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

Hello, and welcome to the British American Tobacco 2020 Full Year Pre-close Trading update. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I would now like to hand the call over to your host, Mike Nightingale, Head of Investor Relations, to begin today's conference. Thank you.

Thank you, Molly. Good morning, everyone. I'm Mike Nightingale, Head of Investor Relations. And with me this morning is Tadeu Marroco, our Finance Director. Welcome to our full year 2020 pre-close conference call. Just before we begin, I need to draw your attention to the cautionary statements regarding forward-looking statements contained in the trading update. I will now hand over to Tadeu, who will say a few short words on the current trading before we open up to questions. Unless otherwise stated, our comments will focus on constant currency adjusted measures. Over to you, Tadeu.

Thank you, Mike. Good morning, everyone, and welcome. Thank you for joining us this morning. In 2020, we are transforming BAT and continuing to grow the business against the challenging global backdrop caused by COVID. Throughout the year, our priority has been the health and well-being of our employees. We have made no redundancy of furloughs as a result of the crisis, and we have continued to pay all our employees in full. It is the commitment and dedication of our people around the world that has ensured that we are on track to deliver a strong set of results in 2020. We are committed to building a better tomorrow, delivered by our continued focus on the 3 strategic priorities. Reducing the health impact of our business through providing a range of enjoyable and less risky products is the greatest contribution we can make to society. We continue to be clear that combustible cigarettes pose serious health risks, and the only way to avoid this is to not start or to quit. BAT encourages those who would otherwise continue to smoke to switch completely to scientifically substantiated reduced risk alternatives. We have continued to increase investments and to drive a step change in New Categories. We are very proud to now have around 30 million consumers in noncombustible products. We are growing value sharing vapor, volume sharing THP and delivering strong revenue growth in modern Alto. Our New Category revenue performance is accelerating in the second half despite a strong prior period comparator. We are continuing to drive value in our combustible business and are on track to deliver savings of at least GBP 300 million from Quantum. In addition, the radical transformation of the organization and increased agility brought about by new ways of working have enabled us to quickly and effectively adapt to navigate a challenge caused by COVID. The business is performing strongly against an environment which remains uncertain due to the global pandemic. We are on track to deliver on our 2020 guidance. Cigarette and THP volume has improved over the second half, driven by continued resilience in the developed markets and some improvements in emerging markets such as Brazil, Bangladesh and Turkey. We expect to outperform industry volume, which we now expect to be down around 5% decline with the U.S. industry volume broadly flat. Given this, continued strong pricing and a reduced full-year revenue headwind from COVID of around minus 2.5%, we now expect to deliver revenue growth at the top end of the 1% to 3% guidance range. In this improving trade environment, and thanks to our strong cash generation and tight cost management, we have taken the opportunity to further increase New Category investments in the second half by close to GBP 200 million. This represents a total additional New Category investments of around GBP 450 million in 2020. We continue to expect to deliver mid- single figure constant currency adjusted diluted EPS growth. This is despite the further increase in New Category investments, absorption of a one-off impact of New Category revenue of $50 million following our decision to withdraw glo Sens from the Japanese market, the effect of a strong prior period comparator and associate income from ITC that is significantly negatively impacted by COVID. We expect that a translation headwind of 3.3% on full year 2020 adjusted diluted EPS with the impact expected to be between 2% to 3% for the full year 2021 applying current foreign exchange spot rates. Turning now to trading in the New Categories. In vapor, Vuse/Vype is fastest-growing international vapor brand growing value share of its top 5 markets by over 7% points to 26% year-to-date. The brand has now achieved very share leadership in closed systems in 4 of the 5 larger vapor markets, exceeding 50% value share in 2 of them. Vuse/Vype is #1 in device sales in all top 5 markets with device volume share in excess of 50%. In the U.S., Vuse is the fastest-growing brand with 24% value share of total vapor year-to-date, driven by Alto at 19%. Vuse continues to close the gap on the market leader and has achieved value share leadership in 7 states. Vuse also took market leadership in Canada in August, having commenced the brand migration from Vype in May. Canada is the first market within the top 5 to migrate to Vuse and achieved a 100% retention rate. Market share for Vuse at the end of October reached 64%, driven by the success of ePod. Migration to Vuse in the remaining top 5 markets will be completed during 2021. In THP, the continued success of Hyper was reflected in glo reaching record total nicotine volume share in Japan of nearly 6% in October with Hyper reaching 2.3% nicotine share. Hyper has maintained a conversion rate in excess of 50%, 2x higher than any previous glo product. Glo continues to grow volume share in ENA with a THP category share of around 15% across the top 8 markets. In Moscow, Hyper drove growth volume share of total nicotine to a record 3.3% in October and was the top-performing THP brand across all tracked social performance metrics. We expect growth of close to 20% in THP volume in 2020, reflective of the successful launch of hyper in Japan in April and its subsequent rollout into key cities in ENA. THP revenue is expected to be down, mainly due to the year-on-year impact of the withdraw of Sens and excise harmonization in Japan. In Modern Oral, we continue to grow strongly and to consolidate our leadership position outside the U.S. In the U.S., in November, we announced the acquisition of Dryft. The acquisition significantly strengthens our position, expanding our portfolio from 4 to 28 nicotine strengths and flavors. It also enabled us to participate in the segment above 6-milligram nicotine, which represents 6% of the category. The Modern Oral category in the U.S. has benefited mostly from geographic expansion by all the key market participants and currently represents around 1% of the U.S. nicotine markets. Velo branded Dryft products have now been launched online and into distribution in Circle K stories in the U.S. We expect to expand the distribution of the Dryft products from 20,000 to around 100,000 outlets by the end of the first half thereof 2021. We are building capacity and expect to be unconstrained around mid-2021. In ENA, we are consolidating our clear leadership position with share growth in all key markets. We are achieving conversion rates from tried to regular usage of over 50% and have higher average daily pouch consumption than the category average. In summary, we are entering 2021 with good momentum across all 3 New Categories, with some exciting new launches planned. In vapor, we are launching a bluetooth-enabled version of Vuse providing electronic age verification. The product will be launched in Canada as a pilot market in the first half of 2021. Our Vuse Alto PMTA submission in September also included age verification technology. Also, in early 2021, in line with our ambitions to explore and to broaden our portfolio beyond nicotine, we are planning a city test of a CBD vaping product in the U.K. And in Modern Oral, to better meet consumer needs we are leading with the launch of the first mini pouches with a recyclable can in Sweden, Norway, Slovakia and Switzerland. We plan to expand to at least 10 markets by Q1 2021. We also aim to make all our Modern Oral cans outside the U.S. recyclable in the first half of 2021. We will continue to lead in innovation in our multi-category approach. Moving to driving value from combustibles. Our excellent performance is underpinned by resilient industry volumes, particularly in developed markets with BAT outperforming the industry. Continued strong price/mix drove global value share and is up 20 basis points and our strategic brands value share up 40 basis points. The U.S. business continues to perform strongly with an excellent performance from Vuse and good pricing combustibles. Corporate value share is up 40 bps and premium share is up 50 bps year-to-date. This is driven by Natural American Spirit and Newport. We are growing share in the branded value segment, and to date, we have seen no accelerated down trading. Moving to the balance sheet. We maintain our strong liquidity profile following recent successful debt issuances. We remain committed to our targets to reduce adjusted net debt to adjusted EBITDA to around 3x by end 2021, and maintain our 65% dividend payout ratio. This will be achieved through continued strong operational cash conversion in excess of 90% of adjusted profit from operations. Turning now to ESG, which is central to our strategy. I'm pleased to report that we have recently received further external recognition, building on our BBB MSCI rating and the recent improvement on our Sustainalytics score from 28.2 to 27.8. BAT has again been named in the Dow Jones Sustainability index for the 19th consecutive year and is the only tobacco company to be included in the DJSI World index. BAT has been included in the Financial Times Diversity Leaders leased for a second consecutive year with our score increasing from 7.08 to 7.23. We have also been included in the A-List by the Carbon Disclosure Project, CDP, for climate change action for the second year in a row. Finally, tomorrow, we are launching a sustainability-focused report on human rights, the first by any company in the tobacco industry. In conclusion, the business is performing strongly during this challenging circumstance, and we are on track to deliver on our guidance. We are investing, delivering and transforming the business, thanks to our continued focus on our 3 strategic priorities. We are growing share in New Categories, driven by innovation and increasing investments, supported by continued value growth in combustible and the benefits of Project Quantum. This enabled us to both deliver on our financial commitments and become a faster, simpler, more agile business. In summary, we are delivering on our 3 strategic priorities. We now have around 30 million consumers in noncombustible. We are investing additional GBP 450 million in New Categories and continue to deleverage the company. We are committed to a better tomorrow purpose. Thank you. I will now open the call to questions.

[Operator Instructions] Our first question comes from the line of John Leinster Collin from Societe General.

A few questions, if I may. First question is on glo in Japan. I think at the interim results, you said your exit rate in June was sort of 5.9%. And then you say here, it's good you have hit a sort of high in October, 5.9% with Hyper, having risen from 1.3% to 2.3%. I mean, does that imply that Hyper is just cannibalizing existing glo. And is -- why is the market -- why is the total share of glo not really risen in a segment that has clearly risen within total market? That would be my first question.

John, look, the point they're reading in the middle of the year was one ad hoc reading, weekly reading that we quoted at that time of 5.9% and this one now in October is a more robust reading throughout the end of the month. We are clearly growing as a family. There is some cannibalization, but our total category market share is growing as well in japan. We're now slightly above the 20% mark, and we were below that by the middle of the year. So there is a clearly a growth expansion on the whole glo family and the glo Hyper is outperforming within that.

And secondly, I think you mentioned that you don't expect to be capacity constrained on U.S. Modern Oral by the middle of 2021. Can you give us some idea of what that capacity would be?

Well, we have already a very well-established capacity in our current SKUs. And as part of the Dryft acquisition, we are also inheriting third-party supply capacity for the current Dryft volumes, and we are bringing machine from outside also to reinforce our capacity in the U.S. So when we mean to being constrained is basically a combination of all those three, eventually move some capacity from the current 1 to the Dryft format. But also being able to reach at least 60 million by mid of next year, which we believe that will be a good capacity to fulfill our plans and go above that in the subsequent period.

And lastly, if I may, obviously, South Africa was a rather bizarrely shut for a long time. Now it's reopened, has the market moved back to the legal market? Or is there still significant problems with illicit trade?

Well, so South Africa markets, you have to consider that before the crisis, the government was doing massive inroads in illicit in 2019, for the first time in many, many years. We saw a reduction on the illicit trade, given the enforcement of the new government that has been assuming power at that time. And clearly, for the first time, BAT, in many, many years, was growing volume, was growing turnover, was growing share, growing profit. And all of a sudden, this came to a halt in the end of Q1 this year. So the illicit at that time has been dropped back to the likes of 52%. And then you have this extended period of time without being able to sell any cigarettes, the illicit dominate the market. New networks were established as a consequence of that. And now the level of illicit is higher than it was before, as you would expect, cause it takes some time for these networks to be dissembled again and the government to be refocused on what they have done before. So at -- as we speak today, we saw an increase in illicit rate from the likes of 52% before to close to 60% and the government now needs to go back and do what they have done before the pandemic, which is a clear demonstration that when we have the willingness, there are ways to tackle that, and we'll be supporting for sure.

The next question comes from the line of Gaurav Jain calling from Barclays.

I have 3 questions. Number 1 is, would you be -- can you share your initial thoughts on FY '21 volume outlook, especially in the U.S.?

Well, Gaurav, 2021, you know that today is still very volatile for us to make predictions now. We have a new government in the U.S. There are now discussions about fiscal stimulus. The COVID crisis nowhere near the end. We have a bright light at the end of the tunnel, but it's still a long months to go in terms of the vaccine. But it's still a long months to go to be -- the vaccines to be rolled out. And it's very difficult to, at this point in time, to have a firm prediction about volumes. The fact is that 2020, we saw, as you saw in our statement, a very solid U.S. market is a number of factors impacting in a favorable way, the U.S. market. But it's very early to call. We expect to do a more firm view on the U.S. market by our year-end results in February.

My next question is your 2 long-term objectives. One is high single-digit EPS growth and the second is New Categories of revenue of GBP 5 billion by 2025. So that would imply that annual New Category revenue growth would be like GBP 700 million per annum versus that GBP 200 million, GBP 300 million growth that we have seen in the last year, 2, 3 years. So does it require a significant step-up in SCR growth rate and investment? And I guess the question I'm trying to ask is that -- are these 2 goals incompatible with each other?

No, I don't think that they are, and we clearly have prepared the company to allow us to continue to generating the savings that we need. That's why we launched Project Quantum. We also have a very strong combustible business as you know, and these both factors will be generating the funds necessary to fulfill the growth of New Categories. You have to take into consideration that 2020 is a very particular year. We had, for example, a number of headwinds in 2020, New Categories that materialize. The COVID impact on supply chain in the first quarter as a consequence of the shutdown in China, like we spoke in the half year results, the closure of shops in ENA in Japan, ENA happen again in the second lockdown in Europe. In marketing activation disruption, we have the Modern Oral ban in Russia at the end of '19, beginning of this year that we had to lap, and we had also the impact of glo Sens that we caught about. So there were a number of factors. The vapor industry still recovering from the a value crisis in the U.S. and also the new legislation, the FDA at the beginning of the year. So I think that we cannot read much through the numbers in absolute terms in 2020 in terms of NTO. But the most important thing is just to understand and to recognize the momentum that we have in all those categories. As we quote before, we are growing share in every single of those categories. In vapor, we are really leading 4 out of the 5 top markets and making big inroads in the U.S. In Modern Oral, it's just solidifying our leadership outside the U.S. In the U.S., now with Dryft, we have a much more competitive offers to consumers. And in THP, we are getting close to 20% volume growth despite the headwind of glo Sens. So I think that this gives us the reassurance that we will be able to achieve our $5 billion target by 2025, and at the same time, continue delivering our financial [indiscernible] as long as the post -- the pandemic is over.

And my last question is just on share repurchases, like you're ensuring that it may be like 2%, 3% cost of debt and your equity free cash flow yield is north of 10%. The leverage once we adjust for the associates, I mean it's not really 3.2x, the [ economic ] level, it is much lower. So why not start buying back the stock today?

Well, look, this -- the capital allocation is a subject that we'll be reviewing on a constant basis. We believe that the best thing we can do for the next year is to strengthen our balance sheet. We have done a very good exercise recently in terms of liability management that changed the shape of profile of the debt moving forward quite nicely, like we pointed out in the announcement, we believe that the best way to remunerate our shareholders at this point in time is to keep the dividend as it is. It's part of the DNA of the company. And we also want to continue investing in our M&A business and New Categories business through eventually some M&As like we just did with Dryft in the U.S. So by the time we get to the end of 2021, and we have reached the around 3x leverage, we'll be reviewing again the capital allocation. And if the circumstance persists as it is to date, because I agree with you, about the undervalue of the company, will be reconsidered all those points again by then, okay?

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

My first question is on the guidance. The global volumes look to have been about 2% better than you're previously expecting, and that's with a skew to the higher price/mix developed markets. So I'm surprised that the topline guidance was not raised by more than the roughly 1% you've indicated. So I appreciate you've touched on a few factors holding back revenue growth this year, but could you perhaps be a bit more specific on which factors have primarily held back?

Yes. Yes, sure Alicia. Look, we -- like we articulate a bit in the half year. There are 2 -- 3 major drags for BAT this year. The first one is the global travel retailer, although the volume is not that much material, there is a massive value intrinsic to those volumes. And the business, if anything, was completely decimated, the second one is South Africa is a big market for us in terms of -- because we are leaders, and we couldn't sell one stick of cigarettes since the end of April until in the second half of August, so it was a big blow in terms of revenue and weakness that we saw many emerging markets. There are a lot of disruption mainly that happened in the first half of the year, the likes of Mexico, the likes of Pakistan and Sri Lanka markets where stick sales are predominant. And this was a big drag that was difficult to recover. We had some upsides, like you referred to, the developed markets clearly outperformed in this crisis. And our performance in the U.S. in particular as well, was very beneficial. But this all nets to this 2.5 impact that we are quoting in terms of turnover. And so that's what it lies behind the numbers.

My second question is on Modern Oral in the U.S., obviously, a very exciting growth category. Many companies are involved in developing this space. Can you characterize the competitive landscape that you're seeing there? And has there been any change in competitive dynamics there, in particular with regard to price mix?

Yes. Look, the -- yes, you said it's a very fast-growing segment, although it's still 1% of the U.S. nicotine pool. And it's important to quote that because we have to put things into perspective. We -- if you look from the other more development -- developed traditional oral markets, the likes of Norway, for example, Modern Oral is now reaching 20% of the -- a bit more of 20% of the market. And in Sweden, for example, it's something like [ 8% ], we had similar to the West, that's closer to 10%. It's a very competitive category, like you referred to. We have players investing with new products. And we -- in our case, in particular, we were not able to compete freely across the whole scope of the category because we were limited with the offers that we had in place. So we are testing -- the reason that we are now in Circle K is actually to test our marketing mix to make it as more competitive as possible. And in order to be able to roll out the rest of the country from beginning of next year onwards, I think that we'll see how this pans out. And we are very optimistic in terms of the possibility to extend our range of offers from 4 SKUs to 28, as you can imagine, and be able to compete in a segment of above 6 milligrams that we were not before. So we have to see, and I think that it's a bit early to make predictions in terms of price mix. I think that the moment is our players are trying to compete, trying to increase distribution. And more important now is to have the right marketing mix in place.

And if I could just ask a final one. Can you update on anything that you're seeing in the U.S. market with respect to various local menthol bans, what impact, if any, are you seeing on consumer behavior in those areas where there have been local menthol bans?

Well, where they have been, in reality, we haven't seen much impact. Because at the end of the day, the consumer end up circumvent that and buying in other geographies, close buys or buy by eCommerce, if possible. So there was no really implications in terms of sales. And we still believe that the FDA is the body that is the one responsible to make this type of calls. And we -- and in seeing in the priority list of the FDA, we are not expecting to see either menthol ban or nicotine control enforcement anytime soon. In reality, we are seeing, for example, based on the latest research incidents in terms of use of menthol in cigarettes and vaping, that was a remarkable reduction from the -- compared with the previous year which just take the pressure off. And another point that I would like to make around that is that as time passed by, and you start having examples of menthol ban outside the U.S., you can use this as a kind of a reference for the future. And we just saw this year, for example, the introduction of menthol ban in Turkey in January this year and as you know, in May, in Europe. And both of discounts in Turkey, the level of retention was even higher than 100%. In our case, we gained our market share. Because we had a differentiated product in Turkey with a differentiated format and differentiated future. In Europe, we had also made a retention above 100% because we were present in the New Category space. And we saw that out of the cigarettes, we had a retention of 91%. Some 2%, 3% decide to quit completely the category. And the balance decide to move to New Categories, where 7% moved to vapor, where like we just spoke about, we were very strong. As a consequence of that, in terms of nicotine retention, we were more than 100% than we were before the menthol ban. And if you'll now make an analogy of those circumstances back to the U.S., you see that Newport, which our largest menthol brand in the U.S. is the one1 that has 70% of the franchise in a differentiated format with 100 millimeters length that cannot be copied. As you know, the FDA has frozen all specification of cigarettes since 2007. So you cannot launch new SKUs in the market. And it has also the lowest level of mentholation in the market, and we are present and making big inroads in the New Categories. So I think that in the future, if we see a menthol ban coming in the U.S., we'll be prepared well. And those facts already happening outside the U.S. is a clear indication for that.

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

A quick question on the level of new investment, you've done a very good job recruiting new consumers this year. The [indiscernible] levels keep higher. How should we think about what seems to be the right level of overall in this category going forward? I'm particularly interested about you're still maintaining the GBP 5 billion revenue ambition by 2025. And what should it mean in terms of profits for the shareholders? And then secondly, could you just briefly touch upon how your emerging market [indiscernible] is shaping up post all the restrictions? Are they -- are you seeing down on trading? Are you seeing brand migration? Are seeing more -- coming away from the illicit market? Could you just give us more general view on emerging market consumer, please?

Okay. So there's a lot of questions. So Sanath, let me try to address them. Look, we have -- yes, we are very pleased with the performance on the noncombustible consumer base. We have 30 million. It's almost 30% more than a year ago. As you know, we have the ambition to reach 50 million by 2030 that we released we set out in our revised strategy back in the [indiscernible] March. And it's important that to recognize that today, there are already more than 80 million of those noncombustible consumers out there, and we have 30 million of that. So there is a, I read today, a massive contestable space for us to go after. And this is the -- what means -- that gives the confidence that we are able to achieve the GBP 5 billion by 2025 because given the strength of our portfolio of -- in the New Categories and the contestable space that already is there today. And we, if anything, we'll continue increasing over time, will give us all the indications that we are able to achieve that and start accelerating our growth from next year. In terms of profit for shareholders, I do believe that we have done the -- we have invested a lot in the New Categories in the first years in building the necessary capabilities to be successful, the likes of IPs, the designs, digital, innovation and so on and so forth. More recently, we have a resource allocated this level of investments to a more consumer facing type of investments. And we think that we have the right level. As a consequence now of year after year, as a consequence now to see the revenue growing faster. And in reality, we expect that we have reached the peak in terms of losses in our P&L in New Categories in 2020, which means that for 2021 onwards, the New Categories we expect to be more EPS accretive. And this, together with our cost agenda that we articulated at midyear in terms of the quarter and the full year last year, we expect to generate the true levers necessary for us to continue delivering our financial algorithm while transforming the business. Now, in terms of your emerging markets, as it is today, it's a bit of mix, the -- some basket case here in terms of mix. It's a mix case because we have countries like Brazil, for example, performed extremely well. We are seeing double-digit volume growth in Brazil this year as a consequence of interruption of illicit flow from Paraguay. Remember that a lot of those emerging markets has been impacted by illicits. And illicits, if anything still grow. It's growing slightly lower this year, but it's still above the previous year. The likes of Pakistan, for example, is growing. The likes of Indonesia now more recently because of the excise and so on. So we have markets where we can control this, like Brazil is a typical example. They performed extremely well and where you cannot, like South Africa was an extreme example, still with a lot of work to do in terms of recovering that space that we lost. So I think that at the end of the day, it's -- at the end of the day, it's a very mixed picture out there. And -- but overall, we are seeing some spots of a good performance. We quoted it at Turkey, we took Bangladesh and Brazil, which is trying to offset some others that is a more negative [ role, fuel, ] okay?

[Operator Instructions] The next question the line of Rey Wium calling from SBG Securities.

Tadeu, I'm just curious, if you may, can just elaborate a little bit more on South Africa. I mean, if we now take -- since you have been allowed back in the market, what is your market share, for instance, relative to what it was in the same months in the prior year? Are you down? Or just what I understood is that the illicit side is still -- well it has gained a foothold and it's -- you're struggling to dismantle that. Is this a correct assumption?

Yes. There is no -- actually, we -- the problem with the South African market is not about market share. The problem is the whole market across the illicit, like I mentioned before, we had this problem related to the incidence of illicit growing from the likes of 52% to very close to 6%. Our share is pretty much flattish throughout the period. When you saw our performance, and we have been growing share, like I mentioned before, until Q1 2020. So we enter in a very strong momentum just before the COVID crisis. And we are able to -- we were able to kept at that level broadly after the crisis went through. The problem is the size of the market because of the illicit now got some -- make some inroads because of these networks of -- that were established in those months that there was no legal sales of cigarette. This needs to be dismantled. And -- but I have to say the problem to tackle illicit in South Africa, the government has demonstrated in the past that is possible to be done. So we are very optimist that with the learnings that they had before the COVID, they could reassess that and making, again, inroads tackling illicit problem in South Africa.

Then I just have a question regarding the overall new product category revenue. I know your longer-term or medium-term target, I think, is 30% to 50% a year. In the first half, I think it was like 15%. So based on what you've said about the GBP 50 million hits in Japan and to leading products revenue down. Are we going to get a bit of an acceleration into the second half revenue versus the first half and probably still falling short of that 30% target? I just want to get an idea sort of the ramp-up until we get to sort of growth rates above the [ 30% ].

Yes. No, we didn't provide guidance for New Categories into revenue growth for this year 2020. We had a 12% increase in the first half of the year. And we are saying that we are accelerating in the second half. And despite the headwinds coming from glo Sens, for example, we are -- and all the points that I mentioned before, we are expecting to perform better in the second half than we did in the first half. And that is the comment that is we want to make at this point in time. But my point that I raised before is that we had to be cautious that this was a very particular year, a very difficult year, given all the backdrop that I highlighted before, we were, for example, in ENA until recently with all our vapor stores closed again and across Europe in the second lockdown. And we have problems in the first half and so on. So we had to put this into context.

And then finally, I just want to put you back on the spot about the share buybacks. Did I understand it correctly that you say that once you get through a net debt-to-EBITDA around about 3x, you would probably then put it back on the table to consider? I just want to get a sort of a broad idea at what sort of level of share buybacks could be a future again?

Well, I think that we are getting very ahead of the game here. Well, as I said, capital allocation is constantly being reviewed. We are very clear for the year to come that we want to strengthen our balance sheet, hence, deleverage the company to the levels that we have said before. And we want to continue investing in New Categories and continue doing the dividends of the 65% payout, as we have been saying for a while. So what I said is that, for sure, by the time to get -- we get to this level of the leverage around 3x, we will get more flexibility. And hence, you have to put all those things back on the table, but this will depend a lot in terms of the evaluation of the company that time as well. So a number of factors are in play.

The next question comes from the line of Alan Erskine calling from Crédit Suisse.

Just 2 questions for me. One, a point of clarification. Of the 2.5% impact of COVID-19, I mean obviously, some elements are very easy to quantify like travel retail, et cetera. Some are harder to quantify. I mean, I would imagine that certainly some of the better performance in the U.S. is because people have more discretionary income to spend. They have more home time. And similarly, Northern Europe will have benefited from tourists staying at home. So I think, Tadeu, you indicated that the 2.5 was a net number. That was your best guess of what all of those easy to quantify and less easy to quantify impacts were. So I just wanted to sort of clarify that, that is the case? And then my second question is just what learnings have you had from the failure of glo Sens? I mean, clearly, you did work going into the launch of that, what -- what disappointed you? What went wrong with that product?

Thank you, Alan. Yes. Look, your first question, you're absolutely right. It's very hard to disentangle all those different elements. You see the U.S., for example, market that is performing quite well this year. And we saw that one of the big impacts that is responsible for that is related to the vaping slowdown and stopping the outflow to cigarettes. We know that. There were, for example, shipment days that were beneficial this year, oil price at very low price and we know about the correlation between oil price and the sales of cigarettes. So there are a number of effects other than the potential fiscal stimulus and all that. Because you saw that the fiscal stimulus withdraw in July, and the volume was still holding on very nicely throughout the second half. And the same happened in many other markets. For example, we were in Mexico, Argentina, where it was very, very badly hit by COVID and hence, the sales we were able to be able to come back to the markets in a much more agile way and making inroads in terms of share that mitigate some of that. So this 2.5 is a really, really consolidated figure related to that. So that's the first question. The second point, well, look, I think that the glo Sens, just to remind us, the glo Sens was the use of basically 2 different consumables. One is tobacco and the other the liquid pods that were running out at different times. And what clearly complicated for consumers, while the satisfaction was not optimal either. So we gave all the support to increase the penetration that was a key metric for us in the first half of the year. But we find the site with the other product to avoid being distracted through a very successful glo Hyper launch. I think we have fundamentally changed our beta testing, our consumer validation methods to prevent such failures in the future. But one point that is important because this is a consequence of trying to be leading -- leaders in innovating. We can be successful as we demonstrate through the glo Hyper, being the first in the market with the induction technology or not as was the fact of glo Sens. The important is to learn fast and to improve for the following launches.

We have no further questions coming through on the phone lines. So I'd like to hand the call back over to Tadeu Marroco to close the call. Thank you.

So thank you, everyone. So in summary, just to leave the math with you all, the business is performing well in challenging circumstance. We are guiding to the top end of our 1% to 3% revenue range, and we are capitalizing on strong momentum in the business to invest a further GBP 450 million in our new categories. We have been, as you saw, making big, big inroads in terms of our nonconsumable combustible product consumers, growing almost 30% to 30 million now. Vapor Vuse has increased substantially its value share across the top 5 markets. In THP, we expect in the top 8 markets now to be above 50% of the category. And in Modern Oral, Velo Lyft has consolidated leadership outside the U.S. and the Dryft acquisition, significant strength of our U.S. position. The business is performing well. We are on track to deliver on our mid-single-digit constant currency growth guidance. Let me tell you, we could have delivered high single figure EPS this year in 2020, however, we are clear that continuing to invest behind new categories is the right thing to do for the business, and we want to leverage on the momentum that we have. We are investing, we are delivering, we are transforming the business, and we are committed to our purpose to build a better tomorrow. So thank you. I look forward to speaking to you all in February at the prelims, and I wish you and your families are very happy Christmas. Thank you, everyone.

Thank you for joining today's call. You may now disconnect your lines.