Hello, and welcome to the BAT 2020 first half pre-close trading update conference call. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Please note this call is being recorded. I will now hand over to Mike Nightingale, Head of Investor Relations. Thank you.
Thank you. Good morning, everyone. Welcome to our 2020 first half pre-close conference call. With me this morning is Tadeu Marroco, our Finance Director. I hope you're all well, and I'd like to take this opportunity to thank you for joining us this morning. Before we begin, I need to draw your attention to the cautionary statement regarding forward-looking statements contained in the trading update. As a quick reminder, in addition to this call, Jack Bowles, our Chief Executive Officer of the event today, will host a fireside chat at the Deutsche Bank conference at midday today, U.K. time, which will be available on bat.com as a webcast. There are no presentation materials for either event. I will now hand over to Tadeu, who will say a few short words on current trading before opening it up to questions.
Unless otherwise stated, our comments will focus on constant currency-adjusted measures and volume share data to April 2020. Thank you.
Thank you, Mike. Good morning, everyone, and welcome. I hope you are all keeping safe and well. COVID-19 is having an unprecedented human and economic impact. It is thanks to the hard work and dedication of our teams around the world that to date, BAT has been able to navigate these difficult and volatile times and continues to be a highly resilient business. Our focus throughout this period has been on four key priorities. First, our priority has been to safeguard the safety and security of our people by implementing safe working practice and acting quickly and responsibly whenever employees have become ill. Second, we have focused on maintaining supply chain continuity by building excess stocks at all points in the chain, leveraging our networked manufacturing footprint, and implementing well-prepared business continuity plans.
As a result, we have faced no significant factory shutdowns aside from where they have been mandated by governments. We are also leveraging our distribution and manufacturing capabilities to support the wider community at this difficult time. Third, we have continued to invest behind our brands while remaining on top of changing consumer behaviors during the lockdowns, adapting our marketing activities accordingly. Finally, we have treated our people fairly. We have made no redundancy, no furloughed any employees, and as a result of the crisis, and we have continued to pay all our employees in full despite the challenge to the business. As you can see from today's announcement, this approach is being rewarded by a resilient business performance. While the trade environment is extremely volatile and unpredictable, the business continues to perform well, building on a very strong performance in 2019.
This is demonstrated by the fact that we are growing share in combustibles together with the new categories across all four regions. In addition, price mix continues to be strong. Elasticities remain unchanged, and we see little evidence of accelerated down trading. In the context of the continuing challenge of COVID-19, we are on track for a good performance in the context of a very challenging circumstance. We also remain focused on our three strategic priorities: driving value growth from combustibles, investing to deliver a step change in new categories, and transforming the business to create a stronger, simpler, more agile BAT. The progress we have made against these three priorities has positioned us well for continued delivery in the current environment. Around 75% of our revenue comes from developed markets, where results have been strong.
Our research has shown that consumption in these markets is trending in line with or slightly ahead of last year, and pricing has remained strong. Emerging markets have seen a more pronounced impact from COVID-19, including in Bangladesh, Vietnam, and Malaysia. In addition, factory closures and other lockdown measures have persisted for longer than anticipated, particularly in South Africa, Mexico, and Argentina. In South Africa, there is no sign of the tobacco sales ban being lifted despite our ongoing lobbying efforts. With these uncertainties likely to continue into the second half, we now expect the global industry volumes to be down around 7% this year. This, together with the previously announced impact on international travel retail sales, means we now anticipate a total headwind of around 3% from COVID-19 on full-year 2020 constant currency adjusted revenue, offsetting the otherwise resilient performance of the business.
As a result, we expect full-year constant currency adjusted revenue growth of 1%-3% and mid-single-digit adjusted earnings per share growth. The good performance of our business is borne out in our share growth, with corporate volume share up 50 basis points year-to-date, the strongest performance in recent years, and value share up 20 basis points. Our global strategic brands continue to support that growth, with both volume up 30 basis points and value share up 40 basis points. Demand in the U.S. remains resilient. Fewer consumers are switching from combustibles into vapor, and gas prices are lower, with sales to retail volumes down around 2% year-to-date May.
We now expect the U.S. cigarette industry volume to be down around 4% compared to our previous guidance of around 5%, have not seen evidence of an acceleration in down trading or in the growth of the deep discount segment. Against this positive market backdrop, our business is performing strongly, we expect strong constant currency revenue growth in the U.S. in 2020. Volume and value shares are up 10 basis points and 30 basis points respectively, new U.S. corporate share reached a record 35%, the highest since the Reynolds acquisition. Our premium brands Natural American Spirit and Newport continue to drive this growth, with value shares up 10 basis points and 30 basis points respectively. Moving on to new categories. We continue to invest in new categories, expect to make further progress towards our GBP 5 billion revenue ambition during 2020.
Growth this year will be slower as a result of COVID-19. COVID-19 has disrupted consumer activation plans in new categories, reducing overall industry growth rates. It has also led to scale back or postponement of some launches, as well as some supply disruption and out of stocks early in the year. While the vapor category continues to recover following the global slowdown in second half last year, the U.S. market remains below historical levels. However, traffic to our new categories websites is up significantly, and internet sales have more than doubled. As a result, we now anticipate reaching the GBP 5 billion new category revenue targets in 2025. Nevertheless, I am pleased to say that we continue committed to see the benefits of our multi-category approach and sustain investments in the business with share growth in all three categories.
Not least in vapor, with Vuse growing value share in all key markets, expanding on our leadership position in France and Germany. In the U.S., total Vuse brand share has grown to 26.2%, with Alto share up 570 basis points to stand at 21.1% share. Meanwhile, in the U.K., Vype continued to gain share, and in France and Germany, it expanded its leadership position. Vype also remains the fastest growing brand in Canada. We are also growing volume share in THP. We recorded a strong performance in Japan with glo total nicotine volume share up 30 basis points to 5.4%. glo Pro has been an important source of THP growth, and the recent digital launch of glo Hyper has also been encouraging, with it already reaching 40 basis points of volume share after less than a month.
glo Hyper has also been soft-launched in Italy, Romania, Russia, and Spain, with good early results, and it will be fully activated in Japan in Q3. Modern Oral, we have continued to strengthen our global position with further volume share growth in Sweden and Norway. In the U.S., Vuse is holding share in the sub 6 mg segment at 29%, with total volume share at 9.5%. Our activation plans for Vuse in the Western states have been disrupted by COVID-19. Turning now to the balance sheet, we remain firmly committed to reducing leverage. We continue to expect strong operating cash flow conversion in excess of 90% for 2020 and to make progress over the year to reduce leverage. With the impact of COVID-19 lowering EBITDA growth in 2020, we now anticipate net debt to EBITDA to reduce to around 3x by end 2021.
To summarize, the business continues to perform well given the extremely volatile and unpredictable trading environment. Despite the unprecedented challenge we all face, we expect to deliver mid-single-figure adjusted diluted EPS growth on a constant currency basis. If FX rates were to remain as at June 5th, full year adjusted diluted EPS growth would face a currency translation headwind of around 1% at the half year and around 2% for the full year. We are delivering on our priorities. We are driving value growth in combustibles. We are continuing to invest behind this growth and in the new categories. We are transforming the business. In the context of a very challenging year, we are on track for a good performance and remain committed to our 65% dividend payout policy. Thank you. I will now open the call to questions.
If you would like to ask a question, please press star one on your telephone keypad, and please ensure your line remains unmuted. The first question in the queue comes from the line of Adam Spielman from Citi. You are now unmuted. Please go ahead.
Hello. Thank you and good morning. First of all, thank you for a very clear press release. I suppose I have two sets of questions. One of the question is really around this question about the lockdown impact versus the recession impact. In particular, you called out slower growth in emerging markets, and I'm talking about not due to the lockdown in South Africa, when you're talking about Malaysia, Vietnam, and Bangladesh. You say that you're not seeing accelerated down trading, but can you explain exactly what's happening there? It would have, I would guess at least, that with higher unemployment, lower wages, particularly for casual workers, you would see basically reduced demand, and so a little bit of color on that would be very helpful. I'm going to go to a separate question on glo, but we can come to that.
Okay. What we are seeing in those particular markets is pretty much the disruption caused by very stringent lockdown measures. You have to remember, a number of those markets are stick sales markets, when we have stringent measures like curfews that we saw in a number of markets, you just promote a massive disruption of the distribution and sales of these products in the markets. Another factor is that a lot of the consumption in this market are social consumption. You go to Vietnam, for example, one of the markets that you are referring to, a number of the consumption happens in HORECA pubs, restaurants, where people get together and smoke, and they were all completely shut down. Some of those measures took longer than we were expecting. In that context that we highlight some of these particular challenges that we face and we are still facing some markets.
I suppose the follow-up question to that is, to what extent are you concerned that with lower income, particularly for informal workers, particularly in emerging markets, we'll start to see an impact on demand in the second half?
I think that the best way to approach that is reflecting our portfolio. This is not the first recession that we have been through. We had something similar or the same dynamics, let's put it that way, 10 years ago. From there to today, I would guess that we are much better prepared today, because at the end, we have a much more balanced portfolio than at that time. Our Global Drive Brands now represents something like 68% of our total portfolio. We have very strong brands in each of the different price points. We have very good brands in low and value for money. We are well prepared in that aspect.
The other point that we'll be making use more and more is the capability that we have created over the last few years in terms of revenue growth management and having database of consumers' information with price elasticity that we can price differentiate by different geographies in a particular country. We have been doing that very extensive in developed markets like Australia and the U.S. We can even price differentiate by post code, for example, in some of the cases in those markets. We are rolling out this capability now for emerging markets as well. On top of that, you have to consider that a lot of support is being given fiscal stimulus by governments. We have in some of those markets, a big problem related to illicit trade. In some of those markets actually, we have seen a benefit of some of those lockdowns.
You go to Brazil, for example, where you know that illicit is a persistent problem for many years now. Most of these products come from Paraguay, and with the border closed and the lockdown in place, we are seeing actually an increase in volumes in Brazil markets as a consequence of that. There is a lot of different dynamics in place.
Okay. Thank you very much for that. Separately, can I turn to glo Hyper? Is there any color you can give on it? Specifically, it's always seemed to me an incredibly important launch for you. Is it living up to expectations? Is it exceeding them? Any color on glo Hyper would be very appreciated. Thank you.
Yes. The answer is yes. We are very excited with this launch. We just achieved, I mentioned 0.4 up to the reading that we had end of May. The latest reading actually is 50 basis points growth in something like six weeks and just on a digital activation, because we were most of the time in the emerging plan in Japan, so we couldn't really activate properly the brands. All the insights that we have been received from consumers in terms of conversion, in terms of satisfaction, they are much ahead of the current products that we have in the market. Even glo Pro, which was a rather a bigger upside compared with the previous version of glo. We are excited about this launch.
We are rolling out now in place like I mentioned before in Europe, in Russia. The only problem that we are facing is, as I mentioned, is the disruption in terms of activation. From one side, it help us to be even better in terms of our digital activation. On the other side, it's difficult sometimes to convert consumers when you don't have the pop-up stores open or your stores open, and it's very difficult to contact consumers more directly. In terms of the product we believe that is a really a step change from what we had so far.
Okay, thank you very much. That's all from me for now.
Thanks. Bye.
Thank you. The next question comes from the line of Gaurav Jain from Barclays. You are unmuted. Please go ahead.
Thank you. Good morning.
Good morning.
I have three questions. My first question is on South Africa. Can you please dimensionalize the impact of that? For how long are you factoring in the ban in your guidance on volumes, on revenue, on EPS?
Gaurav, South Africa, by the time we released the RNS in April, we were expecting the ban in cigarettes and tobacco in general to be lifted by the 1st of May. This had been announced previously by the president of the country. A few days later, we saw that by the time we were reaching that 1st of May deadline, they decided to extend the ban and there is no sign, as you know, to be lifted. We are now in level three. We were expecting them to release level three from 1st of June. This didn't happen. We are now the only product actually that is being banned in South Africa. As you can imagine, the illicit trade took over the country. They had already a previous problem with illicit trade.
We don't mention financials on individual markets, but just to give you an idea, and you can work backwards from there, the government is losing in terms of tax collection, approximately ZAR 1.5 billion on a monthly basis from the industry. This is at current exchange rates approximately GBP 75 million. It's in a very needed period of time. In our projections, we are giving a range exactly to cope with this type of volatility. It's difficult really to predict at this point in time precisely to have a specific date where we're going to resume to sell the product. That's the reason we provide a range from now on.
Sure. That's very helpful. My second question is on the U.S. market. You have upgraded the volume guidance to -4%, and you are highlighting that till May volumes are -2%. This will imply that 2H volumes are down -6% when comps are very easy. Why wouldn't the volumes be even better than minus four? What are the factors we should keep in mind?
Look, the U.S. market, you know that the first half was impacted by consumer pantry loads in Q1. We saw some of this behavior carry on just even after March, because of the uncertainties in terms of lockdowns in a number of states. The whole situation is easing, we don't know exactly how the consumer buying pattern will be moving forward when we have the lockdown eases. The other point that you have to bear in mind is that we had an additional trade day in the first half of the year, which we're not repeating the second half.
We note that there is a lot of unemployment in the U.S., but at the same time, there is a lot of fiscal stimulus and there is a lot of reduction in terms of discretionary consumption from consumers, because when they were in lockdown, they actually didn't have the chance to go out and go to cinemas and restaurants and so on. It's difficult to predict exactly what will happen in the second half. If you go back to normality, then we would expect some of this fiscal stimulus will not persist longer. Again, the consumers will have other competitive expenditures to make it. A big unknown is around the price increase that we might see in the second half as well.
There are a number of factors now, and given the circumstance that we are living around COVID-19, that makes us very difficult to predict. You are right, we'll be finishing the first half in a better position than the full year guidance. The second half is basically to be prudent to deal with the unknown of all those factors that I just referred to.
Okay. That's very, very helpful. My last question is on the EU menthol ban, which came on 20th May. Have you seen any major impact on markets like Poland and U.K.? Any major shifts because of availability of competitor heat not burn products and menthol variants? Anything that you can shed light on?
Yeah. It's very early days, as you mentioned. It just came through. We haven't seen any major change. We are for selling a lot on terms of vapor. I was referring to the vapor industry not coming back to the previous levels that we saw by summer 2019 in the U.S. That's not the case in the case of U.K., France, for example, that the industry has already grown beyond what we saw in 2019. Internet sales in vapor also has more than double in this period of time, and we are very pleased with that. This could well be also being boosted by the menthol ban and the people searching for different alternatives, consumers search for different alternatives. It's difficult now at this point in time to know exactly what in short period of time.
One market that I would like to point out that has introduced menthol ban since beginning of the year is Turkey, as you probably know. Our brand is doing extremely well, and that's another reference point that we have. We always quoted Canada before. We said that the level of retention very high from consumers because they first start smokers and then they smoke menthol. The level of retention in Canada was more than 90%. The same happening in Turkey. Our share actually is growing strongly in Turkey at the back of Kent. We are very pleased with the performance in that particular market. We are now number two in the market.
Well, thanks a lot.
Thank you. The next question comes from the line of Owen Bennett from Jefferies. You are unmuted. Please go ahead.
Morning, guys.
Hi, Owen.
Just the one question from me. I was just hoping to get some more specifics on the slower new category sales development to the GBP 5 billion gain push start. It does appear you're blaming the U.S. tax-free development. I was just wondering, is that the case and is it solely vapor in the U.S.? Are you making any changes to your assumptions around market share development in vapor in that market as well?
Yeah. There are a number of factors playing in that space, Owen. We said at the year-end results that being a new category and unregulated category, there were a lot that we were learning from that category. We were seeing disruption from regulatory front, and we highlight that at the year-end results. One that comes to mind is Modern Oral in Russia that were growing nicely. As Robert said, we had a local competitor introducing a product which was 15x more strength in terms of nicotine than ours in a completely responsible base, and the government decided to ban completely the category. Now we are engaging to regulate the product, but this takes time. The same happening with vapor in Mexico at the back of the EVALI crisis in the U.S. The regulatory volatility we pointed out at the year-end results.
The second one, we were red facing in February the disruption in terms of supply chain coming from China. Today it's completely come back to normality. At that time, we have been disrupted, and then we faced some out of stocks in some geographies that has now completely been recovered. On top of that, we were seeing all these activations issues that we are having and the launch plans that we have mainly on the THP side. The vaping market that you are referring to in the U.S., it's right, hasn't come back. Just to give you some numbers today, we still are trading on average on a monthly basis something close to 15%-20% lower than the peak that we saw in 2019. We expect the industry to recover.
In our projection, we want to finish the Q4 40% higher than we started the Q1 of 2020. Overall, this year means that we probably expect an industry down around 9% in 2020. We are not seeing the same outside the U.S. Canada actually is another market. I just quote U.K. and France, Canada is another market that we are seeing higher industry volume compared with the previous year. The U.S. is a big market, as you know. When you pull all this together, we were saying that we'll be at lower growth this year, and the consequence is basically one year that you are losing, and the adjustment that we are make to the targets just reflect that. The more important thing is the underlying performance that we are having.
We are growing in every single category, in every single market year to date where we are present with no exception. We extremely pleased with the performance of Vapor. We have more than 2x our share in the U.S., which is the biggest market, and we are very confident that we will continue growing throughout the year in the U.S. We are also doing extremely well in Canada. We are just increasing the leadership in France, and we are doing well as well in Germany with leaders in closed systems. The U.K., we are solidification our performance. Vapor for us is doing extremely well. Modern Oral continues to grow. In the Nordics, you saw our performance is around 14% share in Norway and 4% share in Sweden. Very strong holds of traditional oral.
We are doing pilots in emerging markets, going for sachets, for example, that you can sell less quantity instead of a box of 20 nicotine pouch, you can sell two, three, and make it much more affordable for markets where stick sales of cigarettes is more predominant. THP, we have already reached more than 2%- 2.4% in Moscow and around 2% in cities like Kiev, and we're doing extremely well in Kazakhstan with more than 30% of the segment share in Kazakhstan. We have glo Hyper, like I mentioned before to Adam, that we are very encouraging with the first signals that it relates to. One point that I would like to make that to all of you is would be easy for us to actually to hold on to the high single-digit figures and that we were talking before.
I don't think that this would be the right thing to do for the business. We have a growth momentum. We want to continue growing, and we want to continue investing in the new categories. The reason why we are making all these adjustments is basically to get out stronger than we get into this crisis. I think that that's what will be recognized once we go through this.
Cool. Perfect. Very helpful. Thanks very much.
Okay.
Thank you. The next question comes from the line of John Leinster from Societe Generale. You are unmuted. Please go ahead.
Thank you very much. Good morning, gentlemen. I have a couple of questions. One, you've obviously mentioned that currency translation is a 2% headwind. Is there any significant problem in terms of currency transaction, or is that something that is likely to come through next year? Secondly, on the cash flow, you've mentioned the sort of 90% cash conversion ratio this year will be pretty much unchanged. Are the components of that also pretty much unchanged? Is there any variations or would you expect perhaps working capital to be a slightly more negative, but reductions in CapEx? Is that frankly just completely unchanged on prior expectations? Thank you.
Okay. Regarding our currency transaction, we will have a higher currency transaction hit this year. There's no doubt about that. Last year, we had GBP 130 million. We expect at least to double that this year. We are saying that we have much less exposure to currency transaction than we were three years ago because of the footprint of BAT, now more exposed to developed markets and less to emerging markets. Remember that emerging markets is more or less 25% of our earnings. The level of exposure that we have today is much less. With some of those markets we hedge, and you rightly so, you'll be feeling this impact more throughout the next 18 months or 12 months. We'll be recovering through price like we always did. All our numbers, I would like to highlight, we don't eliminate transaction effects.
All the numbers that we quote includes the transaction effects because we believe that's the right way of doing that. The message here clearly is that it's less exposure than before, and we'll be managing through hedging some of those markets very difficult to hedge, and this will be managed through pricing over time. In terms of the conversion, we worked on CapEx, and I mentioned that last year. We were bringing CapEx to the level of depreciation, so there will be no leakage there. This clearly helps. We will have some pressure in terms of working capital, mainly for the half year, although the half year numbers, I wouldn't expect the conversion to be much dissimilar to the previous year. We managed to offset that higher supply inventory. Basically, the investment that we are making working capital to cope with all these uncertainties coming from COVID-19.
We managed to offset that by other measures in the working capital. Conversion for the half year will be pretty much similar to one year ago. Then for the year, we will be managing through CapEx. That will be another lever. We are always reviewing and putting a lot of emphasis, as you can imagine, because our focus has been pretty much on the cash generation to reduce the debt and be able to deleverage the company as fast as we can. We always try to find ways to offset any type of pressures, so it will not be different this time.
Okay. Thank you very much.
Thank you. The next question comes from the line of Alan Erskine from Credit Suisse. You are unmuted. Please go ahead.
Hey, good morning, everyone. Two questions from me. The first one is a big picture. Clearly, COVID-19 has a lot of uncertainties attached to it. A number of consumer companies chose, as a consequence, to withdraw guidance. You didn't, yet six weeks later, from the AGM statement, you've had to revise guidance. I guess my question is, can we feel comfortable that in this new guidance that you've built in some, shall we call it wriggle room, for unexpected events? I think Adam mentioned earlier, maybe down trading getting worse. We can feel comfortable that in September or whatever, you're not coming back with another revision to guidance. That's my big picture question. Just my second question is, when I look at the impact on volume, as you highlight, it's largely related to emerging markets.
If anything, your U.S. business seems to have been a bit better than expected. I'm just slightly puzzled why the volume impact is also dissimilar of the revenue impact. Are you not seeing a positive mix effect from the way the volumes have played out? Thank you.
Okay. Look, Alan Erskine, yes, you are right. We decided to keep the guidance. We were one of the few to do that. We believe that this would be easier to be more transparent for our shareholders and investors to understand exactly how the impact of BAT was facing from COVID-19. By the time we released the guidance in April, we had a limited picture, mainly on the emerging markets. The situation deteriorates, unfortunately, over the last 6 weeks. We spoke about the markets in Asia, but the same happening in Latin American. Argentina, for example, the lockdown in the factory took longer, the several weeks, and Mexico is still closed. We had to activate a number of contingency plans in those markets, and that costs more money in terms of supply chain costs and so on and so forth.
As I said before, we could stick to the guidance that we provide, but we don't think that this would be the right thing to do for the business. At the end, we are very conscious about continuing investing to leverage the momentum that we are facing many new categories and also in combustible. Doing the right thing for the business in the medium term. The algorithm that we have hasn't changed at all. Our growth of algorithm is exactly the same. We have toned down a bit this year to cope with this unprecedented circumstance that we are facing. All the focus that we have in terms of the leverage, in terms of the dividends, in terms of being able to grow new categories, to continue very healthy business in combustible, these are all there. This hasn't changed anything.
In terms of your questions, it would be much more comfortable to have taken it out, because then you don't need to actually explain anything in terms of the guidance. We believe that to provide this transparency is the right thing to do. We create some wiggle room in terms of the range that we provide. For sure, that we are seeing and we are assessing a very different pattern between markets at this point in time. Developed markets, the likes of U.S., Europe, Australia, Japan, Canada, very different in terms of impact, in terms of from the emerging markets. The volumes are pretty much in that emerging market space.
If you see the volumes, if I break down these different patterns of volumes markets, you'll see that the developed markets, the reduction is pretty much in line with historical levels. The big hits coming from the emerging market, given everything that I have explained so far. I cannot assure you that's the case, because we are in a very unstable situation. We don't know if there will be another peak happening in terms of the virus in some of those markets and very draconian lockdowns again. With that apart, we believe that we create another space in this range that we just updated the market with. In terms of the volumes, yeah, the price mix is strong. Some of those volumes are very rich volumes, like for example, GTR.
They have a very big, heavy mix for us in terms of value and hits us in the turnover as well. The 3%, I think that the 3% impact that we are seeing, we could easily distribute this in terms of one-third related to the impact of the GTR that we had quoted before and another third in terms of these emerging markets that we saw the difficulties in terms of restriction lockdowns in the stick markets, in the social consumption that reduced in the likes of Asia that I referred to. Another third in the likes of extended lockdowns or even distribution bans in South Africa, Mexico, and Argentina. That's where we get to the 3% overall gross number.
We are highlighting a lower number than that in our targets, because we are seeing some of that being offset by the performance in developed markets. I think that's more or less the story that we come up with in terms of this revised guidance.
Super, thank you.
Thank you. The next question comes from the line of Alicia Forry from Investec. You are unmuted. Please go ahead.
Hi, good morning, Tadeu. I'm just wondering, I appreciate it's maybe difficult for you to quantify, but I'm just curious how much of your business globally you think might be exposed to social environments like the HORECA channel. Just curious how that might impact your business during this time, how meaningful it is. My second question is on the margin headwinds during this disruptive period. I understand that the headwinds that you expect are primarily due to your decision to continue investing in the new categories business through the slowdown. But there's clearly been an increase in costs in the tobacco side of the business as well. I was wondering if you could comment on those costs that you're seeing in the tobacco business associated with the lockdowns, and how quickly might those fall away as lockdowns ease. Those are my questions. Thank you.
On the margin side, for us to be able to, from 1- 3 MTO, deliver the mid-EPS target, we will need to get a good operating margin growth. We are expecting a good operating margin growth, because we have been working in terms of making the company more agile, faster, empowered. This was all done at the back of Quantum that we started last year. Quantum, as I mentioned at the beginning of the year, is bringing good savings this year. It's GBP 300 million. We also have a Quantum 2 for 2021- 2022, we are trying to bring forward some of those savings as well, as much as we can. This will help us to continue investing while being able to cope with some of those extra costs that I was referring to.
Supply chain clearly is an extra cost, not just in terms of working capital, but in terms of logistic costs, because when you have, for example, to activate a factory in Chile as opposed to supply the Argentina markets or in Mexico that we have our factory supplying Canada, and we have all of a sudden to supply from our factories in Brazil and Chile. This brings costs. This brings extra costs. We will be able, with this exercise that we were very fortunate to start last year, to cope with that and still be in a position to continue investing behind the New Categories and deliver this revised guidance that we are now making public in the market. In terms of the HORECA, all the emerging markets consumption is a very social event. I was quoting Vietnam, and these are the place where we suffer most.
What we have seen is that little by little, these spaces are being opened up. You saw, for example, in Europe, France, for example, you saw already cafes in place, and Italy is the same, it's happening now. I think that it's not a major concern at this point in time if things move in that direction. For sure, nobody knows if there is another spike coming in or not, but some of those emerging markets are very subject to the HORECA channels. In other markets, like U.S., for example, it's pretty much convenience stores where 7% of the cigarettes are sold, so it's less of a problem in that particular space. Again, that's why you see a lot of differentiation between the patterns that we have been so far seeing in terms of volumes in developed, mature, and emerging markets. This is part of the explanation.
Okay, thank you. We'll move on to the next question from Nico Von Stackelberg from Liberum. You are unmuted. Please go ahead.
Hi, good morning. Just a quick question on the guidance for the top line. I remember the guidance was at the lower end of the 3%-5% range, let's call that 3.5%. You say there's around a 3% headwind on top line due to COVID. That suggests you end up flat to maybe +1%. Am I right in thinking that? Why is the target 1%-3%?
Well, Nico, the target is 1%-3% basically for us to have space to face eventually some unknowns that given the circumstance that we are living. I cannot be precise in terms of turnover at this point in time, because at the end, it is still a lot of uncertainties out there in terms of the pace of recovering some of those markets that were badly hit. South Africa is a good example. I think that is the most extreme example where we are not being able to sell one stick of cigarette since the beginning of April. That is the only reason why we are saying that. The reason why we decided to revise it downwards, this guidance that we released at the end of April, is pretty much because of the extension of some of those lockdowns.
South Africa, I explained the situation there, but it's also happening in places like Argentina and Mexico, where we are still seeing the factory closed at this point in time, and some of the broader group of emerging markets in terms of consumption patterns related to, again, the disruptions in the lockdown. That's the reason why, because for the global travel retail, we are aware by April. We knew that some of the emerging markets were suffering disruptions that we have at that time revised the volume guided to minus 5%. The reality is that this impact in emerging markets was even bigger than we first thought.
Okay. Can I ask two other questions? One, I know there's a lot of uncertainty in the U.S. on pricing. Can you give me any feelers for what you expect in the second half and what you're specifically looking out for and how you think it plays out? Secondly, can I ask about the GBP 5 billion target for NGP revenue.
Do you think that's really incentivizing the right behavior to be pushing for revenues? I appreciate if you focus only on profits, it's not going to give a chance for this category to mature and to block them. At the same time, well, it would seem that putting a profitability target maybe five years out might help encourage investment in the categories that should reasonably deliver the returns on capital over time and not just pushing for sales at the end of the day. Do you have any view on that?
Okay, Nico. Look, I think that we cannot associate the GBP 5 billion push for one year with any financials decision. The reason why we are bringing down the target for NGP is exactly to create the space for us to continue investing. We are not compromising investments behind the new categories. We have to realize that those categories are very new to the world, some of them completely unregulated. What we saw in the U.S., for example, at the back of last year with this whole issue around the youth epidemic and all that, is just a consequence of an unregulated product. This has implications that is difficult to foresee. It's the same happening in the Modern Oral, when the local player goes then and commercializing in a very irresponsible way, a product that should never be in the market in the first place.
They are unregulated categories, and as a consequence, volatile, difficult to predict. This has nothing to do with our decision to invest more or less. We are continuing investing. We are continuing working hard in our pipeline. The whole organization is mobilized to make a step up in new categories. It's one of the priorities that Jack set up since the beginning. As I said, our underlying performance is very strong. Now, we have prudently moved this to 2025 as a consequence that we actually are facing a very difficult year, where there's slowing growth. It's a mathematic thing, you see what I mean? There's lower growth in one year, given the fact that it was very close already, will have an implication. It's just two. It has nothing to do with the mobilization of the group and has nothing to do with the decisions around investments.
We continue doing all possible to first improve the quality of our pipeline. I think that we are demonstrating this by the performance in the market. Second, we are working hard to get all the insights we need in terms of consumer to get even to promote a better efficiency in terms of market investments. We are getting better and better in that. Where we allocate our investments behind New Categories, we are making big inroads in that. Third, we are doing all the support necessary to create the global brands. We are seeing some migrations already happening in the Modern Oral space towards Velo. We have seen some migration happening now in Canada. We are just moving to Vuse. Things are happening as we said. We continue doing that.
I don't think that we need to link the GBP 5 billion 2025 to any financial space to our decision related to that. Be assured that the whole group and whole organization is mobilized to make it happen as fast as we can. On the pricing, it's difficult for me to make an assumption on what's happened. Last year we had three price, was a bit abnormal compared with the previous years. That was basically a two price pattern. We really have to see what happens in the second half. We probably have another price happening there. The fact is that the market is really strong as well, so we have to see how this pan out.
Okay. All right. Thank you.
Now for our last question in the queue from the line of Patrick Folan from Redburn. You are unmuted. Please go ahead.
Yeah, good morning, guys. Just two questions for me, please. Looking at the overall full year cigarette volume, value share grew less than volume share. Is that down trading? Is it geo mix or is it discounting? Secondly, you talked about the impact in emerging markets and considering the situation in Brazil, are you seeing any change in trading in Brazil? Is there a more pronounced illicit impact? Just those two things.
Okay. Let's start with Brazil. Yes, we are seeing year- to- date an increase in sales around 6% in the market, 6%-7%. As I said, this has also to do with the fact that in Brazil, although the COVID situation is really, I would say, hitting the country badly, we haven't seen these levels of disruption in terms of lockdowns that we saw in many other markets that we spoke about. In Brazil, we have this external supply of illicits coming mainly from Paraguay when you have the borders closure. You just create a disruption in that flow. This translates into more legal consumption in the market.
We are seeing an increase in volumes there, which will be also helpful for the government to reconfirm how important it is to take measures against illicit trade, because this is the immediate reaction that they face in terms of the tax collection increase, which is a very positive side. The price is just a consequence of the volumes being more focused. We are seeing more of the market share growth happening in emerging markets. One thing that is we are seeing every time there is a lockdown and the market comes back, we are able to gain a lot of traction. Because we have been planning ahead of that, and some of those markets, we have direct distribution, that's very helpful as well. We have a very strong plan to recover as much ground as possible.
This is paying off. You see most of this market share growth coming from the emerging markets. That's nothing to do with down trade. It's just the geographical way that is happening.
Thanks.
Thank you. There are no further questions, so I'll now hand the call back to Tadeu Marroco to close the call. Thank you.
Okay. Before I give my final remarks to you, the only comment I would like you to take with you, I think that we are living a kind of Darwin moment, where just the strongest will probably thrive in the future. BAT will be adapting, so what we are trying to do now is be adapting to that, and we will continue investing, and we will continue growth in this new normal. For us, the priority is continue growing our business and keep investing, doing the right thing for the business. I would like to thank you all for your time today. Just a few words for you in summary. We are a strong business. The environment is very unpredictable, as you know, but we are performing well against this backdrop. We are building a better tomorrow.
We continue to invest in the business in both combustible and new categories. We are delivering our own three key priorities. We are delivering value from combustible, we are driving a step change in new categories, and we are transforming the business. Despite the challenge we are faced with COVID-19, I'm very excited by the future opportunities for BAT, and our confidence is reflected in our continued commitment to our 65% dividend payout policy. I thank you again for joining us today. Look forward to speaking to you over the next couple of days, and of course, in July at our interim. Stay well, stay safe, and bye-bye.
Thanks.