Hello, and welcome to the BAT 2019 Second Half Preclose Conference Call. Please note this call is being recorded. I will now hand over to Mike Nightingale, Head of Investor Relations. Please begin.
Good morning, everyone. Mike Nightingale here, Head of Investor Relations. With me this morning is today, Morocco, our Finance Director. Welcome to our 1st pre COVID conference call. This is the first time we've held a conference call for
our pre COVID 3 year update, and we do hope that you'll find it useful.
Just before we begin, I'd like to draw your attention to the cautionary statement regarding forward looking statements contained in the trading update.
But I'll now hand over to Dave
to observe a few short words on current trading before we open it up to questions. Unless otherwise stated, our comments will focus on constant currency adjusted measures.
Thank you, Mike. Good morning, everyone, and welcome. I'm very pleased to have this opportunity to talk to you about how we are progressing 2019, and I want to thank you for joining us this morning. As you can see from today's announcement, the business continues to perform well. We are building on the good progress we made in the first half and continuing our journey to transform the business.
We are driving value growth in combustibles. We are investing to deliver step change in new categories, and we are transforming the business to create a stronger, simpler, more agile VAT. As a result, we are on track for one of our best financial performance for many years. We expect adjusted revenue and adjusted profit from operations to be in the upper half of our guidance range of 3% to 5% for revenue and 5% to 7% for operating profit. This reflects a good performance in combustibles where we are seeing share growth and strong pricemix as well as good growth in new categories.
As you know, we have increased our focus on value growth in combustibles. We aim to deliver superior and winning product experience whilst driving efficiencies and reducing environmental impacts. We have rationalized and simplified the portfolio. We are focused on the global strategic brands and investing in key markets. This is driving value share, which is up 20 basis points with the strategic brands up 55 basis points.
In addition, I'm pleased to say we are back to growth in volume share, which is up over 10 basis points having been down early in the year. We continue to expect industry volume to be down around 3.5% this year. BAT full year volumes are expected to be broadly in line with the industry after adjusting for the continued impact of Egypt and Venezuela and a 60 basis points impact from a one off stock reduction in Russia. The good price environment has continued, and we expect full year combustible pricemix to be in excess of 7%. In the U.
S, we are really pleased with how the business is performing, and we expect constant currency revenue growth to be within the 3% to 5% group guidance range, with pricing and value share growth have more than offset the industry volume decline. U. S. Value share is up 30 basis points. We have worked hard to position ourselves and are growing in all the right areas, consolidating our leadership position in Mantle and Azul Small Business Under Turkey and continue to grow our share of premium.
We continue to expect U. S. Industry volume to be down around 5.5 percent in 2019 with the timing and frequency of pricing during the year being one of the main drivers as well as the impact from the growth of paper. Although the paper market has lowered, we are not anticipating a significant fallback to cigarettes in 2019. We would expect U.
S. Warrants to be down around 4% to 6% next year, depending mainly on pricing and the regulatory environment. Turning now to new categories. Our approach to multiple categories development is underpinned by robust price product stewardship, age restricted assets and responsible marketing practice. We expect to deliver good full year new category revenue growth at the lower end of our 30% to 50% guidance, reflecting the negative U.
S. New flows. The vapor market has slowed in the last few months, with industry vapor sales should be paid in the U. S. Down around 25% and consumer offtake down 10%, although we have seen some signs of recovery in the most recent data.
New category growth, excluding U. S. Vapor, is on track to deliver in the middle of the range, in line with our guidance at the end of this. In the U. S, deals also continues to grow and has reached a value share of 11.1% in October, driving a value share of 70.5 percent for their overall Pius family, which is now the number 2 in the market.
At present, Alto is the only top 5 brands growing volume in declining markets and has more than doubled its uptake share of replacement cartridge in the second half. I'm also pleased to say that we just received confirmation from the FDA that our VuzuSole PMT application has been accepted for scientific review. Vyatt continues to do well in the 2 largest markets outside the U. S. Value share reached 11.8% in the U.
K. And 19.2% in France in October with eBird now successfully launched in both markets. In Canada, Vipe is the fastest growing brand, reaching a value share of 27.6% in October, up 5 0 7 basis points since July. In THP, Glo is holding share in Japan at 4.9% year to date. As you know, we recently launched our new Glow Device, Glow Pro, Glow Nano and Glow Sense together with a new range of consumables.
We have yet to see the benefits of this in our shared data as distribution for NAND and PRO is still building and we have only just launched the GLOSESS. However, early indications are encouraging. For example, consumers have told us they really like the benefits of our induction heating technology. They like the fast ramp up time and the pause button and appreciate the improved sensorio experience. It's a good performance in a very competitive market where we have seen a lot of new product launch from competition in the first half.
Importantly, we continue to grow share in the overall nicotine market in Japan strongly, and we have reached 18.4% year to date, up from 16.3% last year. In Russia, GOL has been demonstrating consistently improving performance with share of Tabakan equity now over 1% in key cities, including Moscow. In modern oral, Vila's rollout in the U. S. Has now expanded to 75,000 ounce wise.
The brand has already reached a category 1 share of 9.2% in October, with shares in excess of 20% in 9 states and more than 10% in a further 9 states. Lipti and EPOC also continue to do well, consolidating their leadership of the modern 2019. Moving on to the balance sheet. We are determined to reduce leverage. We remain committed to a full year reduction in currency neutral adjusted net debt to EBITDA of 0.4x and are on track to deliver full year free cash flow after dividends of 1,500,000 dollars To summarize, the business continues to perform well, and we are on track to deliver on our commitments to high single figure EPS growth on a constant currency basis.
If FX rates were to remain as at November 25, fully adjusted diluted EPS growth would benefit from a current translation tailwind of around 1.2% this year, with this becoming a headwind of 2% in 2020. We are expecting a strong performance in 2019, driven by good revenue growth and continued share gains in combustible, together with good revenue growth across our new categories. Thank you, and I will now open the call to questions.
Our first question comes from the line of Adam Steelman at Please go ahead. Your line is open.
Thank you very much and good morning. And thank you also for such a detailed press release. My question concerns the sort of definition of market share in particularly, I guess, in Glow in Moscow and also for Velo in the U. S. So you talked about over 1% market share for Glow in Moscow and about 9 Or is it sort of share Or is it sort of share within the stores that you are selling?
Because obviously, sometimes these definitions can change. That's my simple question or my first simple question.
Okay. Look, this is shipment share of the whole country. It's not where we just stay the shipment share of the place where we are talking about.
Fine. Perfect. Very simple, Victor. Yes. Am I correct?
The way I think about the whole shape of this set of reports, I think on the one hand, clearly, volume in Russia or shipment volume because of the destock is getting weaker and Egypt and Venezuela. But on the other hand, sales growth overall, constant currency is fine. And that suggests to me that perhaps, if anything, the U. S. Is getting a little bit stronger as we come to the year end.
Is that a fair point that the U. S, if anything, is getting a little bit better for you and that offsets is offset by slight weakness in other markets.
Yes. The U. S. Markets specifically, we are keeping our guidance of 5.5% for the industry decline. We have seen recently a small uptake in terms of volume in cigarettes.
We are not making any change to the guidance still, but this can be well be a consequence of timing of pricing. So we are yet to see a major relevant impact coming, for example, the news flows from vaping. We haven't seen that yet. That's why we are keeping our guidance at 5.5. Percent.
Now saying that, we are very pleased with the results we are getting from revenue in our U. S. Business within our range of 3% to 5% as we stated in the statement this morning. And this coupled with good pricing and share environment across the world is giving us the upper end of our guidance this year. In terms of volumes, I posted in the interim is about Asia and Venezuela.
Just as I remind Venezuela, I think that we all know what's happening there, and we basically have ownership or we control the market. We are leaders in the market, and we suffer most because of the deterioration of economic situation there. In Asia, we had a health tax that's impacted the lower end of the portfolio where we are more present. And I mentioned those two points there. In Russia, the reduction in distribution inventories has to do with the fact that we are looking, as I said before as well, to all the same opportunities we have in terms of cash management initiatives.
One of that is review improvement in supply chain. We saw an opportunity happening from Russia as a consequence of the closure of the VAT factory in Sarsop, And this will translate in some impact this year. That's why we are flagging that.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Gaurav Jain of Barclays. Please go ahead. Your line is open.
Thank you. Good morning and thanks for the detailed press release as well as the conference call. So I have a few questions. Number 1 is on the 2020 U. S.
Volume outlook. Does this include any impact from minimum age 21 regulation?
Well, the idea behind the range of 4% to 6% is exactly to cope with those uncertainties. And the reason why we have mentioned the drivers of uncertainties that on the regulatory front, you're absolutely right, 21 age, minimum age is present as we speak. By January, it will be around 40% of the sales in the U. S. So we don't know if there will be a federal legislation that will increase this percentage and by when.
And so we want to try to flag this possibility. That's the reason of the range. There are other regulatory plans that can impact positively the market is on the vaping side depending on how more the enforcement will be in terms of the MTA coming in May plus the guidance that we expect from the FDA as an entry into the PMTA, we still don't. We are uncertain about that. So I think that on the regulatory front, these are the major swings and hence the range.
The other elements of the range has to do with the timing of pricing, as you can imagine as well, and the whole macroeconomics like gas price and the macro itself.
Sure. That's very helpful. Now second is the guidance for new category revenue for 2020 and longer term. Your guidance is 30% to 50% for the next few years. And we yet find that every few months, it's very hard to forecast what's going to happen in the U.
S. Vapor market. So is there an opportunity for you to reframe the way you communicate the new category guidance to the market?
Yes. Look, I think that's more important is the ambition that we have set of $5,000,000,000 revenue by 2023, 2024. And this, we are sticking to that. For sure, that's to get to that position. This will require between 30% to 50% growth on average.
But you are right. One thing that we have learned is that it's unpredictable. The U. S. Is just showing that for us.
It's hard to forecast on the short term. You're absolutely right on that. Depends on regulatory framework. Depends on consumer acceptance. But our ambition is completely unchanged, and we are confident that we are doing the right investments in consumer insights.
We are doing the right investments in terms of expanding the building. And we have a lot of plans coming through in 2020 in terms of new launches. And we can provide a bit more detail in 2020 if necessary. But the bigger picture is the ambition to deliver $5,000,000,000 And we are very, very happy with the performance that we have underlying in terms of vaping. You saw the statement that we released today.
We have more than doubled our share in Vuzhou over the last 3 months in the U. S. We are doing extremely well with equivalent of outages e poisoning in Canada, in France, where we are now market leaders in the U. K, which are the biggest marks in vaping. We are making very good in growth in terms of modern oral, not just in U.
S. But outside the U. S. As well. And we are increasing our competitive position to HP with the new launches.
So that's what matters. Our ambition continues, our commitment, our levels of investment, and we want to get to the $5,000,000,000 in 2023, 2024.
Sure. And if I can ask one last question. I believe you haven't really shared your capacity for Velo so far and what the capacity and distribution plans can be going forward. So can you shed some light on those?
Yes. We don't have any constraint in terms of little capacity. We have, as I said, now be present in 75,000 stores. By the end of the year, we want to be above 100,000 stores in view. We have been setting our capacity to be able to cope with all this demand and in terms of medium cans, and we are not expecting any type of restrictions from that side.
Great. Thanks, Ed. Thanks a lot.
Thank you. Our next question comes from the line of Alan Erskine of Credit Suisse. Please go ahead. Your line is open.
Hi, good morning guys. Yes, just two questions from me. One is on the net debt to EBITDA guidance. You're saying that you still expect it to be down approximately 0.4x, excluding the impact of FX. If the exchange rates stay as they are, if sterling stays at 1.28, 1.29, would that also be the case in reported terms?
Or might it even be more favorable? And my second question is just on the pricemix benefit of in excess of 7%. Can you give us some idea of what the geographical mix component is within that? Thank you.
Yes. Okay, Alan. Net debt is 0.4x FX. You are right. If the currency stays, it's a big if, no?
It's very unpredictable, and you'll note that this needs to happen on the 31st December. But if it stays around the 1.5, we are in the range between 0.4 to 0.5. So we'll probably be seeing some uptick $0.4 guidance FX. And then in terms of the price mix, we are facing a positive geographic price mix. We are basically seeing a bit shorter than 1%, something close to 0 point 5% on geographic mix.
And it's basically a consequence of us making big inroads in the likes of Japan, for example, and which is something that has changed over the previous years where we used to have Brexit mix, and we are very pleased now that we have upside to come from that. Thank you.
Our next question comes from the line of Alicia Sheree of Investec. Please go ahead. Your line is open.
Hi, good morning. Just a few questions from me. One, you mentioned some recent improvement in the U. S. Vaping market.
Just wondering if you could sort of flesh out a bit what you're seeing there, what your current assessment is of that market? And do you think safer products in the U. S. Can see positive volume growth in 2020, assuming approval from the FDA come through with limited disruption business? And then secondly, I was wondering if you could discuss in heated tobacco, what you've seen as far as pricing development in markets where GLOW and IFOF are competing against each other?
That would be helpful.
Okay. So just coming to your first question. Yes, we saw a reduction in terms of sales to retail because the problem that we saw in the back in U. S. Way has basically driven by both consumer uptake and retail confidence.
In terms of sales to retail, I mentioned volumes in terms of cartridge comparing the position that we had in the middle of the year that was before all these new flows coming through the market, we had a decline around 20% to 25%. And we are seeing recently a recovery around 7% when you compare the first positions of November compared with October. So we are seeing some recovery from that. For sure that we are performing better than that because we are gaining share in that depressed industry. In terms of your question around the FDA, yes, it's still very uncertain, the positioning of FDA.
We are still to be seeing what will probably materialize from that. We are trying to engage as much as we can with FDA. And but one thing that we are very confident with is the fact that we have received the approval from the FDA for our 1st submission of Vuz SOLO for scientific review. This is quite important for us in terms of our portfolio of papers in the U. S.
And we have to bear in mind that all types of guidelines that the FDA will be issued to address mainly the youth epidemic, which we fully support and endorse. This will be entering steps until we get to the May 2020 with PMTA coming through. So that's the major impact on that. Now your second question, can you remind me, Alicia, on the second question was related to what Sure.
I was just wondering about in heated tobacco, in markets where as well and iClus are competing against each other. If you could update us on how pricing has evolved on heated tobacco in your experience thus far?
Yes. Look, this depends this varies a lot and depends on the market. If you take Japan, for example, we have more than one price position in the market. We have some of those products positioned in the premium of the market, some more in the work of the markets, in the weighted average price of the market. And if you see outside Japan has been below a bit below premium or on the average of the price.
We are trying to compete in those price positions with IQ. We are not seeing much dissimilar pricing between us and them. And I think that this has been very, very stable over the last few months, I would say.
Our next question comes from the line of Samet Sighin of Morgan Stanley. Please go ahead. Your line is open.
Good morning, guys. Just two questions from me. 1, on the coming back in the U. S. Volumes and your expectations for 2020 and your range of minus 4% to minus 6%.
So can you just walk us through why do you see the top end of the range being favorable and impacted by PMTA, please? And the second one is on your NGP guidance, which you have longer term of about $5,000,000,000 by 2023, 2024, how much of that do you see coming from the U. S. Overall?
It's nice. Look, we always said that the PMTA will create a compatible space between $1,000,000,000 to $1,500,000,000 in the U. S. We saw by our own experience that how cumbersome can be the process of generating all the scientific material to get through the line. And it's not as you know, it's not just the science that will be important here, but also marketing practice.
So we believe given the timing resource, physical resource in terms of knowledge and also financial resource that a number of the current players will probably not be continuing in the markets after this guideline is established. So that's why it depends a lot in terms of enforcement in our perspective and also depends on what will be done until there in terms of the guidelines that the FDA is supposed to be releasing. That's the level of uncertainty that we have that could have an implication FMC markets, and that's the reason why we are putting this range. That's basically the reason of the range. In terms of the $5,000,000,000 this will be a combination not just about geography, but will be a combination of categories.
And as you can imagine, this evolves in a very frequent basis. As you launch new products, you'll see attracting to consumers and it's very hard to predict necessarily by market and by category where it's going to land. For sure that we keep saying that we have invested a lot in terms of consumer insights. That's the most important thing to be able to navigate into these multi category strategy that BAT has. There is a lot of insights and foresight that we are generating that we have invested heavily over the last 12 months.
So we have very good information of each category, and that's what defines us in terms of resource allocation, where we deploy our investments. But for sure, if you see after we are in a market with a one category, a bit more traction than we were expecting, we're going to invest more. And this necessarily probably will make this as a kind of a change in targeting within the €5,000,000,000 But all our indications, it shows that it's that's the number that we'll probably be related being able to achieve, which will mean for us a number of posts above 20% of our revenues coming from new CapEx.
Thank you very much. Just going back to the first question on the numbers and volumes, does that mean that you expect from the PMTA process, some migration of consumers back in to the cigarette fold from NGP?
Well, in the U. S, 40% of consumers are dual users between vaping and cigarettes. I think that's what you could say depending on how hard is the offers in the market for vaping that you'll probably be seeing less outflow of consumers from cigarettes to vaping. I think that that's the issue might happen depending how the regulatory environment will impact the market.
Money. That's very helpful. Thank you very much.
Okay.
Thank you. Our next question comes from the line of Nico Von Zeklberg of Liberum. Please go ahead. Your line is open.
Hi, good morning, gentlemen. Just my first question, please, on the illicit trade. Do you have any callouts by market on where the illicit trade has been particularly severe? And then secondly, I'm just trying to back into your free cash flow before the dividend. So could you give me a rough steer on where you hope the dividend growth to come out for the full year or vice versa?
Could you give me a rough indication of where you see free cash flow ending up before the dividend? Thank you.
Hi, Nick. The Dutnot spray, the Dutnot spray market has actually increased. We have increased overall in 2019. And this is driven by markets like, for example, that has a big wave in the markets like, for example, Ukraine, the likes of Russia and the likes of Pakistan. And but we are saying that.
We're also seeing decline in markets where for us, we are overexposed like South Africa, which is a good news. For the first time after many, many years, we have seen improvements in glutamic space in South Africa in particular. As a consequence of that, we will be growing share, we will be growing NCO, we're growing profit in South Africa and which we are very pleased with. The other market which is very relevant for VAT is Brazil, as you know. And Brazil does not pay has been growing fast over the last few years.
And given the new government and the new direction in terms of enforcement, for the first time after many years, we are seeing the NP growing in the low low and low single figures with a good expectation for the next year although the economy in Brazil starts to picking up again. So overall, it's a story of increasing the NPE, but where we are most over exposed is a good story for us. Good. Talking about the free cash flow, yes, we set up a dividend to that will be 1.5 hour dividend around $4,800,000,000 and you can have from that the numbers are before dividends. And this is part of our strategy to delever the company.
As you know, we are putting a lot of focus in terms of CapEx that I mentioned before, working capital, conversion, operating cash conversion rates, we expect to be north of 95% moving forward. So these are the strengths of the balance sheet. As you know, it is a very cash generative company. And the other thing is that we have a very good match between the currency breakdown of our debts and the currency earnings today. And of course, the company today is very different than what it used to be a few years ago after the acquisition of Gray Mills because our exposure to emerging markets financially in terms of earnings is much less than it used to be, which put some more strength in terms of our balance sheet.
Thank you so much.
Thank you. And our final question comes from the line of Ray Viam of SPG Securities. Please go ahead. Your line is open.
Hi, Taro and Mike. I'm just curious if you can maybe just elaborate a little bit more about the trends in Russia. I mean, first thing, I just want to clarify, I mean, this 60 basis points of reduction that you're talking of, so my calc's sort of indicator is around about 4,000,000,000 sticks hits in the second half. And then related to that, I mean, obviously, it looks like tobacco heating products are making good growth in Europe as well as in Russia. So I just want to know if you can just share a bit on your plans specifically in Russia.
I mean, if you look the trend in Japan, obviously, first new advantage is important. So do you have any capacity issues? Or will you be able to fulfill the demand in that market? So that's okay. I just want to get a feel on the Russian capacity market.
Okay. The Russian as part of the cash exercise we discussed before, we have to make a full assessment of our supply chain in a number of key markets for us. And we saw an opportunity in Russia to reduce the level of inventories that we had there because we had the factor of 1 or close of 1 of the factors there in Russia happening during the year. And as a consequence of that, we adjust our inventories by $4,000,000,000 You're absolutely right, and that's reflecting the $600,000,000 one off. This is generating more cash and helps with the cash generation in working capital that I have always said that would be a priority for us to manage.
We have done here a bit here and there, but that's the most relevant market. We are growing share in Russia. Everything is doing well in Russia, have a strong portfolio of combustible there. And THP, we are very pleased that we have seen consistently growth since January to now with the new launch and reaching the markets. And we haven't seen, for example, GloPro in the market yet.
We just launched Global Nano there. And we reached more than 1% share in the key cities of the country, not just in Moscow. And the same is happening in reality in Ukraine and in Kazakhstan as well. So we are getting more and more traction in globe across Eastern Europe. There is no issues at all in terms of capacity for THP or either for everything that we are doing in terms of reviewing supply chain in Russia.
Okay. Excellent.
Thank you. And as there are no further questions at this time, I'll hand back to Thadio to close the call.
Okay. So thank you very much. So in summary, delivering a strong financial performance in line with our guidance, We are very pleased with constant currency revenue operating profit in the upper half of our guidance range. High single digit favored constant EPS growth plus a 1.2% current tailwind for EPS at current rates this year. However, the leverage is on track.
Our combustible business performing very well with strong pricing and share gains. Our U. S. Business expects to deliver strong revenue and profit performance, good growth in new categories in the second half as we gain share and creating a stronger, simpler, more agile VAT, which is in line with the progress that Jack set at the very early beginning of the year. And our restructuring project is completely on track as we will be updating more on those points and more of that in February when we have our year end release, okay?
So thank you very much for joining us today,