quickly.
Yeah, hopefully.
There's been a sort of reinvigoration around your sort of heated tobacco product-
Mm-hmm
... and glo, and the launch. Well, first of all, you sort of resolved the litigation with PMI. Sort of the first question on that is: How does that, what does that change in reality in terms of your innovation pipeline? And then secondly, what's the initial sort of feedback from the new product launches?
Yeah, the agreement with PMI was the right one for. And we have seen other industry coming to this sort of agreements. And it's confidential, I cannot talk much about that, but give us, within some boundaries, more freedom to innovate, clearly. But it's not just about the IP deal, but also about the ecosystem that we are creating. We have established a hub in Shenzhen. We have today almost 300 people there. We have established very good relationship with exclusive few suppliers, and also we have invested a lot in terms of insights, foresights, in order to be able to connect that hub with the one we have in Southampton. We have another one in North Italy.
So we create an ecosystem of innovation and a rhythm of innovation that is, very different from what we had in the past. And this is result in, for example, being the first in the market with a non-tobacco product called veo. It's doing extremely well in Europe, and, the device that we have today is well ahead the previous one. We have a very nice display, we have boost button, a boost button. We have a different heating profile, which translate in more satisfaction. But, obviously, when we see all that, last year we are lapping the first half, the price reposition we have done in Japan and Italy, and, so this will create some pressure in the first half of the year.
But, but we expect more than, than recover that in the second half of the year. Even though, because these new innovations is allowing us to, for the first time on the device side, compete on the premium segment, which is 7% of the value is of the category. I have never had an offer in that segment. And also, we have started taking some price up in markets like Italy, more recently, and also Japan.
Yeah, okay. That's, again, another encouraging development. On Velo, the modern oral product, can you talk about your strategy to relaunch in the U.S., and just any initial feedback from what you're seeing there?
Yeah. Obviously, the best solution for the U.S. in terms of Modern Oral, for BAT, is bring our leader product outside the U.S. into the U.S. That's what we want to ultimately, because we are, we have a very strong product outside the U.S. when we have freedom to operate. This, to be realistic, is 12 months, 18 months away, because it's in the PMTA queue. Let's put it that way. So we have revamped our VELO product in the U.S. with a very different, I would say, proposition for the consumer in terms of the way that we express the brand. And this has resonate quite nicely because the product is a good product. In blind test, is parity with the leader.
Yeah.
So we saw market share in our pilot state of New York reaching 13.5%, which is well ahead of the national share of 4.45%, and we have just start to roll out this new product across the country. In parallel to that, in recognition that a lot of traditional oral users are also migrate for this new category, we have just launched, it will be in the tenth of June, national rollout of Grizzly Modern Oral in that same space. And we expect to achieve 51% of the distribution Modern Oral by the end of the year. So with those two offers, we are more positive about making progress in this category in the U.S. from now on.
Yeah. Okay. I'm gonna ask sort of these two questions together-
Mm-hmm.
Because I'm slightly conscious of time.
Yeah.
You recently sort of revised gearing guidance down to 2-2.5 times.
Mm-hmm.
What was the thinking behind that, and also, what's the sort of thinking around share buybacks? Obviously, you're returning the proceeds of the-
Mm.
ITC sell down, but sort of longer term, how does the board think about sort of share buybacks?
Yeah. We have to consider that BAT is a very highly cash generative company in the first place.
Mm.
So what we need is to reduce the target to face the macroeconomic reality. This time of very low cost of capital is gone, way gone.
Yeah.
So we had to adjust that, and that's exactly what we did, narrowing the target. What we want is to... We know that we have a cash generative, but also we know that we have some headwinds to face. Canada, for example, as soon as we settle CCAA, and we have been more transparent in terms of the numbers of Canada, and I have been saying to investors that the best way to think about Canada, because I cannot speculate on Canada, even though, because it's confidential, is to consider out of the BAT numbers. And if you do that, your leverage will be up another 0.3 times. So what we are aiming for is to get to this new corridor by 2026, ex-Canada.
And, because what I mean about reaching this target by the end of this year, for sure, Canada is still consolidating the BAT numbers. So we want to make all we can to be able to get to that range, ex-Canada, in 2026. And, and we believe that we have, with the cash generation, we generate conversion rates that we generate, and to do it in a way that we can keep the share buyback, which we believe that is part of the capital allocation policy of the group moving forward, and at the same time, being able to manage the leverage of the company and do the right investments for the growth of the business in moving forward.
Yeah. Okay.
Okay?
Thank you very much today. I think we're out of time, so thank you very much, everybody, for your attendance, and see you later.
Thank you, Damian.
Thank you.