Good morning, and welcome to BAC 2020 Interim Reserve Presentation. I am Jacques Bose, Chief Executive, and with me today is Talio Marlcorp, Finance Director. I hope everyone is listening this morning and your families and friends are well. Before I start the presentation, I need to draw your attention to the disclaimer on Slide 2 and Slide 3, which I will take as read. I am very proud to report in the first half of twenty twenty, our multi category strategy has continued to deliver growth in what has been an exceptionally challenging circumstances.
These results demonstrate that our strategy is delivering growth in all key metrics: revenue, operating profit, EPS and cash, driven by growing volume share in THP, value share in vapor and revenue in modern ore, alongside combustible and strong pricing. Our increased agility brought about through 1 term, and our diverse geographic footprint enables us to adapt and navigate the challenges caused by COVID. We remain committed to delivering a strong operational performance and our dividend policy. We are building a better tomorrow with our defining corporate partners and an ESG strategy that is front and center of everything we do. We have made strong progress in 20 20.
Non commerce segment now makes up 10% of Bouygues. We have continued to invest more in the business, attracting additional 2,700,000 consumers in our non combustible products compared to last year. Having added 1,100,000 new customers during the first half through the peak of the pandemic. And we have also set ambitious environmental targets. We are clearly powering forward.
With our focus on our 3 clear commercial priorities, we are delivering today and investing in the future. We continue driving a step change in new categories performance with market share gains and 12.7% adjusted revenue growth at constant currency. Our continued focus on combustible value growth drove strong cigarette price mix and adjusted revenue of 2.4% at constant currency. The benefits of Project Quantum delivering a stronger, simpler and faster organization have enabled us to navigate COVID with increased agility, while delivering 240,000,000 barrels cost savings year to date. We have a commitment to deliver.
And I would like to take this opportunity to thank our people who have gone above and beyond we delivered these results despite very challenging circumstances. Turning now to the numbers. Reported results benefit from the impact of the Quebec class action on the prior year compartement and reflects a foreign exchange headwind of about 1%. To better understand the key drivers of our performance, we will now focus on constant currency adjusted results, unless otherwise stated. We are taking share almost everywhere in all four of our regions' incumbent customers.
We grew across all key metrics. We grew revenue, profit and EPS, despite a 4% revenue headwind from COVID in the first half. Cigarettes and THP volumes were down minus 6.3% or 5.3 percent excluding global travel retail. This was against an industry down around 6%, excluding GPR. We continue to expect full year global industry volume to be down around 7%, excluding GTR.
Strong cigarette pricemix and new category performance drove total group revenue up 2.4%. Adjusted operating profit was up 3.3%, ahead of revenue growth, reflecting tight cost control and the early benefits of Project Quantum. This was a strong performance delivered in challenging circumstances. The 4% revenue headwind from COVID in the first half reflected the impact of reduced international travel on GTRO and contrasting experiences in developed and emerging markets. In developed markets, which are around 75% of our revenues, consumption trends have generally been resilient or even slightly improved with good pricing.
And to date, we have seen little evidence of accelerated downtrend. In Energy Markets, which accounts for around 25% of revenue, the picture has been more mixed. In some markets, we have seen governments mandated factory closure and deeper lockdown measures that have significantly impacted consumers' ability to access our products. Uniquely, in South Africa, there has been a ban on sales of cigarette sales since late March, which remains intense. By contrast, in other markets such as Brazil, we have seen border closures benefit industry volumes through a reduction in illicit trade.
Despite the pressures from COVID, we have grown the volume share across both developed and emerging markets. While new category growth initially slowed, it is now recovering. In new categories, we responded rapidly to the new environment, leveraging our digital capacity, investing in consumer acquisition and growing our value share in THP, value share in VACOR and revenue in modern product. We are making good progress across our 3 strategic brand platforms. With $2,700,000 growth in consumer numbers, we have increased revenue nearly 13% despite the challenging environment.
We invested an additional €215,000,000 in new categories in the first half. With our clear focus on consumer acquisition and digital, we are now the leader in device sales in PayPal. We have doubled our e commerce sales, and we have halved the time we take to go from prototype to launch. This is a strong base for the future. During the pandemic, we successfully pivoted our consumer activations into digital, achieving best in class consumer engagement really across all 3 category brand platforms.
Turning to each category. In vapor, with consumer numbers now over $6,000,000 we delivered an excellent performance. The key vapor markets are growing strongly in the first half, and used by is growing in family share in every key market. Having over 2,000,000 consumers compared to the same period last year, We delivered 39% revenue growth in VACON. This was driven by an excellent performance from our strategic brands, Viewers Fight, which tripled its total value share across our T5 markets against the same period of massaging.
The T5 markets represent 80% of total day for industry revenue. In the U. S, Viuzanto tripled its value share year on year, driving revenue up 17%. This performance was piecing against the context of industry dynamics over the last 12 months, which have not been easy. In the second half of last year, concerns in the U.
S, specifically, the raw new vaping trends and the EVA prices, resulted in broad based labor industry decline across our top 5 markets. We see strong recovery with the majority of markets now back above pre crisis levels. Industry growth rates in the last 3 months have been very encouraging, and JuiceBite has grown value share strongly in every key markets. The brand is now the leader in devices in all key markets. It is clear that gasoline devices include the hands of consumers is vital to conversion, and we see this as a leading indicator of our future growth in the category.
Last year, to further strengthen our portfolio, we decided to migrate to 3 global new category brands. Brand migrations in Paper have continued during the period, with 70% comparable revenue now under the views brand, and Canada is an excellent example. In Canada, share gains accelerated through the migration of Back to View. The My Version plan was driven through digital channels, generating record levels of consumer awareness and drew on our many years of successful experience in commerce event brand migration. Online sales were up 50% sequentially in Q2, and our share of device sales reached 70%.
Retention rates were 100% over the migration and used reached over 44 shares in June. We are particularly pleased with these results given that the activity was completed under long term restrictions in Canada. Turning now to our performance in THP. In line with our strong innovation plans for THP and building on the launch of GLOW THROW last year, we have started to roll out hyper, strengthening our GLOW portfolio. We have achieved our highest volume share position for Glow across key markets.
This has been driven by the early success of low hyper in launch markets and the improved consumer satisfaction it offers. Launch and activation plans for Hyper were switched to digital, and we're extremely encouraged by early results. In Q2, high price driving share growth in both JAKAN and INR. In Moscow, GLOW segment share has doubled to 16%, and total nicotine share has accelerated to 2.8%. We have started the rollouts in Italy and other markets in EMEA.
This has driven good growth in tumor volumes, which were up 9.1%. THP revenue in the barrel was down 12% due to the excise harmonization in Japan and the underperformance of GlowSense, our hybrid platform. Glow Hyper's improved product performance come from several advancements that have materially improved consumer satisfaction. These include powerful new induction. This provides a fast ramp up time and a boost function, delivering additional satisfaction and income.
And new consumables with 30% more tobacco and a familiar premium Kingstie format, delivering more taste and flavor. This has delivered strong consumer acceptance scores with research showing 80% overall likability in terms of taste satisfaction, flavor and taste intensity. In Japan, supported by the success of Glow Hyper, total global volume share is now 5.4% in June and reached a June exit volume share of 5.9%, its highest ever level. 37% of hyperconsumers are new to the franchise, and conversion rates from trial to regular usage are at 50%, double previous level. Both are good indicators for the future growth outlook.
After 12 weeks, hyper has achieved a June monthly volume share of 0.7% and reached a weekly exit volume share of 1.3% at the end of June. In modern orange, we are growing revenue in a rapidly growing category with an exciting future opportunity. We have strengthened our leadership position in Scandinavia and remain leaders outside the U. S. Also, in emerging markets, we are establishing a supply chain and manufacturing for final functions in APME and AMSA with encouraging initial results despite COVID.
In the U. S, it is a nascent but promising category with around 1% total nicotine value share compared to traditional orange at more than 10% total nicotine value share. Year to date, we have grown share in the U. S. With a limited product range.
This is helping growth in the short term in what is a highly competitive category. We are working hard to address the portfolio gaps. This will require us navigating the FDA regulatory framework, which will take some time. Globally, modern org is an exciting category with high growth, high margins, a rapid payback and significant potential. We have a winning portfolio in Scandinavia and continue to build on our strong market share position.
While consumer activation for more recent launches have been impacted by COVID, We have a program of rollouts planned for the 2nd half, building on encouraging pilots in ADME and Hamsa. It is clearly still early days for this exciting category. In the key Nordic markets, we are consolidating our leadership position with our superior products, reaching 14.7 percent of the Norwegian and 4.5% of the Swedish total oral market in June. In summary, in new categories, we are driving growth through consumer acquisition. We continue to invest with an additional £250,000,000 in new categories marketing in the first half.
We have attracted an additional 2,700,000 new consumers to our non combustible products year on year and continue to add to our consumer base throughout the pandemic. We have adapted to the challenges of COVID, switching to digital activation and generated results with share gains in vapor and THP in all regions and strong revenue growth in modern ore. Moving to Commer's commitment. We delivered an excellent performance. We are growing volume and value share globally, with share gains in every region.
In the U. S, we continue to drive revenue growth, delivering strong results. Global volume share was up 50 basis points, one of our strongest performance ever, and value share was up 20 basis points. This was driven by 40 basis points value share gain in strategic brands, which represents 2 thirds of Group 1. The share gains and strong price mix of 8.5% combined to drive combustible revenue up 2.2%, despite the industry volume decline.
We have a well balanced portfolio of brands across a broad geographic footprint. This has delivered consistent growth across all price segments in the past. In some markets, down trading has been a feature in recent years and this continues. However, we have not seen any acceleration in DART trading in the past, and our portfolio is well positioned across all price points. Our strong differentiated brand portfolio continues to drive share growth across all the key consumer segments in freshness and simulation, steel format and in non full flavors.
Our focus on value growth in developed markets and volume growth in emerging markets is also delivering return, with value share up 30 basis points in developed markets and volume share up 70 basis points in emerging. In the U. S, we have driven revenue, taking pricing ahead of peers, while continuing to grow robustable value and volume share, driven by the strength of our brand portfolio. As a result, adjusted revenue and profit were both up 10%. Value share was up 30 basis points and volume share grew 10 basis points.
Reynolds achieved a corporate volume share of 35%, with Newport at 15% and a continued strong performance for natural American experience, driving premium volume share, up by 50 basis points. The U. S. Industry cigarette volume was up 0.8% during the period, driven by stronger consumption trends, a less negative impact of vaping on cigarette consumption, higher inventories at all levels of the supply chain and an extra selling day. We now expect U.
S. Industry volume to be down around 2.5% for the full year, driven by the continued resilience of consumer demand and higher trade stock levels being maintained as a result of COVID. New category revenue grew by 76%, driven by U. S. Vapor valuation gains of 10 percentage points.
The vapor category is recovering in the U. S, growing 20% in the last 3 months. Our multi category strategy is delivering strong share growth in total nicotine in the U. S. The total nicotine share, value share grew 70 basis points and volume share was up 60 basis points.
Looking ahead to H2. We continue to see robust consumer fundamentals, and long term restrictions are eased. These results demonstrate our ability to successfully navigate the family, but the environment remains uncertain. Our global travel retail business remains substantially impacted, and we do not anticipate a recovery until late in the year. In South Africa, cigarettes and the reinstated alcohol ban sales ban are in place.
We are challenging the ban and the board hearing after some hearing is now scheduled for August. We believe we have a strong case. While COVID related uncertainties remain, we are planning for the sequential recovery to continue through the second half. South Africa remains a unique situation. We had a very strong Q1 with volumes up 10%, driven by a reduction in illicit trade.
Since the imposition of the sales plan in March, the whole market has shifted into illicit. In addition, illicit prices have tripled compared to prices prior to lockdown and created product availability issued around the country. As a result, the government has lost £340,000,000,000 in excise and VINV VE and are now experiencing an ongoing profit impact of £25,000,000 per month. We look forward to the court hearing next month, and we are planning for a positive outcome. So in summary, Australia 3 gs is delivering growth in very difficult times.
We remain committed to delivering strong operational results and our dividend growth policy. We remain focused on our commercial priorities. We are delivering today and investing in the future, creating a stronger view. Our people have gone above and beyond to deliver these results, and I am proud of what we have achieved. I will now hand over to Thadeau, who will take you through the financials.
Thank you, Jack, and good morning, everyone. As Jack highlighted, we are proud of our first half performance. We have delivered growth in what have been challenging circumstances. Our relentless focus on costs has released funds to support our growth agenda and drive good margin expansion. We are realizing the benefits of Quantum with Phase 1 savings accelerated into the first half.
We are highly cash generative and remain committed to deleveraging to dividend growth and a 65% payout ratio. Our strong performance in combustibles drove revenue growth of 2.4% despite a 4% COVID headwind in the first half. Combustible volume decline was more than offset by value share gains and good pricing powered by our global brands. First half pricemix was strong at 8.5%. This reflected the achievements of over 80% of full year planned pricing and the rollover benefit from good pricing in 2019.
This means we will be lapping a strong pricing comparator in the second half. Industry elasticity and affordability dynamics remain robust, and we have seen little evidence of accelerated down trading to date. In addition, the rollout of our revenue growth management initiatives enable us to take more target pricing and to manage discounting more effectively on a data driven basis.
Turning to our regional performance.
We had grown value share and volume share in all four regions. Financial results across the regions reflect their differing exposures to developed and emerging markets, with stronger revenue growth in the U. S. And EMEA. The results in ACME and AMSA demonstrates the impact of COVID in the margin markets.
In the U. S, as Jack has already covered, revenue and profit grew close to 10%, driven by value share growth, strong pricing and better than expected with value share up 10 basis points, driven by strong performances in Russia, Turkey, Italy and Romania. Volume in Russia has benefited from trade stock movements in 2019 2020 related to the preparation of track and trace implementation. The EU mantle ban was introduced in Mid Bay, although its full implementation has been delayed in some markets due to COVID. While it is very early days, results to date have been encouraging.
In key markets, our consumer retention rates are currently in excess of 100%. We are growing our share of consumers in the total nicotine market. This is driven by cross category consumer activation, our differentiated combustibles products and the strength of our new category mental portfolio. In APME, we continue to gain volume and value share despite the challenging backdrop of COVID, the delayed implementation of minimum pricing laws and tax rise in Indonesia and increased illicit trade in Pakistan. In AMSA, Vonnegher, again, and strong pricing resulted in revenues down only 1%.
This was an excellent performance given the South Africa sales ban and the government mandated factory closures and lockdowns in countries, including Mexico and Argentina. This slide highlights the contrasting industry volume performances in developed and emerging markets. In Germany, for example, domestic purchase stepped up at border closures, restricted cross border volume and cut outward tourists, leading to industry volume growth. In emerging markets, the picture is more mixed. Deeper lockdown measures have impacted volume in countries like Mexico and Vietnam.
In contrast, border closures have reduced the list rate and increased duty paid volumes in markets like Brazil. While in Russia, consumption has remained relatively resilient. Moving on to operating margin. We are releasing the funds to support the growth agenda. We delivered margin growth and further increased investments in new categories, carrying over the step up in new category support from the second half of last year.
The 80 basis points increase in the first half builds on a strong performance in the prior periods and is despite a 50 basis points impact from transactional FX. This was driven by another excellent performance from the business, which more than offset the incremental costs related to COVID. Strong pricing, continued cost control and the acceleration of quantum drove a 400 basis points improvement. We are realizing the benefits of Phase 1 of Quantum. Alongside greater organizational speed and agility, Quantum is delivering significant cost savings.
We have accelerated Phase 1 savings, realizing £240,000,000 in the first half. Phase 2 will build on this success with the organization expected to be ready for project rollouts from the beginning of 2021. EPS grew strongly and was up 6.6% in constant currency, driven by our good operational performance. Earnings growth also benefited from a lower underlying tax rate and a strong contribution from associates. Our share of income from associates, mainly ITC, is expected to reflect the impact of COVID in the second half.
We expect our full year underlying tax rate of slightly lower than the previous guidance of 25.5 percent as the impact of several one off items in the first half are diluted over the full year. Extrapolating current spot rates, we expect a currency translation headwind of around 2.5% on adjusted EPS growth for the full year. Cash conversion in the period was strong at 80% or 73%, adjusting for the benefits of deferred U. S. Tax payments and the impact of COVID related stock builds.
This is still materially above the prior year period. In the first half, we further strengthened our liquidity position through bond issuance, the establishment of bilaterals and the renegotiation of our RCF. Our maturity profile remains very manageable, with an average maturity approaching 9 years and close currency matching. Having repaid GBP 2,300,000,000 in July, we have just GBP 1,000,000,000 remaining in 2020. In the 2021 financial year, we expect to be able to prepay a proportion of our 2022 maturities as we have done in the past.
We remain focused on maximizing cash generation and deleveraging the balance sheet. We expect to deliver at least 90% operating cash conversion and are on track to end 2021 with adjusted net debt to adjusted EBITDA around 3x. We continue to expect gross CapEx for the year to be around £650,000,000 broadly in line with adjusted depreciation. Our priorities remain unchanged: to deliver the balance sheet while maintaining our commitment to dividend growth and our 65% payout ratio. These results demonstrate our continued resilience.
We continue to expect around a 3% COVID headwind on 2020 revenue. Whilst uncertainties remain for the second half, we are on track to deliver our 2020 guidance of 1% to 3% constant currency revenue and mid single digit EPS growth. Overall, we are performing well in challenging circumstances. The change we are making in the business and our continued investments in our brands will enable us to exit this crisis stronger. And with that, I will now hand back to Jack for his closing remarks.
Thank you, Daniel. Our people have gone above and beyond to deliver these results. Our multi category strategy is delivering revenue, profit and earnings growth in exceptional circumstances. The strength of our brands across new categories and combustibles is driving volume and value share growth across all regions. And we're navigating the environment with agility supported by the diversity of our geographic footprint.
Our 3 clear commercial priorities have enabled us to make good progress in 2020, and we are building a stronger, simpler, faster organization. The strength and resilience of our Multicatable business is enabling us to deliver today, as shown by these strong results, and invest for the future. There is strong energy in the business. We are building a better tomorrow with a clearly defined purpose to reduce the health impact of our business. In 2020, we have made good progress against our clearly defined ambition, and we remain committed to our medium term guidance post COVID.
While we cannot know what the future will hold, I'm confident that we will exit this crisis stronger than we anticipate. Thank you. There will be a conference call Q and A held at 8:30 a. M. UK time, where there will be an opportunity to ask questions.
Thank you very much for listening, and stay safe.
Hello, and welcome to the BAT during the Q and A session. I will now hand you over to Jack Bowles, Chief Executive. Thank you.
Good morning, everyone, and welcome to BAT's 2020 interim results Q and A session. I'm Jack Bowles, Chief Executive, and joining me on the call is Thaddeus Mauroco, Finance Director. As you will have seen from our announcements this morning, our multi category strategy continues to deliver revenue, profit and EPS growth in the first half in exceptionally challenging circumstances. We have continued to invest in our portfolio. The strengths of our brands across new categories and combustible is driving volume and value share growth in all regions and enabling strong pricing.
In the last 12 months, we have attracted 2,700,000 additional consumers to our non combustible portfolio, which now makes up 10% of our group revenue. With our diverse geographical footprint and the increased agility brought about through Quantum, we have adapted rapidly and are successfully navigating the challenges of COVID. There is strong energy in the business. We are building a better to more with a clearly defined purpose to reduce the health impact of our business. Together with our 3 clear commercial priorities, this has enabled us to deliver a strong performance in the first half of twenty twenty.
I will now hand over the call for your questions. Operator, please may I take the first question?
The first question in the queue comes from the line of Wei Wu from BG Securities.
Good morning.
Hi, Jack and Carlos. Thank you for the opportunity to ask questions. I just had a question specifically around South Africa. Yes. I just want to know, how does it impact your market share position subsequent to let's say things get sorted out?
Because I'm sure obviously it must be destroying brand equity. And also related to that, these players that are now operating in the market, are they basically, can I call it non duty paid cigarettes or are they like probably like in Brazil with like half or underpaid on duties? So that will be quite interesting just to hear your views of what how this is actually impacting your business because clearly, it's not a decent situation.
Yes. It's a very complex situation. Yet at the end of the day, governments take their actions related to COVID. What I can tell you because, as you know, there is a legal case at the moment, and I cannot elaborate too much on that. But the reality in the market is the following.
There is a ban on cigarettes. There is a renewed ban on alcohol. So that's a lot of lost revenue for the government. At the same time, the market has become completely 100% illicit, and the prices have tripled in the market. So you have a situation where the consumers do not access legal products.
And even for illegal products, the availability of products is a bit patchy. In that environment, as I said, we have a little bit case, and we are preparing, of course, a model of all returns when the market reopens. Clearly, our brands are extremely strong. As you could see in the Q1 of the year, we had an extremely strong performance in South Africa. In 2019 also, we saw growth in revenue, and we saw growth in terms of volume and market share.
So our brands, I assure you, are very strong in South Africa, and we'll do the mother of all come back as soon as it opens. Alain, would you want to add something?
No, I think that's just the Okay. Sorry. I just also just want to know, I mean, just in terms of excise taxes, I mean, this is probably
a little bit more in
a medium term. Clearly, when governments get under pressure, excise tax is normally the first lever that gets pulled. I don't know if you have any indications of where there may be some excise problems down the line. And maybe if you can tell us anything that you've learned from after the global financial crisis in terms of what tends to happen with excise taxes?
I think that yes, thank you very much. I think that in general, as we saw in the past, we are extremely good at navigating these kind of circumstances. As I said, the prices at the moment are 3x higher than the prices post the lockdown. So there is a lot of space to operate. And as I said, we're going to have the mother of all come back in South Africa.
Our brands are extremely strong, and there will be some skirmishes, but we'll take care of that. We have a very strong position in South Africa. We didn't reduce any personnel in the whole company, and the whole sales force is up and running. And we will make sure that we take back our position in South Africa. And I think that it is going to be a very vibrant situation as soon as it reopens.
Okay.
Thanks.
Yes. Can I just complement this point around the deck side? Cigarette's total tax as a percentage of government revenues in general is not that as big as people first think. But at the end, it range between 1%, 2% and then in extreme case, you can go up to above 5%. And when you compare the Tabakasas contribution with the government debt as a percentage of the GDP, it's quite not really material.
So I don't think that these assumptions that necessarily we're going to see a lot of excise hikes is supported, but this has side effects like illicit rate that we all know. In the case of
Thank you.
Thank you, Ray, for your question. The next question is coming from the line of Gaurav Jain from Barclays. You're now unmuted. Please go ahead.
Yes. Good morning. Good
morning, Jack. Good morning, Tayo. Thanks a lot for
the opportunity. So my first set of questions is on Japan. So your volumes in THP are down 6, while your key competitor there the volumes are up 9% in 1H20. So I just want to understand whether you are gaining volume share? And also if you could explain why revenues are down, that would be very helpful.
Sorry, I didn't hear the second part of the question, I'm sorry.
Why are the venues down in Japan on the THP side of things, that would be very helpful.
Okay.
Yes, I mean, they are in Japan, as you know, it's the bigger market in terms of THP worldwide. And we have a glue that is there and has been doing extremely well. Of course, GlowSense was not as successful as we expected, but Glow Pro was very successful. And on the back of that, we've launched Glow Hyper, which gives us at the latest exit share of Glow at 5.9% in Japan and Hyper at 1.3%. So it's a very, very strong performance.
So stock movements, yes, But yet, the acquisition of consumers is doing extremely well, and we have a very high share in terms of device sales. So we're in a good situation. Thadio, you want to add something?
Yes. I want to remember that in October 2019, we had another step on this THP excise amortization that's happened in Japan when we were already having a 10 yen pass on due to the increase of Japan consumption tax, that's equivalent to VAT that move to 8% to 10%. So for competitive reasons, we had to absorb that excise amortization. As you know, we always keep an eye in terms of relative price in the market and so on. And that's the in Japan.
In the volumes that you are referring to, in November December, we were of 2019, the volumes were driven by normal end of year loading floods, stronger shipments to support the pro national expansion. If you go back at that time, we were launching our induction technology, which is what we call Pro and device as well as Globe Nano. And we had in parallel a much improved consumables that was also being launched. So basically, new device penetration activities were complemented by higher IMS of consumables at that point in time. So that's the reason why we see a deepening in sales in January this year.
Just to give you a flavor for you, if you compare February June 2020 with February June 2019, our volumes would be up 5.2%, which show how depressed was our sales in January 2020 because of the dynamics that I just explained.
That's very, very helpful. My second question is on the e cigarette PMTA process, which is now just a month away. And I think you had mentioned once that it can open up almost a 2,000,000,000 retail sales opportunity for you, if I remember correctly. So what is your expectation now based on what you have been seeing in the market in the last few months?
Yes. The PMTA in the U. S. Is a lengthy process. As you know, the data has been moved already in the past.
And what we said is €1,500,000,000 of contestable space available by the end of 2021. I mean, what we'll have to see is at what speed the FDA will take their decision after the submissions of everybody. We're very well placed with all our submissions, and it will take a bit of time. But nonetheless, what you see in the U. S.
Is that the closed systems are getting traction and at the same time that the cost of doing through a full PMTA for products is quite expensive. So that's why we said that there is a potential protestable space of €1,500,000,000 moving forward. As you know, with our SKUs in the U. S. And Alto, as you saw the performance, we're doing extremely well.
Alto has tripled share in U. S. Year on year, so we're doing extremely well. And we'll continue to bring consumers to these platforms.
Yes, I think they just moved the both post now to September. So like Jack said, we are very well prepared to make all the submissions. We have read submitted 29 SKUs in paper. And it's a question now to wait for the enforcement to materialize in the market.
So we've tripled our share with Aalto in the U. S. So we're doing extremely well. The PMTA takes a little bit more time, and that will create a lot of contestable space, and we are growing in that environment.
And my last question is on the political environment in the U. S. And these flavor ban bills, especially SB 793 in California. You know, you clearly half of your cigarette portfolio is menthol. So how do you expect, if a flavor ban were to happen in California, how will that impact your business?
Yes. It's a very good question. Thank you for asking that. I would just like to remind everybody a bit of geography. The U.
S. Is a lot of states, 50 states, and they're all different in terms of price, in terms of excise, in terms of regulations. So I think that you have to separate what happens in one specific location in the U. S. To the total U.
S. Market. I think that we have a lot already, a lot of different situations in terms of pricing, in terms of access to consumers in different states. I must say that these are scare missions that are not that important, and we'll take care of them as we go along. The most important bit is that we have very strong brands and that we're able to navigate the situations in the different states already, and we'll continue to do so.
So there will be some scare measures, but the overall market in the U. S. Is very favorable. There is a lot of progression in terms of our market share, our value share across the different portfolios, and we're in a very strong position. Rodrigo, do you want to add?
Yes. I think that you know that we have Reynolds has filed litigation challenge on the local flavor bans. While we cannot comment on the specifics of ongoing litigation, we believe that some flavor products are important because this helps other smokers to migrate away from cigarettes and the flavors we market provide consumer acceptable choice for other smokers who are really looking for potential less harmful alternatives to cigarettes. So this is a I think that should be pressed by federal law Law and I think that's the like Jack said, is very different than the different dynamics across the states.
Brilliant. Thanks a lot.
Thank you very much.
Thank you,
Yes, good. Thank you. Always with a lot of interest.
Thank you. Someone is at least.
Yes, I just had a quick question on coming back to PMTAs and modern oral.
I was just
wondering what your plans are around a PMTA for potentially higher nicotine strengths and additional flavors given the gap in your portfolio there? And is that something you're looking to address sooner rather than later?
Yes. I mean, in terms of the PMTAs for all tobacco, so everybody everything will be submitted at the right time. As you rightly point out, as we said in our different communications, we are doing well in 4 milligrams and below, and we have a gap in terms of flavor. Just remember that the oral tobacco, modern oral in the U. S.
Is 1% of total nicotine consumption compared to 10% nicotine consumption in traditional oral. So it's a small segment at the moment, and we're doing well in 4 milligrams and below. All the PMTAs are lined up, and we want to expand our portfolio in higher nicotine levels. And we'll communicate with you when we put in place the solutions. It will take a little bit of time, but I'm not too concerned about that.
We're working hard on the subject, and we have a lot of other priorities to take off in the U. S. This is a midterm thing, and I promise you that we take care of
it.
Thank you, Owen. And the next question is coming from the line of Nick Oliver from UBS. You are now unmuted. I may now go ahead.
Hey, good morning, guys.
Hey, good morning. How are you?
Yes, good. Thank you. Just a couple from me. Firstly, on the investments in new categories. Last year, I think if I'm right, you invested £500,000,000 in H2.
How should we see the €250,000,000 investment in H1 in that context? Should we expect a further step up in the second half?
Yes. First, I mean, as you saw through the numbers, I mean, we have navigated very well in the first half of the year, and we're coming stronger out of the first half of the year. The second thing is we said last year that with Quantum, we'll have at least $300,000,000 available that we want to reinvest in the business, which we are doing, as you saw, dollars 250,000,000 in the first half of the year in a very challenging environment. But I'm convinced that we have to do the right thing for the business for the mid- to long term and to make sure that we invest. We have platforms that are working extremely well.
We've seen the traction that we get in the 3 different platforms in model oral, in THP and in e cigarettes. So we'll continue to invest. The comparators will be different between H1 and H2, but I think that we have to grab the opportunities as they present themselves and to invest where it is important for the business on the mid- to long term. Thadeo, you want to add something?
Yes. I just want to remind them that this EUR 500,000,000 last year, a lot of that we did in the second half of twenty nineteen. So we'll be lapping a very strong investment in Mexico now in 2020. We continue to invest in the first half of twenty twenty. That momentum that we started having at the end of last year when we started investing in KHP to moving to Hina in place like Russia.
Now we are more recently rolling out hyper in Japan and also in Hina. In paper, we have upscale our investments in the U. S. And NINA in order to support our mental band strategy. And in modern order, we are moving launches to emerging markets like Pakistan, for example.
We are also investing capabilities in social media listening, e commerce insights and design, data analytics and so on. But we will have to have in mind that we'll be lapping a half year now that was full of investments. So we are not providing any guidance in terms of full year, but that's the only thing we'll have to have in mind.
What's important for me on that one also to add thank you, Thiago To add is the 2,700,000 of non combustible product consumers more that we've added versus SEP Pay last year, which represents a growth of 30% of consumers. And that's absolutely massive. So it means that we have a formula that is working in terms of offers to extremely good insights on the consumers and working on short. So it's about the rollout. As Thiago said, we've done a lot of improvements in terms of digital during the COVID, and we see the results.
I mean, Vuz is now 26% share across the T5 markets, which are representing 80% of global vapor industry. Alto has tripled share in the U. S. And Glow is doing its best market share at 5.9% at the end of June. Glow in Moscow is now at 2.8% of total nicotine in June.
So we're getting some traction, and we want to make sure that we invest. So we do resource allocation every month. David and myself are extremely busy on the weekly basis to do the heaviest resource allocation in order to make sure that we continue to grow our new category of business. As I said, we've added $2,700,000 of the Commerzbot product consumers. It's massive.
At the same time, we never let go on Commerzbot. We are growing value share. We are growing market share at record levels in the last few years. And it is very important for us to get the cash to get the resources in order to continue to invest. So we're investing at the right level for our customers.
We're getting the traction, and the pricing environment is good.
Okay, great. And then just one final one also on new categories. I think in the past, you've said you're making positive operating profits in vapor in Canada and modern oral in Scandinavia and THP in Japan. Are there any changes to that? Or any other markets you can call out that are kind of
positive from a profit perspective?
I think we are in the phase of acquisition of consumers because a few years ago, we were a bit on the back foot and we've accelerated dramatically with much better traction in terms of development of new products before we needed 24 months to go from working prototype to launch. Now we have 12 months working prototype to launch, and this is going to continue to improve. I think with the quality of the insights that we have on all 4 categories, which you were the only ones because you were the only ones to operate worldwide on all these categories At the same time, it is more complex, but we have a lot of insights that allows us to push forward. Thadeau, do you want to add something?
Yes. The only thing I would like to add, Nick, is in summarizing is the payback that we have in modern oral is quite fast, like I have already said in the past. And all those markets where we have been launching, we have been extremely successful in Modern Oro. We saw that we increased our revenue by 70% in the first half of the year. So these are basically all in positive territory in a very short period of time.
When it comes to vape and THP, it takes longer. When you see our numbers, you just saw a consolidation of all the categories in all the geographies. So I said before that I expect that moving forward to the years to come, a lower operating margin drag from the base that we have in 2019. And from 2021, given the encouraging performance that we have seen across all categories and the plans that we have to improve further improve gross margin, we expect the impact in the P and L to soften and being more accretive year after year.
Okay. That's very clear, guys. Thanks a lot, Jonas.
Thank you very much.
Thank you, Nick. And the next question is coming from the line of Adam Spielman from Citi. Adam, you're unmuted. I may now go ahead.
Hi, Adam. How are you? I'm fine. Thank you very much. So thank you for taking the question.
My first question is around up trading or down trading in the U. S, and I guess more globally. So there's been a lot of comment that actually we're seeing down trading in the U. S. And yes, at the same time, your premium brands are doing quite well, which is actually up trading.
So I was just wondering whether you can think this sort of you think this is a market where there's up trading or down trading? And then I got a sort of more general question afterwards about it globally.
Yes. Sorry, Adam, you know I'm French. So let's start with the French with the first question. My brain is small. So let's focus first on that one.
The if I may, the I mean, there is a limited number of brands in the U. S. That you have to look to understand. First, you have to always refer to the point that the price elasticity in the U. S.
Is very good, 0.3, 0 point 4. The second thing is absolute prices in the U. S. Are quite low compared to disposable income and in absolute terms. When you have a pack of cigarettes at €10 in Europe, you have a pack of cigarettes of €5 to 6 in the U.
S, dollars 5 to $6 So I think that there is a strong space for pricing, as you've seen in the last 2 years. And on the back of that, some say that there is down trading. I don't see that down trading in the U. S. When you compare the big 3 and the non big 3, you see that the non big 3 trend of growth has not changed.
They're taking pricing alongside the big three. So the price gaps are not significantly increasing. And then the second thing is there has been some depositioning of SKUs for some competitors that moved 10 percent of their volume on one brand to a lower price point. Well, at the end of the day, with above what our premium share going up, as you saw in the presentation, and our brands being very strong. It demonstrates again what is the definition of marketing, build strong brands and make sure that they have the equity to support their price position.
So I think that we're doing extremely well in that environment. And I do not see in the U. S. Any important signs of accelerated down trading. In terms of the rest of the world, what you see is, for mature markets, very little signs related to down trading.
It is more you should take Germany, for instance, because the as I said before, the market the legal market in Germany because of the closing of the borders to Eastern Europe, the size of the market has increased. It was negative in 2019. It's positive now in 20 20 in Germany. And of course, the consumers are looking for alternatives. The consumers that were buying these EVC products, they are now buying more make your own and more your own and low price points.
So it's not down trading. It's just flops of distribution. The premium in developed markets is doing extremely well and the above WAP. So above average price in the market is doing extremely well. Then so no sign of accelerated down trading.
None. Then you go to emerging markets. And emerging markets is more a question of availability of products and the lockdowns. So these are situations where when the markets are open, we don't see any acceleration related to that. And then the numbers that you could see here and there are more related to lockdowns of different pieces of distribution.
In some countries, CVSs are closed. In some others, general distribution are open. So it all makes sense to me, and that will normalize. So I insist no down trading. Remember always, in any other FMCG category, the price gaps top to bottom are normally twofold, 200% and more.
In cigarettes, you're more around 25% top to bottom. And the consumers do not buy like their toothpaste every month, but they buy cigarettes every day. So you don't have there's a much more resilient environment and business and the price elasticities are good. Did I answer your question,
Anand? Yes. Thank you. And you went a little bit beyond it. But there's
one I'm always trying with you to go beyond the question.
On Slide 29 of the presentation, Pat, I'm quite intrigued because there it says in EM, your volume share was up 70%, but your value share was flat. I don't really understand that.
Yes. Thadeo, you want to take that one. It's more related to the availability of some products and the lockdown of some markets. But, Thadeus? Maybe you can take that one.
Yes. You are referring to our different share position in the telecom in emerging markets. Adam? Yes, I can hear you. Yes, yes.
Hi, Adam. You are referring to the different positions in terms of our share in developed and emerging markets, no? Yes.
But particularly in emerging markets, your volume share is up and your value share isn't. That's implied. Yes.
But that's what the dynamic that Jack was referring to. A lot of those sell markets where you have people, for example, in a daily salary basis and they will have lockdowns and they the level of switch that normally happens to be around 10% in those markets went to 20%. And they change brands either for economic reasons, but also because they don't they can't find their brands. And they eventually will buy brands that is more lower end of the market. It's not a consistent down trading movement, but it's just because of the circumstance that they are living in.
And we have been tracking these on a monthly basis, and we can see this very changing substantially when you move away from lockdowns and when we get into lockdowns. I think that's what you've seen the sharpest of the reflection of some of these movements that was aggravated in Q2.
Okay. Thank you very much. And then can I ask a question about the rollout of Glow Hyper? Clearly, the reviews are good. You say that you're going to full distribution in many markets.
And I the question is, what difference will that make? Do you see a sort of discontinuity, a positive discontinuity, a step change in volume for Glow Hyper. Can you give us any sense of your capacity for
it in
the second half of this year and looking into 'twenty one and beyond?
Yes. I mean, Adam, you know me. I go step by step. We've made the proof of the concept in Japan. We're having now 1.3 share points after a limited number of weeks, less than 2 months.
Normally, as you know, in Japan, 3 weeks of excitement at the beginning and then it dips like if there is not a law. The very encouraging seeing sign in Japan is that we continue to grow. Very clearly on one of the charts of the presentation, we say why because the product is having overall satisfaction that has grown. The format is better. There's 30% more tobacco in there.
And we're extremely good in terms of everything that's related to the flavors. So we have success there. We'll have to see how it continues and how it starts. It's a very competitive market in the Japan. It's the most competitive market.
It still represents more than half of the total volume of THP. And we see that when we do either market research or pilots or limited launches like in Russia, for instance, In Moscow, we have 2.8% in June, and this is a great majority on Hyper. So we will do the rollout, and we will do it step by step in order to make sure that we have the traction that we need. Do we have product in terms of sorry, do we have issues in terms of manufacturing? The answer is no.
But I want to go step by step in order to take the learnings as we go along to increase the efficiency of our marketing return. I want to make sure that we learn as we go along. I think that we have a very good product, induction heating plus boost button, a better format in terms of which was one of the problems that we had, a better format in terms of the dimension of the consumable. And we'll continue to push through. We have very good insight.
It's extremely promising, and we'll take it step by step.
Is there any if you were an analyst, what sort of volume numbers would you be putting in for 2021 in your model?
Well, I mean, the sad news is I'm not an enemy. You guys remember, I'm a limited French farmer, so my brain doesn't work that well. So we have to make sure that we understand what are the different parts of the puzzle. As I said, in terms of manufacturing, no issue. In terms of insights, very positive.
In terms of overall acceptance, competitiveness and conversion rates very high and very competitive, let's put it this way. And we have something that works very well. Now we have to do the rollout. We have to build the brands. We have to look at the specifics.
Remember always that maps chart that I shared with all of you at the Investor Day recently. It's very important to know and to look at the consumer satisfaction index also that was in Paul Lagervek's presentation during the Investor Day. There are markets where THP can be more successful than others. If you look at the U. S, for instance, very clearly, there is no traction on THP as we speak.
And there's a lot of traction in terms of e cigarette and oral and modern oral. So I think that it will depend on your work piece. But we know where we want to launch, and we have just to be cognizant of the fact that in some markets, the category THP is having some breaks in terms of taxation level that are maybe potentially not sustainable on the mid- to long term. So then having products that are sold far below the price of cigarettes in some mostly some countries of Europe, you really have to have a satisfaction of the consumer that is very strong. So we will navigate all this and make sure that we have the right understanding.
We have a winning product. I will launch it fast, but there's a difference between rush and speed. And we'll go for speed rather than rush, but we'll do it.
Okay. Thank you very much.
Thank you, Adam. Stay safe.
Thank you, Adam, for your question. And the next question is coming from the line of Michael Lavery from Piper Sandler. Michael, you're unmuted. I may now go ahead.
Hi, Michael. How are you? Thanks.
Good morning. Yes, thanks. How are you?
Very good.
I'm sorry if I missed this more, but I just wanted to see if you could give us an update on the disputes with Florida, Texas and Minnesota on the cool Winston Salem and Maverick brands. And I just I guess the 2 or 3 questions would be, I know Florida's appeals court has found you liable for about $100,000,000 and the ongoing payments related to that. So first would just be, is there an appeal process still to go there? Is that final? What are any next steps?
And then next would just be what's the read through for any of the other states that are in similar discussions?
Mike, sorry, maybe I start with this one, if you don't mind.
Yes. This is the recent case that come up yesterday. And as you can imagine, Mike, we cannot comment on that. The only litigation that is going on, the only thing that we can say is that we are not expecting any type of short term resolution. This will probably come through 2020 21.
But other than that, we cannot mention or make comments about that.
Can you at least confirm that you then, of course, have some more appeal steps to take, it sounds like?
Well, like I said, I think that this will carry on until 2021.
And that applies for Texas and Minnesota as well?
Well, yes, the whole 3, yes. Yes, okay.
All right. Thank you very much.
Thank you very much. I mean, we take all these legal cases seriously. Yet at the end of the day, they are limited. And we have to make sure that we take the right time and the right approach. It will take time, as Antonio said.
It will take time.
Okay. I understand.
Thank you very much.
Thank you, Michael. The next question is coming from the line of John Lenstorf from Societe Generale. John, you're unmuted. I may now go ahead.
Right. Good morning. Thank you.
Good morning. Good morning.
A couple of things, please. I think in the recorded presentation, you mentioned that the early signs in Europe on terms of the switch over from menthol were going quite well. I was just wondering if you could flesh that out because I mean, obviously, there's been some delays in some of the implementations, in particular, whether You're referring
to the Menthol ban?
That's
right. Okay, yes.
There's obviously been some delays in implementation. I was wondering, in particular, in Poland, has it actually been implemented? And can you flesh out the comments as I think you were making some comments about cross category switching and so on and so forth as to what we've seen in Europe for that, please?
Yes. As we know, I mean, the metal band, I mean, it's not the first time that it happens. You have some examples in Canada and in other places. What happens normally is that you have a very good retention in terms of consumers. Why?
Because on commerce tables. Why? Because the consumers are smokers sourced, then they're smoking a brand, then they're smoking Mentor and in that order. So normally, the retention is very much the only size, as you said, it has been delayed in terms of implementation, in terms of controls. And I think what is important to see is that for the first elements that we get out of this, but we'll have a better read towards the end of the year in order to have the dust that I've settled a bit is that the retention rate is very high.
And then also in Europe, very clearly, e cigarette is the number one in terms of number of consumers in Europe, far beyond any of the other categories. And there is a good switching when consumers want to continue with mental. And it goes to e cigarettes, and we're very strong in e cigarettes. We're the leaders in Europe in e cigarettes. And so we're having a positive level in terms of consumer retention.
So early signs are actually good every country, Poland and others. But we'll have to see and wait a little bit for a few months to go through. I think that between combustibles, as I said, smokers are smokers first, then it's about the brand and then it is about nicotine and flavor. So I think that what something that we're able to navigate something that we're able to navigate very well.
Okay. Secondly,
I think
again, you on there was some possibility of legislation in Russia. Obviously, the modern oral segment was effectively banned for a time. Is that correct? Is there a likelihood that Russia will legalize
We're a very responsible company, and it starts there. And we had the experience of some players in the U. S. On e cigarettes that were going too far in terms of consumer activation, that we're going too young in terms of consumer reach and that we're doing too much in terms of digital. That has created a lot of promise.
My approach is always the same, if I may, and very consequent and consistent with the past, which is we want to have a level playing field in terms of commercial activities, and we want to have regulations that puts the protection of the consumer first. When we saw at the end of last year in Russia that there were some small players that were putting levels of nicotine in their pouches that were more than 10x more anything that you can think of. We went ourselves to the government and said that there is a need for a new regulatory framework in Russia related to modern oil. And if it could not be done on the short time, that value of sales should be the right way to go, which has happened. Now it takes a bit of time to have a regulatory framework that is put in place because I want that category not to be built on sand.
I want that category to be built on a framework and a foundation that allows us to play to our muscles, which is quality of the brands, products you want to ship and quality of the products in an environment that is sustainable. And I think that was the right approach that we took there. And when the new regulatory framework will be defined, then we'll go for blast because we know from the 1st months where we were in the market before it was banned, then we were doing extremely well, like all the other countries where we went to with modern oral. I think that modern oral has a lot of traction because remember the consumer movements. I always said that before for cigarettes, you had around 20 consumer movements.
Now you have around 5 for combustibles. So there are 15 to be recaptured by other forms of products for the consumers. And I think that there's a lot of opportunities. But I prefer to play it step by step and to have a long term sustainability of the business rather than a crisis with rogue players that are putting some product definitions that are not in the purpose of our company, which is to reduce the health impact of our portfolio moving forward. Did I answer your question?
Well, yes, I guess really, I guess, in Russia, you're saying that you don't expect the ban to continue indefinitely, you do expect it to be removed at some point?
Yes, yes, absolutely. It is about finding the time and the development of the new regulation in Russia and then we go. We know that the products work over there. We've been successful, as I said, in the months where we launched. There is appetite for this category in Russia.
Okay. And lastly, if I may, more general question. Sure. The price mix comp comparative of I think as you've said yourself becomes quite difficult, more difficult in the second half. And I know that there's been some industry comment about the prices being delayed, perhaps unsurprisingly given the COVID situation.
Should we therefore see quite a big drop off in the sort of price mix that we've seen in the very strong sort of first half?
I mean, all our competitors are different in terms of geographies and things like that. What I can tell you is that in the U. S, to start with, we you've seen a very strong pricing environment, and you've seen that also in 2019. And you've seen that the market size in the U. S.
Is growing not too badly in the first half of the year. So the price elasticity in a lot of places is at 0.3, 0.4 in mature markets, which represents 75% of our revenue worldwide. I think there is still some space for pricing. And I think that the comment may be related more to specific countries and specific geographies. We don't see major pricing.
We have had a lot of pricing in H2 last year, so the comparator will be high. But yes, the pricing environment is strong. There are some things in Indonesia where the minimum price is delayed. But Indonesia, when you know Indonesia, what you know is when there is an excise increase at the beginning of the year, the price is passed on through the year, and you're going to a neutral point by the half year. And then on top of that, so it's very progressive during the year.
Then after that, there are minimum prices and things like that. It's very impactful in Indonesia. So the market has gone down dramatically, but that's more or more in one place. In all the other places, we are seeing pricing environment is strong. Thadeau, do you want to add something?
Yes. The reason why we highlighted the second half is just to put in perspective. We have our guidance out there for this year to grow revenue between 1% to 3%. This takes this into consideration. Like Jack said, the price environment is still very strong.
There are some outliers because of disruption, like you said, but it's nowhere near the majority. We are and more important, we have 84% of our price that we'll expect for the year rather taking. So I think that everything is already in our assumptions.
Okay, great. Thank you very much.
Thank you very much.
Thank you, John. And the next question is coming from the line of Nikol von Stackelberg from Liberum. You're unmuted and may now go ahead.
Hi, good morning guys. Hope you're all well. Just want to ask a quick question on the cash performance. It was a good one, but there were some deferral of excise and corporate tax payments in the U. S.
Do you know roughly when that's expected to reverse? And I guess related to that, the cash flow conversion was strong and you're continuing to expect the cash conversion above 90%. What gives you that confidence for the full year? Yes.
Look, we yes, we had this boost from the deferral of tax. If you take our conversion on the excise that was different in the U. S, around $800,000,000 We also had to cope with very high levels of inventory due to security stocks in inventories as a consequence of Corvi adding up a EUR 400,000,000 pressuring in our working capital. If you strip these out, the conversion would be around $70,000,000 $71,000,000 which is still ahead of last year, which is just a demonstration of all the airports and the discipline we are taking in terms of the cash flow. So we expect this to reverse 95% of this cash in Q3.
So we'll be all done in the second half of twenty twenty. But given the focus that we have been in managing cash for some time now, I'm quite confident that we can deliver the 90 plus conversion.
All right, great. And quick question on South Africa, really. It's a bit of an I'm sure a known unknown, but is what are you factoring into the guidance? And maybe just the fact that it is a known unknown kind of explains the range at the end of the day. Is that fair?
Or just curious what's the factored in there?
Yes, it's a loan, no, no, no. Yes. It's a loan, no. So I mean, we have the legal case that is in there. As I said, we have prepared the motor home comebacks in South Africa.
The prices are 3x higher before COVID. So there is a lot of space to operate, and we'll make sure that we take all the benefits. Now I don't want to give too many inputs on that one because we have a legal case. It took us some time to get the court hearing. Now we have it, and we'll take it from there.
Also as booze or alcohol, sorry.
Okay. Yes, yes, that's right. And going back to Adam's question, and I
think his question Sorry. Yes.
Can I go back to Adam's question? His question, I think, was a bit more on global. But can we zero in on the U. S. A little bit, just so I understand better?
I think that the cigarette industry volumes were up 80 bps. Your volumes were down 20
Sorry, sorry, sorry. Was just finishing on the previous question. I didn't hear there you jumped the ground a bit there. I didn't hear your question. Can you repeat your question?
Yes, sure. Sorry about that. I didn't mean to interrupt. The question is on cigarette industry volumes in the U. S.
Your the industry volumes were up 80 bps, your volumes were down 20 bps and yet you say you gained volume share of 10 bps. Is this just an issue of coverage?
Tell you.
Yes. There is a movement in inventories here and there always in the U. S. You cannot take this literally. The important thing is that the market is performing better than we first thought.
That's why we moved from 4% to 2.5%. There's still some uncertainties out there for the second half of the year. You know the first half, we had additional stock build for by retailers and consumers, which is pretty much a one off. Independent of reversing or not in the second half. We don't believe that will, but it's a one off that will not repeat in the second half.
We had the dilution of the extra trading days we have in the half one throughout the year as well. And there are some uncertainties out there in terms of consumer reaction to the recent second price increase given the economic background, consumer purchasing power dynamics in terms of levels of unemployment vis a vis the continuation of fiscal stimulus, the COVID dynamic itself in terms of easing lockdowns, there is still some uncertainties. That's why we are expecting a second half worse than what the first half. But this direct correlation between our bonds and the monthly bonds, yet it always tricky for some inventory movement at the end of the period.
Okay. One final quick question. The alcohol industry has been pretty clever in terms of setting up industry regulators to govern advertising policy. The experience in the U. S.
With IQOS and certainly this experience in Russia with modern oral, I'm just curious why hasn't the tobacco industry decided to establish regulatory bodies that effectively monitor and help control responsible advertising? Because it's been quite a net benefit to the alcohol industry. It seems like the tobacco industry could benefit as well.
Yes. I mean, it's a question that is more related to the fact of having marketing goals. And we have very strong marketing quotes in BAT. Now some others do or don't have. The way that we do our business with the marketing code that we have, that we review on a regular basis is to be on the right side of the fence always and to make sure that we have the possibility to have a sustainable short term, mid term and long term business.
Other industries might do it differently, but the reality is, you have a lot of small players in the industry. You have a lot of small players. We always forget that in the U. S, you might have maybe 2 other different tobacco companies in the U. S.
And we're always speaking about the big three and the non big three. But the reality is there is more than 200 companies. And I do not feel that there's a possibility to bring all these people together. It's extremely fragmented. So we have, as a leading company in that business, we have a very strong and very robust marketing quarter that has allowed us to be responsible in the way we do our business moving forward.
Okay. Thank you, guys. Appreciate it. And I think I might have missed your question. I meant Juul in the U.
S. Thank you.
Thank you, Niko, for your question. And the next question is coming from the line of Serna Sanderson from Morgan Stanley. You're unmuted. I may now go ahead.
Hi, how are you?
I'm good, Jack. How are you? All are well. I have two questions on the U. S, if I may, please.
First one, just trying to kind of peel the onions maybe on the U. S. Volume growth number, which has been very strong. Of course, at the start of the year, you had a tobacco 'twenty one and thoughts about how that might impact the overall volumes and then COVID struck. You probably have more income or discretionary income now with consumers.
But if you kind of think about overall smoking prevalence rates or per user rates or maybe consumers migrating away from vaping back into cigarettes, how do you see all these moving variables and the impact of tobacco-twenty 18 along with that? Just so that we get a frame of reference how to think about it for 2021 maybe?
Yes, yes. So as I said, in terms of the situation in the U. S, so you have mononoral that is around 1 percent. You have traditional oral that is around 10%. You have e cigarettes that is very close to that now, that 10% and the rest is combustible.
What we've seen is that there was a slowdown in new categories Well, THP sorry, I forgot THP, but it's so small that it's after 6 or 9 months. I mean, there is more time to wait. These categories take a very long time to establish themselves. It's normal. So in terms of the movements that we see is we see that there was a crisis in Q3, Q4 in the TUI cigarette, which is the bigger one, and that has recovered quite nice easily.
So it has grown by 20%. So that's good. That's why it's coming back to the right levels. We're taking stronger positions in this category. What I think is important is that there's also a more, I would say, big company approach related to that.
Why? Because consumers are going to close systems, which is extremely interesting for products who are cheap once and also for efficiencies in terms of the business. So as we said, Alto has tripled its share in the U. S. On year on year.
I think that the overall trends will continue in terms of e cigarette recovering in the next periods. And you will have the same situation that you have at the moment in terms of that slowdown that has happened in terms of transfer from combustibles to new categories. And it will take some time for the trend to reemerge strongly again. So I think that the combustible in the last 6 months, Talione was referring to that earlier, has benefited from less intake from e cigarettes. The e cigarettes have started to grow again.
So all this will go in the right direction. But I think that on the midterm to long term, you will have the continuation of migration from combustible to the other categories, but I have to I would say at a reasonable pace. And all this will bring some stronger foundations. And also the PMTAs will help to create contestable space in new categories because we still have a lot of space to conquer in terms of new categories in the U. S.
And there's a lot of potential that is already there. So we're not speaking about things that might become or people that might become users of these categories, they're already there. There is a lot of space. And that's why we say that for companies like us, for us especially, with the strength that we have in our portfolio in the U. S.
In non combustible, there is 1,500,000,000 contestable space for the next 3 years. So that's just massive. But we needed to build these strong foundations, which we did in the last 18 months, okay? And the regulatory framework is getting more predictable because Mr. Gottlieb has been very active in tweeting.
But in reality, in the 2 years that he was there, nothing has changed. It's something that is extremely important to consider that there has been some flavors and things that have happened. But fairness, it has been more benign and better than what was expected by most. Thadeo, do you want to add something?
Yes. I think that more important is looking to the total nicotine size in the U. S. Moving forward. As you said, there is a defined predefined reduction in terms of FMC that will happen due to the reasons that you just highlighted.
But there will be movements throughout the other categories and you have to see the U. S. Market in its holistically in terms of size of nicotine. And this one, we expect to grow over time.
And on that, if I may, just try to extend on that question. You've shared nicely the slides with the split of the U. S. Nicotine market. How much do you expect this to kind of evolve?
Or how do you expect this to evolve, let's say, in that 10 year timeframe you have posted for recruiting 50,000,000 new consumers or 50,000,000 NGP consumers? How do you expect this U. S. Market to evolve with modern oral, vaping and combustibles? And how many of the new consumers you expect to probably get from the U.
S?
I mean, of course, we're doing planning, but this is to be recalibrated as we go along. What we know is that the closed systems in e cigarette, which is the biggest category, the closed system in e cigarette are growing quite strongly in the market. But to put some numbers 10 years down the road would be totally premature. I think that we're doing well in the current environment. We have grown substantial share recently, and we'll continue to do so step by step.
Thank you very much.
Thank you, Sanath, for your question. And the next question is coming from the line of Alicia Forry from Investec. Alicia, you're unmuted and may now go ahead.
Hello,
Alicia. Hello?
Sorry, if there was a question, I didn't hear the question. I'm sorry.
Okay. Can you hear me now?
Yes, better.
Job. Okay. So modern oral in the U. S. Clearly outperforming heated tobacco and they're both fairly new categories to that market.
What do you think is behind that outperformance in modern oral, especially considering that heated tobacco is a closer approximation of the smoking experience. What can you tell us about why consumers are moving to modern oral more quickly than they are to heated tobacco? And then my second question is on
Maybe we should stop there and then you ask for a second question after. So on THP, I mean, we look at all the different categories and we look at the facts. And in the U. S, it has not been a tremendous success up to now. It's a long term play, for sure.
And as we have said many times, in terms of satisfaction index, you always have to refer to the situation whereby cigarette in Japan is around 3 milligram and a cigarette in the U. S. Is around 15, 16. So it's very difficult when you heat tobacco to have the same satisfaction as when you burn tobacco, okay? So there's a gap there.
Also, you have modern oil that is also on the back of a tradition that is already existing in the U. S. So traditional oil that represents 10% of the market. So there's a bit more traction related to model oil. But we'll have to see in time what happens really because at the moment, it is a category that is interesting, of course, for the long term.
Don't get me wrong. But at the moment, it is mostly acquisition of distribution from the different players. It is rollouts and it is a small category that is 1% of total nicotine usage. So you have to take a bit of time. It makes sense in terms of having the possibility, referring to the consumer moments that I was speaking about before, that if you bring, for instance, the kids to school in the morning, you're not going to smoke, you're not going to vape or you're not going to use DHP in the car.
So Model Nore is a solution for these kind of models. But let's take it step by step. For the time being, the strong acceleration is related to expansion of distribution and availability through the market. Then we'll have to take it from there. You have differences between markets that are just or between states that are just absolutely massive.
So the whole dust will have to settle a bit. The portfolios will have to go through PMTAs in order to be validated, and then we'll take it from there. As a category, traction, especially in emerging markets because in those markets, very seldomly, the consumers can afford the device like a THP device or like a DCD device. They are very expensive for them. But so it's a very good alternative of a more acceptable product in terms of the consumers.
So we'll have to see, but we are doing some pilot tests in different markets in emerging markets, and the first results are quite encouraging. So we'll take it step by step, okay? Thadeo, you want to add something, Nadeo?
No, I think that's right. If you see the I think that the THP is basically satisfaction issue like Jacqueline was explaining. And the Montano, the source of business is 40% comes from moist, the snus. So it's not a surprise to see when you have a traditional oral market already established, which is exactly the case that we saw in Sweden, in Nordics, that you're going to have a 10% -ish of the segment coming from
other products, because it's a
more modern way of using the product. And there is another 50% that's coming from all the capitals, FMC, like Renault Dex. So it's a different dynamic from TSP.
My second question is on the emerging markets. You previously noted that many of them are under pressure from COVID, which has impacted logistics and how consumers can move about in some of those markets. My question is how have you seen trends evolve perhaps in some of your larger emerging markets that were under pressure since those various countries have emerged from lockdown? Has there been a big rush of pent up demand or has the recovery been more gradual?
Yes. I think it's a very broad question, but let me try to have a go at it. I mean, if you think Brazil, because you're speaking about important markets for us, I mean, Brazil was in a situation of illicit beyond 50% with the reduction of the illicit volume by 6%, 7% on a yearly basis and sometimes even more. We have a very strong portfolio in Brazil. But because of the lockdown, you have the borders that are locked.
Because the borders are locked, then the illicit that is coming mostly from Paraguay have been reduced quite considerably. You have army on one side of the border and army on the other side of the border. So what we've done is we've activated on Rotman's some additional SKUs in order to capture these consumers. We're not having the possibility to buy any signal ads because when we bring them back to the portfolio, then we start to bring them back to the family of SSO. What we've seen is that the market in the legal market in Brazil has grown by 7% at the beginning of the year.
That's absolutely massive, and our market share has gone up. We have the best portfolio by far in Brazil with presence in all the different price points, and we're benefiting from all this. So I think that what you have to consider is a market like that that has benefited. The Mexico is another one that is very important, and you might have seen that we've grown share very, very strongly in Mexico. Why?
Because we were able to have the right products in the right places available to the consumers better than competition. So we moved around a lot of products. And as I say often, I mean, we spend more than €90,000,000 on the first half of the year in terms of logistics and moving products around in order to make sure that we deliver the products to the distribution and that we deliver the products to the consumers. But in some situations, there's just a lockdown. If you take Pakistan or Bangladesh, for instance, there is more problems in terms of availability.
Thade, would you want to add on that?
Yes. It's more on the availability side. Of course, you'll be at the moment. It's very social, the consumption of cigarettes. When you have lockdowns in place like Horeca, for example, it just reduced substantially.
And or when you are in curfews and you are not able to buy then find your product, that's the dynamic very different from other places like Jack was referring to as having leases reducing as a consequence of closure of borders. So we have a mixed picture there. Overall, it's negative. That's why it's a drag. But we expect that as the lockdown start easing, the situation comes back in a favorable way.
Sorry, I thought that the line went dead. That's the beauty of this connectivity, but also the problem. So sorry, did I miss one of your questions?
No, I think that was it. Maybe if we have time for just one last one. You talk about distribution changing a bit in new categories clearly in mature markets. Clearly, some of the vape shops haven't been open and also their products in the U.
S, they haven't been able to sell all of them, while the
flavors have been able to sell all of them, all the flavors have been banned. So do you think that these channel shifts are likely to persist post the crisis? Has the marketplace in mature markets changed?
Yes. It's a good question. I mean, there has always been there has already been the trend in the last period that consumers go now more to general trade shops in order to buy their products. And the vape shops have seen the impact of general trade now having more sales now and also closed systems having more sales now. So the specialized side of these shops is a different situation than it was even a year ago.
I think that it's good that it goes to general trade because then we can flex our muscles in terms of distribution because we have already very strong positions with these different channels. So that helps the evolution of the market.
Thank you. That was the last question in the queue. And I will now hand it back over to Strat Balogh to close today's
call. Well, thank you very much. A lot of questions. Thank you very much for your interest. In conclusion, these are strong results delivered in challenging circumstances.
Our people have gone above and beyond to deliver them, and I am proud of what we have achieved. In the first half of twenty twenty, we have made good progress. Our priorities are clean. We remain committed on our dividend policy and medium term guidance post COVID. Whilst the global pandemic creates uncertainty in the near term, we continue to adapt and invest in our business.
I am therefore confident that we will exit this crisis stronger than we will do it. We are building a stronger, simpler, faster VAT. And thank you very much for listening, and stay well. Thank you very much.
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