British American Tobacco p.l.c. (BATS) Earnings Call Transcript & Summary

Hello. And welcome to the BAT Capital Markets Day. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Jack Bowles. Please go ahead with your meeting.

Welcome, everyone, and thank you for meeting us today. There is a lot we want to cover today, about our business and about our strategic path. You will, of course, be wondering about the impact of coronavirus on BAT and on our industry. As you know, we are a major global business. And of course, the welfare of our people and stakeholders is a key priority. As you might expect, we are monitoring the situation extremely closely. And we're actively managing our business globally. I would like to emphasize 2 things: One, our business is one of the most resilient sector of the global economy; and second, to date, we have seen no material disruption to our business. You will hear more on this area from Tadeu later in the webcast. That all said, it is also important for you to see today some key things about us. Our strategic path and our long-term future. First, we have consistently delivered against our financial guidelines. We have delivered again in 2019. And at present, we are confident we can deliver 2020. Second, we have a clear strategy for growth, founded on our unique cross-category consumer understanding. And we would like to tell you how this strategy is evolving. Third, we are building capabilities. We have the resources to continue to fund investment for the future, delivering the balance sheet and deliver against our financial objectives. And finally, we have a focused, high-quality team of people, some of whom you will see speaking today, to lead this business in the future. During the presentation, we'll go more into details on each of these points. We will demonstrate a number of things that we are delivering our financial results; that we are committed to our 2020 priorities; that we have a clear strategy to build a better tomorrow; and that we already started building the capabilities for the future. And we are already creating a bolder, faster and more empowered organization. I'm sure that you will find these short presentations useful, and we look forward to answering the questions at a later stage. In March last year, I set out 3 clear priorities. In 2019, we have delivered against these priorities. We are creating a stronger, simpler and faster business, and our commitment to delivery remains unchanged. In 2019, we delivered on all our financial commitments to the market, both in combustible and in New Categories, whilst also making significant additional investment for the future. And importantly, we delivered on our high single-digit earnings growth commitment. Furthermore, we remain committed to delivering on our 2020 targets. We expect revenue growth of 3% to 5% and high single-digit EPS growth, alongside strong cash generation, allowing us to continue to deleverage the business and deliver on our commitments. Finally, although the environment remains volatile, we will continue to drive value from our combustible business, whilst driving a step change in New Categories and remain committed on our ambition to achieve GBP 5 billion of revenue in New Categories in 2023/2024. Facing the opportunities ahead, it is clear to us that we need to evolve our strategy and purpose. We aim to build a better tomorrow and the heart of this is our new corporate purpose. Our purpose is to build a better tomorrow by reducing the health impact of our business through offering a greater choice of enjoyable and less risky products to our consumers. The pillars of the strategies are: first, our mission, which is all about meeting consumer needs through world-class brands; second, combustible value growth and step change in New Categories, which are fundamental to how to win; third, we are committed to deliver a better tomorrow and creating value for all our shareholders and stakeholders; last, we have a new ethos, energizing the company to create an organization fit for the future. The presentations we have prepared for today will take you through more of the details of the strategy. But I would like to explain more, now the most important aspects now. Our mission is about stimulating the sense of a new adult generation. And to do so, we have to win in high-growth segments and priority markets. As you will see later today, we are clear on where and how to focus our investment in order to win. We are the only player to have a global business across 4 categories. This gives us unique and superior consumer insights and foresights. We leverage these to further develop and deploy remarkable innovations, partner with powerful brands. We are investing in a digitally enabled and connected organization, and we will energize our people and partners -- and partnerships to bring this to life. Finally, our business in the U.S. gives us a truly global scale and a competitive advantage versus our peers. Our strategy recognizes the importance of winning in the U.S. Fundamentally, our strategy is about meeting consumer needs and recapturing lost consumer moments, but it is also about addressing societal expectations. Over the years, consumer moments that used to be satisfied by cigarettes have been replaced by other products. With our unique cross-category consumer understanding, we are clear, there is a huge opportunity to recapture these moments with a broader portfolio of products that are less risky than cigarettes. These are new products that may, in time, go beyond our nicotine products. Meanwhile, we are going to continue to focus on generating value from our combustible business and adding a step change in our new existing New Category business. For the long term, we will also investigate the opportunity to build a portfolio beyond nicotine, as this represents a clear future growth opportunity. We will do this in a way that is consistent with our new purpose. It is imperative that we follow clear boundaries to guide our portfolio expansion. We are clear that our portfolio expansion has to leverage our strength and our existing delivery platforms in vapor and modern oral; should reduce health impact compared to cigarettes; make a positive environmental contribution; and, of course, be strategically and financially sound. In doing so, we will build a better tomorrow for our consumers by offering them a wider choice of products that is less risky than cigarettes and stimulate their senses. We are clear that our business should create value to all stakeholders, for consumers, for our shareholders, for our employees, and most importantly, for society at large. Recognizing the importance of this, we're evolving from a business where sustainability and ESG has always been important to a business where it is front and center of all in what we do. We have, therefore, established a sustainable agenda for sustainability with key 4 pillars. The first and most important pillar is to reduce the health impact of our products and our business. Yet, we are all focused on 3 underpinning priorities; excellence in environmental management; delivering a positive societal impact in our supply chain; and ensuring robust corporate governance across the group. In line with this commitment, we have stretched ambitious targets for the future. By 2030, we aim to have 50 million consumers in our noncombustible business. And we have a clear ambition for our operation in Scope 1 and 2 to be carbon-neutral by 2030. And these are stretching goals, which demonstrate our commitment to sustainability. Our core strength has always been our people, and this will never change. To build a better tomorrow, we need an organization that is fit for the future. We have already started to transform the organization. In 2019, we announced project Quantum, the first step in building a simpler, faster, more agile organization. The project was largely completed in January of this year. It has already de-layered and streamlined the organization and reduced 2,300 roles. It will also deliver GBP 300 million of savings in 2020, to create the space to invest and to deliver against our financial commitments. Program Quantum is not just about organization design, it has also simplified our ways of working across the organization, allowing us to become a more energized, more efficient and a more resilient organization. In addition, we are building the capabilities around the organization. We need these capabilities for the future and have hired more than 300 new specialists, managers in digital, innovation and direct-to-consumer, and we have simplified our ways of working across the organization, to become a more agile and efficient organization. But no organization transformation can be delivered without its people, empowered and committed to the change. We, therefore, developed a new ethos with our people that defines the culture and behaviors required to drive the transformation and build a better tomorrow. We are bold, fast, empowered, diverse and responsible. All of these pillars, put together, are the foundation of our strategy for growth, and you will see this through all the presentations today. BAT is changing. Today, BAT is a powerful combination of British American Tobacco and Reynolds American. Also today, BAT is a combination of a business with a strong multi-category business with a clear purpose of creating a better tomorrow. And we have recognized this through a new execution of our corporate look and feel. This represents the BAT of the future. So in summary, we have an ambitious strategy for growth. We are committed to deliver on our financial targets. We are stretching new ESG ambitions. We are creating space to invest for the future and deliver on the financials. Therefore, project Quantum will continue, and we have the ambition to deliver GBP 1 billion of savings over the next 3 years. Tadeu will talk more about this in his presentation, where he will explain what a better tomorrow means for our shareholders. Thank you very much.

Thank you, Jack. Good morning, and good afternoon, everyone. I'm Tadeu Marroco, Group Finance Director. Our purpose for delivering a better tomorrow was set out by Jack in his opening remarks. I will now provide details on how this will drive sustainable shareholder returns. Throughout my presentation, I would like to reinforce the following key messages. Over the last 3 years, BAT has managed to deliver strong financial results, whilst increasing investments for the future. We have taken a diligent approach to create space to continue investing and keeping delivering our financial targets. BAT is a very strong cash-generative company with a relevant exposure for hard currency and a well-balanced debt profile. And we are fully committed to continue delivering -- deleveraging our balance sheet. BAT has the right strategy to promote a sustainable return for our shareholders. Before I start my presentation, I would like to address coronavirus upfront. Jack has already alluded to the humanitarian impact of which we are all concerned and mobilized to mitigate as much as possible, securing the health and safety of our employees and partners. From the business perspective, we are fortunate to have a business that will be more resilient than others in the COVID-19 environment. We are not exposed to China on the demand side given that our sales in that geography is immaterial. We saw disruption in our New Category supply chain in February. Operations resumed from early March, and we expect to ramp up production over the next few weeks. We are also closely monitoring Tier 2 and 3 suppliers and alternative logistics routes from China, all of them working relatively well at this stage. But we are not completely isolated from the coronavirus impact. Our New Category site, we saw some out of stocks in certain SKUs and in certain geographies, which is now recovering. We postponed few launches, and we are seeing some certain disruption in activation activities in few geographies. The impact of duty-free New Categories is immaterial. On the combustible side, the supply chain is geographically diverse and is operating well so far. On the demand side, apart of some softness in demand in some geographies badly hit by the virus, the biggest impact so far is in duty free, which accounts to less than 1% for group revenue. I'd like to update you on the plans we have put in place to respond to this crisis. Of course, the health of our people is of paramount importance. BCP and crisis management teams and actions are underway and we are adapting our ways of working, utilizing technology. We are building stocks and supporting distribution across our network. We have demonstrated our continued ability to generate cash. Resource allocation is reviewed on an ongoing basis, and we are deploying tighter cash control measures. Last week, we renewed our GBP 6 billion revolving credit facility backstop. This, together with other funding lines, which we were continuing to develop, give us good access to liquidity. As we stand today, there is no change to our 2020 guidance on group revenue and earnings growth. We also expect to continue to delever our balance sheet. New Category revenue, as mentioned at year-end results, will be impacted in 2020 by the disruption caused by the coronavirus as well as the vaping market is still recovering from the U.S. slowdown in the second half of last year and the uncertain regulatory environment. We have a very resilient business as we saw in past crisis, and we will continue to monitor developments globally. And to the extent we see any further impact on revenue, we will seek to balance this with cost efficiencies, which will be accelerated as required. As BAT, we are committed to deliver and have always delivered on our high single-figure earnings guidance. Over the last 3 years, we have improved our results alongside investing to establish our New Category business. We are coming from a strong past record. Group revenue was boosted by consistent market and value share growth of our combustible business. Meanwhile, we also managed to grow across each of the 3 New Category of THP, vapor and modern oral. Global powerful brands in combustible have allowed a strong top line performance. We have also worked hard on our cost base over the last few years. And today, we are in a very healthy operating margin position. We are confident we can continue to grow operating margin in future. If we deep dive into the operating margin, you will notice that we are investing in the capabilities we need to create a competitive multi-category business, whilst delivering today. The underlying business progress shown in this slide, in green, is a consequence of the strength of our combustible business and operating efficiencies management. Alongside this margin growth, we have been able to invest in the new capabilities, as highlighted in the right side of the chart as well as built the global brands in the New Category space, which you can see in the investments in blue. On -- our cash generation has easily above our long-term guidance of 9% cash conversion. We were able to set up free cash flow generation, helping to pay down the corporate debt. As a consequence of the cash generation as well as our earnings growth, we have consistently been able to delever the balance sheet at a rate of 0.4x on a constant FX. Due to the difference on year-end spot rate and average FX, we didn't see a linear trajectory of deleveraging over the last couple of years. We are now at 3.5 multiple and have an ambition to reach less than 3x by the end of 2021. We have now grown dividends on a continuous basis by more than 20 years. Over the last 15 years, our dividend growth on an adjusted constant basis has averaged 11%, even higher than our earnings growth of 10% annual growth in the same period. We are absolutely committed to maintain our 65% dividend payout ratio with growth in Sterling terms. Looking forward, we have set 3 clear financial focus areas to create the space to continue delivering. The first one is release funds to support future growth. The second one is maximize the effectiveness of our marketing investment, mainly in New Categories. And the third one is to focus on deleverage our balance sheet. Let me show you each of them. Our first priority is to release funds. We have an ambition to deliver a minimum of GBP 1 billion in efficiencies on an annualized basis over the next 3 years, starting in 2020. This will support investments and continued delivery in the medium-term as we build a strong business in New Categories. To that aim, we worked hard last year in the first phase of project Quantum. As we announced before, this first phase was about a full review of the organization design of the group. This resulted in the creation of a much more agile, empowered and fast organization, by reducing layers and putting clear accountabilities in place. And although the main driver behind this first phase was to increase the business competitiveness in the way we operate, we also achieved savings. We will be delivering GBP 300 million from Quantum phase 1 in 2020. Looking forward, we will focus our -- on further work streams in phase 2, including operational efficiencies with a focus on route-to-market reviews. We will continue to press ahead with our supply chain productivity agenda, operating as one virtual global factory with a one global planning hub and global procurement, managing 90% of our direct materials and [ 8% ] of our indirect spend. We have considerably scaled up our investments behind New Categories in the past 3 years, and we want to ensure we have the best return from these investments. We will be diligent using our methodology called MAPS, backed by consumer insights in order to prioritize the geographies and markets where we will be investing. We will leverage data analytics and algorithm more and more to ensure we have the right information to make resource allocation decisions. We will be focused not just on growing New Categories, but also profitability. A key point to make it is that we will be first focused on winning the current categories that we are in and have a disciplined approach to further portfolio development. We will adopt a very disciplined approach to explore future opportunities in the beyond-nicotine space when the right time comes. Cash generation is a key priority moving forward. The focus will be on working capital management as well as our CapEx. We don't anticipate any large debt-financed M&A. We expect to leverage on our newly created corporate inventory to develop the partnerships that are needed to further enhance our competitiveness. Our target is to delever the balance sheet to a ratio below 3x by the end of 2021. 2 years target helps to navigate through the FX volatility. We see a massive opportunity in the noncombustible space. There are already 68 million consumers using nicotine noncombustible products. And just around 15% of them are currently consuming our own products. There is a huge contestable space already existing today, and our focus will be to grow in this space now and in the future. The winners will need capabilities, including brand building, strong distribution reach, IPs and science as well as knowledge to be able to navigate in a regulated environment. We already have all these capabilities in our business. And this will be a differentiator factor moving forward. We will be focused to ensure we have a future business in New Categories with the profitability as robust as we have today in our combustible business. We have already a very good position in terms of gross margin in 2 out of the 3 categories. On THP, although consumables current margins are even higher than combustible, we expect some headwinds in future, mainly from excise and tobacco regulation. Some of that will be offset by continuous cost saving reduction. Over the last 3 years, THP device costs reduced by 30% and consumables by 60%. Consumables today is just 20% higher in terms of cost than our combustible products with a clear trend to reduce further as we increase scale. On modern oral, with the benefits of no need for device, we already see high margins on our premium products. And if anything, we expect margins to continue improving as we benefit from scale. We also have a robust plan to enhance the vapor profitability moving forward. This is expected to be achieved as we see consolidation of the business towards closed systems and direct-to-consumers. The scale we will achieve as we consolidate our global brands will also be a key factor to improve profitability. These are our targets moving forward. They will give us the flexibility necessary to create a competitive and sustainable business in future.

Thank you, Tadeu. Good morning, everybody. My name is Kingsley Wheaton. I am the Chief Marketing Officer of BAT. I've been with the group for 24 years. And I have done a variety of senior management roles over the last decade. Today, I'd like to focus on 3 areas, in particular, of the evolved strategy. I would like to talk more about our mission, stimulating the senses of new adult generations, and how we make that a reality. I would like to talk about where we must win, which is all about winning in high-growth segments of the future and key priority markets. And I will talk in some more detail about the capabilities we are building in terms of how to win. And finally, I'd like to build on the purpose that Jack has talked about and think about key stakeholder outcomes going forward, particularly with a lens on our impact on society. So we are absolutely committed to delivering a better tomorrow. We have long said that we have a multi-category strategy, a strategy that puts the consumer first and right at the center of all that we do. And we have unique insights across 4 global categories that can bring that to life. Also, we have many strengths, which are deep set within the BAT business, and we are investing in and accelerating new capabilities. I will talk about the what we're going to win with in terms of our portfolio, where we're going to win in terms of priority market focus and how we're going to win in terms of activation and execution. And finally, this is a strategy which I absolutely believe is about a sustainable future for BAT. And I will talk about that very sustainability at the end of my presentation. When we started to develop and think about the strategy, we had a long think about the core beliefs that underpin our business. And indeed, we have been showcasing and training those beliefs in a corporate advertising campaign, which has been running in the Financial Times since January. And you can see some of those executions in front of me. You've articulated -- we've articulated here our purpose, how we are committed to progress through delivering consumer choice, powerful brands, which is underpinned by science and brought to life by the wonderful diversity, which has always been a BAT strength. Just to give some market context, there are about 68 million consumers of noncombustible products worldwide, of which BAT has currently about a 16% share with 11 million consumers, giving us ample contestable space to drive growth into the future. Roughly, that marketplace in terms of consumer splits, 2/3 from our international markets and 1/3 from the U.S.A. Translating those numbers into revenue, you can see that those 68 million consumers turn into about GBP 16 billion of net sales revenue, which we've currently GBP 1.3 billion or thereabouts. BAT currently has 14% share of that revenue pool, again, indicating there is substantial contestable space to go for in the future. The characteristics of our international markets are slightly different from the U.S.A., where the category split 3 ways in our international markets, between vapor, tobacco heating and oral products. Whereas in the U.S.A., we see almost exactly a 50/50 split between oral products and vapor products. Of course, beyond the consumer numbers and how that's translating into revenue, there is a lot of change going on around us. And the context for our consumer-first multi-category strategy for growth is the societal change that's going on around us. And let's face it with 115 years of history, BAT has seen a lot of societal change and delivered and succeeded through all of that. That societal change is giving rise to consumer change, who are probably changing faster than we've ever seen before. And the consumer dynamics over the last 5 years or so are probably the most progressive we've seen in the industry's history. That is amplified and accelerated by social media and the speed of today's communication. So if we have a strategy to win, that strategy must be about winning in the high-growth segments of the future because it is upon those high-growth segments of the future that we will be able to deliver long-term sustainable growth, which is absolutely critical. If we take a step back and think about how that consumer has changed over the last 20 or 30 years, we can quite easily see that 20 or 30 years ago, smoking was able to satisfy a variety of consumer moments. And over time, as there has been societal shift and regulatory change, some of those moments have been reduced. And so therefore, we think that with a new portfolio, with a broader portfolio of tobacco and nicotine and over time and beyond, we will be able to recapture those consumer moments to fuel our sustainable growth over the long term. And Jack talked about this earlier, our portfolio evolution, which goes from combustibles through new categories and beyond nicotine. And how social acceptance improves as we move from the left to the right. If we unpack that a bit further, as we build a combustibles business for value generation, which is the engine room of value creation, if you like, of our business, we are able to regain moments with New Categories products, and we're committed to delivering a step change in that. And we are able to find more moments and indeed more consumers when, over time, we think about moving into a broader portfolio that takes us beyond nicotine. Of course, the limits to that portfolio expansion are not boundless, and Jack touched upon the clear boundaries that we have set for that portfolio expansion. We must leverage the hard-won competency and capability that we have in our current delivery platforms, particularly vapor and modern oral. We have very long-standing capability in the areas of science and regulation, which will underpin our portfolio expansion going forward. And that would all be nothing without using BAT's global marketing reach and expertise. And I think it would go without saying that our portfolio expansion would always be subject to stringent financial and strategic attractiveness tests. And we are clear about the regulatory pathway that we seek going forward, and we are actively trying to shape the desired regulatory frameworks for our portfolio. We believe in category-specific regulation, that is to say regulations for the 3 categories of vapor, modern oral and tobacco heating. We think that regulation must be and should be scientifically evidenced and supported. We argue for product standards, clear packaging and labeling, responsible marketing standards, which is something we've been doing since 2001 when we launched our first international marketing principles, and of course, our products and our portfolio should be for sale to people of legal age and above only. I've touched on the science and evidence base that underpins that regulatory view and how we're trying to shape regulation going forward in a smart way. I just want to update on behalf of Dr. David O'Reilly, where we are with our science program. We are nearing completion of our glo scientific assessment. We are in a very strong position, I think, with Vuse given the PMTA submission we made on Vuse Solo in December. And more of the Vuse portfolio is to come before the May deadline. We have the science now to support Velo as a reduced-risk product. And with this science package, we're able to build increasing confidence with our consumers in our products, which supports our purpose going forward. And we are in the early stages of doing the right scientific work, as you would expect, on our portfolio that will go beyond nicotine. Another really important leg of R&D and our portfolio expansion is intellectual property, and we have been very, very active in that area. We've had a step change in patent filings since 2017 with twice as many patents filed in 2019 as just 2 years ago. We are stepping up the talent and the capabilities we have in that area with external recruitment, enabling us to bolster our capabilities. And we're not only building IP organically through our R&D hubs in Southampton and in the U.S., we're also buttressing the IP portfolio through the M&A that we've been doing. And of course, I think you would go absolutely without saying we are absolutely committed to robustly defending, protected and pursuing our IP rights on a going-forward basis. So our mission is all about stimulating the senses of new adult generation. I think this is a really, really exciting for BAT. This is a consumer-first strategy, and I believe we stand at a pivotal moment. I think we will transition from a business which defines itself by the products it sells to the consumer needs that it meets, through a broader, expanded portfolio of tobacco, nicotine and beyond. In order to understand our consumer better, we have our proprietary intelligence segmentation methodology or PRISM. And we talked about that last year at the Capital Markets Day. That is a unique multi-category view of the consumer. It allows us to see over the horizon, over the arc of the horizon and be predictive about where the consumer is heading and what they demand of us next. And that PRISM system allows us to guide our portfolio development and portfolio structure and frames what we have in terms of our portfolio today and tomorrow. Using our market prioritization system or MAPS, we're able to take that portfolio and ensure that we are focusing on the right markets and the right priority opportunity spaces for the maximum commercial success. This is about deploying the right products in the right places to the right consumers, driving maximum consumer resonance and investment efficiency. We put it through all of our products through a 4-step process where we look at the consumer and the commercial opportunity. We evaluate those products in any given marketplace against the product satisfaction index or PSI, which Paul will talk about later. We overlay the regulatory and tax environment, both today and as we anticipated into the future. And we assess the distribution and channel landscape that's available, and that allows us to figure out how to build the right portfolio in the right place and deliver the right returns to BAT. And finally, capabilities. As I said earlier, we've been a business -- a public listed business for 115 years. We have many deep set capabilities, and we will continue to leverage our global marketing reach and scale. But also, we have new capabilities, and we are using those to accelerate our transformation. We are investing in those for the future, and we are committed to speeding up the development of things like foresights beyond nicotine, 21st century brand building, direct-to-consumer through our e-commerce model. And Paul will talk about those in more detail later. In essence, we're going to take our long-standing deep set capabilities that this group has and partner with them with new to world capabilities to accelerate our transformation story. So if I put that all together and think about our consumer-first multi-category strategy in action. We have a mission, which is about stimulating the senses of a new adult generation. We have our proprietary insight system, PRISM, which guides our portfolio development. We use our MAPS system to understand priority markets' focus and investment returns. And then we link that to our in-market activation and execution to build our products and brands as fast as is possible to deliver returns to BAT. This is an exciting framework, which will power long-term growth in high-growth segments of the future. I just want to come back to our sustainable future, which was the third leg of my presentation. We have split our stakeholders into 4 in our strategy: consumers; society; employees; and shareholders, and we aim to deliver a better tomorrow to all 4 of those stakeholder groups. But I would like to focus here on how we deliver a better tomorrow to a society, in particular. And Jack has outlined our ESG mission earlier. And that is a business where sustainability, which has always been important, is put front and center in all that we do. And I personally am very, very excited about that mission and accelerating that journey going forward. Although we don't do it for this, it is nice to be rewarded and recognized, and we have been acted -- active in the world of sustainability for 2 decades and more. We were industry pioneering when we entered the DJSI, and we have been a member of the World Index for 18 years consecutively. Most recently, we received a SEAL Award, which places us in 1 of the 50 most sustainable companies in the world. If you have a look at the all-important sustainability indices on the MCSI, we are currently BBB, and on Sustainalytics, we post a score of 65 out of 100. There's lot more work to be done, but we have a great starting point, and we are committed to accelerating our ESG approach. I'd like to now play a short video, which encapsulates our ESG journey so far and a hint of where we're going into the future. [Presentation]

Jack has talked earlier about our really big ambitions for the future. And I am really delighted to be able to reemphasize our commitment to these 2 ambitions for the future. So we aim to have, by 2030, 50 million consumers worldwide of noncombustible consumers, that's up from the 11 million we have today, a journey of an additional 39 million consumers over the next decade. And also, I'm very pleased to say that we have an ambition to be carbon neutral in our operations over the same time period, also delivering that in 2030. Those are our ambitions. The organization is excited, motivated and energized about accelerating this ESG journey. And to bring that to life, we have framed a new sustainability agenda. The headline act, of course, is reducing the health impact of our business, but there are 3 really, really critical supporting pillars. That's about excellence in environmental management, making sure that we deliver a positive societal impact through our value chain, and as you would expect, the highest standards of corporate governance. But I think more than the agenda itself, it's about accelerating those ambitions. It's about measuring those ambitions against clearly laid out metrics and objectives and making sure we publish our progress so that people, our stakeholders, can monitor our journey over the next years to come, culminating in those 2030 ambitions. So we have a clear consumer-first multi-category strategy for long-term sustainable growth. This strategy is about winning in high-growth segments of the future to deliver sustainable value. There is a large pool of noncombustible consumers today, some 68 million of them and growing, and we aim to have 50 million consumers by 2030. We're going to do this through a broader portfolio of tobacco products, nicotine products and beyond, and we have a system for activation and execution, which takes us for mission through our insights, guides our portfolio through our MAPS system in terms of where to win, which we link to our capabilities to ensure powerful activation and execution. And all of that is supported by 2 big sustainability goals: The number of consumers we have in the future; and our commitment to carbon neutrality in 2030. So I've been with BAT for 24 years. I feel more excited today than when I joined 24 years ago about the future of this business. I'm very excited to see this evolve strategy in action. And as I said, I think we are at a crucial moment as we turn from a company that defines itself by the product it sells to the consumer needs that we can increasingly meet. Thank you very much, indeed. I think we will now have a short coffee break. [Break]

Good afternoon, and welcome back. I am Paul Lageweg. My role is Director for the New Categories. And in the last year, my key focus has all been about step-changing the performance in the New Categories. And this is obviously a key pillar of our newly articulated strategy, and you have heard Jack and Kingsley explain this, and we are making good progress. Firstly, and this is very important for you, I would like to reinforce that the growth of the New Categories is a very positive development for the industry that provides higher and more sustainable levels of industry revenue, of course, for 2 simple reasons. Firstly, the gross margin of these products are generally higher than what we are enjoying for cigarettes. And secondly, we're regaining consumption moments that we have lost for cigarettes, and BAT is increasingly doing well. There is an enormous amount of work happening in building the right capabilities, and that is to ensure our competitiveness over the mid to long term through a major transformation of BAT itself. We are not yet where we want to be in tobacco heating products, but we are making good progress in closing down the gap in product performance, especially in terms of sensorial satisfaction. We are already the clear winner in all key vapor markets by consistently growing share. And we have become the global leader in modern oral, a category with a massive future growth potential. And as part of our newly articulated strategy, we also see a midterm opportunity to explore beyond nicotine. You should recognize that the emergence of New Categories is still in its infancy. Not only far more smokers will switch to reduced-risk products, but also the categories themselves will transform. And we want to lead this industry evolution as this offers a massive growth opportunity to BAT. And this growth is value accretive, not only is the margins per unit are generally higher for reduced-risk products due to the lower excise rates, but also as we're regaining consumer moments. And even consumers that haven't yet fully converted and are still using a combination of combustibles and New Category products are also more profitable as they tend to use a lot of New Category products at times that they cannot smoke. We are already seeing how this is sustaining higher levels of industry revenue growth. And we grew our revenues last year by 5.6%, supported by the growth of our New Category products. Now very few large global consumer packaged goods companies manage to deliver that level of revenue growth. As you know, we as BAT, have always believed in a multi-category portfolio. This is core to our strategy. And the level of satisfaction that each category delivers in each market is an important driver of its commercial success. So this is a simplified version of our satisfaction index. In the low-flavor markets, like, for instance, Japan and Korea, THP provides a high level of satisfaction. While in the mid-flavor markets, like, for instance, in Eastern Europe, the picture is more balanced. While most of the -- rest of the world, in the high-flavor markets, vapor is clearly preferred. Now the very important thing for me is that modern oral has a universally high appeal and therefore, has a truly very large global potential. This product satisfaction index is only one of the inputs in how we determine which categories to launch in which markets. We also take into account other factors, like, for instance, the regulation and excise environment and our capability on the ground, our ability to win. And this really allows us to launch the wide categories in the wide markets with optimal resource allocation. The multi-category portfolio approach is clearly right, but we must prioritize ruthlessly. Kingsley already shared that cigarettes have lost some of their historic needs and moments. And that now in especially the developed markets, they predominantly are occupying this classic space. But through our multi-category portfolio, we can reclaim most of these moments and needs. So we are growing the cake itself. And we are targeting each of these consumer spaces with one dedicated brand. Now FLOW is this new space beyond nicotine, and I will explain that a little bit later in more detail. But we have a very solid foundation. We are the global market leader in modern oral. We're also the leader in vaping in Europe, and we're increasingly becoming a strong #2 in vaping in North America, and we're also the #2 in tobacco heating products. So in total, we have now 11 million consumers that are using our noncombustible brands on a weekly basis. But we want more, and for that, we have to establish new capabilities. So we are working hard on an entire transformation of BAT itself. We are building several new and powerful capabilities that will become a key source of competitive advantage over the mid to long term. So let me just give you a few examples. It obviously all starts with the consumer. We believe that having superior multi-category consumer insights and foresights will be a true competitive advantage. We're the only company that has this multi-category understanding of consumers. And in those fast-chasing categories, we need foresights and more fundamental understanding of the underlying consumer drivers. We also need to collect these foresights much faster, for instance, instead of doing large traditional consumer surveys with traditional field work and then tabulation of results that can easily last up to 2 months, we now have online expert panels for each of our categories that provide insights within a few days. And a lot of our consumer research was always done locally, but it didn't always ladder up to relevant global insights. So we have now replaced this with a global program where all data goes into a large database. And we combine this data for any question that we have about our business. And of course, we are also extensively leveraging this powerful database of 7 million consumers. I think that the design of our New Category devices, including, of course, the user interface and user experience, are very important choice drivers for consumers. Now we lacked capability in this area, and our devices are simply not looking good enough, but we have hired a world-class Head of Design, who is now building hubs in Asia and the U.K. where we work with leading external partners to ensure that the design of our devices drives very strong consumer appeal. We're also building a more agile and externally focused innovation model. And this has already cut our development time in half and build a much stronger pipeline of truly breakthrough technologies. For instance, we established open innovation hubs in China, Shenzhen and in the U.K. last year, and we will do the same this year in San Francisco and Israel. And in those hubs, we systematically scan the market for new ideas and new solutions but also we develop most of our new platforms with strategic external partners. So let me just give you one more example. We are also entirely changing how we interact with consumers. We have now 7 million consumers in our database. And we know a lot about each of those consumers. And that allows us to interact with them in a highly personalized basis. This is very effective, and it is reducing conversion cost by up to 85%. Now we are also driving a lot more of our consumer base into e-commerce, so, for instance, subscription models. So our e-commerce is now becoming a multi-category platform, and that allows us to introduce new categories, but also new offers at a very low cost. So this is truly a major transformation of BAT itself. And we are bringing a lot of new top talent into the company to lead this transformation. Last year, we recruited more than 300 managers externally. And of course, that has all been funded by project Quantum and the resource allocation that we're doing within the business. So let us now quickly walk through each of those categories. Starting with tobacco heating products. We are not yet where we want to be. We are working hard to improve our product competitiveness. As the first step, we launched glo Pro and Nano at the end of last year. We're also building on the learnings of glo Sens, and we make further improvements this year through the launch of glo Hyper in April. So step-by-step, we will be closing the gaps. But an acceleration is clearly required. Last year, we grew only 23% in terms of revenue. And our share was flattish for most of the year. So today, we have only 15% of the global THP category, and that is predominantly concentrated in North Asia where the category is already saturating. We have always done very well amongst considerates. This is a relatively older cohort that is looking for milder taste. They don't care as much about the design, but they want products that are easy to use and clean and value is also important to them. But clearly, the much bigger opportunity is among the innovation enthusiasts, even more so in Europe. These are relatively younger consumers that came from smoking higher flavor cigarettes. So taste intensity is very important to them. They also like to explore novel flavors. And for them, the size and design of the device are very important. So for us, to grow our business in tobacco heating products, we need to do much better amongst this group. As the first step, we launched therefore, glo Pro and Nano at the end of last year. And glo Pro is really the first device that has tobacco -- sorry, that has induction heating. It also has a boost button and it delivers, therefore, much higher levels of taste intensity. While Nano is more stylish, and the first step, therefore, towards addressing our device appeal. We were flattish for most of last year, but since the launch of Pro and Nano, we are back to growth again in Japan. And the same counts elsewhere like Russia, where we are still focusing only on the top 5 cities, but we're growing strongly from a low base. We have now 2.2% share in Moscow of total nicotine and we will therefore now be expanding to another 10 cities in Russia. Not only our growth has improved but also the conversion rates have improved after the launch of glo Pro and Nano. So this is a good step in the first direction. Now not all our launches have been as successful as this. The performance of glo Sens has been below our expectations, but we fully understand why performance is not better. We have captured the learnings as we still see a sizable opportunity in offering the best of both worlds between tobacco heating products and vaping. This was still a legacy project. We clearly have to design this a bit differently, and that is what we're doing now. But it is evident that step-by-step, we are closing the gap. The next significant step is being launched right now, glo Hyper. This product delivers the best taste intensity in the market. It has a regular premium king stick format with 30% more tobacco. It also uses our patented induction heating technology with the boost button for extra satisfaction. So for most of last year, we still had an inferior platform. But going forward, we are now very competitive, especially on sensorial satisfaction on taste and on flavors. And then we have this regular premium king format that we know consumers know and love. So this is a big step forward, but there's always more to be done. For instance, we have more work to be done on device appeal. But it is clear that consumers like this new Hyper experience. Here, we offer a much higher level of taste satisfaction that can also be controlled through the boost button. We have a familiar premium king stick format with 30% more tobacco in addition to our slimmer format. And unlike the market leader, we offer a wide variety of capsules with different flavors. And 2/3 of our franchise is already today in menthol and other flavors. So this is also a key area of strength that will benefit us during the menthol ban in Europe in May. So in summary, we are making step-by-step progress to reduce our gap in competitiveness. Still lot more to be done. But I am confident that we will credibly emerge from a distant #2 to a very strong #2 in tobacco heating products. Now let's now move on to vaping. This is already a category where we are ahead or where we are in THP. And as a result, we are now consistently gaining share in truly all the key vapor markets around the world. We are the clear market leader in Europe, and we are determined to become the global leader. And these results are driven by a superior portfolio, combined with powerful consumer engagement, building a strong global brand, and we are making progress to enhance our profitability. And as I mentioned, we're clearly winning now in all key vapor markets. Now this is the superior portfolio. So we have both the stylish ePod, what is called Alto in the U.S., which is superior on all key attributes versus the competition. And then we also have the power horse, ePen 3, which delivers almost 3x the vaping cloud of our competition. And this is especially relevant in the European [ TBD ] markets with nicotine ceilings. So both these platforms are superior. And therefore, it's not surprising that consumers in the U.K. have awarded us now for the second year in a row with the product of the year award against all our key competitors. Now not only our platforms are superior, we have also done a lot of work recently on our flavors. And we're now rolling out a portfolio of flavors, of which most are the absolute best in the entire industry. And then we're doing a lot of work to premiumize our brand offering through limited editions, color ranges and accessories. And for all our brands, we're doing a lot of work to reduce the environmental footprint, the impact on the environment. For instance, in the case of Vuse, we eliminated the silicon hygiene caps from our cartridges. Our new packaging that we will soon be introducing will not have any outer plastic wrap anymore, and we're also increasingly starting to recycle the cartridges itself in most of our markets. But really key driver of our success is our highly effective marketing campaigns. We have won several prestigious awards for our marketing campaigns, including an Effie and an IPA. This is truly unprecedented for our industry and a great reflection of the strength of our marketing efforts. As part of that, we're also transforming our retail stores. You may remember that we acquired a number of vaping retail chains in recent years in the U.K., Germany, Poland and South Africa, with a total of about 750 stores. Now all these stores are totally different today with names like Twisp, High End Smoke and VIP. But we also have a very different portfolio in all these stores. So we have piloted bringing these stores together under the same Vuse inspiration store banner with the same portfolio, the same layout and the same consistent retail practices. This has been hugely successful, so we are now planning to convert all of our stores during 2020. In addition, we plan to open some new stores as well. For instance, just today, we opened a store here in London on Oxford Street. Now when we attract consumers into our superior closed systems, we try to guide them very quickly to our e-commerce platform. So this is growing rapidly. We had 5 million visitors last year, and we are doing much better now to convert them to loyal consumers, for instance, leveraging subscription models, amongst others. And this is on average, providing 40% higher profit per user. Now vaping is by far the largest reduced-risk product category in terms of the number of consumers. But we also have to improve its profitability. And the good news is that the industry profitability continues to develop very positively. You will remember that the category just a few years ago was dominated by open systems. So you had thousands of brands, open liquids, that were predominantly being sold in vape stores and dedicated online retail, and they actually made most of the margin out of the category. This is now quickly transforming to branded closed systems, so predominantly in our traditional retail, where our strength is and where retail margins tend to be significantly lower. So the industry is quickly consolidating around a few big global brands that are all controlled by the tobacco major. And regulation, like the FDA in the U.S., will only further accelerate this trend and for the U.S., generate a contestable space of GBP 1.5 billion this May. In addition to this positive industry trend, we are also doing a lot of things to improve the vaping margins. And there are 2 areas that specifically stand out. One is the retail margins. On average, vaping retail margins are around 40% as compared to roughly 11% for cigarettes. This is because the category was created by many small players. Now obviously, our increased skill with powerful global brands will help us to manage the retail margins. But we're also working for various reasons to convert more of our user base on to a D2C platform, so onto our e-commerce, including through subscriptions. And this will also help us to personalize and customize our consumer communication, and we can sell a much wider range of liquids through e-commerce. And you may know, this has been a key driver of the success historically of open systems. Another key opportunity is really in the cartridge cost. A quite shocking fact is that the liquids in our cartridges account for only 7% of the total cost. So we are now fully automated -- automating our cartridge manufacturing. So ePen 3, we fully automated last quarter, and next quarter, we're doing the same for ePod. This will drive very significant savings. And next quarter, we're doing the same for ePod. This will drive very significant savings. And further margin improvement will also come from consolidating our portfolio. Behind 1 leading global brand, Vuse, are 2 winning superior platforms, but we're also, for instance, harmonizing our global liquid portfolio. Behind the best liquids that we had in the portfolio, and they will all be produced in 1 factory in Poland. So how is all of this now translating into our performance? Well, we are truly winning everywhere. And this is the U.S., the most important market, where we are consistently getting more consumers into our brands. If you look at the last period, 65% of all new device kits that were sold were from Vuse. And as a result, we have been consistently growing share in the last 6 months, tripling our Alto share and doubling our Vuse share over that 6-month period. Now in the state of Georgia, we tested a new marketing model that yielded even better success and no surprise that we will be replicating key elements of this model now nationwide. Our PMTA submissions are on track, and frankly, our portfolio is very well positioned for success in this environment. Unlike our competition, as you can see from this data, we clearly have no issue with under-age users, and we're also successfully building a portfolio of lower nicotine strength products. Canada is a very similar story, where we have had the highest device share in the last 6 months. And as a result, we are consistently, every single month, growing share at the expense of the market leader. Then on to Europe, where we are the clear market leader. Like in France, where a year ago, we were still neck-to-neck with myblu, but now, we are more than twice their size. In October, we launched ePod, and you can see how this further accelerated our share momentum. The same counts for the U.K., where our total share is actually close to 40%, but this is just showing the Vype share at 12%. And it's important to note that in the U.K., only from May, we will be rolling out ePod at scale. And you have seen how this has helped us to accelerate our share momentum in France. Also in Germany, we have clearly now overtaken myblu to achieve market leadership, and we're almost 3x the size of [indiscernible]. So we are the clear leader, truly actually in all European markets, all the way from Poland to the Netherlands. So in summary, we are building the world's best vapor business with a superior portfolio of award-winning products and a powerful brand supported by award-winning marketing campaigns. We're leading in Europe, and we're becoming the very strong #2 in North America. So we are well poised to become the vapor leader globally, and we are improving our profitability at the same time. Now on to Modern Oral. We are already the global leader in Modern Oral, but we aspire to skill this category to its true global potential, that we believe will be very large. So we are the global leader, both in volume but also in value, given our strength in Europe. And we believe that this category has the potential to be very large. There is a massive advantage of not needing a device, that takes, for instance, away the cash outlay or trial, and therefore, makes the category more accessible for developing in emerging markets. And this is the only category that offers through discretion. You can't see when you're using it and you can truly use it anywhere and any time. So increasingly, we start selling a lot of these products in airlines as well. As satisfaction levels are universally high for this category, and we have therefore, very high conversion rates, especially amongst millennials and adult Gen-Z. But the commercial model is also very attractive. With margins per unit on average, 2.8x what we make out of cigarettes. And this is without a large upfront device cost. So we see a large global potential. We expanded last year to 17 countries. And our costs is strong, but from a low base. So we are working hard to grow this category in its existing markets, and obviously, we will be expanding to new markets as well. Now we do have a portfolio gap in the United States, as we only have 2 and 4 milligram nicotine variants and also a more limited flavor range. But we are doing well in the segment where we are focused on, and this is the fastest-growing segment in the market, and we have an opportunity to address our portfolio gap through future submissions to the FDA. But since our launch, we have been the fastest-growing brand in the United States, since we launched last July. So we don't have really a product performance issue. Based on our research, our product is actually superior to the competition at the same nicotine strength, and we are therefore enjoying very good conversion levels. But we're clearly doing very well elsewhere as well and probably, the thing that excites us most is the pilots that we did last year in Pakistan and Kenya because they demonstrate the true potential in the developing emerging markets, where more than 60% of our business is based today, and of course, where most of the world population is living as well. And we are very, very pleased with the results that we got out of Pakistan and Kenya. So as you know, we will be migrating, where legally possible, all our Modern Oral brands to Velo, and we are very confident in the future of Velo. We also have a great track record in migration. We successfully migrated over 100 brands in the last decade. And we have some outstanding products. Today, outside of the U.S., we have a unique and patented nicotine delivery system, which is clearly a major competitive advantage, but we're working on more. We will soon be introducing another unique and patented upgrade with longer-lasting flavors, and this is a clear unmet need into the categories. And we are working on a lot of exciting packaging innovation, for instance, to make the product more portable. So our focus will be on scaling our leadership in Modern Oral to build this category to its true global potential, leveraging our superior patented technologies and of course, a single global brand in Velo. So we have a strong foundation. We will be scaling, as I mentioned, our leadership in Modern Oral to build this category to its full potential. We are building the world's best vaping business, and we aim to emerge as a strong #2 in tobacco heating products through addressing our competitiveness. But as I mentioned in the beginning, we also see a mid to long-term opportunity that we want to explore beyond nicotine. And this is all around this consumer space that we call FLOW. So this segment is particularly largest amongst adult Gen Z and millennials. These consumers are still looking for ways to manage their flow, their energy levels during the day. But they want to use more natural ingredients that are better for you, and we think we are very well positioned to come up with some breakthrough offers for these consumers, but we will do that in a very disciplined way, focused on leveraging our core capabilities. For instance, we are covering more retail outlets globally in the markets where we operate than any other consumer product company. But we will also leverage our superior delivery platforms. So let me just explain why we believe that, that is such an important competitive advantage. Because there is a reason why cigarettes historically have always been so successful. Any active ingredient that is delivered through the buccal or the aerosol system is simply far more effective. You straight away get the impact, or you enjoy the impact immediately. You can use less of the active as well, and you can control a lot better how much you want to consume. So for any active, for instance, CBD to caffeine, this is a more effective way to satisfy consumers. So our initial focus is really on 2 areas. One is them -- one of them is our consumer foresights. So we see 3 very attractive consumer spaces, where we're doing more work on: Focus, boost and calm or relaxation. Secondly, we're doing some early work on the science, and here, we really follow 3 important principles: We will not mix any of these potentially new actives with nicotine; we will utilize the wide signs in terms of product safety, and of course, the efficacy of the products, but all of this is still very much in an exploratory space. So in summary, the growth of the new category helps to sustain higher levels of industry revenue growth. And we as BAT, we're building the wide capabilities to emerge as a clear winner in this industry transformation. We are step-by-step closing our gap in Tobacco Heating Products to emerge as a strong #2. We are already winning in all vapor markets and building the world's best vapor business. And we are leveraging our leadership in Modern Oral to scale this category to its full potential. And we're also now starting to explore these midterm opportunities beyond nicotine. So we are confident, I am confident, that we can deliver the GBP 5 billion revenue by 2023 and 2004 (sic) [ 2024 ] despite some of our severe headwinds this year. Thank you very much. I'd now like to hand over to Chris Sijtsma, who will take you through our core business, our combustible business.

Thanks very much, Paul. My name is Chris Sijtsma, and I'm the Group Head of Combustibles. Today, I will present the role of combustibles within the context of our new strategy, and how combustible underpins sustainable value growth. And here are my key messages. The objective for the combustible category is to drive for sustainable revenue growth with continued volume share and value share growth. We will continue to develop and invest in our brands for equity and future value by offering winning brand and product propositions enabled by purposeful innovation. And this is underpinned by a hard drive to accelerate the delivery of efficiencies. We will further consolidate our portfolio of strategic brands and deliver efficiencies through a much leaner portfolio with far fewer SKUs designed to a margin. Revenue growth management is a critical enabler to lock -- unlock future value and our resource allocation will be focused and prioritized to deliver better results with fewer initiatives. Over the past 3 years, combustible duty paid industry volumes have declined at a CAGR of 3.6%. However, industry revenues, they've grown at 1.1%. BAT has grown its revenues from combustibles at the rate 2.5x the industry average and at a CAGR of 2.8%. With further momentum in 2019, when we grew revenues from combustibles with 4.6%. In 2019, we've grown our group volume share and our group value share with 20 basis points, with 70 basis point share growth for our strategic brand portfolio. This chart shows the price mix for BAT for 2018 and 2019. The reason for the revenue acceleration in 2019 is an improved geographic mix. Out-performance has been delivered in the market with total consumption down, moderately down, at a CAGR of 2.3%. And here, total consumption means the consumption of duty-paid cigarettes plus the consumption of illegal cigarettes. Over the past few years, we've seen an acceleration in the growth of illegal cigarettes, putting some further pressure on duty-paid industry volumes. Due to the growth of illicit cigarettes, combustible duty-paid industry volumes have declined at a CAGR of 3.6%. The year started well in the United States. For the full year, we assume the U.S. cigarette market to be down by 5%. Globally, there may be some limited impact from the coronavirus. On balance and with our knowledge of today, we maintain our current outlook and our forecasting duty-paid industry volumes to decline with circa 4%. This is slightly worse than the historical rate of decline, due to significant excise increases in 2 low-value markets, Indonesia and Turkey. Aggregated performance, however, only tells a partial story. And to give you a flavor of the depth and breadth of our performance, I will now take you through our high value markets, the United States, Australia, Japan, Germany and Romania; 3 developing and emerging markets, Russia, Pakistan and Nigeria; and 3 markets, Malaysia, South Africa and Brazil, where the size of the illegal cigarette segment is very significant. And I will conclude with a few markets, we internally refer to as, our hidden gems. Together, these 50 markets represent 63% of our revenues and 42% of our volumes. They're all facing their own unique challenges and opportunities. But they have 1 important thing in common. In a majority of these markets, we grow revenues on the back of strong equity brand portfolio. 2019 was a good year for our U.S. business. Against a flattish volume share, we've grown our value share with 30 basis points. And this is important, we're growing in the right consumer and product segments. We've grown our share of premium with 50 basis points, our share of menthol with 70 basis points, and our share amongst 21 to 30-year-old smokers with 30 basis points. This performance has delivered revenue growth at a CAGR of 2.3%, with further momentum in 2019, where we grew revenues from combustibles with 3.8%. Our strong performance is a direct function of the strength of our brand portfolio. The chart shows the price elasticities for our strategic brands. The industry average price elasticity is minus 0.38, but with better, much better elasticities for Camel Crush, Newport menthol and Natural American Spirit. In terms of revenues, 67% of our revenues have a better-than-average industry price elasticity. 76 have an equal or better than industry ever price elasticity. Better elasticities translate into better volume performance. In 2019, the U.S. cigarette market was down with 5.3%. Natural American Spirit outperformed the market with 580 basis points, Newport with 310, and Camel Crush with 420 basis points. Our strong performance among smokers between 21 and 30 years old is a further contributing factor to the price resilience of our brand portfolio. To conclude the U.S., despite the market volume decline, and because of the strength of our brand portfolio, the price resilience of our brands and the strong performance amongst 21 to 30 years old smokers, we're confident that we will continue to grow value for combustibles in the U.S. Australia is one of the most regulated tobacco markets in the world. A retail display ban in plain packaging have been in place now for many years. And with prices for a pack of 25s averaging at GBP 17, cigarette prices in Australia are amongst the highest in the world. In 2017, we've seen a sharp market volume contraction due to excise tax increases. And over the past 3 years, combustible duty-paid industry volumes have declined at a CAGR of 5%. But we are performing well. We have a strong portfolio with high-equity brands. B&H is the leader in the premium segment, Winfield is the #1 brand in the aspirational premium segment, and Pall Mall is a leading brand in low. By effective price laddering and by offering superior and differentiated smoking experiences, we've grown our share since January 2017 with 360 basis points. This performance has delivered revenue growth at a CAGR of 6% over the past 3 years. And Australia shows and demonstrates that also in highly regulated markets, we can deliver sustainable revenue growth. With 77% of consumption in combustibles and 23% in tobacco heated products, Japan is a true multi-category market. Nicotine industry volumes, over the past 3 years have declined at a CAGR of 3%, with combustibles declining at 9%. We're performing well. We've grown our THP share with 64 basis points, our cigarette share with 102 basis points, driven by strong performances of Lucky Strike and Kool. Across the 2 categories, we've grown share with 170 basis points. And this compares with share declines for our 2 key competitors with 50 basis points and 130 basis points, respectively. We've had strong revenue growth over the past 3 years at a CAGR of 23%. In 2019, the cigarette market declined with 8%. In contrast to that, we've grown volumes with 7% and revenues with 14%. Germany is a stable market with combustible duty-paid industry volumes moderately declining at a CAGR of 2%. With Lucky Strike in premium and Pall Mall in value segment, we have a strong and consolidated portfolio of brands. And over the past 3 years, BAT Germany has grown revenue from combustibles at a CAGR of 9%. One of the very few growing markets in Europe is Romania. Over the past 3 years, combustible duty-paid industry volumes have grown at a CAGR of 3%. And on the back of a very strong brand portfolio, with Dunhill in premium, Kent at mainstream pricing, and Pall Mall in the value segment, we're holding close to 60% share of the market. Over the past 3 years, we've grown revenues from combustibles with 13%. Let me now continue with the developing and emerging markets. Over the past 7 years, combustible industry volumes in Russia have been consistently declining as the government progressively increased excise tax on cigarette. Today, the tax incidence on cigarettes is 65%, and this has resulted in market contraction, in the growth of the consumption of illegal cigarettes and market down trading. As a consequence of this, our revenues from combustibles in 2019 were down by 10%. With excise on cigarettes normalized, we expect the outlook for the Russian market to improve. We're well positioned for that. We've had strong share growth, driven by our strategic brands, in particular, by Rothmans. Due to excise tax changes, industry volumes in Pakistan have been fluctuating. Net-net, and over the past 3 years, combustible duty-paid industry volumes have grown at a CAGR of 7%. We've had strong share growth driven by outstanding performance of Pall Mall. And today, we are holding a category share of close to 75%. Over the past 3 years, Pakistan has grown revenues from combustibles at a CAGR of 8%. Nigeria is one of the most important markets in sub-Saharan Africa. Over the past 3 years, combustible duty-paid volumes have been gradually growing at a CAGR of 1.5%. With category-leading brands like B&H, Rothmans and Pall Mall, we're holding a strong and growing consumer share. Over the past 3 years, we've grown our revenues at a CAGR of 10%. I will now continue with 3 other markets: Malaysia, South Africa and Brazil. In these 3 markets, the size of the Illegal cigarette segment is very significant. And as we're holding shares between 55 and in excess of 75% in South Africa, reverting illegal cigarettes back into the duty-paid market represents a real and significant value opportunity. Malaysia, however, is not a great story. Total consumption is 20 billion sticks with 64% of that in illegal cigarettes. As we are the market leader, this development mostly impacted BAT. And in 2019, our revenues were down with 90%. But things can turn around very quickly, which takes me to South Africa. So Africa needs an introduction. There's always been a certain level of illegal cigarettes in the South African market, but things really spiraled out of control, when these traders started building factories in South Africa mainland, manufacturing billions of cigarettes without paying a penny of excise tax. Total consumption of the South African market is 37 billion sticks, half of that is in illegal cigarettes. A few years back, we started a very aggressive campaign to attack illegal cigarettes, take back the tax. And we started getting traction for the issue, so much so that in mid-2019, the illegal manufacturers were forced to raise their prices. At the same time, we modernized our brands, we [indiscernible] our brands. And after years of decline, in 2019, we're growing volumes again with combustible revenue growth of 4%. Another market that's significantly impacted by illegal cigarettes is Brazil. Total consumption is 116 billion, with more than half, 55% to be precise, is in illegal cigarettes. Amid this turmoil, we embarked on a very ambitious journey to migrate a brand of local brands to our strategic brands. This journey started in 2009, where we migrated Carlton to Dunhill. That was followed by the migration of Free to Kent in 2017, and in 2019, we migrated another significant local brand, Derby to Kent as well. And at the same time, we consolidated our local low price brands into Rothmans. Today, our strategic brands have a volume contribution of 72%. We have a much better portfolio, with much better equity, ready to recapture volume from the illegal cigarette segment. In 2019, we slowed down the growth of the illegal cigarette market. We slowed down our volume decline. And BAT Brazil has grown revenues from combustibles with 6%. Hidden gems are markets that may not necessarily be top of mind. They're smaller in terms of their volume contribution, but they are very profitable. On the chart, you see 4 examples, Sri Lanka, Papua New Guinea, New Zealand and Norway. Year, on year, on year, these markets deliver revenue growth contributing to the group's results. So far, my market update, I showed you 50 markets, they're all facing their own unique challenges and opportunities. But as I said, they have 1 important thing in common, and a majority of them consistently grow revenues backed by a very strong portfolio of high-equity brands. We will continue to develop and invest our brands for equity and future value. By offering winning brand and product experiences enabled by purposeful innovation. Today, I will briefly touch on the performance of our strategic brand portfolio. Together, our 8 brands represent GBP 53 billion in terms of consumer spend, in terms of consumer price turnover. A brand like Pall Mall, in terms of consumer spend, is comparable to the global spend on a brand like Pepsi. The consumer spend on Kent is comparable to the global spend on Diet Coke. And the spent on Newport is comparable to Cadbury. Our brands are significant, they're sizable and they're performing well. We now have 8 years of consistent group volume share growth behind us. And over the past 3 years, since January 2017, we've grown our group volume share with 70 basis points. This is driven by stellar performance of our strategic brands, which have grown 310 basis points over that same period. In 2019, we've grown 6 of our 8 strategic brands. And we're growing in the right segments. The mega trend in combustibles is consideration. Non-full flavor, products that offer more considerate smoking experience. Slimmer, products with a circumference thinner than regular King Size. And fraction stimulation, products that offer an exciting flavor experience are all different expressions of consideration. On the chart, you see the share growth of each of these 3 product segments. And our share of that growth. We're punching above our weight by taking more than our fair share of the segment growth. I will conclude with our efficiency agenda, portfolio consolidation, portfolio rationalization, revenue growth management and resource allocation. BAT has always been a multi-brand company, but it doesn't mean that scale is not important. Back in 2004, and with a volume of 128 billion sticks, our Strategic Brands, accounted for 90% of our total volume. Today, the Strategic Brands volume contribution is 64%, and our ambition for the next few years is to take it significantly beyond that. And we will do this as follows: we will continue to organically grow our Strategic Brands. And where opportune, migrate local brands to one of our Strategic Brands; secondly, for some of our local brands, we adopted a shadowing concept, meaning that we take the brand mix of a Strategic Brand and apply that very same mix to a local brand to make the management of these brands simpler and more effective. We will go a lot further in this than what we've done so far; and finally, there will always be a tail of local brands that cannot be migrated for whatever reason. For these brands, we will develop a common chassis, a range of standardized brand and product expressions again, to make the management of these brands simpler and more efficient. Over the past few years, we significantly reduced complexity of our business by reducing our SKU count by 10%. In 2019, we agreed to make a real step-change and complexity reduction, with a further SKU count reduction of 25% from the basis of quarter 2019. Now this will have many benefits across our primary and secondary supply chains, but most importantly, and at retail, it will create a space for expanding our new category assortments. And we design our SKUs to a margin. The principle is simple, we developed a framework of flexible brand standards, allowing high-margin markets to adopt a high-end product spec, giving low-margin markets a flexibility to go for a lower-end product spec. This is all within clearly defined quality standards and parameters. In a mature category like combustibles, revenue growth management is absolutely key. It's about building a digitally-enabled, analytics and insights capability to execute pricing as effective as possible to optimize assortments and trade investments. Over the next 18 months, we will progressively build this capability in our high-value markets. I talked about the importance of the 3 product segments: non full flavor; slimmer; and freshness and stimulation. In 2019, 88% of our new brand launches were against these 3 product segments. By better focusing, by better targeting, we reduced the number of new brand launches since 2016 with 60%, but we are achieving better results. We call a new brand launch successful if it achieves half its share within 12 months time. Historically, our success rate was 26%, but in 2019, and with a success rate of 56%, we're setting a new industry standard. Altogether, the new brand launches contributed 1.4 percentage points to our group volume share, representing GBP 700 million in terms of revenues, which is 70% of our revenue growth. The objective of our efficiency agenda is to improve the revenue to gross margin conversion. On the chart, you see the progression of revenues and gross margins for our strategic brands since 2017, with 2017 indexed at 100. We've grown revenues at a CAGR of 5.2%. But more importantly, gross margins ahead of that at a CAGR of 8.7%. By further consolidating our portfolio, by rationalizing the tail of our portfolio, for our framework of flexible brand standards, the revenue growth management capability we are building and through focus and prioritize resource allocation, we are confident that we will continue to grow gross margins ahead of revenues. That takes me to the end of my presentation, and let me summarize. Over the past 3 years, industry volumes have declined at a CAGR of 3.6%. Revenues, however, have grown at 1.1%. We have grown revenues at a CAGR of 2.8%, but with further momentum in 2019, where we grew revenues with 4.6%. For the next few years, we have a few, very simple priorities. Our objective is to drive for sustainable revenue growth with continued volume share and value share growth. We will continue to develop and invest in our brands for equity and future value. And this is underpinned by a hard drive for efficiencies. Thanks very much. Thanks for listening, and let me hand over to Marina. Thank you.

Thank you, Chris. Good morning, good afternoon. I am Marina Bellini, Information and Digital Director, Chief Information and Digital Officer in the group since 2018. With over 20 years experience working across the globe, AB InBev, PepsiCo and PwC. Leading the digital agenda for BAT over the past 2 years has been very rewarding because strong results are being delivered and the opportunities ahead of us are also big, while leveraging technology in our business to deliver exponential value. In our strategy, Digital plays a key role in strengthening many capabilities across the organization, such as insights, consumer brands, innovation, and connecting ourselves internally and externally in an agile way. Our approach to Digital is to apply new technologies to existing and new business process to accelerate our results. Key principles we're following in this path are Digital being applied across the enterprise, big focus on consumer marketing and also way beyond it, in the entire value chain of BAT. Technology is the key enabler, and its exponential value comes to fruition when the organization has the skills, the ways of working and the culture of how to exploit it. Data and analytics is centered on how we manage technology in the group. Continuously challenging ourselves to bring automation, insights and foresights to drive sharper and differentiated decision-making inputs to our managers. The story that I'm excited to share with you is the following: digital has delivered in 2019. We are, for sure, not an old dinosaur as sometimes people see the tobacco industry. Here, technology has been applied in a meaningful and modern way and brought results to BAT. We know how to drive change, this has started and is accelerating at pace. The group's priorities of combustible value growth, step change in new categories and simplification of the company are powered by new technologies. We have an ambitious plan, and we are on track to achieve it. And this is, and will always be then guaranteeing and stable, efficient and secure technology stack, building on our strong foundations, addressing GDPR, Cyber and overall compliance requirements such as Chip, TPD, SOx and many others. In 2019, strong results were delivered in BAT leveraging Digital. Over 25 million consumers, of which 7 million are new categories that we have in our database, and we are communicating with on their journey of migrating to, and engaging with, reduced-risk products. Our 88,000 farmers and almost 700 tobacco-leaf technicians are supported by a mobile solution that allow us to have crop-yield estimation, track sustainability metrics, transact contracts all real time, bringing efficiency and accuracy to the process. 0.5 billion of packaging materials inventory is constantly optimizing, enabled by advanced analytic tools. It has allowed for 5% reduction of this working capital item. Through robotics, analytics, several new technologies and external partnerships, we've delivered over GBP 40 million in efficiency, in shared service and IT. While launching a digital expertise program that has already covered over 1,000 senior managers in the group. Strong resources and plans were put in place behind strengthening the technology and the digital team. And we have skilled resources in our markets. And in our 4 tech hubs in Poland, Malaysia, Mexico and the U.S., and we are setting up our innovation labs in San Francisco, London and Tel Aviv, to further develop external partnerships that can accelerate our journey, building a better tomorrow. With the new employer branding, BAT's purpose and vision and the digital transformation plans, we were able to hire over 100 people from top companies of many different industries, such as Pharma, Big Tech, Fintech, FMCG. While we're improving on the diversity of our teams, over 30% women, more than 60 nationalities, and people with very diverse professional experiences in BAT and from outside. Key skills are being [ raised ] in the group, such as design thinking, disruptive technologies and data sciences. Training and on-the-job learning, and it's not only about skilling up our people, but also about building strong partnerships that bring experience and value to the group at speed with partners such as McLaren and Salesforce. To deliver digital transformation at scale in the group, our strategy is: First, to drive process to be data-centric. One example, using multiple data sources and AI for better informed pricing approach in Australia, with micro segmentation with discounting and portfolio defined at store level. Another example, using more and more real-time insights with social media, e-commerce, traditional and new methods of consumer research and many other data sources brought together to improve consumer engagement in the U.K., Italy and in Japan. In Japan, the engagement rate is up by 21%. Then we've trained the organization to use agile methodology and leveraged technology solutions globally and allowed for local differentiation that brings competitive advantage at speeds. One example is that we have over 10,000 trade reps worldwide in a single global technology platform that all average on a daily basis and gets activated by each market with the components that matters by differentiating the solutions that helps them win in each marketplace. And also another case, we have 6 million new category consumers, records in our global consumer relationship management platform. Deployed at speed in 19 markets, with solutions in different channels, in line with each market opportunity, regulation and experience in countries such as Japan, U.S. And the U.K. and using these records, we have sent over 90 million personalized messages last year. Third, our strategy pulls value from a structured innovation process, connecting many new external partners, Big Tech, entrepreneurs, VCs. To deliver a solution, for example, like we are piloting Chile, Mexico, South Africa and Brazil, to have an Uber-like network to deliver to our trade partners, reducing logistics costs potentially by 5% to 30% and achieving greater than 99% delivery on time. Great case is also driving consumer research, not on 8 months time frame, but 8 weeks, as we just did in the U.S. and Japan for new actives. An innovative solutions on age gating, they are being piloting and looking very promising for retail and e-commerce. Last, we are embedding digital in BAT's DNA. Specific training for marketers, technologists, HR, legal, finance people in digital marketing. Digital immersion programs for our senior leadership and Squads, mission based teams, in Canada, Mexico and Japan, successful delivering on New Categories growth. Supporting our combustible value growth priority, we have improved our B2B revenue 5x in 2019, freeing up costs and time from our sales team to support higher performance of our trade partners. We've created analytics models as part of the plan to fight illicit trade in Brazil and we're able to bring back to the duty paid part of the market, 1.8 billion sticks. We are now investing to grow our B2B channel and better serve our trade partners, leveraging our global trade platform that enables for multichannel and multi-category route to market, and continue expanding analytics and execution solution to support micro segmentation to price and portfolio manage our offers. Digital has been critical to the acceleration of New Categories. In 2019, we grew by 3.5x the number of followers in social media. We achieved 7 million consumers of new categories in our database that we engage regular with. And moving forward, we will continue to deliver on the growth via direct-to-consumer e-commerce sales, improving margin, experience and services. We are going to grow the consumer database and the personalization of messages with each one of them to continue to expand their understanding and engagement within noncombustible products. And as it's just happening today, in Oxford Street here in London, our BAT Vapor retail stores will offer a unique shopping experience, connecting all consumer touch points. Delivering on the priority of simplifying BAT was achieved through change in organization and process, as mentioned before by my colleagues, but also by the exploitation of technology at scale. Automating back office process and achieving in billing, pricing and some other activities, up to 90% reduction in processing time. And reducing by circa 30% the energy consumption of our data centers. With higher complexity in our supply chain, given the increased portfolio in new categories, concurrent planning is coming live in Australia, Brazil, Japan and the U.K. this year that allows for a more responsible and flexible operation. Leveraging IoT in our tobacco leaf operations will bring speed and a more precise quality differentiation, and increasing the number of bots in our organization, you further deliver efficiency to the group. We are on track to deliver on our ambitions plans to be amongst the most technology-enabled FMCGs. We aim to have 25 million new category consumers in our database that we engage with in an individual way. We will have personalized products as we grow in understanding of individual preferences and can customize accordingly, weighing to have almost zero touch factors running at maximum efficiency and flexibility. And a workforce that focuses on value-added activities and a bot workforce that delivers on the transactional and repetitive tasks, we will be top quartile on Cyber security, we will be top quartile on digital quotient. We are going to be not only amongst the best companies to work for overall, as we already are today, but also the best companies to work for millennials and Gen Zs. We will be amongst the most tech-enabled FMCGs globally. This is an exciting story of digital having delivered in 2019, an organization that knows how to drive change and leverage technology at scale, supporting our priorities and delivering against our very ambitious plans. Now I will hand over to Jack for closing remarks. Thank you.

Thank you, Marina. So we have covered a lot of grounds today. I'm sure you will agree with me that our foundations are strong. As I said in my opening presentation, we are very fortunate that ours is a business that is one of the most resilient in these difficult times. The welfare of our employees and our stakeholders remains our priority. However, despite the challenges that we are facing due to the corona Pandemic, to date, we have seen no material impact in our business. Today, we have shown you that we are resilient and have consistently delivered against our financial guidance, and we delivered again in 2019. And while we do not know what the future may hold, at present, we are maintaining our guidance for 2020 with 3% to 5% revenue growth, high single figure EPS growth and continue to deleverage the balance sheet. We have an ambition to build a better tomorrow by reducing the health impact of our business through offering a greater choice of enjoyable and less risky products to our consumers. Our strategy is clear, and we know we have to win and how to win, and we are building capabilities across the organization that we need to support our growth. As an organization that is bold, fast, empowered, diverse and responsible, we have the right culture to accelerate our delivery. The strategy I've outlined to date underpins our confidence to continue delivering revenue growth of 3% to 5%, with GBP 1 billion of savings in efficiencies over the next 3 years. This allows us to deliver on our financial commitment and make substantial further investment in the growth of the New Category business and continue to deliver the deleveraging of the balance sheet. While also delivering on our stretching new ESG ambitions. In summary, we're a resilient business and remain very confident in our ability to deliver on our commitment to high-single figure EPS growth in the future. Thank you. And I will now open to questions.

[Operator Instruction] And our first question comes from the line of Nico Von Stackelberg from Liberum.

I just wanted to ask about pricing in some of your key markets. So I know last year was a very strong year with pricing -- price mix of 9%. Can you tell me a little bit more about where the pricing will come from this year? And how you see the geographic mix playing into this?

Yes, thank you very much for your question. I think what's very important to realize is that the springboard that we have coming out of 2019 is a very strong one. That gives us the ability to deliver on our numbers for the year. Yet, of course, there is the coronavirus, which is going to be an unknown as we go along. But yet to date, we didn't see any major impact on our business moving forward. So I think that this is going to be the biggest impact, the biggest risk, but we are a very resilient industry, and we are a very successful company in that industry.

Okay. And my next question is on next-generation products. I'm just wondering, can you tell me what percent is repeat purchase versus how much is merely pipeline still? Or how do you break that down internally? And can you put some numbers around it, please?

Yes, what's important -- thank you very much. What's important is that most of our volume is not related to pipeline filling because we had very little launches at the end of the year. So most of our volume is effectively genuine volumes coming through. Because as you saw in the presentation of Paul Lageweg, we have an acceleration in terms of share, both in the 3 categories, and that will continue in the months to come. What we see very clearly is a very strong springboard in Q4, and that will continue to help us for delivering our numbers for 2020.

Excellent. Final question, please. On the next -- on the beyond nicotine category, so I assume it's something around cannabis, CBD, [ eutrophics] and so forth. But could you just tell me a little bit more about which segments you find economically attractive. So I've seen a number of heavyweights in the industry really suffering recently. I really question the economics of some of these categories. Could you give us a bit more confidence that some of these categories will prove profitable and attractive for shareholders in the long run?

Yes. First of all, what you have to remember is that we have 3 categories today, and these 3 categories are going very well. We grew by 32% last year. Now we have still a lot of ground to cover and a lot of space for growth and a lot of potential in these 3 categories as they exist today. But nonetheless, we're going to go further and beyond that on the midterm, long term. So we have time for that. First, what is very important is to have the right scientific understanding, coupled with consumer insights that we have across the 3 categories. And then as we said during the presentation, it is going to be, first, focusing on the different platforms of delivery that we have. And that makes absolute sense for us. We don't want to spread ourselves thin. What we want to is to build from a strong foundations with a very clear framed approach in terms of science in order to make sure that we are successful. So that's for the long term.

Our next question comes from the line of Owen Bennett from Jefferies.

A couple of questions, please. Firstly, on the vape performance, there was no mention of iSwitch. I was hoping maybe you could comment on what's happening with this product and the future plans. And then secondly, you've spoken about the improvement driven in Japan by pro and nano, I was just wondering when can we expect these to be rolled out beyond Japan?

Yes. So the first question, as Paul said in his presentation, what we're doing is we're refocusing our portfolio in terms of number of SKUs, but also in terms of number of devices. What we have for the time being is 2 very successful ones. That are ePen 3 and Alto. We are successful -- extremely successful with these 2 platforms and certainly very successful in the U.S. So we'll continue to push on these platforms. What is important is that we have the focus related to the different platforms. And the second question was, sorry?

Just on the ePen in Japan by pro and nano. I was just wondering when they may be rolled out beyond Japan?

Yes, it's a very good question. What we do always is we, I would say, concept proof the launches that we have, and we've done that in Japan. These 2 platforms are working very well for the reasons explained by Paul during the presentation. And gradually, looking at resource allocation and looking at MAPS and looking at the consumers, we will expand these launches through the year. What is very important to us is the new launch that we're going to have in the next few weeks. And that is going to be extremely important for us because it has 30% more tobacco and it has also boost button, and it has also larger heating surface that allows us to put more tobacco and to have more flavor coming out of it, thus increasing the satisfaction to the consumer. We had some gaps, and we're going to continue to push on that, and we're closing the gaps.

The next question comes from the line of Sanath Sudarsan from Morgan Stanley.

Can I ask 2 quick questions, please? One, can you please help us understand better the level of migration of current smokers into NGP? You have set a target about 50 million consumers in a decade. How big a share of the NGP market do you expect this to be? And where is the category sourcing consumers from in your view? That's question number one. And question number two, can you give us much more insight on the level of pricing power you still have in many of these markets? Given from the data you showed on combustibles, pricing has remained very strong across even mature market. So longer term, over the next 5, 10 years, how do you see the pricing evolve?

Yes, I mean, first of all, I don't have a crystal ball. But what we see is that there is a strong pricing that has happened in 2019. What we see at the beginning of the year, with 65% of our pricing that was planned that went through, it means that there is pricing opportunities moving forward. The second element is what Chris Sijtsma spoke about, which is the fact that our pricing elasticity numbers are very good, especially in the U.S. and it gives us a lot of space to grow. At the end of the day what is important is the adequation of the pricing and the speed at which the pricing is taken, and at the same time, the affordability to the consumer. So I think that we're in a good position looking forward, but it's very difficult to plan further and beyond the 2 years to come. The first question was? Sorry.

Sorry. Just in case -- in terms of your NGP number you set out for a decade, you want to be near 50 million consumers. So how big a share of the consumers of NGP do you expect that to be? And where do you expect to source these consumers into the market? Are they coming from smoking? Are these new consumers? How do you think that evolves?

Yes. First of all, mostly, they will come from smokers. What we said is we want to have a health footprint that is reduced and that will give us a more sustainable and a more, I would say, dynamic company. So that's the first point. The second point is the migration will happen gradually. We thought 2 years ago that there will be 1 category. That's what the industry thought. Now we know that there are 3 categories. We thought that the consumer was a bit monolithic. You saw through Paul's presentation that it's a very dynamic environment with a lot of consumers. Our insights are telling us much more, but we know that these categories will continue to evolve. Why? Consumer acceptance; two, satisfaction, but also regulation and price and excise. So these 3 categories will develop differently as we go along. What is important is because we have a portfolio of 3 categories, we're more immune in a way to the development that are coming. And we will be making sure because we have an agile organization and agile ways of planning our business and a very strong new organization with new capabilities, we will be able to navigate better all these developments of these different categories. We want to have the 50 million consumers because this is important to us.

Jack, just to follow-up on that, so those 2 questions together. So how much do you think price could be a variable pushing consumers out of smoking into NGP or accelerating that shift?

Yes, I think you have to come back to Chris Sijtsma's presentation on that one, which is you saw, for instance, in Australia, where the prices are very high, average price is around GBP 17. The consumers are reducing in number, but the value of the market is increasing. What I'm interested in, and that's what I said in the 3 priorities I outlined 1 year ago, is that on combustibles, I'm going after value. I don't want to lose my shot, of course, in terms of share, and we grew share last year. But the most important is the value. And I think that there's still a lot of space in terms of pricing for the future.

The next question comes from the line of Jonathan Leinster from Societe Generale.

A couple of questions, if I may. First one, with regards to the Modern Oral segment, you're sort of industry leader on that, particularly in Europe. When you talk to regulators about this market, what are their concerns regarding Modern Oral? And what are you looking for in terms of the sort of regulatory outlook for that segment?

I think it's a very good question and a very fundamental question. What we want to have, as we said last year, is a clear regulatory framework in each of these different categories. That Modern Oral category is developing very fast, yet we're trying to follow systematically with the regulatory framework that is discussed and engaged with the different governments in the different countries in order to make sure that we're on the right side of the regulatory framework to ensure -- as we do a lot in terms of science, to ensure the quality of our products and that the overall competitive environment is not only a level playing field, but also, I would say, a secure environment for our consumers. So we go step-by-step, yet, at the same time, Modern Oral, as was said, is a very good way of recapturing consumer moments about the -- for the consumers in the different countries. That gives us the possibility to expand quite fast. And by the way, we have no limitations at the moment in terms of capacity of production. We have patents, we have good products, and we'll continue to deliver these good products. As Paul said, we are starting to sell in airlines and that's a very good sign in terms of the potential expansion of the different categories.

Okay. And secondly, on the heated, just to be clear on the heated tobacco segment, you seem to indicate that the focus this year outside of Japan was going to be very much on Eastern Europe rather than Western Europe. Is that broadly correct? Is Western Europe relegated to a relatively minor role because it's a high tar market?

I would answer that question first by saying that it's quite a sensitive competitive information that you're asking me. So I'm not going to answer directly your question. But the second thing is, I think that we have some launches that are going to happen this year in H1. We have some launches that have happened in quarter 4 last year. We're taking the learnings because we have insights on the 4 categories, and we'll continue to expand our footprint in the right way moving forward.

The next question comes from the line of Alicia Forry from Investec.

Jack, 2 questions from me. One on the vapor product consolidation. I'm curious why you've chosen to consolidate behind the Vuse brand. You put up a lot of charts showing how Vype has outperformed a bit more strongly in Europe than Vuse has in North America. Perhaps if you could discuss that? And also, it seems like consumers of these products are quite fragmented and everyone want something different from it. So can you explain how one brand umbrella can really satisfy all of those various needs of the consumer, please? And then secondly on menthol...

Can I start with this one?

Yes, of course.

Okay. So first, thank you very much. First of all, vapor very important. It was an extremely fragmented market. Now it is consolidating. So we have more focus on one major brand, and we took the decision of that brand against that one because we knew that the different capabilities that we have related to that brand, the consumer resonance and the way we can market in the different markets allowed us to take that brand, which is Vuse, and to put it everywhere. At the same time, what we're going to do is to reduce the number of SKUs, to reduce the number of flavors that we have and to have a more consequent approach in terms of the financials and a more radical approach in terms of concentration.

Okay. And on menthol, we haven't touched too much on it here today, but it does seem to be under a lot of attack from various legislative bodies at varying levels of the government in the U.S. If we assume that this pressure on the segment continues and possibly could even worsen, what is BAT's strategy for the possibility of transitioning to a menthol-free U.S. market in the future? What can you say about your preparations for that possibility?

Yes. Thank you very much. Very good question. It is true that menthol has been a bit of the agenda recently. It has been very high on the agenda in the last 2 years. Nonetheless, nothing has changed. Why? Because there is no scientific evidence that makes any difference at the moment. There is no piece of information that says that it is going to go further in terms of scientific evidence. We do strongly believe that menthol should be in the market. And we see in the U.S. that even for vapor products, you are still allowed to use menthol products. First, you have to remember that even for combustible business, first of all, consumers are smokers. Secondly, they are using a brand, and they are very proud, and they're very happy to use this brand. And thirdly, we have the strongest cohort in terms of the beyond 21 years old in terms of menthol. So I think that we have an extremely good resilience. There are markets, as you ask the questions, there are markets where menthol ban has already happened. Like, for instance, Canada. What has happened in Canada in 2017? Menthol was banned. What happened? Retention was 98%, and the consumers continue to use their own brands that they like and they enjoy. So I think that there is a lot of experience in BAT how to tackle these new environments. But also, I don't think that the risk is extremely high at the moment in terms of the U.S. In terms of Europe, you will have a menthol ban during the summer, and we are very well prepared in order to go through and to come out stronger out of that menthol ban.

Our next question comes from the line of Gaurav Jain from Barclays.

I have 3 questions. So question one is that some of the consumer stable categories, such as food products and hygiene products, are seeing a huge amount of pantry loading right now. Now this has led to a question whether consumers are taking money out of some other categories, such as tobacco, and whether consumers are down-trading. So can you please talk about what's happening in U.S. as well as also in Italy and Spain? That's my question one.

Okay. Let's start with that one issue, if I may. First of all, what's important is that we don't see any change in terms of patterns of consumers recent -- patterns of consumption recently. Why? Because cigarettes, to the opposite of a lot of other categories, is a daily purchase. So consumers continue to go to the shops. And even in Italy and in France, you still have the -- tobacco is open and consumers can continue to supply. So we don't see important stockage or building stocks from the consumers. It is much more the daily consumption that is happening, and that is continuing to happen. We didn't see any changes in the last 2 months in terms of that pattern.

Sure. That's very, very helpful. Question number two is, yesterday, the FDA passed the rule on graphic health warnings on cigarette packs in the U.S., and this has to be implemented next year. How do you think this will impact your business over the next 3 to 5 years?

That's one. That's the -- I didn't hear your question. It's about the health warning in the U.S.?

Yes, the graphic health warning on cigarette packs in the U.S.

Yes. I mean...

How will that impact your business?

Our position has always been the same. We are supporting of regulation. Yet that regulation has to be balanced regulation. So first of all, we have to see the content, and we are in close contact with the regulators in order to make sure that we have our voice at the table in order to make sure that, that regulatory framework is balanced. So we'll take the opportunities as we go along, as you said, that's going to be for the mid of 2021.

Sure. And last question, and this is for Tadeu. One of the initiatives earlier this year was that you will drive working capital savings through better inventory management, and I think you mentioned during your discussion on coronavirus that you are building up stocks. So do you think that inventory management initiative will get pushed out?

I -- yes, I quoted that as one of many that we are doing in order to manage working capital, and it's not just about working capital, but CapEx as well. Remember that we made this commitment to reduce the CapEx to the level of depreciation. We see this on -- as a temporary measure. It's difficult to predict now exactly how long this will take. At the end, we are not expect to have a major impact in terms of working capital in our numbers. We proved the last 2 years that we have a very cash-generative company in terms of free cash flow. And our levels of conversion is very high in the 90s plus. So we don't expect to have any difference this year compared with the previous one, although in the next coming months, probably we'll have some drag coming from the working capital, which overall shouldn't be a big weight for the position of the group.

The next question comes from the line of Vivien Azer from Cowen.

Two questions from me, please. The first on glo hybrid. How are you guys thinking about pricing, both on the device and the consumables? Will they be priced at a premium or purity to the legacy products?

You're speaking about hybrid?

Yes, please.

Yes. So I mean, these are things -- it is exactly the model that I spoke about. We launched something in the market because we see an opportunity. We do believe that hybrid in specific markets, because of regulatory frameworks, is an interesting concept for the consumer. We have done a lot of research on it post, prior and during the launch. And we know, as Paul said in his presentation, that there's lot of things that we can improve. So that's an unknown category that we're discovering as we speak. We are the ones that are pioneering in that category, and we'll continue to do so, and we'll take the learnings and continue to expand.

But sorry, just -- and I apologize if I'm misunderstanding something. It sounds like this is a new device. It's certainly a bigger, different consumable with 30% more tobacco. And so I'm just trying to understand, will this product be priced at a premium to the legacy glo products that are in the market or be priced on par?

Are you not confusing? I'm not sure. I'm trying to understand the question. Are you speaking about the hybrid with -- hyper or hybrid?

Sorry. No, I apologize if I'm mischaracterizing it. Let me be just more clear. You've got slim consumables and now you have these new consumables that have 30% more tobacco. Will they be priced the same? Or will the larger consumables with 30% more tobacco be priced at a premium?

So you're referring to hyper. Okay. Thank you very much.

Oh, I'm sorry.

No, no. No problem. No problem. So this is the consumable and the device that we're going to launch in a few weeks from now. I think this one is a very important one in our portfolio in terms of THP. Why? Because we know that the satisfaction index, and you can refer to the chart that was in Paul's presentation, the satisfaction index is extremely important. And we know that with the current products that are in the market at the moment, there is a gap in terms of satisfaction in all the markets that are not low tar. So what we've developed is a product where the consumable is bigger and thicker, closer to the format of a normal cigarette. First point. The second point is, it has 30% tobacco more, which allows you to give more flavor to the consumers with the risk-reduced product. And thirdly, there is more heating surface around the stick that allows you to heat better the tobacco and to get the satisfaction to the consumer. And lastly, there's a boost button on that device. So that should increase your level of satisfaction and the delivery to the consumer. So this is a breakthrough that we're going to launch in the next few weeks. In terms of pricing, it will depend on the different market situations in Asia and in the rest of the world in order to make sure that we have the best adequation and the best trial levels for the consumers.

Okay. That's fine. As you think about the U.S. marketplace, clearly, your market share performance in 2019 was really quite healthy. And I appreciate your comments on price elasticity. But as you kind of think about the outlook for the U.S., there have certainly been some alarming predictions around what unemployment could become given COVID and the lockdowns that are happening in key cities. So how have you guys thought about the evolution of price elasticity to the extent that the macro landscape in the U.S. deteriorates pretty meaningfully?

Yes. First of all, I think the important first point is that we see our situation or our position in the U.S. as extremely strong. We have the strongest brands. We have the strongest development in terms of the different categories that we operate in. And we have a better price elasticity coefficient than others. Our portfolio is extremely strong. As you said, our share is good and our value share is increasing quite significantly. So it will continue to go in the same direction. What we see now, looking at moving forward, is the first 2 months of the year the market has been 1% better than the same period last year, which is a good indication for the beginning of the year of the health of the industry in the U.S.

Our next question comes from the line of Michael Lavery from Piper Sandler.

This is Jeff Kratky, on for Michael. So beyond nicotine, would we infer correctly that cannabis and hemp are under consideration? And for any nonnicotine push, do you expect to use M&A or launch products organically?

Okay. So there are 2 things. One is in terms of products for that next generation of products, we're looking at a variety of different stimulants. The list is long, and we are reviewing them all at the moment. And we're doing all the assessments that we need to do in the frame that we spoke about earlier in the presentation. What we have to make sure is that we understand the different factors related to the launches. And we have to make sure that this is health beneficial to our consumers moving forward. So we'll review in time and that's for midterm to long term, further and beyond what we have at the moment in the market.

On the -- can I just compliment on the M&A side, we are not expect to do any type of major acquisition in that space. We rather prefer to use our newly created corporate venture entity exactly to explore partnerships and joint ventures that would be interesting for us to develop the capabilities that we need to in that new space.

I mean, I think it's a very important point that you're raising. In the future, you will see more and more partnerships with other companies in terms of either IP or technology or processes. And what we want to do is to own as much as possible the end-to-end in terms of the development and the launches of these products supported by third-parties. I think it is very important to us to own our future and to be able to leverage in the future.

Got it. That's really helpful color. And just a quick follow-up on M&A. You mentioned it as part of -- as a strength and part of your strategy. What level of leverage would you need to consider another large deal? Would that only be after going below 3x in 2021?

Yes. We are fully committed, like I said several times in the past, that's to deleverage the company at this point in time. We don't envisage any substantial M&A coming forward in the next short term or even midterm. We want to now focus on our corporate venture capital. Because to be honest, if you see what's happening in terms of M&A in that space, they haven't been very successful independent of our current position. We think that we'll be better off leveraging the capabilities that we are building through the corporate venture, and like Jack said, trying to explore potential joint ventures and partnerships in the future, I think, that will be much more effective and efficient for us.

Our next question comes from the line of Pooja Gupta from Barclays.

Pooja Gupta at Barclays. I was hoping that you could further build on some of your comments around actions you highlighted that are specific to the short-term to your COVID-19 response. For example, could you tell us a little bit about the tighter cash control measures that you're implementing? And then given some of the seasonal cash flow needs that you typically experience in the first half of the year, particularly around like MSA payments, do you anticipate having to need any -- do you anticipate having to need accessing any of the credit lines you have available to improve your liquidity position even if it's out of an abundance of caution at this point?

Yes, thank you for the question. Some comments on that. In 2019, we refunded in order to reduce our exposure of 2020. So the other point that is important is that we have already proved that over the last 2 years that we were able to generate almost GBP 2 billion in terms of free cash flow after dividends and most of it had been used to pay down debt. So our debt and our bonds and bank maturities is adding up to GBP 4.3 billion now in 2020. We expect to some of the -- of that being paid down like we did in the previous 2 years with the free cash flow that we generate. And we have been active in terms of CP markets in euro and the U.S. dollar. And we have just renewed a new RCF, GBP 6 billion tranche, which is a liquidity backstop with a syndicate of 21 banks. They are very solid and diverse banks. There is no financial covenant around those. We are pretty sure that we can have access to them at any time. We -- there is no reason for us to do a preemptive movement at this point in time.

Our last question comes from the line of Nico Von Stackelberg from Liberum.

I have a follow-up. I hear some rumors that there might be EUTPD 3. Do you know what's in scope? Or have you had any conversations around EUTPD 3? Is there anything worth noting there in terms of closed systems? And I have one more question.

Yes, there is -- there are always rumors. At the end of the day, facts matter more than rumors, and we don't see anything at this stage. There might be some adaptations in terms of regulations. I think that we've always said regulatory framework is extremely important. And if that regulatory framework makes sense for the consumer moving forward, then we will be interested in this. First, let's start with TPD that is going to happen soon. And we're well prepared for that, and we'll make sure that we take the benefit of that change in the regulation because we want to be a successful company, and we are a successful company.

Okay. Great. And then I want to ask on menthol cigarettes, and I'm going to sort of use your question to understand what might happen in the U.S. if cigarettes -- if menthol cigarettes are banned at a federal level. Can you tell me about what you're doing currently in Europe on menthol ban here or from the learnings that you had from your Canadian experience? So what are you doing differently versus Canada over here in Europe? And does any of it really apply to the U.S.? Or is it just such a different market?

Yes. Thank you very much. It's a very good question, and it's going to happen in a few months. So I understand the concern and the interest. Let me tell you, we are very well prepared for it. We know how to navigate these kind of changes of regulatory framework, and we know how to adapt our portfolio as we go along in order to make sure that we continue to grow value share and that we continue to grow market share. What's important to us is serving the consumers in the right way, having strong brands and continuing to deliver our business moving forward. So I think it was the last question. So thank you very much. I know it has been a long day. It's an unusual format for this day. We've tried to make it as cleaner for you in terms of where do we want to be and how do we want to evolve the company. But let me recap a little bit. First of all, we started the year very well. The second thing is we're a very resilient company in a very resilient industry. We have a very clear strategy in terms of growth moving forward. We even gave ourselves some ambition for 2030 because you need to have visibility and navigation. 50 million of noncombustible product consumers, carbon neutrality, and also, as Tadeu has demonstrated during his presentation, we want to deliver on the financial side of our business further and beyond growing share and growing value share. We are confident in high single figure EPS growth for 2020. We are building a better tomorrow, which is a company with purpose, a company with direction and a company that has delivered not only in 2019, but that will deliver in 2020 and will continue to do so. So we are extremely confident in our long-term growth opportunity for BAT moving forward. I think it is a very robust company that has very strong foundations and that will continue to deliver in the future. Thank you very much for taking the time. And looking forward to see you soon. Thank you.