Hello, and welcome to the BAT Half Year Results for 2019. Throughout this, all participants will be in listen only mode And after this, there will be a question and answer session. And please note this is being recorded. I'll now hand you over to Jack Bowles, Chief Executive. Please begin.
Good morning, everyone. I am Jack Bowles, Chief Executive. And with me this morning is Tadeo Marocco, who from Monday will succeed Ben Stevens as Finance Director. I would like to take this opportunity to thank Ben for his immense contribution to the group over a career spanning nearly 30 years. As you all know, at the end of this week and after 11 years on the main board as Finance Director, Ben will be retiring.
He leaves with the best wishes of the whole board for a long and happy retirement. Before I start the presentation, I need to highlight the disclaimer on Page 2 and Page 3, which I will take as read. As usual, at the end of the presentation, there will be an opportunity for you to ask questions. As we said in March, we are focusing on transforming the business by delivering value growth from our combustible business, driving a step change in new categories and and complexities. This is providing the capabilities and resources to invest in new categories and to grow operating margin.
Our review of the organization is well advanced. We are looking at the numbers of business units, reducing organizational layers and simplifying processes, while further leveraging our shared services center. We will update you on our progress when appropriate. Turning now to the results. I'm very pleased with the half year.
We have a strong performance in combustible, and industry dynamics remains robust. Our combustible business continues to drive the financial performance of the group, and we are performing well. We have continued to grow value share, and our volume share is improving. In the new categories, revenue was up 27%, and we are on track to deliver full year revenue growth around the middle of our 30% to 50% guidance range on a constant currency basis. Over 9,000,000 consumers already enjoy our potentially reduced risk products.
While I recognize there is more to do, we expect a strong acceleration in the second half. This is driven by the impact of the full year of at our Capital Market Days in March. I'm pleased to say we are delivering on our financial objectives. Revenue, margin, profit and EPS growth are all in line with the guidance. We have done this while at the same time significantly increasing investment in the business.
Cash and deleveraging the business is a clear focus for us in 2019. We continue to be confident of reducing our leverage by 0.4 turns, excluding currency translation. Overall, the business is performing well, and we are on track for a good year. I will now pick up some of the key themes of the first half in a little bit more details. As I said, we have a strong performance in combustible.
Total cigarette and THP volume declined 3.5%, broadly in line with the estimate industry decline. We continue to expect overall industry volume to be down around 3.5% for the full year. Cigarette brand portfolio delivered strong growth both in volume and in value share. Corporate volume share improved in Q2, and share in the first half is now level with last year. This was achieved even though we have reduced our combustible SKUs by 10% over the last 12 months, excluding the TPD implementation in Europe.
In the U. S, we are winning where it matters with growth in value share, premium share and as you thirty share. This was driven by good performance from Newport and NAS, which both grew reduced discounting and improved mix. There was some additional benefit from the timing of expenditure and the effects of the VIBE recall last year. Volume was down 6%, mainly due to the industry contraction as we concentrated on building value share against volume share.
This was against an industry down 5.4%. Following the additional price increase taken in June, we now expect full year industry volume to be down around 5.5%. The U. S. Regulatory agenda continues to follow a robust process and is therefore moving slowly.
There have been no material development in the U. S. FDA regulatory agenda on neither menthol or nicotine. In vapor, we believe we are well positioned to meet the new May 2020 deadline for PMTA submissions. As I said at the Capital Markets Day, I am looking to drive a step change in our new categories performance.
I firmly believe that a truly global group like BAT needs to be strong in THP, vapor and modern oral. I am pleased to confirm that we expect to deliver on our guidance of new category revenue growth around the middle of our 30% to 50% guidance range on a constant currency basis. In the first half, new category revenue grew 27% on a constant currency basis. Vapor revenue was up 58% with good performance from Vipe in Europe and Canada and Vybeuse in the U. S.
This was despite Q1 Vuz sales being impacted by the VIBE restocking and trade uncertainty around potential vapor regulatory development. Modern 300%, mainly due to the growth in Hina and new launches, including Lyft in Russia. I am very excited by our rollout plans for Velo in the U. S, which started last week. THP THP of the launches of Glow Pro and Glow Nano in the second half.
As a result, THP revenue rose 4%. This is expected to accelerate significantly in the second half, driven by new product launches. As you will see later, we have a lot of activities planned for the remainder of the year, and we expect a strong second half. Before we go into some of the details on new categories, I would like to talk about our brand portfolio. Following the acquisition of Reynolds, we have the opportunity to rationalize our large new category brand portfolio, focusing on core drive brands and fewer SKUs.
We have therefore decided, subject to regulatory consideration, to consolidate and will be Vuz in THP, this will be Glow and in modern oral, Velo. This consolidation will completed by the end of 2020. This will allow us to focus our resources and internationalize our consumer propositions, creating strong global brands. I will now move on the new categories in more details based on the existing brand lineup. In Vapor, Vuz Alto is performing well in the U.
S. And is up 3 20 basis points since the beginning of the year. Awareness for the brand is still low at 30%, and active distribution is only around 25%. So there is significant opportunity for digital and face to face consumer activities. We have a significant uplift in support plan in the second half.
In EENA, we continue to lead the category. In the U. K, vapor represents 25% of the total nicotine market, and we have a value of 39%. Vybe achieved a record value share of 11.6% in June. This was driven by the success of Vybeepen3, which grew value share by 4 10 basis points.
In France, Vybeep reached a value share of 17 point 3 percent led by EPEN3. We are now the number one player in the retail vaping market in France. Elsewhere, in Germany, value share, driven by the successful launch of EPOD at the beginning of the year. In modern we are growing share rapidly in both the established oral tobacco markets in Scandinavia and new oral markets like Denmark and Switzerland. We are market leader in the modern oral category in both Sweden and Norway with a 57% and 73% volume share, respectively.
As you can see from the slide, this is driving strong growth in our share of the total oral category in both markets. In Switzerland and Denmark, we are also leading the total oral category, respectively. Modern oral is an exciting fast growing category with significant consumer appeal. There are no device requirements and no limitations on where and when consumers can enjoy the products. We believe the category has significant untapped potential.
We are performing extremely well with revenues up almost 300% in the first half. Ultimately, new categories are all about expanding our share in the total share
in the total nicotine
spend by consumers. I'm delighted to say BAT remains the fastest growing nicotine product company in Japan. Our overall share of the total nicotine market grew by 80 basis points this year. In July, we reached a weekly record of 18.3%, up 160 basis points. This has been driven by growth in both THP and consumable combustible, sorry.
Glow is performing well in Japan, where THP now represents 24.4% of the market. Glow has captured 28% of segment growth since Q4 2018. Share in June is 5%, up 30 basis points despite significant competitor activities. In other markets, we have made good progress in a short period of time. However, let's remember that Japan alone continues to represent more than 60% of worldwide THP volume.
As a consequence, we will first prioritize Japan for our THP innovations followed by launches in Hina. We have a strong pipeline of product launches and marketing support planned across new categories in the second half. GloNano is our new slimmer device addressing affluent explorer consumers' demand for a stylish day usage product. GoPro utilizes induction heating technology. This delivers better satisfaction and a rapid heating for a quicker taste release.
Glow Sense combines vaping technology with real tobacco, creating a bridge between THP and vapor for a satisfying full test experience. We plan to launch Glow Pro, Glow Nano and Glow Sense in Asia in the second half. These new products, combined with our newly launched flavor, will deliver consumers better satisfaction and design. We are the only company to offer flavor capsules in Japan, which already represents 22% of our sales. We also have significant vapor activities planned planned for the second half.
We will begin rolling out a new global brand positioning and campaign, unifying Vuze and Vipe and supporting the migration of the portfolio to Vuze brand by the end of 2020. This will be backed by significant increased brand building activities. Following our consumer segmentation, we are further strengthening our vapor product portfolio. In the U. S, we plan to roll out a 2.4 gram nicotine variant of Vuz Alto to address an emerging segment for lower impact products.
In addition, we have just commenced a special promotion offer of €0.99 for Vuz Alto Power Kit. This is in response to the current competitive pricing environment and to drive awareness and trial. We also plan to launch an upgraded device for EPEN3 with better battery life and improved functionalities, together with a new range of flavors. Finally, we're excited by the modern oral opportunity in the U. S, and we have ambitious plans for Velo, our modern oral nicotine product.
The rollout is already underway with a rapid distribution expansion supported by digital, radio and TV advertising and direct consumer engagement. In addition, we expect the outcome of our MRTP application for Camel snus by the end of the year. This could give us a major opportunity to further develop this important potentially reduced risk product category. Outside the U. S, we have a number of new markets launches for EPOC and Lyft planned in the second half.
So in summary, we have significant activities planned, spanning all three of our new categories, and we are confident that this will drive an acceleration of our growth in the second half. I will now hand over to Thadeau, who will take you through the
free up resource for investment while generating cash to delever the balance sheet. As we grow our new categories business, I'll be driving efficient and effective resource allocation to ensure we maximize returns on investments. This is vital as the complexity of our multi category business increases. This virtual cycle will increase operating margin, supporting our ambition to expand the margin by 50 to 100 basis points per year. It will also drive the 0.4x annual reduction in leverage ex currency we are targeting, fund increased investments and deliver investor returns.
I will now turn to the numbers. Revenue grew 4.1% on an adjusted constant currency basis. This was driven by a strong adjusted revenue growth of 5.2% in strategic combustibles. I should remind you that combustibles still represents 92% of our business. There was a good performance across the regions on an adjusted constant rate basis.
In APME, volume including THP was down 2.3% and revenue grew 1.6%. Good pricing was partially offset by lower sales of THP devices ahead of new product launch planned for H2. Despite increased market investment, profit from operations was up 4.6%. In AMS, volume was down 3.5% and revenue was up 7.5%, driven by strong pricing and higher revenue from new categories. Profit from operations was up 0.8% with good performance in Canada, Nigeria and Kenya, partially offset by significantly increased marketing investments.
In EMEA, volume declined by 4 percent. Revenue was up 4.6% with good pricing combustibles and a more than doubling of our revenue in new categories. Profit from operations was marginally higher due to the impact of increased investments in new categories. As Jack has already covered, in the U. S, we had a good performance.
Revenue grew 3.7 percent driven by strong pricing, reduced discounting and improved mix. Profit from operations grew by the VIBE recall. Overall, we plan a significant increase in new category spend in the second half, in particular in the U. S. In support of Vuzia Auto and the rollout of Vilo.
This will result in a more balanced performance across the regions for the full year. I'm delighted that after several years of transactional FX impact, we are back on a path of consistent margin growth. On an adjusted basis, margin grew 110 basis points ahead of our guidance. This was after absorbing the increased investment in new categories, which was a headwind of 110 basis points. We made good progress on margin.
We are on track to deliver on our guidance of 50 to 100 basis points of margin improvement for the full year, alongside the increase in investments we are planning for the second half. Our growth in adjusted revenue and good cost management delivered a 5.9% increase in constant currency profit from operations. At constant rates, adjusted net debt at the half year was €2,100,000,000 higher than year end 2018 levels. This was driven by the timing of the MSA payments, which occurs in the first half and the implementation of IFRS 16, which increased the reported net debt by €600,000,000 1st half operating cash conversion was 66%, reflecting the normal timing of RMSA payments in the first half. This is similar to H1 2018 if we adjust for the impact of the early MSA payments in December 2017.
We expect a strong second half cash performance with a full year operating cash conversion in excess of 90% and a net CapEx of around €800,000,000 allowing us to meet our targets of 1 point €5,000,000,000 of free cash flow after dividends. We are committed to deliver at 0.4 turns to a ratio of 3.6 at the end of 2019, excluding the impact of currency translation. This is based on delivering strong EBITDA growth and free cash flow after dividends of €1,500,000,000 We remain committed to growing the dividend and a payout ratio of 65%. On a constant basis, adjusted diluted EPS grew 7.1%, delivering on our high single figure earnings growth commitment. With a currency tailwind of 1.7 percent points, adjusted diluted EPS was up 8.8 percent at current rates.
This was driven by growth in operating profit and a good performance from ITC. Net finance costs increased mainly due to the lower investment income and the impact of translational FX from the relative weakness of sterling against the U. S. Dollar. We continue to expect the full year net finance charge to be around 1,500,000,000 We also expect an effective tax rate of 26% this year, down from the 2018 level of 26.4%.
On currencies, if rates were to stay where they are today, the translational FX impact on full year results would be of around 3% on operating profit and EPS. So this was a strong first half with revenue, margin, profits and EPS all delivering in line with the guidance we gave. In March, I stood up and gave stretching financial guidance for the full year, and I can confirm that we are on track to deliver against this. In constant currency, we expect revenue growth in the mid upper half of our 3% to 5% range, adjusted profit from operations growth in the upper end of our 5% to 7% range and continue to deliver on high single figure earnings growth. Thank you, and I will now pass back to Jack for a few closing remarks.
Thank you, Thadeo.
In summary, I'm determined to make BAT a winner in all nicotine categories, transform the business and build BAT a stronger, simpler and faster organization. Our combustible business is performing very well. Pricing is strong, and market declines are in line with historical levels. We continue to build on our strong position in combustible tobacco. As we step change in new categories, we will build strong global brands and provide consumers with great new potentially reduced products, increasing the opportunities for 150,000,000 consumers to enjoy our products.
We have work to do in new categories, but I'm excited by our plan of product launches for the second half and into next year. I am confident we will deliver a strong second half with full year revenues growth around the middle of our 30% to 50% guidance range. I am committed to delivering high single figure adjusted diluted EPS growth on a constant currency basis, strong cash flow and tight cost control, while investing further in the brands and capabilities to build a global multi category business. I'm looking forward to a strong second half and delivering on the full year guidance we gave in March. Thank you.
I will now open up for questions.
Thank Our first
Good morning, guys. I hope all well. I just had a couple of questions on reduced risk in the U. S. And for so I see with recent Nielsen numbers, Enjoy seems to be having a bit of success.
So just some comments on that. And then secondly, you spoke about moving to €0.99 per views and power kit. Is that something that everyone is doing at the moment in terms of move to that price point?
Yes. I mean, thank you for the question. I'm not going to comment on competitive activities. But what I can tell you is that Alto is performing well, that there are some price skirmishes in the market, and I will respond accordingly in limited geographies. And I will make sure that we continue on our path of growing Alto in the U.
S. Market. The brand is growing strongly. We will do more investments in the second half, as we said in the presentation, and we'll make sure that the Vuz brand is growing significantly H2.
Okay. And then just quick follow-up. So I mean, obviously, Altria reported numbers. They're talking kind of they're talking about the opportunity around IQOS and heated and say there's quite a significant opportunity there. I was just wondering, to that extent, why you continue to be quite quiet around plans for EclipRevo?
I know you say you want to focus on a modern oral, but it just seems a bit strange to need to ignore a category or at least be a bit more vocal around your ability to compete in that segment if you needed to.
Yes. I think you have to consider the fact that the categories that are emerging and strong in the U. S. Are already established, like the vapor category. Then on top of that, we see a great opportunity in oral tobacco, no devices, you can use it everywhere and that we consider that this should be the two points of focus for the time being.
We have a product that is there in the U. S, but I prefer to focus my resources and make sure that we are successful in the vaping category. That is the biggest category in terms of new categories at the moment and oral tobacco that has a lot of potential moving forward.
Cool. Thanks very much. Appreciate it.
Okay. We are now over to the line of Gaurav Jain at Barclays. Please go ahead, sir.
Hi. Thanks a lot for taking my question. So, the long term U. S. Volume market decline was recently updated by Altria from 2-four percent to minus 6 percent.
And they gave a number of reasons, including higher cannibalization of e cigarettes, also iCos taking off in the U. S. Do you have any view on how the long term U. S. Cigarette volume declines pan out?
And how should that impact your long term EBIT growth in the U. S? Thank you.
Thank you very much for your question. Our view related to the market goes to the end of the year and we say 5.5 percent around 5.5%. Why? Because there has been an additional price increase in July. That's the inflection between the previous guidance and the 5.5% that we're giving now.
We don't see any major shifts in terms of the e cigarette development in the U. S. And also, we see that since the beginning of the year, the price of petrol has increased significantly from $2.5 to $3.90 recently to 2.90 dollars recently. And these are the major drivers in terms of the size of the market. After that, we'll have to see what happens with the pricing in the market and with the development of e cigarettes and oral tobacco in the market.
Sure. And if I can ask a question on leverage. So you are reiterating your leverage reduction targets and investors are worried about your high leverage in that context where the industry is changing so rapidly. Is there an opportunity for you to accelerate your leverage reduction target maybe by reducing dividend growth or through working capital improvements? Or there is a margin gap between you and Altria in the U.
S. So why can't that be closed?
Yes. We have plans to even strengthen our cash generation from next year onwards. We have I think that we have opportunities. We guide this year that we will be above 9% conversion. We think that for next year onwards, we can be a bit more optimizing working capital and CapEx and bring this target to at least a 95% growth.
And this will give us the reassurance of the €1,500,000,000 free cash flow after dividend generation. Have to consider that over time, as the profit grows, this number also will be growing over time. So we are pretty confident that with the combination of strong cash generation like this BAT today with the strong earnings that we have already guided, we will be able to delever at 0.4%. And by the end of 2020, we should be very close to the 3 tiers in terms of ratio.
Sure. And if I can ask one last question around Velo launch in the U. S. So the margins on your smokeless tobacco product are pretty high. Is there a risk that VELO is going to cannibalize your own business before it goes into the growth opportunity which is available in the market?
No. We see that there is a lot of complementary because of the new moments of users from consumers. So we don't see this as a direct cannibalization at all. It's very different from THP. And we actually we have actually very strong margins also in this type of products.
I know that the U. S. Combustible is also very high, but we are less concerned about that because we don't see this level of cannibalization being that much.
Okay. We are now over to the line of Adam Spielman at Citibank. Please go ahead, sir.
Thank you very much. So my first question is really about marketing spend. You said that in the first half, U. S. Profits were perhaps a little bit higher than usual because of reduced marketing spend.
And then you sort of said in the second half, marketing spend will increase on the new categories. So one question is, are you able to quantify in any way at all the impact of the reduced marketing spend in the first half and equally in the second half? So that would be my first question.
Adam, actually, we didn't reduce marketing investments in the U. S. In the first half. What we were saying is that in the second half, we have further increased marketing investments. The performance in the U.
S. Was pretty much driven by the fact that we have a very strong pricing with less discounts, improved mix. We grew value share by 30 basis points. So this all contributed. And on top of that, we had some timings, one offs that I would say related to the VIBE recall.
Remember that we are lapping a semester last year where we had to stop selling the product. And on the same time, we had the write off costs related to the recall. And on top of that, we had MSA charge movements that also impact favorably the U. S. In the first half.
What we said is that in the second half, we don't have these one offs in the first. And on top of that, we're increasing further the investment behind new category in U. S. Specifically.
And are you able to quantify that in any way at all, are you the increase in investment?
Well, the only thing I can say to you is that these one offs that we have in the if you strip out the one offs in the first half of the U. S, you still would give us a kind of high single digit operating profit, but will not be the double digit that you are seeing in the
report today.
But you have to take into consideration as well that there was some movements in terms of one offs in other regions. So I expect at the end of the year that we will have a much more balanced profit across the regions in BAT.
And I suppose that perhaps answers what was going to be my next question because my next question was going to be, if your marketing spend goes up in the second half, is there anything to offset that with lower costs to ensure that you get your guidance? And so is the answer to that fewer one offs? Or how should we think about what offsets the increase in the marketing?
Adam, this is Jacques. I think your question is very important. I mean, what we want to do is to invest the right amount of money in the business. We have new launches that are coming through, and we want to make sure that we'll put sufficient resources related to that. The second point is we're very committed to delivering the financials for the full year and we have the space to continue to invest more in the second half of the year.
And we believe that the offers that we have for the consumers for the second half are very powerful to look at the different segments that we're going after. I think that we have the possibility to deliver the financial results and to invest. Of course, as you're saying, we're doing huge efforts in terms of cost base. There's a reorganization of the company that we're undertaking as we speak, but also we We're reducing the number of SKUs in new categories, and we're making sure that we're sweating our cost base as hard as we can.
Thank you very much. That's very clear, Jack. So one final question for me. I noticed that if I look at your new category sales, half on half, they're quite volatile. So an example of that is that if I think about e vapor, let's say, in the U.
S, it was quite low in the first half of last year, but it jumped up a bit and sequentially it's fallen a bit. And I guess that's to do with pipeline effects. And I was just wondering whether and I assume there are going to be more pipeline effects in the second half as you launch new products in Japan and also some of the new e vapor products globally. And I was just wondering if you could sort of talk to that in any way, if you can somehow disaggregate what is sort of really going on an underlying basis versus pipeline filling? Because as we do our models, it's quite confusing seeing this volatility in the line items.
In the specifically in the U. S, the major driver for the variance that you are referring to is related to the Vipe recall. And because if you strip it out, the numbers will be very different when you compare second half twenty eighteen, first half twenty nineteen. So you have to take this into consideration. There is elements of pipeline, but I don't think that the element of pipeline would be as strong as to justify any major swings, the one as the one that you referred to.
What's important to consider, Adam, is that's why we gave guidance of 30% to 50% in average in the years to come. What is important to consider is there is a lot of fluctuation related to new launches, our new launches, competitive launches. That creates a distortion on the monthly basis. Nonetheless, we confirm and we affirm that we're going to deliver 40% around the middle of the range of 30% to 50%. That's important to us, and we're putting a lot of efforts related to that.
I vividly remember your question at the Investor Day where you said that we have to make sure that we can balance additional investment and not only delivering financial results
at the
end of the year. That's what we are doing. I took your advice, Adam.
Thank you very much. Thank you for answering so
clearly. Cheers.
We are now over to the line of
David Hayes at Societe Generale. Please go ahead. Your line is now open.
Thank you very much. Hi, everyone. So I'm going to go for 3 questions if I can. Firstly, just on pricing, the outlook for full year. I wonder whether you can tell us what percentage of pricing you've already taken for this year and what the outlook is for pricing, therefore, for the full year.
Secondly, just you just mentioned again about the cost savings and the reduced as you rationalize the portfolio. Is that having any effect on volumes negatively? Or would we expect that to have any effect on volumes negatively in the second half as you go through that process? And then thirdly, just on the FDA update on nicotine events for both you and all, you're seeing very confident that there won't be any more updates before the end of the year. I just wonder whether you take that to mean anything in terms of what's going to be the outcome of the proposals?
Okay. Sorry, I was trying to get the first question first and the other, but I'm going to pick up 2, the first one and the last one. The second one, I didn't hear, so I leave it to Thadeo. The first one was related to the pricing. Where are we in the pricing?
We are at 78% of our pricing in the first half of the year. So that's a very strong position, and we're happy with that position. So still some to go for the second half of the year. The second thing is related to the FDA. Very clearly, as we said during the presentation, I would say the doomsday scenario that has been spoken about in the last 3 years is not yet materializing.
We are very confident in the robustness of the process of the FDA in terms of regulatory framework. And we do not hear at the moment any significant movements related to neither nicotine reduction nor mental ban. Of course, there will be some things happening in terms of e cigarettes in the U. S. Market, But we consider and we consider rather than but and we consider that we will be in a good space for the new deadline that has been fixed, which is the summer of 2020.
I think that we have a robust portfolio that continues to grow, and we have opportunities to grow The third The third question, I didn't hear, I'm sorry, because I was trying to get the questions one after the other. Tadeo?
You can confirm. I think that you are referring to the volumes and the implication of the volumes on price due to the pricing. Is it right?
No. It was more actually the SKU rationalization, the portfolio rationalization, which obviously is helping the cost save generation. It's just whether as you go through that process, does that have a negative volume impact at all? Either have we seen that? Or does it have an impact negatively in the second half as you rationalize the portfolio and take some of those SKUs out of the market?
Yes. We don't see any major impact from rationalization of the portfolio and volumes. What is what we are seeing is that there are some specific markets where, for different reasons, mainly related to tax increase, and we are losing volume in a very low value, low margin. Markets like, for example, Bangladesh, where we had an excise increase in the second half of last year, which raised the floor of the mark by 30% and the illicit trade grew tremendously, sharply in that period. And the market went down 10%, and we are market leaders there.
Venezuela, where we also are market leaders, and there is a massive issue related to the economic and social problems in Venezuela right now. And Egypt also took some pricing in the low end, hitting us where we were leading in the low end of the segment. So this is a drag that could add up to close to 2% of our report, 3.5% down. And a big part of this drag will probably continue over time because these are situations that we don't see unwinding for the rest of the year. But as I said at beginning, they are very low margin, low value, and there is minimal impact in terms of the group financials related to those volumes.
In terms of the portfolio rationalization, we are not seeing any downsized material related to that.
Okay. We are now over to the line of Nico Von Stackelberg at Liberum. Please go ahead. Nico, your line is now open.
Thank you. Good morning, guys. You basically said that you were not aware of plans for the FDA to advance a rule making process on nicotine. Nicotine. Now the FDA or former members of the FDA have publicly said that they expect a preliminary rule at least to leave the FDA for HHS.
And Altria also said the FDA may publish a nicotine rule by the end of the year. So just trying to appreciate maybe dictions coming into play here. But so what's the difference between your view and Altria's and sort of what's been said? Then I have 2 more questions, but maybe just one at a time.
Yes. Thank you very much. Yes, I mean, the FDA, as we said, did not make any moves related to neither nicotine nor mantle, and we do not hear anything about that very clearly. In terms of nicotine in terms of e cigarettes, sorry, of course, I mean, we've always said that we need a more efficient regulatory environment related to e cigarettes, especially related to the epidemic of underage usage. We have been always extremely clear that we will not have some activities in there and that our marketing code that we have in the company is very strict related to that.
We never have been ever considered as promoting our products underage users and we'll continue to do so. In terms of further regulatory activities related to e cigarettes, we are very well equipped with the approach that we have in the market to respond to these kind of evolutions. And as, for instance, the evolution happened related to 2020 and the new deadline, then we're ready to cope with that. We're a strong company with a very strong R and D and with very strong capabilities in the U. S.
Just they are quite adjusted. And I was just sort of wondering if you could maybe help out on just a statutory basis maybe or statutory on constant rate basis. But could you just help me with the cash flow from operations in terms of where you see that by the end of the year? Of course, MSA payments, I'm not interested in the MSA payments. I realized that was a big technical for the first half, but the working capital was a little bit lower than I had expected.
So just can you help me square that, please?
Yes. Nick, we have distorted and difficult to read of the cash flow because of the MSA payment that was done in December 17. That impacts the first half of last year when you compare this period with the previous periods. But if you take this apart and we try to do that when we report on a normalized base, there is basically one movement, a high movement in terms of working capital. This is basically inventories movement.
Our conversion this time was around 66%. Last year was slightly better, was around 70%. As we expect to be ahead of 90%, I would say I'm expected to be very close to between 94%, 95 for the end of the year. And from next year onwards, like I said before, we are targeting a threshold of 95 in terms of conversion of operating cash flow.
Excellent. And finally, just a quick one. We've discussed this before back in March, but the PMK for Glow, I was just sort of wondering, do you have an update here? And I mean, it seems like it's taking a little while to get that application through. Why is it taking so long?
Is it sort of like thinking around which product you PMTA? Or yes, what is the general thinking there? Thanks.
PMTA of THP?
Of yes, exactly. THP in
the U. S. So GLOW, yes.
Yes, it's a good question. I mean, we already have a product that went through PMTA, so we are covered with that. I do consider that the objective is to have the best product that is put in the PMTA. It takes a bit of time. I'm not concerned related to that because in the U.
S. Is already very strong in terms of new categories and the leading categories are by far e cigarettes for sure, where our performance is improving and oral tobacco, that is something that we see as a very big potential in the U. S. So I'm not concerned related to that for the time being.
Okay. Thanks, guys.
Thank you.
Okay. Before going on to the next line, which is Richard Taylor at Morgan Stanley, could you please, if you have any further questions
Firstly, can you give us an update on the developments for modern oral in Europe ex Scandinavia? So any positive developments we should be thinking about that?
First of all, I mean, we're having a very good performance in Scandinavia even in traditional snus markets, whereas snus can be up to 50% of the total market. It's a category that is growing because there is a consumer need related to that. The second thing is from the experience that we have in Switzerland. We saw that the category is growing very fast. And now that, that category of at the moment, and we see that after some weeks, we have 25% of the category.
So we do consider that we have extremely good products. We have very good IP also related to these products and we have the capability to roll out. The benefit of this category, as we all know, there is no devices and the margins are extremely good. So we do believe that the potential outside of Scandinavia is big and that's why we're launching Velo in the U. S, and we expect strong results for the second half of the year related to Velo launch in the U.
S.
That's very helpful. And then how should we think about the phasing of the investments in terms of U. S. Versus the rest of the world through the rest of the year, please?
Yes. This would be a competitive information, so I will not go there. But what I can reaffirm is that we've invested more in the first half of the year, also slightly more in combustible business in order to make sure that we continue to do the right job in combustible business. So we did not reduce the investment in combustible business. We've increased it slightly in the first half of the year.
And then we will roll out the different plans that I presented earlier through the presentation. And it's not a question of allocation of resources between the U. S. And the rest of the world, but more covering the consumer needs and doing the right launches for the different new innovations that we have. We will have also for 2020 a stronger pipeline in order to be successful in the market.
Okay. And that's very clear. And then these two questions related the 2 last questions are related. It would be very helpful if you can give us guidance on your expectations for net debt to EBITDA for full year on a mark to market basis? I can see the currency adjusted basis, but it would be very helpful on a mark to market basis.
And then I suppose this is a follow-up to Gareth's question earlier. Jack, at your Investor Day, you said you wanted to prioritize deleveraging. Up EBITDA faster is your plan A, but it isn't really speeding up the deleveraging. So what other options should we be thinking about? Is it accelerated cost savings?
Is it something with a dividend? Is it brand sales, asset sales? It would be great if you could give us some color into your thought process here, please.
Yes. I mean, let's start from the beginning. First, we are doing a lot of efforts in terms I will not give breakdowns or direction related to that because that's forward looking. But we're doing lots of efforts in terms of our cost base. As I said, we're reorganizing the company to be a more effective and efficient organization and to declutter the organization.
That will bring some savings. We are doing a lot of efforts in terms of reduction of our CapEx moving forward because we've done a lot of just and combustibles in order to free up some cash. All the other options, I'm not going to comment on because it's not the right time to do it.
Yes. Just to comment on your request, Richard, I can even tell you where we stand now, but it's really not helpful because VAT is a very cash generative company at the second half of the year because we are just lapping the MSA payment and a lot more of cash will come will be generated until December. And also, we expect to have a stronger second half in terms of earnings compared with the first half. And so we are on track to deliver the €1,500,000,000 free cash flow after dividends. And with the stronger earnings in the second compared with the first half, deliver the upper range of our guidance in terms of earnings, that we'll be able to deliver at the 0.4 percent at currency neutral.
But as you likely point out, the December 31st December is a key date for us in terms of exchange rates. So everything that I can say from there is pure speculation.
Okay. Thanks very much for the questions Okay. So we have time for one final question. So we are going
to go to the line of Gerry Gallagher at Deutsche Bank. Please go ahead, sir. Your line is now open.
Thanks very much. I had more of a comment to make rather than a question. I couldn't let today's call go by without mentioning Ben on behalf of the investment community. On behalf of everybody on this call and those who can't make it, I just want to offer Ben all the very best for a long and fulfilling retirement. And I'm very conscious that a number of people on this call haven't been involved in BAT as long as I have and a number of other people who have the company.
So I just wanted to outline for those people what Ben has been up to through his career at BAT just so that they can understand the impact and the very positive impact he has had on the Jack said, Ben joined in 1990, but I think it's important for people to understand that Ben has been far from a career accountant. He's had roles in marketing. He's run the business in Pakistan and Russia. He's run corporate affairs. Ben was in charge of merging Rothmans and BAT in 1999, which is a transaction that happened very quickly after the demerge of the insurance businesses in 1998.
And my recollection of the time was that, that deal was kept incredibly tight amongst the few people at BAT. And for Ben to take that up and do the excellent job of integration he did, I think is extremely commendable and noteworthy. That was one of BAT's major acquisitions we've seen over the last 20 or 30 years. And he's also been in charge of strategy, M and A and IT. And in 2,004, he went off to run the European business before becoming the CFO of the business in 2008, 11 years ago, and that's something I will come back to in a second.
Clearly, a CFO can't be judged and shouldn't be judged by the numbers alone, far from it. But I just want to highlight 1, which is one that most people say Ben has got most control over and has had also in a number the past. The year before Ben became CFO, the margin of BAT was 30.5%. The margin at the end of 2018 was 42.6%. And I think he's, as we've heard today, set the business up to be in a position where post his retirement, the business is in good shape to continue to drive the margin of the business higher whilst maintaining the momentum sustainably in the top line of the business.
And I think that is to be commended. One final point I do want to make. You may recall when Nicandro retired, I said to them he should be very worried because I've known him longer and he's been around longer in terms of exposure to the investment community. Well, the reality is I've got nothing that I can say that can wind Ben up. And I think the reality of that and the reason for that is you're just then a decent bloke, and I've had a lot to do with you over the years, but I've enjoyed our time together.
As a CFO of a business like VAT over 11 years, you've had 22 half year and full year results, but the reality is you've had a lot more than that, if nothing other than before very recently, you had the quarterly updates as well. I hate to think how many questions you've had from people on this call and people in the past, and you handle them all with extremely good grace when we all know that some of them were, if not stupid, pretty close to stupid and the growth with which you dealt with them on each and every occasion is to be commended. So with that then, my very sincere and on behalf of everybody sincere wishes for you, your family, as you move forward into the next stage of your life. Thanks very much, Ben, and good luck. Thanks, Thierry.
I appreciate your comments. Best
of luck for your retirement and using best of luck for your retirement and using your magnificent new boat. Thank you very much for listening. If you have any follow-up questions, please contact the Investor Relations team. I'm looking forward for a strong second half and delivering on the full year guidance we gave in March. We look forward to speaking to you in February next year