Good morning, everyone. I'm Jack Bowles, Chief Executive of BAT, and I'm here with Tadeu Marroco, our Group Finance Director. We are very happy to be with you, albeit virtually, for our 2020 preliminary results presentation. I hope everybody listening this morning and your families, our friend, are well. Today, I am excited to update you on the progress we have made in 2020 on our journey towards A Better Tomorrow. Tadeu will then share more details on our performance and 2021 outlook before I return with more color on our strategy moving forward. We are absolutely committed to transforming BAT. In 2020, we defined our corporate purpose to build A Better Tomorrow, which is central to everything we do. We have a clear vision to transform and grow, changing not just our portfolio, but our structures and culture.
It will be fundamentally change the nature of our relationship with society. We are transforming into a high-growth, multi-category FMCG business with a reduced risk to public health, driven by evolving consumer needs. We have already started this transformation, and today, we want to show you the progress we have already made. With 10% of our revenue now in non-combustible products, we are on track and excited by the momentum, and we have clear targets going forward. We made excellent progress in 2020 with accelerating consumer acquisition and volume growth across all three new categories. We have generated great momentum, and we are growing share in all three new categories as we exit the year. We took the opportunity to continue to invest a further GBP 430 million in the new categories and delivered 100 basis points of margin expansion.
This was fueled by our continued strong performance in combustible and GBP 660 million of savings. We generated cash, free cash flow of GBP 7.3 billion, driven by operating cash flow conversion of 103%, well ahead of our 90% target. We are proud to have delivered revenue, profit, and EPS growth and strong cash flow in challenging circumstances. While we have further to go, our transformation is well underway. We have a clear responsibility to transform our business and lead the category. Why? Because we are the largest and also the only true global tobacco and nicotine company worldwide, and we are taking this responsibility seriously. We have strong points of difference, and we are uniquely positioned because we are the only truly international company present in over 180 markets, including the U.S., which represents 40% of the global industry value and also creates trends across our multi-categories.
We are the only consumer-centric, multi-category company with the global scale to leverage our insights on consumer satisfaction and taste preferences. We are the only company present in all four new categories, from tobacco to nicotine and beyond. Finally, we are the only company building strong, unique, and recognized brands of the future, specifically positioned in each category. All of this is underpinned by the quality and diversity of our people who embrace our corporate ethos, our passion for change and speed. Our transformation is already underway. In 2020, we accelerated non-combustible consumer acquisition, adding another 3 million consumers to reach 13.5 million with growth in every category. We added 1.1 million consumers in Q4 with sequential acceleration through the year as our growth doubled through the second half. Our continued investment generated tangible results, and we remain very confident in achieving our 50 million target by 2030.
We have strong global brands across all three new categories. Vuse is well on the way to global leadership and was the fastest-growing vapor brand in 2020, reaching 26% value share across our T op 5 markets. glo Hyper has closed the satisfaction gap with PMI, with total nicotine volume share reaching a latest February weekly share of 6.3% in Japan. This is up 100 basis points since August, driven by the growth of our first-to-world induction heating product. Although revenues was impacted by the sales withdrawal. THP consumable sticks volume was up 29%, and across our Top 9 markets, glo now achieves a 15% category share. In Modern Oral, we delivered excellent growth with the volume up 62%. We consolidate our Modern Oral leadership internationally, and our U.S. portfolio was strengthened by the acquisition of Dryft in September.
With share in the U.S. back to sequential growth in December, reaching 11% in January. We have made excellent progress, particularly in the second half. We enter 2021 with strong volume and share momentum and a pipeline of exciting innovations. We have further to go, with a huge opportunity ahead of us to accelerate across all three categories. Vuse and glo, with the introduction of Hyper, saw strong and clear volume acceleration in H2. Velo, with the acquisition of Dryft at the end of the year, is expected to accelerate this momentum in 2021. Turning now to numbers. Reported results benefited from the impact of one-offs in the prior year. To better understand the key drivers of our performance, we will focus on constant currency adjusted results unless otherwise stated. You will hear in more detail from Tadeu in a moment.
Our results show that we are delivering today with a continued strong performance in combustible. We gained 20 bps of corporate value share in combustible, driven by our strategic brands, which grew 40 bps with continued strong price mix and volumes ahead of the industry, demonstrating our strength and the strength of our combustible business, driving growth in revenue, profit, EPS, and cash in a challenging environment, allowing us to pay dividends of GBP 4.7 billion and to continue to deliver the balance sheet. I am proud of the response of our people and teams around the world to global pandemic. It is their resilience and agility which has delivered these results. It has already brought out the best in BAT, allowing us to build on and accelerate our new capability. We simplified the organization, reducing management by 20%, further enhancing operational agility through Quantum.
Our rapid response in our supply chain ensured no combustible out of stocks. We accelerated our transformation to new ways of working, pivoting our business to faster growth digital platforms. With ESG front and center in everything that we do, we supported our employees, suppliers, farmers, and their broader community with a wide range of programs, both financial and practical. Our COVID vaccine candidate entered phase I clinical trials in December. Our people have gone above and beyond, ensuring that our business performs strongly throughout the crisis and will exit even stronger. Over to Tadeu, who will talk you through the details of the results.
Thank you, Jack. Our performance in 2020 is a great example of the journey BAT is on. We are transforming the business with strong share gains and consumer acquisition growth powering new categories, as well as combustible and cost savings funding our investments, while Quantum simplifies our ways of working. We are delivering good revenue and earnings growth in challenging circumstance and excellent cash generation, enabling us to maintain our 65% dividend payout commitment and further delever the balance sheet. We are taking this strong momentum into 2021 and remain confident in our financial algorithm post-COVID. In 2020, we delivered revenue growth above our revised 1%-3% guidance range, and we would have been comfortably above our 3%-5% medium-term guidance range without the impact of COVID.
Combustibles is the engine growth of the business, and it is in great shape, and we remain global leaders in volume and revenue. In 2020, our price mix was 7.3%, which, together with the strength of our brands, delivered another year of both value and volume share gains, with combustibles contributing a weighted 2.3% to group revenue growth. Non-combustibles added another 1% to group growth with an accelerated performance in the second half. This is a number we are confident to increase in the coming years. I'm very pleased with the results delivered in 2020. We are very happy with our performance in vapor, with the standout market share performance of Vuse. We are committed to establish Vuse as the global leader in vapor. We are well on the way with number one positions in four of the Top 5 markets.
Our value share in the U.S. in 2020 has nearly doubled. We are now the leader in 15 states. In Canada, we achieved leadership while migrating the brand from Vype to Vuse. In Europe, we've further strengthened our leadership positions in top markets. With the momentum and scale we are building, we are very confident in our pathway to vapor profitability. Looking into 2021, with our number one device share across all these markets, we expect further share gains in consumables, and we'll be piloting new launches incorporating age verifications technology in key markets in quarter two. Earlier this year, we activated our beyond nicotine strategy with a fit.city test of a CBD vaping product in the U.K. We are excited about this opportunity, and we'll keep you updated on progress.
With the strength of our Vuse brand, we are confident we can be the global leaders in vapor, making Vuse both a high-growth and highly profitable brand. With glo, we have taken a significant step forward with our induction heating product, Hyper, our best-performing launch yet. We have been candid that we needed to close the satisfaction gap with peers. Hyper has done this. On key consumer attributes, it scores the same or better than competition. Half of glo in Japan is already in Hyper just nine months after launch, which positioned us very well for the future growth. This transformation has been borne out by sales, with good progress across all of our key THP markets. In the end, Hyper is just one step on the journey in our ambition to have the most satisfying products and the fastest-growing THP brand.
We are very excited about our future innovation pipeline and where we can take this brand. In Modern Oral, in 2020, we continued to consolidate our strong leadership position outside the U.S. Our success in Scandinavia and across Europe showed that we have the best international portfolio of products in Modern Oral. Beyond Europe, we see very exciting prospects for Modern Oral globally. In many emerging markets, consumers are familiar with other similar oral products. With no electronic device to buy, this is an attractive, affordable product for consumers. We are already seeing encouraging results from markets including Pakistan and Bangladesh, and we will continue to invest in its rollout. In contrast to our success in Europe, the U.S. is the one market where we have not performed as well as we would have liked it. This is changing.
Our recent Dryft acquisition really transforms our U.S. portfolio, expanding our product range from four SKUs with only two flavors and strengths below 6 mg to 28 SKUs across a range of flavors and strengths. With a great U.S. product and entry into the key 6 mg plus segment for the first time, which accounts for 2/3 of the market. After an encouraging initial period of exclusivity with one chain, we are building distribution further under the Velo brand, with the latest volume share reaching 11% in January. Overall, across the new categories and beyond, we are making great progress, giving us an excellent platform to further accelerate growth in the future. This strong momentum would not be possible without the cash flow and capabilities from our combustible business, which is industry-leading. Our combustible business continues to perform very well across all key metrics.
Overall, in 2020, we grew our revenue by 2.8%, with 20 basis points of value share gains. We continued to take strong pricing ahead of the industry and grew volume share. This would not be possible without an excellent brand portfolio that spans a wide range of price points and is concentrated around strong strategic brands in each market. The price environment remains strong. We have seen no acceleration in down trading in developed markets. With our revenue growth management tool, we are now able to precision targets with store-level pricing to further enhance combustibles' value. I'm really happy with the resilience demonstrated by our combustible business throughout the year, which has shown its ability to deliver whatever the environment. One example has been our performance through the menthol bans in the E.U. and Turkey. Our combustibles portfolio over-indexed menthol, yet we significantly grew our share of nicotine.
Overall, we achieved 110% retention of total nicotine consumers through the menthol bans, capitalizing on our unique multi-category position, adding over 300,000 new consumers in the last six months. Taking a look at the regions more broadly. The regions reflect the impact of COVID, particularly in the emerging markets and global travel retail, and the number of additional one-off factors. Despite this, we delivered a resilient performance. In ENA, we invested strongly behind new categories to drive 50% revenue growth, led by a doubling of THP revenue from the successful launch of Hyper and Vuse also performing strongly. As mentioned, we grew our share of total nicotine through the menthol bans. In APME, glo volume growth from Hyper was more than offset by Japanese excise increase and the withdrawal of glo sens, our hybrid proposition.
Yet, we continued to take market share across the region, and in the second half of the year, benefited from the gradual market recovery as lockdown restrictions eased. The team's strong focus on our cost base drove margin expansion despite the tough external environment. In AmSSA, strong growth in Vuse drove new category revenue up almost 60%, and we responded quickly to government-mandated shutdowns across the region, shifting production to available sites and avoiding out-of-stocks. South Africa reopened in August. Although the illicit trade remains above pre-lockdown levels, we rapidly returned to market leadership. As we said at the half year, there was a clear differentiation between emerging markets and developed market performance. We saw a significant recovery in our emerging markets volume in the second half, and this has continued into 2021. While emerging markets represent around 70% of our volume, they are 25% of revenue.
Despite COVID restrictions impacting consumers' ability to access the product in many emerging markets, consumption remained resilient. Although impacted by global travel retail, our developed markets remained resilient throughout the pandemic. We expect the global industry volume to recover to a decline of around 3% in 2021. In the U.S., we had our most successful year to date, with strong growth across revenue, value share, and profit, reflecting the strength of our brand portfolio, robust pricing, and an accelerating performance in new categories, where revenue was up by over 80%, driven by Vuse. In Combustibles, we benefited from a strong portfolio across price tiers. At the premium end, we had the best performance brands. In 2020, Newport and Natural American Spirit continued to grow revenue strongly, with Newport reaching 17% value share. At this stage, we are not providing U.S. industry volume guidance for 2021, given market uncertainties.
While the positive industry dynamics in 2020 will not necessarily benefit every year, we have a strong brand portfolio with lower elasticity than industry and a target approach enabled by RGM. Together, this give us confidence in our ability to deliver sustainable value growth and profitability going forward in the U.S. Moving on to operating margin. We delivered a 100 basis points increase, reaching an overall margin of over 44%, and invested an incremental GBP 430 million to drive our growth in new categories whilst absorbing one-off costs related to COVID. This was funded by our strong value growth in Combustibles and GBP 660 million of savings driven by Quantum. We expect to further increase our investment in new categories in 2021, with spend weighted towards the first half.
We also expect the drag from new categories on operating margin to reduce for the full year as revenue growth offsets the additional investment. Simplifying the business, our third operational priority, is driven by Quantum. We are releasing funds and create a stronger, simpler, faster organization. We are on track to generate at least GBP 1 billion of savings by 2022. In 2020, we realized GBP 660 million total savings. These savings do not include any net efficiencies related to COVID. We have created a more agile, empowered, and faster organization with reduced management layers and clear accountabilities. For example, our development pipeline has reduced from 24 months to 12 months, and our speed-to-market deployment has improved by 40%. We delivered robust EPS growth of 5.5% in constant currency, meeting our guidance for 2020.
We could have easily delivered on our high- single-figure medium-term guidance had we not continued to invest behind the new categories, but this would not have been the right thing to do for the business. Income from associates, mainly ITC, was down, reflecting the impact of COVID, particularly in the second half. Our underlying tax rate was lower at 24.9%. We expect a similar underlying rate in 2021 of around 25%. One of the highlights of our 2020 performance was our excellent cash generation. We delivered operating cash flow conversion of 103%, well ahead of our medium-term target of over 90%, driving our free cash flow of GBP 7.3 billion. This funded GBP 4.7 billion in dividends to shareholders, the largest payment in the FTSE. We deleveraged the balance sheet by 2x at current and 3x at constant rates.
With adjusted net debt falling GBP 2.2 billion at both current and constant rates, we remain confident in our target to reduce adjusted net debt to adjusted EBITDA to around 3x by the end of 2021. As mentioned, cash conversion in the period was strong at 103%. During 2020, we further strengthened our liquid position through bond issues, including a liability management transaction repurchasing and redeeming debt that would have otherwise matured in 2021 and 2022, signing short-term bilateral facilities and renegotiating our revolving credit facility, extending its maturity and removing the financial covenants. Our maturity profile improved and remains very manageable, with maximum annual debt maturities moving forward no higher than GBP 4 billion, with an average maturity approaching 10 years and close currency matching. One of my priorities is maximize cash generation to fuel our transformation.
We expect to generate cumulative free cash flow of around GBP 40 billion over the next five years. To drive this, we expect at least 90% operating cash conversion and good profit growth, and this will be supported by Quantum savings. In 2021, we expect gross CapEx of GBP 700 million, broadly in line with adjusted depreciation and amortization. Looking forward, we remain committed to our capital allocation priorities, with a 65% dividend payout ratio, investing in new categories, and the leverage to within our new corridor of 2-3x adjusted net debt to adjusted EBITDA. We believe this is the right level of gearing for the group, given our strong cash generation, and this will give us more flexibility in terms of capital allocation by the end of 2021.
We are carrying great momentum into 2021 and expect continued strong operational delivery with revenue growth in the 3%-5% constant currency range. We are confident, but we are not complacent. With COVID an ongoing challenge, an uncertain U.S. volume outlook, and a continued COVID impact on our associates, we retain our outlook for mid-single- digit adjusted diluted EPS growth for 2021. With performance within the mid-single- digit range dependent on the factors I just mentioned. We will update you as the year progresses. With that, I will now hand back to Jack.
Thank you, Tadeu. We have grown earnings and accelerated our transformation in 2020 through COVID. We have genuine momentum, doubling our rate of non-combustible consumers acquisition in the second half, with a further acceleration in Q4. We are generating the resources and cash flow to do this from our focus on growing value in combustibles, as well as the benefits of simplifying the company. We are led by the consumer, which is at the heart of our consumer-centric, multi-category model. These leverages our well-established cross-category consumer insights, deep understanding of product satisfaction, detailed market opportunities mapping, digital consumer and RGM capability. This has taken many years to build, and every element is vital for multi-category success, giving us a unique competitive advantage. To further accelerate our transformation, we have put in place Quest. We announced Quantum in 2019 to deliver a simpler, faster, more agile organization.
Quest combines Quantum with four other workstreams under Tadeu and myself, and is the catalyst to build the enterprise of the future, accelerating the move from a business that is used to sell cigarettes to a consumer-centric, multi-category consumer product group. What does it all mean? Our targets are clear. With the momentum in the business, we are well on track to achieving GBP 5 billion revenue with new categories by 2025, and we have mapped a clear pathway to 2025 profitability. Through our portfolio of products in nicotine and beyond, we are confident of reaching 50 million non-combustible consumers by 2030. We have made excellent progress in 2020 and post-COVID. We are confident in returning to our medium-term guidance with revenue growth of 3%-5% and EPS growth in high- single- figure.
We are clear that by delivering in both our ESG and financial targets, we will generate significant shared value for all stakeholders, including our shareholders. We are building A Better tomorrow. We have started, we are accelerating in new categories, we are a step ahead in multi-category capability. While we know we have further to go, we see a huge opportunity. I am proud of what the organization delivered in 2020, and we're carrying strong momentum into 2021 with combining our growth acceleration and pathway to profitability in new categories. This is a pivotal year in creating the enterprise of the future. We will be sharing more with you during our presentation at the CAGNY conference tomorrow, I look forward to taking your questions at our Q&A session at 9:30 A.M. U.K. time. Thank you for listening, stay well. Good morning, everyone.
2020 has been the year of delivery, transformation, and acceleration. We have a strong 2020 in combustibles, and in NGP, we had a very good performance with the growth in volume in all three categories by around 50%. We also have 2 million more consumers in H2. The dividend is strong. We did a lot of work on the cash and the leverage. 2021 is really a pivotal year. We have momentum, we have strong foundations with the right strategy. We are a global consumer multi-category company accelerating our transformation. Now it's time for questions. Can the questions come, please?
Hi, this is your operator. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Please ensure that your line remains unmuted locally. You will then be prompted when to ask your question. I can see that we have several questions coming through, so please stand by while the questions are collated. Our first question comes from the line of Nik Oliver from UBS. Nik, you are now unmuted. Please go ahead.
Hey, good morning, guys. Thank you for taking our question.
Hey, Nik. How are you?
Hey, morning. Yeah, good, thank you. Just a couple from me. Just on some of the COVID-19 headwinds that you flagged for 2020, could you just share how much of that was the global travel piece? I guess so then hence how much of that will sort of spill into 2021? If they help us on the EPS bridge. Secondly, is there any guidance you can share on what is the implicit transactional headwind baked into the constant currency EPS? Because I know the transactional you absorb through the organics. That would be very helpful. Thank you.
Okay. Jack, you want me to take this one?
Sure.
Okay, Nik, on the COVID-19, We said at the mid of last week that we were expecting 3% hit on the turnover line, end up being better than that. Basically, it was a recovery of emerging market that went better than we first thought in the second half of the year. We end up with 2.5% hit in 2020 as of the net turnover. Half of that is Global Travel Retailer. 1.3% of our revenue was hit by Global Travel Retail, and we are yet to see the recovery of that in 2021. Remember that this is one of the elements of uncertainty that we have to take in consideration when we flag a guidance for this year in particular.
At the end of the day, we can see some rebound of that, or we can see even upward situation because we had one quarter. The first quarter of last year was still positive, was still selling, and all of a sudden was a completely shut down from quarter two. This is one of the elements of the uncertainties as well. Taking on your second point about transaction, I would like to remember everyone that our guidance includes transactional effects. When we highlight mid-single- digit, there is an element of transaction effects that is already incorporated in these numbers. Last year, as you saw from the presentation, you have an idea because we highlight that in the operating model waterfall. Last year was around GBP 30 million, which equates to something like one equivalent of operating profit. In 2021, double that based on current rates.
As we stand today, we actually have a 2% headwind in operating profit as part of transaction effects, which again, is already part of our range when we say mid-single- digits range is part of that, okay?
Okay, guys. That was really clear. Thanks so much.
Our next question comes from the line of Adam Spielman from Citi. Adam, you are now unmuted. Please go ahead.
Hi, Adam. How are you?
I'm fine, thank you. Good morning to you. I really wanted to get a little bit of a sort of more understanding about the mid-single- digits constant currency EPS guidance. I suppose going into this, I had thought globally, you have a pretty easy comp because COVID was globally a negative in 2020. For the first time, you've got reduced risk product turning to actually be a positive profits contribution, as I understand it. There's a swing in profitability from new categories. I was just wondering if you can give me some of the elements that you think are leading to this mid-single- digit guidance. As I said, I would have thought your comp was easy and you're beginning to see a positive swing in new categories.
Yeah, Adam, thank you. I think that to start with, we have a strong 2020 and we are very happy with that. We exit the year strong in combustible, strong in new categories. Nonetheless, there are some uncertainties in front of us. Frankly speaking, we prefer to have a guidance that is reasonable because there are some unknowns in there. You still have the COVID that is going to bring some attention, especially in mature markets. You have uncertainties in the U.S., of course. You have our associates that are, like ITC, recovering slowly in terms of the COVID that has been quite brutal in India has an impact.
I think that we prefer to be reasonable in terms of the guidance, and then it's going to be from the top and the bottom of the guidance, and we will update you as we go along across the year. Tadeu?
Yeah, I think that you're absolutely right. We are very happy with the performance that we have at the back of 2020. We had a good momentum 2021. You are right, Adam, we expect to start reducing our P&L losses in new categories, but we cannot ignore that the problem of the pandemic is still there. We expect it to be better, around decline of 3%. Most of it will probably be recorded from the emerging markets. There will be some elements of geographic mix there that we had to take into consideration. We are strong U.S. markets, in 2020, and as you saw, we haven't provided any outlook for U.S. market, given that too unclear yet to see how the market develop post-COVID, and that's the reason why we haven't provided the guidance. We spoke about GTR, which is still some uncertainties there.
Jack rightly allude to ITC. We report ITC with one quarter lag. This means that our kickers for 2021 can be also low as it was in 2020. When you consider all that, we decide to take a more prudent view around the mid-single- digits, and as we go along, we update in the market.
You know, Adam, we will reduce our losses in new categories. We will be around three in terms of net debt to EBITDA. We will deliver in terms of combustible. We will continue to accelerate in new categories, and we will simplify the company with Quantum, and now the addition of Quest. I think that it is a pivotal year, 2021, and I want to have the possibility to invest and to make sure that we deliver on our guidance, but also that we continue to transform the company and accelerate in the great momentum that we have in new categories across the three categories, and also beyond.
Can I ask you just a couple of follow-ups? I think the answer, just talking about the guidance, I think one way of saying the answer, and I just want to check I've got this right, is frankly, there's more uncertainty in 2021 than pretty much any year you've seen before, given COVID and all its multiple effects. Because of that, perhaps you're being a little bit more conservative than in previous years in your guidance. Is that a reasonable summary?
I would agree with the first part of your comment. I would say more instead of conservative, I would say reasonable. As I said, we have a good momentum. We will continue to accelerate in 2020, and we will update you in the mid-year. I think it is the right way to go because we have momentum, and we want to continue to accelerate our transformation.
Just to be clear, Adam, if it were not for the uncertainty of COVID, we would have returned to the high- single-digit EBITDA. There is nothing to prevent us to get there. Until we get the clear of this, we cannot ignore that. We are still living through this pandemic.
Okay. Just turning to the new categories.
Yes.
You see 2021.
I'm sorry, Adam, the beginning of your question.
Okay, turning to new categories.
Yes.
As you think about 2021 now, compared with how you were thinking about 2021, let's say 12 months ago, would you say things are in line with your plan, ahead of plan in terms of revenue, but also the investment needed behind it?
I think there are three sides to that. One is, as we said at the beginning of 2020, we expected an acceleration in terms of the new categories. We had a lot of launches, Hyper, for instance. The launch of Modern Oral in the U.S. with the acquisition of Dryft. There were a lot of things that had to materialize. We saw a very strong acceleration in the second half of the year with an additional 2 million consumers across the world. 13.5 million consumers, 2 million in the second half, and 1.1 in the last quarter. We have strong acceleration. As I said earlier, in the second half, the three categories in terms of volume grew around 50% in volume. We're getting where we want to be. We still have a lot of developments to be done in terms of geo expansion.
Still a lot of things to be done in terms of putting our products in front of the consumers. I think that it is a strong start with the Q4 and the beginning of the year, and we'll continue to accelerate further to that. That's what we wanted. I think that we have to sustain the investment in terms of new categories. As I said before, it is more now we have built the capabilities. It has taken us three years to get there with our multi-category, consumer-centric approach. We're the only one to have that and to have been present in the new categories, the three categories and beyond. We have already started with CBD in the U.K. and other developments as you saw in the presentation. I'm happy with the development. Now we can continue to accelerate.
We're on the journey and accelerating on the journey. Tadeu, you want to add something?
No, I think that you said it all. I think that we have addressed the three major points that we had around new categories. First, we knew about the satisfaction problem we had in THP, glo Hyper is proving we have addressed this gap and given the performance, not just in Japan, but outside Japan, which is quite exciting. We know that we had a problem in Modern Oral U.S., which the acquisition of Dryft puts us back in the competition, in the fight, because at the end, we moved from four SKUs to 28 SKUs. We knew that we had to address the profitabilities that we had in Vapor. We have made big inroads. We have a clear roadmap to profitability in Vapor. That's the reason why we are very confident to start reducing the losses also in the P&L from 2021 onwards.
We're on a very good track, Adam, for the GBP 5 billion by 2025, and we'll accelerate as we go along. We go step by step. You know me, I'm more of a farmer somewhat. We do what we say, and we say what we do, and we deliver, and we'll continue to do so. The pivotal moment is the year 2021, where we'll continue to invest. As Tadeu said, reduce the losses in new category despite the additional investment, and continue to plow forward. We have the cash. Why? Because we have a very strong combustible business, and we are migrating the consumers from combustibles to new categories. There is a lot of space. We are present internationally, but also in the U.S., and we're the only ones like that. That gives us the possibility to continue to plow through.
In the U.S., for instance, on vapor, we have already 15 states where we are leaders in vapor. In Canada, we took the leadership in vapor, we're continuing to accelerate on THP. In Modern Oral, we're the leader worldwide. Now through the acquisition of the products that we did, now we went from 8%- 11.1%, 11.2% share, and we're just in expansion of distribution. As you know, all these products, including e-cigarettes in the U.S., for instance, are going more and more into general trade, which means lower trade margins by far. Also, the volume gives us reduction of COGS. All our innovation is not only geared at satisfaction to the consumer, but also reduction of COGS and scale. I think that we're on the right path. We will continue to accelerate.
Okay. Thank you very much.
Thank you, Adam.
Our next question comes from the line of Gaurav Jain from Barclays. Gaurav, you are now unmuted. Please go ahead.
Yeah, good morning. Thank you. I have three questions. One is on heat not burn-
Okay. Please, can you start with one, then go to the next one, then go to the next one?
Sure.
I'm French, so I have the time to digest. Thank you.
Yeah. No worries, Jack.
Thanks.
Can you talk of your heat not burn plans over the next few years? You are still in a limited number of markets. How many markets should we expect that you launch in over the next few years? Is Europe going to be a big focus? I don't think you are still in Germany. How are you thinking of heat not burn?
I think that you have always to go back to what we said in terms of the way we look at the full portfolio in terms of new categories. There are some markets where we'll emphasize on one category and then reduce the investment on the other categories. The consumers are different from geographies, but also taxation, but also regulation. We will have an expanded footprint in terms of THP, but we'll not put THP everywhere. We will have an expanded footprint on THP where we feel that the category has legs for the future, i.e. the current markets plus others that we have determined as additional markets for THP. It's an approach by category because we have these three categories that we can navigate.
Sure. Thank you. The second is on this GBP 400 million charge in relation to the MSA liability that you have booked in relation to the brands that you sold to Imperial. How should we think about this? Now you have booked the charge, how should we think about it?
Tadeu, you take that one.
Look, this is an old litigation that we had that comes back to the transaction that involved Lorillard. In the past, as you know. I do not want to make much comments about this because the litigation is ongoing. We booked the charge because we have a request from the Florida states to pay for the old product, well, the MSA related to the products that we sold to Imperial, or Reynolds at that time sold to Imperial, and at the back of the transaction. We had to book a charge, and we paid. Actually, some of that has already been paid. We made a provision based on the best estimate that we have for the other three states that we are in. We have a final court judgment in Delaware. I will prevent to make any further comments on that.
The important thing is that it's all already booked in our results. Some of that already paid and some odd in terms of provision.
Sure. Thank you. Just a last question, on the stock. Look, since April 1, 2019, BAT stock is down 70%. There is a lot of value within the company, either through your stakes in other companies. Now your GP business is growing very fast, and we have seen e-cigarette companies listed tech-like valuations, whether it is in Hong Kong or U.S. Is there a way for you to approach the unlocking of the value which resides within BAT?
Let me tell you. Very clearly, a few years ago, when Tadeu and myself took the two jobs that we have now, we were told that in terms of new categories, we were nowhere and we had a lot to do. We've created capabilities. We've taken position in three different categories, and we are growing strongly. So I think what is important to consider is that we have a lot of potential moving forward because we're already three years on the journey of multi-category. We'll continue to accelerate on that journey Tadeu?
Yeah, I think that is right. I don't have much more comment to take. The question is about the second part, Gaurav, because I missed your first part of the question.
Well, what I was asking was that, look, your NGP business is growing very fast. When we see the standalone e-cigarette companies, they are trading at tech-like valuations.
Okay. Yeah.
So is any-
You know, the reality is there was a bubble with e-cigarettes, there was a bubble with other companies in new categories. The reality is you have to have a very strong foundation in terms of international footprint. You have to have the capabilities, i.e., the distribution in the 180 markets that we are in. You have to have the legs and the possibility and the understanding in terms of consumers, in terms of regulation, in terms of pricing, and in terms of distribution, to be able to be there on the long run. That's what I think we've demonstrated. We've created the capabilities, and we go forward. We're not a hay fire. We're there building capabilities on the long- term for accelerating our transformation. We're a global consumer multi-category company, and we're the only one. That is our point of difference, and it is paying off.
H2 2020 has been the testament to that. That gives us a strong springboard for 2021. We'll continue to grow. I'm very confident in the GBP 5 billion. I'm very confident in the 50 million consumers that we want by 2030. It's a long journey. It's not a sprint, it's a marathon. We're winning the marathon. Multi-categories and all the elements of the puzzles are coming together as we speak.
I fully agree with Jack. I think that we need to persevere. It's a question of time. We have created the right foundations. We are already seeing the benefit of it. It's deliberate time. That's why Jack referred to 2021 being a pivotal year. We agree with that, and this will come the correct way.
Okay, well, thanks a lot.
Our next question comes from the line of Richard Felton from Goldman Sachs. Richard, you are now unmuted. Please go ahead.
Hi, Richard.
Hi, good morning. My first question is on NGP margins. At your Capital Markets Day in March last year, you showed a very interesting slide with gross margin to each of your NGP categories and an indication of whether you were facing headwinds or tailwinds. My question is, whether things have developed as you had anticipated? In particular for vapor, you called out various reasons for gross margins to improve. Have you actually seen that in your FY 2020 numbers? That's my first question.
Yeah, I think what's important to note is that we have improved in terms of our costs. We have improved in terms of our distribution costs, and we have improved in terms of efficiency of marketing. That's why we say that for 2021, we will not only continue to invest at a high level in new categories, but we will start to reduce our losses in terms of new categories. I think that's a very important testament to the journey that we're going through in terms of financial efficiency in new categories. Tadeu, maybe you want to add something.
Yeah, just going back to the NGP and what we see today. Look, on the Modern Oral, if anything, the margins are even higher than what we showed before. The payback, we always said that with payback in Modern Oral is once we launch in what markets, it's not more than 15 months. It's a product that there is no device. There is a very good margin, and we are very satisfied with that. On the THP note that there will be probably some headwinds ahead. We are seeing already some governments taking excise up, which means that will be some margin headwinds that we'll be facing. Overall, I think that in our case, that we use most of our cigarette machines adapted to our consumables.
I think that we still have space to reduce the cost of our consumers and keep our margin as attractive as they are in cigarettes, if not more. The only problem that we have been facing, and you know that's around vapor, and the inroads we made in 2020 is around trade margins, because as big as you get, you start having more negotiation power. We are seeing already this in France. We have been renegotiating trade margin with some of the key accounts, the main accounts in France. The other element that we are leveraging is e-commerce. We now have already 20,000 subscriptions, and the subscriptions has more than doubled of a normal buyer. E-commerce has more than twice the value of when you sell in convenience stores. We grew our e-commerce by more than 60%, and it's doing extremely well.
Another element that we are now introducing in vapor and in new categories in general is our Revenue Growth Management tool that is doing extremely well in combustible. We can now take price in some areas with no negative impact in volume. We can be very clever in terms of elasticity across the new categories. We have been doing that in the U.K., for example, with very good results. Finally, we introduce a model now with the return of investment in terms of marketing investment spent in different effort to define exactly the effective touch points behind the investments to allow us to do better resource allocation decisions. All in all, we are progressing. For sure that when you see one particular area, it's a combination of a market where you are just starting and market that we have mature.
We are already seeing the results of all these initiatives coming through in more mature markets.
What makes the difference at the end of the day is all the points that Tadeu spoke about, and scale. Scale in terms of e-cigarettes, we're growing in the second half 59%. In terms of THP, we're growing 45%. In terms of Modern Oral, we're growing 56%. That plus all the points that Tadeu said, that's why we're saying that we will reduce our losses in 2021. That's the pathway, and we'll continue to plow through.
Great. Thank you. That's very clear. My second question is on the outlook for U.S. cigarettes.
Yes.
I appreciate you haven't given any specific guidance for industry volumes. Could you maybe outline some of the scenarios you're thinking about for the U.S. in FY 2021, which underpins your group guidance for 3%-5% constant currency growth? Relating to that, are you expecting a more challenging tax environment in FY 2021 than you would expect in a normal year?
Yeah. First of all, thank you very much. First of all, in terms of the U.S., yes, we're not giving guidance. What you have to start with is 2020. We had a very strong performance in the U.S. Why? Because we have an extremely strong portfolio. We are much better in pricing than anybody else. We led pricing twice during the year, and we took more pricing than competition. We grew volume share and we grew value share. We didn't see any acceleration of our downtrending. We have a very strong portfolio. On the back of that, you will have also the consequences of the COVID that will still be there in 2021. You will have also all the impact in terms of taxation, in terms of regulation. Already in the U.S. you have prices that are ranging from $5 in Houston, Texas, to $10 in New York.
There is a lot of space. Because we have a very strong portfolio, we will be certainly able to navigate all this. We don't give guidance for the U.S. because there is uncertainty, and Tadeu might elaborate a little bit about that later. The reality is, we see that our performance in the U.S. is going to have an increase in revenue because the market will be good. To what level these external factors will impact the business moving forward? We're very well positioned in the U.S. market, and we will be the ones that we will be benefiting more. Tadeu, you want to add something?
Yeah. I think when you think about the U.S. market, you should bear in mind that there is a historic decline around 3%-4% in the markets. Last year, the industry was up 1.5%, but there were these factors that Jack allude to. Inventories was a big factor. We noticed that retailer and wholesalers in general, they increased their levels of inventories to cope with this uncertainties around lockdown throughout the pandemic. We thought that there was more consumer moments. The ADC, if anything, was slightly up in the U.S., for example.
We also thought that the flow back that we have seen in vapor in the year before in 2019, they reduce, and it actually contributes to positive momentum in the cigarette business at the back of the value price. The regulation, the FDA is stripping out flavors out of a part of tobacco and menthol from the cigarette business in January throughout 2020. There were a number of factors. That's exactly what we meant about uncertainties, because we don't know how the pandemic will develop, and hence all these elements that I was referring to will actually impact the marketing in 2021. Macros will perform, the macroeconomic environment. How the vapor in particular that we saw already some uptick on vapor from the last quarter, the last two quarters last year, if it will continue or not?
That's why when we talk about our guidance, we always talk about the range. We say mid-single- digit, there is a range there that could be upper and high or low. It is exactly one of the elements that is part of this uncertainties that we are facing.
What's important is that we have a very strong portfolio in the U.S., both in combustibles and in new categories, and we're planning forward. What is very important to consider is that we know how to navigate all these things. Yet it's too early, especially with competition not giving guidance. I'm not feeling interested in giving a guidance at this stage. We'll see more towards the half year what has developed in the U.S., and we'll take it from there. The start is strong.
Great. Thank you very much.
Our next question comes from the line of Alan Erskine from Credit Suisse. Alan, you are now unmuted. Please go ahead.
Hi, Alan. How are you?
Hey, good morning. I'm very well. I hope you're well as well. Three questions from me, so I'll ask them one by one.
Thank you.
The first question is on heated tobacco in Japan, and two parts to that. You say you exited the year with 6.3% share. Could I just check how much of that or what proportion of that is Hyper? My second question is.
Let me start with that one, if you don't mind. The answer is 50%. What is interesting is that we don't see an acceleration of decline of the products that were there prior to the launch of vapor. What we see is that some consumers are very happy with the Superslims segment, with the Superslims product that we have in the market. It plays to older consumers. For the younger consumers, now we have the glo Hyper that complements the portfolio, if you want. Is the first in the world, induction heating, that we launched a few months ago. I think that we're in a good position in a very competitive market where everybody throws everything in. Philip Morris and JTI throwing everything in. We have grown since August, 100 basis points in terms of market share.
We had a deficiency in terms of products at the beginning of last year. Now with glo Hyper and glo pro, we have a portfolio that resonates very well with the consumers. We have also extended our capabilities in terms of digital, in terms of consumer activation. Digital, especially during the COVID. There was a lot of closures of shops in the first half of the year, and we've accelerated strongly in the second half of the year. As I said, I'm in THP in Japan. We make money. We're happy about that, and we'll continue to do so. It represents more than 50% of our revenue in Japan. Our combustible business also in Japan is doing very well. We'll continue to have these two engines of growth in Japan. That was for the first question.
I think to be fair, you've covered most of my second point as well, but I was just going to say, clearly it is a pivot-.
I'm not a mind reader, but I'm trying to give complete answers.
It is a key battleground, I guess. Given the momentum that you have going into the year, would your ambition be to grow share of the heated tobacco category in 2021 in Japan? I'm conscious PMI have got some innovation coming, would you aspire to growing share 2021 on 2020 in Japan heated tobacco?
Yeah, I think that our position is strong. We have momentum. I think that innovations have been launched by everybody in the course of 2019 and 2020. Now we have the right portfolio, and we'll continue to plow through.
Thank you. My second question, and forgive me, this may be a stupid question, but my understanding of transaction issues, a large part of that was that you are buying tobacco leaf, often in dollars, and then selling the cigarettes in obviously the currencies of the end market.
I am just looking, obviously, the dollar's weakened against the euro quite materially. Maybe just from my understanding, can you just very simply explain why the transaction headwind is greater in 2021 than in 2020?
Yeah. That's why I have a finance director that is an engineer. Tadeu, that's for you.
Well, it's basically our exposure to emerging markets. There is a massive devaluation of currencies. For example, you go to Russia, for example, you are absolutely right. You have to pay your leaf in dollars. All of a sudden, you have a massive devaluation of the ruble. Started last year, but if you take the average last year compared with the spot with this year, is a much stronger devaluation than the average. That's what makes the same happens in Brazil, the same happen. It's exactly the exposure more towards the emerging markets that makes this a big hit.
Thank you. My last question is just conceptual, really. As we look to the journey on NGP products to break even and profitability at some point, could I just ask, which of the two categories, vapor and heated tobacco, do you think will go through break even first?
Well, they are all improving sequentially, which is very good. It will all depend on taxation environment. We see that there's more taxation acceleration in THP at the moment, but we'll have to see through the years. What is most important to us is that we want to reduce our losses as of this year in terms of new categories, a clear road to profitability. As I said before, the scale is very important, we're expanding geographically because we have the right capabilities and we have the right portfolio. We have innovation today, we'll have innovation this year and next year coming to the market. I think that we have a clear pathway. After that's the beauty of being in multi-category. As I said, THP has more acceleration in terms of taxation.
Well, we are in three categories, we can balance our activities. Remember always that in terms of combustible, we have the best performing business. We're growing share, we're growing value share, we're the biggest in volume. I mean, the fact of having all these artillery in our weaponry, if you want, gives us a very strong position. I think that also you cannot forget the fact that we have a team in BAT across the different levels of the organization because we have that genetic of being entrepreneurs at core. Because we have simplified our organization, we've taken out 20% of the management of the company. Also we have changed, I and Tadeu have changed most of the management board with new responsibilities and new people. We've changed 120 that are below.
We've changed something around three quarters of the jobs of the different people that were there, including the replacements. We have taken a lot of people from outside. I think that we have a clear path in terms of development. Tadeu.
Yeah, I agree with you. I think that we cannot forget that depends a lot in terms of the mapping that we'll be doing in terms of expansion, in terms of consumer needs, and we have all the tools necessary to identify that. At global scale, it's always tricky to answer questions like that because at any point in time, you're entering new markets, and you have some more mature markets. The dynamic behind the categories, like Jack said, we have to see how this pan out.
We have a clear pathway for each category in terms of profitability, and we have a very clear pathway in terms of geo expansion. We said that one year ago, and we continue. We do what we said one year ago, basically. We are accelerating in our transformation, and that makes us successful. Now, is it to the point where we are already reaching the GBP 5 billion? The answer is no. We're on a very strong acceleration, and that is why we are in the situation in which we are, which is the base is extremely strong, the foundation is extremely strong. We have the right strategy. We're expanding on that portfolio. We have the right innovations, the right capabilities, and radical cost and resources allocation.
We go very, very close to the cash and to the dividend in order to make sure that we're able to deliver as we transform the company. It's a pivotal year in 2021, where the investments that we've made in last three years, the momentum that we have at the end of 2020, will take us through to a next phase of the development when we start Quantum and redeploying the company in a very different way moving forward.
Super. Thanks a lot, guys.
Super. Thank you.
Our next question comes from the line of Jonathan Leinster from Société Générale . John, you are now unmuted. Please go ahead.
Yeah, thank you.
Thank you very much. Good morning. Yeah, a few questions. I'll go one at a time as well.
Thank you.
First of all, on the NGP, clearly the target implies sort of 25%-30% sales growth. Is that going to be exponential, or should we assume that for 2021?
It's a very good question. Again, I think that there is a lot of moving parts in development of new categories. There is taxation, there is regulation, there is geographical footprint, there is consumer choices. As you saw, we don't stance because we wanted to experiment in hybrid between e-cigarettes and THP. It was not successful, but yet we took a lot of learning. The portfolio will evolve as we go along, and there are lots of things that will happen. I think that it's going to be a journey where I'm telling you now that we're very confident with the GBP 5 billion, and we are continuing to develop our business. We will invest strongly in 2021 to continue to benefit from the acceleration that we have.
Again, I insist, it's the first time that we have in a half year, 2 million consumers. This is massive. That's 1.1 million in Q4 only. We are best in class, that's great, because we need to continue to do so. Because we're edged between our three categories, plus beyond nicotine, that we have already explored since more than a few years now and started with the pilot in terms of CBD, we'll continue to accelerate in that category also. It's a question of deploying all this and making sure that we make the right calls. That's why I want to have space. I want to make sure that I do the right things for the business with Tadeu, making sure that we have the right resources in place.
Right. Okay. Just following on from that, the GBP 5 billion target for 2025, clearly one of your competitors is just talking half of revenues by the same period, which implies a business or NGP business, sort of two to three times bigger. Is GBP 5 billion ambitious enough?
As I said, I'm a farmer. We take it step by step. We have a very strong start. We're happy with that, and then we'll navigate as we go along. I think that our strategy is the right one. I'm sorry, I'm repeating myself, but I think our strategy is the right one, and we'll continue to accelerate. They give numbers, fine. It's for them, it's fine. It's perfect. Very good. Our numbers are our numbers, and we'll continue to develop as we go along.
Okay. Just a more technical one. The FDA has begun to issue notices to delist some of the non-PMTA compliant vaping. I think in the past you've talked about a contestable space of a couple of billion dollars. Is that beginning to show, or are the FDA measures as we speak, still very limited in terms of U.S. vaping?
The way it works in the U.S., and it has been slowed down a bit by the COVID, as you saw, the date was moved back a bit about nine months ago. The reality is, the market is going in very clear directions. One, it is from open system to closed system. Two, from vapor shops to general distribution, and three, from products to brands. Because people need to be reassured by the quality of their brands. We've doubled our position in the U.S. in the last 12 months, we'll continue to do so. I think that all our products are where they should be in the PMTA process, and I continue to believe that there is, for the two years to come, a contestable space of GBP 1.5 billion. Now, how will that materialize in terms of the implementation of the PMTAs? We'll have to see.
That's going to be the starting element. Already, the fact that they're producing a list of products that are not going through the process in the right way gives you some idea that the ball has started to roll. We'll have to see as we go along. Let the whole thing unfold, and we still consider that there is a contestable space of 1.5 billion moving forward. Tadeu, you want to add something?
Yeah. Look, Jack, I just want to point on the GBP 5 billion. I think that more important, for sure, that we are confident we clearly have the momentum. 2020 was very a unique year, we've had to face a number of headwinds, as you probably have noticed from what we disclosed. More important that the transformation is already happening. The world is changing. Our footprint is our footprint, is unique. No other company will be comparable with each other because they are different. We have a footprint that is different. If you see below the group level, at a market level, you go to Japan, more than 40% of our revenue is already in the, what we call, non-combustible. You go to Sweden, it's more than 60%. You go to U.K., it's 30%. This is happening in a number of markets.
For sure, we have a very strong footprint across the world. I think that that's what is important. People who have their own pace, we are very confident we can deliver the GBP 5 billion, and this is a transformation, and that's what matters in my view.
Okay. Lastly, can I ask, you tried the Modern Oral category in a couple of emerging market, and I was just wondering whether there's any update on whether that had proved successful or not?
Yeah. It's a very good question. The answer is yes. We're taking learnings from there because there are a lot of countries in emerging markets where the ritual of chewing these kind of products is there already. Also, always remember, you don't need to buy a device to go to Modern Oral. The cost barrier is not there. There's a lot of illicit in these different markets, and this is a product that will be with taxation. It's all beneficial to both the governments in terms of revenue, the consumers in terms of risk reduction, because they cannot afford the device, and to us, because we have the geographical footprint to support there. We're taking the learnings as we speak in these different markets, and we'll continue to move forward.
I strongly believe that we have a major strength in our geographical footprint and our revenue. 75% of our revenue globally is in developed markets. 25% of our revenue is in emerging markets. Yet, on the volume side, 60% of our volume is in emerging markets. We have the distribution in all these markets that we can leverage. Tadeu, you want to add something?
Yeah, I would just add that COVID didn't help us at all in a year like that, in those tests we were referring to. I think that potential clearly is there. A number of those markets are stick markets, so we can sell not even 40, we can sell sachets of Modern Oral with very few pouches, for example, four or five, make it very affordable. Clearly, and it's a way that we can to democratize the journey towards a reduced-risk product. We will receive that, but we believe that there is a lot of potential there, and it's the right thing to do for society as well.
Okay. Thank you very much.
Our next question comes from the line of Rey Wium from SBG Securities. Rey.
Hi, Rey. How are you? Long time no see.
Hi, Jack, Tadeu. No, all good. Listen, just a couple of questions from my side as well. I just noted the net debt to EBITDA corridor, I think you've now said 2-3x as opposed to the previous guidance, I think was one and a half to two and a half. I was just curious, what has led to the thinking of increasing it a bit? To follow on from that is, if you get your net debt to EBITDA around about 3x , is share buybacks maybe something on the radar screen for 2022?
Tadeu, you want to take that one?
Well, Rey, look.
No, Tadeu will start. What's very important to me is that we go to around three, because that gives us then a straitjacket that is unleashed, and then we can re-look at the way we do capital allocation. That is going to be by the end of the year. Tadeu.
Yeah. Look, Rey, we have set this new leverage corridor for the company of three to two, because we think that is aligned with our credit rating ambitions and our business needs as well. We have clearly expressed it in terms of priorities for capital allocation, that we are committed to the 55% dividend payouts ratio, continue investing in the new category space, and the leverage in line with our targets. We have a very high cash generative company. Even in a difficult year like 2020, as you saw in our results, we were able to generate substantial cash. We expect to generate around GBP 40 billion+ in terms of free cash flow the next five years, which is 2/3 Of the market cap of BAT today.
Once we reach this level or this corridor, we will have more flexibility to assess the areas as share buyback, like you allude to, if the circumstance are the right one, or bear in mind that our focus continue to be invest in the new categories business and beyond nicotine space as well.
Excellent. Just in terms of your industry volume guidance, I think you're saying roughly around about 3% lower. Now, obviously, will we be far off to, given that you've always gained a bit of market share?
Yeah.
Think that you may do a little bit better than that? I just want to get a bit more color on your own specific volume numbers.
Yeah. We do believe that in 2021, the emerging markets will recover a bit in terms of volume. As you rightly say, we grow share and we grow value share. That's what we say for the size of the market. We always aim, of course, to do better than the market.
Maybe if I can just throw in the last one there.
Sure.
Just in terms of the Canada litigation. It's now two years, basically, that this stay has been in place. I know you've provided just an update in the release, but how much longer can we expect this to continue? Any sort of evidence that we can maybe get to some finality on that?
Yes. I think, first of all, it's a legal case, so we have to be cautious in the way we speak about that. Second one, there has been some part that has been covered in the last two years. I think that, looking at it through the lenses of legal, it will take some time. It takes a lot to tango, a lot of people to tango, and it will take some time. It's known, it's taken care of, but we'll have to be patient, I think.
Okay. Excellent. Thank you so much.
Thank you. Have a nice day. Next question.
Our next question comes from the line of Sanath Sudarsan from Morgan Stanley. Sanath, you are now unmuted. Please go ahead.
Hello, Sanath.
Good morning, Jack. Good morning, Tadeu.
Hi.
I hope you're well.
Yes.
Great. A few from my side. Starting off, I just wanted to understand what's the kind of split we are thinking about or we should be thinking about in terms of your investments in NGP with the risk promotions versus core platform investments? What I'm more keen to understand is, what's the impact you've seen in older markets as you've kind of lifted your promotions, in terms of the sales growth or consumer retention? That's the first question.
Yeah. I think the second part, Tadeu will take the first part. I think what we see is that the efficiency that we have in terms of converting consumers is increasing. I think that the quality of the portfolio resonates very well with the consumer. I think that there has been a lot of places where there has been either heavy promotions done by competition, like JUUL in the U.S., where you have to have the resources in order to follow and in order to make sure that you're in the game, and we did so. Of course, we are for value. Value, I mean growing value of the category. We will take the actions that are necessary when necessary. I think that the pathway is clear. We have the right platforms in three different categories, and we are accelerating.
I think that the road to profitability in terms of these three categories is clear. We start to reduce our losses in 2021. Tadeu, you want to take the first part of the question?
Yes. On the promotion side, if you take the year 20% of the investment was around promotions. For sure, this is just a reminder. These are initiatives that will boost your turnover. When you see our numbers, it's rather net of those, let's put it that way. We have a pretty clear way to track the return of those promotions. We have a very clear payback time in each of those markets, and we track this very diligently, as you can imagine. I spoke about the marketing effectiveness tools that we have in place that is completely linked with consumer funnel. We can identify exactly based on our plan too, in terms of numbers of buyers, loyalty, in terms of consumers that want to generate, how much we need to invest in each of their touch points, which is the other 80.
Overall.
I just insist on the point that Tadeu raised, which is the price promotions. The promotions are already in the NTO, are already in the revenue.
Great. Thank you very much. The second one I want to understand is, in terms of your global cigarette user pool, of course, people have been staying at home probably smoking more. You had lockdowns, especially in emerging markets to deal with. As you exit 2020, how have you seen your consumer pool evolve? Have they been more sticky, remaining the same with you? Or you've seen the normal rate of decline in users, which you traditionally see in emerging markets? Just want to understand your user pool, how that has evolved.
We didn't see any acceleration or reduction of the user rate of the products. What we saw more is the fact that borders were closed, has reduced illicit in a certain number of countries. Consumers did not move. For instance, in Germany, a market that is historically going down by 2%, 3%, has grown by more than four.
Germans stayed in Germany, and Germany is a high-value market. It's more these kind of things that have influenced the thing, rather than consumption by consumers. No change in the patterns.
Right. Then the last one I would say is just probably for Tadeu, just trying to deconstruct that GBP 40 billion cumulative cash flow over the next five years. You did about seven, GBP 7.5 billion in 2020.
Yeah, even though you had some payments to be made. You have a guidance of mid-single- digit 2021, high-s ingle- digit thereafter. Which just mathematically puts you more like GBP 45 billion. Should we be thinking about cash generation differently post 2021?
At the end, we are seeing 40+, to be precise. This is predicated in our ability to continue to generate a lot of cash out of the product. That conversion has been exceptionally good in 2020. We target, as you know, above 90%, but the reality is that we have been above 95% over the last few years because the focus that we have given on the cash side. I don't know if you remember, but we decided also to make some calls in terms of CapEx. We've picked our CapEx to levels of depreciation, and they start to kick in in 2020. It's one of the explanations why our conversion has been so high.
The GBP 40 billion+ and our ability to continue to generate and convert as much as possible cash, and also in our financial algorithm of mid-single- digit and going back to high- single- digit as soon as we get the skies on the country. That's all together and considering all those announcements that we have here and there.
All right. Thank you. Can I just ask you on the 2021 cash flow, please, if I may? Trying to just think through your de-leveraging target of around three turns by 2021. You have a normal de-leveraging run rate of about 0.4 turns, and given how the GBP has moved versus the dollar, maybe it's a year where it's actually beneficial to you. Is it a more conservative guidance of around three rather than, let's say, more like 2.8, which should be more normal run rate?
No, I don't think so. Look, in terms of the leverage, you are right. We have been able to leverage that 0.4 the last three years. This year, 2020, it's all constant FX. At the 2020 leverage at 0.3, but the currency is not helping us in the past. In 2020, it's a good example. We managed to leverage because of the current headwind that we face, which is basically the difference between the 31st of December year-end position and throughout the year. If you see 2021, for sure that our net debt, if it stays as it is now for the end of the year, long, it's a stretch to imagine that. There's still a year to go. For sure that the net debt will be reduced.
You have to balance out this. We have to see. It's too early to speculate how it will be this, but our ambition is to get around three times. Was, at a certain stage last year, an ambition to get below three times, but we moved that to today with the required guidance from high to mid-single- digits last year because of the earnings element to that. We still believe that we are on track to get to around three times by the end of the year.
The important point, we, of course, continue to pursue our approach in terms of dividend at 65%. Last year, we had more than GBP 2 billion in terms of free cash to take care of this. I think that the company is in a good situation. We'll go step by step.
Great. Thank you very much.
Our last question for today comes from the line of Gaurav Jain from Barclays. Gaurav, you are now unmuted. Please go ahead.
Yes, sir. Thank you for taking the follow-up. It actually follows from Sanath's question on leverage. How do you calculate leverage? What the comments I have heard from Philip Morris and Imperial is that rating agencies are taking a very conservative view of tobacco companies' leverage and doing all sorts of adjustments. They are planning to repurchase at a much lower leverage than 3x. How should we think about how rating agencies are looking at leverage?
Well, you are a bit cut, Gaurav, so I don't know if you heard it all, but anyway, you want to know how we calculate.
That's the core of the question. I'm not sure I heard everything also because the line was not so good. I think what's important is what we said is that we go to around three net debt to EBITDA, and then we review capital allocation. Tadeu, from what you understood from the question, I'm sorry, it was not very clear and the line was broken.
Well, the calculations, the net debt is basically a conversion back to GBP on the 31st of December. It's a balance sheet conversion, rate one. Given the fact that most of our debt is U.S.-denominated, if there is a strength in pounds at that point in time, we'll benefit it because it's less pounds at the 31st of December. That's one element. If the current state it is today compared with the previous year, clearly it will be less, a lower net debt figure. On the other hand, they calculate throughout with their average, the exchange rate, how much profit we translate into cash at the cumulative rates, average rates throughout the year. This also suffers an impact. We have to see how this performs throughout the year.
Remember that the correlation between FX to pound/dollar is important for the debt, but not that much for the EBITDA that also gets impacted by emerging market currency and all that.
Then we get to the year-end figure. For me, I can explain all that, the constant FX and all that, but what matters is what is the headline number. We don't incorporate ITC in those numbers, if you want to know. Our EBITDA doesn't count with ITC, despite the fact that ITC is part of our investment. That's basically the way we calculate.
Sure. What I was asking you, how do rating agencies do any adjustment to those numbers?
Okay, now I got it. Okay. Well, depends. Depend on the rating agency. Some of them use gross debt as opposed to net debt. Some others, they adjust for PPA. You see. Depend on the agents, but they're slightly different from what we calculate.
Sure. Is there a range of how much higher is your leverage in their eyes versus the number that you have? Like is it 0.3x , 0.4x higher than what we are seeing?
Our corridor of three to two is in line with our credit rating ambitions. We are a BB B+ , and which is exactly where we want to be. We are PWA 2, so want to be PWA 1. I think that is what we want to achieve of the new corridor, is align with our credit rating ambitions.
Okay. Well, brilliant. Thanks a lot.
Thank you very much.
I will now hand the call back to your host, Jack Bowles, for any closing remarks.
Thank you very much. Thank you very much for all your questions and your support during the year. What's important for me is that we deliver, we transform, and we have a strong acceleration in 2020. We have a strong 2020 in combustible, and in NGP, we really did the step forward. We have growth in volume in all three categories in the second half by around 50%. We have 2 million more consumers in H2 alone. Dividend, cash flow, and deleverage were taken care of. Tadeu does that very well. 2021 is really a pivotal year. We have momentum, we have strong foundations, and we have the right multi-category strategy. We are the only global consumer multi-category company, and we're accelerating our transformation. Guys, it's nothing to do with standstill. We have an accelerating path, and we'll continue to do so.
By doing so, we will also reduce our loss in new categories. We will go around three net debt to EBITDA. We will deliver on combustibles and on value on combustibles specifically, continue to accelerate on our momentum of new categories. We will simplify our business with Quantum, and now we have added Quest, which is the enterprise of the future and the next step of our transformation. This is a pivotal year in 2021. We will deliver, we'll transform, and we'll accelerate. Thank you very much for your questions, and thank you very much for your patience. Have a nice day, and stay safe. Also, I remind you that tomorrow we will be at CAGNY, so some of you, or the ones that can participate and join, that would be absolutely fantastic. See you tomorrow at the CAGNY conference.
Tadeu and myself will be there doing presentation and Q&A. Thank you very much. Have a nice day.
Thank you.