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

Hello, and welcome to the BAT pre-close trading update. My name is Rianne, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] For now, I'll hand you over to your host, Mike Nightingale, to begin today's conference. Thank you.

Thank you. Good morning, everyone. I'm Mike Nightingale, Head of Investor Relations. And with me this morning is Tadeu Marroco, our Finance and Transformation Director. Welcome to our 2021 full year pre-close conference call. I hope you're all well. I'd like to thank you for taking the time to join us this morning. Before we begin, I need to draw your attention to the cautionary statement regarding forward-looking statements, as well as the notes and disclaimer contained in the trading update. I'll now hand over to Tadeu, who will say a few short words on current trading before opening it up to questions. Unless otherwise stated, our comments will focus on constant currency adjusted measures. And all share data is year-to-date average to September 2021. Thank you, Tadeu.

Thank you, Mike. Good morning, everyone, and welcome. At the start of the year, we said that 2021 will be the pivotal year in our journey to transform BAT and build A Better Tomorrow, and the business is delivering on that. Firstly, strong New Category revenue growth continues to be driven by accelerated consumer acquisition this year, and we are making excellent progress towards our 2025 GBP 5 billion revenue target. Secondly, with increased scale and operating leverage, New Category losses start to reduce this year. This is a key first step in our pathway to profitability by 2025. And finally, our strong focus on cash flow and the leverage means that we anticipate reaching around 3x net debt to EBITDA by the year-end. This is important as it provides us greater capital allocation flexibility as we enter 2022. Taking each of these in turn. The first key driver of our pivotal year is our accelerating New Category performance. This is driven by continued strong consumer acquisition. In the first 9 months, we have added 3.6 million consumers of our noncombustible brands, reaching a total of over 70 million consumers in September. This is already more than the growth over the full 12 months of last year and is driving continued strong volume and revenue growth across all 3 new categories. We are building strong global New Category brands of the future. Vuse is a great example, with the brand achieving global value share leadership in Vapour in September, and also becoming the first global carbon-neutral vaping brand that has been independently validated. With our products available in 77 category markets across 55 countries globally, we are leveraging our established multi-country consumer-centric approach to provide consumers with a wide choice of scientifically substantiated reduced risk alternatives. And the rough digitalization of our business is increasingly important in accelerating our transformation. Revenue Growth Management and Marketing Spend Effectiveness are now being applied across the New Categories, enabling us to generate higher returns on our investment and drive our improvement in profitability. Our New Category performance over the second half is being fueled by our further increased investment. Vuse is fast approaching value share leadership in the U.S. and is now a leader in 26 states. In our all other T5 markets, Vuse continues to extend its value share leadership position, with a global brand migration from Vype now successfully completed. In October, Vuse Solo received the first of its kind U.S. FDA Vapour marketing authorization, confirming the marketing of Solo products is appropriate for the protection of public health. The Vuse Alto PMTA, submitted nearly a year after Vuse Solo, shares the same foundational science, giving us confidence in the quality of all other applications. In THP, the continued success of glo Hyper is driving category volume share growth in consumables across every one of our top 9 markets, reaching an overall 17.7% category share, up 4.5 percentage points. In Japan, driven by the ongoing success of Hyper, glo is growing THP category volume share, which is up 107 basis points, reaching 21.1%. glo has captured 100% of the THP category volume share growth in Japan in the 6 months ended September 2021. Glo's total nicotine volume share is up 120 basis points to reach 6.6%. In ENA, which now represents 50% of our THP volume, glo Hyper continues to accelerate volume and revenue growth with consecutive quarter-on-quarter share gains in key markets. In Russia and Ukraine, we have nearly doubled our consumable category volume share with category volume share in both markets now around 20%. Across our top 9 markets, which account for over 95% of our PHP volume, our consumables price is, on average, at an index of 90 to our main peer. Glo Hyper is now available in 22 of 24 glo markets globally, with further market rollouts planned for 2022. In Modern Oral, we are extending our international volume share leadership. Our overall category volume share in our top 5 markets, ex U.S., reached 28.9% (sic) [ 68.9% ], up 140 basis points. These markets account for more than half of top 5 Modern Oral volume. We are particularly pleased by strong performance in Sweden and Norway, where our Modern Oral category volume shares of 59.5% and 63.8% were up 5.6 and 1.7 percentage points, respectively. In a highly competitive market in the U.S., while Velo year-to-date volume share growth has slowed since the half year, we have still achieved 5.5 percentage points growth to reach 13.1 percentage. Overall, Modern Oral category volume share in the top 5 markets was 36.1%, down 0.5 percentage points, driven by the increased weight of the U.S. market where we have lower share. Turning now to improving New Category profitability, second key driver of our pivotal year. While we are continuing to increase our investment in New Categories, we are leveraging our increasing scale and expect our New Category business to contribute to profit growth in 2021, as losses start to reduce for the first time. For the 2022 financial reporting period, we will disclose New Category contribution to group profits, to provide investors with increased visibility and clarity on our pathway to New Category profitability by 2025. We have invested and built significant IP in all 3 of our New Categories. This is essential for the long-term profitability and sustainability of our business and is critical to our work on tobacco harm reduction. We have many patents registrations across the world, some of which have been the subject of litigation. In the U.S., we have successfully asserted our patents in THP with the recent determination by the ITC that the competitor's products infringe 2 valid patents owned by Reynolds. In Japan, THP patent litigation brought by both sides is ongoing. In the U.K., there has been 1 substantive decision against us regarding the validity of 2 U.K. THP patterns in the same family. Four of our competitor's flagship THP patents have also been found to be invalid in the U.K. In Germany, our product, Vuse ePod, was found not to infringe a competitor vapour patent. Other than this, there have been no substantive main judgments on the merits in Europe. Patent registrations are unique to their jurisdiction. So judgments concerning patent validity in 1 country have no legal bearing on validity in another. We believe we have strong patent protection for our New Category products and our litigation record in this area to date has been strong. Finally, turning now to the first driver of our pivotal year, our focus on cash flow and the leverage. With strong full year operating cash conversion expected to be in excess of 90%, our year-end net debt to EBITDA would be expected to already be below 3x at constant rates, reducing by more than 0.4 turns. As we approach the year-end, the ratio becomes sensitive to the difference between U.S. spot rates and average rates throughout the year, with the gap widening in recent months as the U.S. has strengthened. Despite this, we expect net debt to EBITDA, even at current spot rates, to be around 3x at 3.1x. We recognize the clear value of our share buyback at the current valuation. We also continue to be clear on the need to deliver on our 2021 commitment to reduce leverage to around 3x. As we enter 2022 and as our leverage approaches our medium-term leverage target corridor of 2x to 3x, we anticipate having greater capital allocation flexibility. So our pivotal year is on track. We are also on track to deliver on our financial guidance. We continue to expect constant currency group revenue growth in excess of 5%, benefiting from the strong New Category performance, which is now a sizable contributor to group revenue growth. We now expect full year tobacco industry volumes to be broadly flat, an improvement from the previously forecasted decline of around 1.5%. This improvement is mostly due to a strong industry recovery in Indonesia driven by the low price segments, which will not benefit our volume. We maintain our expectation for full year U.S. industry volume decline of around 5.5%. Robust combustibles revenue growth is expected to be driven by strong pricing, as we continue to drive value growth, with cigarette value share up 10 basis points. We expect this to be partly offset by the mixed effect of volume recovered post COVID and share growth in key emerging markets, including Bangladesh and Pakistan, as well as lower volume in the U.S. Our U.S. business continues to perform well, driven by good pricing and share growth, with value share up 50 basis points and premium share up 60 basis points. This is being driven by the continued strong performance of Newport and Natural American Spirit. We expect to generate savings of GBP 1 billion from Quantum, 1 year ahead of plan, and we are confident in achieving our upgraded target of GBP 1.5 billion by the end of 2022. Overall, this strong operational performance is allowing us to absorb a large one-off profit headwind of GBP 260 million for the full year. This includes a GBP 220 million impact from excise and competitive pricing in Australia in the second half, an increase from the GBP 170 million excise impact previously stated at our interim results, together with a GBP 40 million impact from excise in New Zealand. As a result, we are maintaining our expectations for mid-single figure constant currency adjusted diluted EPS growth for 2021. Applying current foreign exchange spot rates of 1.32% as of December 3, we continue to expect a transactional headwind of around 2% on adjusted profit growth for FY '21, and a translational headwind of over 7% on adjusted diluted EPS and around 9% on the New Category revenue growth. Overall, we are confident in delivering our financial guidance in this pivotal year. The core of our transformation is to build A Better Tomorrow, and that's now deeply embedded throughout the business. Our strong New Category growth is a demonstration of our transition and is central to our purpose to reduce the health impact of our business. And to deliver on this ambition, we continue to develop a substantial body of scientific data of our reduced risk products across each new category. This includes the 180 day results from our landmark 1 year clinical study on glo, published in July, which demonstrated that completely switching to glo resulted in positive change to all indicators of potential harm compared to smoking, with the majority similar to quitting smoking. During the year, we have continued to make good progress towards our other ESG objectives. In addition, we recently signed up to the UN backed Race to Zero global campaign. The next phase of our journey to create a sustainable enterprise of the future is being driven by our transformation program, Quest. Digital, technology and innovation will drive that transition, leveraging our agile organization and building on the success of Quantum. Our focus on scientifically substantiated, reduced risk tobacco and nicotine products continues and will not stop there. We are expanding our portfolio beyond nicotine. That means delivering products that stimulate the sense of adult consumers, while enhancing satisfaction, enjoyment and wellbeing. The BAT of tomorrow will be a high-growth consumer goods company; global, consumer-centric multi-category, with sustainability at our core. Thank you, and I will now open the call to questions.

[Operator Instructions] Our first question this morning comes from the line of Gaurav Jain.

So I have a few questions. One is on the leverage and share repurchase. So could you please again comment on what your leverage is at the end of the year? And I thought that because of the hybrid debt issuance, it would be south of 3x, but it seems to be slightly ahead of it. So what is the leverage, and then how does one think of share repurchase going forward? Like, would you like to keep this flat leverage and free cash flow after dividends -- investors should expect all of it comes back in the form of share repurchases or you would still like to delever the kind of debt...

Okay. Thank you, Gaurav, for your question. Look, the hybrid is a more niche product. We did the hybrid with the intention actually to reach out to new types of investors that we haven't had the opportunity for, which we did successfully and also to provide a better match in terms of hedging with our euro debt because we didn't have much euro capacity to issue senior debt, and -- but the total magnitude of it is not -- in the grand scheme, is not that much relevant. So you would expect some benefit, more or less, 0.1 turn. But the fact is that we are seeing, even in terms of currency, as I explained in the statement and you know that we are now subject to the spot rate of U.S. dollar at the 31st of December. What we are seeing now is after a stronger [ accounts ] throughout the year, we are seeing weakness more recently and this puts pressure on this indicator of net debt to EBITDA because the net debt is translated into the 31st December spot rate, while the EBITDA -- the earnings is the average of the year, which was a stronger pound. So this more than offsets the potential benefit that we saw from hybrids. That's why we are mentioning the south of 3x at this point in time. So in terms of the expectation, we will be satisfied to be within the range of 3x to 2x. We are not making any type of commitment to go to, for example, low end of the range or all that. We want to be in the range. We think that is important that we reach the range, and having the flexibility I was referring to, to make other types of calls in terms of capital allocation. We know that we -- you know that we are quite committed and we understand the importance of dividends to many of our shareholders, and we are also very clear in terms of delivering our commitment to deleverage the company after the acquisition of Reynolds. So that's why we are putting so much emphasis on cash generation, and we have a massive cash-generative company today after the acquisition of Reynolds with a very strong conversion. And we want to -- and we have all the possibility to keep there. Our debt, moving forward, is very well managed. We did a liability exercise last year, repaying some of the most expensive debt, '22, '23. So in every single year, moving forward, we have a pick up debt of GBP 4 billion, in which more than half of that we can generate organically. So it's completely manageable, the need of refinance. We have a good match between currencies in terms of debt and earnings. And our interest cover is very healthy at approaching 4x, 8x. So all the metrics on treasuries is quite substantial. So for me, we being in the range of 3x to 2x is enough to have the flexibility that we are referring to. And we understand that there is a lot of attention for buybacks given the share price. And we -- the main Board is quite sensible to that as well. We have done in the past, we understand the value of that. And this will be one of the considerations that we'll take as we close the year.

My second question is on cigarette pricing in the industry. So your key competitor is now saying explicitly that they don't think they need to take a lot of cigarette pricing because of the mix benefits that they are seeing from IQOS. And how do you think of cigarette pricing outside the U.S., as you go forward?

The price environment is still very healthy. If you see what we expect to achieve in '21, is even a higher level than what we had in 2020. And we, in particular, in BAT, we are quite pleased with the strong portfolio that we have. We are now reaching 7% of our portfolio, what we call our Global Drive Brands, and well-represented in the very different pricing categories. And we are rolling out the data analytics to -- that we develop in the U.S. across the world that gives us a better chance to leverage on the strength of our portfolio. So we believe that we have a strong foundation to continue delivering the results and the value that we expect to delivering this align with our strategic objective of BAT from combustible moving forward.

Sure. And my last question is on Germany, the recreational cannabis legalization proposal that is there. So clearly, in Canada, you did not participate directly and you have an investment in one of the companies there. But Germany is a much bigger and more important market. So would you look at participating in the cannabis market in Germany if it were to really legalize next year?

Look, Gaurav, this is a continuous reassessment that we make on that space. We saw the opportunity in Canada because we like the Organigram as a company. We thought that was well positioned to growth in the future. So we entered, also, in this -- as a -- in a product development collaboration agreement with Organigram that leverage the combined expertise in plant-based science and product development with initial focus on CBD. And we are satisfied with these levels of investments that we have. We have to see the evolution of cannabis moving forward, the legalization. But you know that we have some restrictions in the U.K., where we have to comply with POC and all that. So we will continue to be prioritizing that at the core level of compliance but we have to keep assessing the opportunities out there. So it's very early to say that we're going to take part on this. We have to understand first the dynamics of the markets.

So our next question comes from the line of Nik Oliver from UBS.

Two from my side. Firstly, another one on pricing. But at this time, the U.S., because I guess we've seen, I think, 3 price increases year-to-date in the U.S. I think there was 4 last year. Just -- what's giving you the confidence to push so hard on price? And any changes you've observed on elasticity, either nationally or at the regional level? And then second one on Modern Oral. You mentioned in the U.S., it's a highly competitive market. Just interested whether there's any plans for a PMTA on the non-U.S. below?

Look, Nik, the U.S., we are very, very pleased with the performance of our portfolio in the U.S. in the first place. As you saw from the announcement, we have now grown premium share by 6 basis points. The value share is 50 basis points. We are not seeing any down-trade in our portfolio. We are well represented in all the different price points with the introduction now of the Lucky Strike at the top of -- the end of the portfolio, which we have deployed tactically in some of the states where we see stronger competition from these non big 3 brands. So we are very pleased, and this gives us reassurance that we can still pursue value from the market given the fact that the elasticity is still very benign. We haven't seen any difference -- major difference in terms of elasticity in the U.S., is around 0.4, which is an indication that there is still a lot of pricing power in the U.S. to go after. And on top of that, like I mentioned in the previous question, we have developed a very strong analytical tool that we call Revenue Growth Management tool that allow us to have a very, very granular visibility of competitiveness even at -- in pricing, even at post code or different channels or key accounts and we can react to any lack of competitiveness in pricing and changing trade terms, for example, very fast. So when you pull all this together, we feel comfortable in taking the value out of the markets. And that's exactly what we are doing in line with strategic imperatives of the group. Now in terms of Modern Oral, the U.S. Modern Oral category remains highly price competitive, and this is a very, very small one. Just to give an idea, it's only around 20% of the value of the Vapour category, for example, to provide an idea. It's the value, I think that reached now something like 1.5% -- around 1.5% of the total nicotine value. And it's a continued low average daily consumption with the vast majority of consumers poly-users with other nicotine products. Just to provide information, for example, the average daily consumption in the U.S. of Modern Oral is around 3 pouch, while in Sweden is 9 and Denmark is 8 pouch. So it's a segment that is still in its infancies and trying to mature. We have learned a lot in the last year after the acquisition of Dryft. There are clearly some areas that we want to improve in terms of our product mix and consumer acquisition. And you were referring to PMTA of international products that clearly is something that we -- is in our strategy. Because as you know, we have a leadership in our Modern Oral products outside the U.S., because basically, they are the best-in-class. And we want to bring those products in the U.S. There is a process to go through, the PMTA is there. But there is signs that we need to deploy. So there is some time that we need to materialize that. And meanwhile, our priority, also, has been where we see the biggest opportunity to switch smokers in the U.S., which is vapour, which we are doing extremely well. And now leaders in 26 states very close to take leadership in the month. So we are very pleased with the progress we are making in our noncombustible business in the U.S.

So our next question comes from the line of Richard Felton from Goldman Sachs.

Two questions from me, please. My first question is on potential changes to federal excise taxes in the U.S. which could, if they are implemented, have a fairly material impact on the Modern Oral and Vapour categories. Could you maybe share some thoughts on how you see those potential changes impacting those categories? And specifically, I guess my question is how important is price in the consumer decision to switch from smoking to vapour, for instance? Then my second question, you've confirmed that New Categories will contribute to profit growth for the first time this year as the losses begin to reduce. Is there anything you can share at this stage on how big that impact is going to be for your EBIT growth this year?

Okay. Richard, look, just on the first one, I think that is premature to speculate what will happen in terms of the federal excise tax. And we saw a bill that went to the lower house, which is different from the one that now is in the Senate. And you are right, the current bill is expecting increase in excise in smokeless products mainly, which doesn't make much sense in terms of the risk continue or the benefits for health for consumers. That's the only comment that I can make for you at this point in time. And -- but I think that is very -- as I said, very early on to make any conclusions of the outcome of that. There is still a lot of negotiations, debates are going through. So, for sure, that price is an important element of this transition. That's why we believe that common sense will prevail at the end and they will not jeopardize the -- probably not jeopardize all the transitions that has already happening in terms of incentivized the alternatives to cigarettes in the U.S. So -- but to be seen. On the loss, we are not providing any disclosure in terms of the magnitude of the loss reduction. But the important point is that from now on -- from 2021 onwards, New Categories will be accretive for the profit of the group. So has already been material in our revenue growth. That's one of the reasons why we have upgraded our guidance for revenue of above 5% is exactly that. You already see a material impact of revenue coming from New Categories. And this will slowly build from the profit side as well. So from 2022, as I said in the statement, we will provide, now, a full disclosure about the profit impact on New Categories so we know exactly where we stand on that. But we are very pleased with the progress we are making in terms of margins improvement across the patch, mainly on the vaping business. As you know, we have some levers to play, which is materializing. The cost of products, for example, reducing as a consequence of more automation and the trade margins are improving as a consequence of the deployment of Revenue Growth Management, which translates into new offers for consumers in different parts and formats. And pricing taking, for example, and the device, we have started recovering pricing device. In consumers, we have never taken discount, and we are also increasing our pricing consumers. So when you put -- and the improvement that we are making now in the e-commerce side, which is one of the top branded websites that we have out there. So we are very pleased with the performance we are making [indiscernible]. So when you pull all this together, the margins in vaping are being a big driver of this recovery in terms of profitability across the New Categories, and we are very pleased. But we're going to see this in more detail from next year onwards.

Our next question comes from the line of Rey Wium from SBG Securities.

Just a few quick ones. I just want to get an understanding of your commentary around cigarette volumes. You said the industry, you expect to be little largely flat. You also talk about your value share is up 10 basis points, but there's no reference to your actual volume share. I don't know, if you could maybe just elaborate on what we can expect on the volume share, maybe?

Okay, sure. Rey, what we said is that, the major driver is compared with what we have guided before in the interim results is the improvement in Indonesia. The consequence of that is basically -- the reason for that is basically the government hasn't enforced the minimal price yet. So the industry hasn't taken the price. And so there is clearly a trade-off there between value from one side and volume. So you have more volume with less value. For BAT, it's not much relevant because we don't have much presence in that market in particular. That's why we call the attention for that. On the cigarette, the way that we are measuring now cigarette market share, given the transition between tobacco heating products to cigarettes, is putting all of them together. And as we stand today, year-to-date, we have a 10 basis points increase in market share.

Okay. Excellent. And just get an understanding of the profit drag in Australia and New Zealand. I mean the increase of about GBP 19 million since half year. I mean you probably more or less knew the impact of the excise situation. Is it therefore fair to assume that there's additional increase in the drag as a result of price competitiveness?

Yes. We have posted already in the interim, an expected GBP 170 million as basically a consequence of excise. And what we saw, as we move around the second half, is the impact of excise that might realize as we would expect, but also a very competitive pricing environment. So we had to react to some of the actions taken by competition there. And this reflecting in lower -- higher losses in the market. We are also quoting New Zealand that also changed the excise. But let me tell you, the excise is a headwind in the short term, but it's beneficial for the long term of the business. Because what we have seen is ad hoc excise increase since 2012 when they -- the government introduced plant packaging in that market. And this has stopped now. So we -- it's good for the sustainability of the business in the long run, it's bad in terms of impact in the short term. And that's one of the reasons why we kept our mid-single-digit performance this year. we had this impact. We quote also transactional effects. We had already said that some time ago since the beginning of the year. The transaction effects this year is quite substantially account for close to 2% of operating profit. And we also had to deal, for example, with our Iranian business that we -- divest the Iranian business in August this year. So we are lapping that as well. So -- and the fact that we still are not out of the woods in terms of COVID. India, in particular, has been better impact and this reflects in ITC performance. Hence, our [ capacity ] between operating profit and EPS. But remember that we report ITC numbers with 6 months lag. So we are still reporting a very difficult environment for ITC as a consequence of COVID in India. And that's where we decided to keep the mid-single digit for this year.

Okay. And just quickly, just to confirm, did you say the market share in tobacco heating products in Russia and Ukraine was around about 20%?

Yes. And our share in THP category in Russia, Ukraine, also Romania and -- is around 20%. Japan is slightly above that, as you saw in the statement.

So our final question comes from the line of Jon Leinster at Societe Generale.

A few questions, if I may. First one, a number of your competitors have said they've got problems in terms of supply chain with semiconductors, which will limit their growth in terms of [ heating ] tobacco. And I suppose, potentially, some of the more advanced vaping products. Is that an issue that you have going into 2022? Or indeed, in the second half of this year?

No, it's not. We have a very strong supply chain management and engagement with our suppliers in terms of Tier 1, Tier 2 with a product that allows us a lot of flexibility, and we could accommodate all these pressures that we are reading the news, in a sense that we are not seeing any headwind coming from that.

Okay. Secondly, again, I suppose on input costs. So clearly, a feature of the day for consumer goods in general. Looking forward into 2022, do you foresee any major increases in costs or input costs going into 2022?

Yes. We definitely are seeing increasing costs for next year. We -- But remember that we have vertical integrated leaf operations. So this is being helped by the valuation of real in Brazil because this is the major source of leaf that we have in the group. So we mitigate some of this impact there. The impact is mainly on the labor cost and the factories but also freight in general. And we expect the inflation overall will be double the ones that we face in 2021. But we have, as a consequence of rolling out Quantum, and you saw that we have just upgraded our target from GBP 1 billion to GBP 1.5 billion. We expect to generate savings to mitigate all these cost impacts for next year.

And then also, clearly, you've been looking at the nicotine pouch product, particularly even in some of the emerging markets and some of the non-Scandinavian European markets. Can you give feedback on the size of the markets in the sort of non-Scandi European, but also the -- any feedback you can give on whether the trials in some of the emerging markets have been successful or whether the product needs to be adjusted?

Yes. Look, we are excited about these opportunities in the emerging markets. We believe that the affordability that is allowed by Modern Oral is a good match with some of those markets, mainly, for example, the ones that you saw a lot of cigarettes being sold by stick, where affordability is an issue, because in those markets, you can provide, for example, these nicotine pouch even in sachets, if you want. So we are in test markets in the likes of Pakistan, Indonesia. We are trying to do in a very balanced way because there is -- in some of those markets, there is a rather traditional -- oral tradition, which makes it easier for this product to be accepted, some others not. So you have to build the awareness of the product first. And we are really excited with the first results that we are having. But it's early days for us to make a meaningful difference in terms of volume. But is building nicely and -- this business in some of those markets.

And lastly, I mean, clearly, glo Hyper has had good success in Europe and Japan. Similar question to one, I think, that was put forward with the European nicotine pouches. Is there any plans for PMTA for the U.S. market?

Yes. The U.S. market, I think we spoke about this before. We are not seeing any major attractiveness in terms of THP in that market, which is not a surprise for us. Because we know from experience that we had before in the likes of Canada, where the industry has invested a lot and with the absence of any products from THP, that would be a hard sell given the circumstances of the -- the characteristics of the market, is a very high [indiscernible] markets in cigarettes. And where we have a very well-established vapour markets already. So when the consumers have made the radical call to move away from cigarettes into vaping, for example, it's difficult for -- to see them, for example, moving back to a tobacco rod, that is still -- you still have to deal with tobacco rods instead of burning or heating it, but it's still a tobacco rod. So we have seen that in Canada. That's the reason why in markets like France, for example, where vape is also well established or U.K., you haven't seen much progress on that. So it's not a surprise, you see, that there is no traction in THP in the U.S. market. But we have plans to apply for PMTA and -- in our own products there, because we believe that it's also an important movement in terms of FDA advocacy outside the U.S., to have that product approved in the U.S. So yes, we are on track to do that. Thank you all for listening and for your questions. And in conclusion, 2021 is a pivotal year in our journey to transform and build A Better Tomorrow. We are delivering strong New Category revenue growth driven by accelerated consumer acquisition this year, resulting in further good progress towards achieving our GBP 5 billion revenue target by 2025. Secondly, we increased the scale and operating leverage in New Category with losses start to reduce this year. This is a key first step in our pathway to profitability by 2025. And finally, our strong focus on cash flow and deleverage means that we anticipate reaching around 3x net debt to EBITDA by the year-end. Importantly, this provides us with greater capital allocation flexibility as we enter 2022. And with that, I hope that you will all keep safe in these uncertain times and would like to wish you and your families a very enjoyable holiday season.