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

Good morning, everybody. My name is Gerry Gallagher. I'm one of the member of the Consumer Staples team at Deutsche Bank based in London. I'm sure you've been introduced to the conference by Steve before me in this room, but it's nevertheless, I'd like to reach out my very great pleasure to introduce people back to Paris after 2 years away. This is our third year from our prior conference and it's great to have everybody back in the numbers that we do have them back. It's my very great pleasure this morning to introduce you to Tadeu Marroco who is the CFO of British American Tobacco. The format of today's session will be a fireside chat. Today, we'll start with a few opening comments. And then we will go into a Q&A session led by me, but at some point, I will open to the floor. Please don't be shy ask any questions you have, and we're scheduled to finish in just under 40 minutes from now. So with that, over to you, Tadeu.

Okay. Thank you very much. Good morning, everyone. It's great to be here face to face in person after 2.5 years or so. So look, just a few words from my side. We are very proud in 2022, the BAT transformation continues at pace. When Jack both took over as CEO back in 2019, he set out very clear 3 objectives for the group. One of them is to step change the performance in the New Categories, and we are continuing to have now a strong growth in the New Categories. Last year, in 2021, we grew by 50% of our revenues in New Categories. He also set out the importance of value generation in combustible to fuel the growth in New Categories, and we are doing extremely well in combustible as well, exactly following this role of generate the funds necessary for us to continue to transform the company and expand in the new categories. And finally, he set out the objective to simplify the organization. We put in place the Project Quantum. Project Quantum was about trying to really simplify the way we work, create more empowerment and responsibility to our markets. And at the back of that, all generate savings. And we are now just reviewing our latest targets, we expect to generate a minimum of GBP 1.5 billion in savings up to the end of 2022. So all of that at the back of generating strong cash generation, the cash flow. The cash conversion has been above 100% on the average of these last 3 years, a lot of focus on that. That is allowing us to continue with our progressive dividend policy as well as introducing a GBP 2 billion buyback recently. Now we know that this horrible conflict in Ukraine is exacerbating all the inflationary pressures and the interest costs are going up. So we are not immune to that, but we are well prepared. And as a consequence, last week, I just confirmed in our pre-close that we are keeping our guidance, no matter the timing of the transfer of business in Russia because we had at the back of a multi-category working -- category strategy that is clearly working, a strong portfolio of global brands and also a very cash-generative company. So all in all, we are moving now to a faster transformation phase. This means that the new categories will become more and more relevant in the algorithm of the group. And we are pressing ahead with our ESG targets in order to conclude the journey of a better tomorrow. So I'm going to stop here, and I know there is a lot of questions coming my way. So I'm going to join you Gerry and then we go through the questions.

Thank you for those opening remarks. I'm just going to pick up on some of the comments you made. You characterize 2021 as a pivotal year for the business when you transform -- transition the business to move it forward. We're now talking about faster transformation. Can you tell me what that means in practice and how will it be evidenced in the group's performance?

Yes. The pivotal year 2021, we defined 3 major objectives. The first one was to really get traction in our revenue growth in terms of New Categories. So we came since the back of 2020 with a much stronger pipeline in every single category and we were able to generate already in the second half of '20, very good growth, and this continues throughout '21. So in '21 for us was the consolidation of this trend that we start seeing 2020. And the second objective of our pivotal year was very important as we have accumulated losses until 2021, in order to generate the capabilities necessary to create those 3 global brands in each of those New Categories. And in 2021 was the first year where this loss starts reducing. And this will be a trend moving forward. And third, we have set ourselves a target of -- to reach after the acquisition of Reynolds back in 2017 to deleverage the company and reach a corridor between 3x to 2x net debt to EBITDA. And again, we reached that in 2021. So this was what we call the pivotal year because this allows us to have much more flexibility in terms of capital allocation. And the reason why we restart our buyback program was exactly due to that. Now fast transformation is a recognition that the New Categories will become more and more relevant for the group results moving forward. We expect to more than double our performance in terms of revenue. We are today around 2 billion to up to 5 billion or beyond 5 billion by 2025. This will be a growth above 25% on a CAGR base and this will translate into more and more relevance of the group revenue performance. At the same time, this 1 billion loss, we expect to eliminate completely by 2025. And again, we'll be very creative in terms of profit growth for the group from now until 2025. And finally, the capital allocation framework that we set out will be much more flexible ever in a year we're going to make an assessment in terms of what are the macro and fiscal conditions, what are the regulatory litigation outcomes and see how we're going to reallocate capital in terms of progressive dividends in terms of share buyback, in terms of doing M&A bolt-ons, which will be -- we will have an important role on the beyond equity phase of the company. And also paying down debt to keep us within this 3 to 2. So when you flow this together, the relevance of New Categories on the revenue side, on the profit side and the flexibility of capital allocation that's what we call fast transformation.

Okay. Thank you. That's very clear. Very helpfully, last week, you gave us a trading update, which characterized as steady as she goes. So I'm not going to focus on too many, if any at all, short-term questions, going to keep it bigger picture, more strategic. And in that vein, could you just help us understand a little bit about Quantum. So you talk about taking complexity out of the business. But at the same time, the business is we've got the combustible elements and you've got the New Categories, the vaping, tobacco heated products and also Modern Oral. So while you're taking complexity out on one level with Quantum, it feels like the business underlying is becoming more complex. So could you help us reconcile those 2 things?

Yes. Quantum, the whole objective of Quantum -- for sure, that we had generated a lot of savings, and this was always part of the equation. But the major importance of Quantum is to increase the agility of the company, the speed to market. So we reduced it by 40% the numbers of direct units that report to the regions. And doing that, we create more empowerment to our area directors on the ground because they are the ones that really need to be on top of managing the day-to-day of these multi categories. So we create a lot of -- we review our -- the metrics of accountabilities and gave them much more power to make day-to-day decisions so they feel if you -- with robust support in order to navigate through this more complex environment. So as a consequence of that, we review the numbers of layers that we have in the group. We moved 25% of our management population out. This equates to something like 2,500 managers out of the organization. We review span of control and we also brought a lot of new people into the organization. So since 2019, we brought 1,000 new managers into BAT, and those new managers are bringing new skill sets because we have to invest much more in terms of innovation, in terms of science, in terms of ESG, in terms of patents. So we had a number of areas, digital is another one, that we had to put a lot of emphasis in order to be successful in these new journeys of New Categories. So what allowed us to simplify the business, giving more empowerment to our people, increase the agility, at the same time, bringing some new skill sets. And as part of the program, we also launched a very aggressive productivity program. So we reduced substantially the numbers of SKUs in our combustible business in order to simplify it via our footprint. And the consequence of that is the numbers that you have just seen and we are doing this extremely well. And it's one of the reasons why we feel a very resilient business to navigate through all these uncertain times that we have and still keep our guidance for 2022.

Okay. Thank you. The next question I'm going to ask, I'm doing 3 fireside chats through the course of this morning to 3 tobacco companies. I'm going to ask this question to all 3 of you. I've already asked it to one. I'm going to ask it to you today. I suspect the answer will be broadly the same, but I'm going to ask it anything. So the question is this. For multi multiple decades, and it's why the industry works, you've been able to have strong pricing. But it nevertheless is the case that maybe over the last 10 years or so, the pricing in tobacco has benefited from the underlying dynamics of how tobacco works, but supplanted by there have been very low inflation elsewhere in the world and tobacco maybe been able to leverage its position. As inflation picks up, will -- what is the risk that the relative ability of tobacco to raise prices or for that matter, the absolute ability for tobacco to raise prices is compromised because inflation is all prevailing and that is now in the system from a consumer perspective where it wasn't before, and you were able to leverage the categories characteristics to raise prices. Is pricing going to be compromised moving forward?

That's not what we have seen, and that's not what we saw in previous inflationary periods and recessionary periods. The business has been -- really the industry in general has been very resilient and if you bring back to our reality today, the elasticity is still very benign across the world. You go to the U.S., for example, is 2.4 the elasticity in the U.S., which means that there is still a lot of space for pricing. And in our particular case, we have a very rounded portfolio of global brands with well-represented brands in every single price point. One thing that we have today, we didn't have in the past is a data analytic tool that allow us that is a revenue growth management to allow us to have a very granular visibility in terms of elasticity even by channel or geography in the U.S., for example, in Australia that we are now rolling out for the rest of the group. And this is allowing us to navigate well through this. And we have to remember that given the characteristic of excise, we really don't need to pass on all the inflation for the consumer and as a manufacturer. And this is one of the elements that has helped the industry in the past and will be the case for the future as well.

Okay. That's very clear. Moving on. Just want to touch on Russia and Ukraine, but in a group context. So previously, you've talked about generating GBP 40 billion of free cash flow over the next 5 years. And just to put that into context, that's about 50% of your market cap or about 35% of your EV. That is pretty impressive stuff or a reflection of how cheap your stock is depending on which way you want to look at it. Could you talk about that GBP 40 billion number in the context of what's happening in Russia, Ukraine and whether we need to think about that number moving forward?

Look, we disclosed that Russia and Ukraine is around 3% of our group revenue. In terms of product to be slightly lower than that, it's in the mall in the ballpark of 2%. So in the broader terms, is not a massive financial hit, Russia, specifically for us, given the exposure that we have now to like so U.S. after the acquisition in 2017. If you see, and I mentioned this briefly about our cash conversion, we have been able to convert 100% of the profit we generate into cash. And as a consequence of that, our free cash flow today sits around 8 billion mark. So the 40 billion is something completely doable. In our capital allocation, we have something like 25 billion-ish of debt that will be paid out as dividend. So it's less 15 billion for the next 5 years for us to decide between share buyback, between paying down the debt and keep it in the corridor of 2 to 3 or eventually do some bolt-on acquisitions that will be more and more relevant for the beyond-nicotine space, not necessarily the new category space. So we feel very comfortable about the 40 billion mark.

Okay. That you kind of answered my next question, but I'll ask anyway. In the sense that maybe you can elaborate a little bit. You raised the dividend by a small amount last year, 1%, I think, was the number. You've announced a buyback. You had the 65% payout level. You're at the top end of your 2% to 3% range on the net debt to EBITDA. Sterling is cratering every day. Great for the P&L, not so good for the balance sheet depending on where it is on the 31st of December, who knows? What does all that mean in terms of how you balance the dividend, the share buyback and paying down the debt?

Yes. This will be -- the reason why we didn't make a kind of a long-term commitment. Some other companies have done like a share buyback or backs for 3, 5 years. We are transforming, so we want flexibility. We want to be able to -- if we see and identify a particular target, for example, in beyond nicotine, we are able to do it properly. So we don't need and we don't want to have a straight jacket leading with capital allocation. So the dividend is basically circumstance for us. In terms of payout, if you go back the last 10 years, the payout of the group has been 67.7%. We have a long-term guidance of 65% payout. Currently, we are sitting at above 66%. So if we see us going below 65 in 1 next year, it's not a problem. And we'll be compounding that as part of the broader decision capital allocation. But with an increasing starting base, that's what we committed, a long-term 65% payout and the increase in sterling terms. And then as a consequence of that, we will be seeing what is left and decide based on litigation outcomes, like I said before, regulation outcomes what can be afford in a particular year in order not to jeopardize the transformation. My -- the first priority of the group is to transform, and we want to use all the leverage possible to accelerate this transformation.

Okay. I've got a couple more questions from a very big pitch perspective before I maybe open to the audience and come back again. And this is something that doesn't get asked very often. ITC, the strategic rationale of holding that stake. If we were having a conversation 10, 12, 15 years ago, as I would have done with your predecessor, shows as well as I am. The answer would have been something along the lines of there's a strategic rationale around India. The market may open up. The ownership rules may change, and we're in there for the long haul. Well, many would argue, and I had that conversation 15 years ago, 15 years is probably the long haul. When does the strategic rationale of holding the ITC stake manifest itself? And if it doesn't, what you do.

Yes. Look, Gerry, India will be the largest country in terms of population in this decade. So it's not one more country. So start there. ITC is performing well. You see the share price is back to the pre-pandemic levels now. And we believe that in New Categories, we might have opportunities in India. The oral size, the oral tobacco size of India is largest than the rest of the world. As big as that. So if you add older, so we talk about Modern Oral in the U.S., in Europe, if you add all that across the world, India is still larger than that. So we believe that we might have opportunities there, and that's the strategic reason why being there at this point in time. I don't know if I'm going to stay another 15 years or not. But the fact is that you note that there is a ban for foreign direct investment in tobacco in particular. So it's hard to get access to that market, it's hard to pull out. But we are satisfied with the performance of ITC for the time being and we are hopeful that these New Categories could present to us as a strategic opportunity in the future.

Good answer. For what it's worth, I'll give you another 5 years before I'll ask it again. Right. One other bigger picture question I want to ask, and I have to ask it, this presentation, this conversation is about you. But what happens in the wider industry impacts on you guys. Could you give us your take on Philip Morris Swedish Match assuming the transaction completes. So we don't know that yet, but let's assume it completes. Could you talk a little bit about how you see that changing the industry framework, if at all. Does it just accelerate what was going to happen anyway? Could you just talk about that from your perspective?

Look, yes, it's difficult for me to talk about someone else's deals. But the fact is that it becomes quite apparent that the realization that this is a multi-category game and not a single category is clear. And this is what BAT has been saying since day 1. At the beginning, a lot of people were criticized why you guys decided to go for all 3 categories, why you haven't done one by one. Well, we decided to do that at the end of the day, consumers are not homogeneous, first. Second, we know that the cigarettes has different levels of pace and strength in different markets, which means that we need different solutions to satisfy consumers. And we note that the regulatory environment is different in different markets. So we always knew that this would be a multi-category again. So what we have been doing that and it's costly. I take this. It's costly. That's why we generate 1 billion loss up to 2021. We have been building strong global brands in each of those categories. So when something like that happens, I'm not concerned at all. See, so we have a very well positioned modern auto offer outside the U.S. The U.S. is a different situation. I was -- I don't know if some of you know, but the products that are in the U.S. today are the ones that has been the U.S. since August 2016. It's not the ones that you see growing everywhere in Europe. So we -- the level of moisture of the products in the U.S. are much lower as a consequence. The number of poly users is 95% of the consumers. 95% of the consumers of Modern Oral in the U.S. are poly users. They are not single users. And the average daily consumption is between 2 to 3 pouches, while in the Scandinavia market, for example, is 6 to 7. So this is a clear indication that the satisfaction is not there. So to compensate that, you have a number of discounts and the value is not there either. 1.5% of the total nicotine market is more than oral today, although all the buzz around Modern Oral is just 1.5%. Vapor is 80%. Traditional oral is another 9%. So we have something like 20% already of the U.S. in noncombustible. But Modern Oral is 1.5. So what we want to do in Modern Oral is to bring our excellent products that we have outside the U.S. to the U.S., but we need PMTA for that. So we have already start applying PMTA, finding PMTA, but this takes time. When the time comes, then we're going to reverse our focus on Modern Oral. For the time being, the focus has been more in vapor and vapor in the U.S., we are very pleased to have achieved a leadership position in the management channels with views. And this will not change. The other thing is that we have filed for a PMTA application for Glow, our THP product. As you know, we have discussed before, we are not a big believer of THP in the U.S. because the gap between satisfaction in terms of high nicotines of cigarettes in the U.S. are very high between 14 to 16 milligrams. And we know that when you have this level of high nicotine like Canada, it's very difficult to get traction into THP. And we know that when you have a very well-established vapor market. Consumers are not willing to move away from vapor and get their hands again on the tobacco roll this time to hit as opposed to burn, but it's still at tobacco roll. So that's why you see not much traction in this country here of THP. It's a very strong vapor market as well. We also see not much traction in the U.K., it's strong vapor market. So -- but we apply anyway, the PMTA law because we want to be present there in case the situation change in futures like an insurance and also to have the advocacy of the FDA suggesting that is a big belief of this contingent that can help us outside the U.S. in terms of engagement. So our strategy doesn't change.

That's a very good answer. It's quite a difficult question. You turned in to talk about the positives of your business, and that was very good indeed.

That's what [ Mike ] does.

I can tell. Good answer, joking aside. Moving on and taking the themes of that -- of your answer there and the transition to the New Categories. How far away are we from BAT potentially being a consistent over the medium- to long-term volume growing business.

Well, I think that this is in our hands. If you see, we want to move from a revenue and value growth company dealing with a decline product that has a negative health impact on society towards revenue and value growing company, growing volumes and having a positive impact on society. This is completely transformation. The quality of the revenue growth for BAT moving forward will be much less dependent on pricing because the algorithm of cigarette has been very clear, we all know for years, has been a product that decline over time with a massive pricing power that more than compensated that enhance you generate revenue. And then you make tweaks in your cost base, you generate profit kickers and you are there in the mid-, high single-digit. In New Categories it's very different because in new categories, you really have possibility to grow volumes. So your revenue growth will be much more linked to the voluntary grow as opposed to the pricing that you need. The quality is completely different. It's completely different. And let's face one thing. We have 1.1 billion consumers of cigarettes in the world today, 85 million of noncombustible, 85 million. So we expect this 85 million to translate into something like 140 million by 2025. This is still a small fraction of the 1.1 billion. So all we need to do is to grow in that space. For us to achieve the 5 billion, by the way, we need to grow around 26% of 6% of this growth. Today, new categories, money-wise, represents 15% of the total new categories. In 2025, we expect this to be around 20%, 22% to be precise. So if you take something close to 30% of this growth, we are already in the 5 billion. And so the answer is yes. We are able to transform this company into a volume growth company, and we have plenty of space to do that.

Okay. Before I open up to maybe there's a question or two from the floor, we'll find out. Just one last question. I think I've now asked 3. You've talked about building an ecosystem of capabilities in beyond nicotine. Could you help us understand what you mean by that? How you frame that? What that means for the group moving forward? Just give a bit more color to that?

Yes. Look, we -- we are seeing a lot of interesting consumers on well-being and simulation. And what we are trying to do with the new categories is to fulfill consumer moments that has been lost by consumers with the regulation in cigarettes. So we bring this consumer moments back, and we want to fulfill even more with the beyond nicotine space, at least for our strategy. So we have been used the -- we have been leveraging the capabilities of the group on R&D, in terms of science, in terms of distribution to identify opportunities in that space. So we have signed a development agreement with Organigram. Organigram is a licensed cannabis producer company, Canadian company. And we want to understand more about this in order to be able to be there in case the regulatory environment evolves. And we are also using our corporate venture capital that we set up in 2019 to be able to explore opportunities in that space of natural written, moods enhancements on edibles, on orals and beverage and try to see if we can have leverage on that based on the synergies that we can find the group. So I think that will be a more inorganic play as opposed to an organic one. And at this point in time, we want us to set the foundations right. So we have the possibility to move now from combustible to noncombustible nicotine products and going beyond that in the future. I think that will be -- I think what I'm trying to say to you is that this group in the next 5, 10 years will be a very different one that we know today.

Well, just to follow up on that. And again, it's something I've asked somebody else already this morning. In the context of how the business changes though, it will remain a consumer-facing business. You won't deviate from that?

Absolutely. We are a consumer company. Most of all, we are a consumer company. That's why I was referring before to the consumer models. So all this is linked with our first of all, purpose to reduce the health impact of our products. Because today, we have the technology and we have the consumer willingness to try these new products and they are much more health conscious than they were before. And you are seeing this in many industries. You see this in beverage. For example, you see zero alcohol in beverage in beers. You see this in food, less sugar. So consumers are much more willing to try these products, and we had the technology that we didn't have in the past. So we are putting all those things together in ultra-transform, but we are at the end of the day, consumer comp. So what we need, we know how to do is to navigate through very tough regulatory environment because of our background, which will be great for us to set the agenda with regulations moving forward. And we know how to build brands. That's what we did in cigarettes that we are now doing New Categories and that we'll be doing in beyond nicotine.

Great. Just under 10 minutes left. Before I move on, I've got plenty of questions. Is there anybody in the audience burning to ask a question to Tadeu?. We've got one just there.

Investors are often constrained with their ESG mandates and investments. So how do you talk to investors about the ESG footprint that you think is important in 5 years' time?

Yes. The ESG is clearly a massively important factor for us. The good news is that I was referring to the purpose of the company, all these strategies that we are referring to, we will address the major elephants in the room that when we deal with ESG. Because ESG for BAT is not new. We were one of the first companies, if not the first to introduce a corporate responsibility report back in the 2000, early 2000s, we have been for 20 years in a row in the Dow Jones Sustainability Index, the only tobacco company without this track record. We have clear targets in terms of environmental. We want our, for example, footprinting operations to be carbon-neutral by 2030. We are working hard in order to make sure that the people that work for us in our supply chain has the better treatment as possible dealing with things like child labor and all that and the government to ensure that we have robust governance to apply for that ethical standards in which we do business. Now the biggest elephant in the room is the product. And the reason why we have invested so heavily on that, just -- and I mentioned that last week, we have invested just in the first half of the year, GBP 1 billion in the 3 New Categories. So yes, we are in 2 billion. This is something like 12%, 13% of our total revenue. But if you deep dive into the group level numbers into more specific market numbers, you'll see that the transformation is well ongoing. In Japan, for example, we have more than 40% of our revenues in these new products. In the U.K., 40%. In Sweden, where it's all about oral is 65% of our revenue is already there. By the way, Sweden has been promoting tobacco for many years. The level of incidents in combustible now cigarette is 7%. And you'll note that when you reach the 5% mark, they say free smoke. That's what they are trying to achieve in U.K. and all that. And they migrate most of them to oral, which, by the way, will make more money out of than cigarette. So it's not that you are doing that as opposed to the financials. The whole thing is that you do the transformation, you have this massive positive impact and you preserve your financial outward as a consequence of that as well. So the transformation is already happening. And this is -- and that's why you are seeing new investors coming along to us and be much more comfortable than before as we have been able to recruit, I was referring to 1,000 people. These 1,000 people came from completely different industries. They came from Indus pharmacy, they came from electronics, from digital. These are people that would never approach BAT 15 years ago, like we were referring to. Never. They will never be associated with tobacco. And why they're coming, because they feel excited about the transformation, they're about of the opportunity to make this impact on society. And so I think that answering your question, ESG set the front for what we do. And it's not just about the ESG that you usually relate to, but also about the products.

We have one more question. Overhead, sorry. We'll come to you in a minute, sorry.

There's currently an increasing fear of a recession. And you just described the transformation. How would you describe your new products reacting to less consumer spending where pockets are kind of challenged with the high energy costs, et cetera, versus the incumbent ones?

Yes. Look, the recession, we are not immune to that. You're absolutely right. We have -- if you go to our U.S. market for example, a good case, we have -- we note that there is a big correlation between oil price and consumption of cigarettes and inverse relations. So we see a lot of weakness now in the U.S. in terms of volume. On the other hand, the -- like I said before, we had a lot of pricing power still to come because the affordability level is very benign. And with all these tools that we have developed in terms of analytic, what we could do is to -- what we can do is to understand the consumer purchasing power in a very granular base and then look from different discounts and in terms of fulfillment of their consumer needs. The U.S., in particular, is the most affordable at cigarettes, the most affordable market in the world, second to Japan only in the U.S. It is the most profitable market in the world. So we are -- and the dynamic about how we price up our products because of the excise structure allow us, like I said, not to be able to pass on all the inflationary pressure we are facing. We are -- because we have some of the markets with a specific exercise. So we take more every time you pass to consumers. So the consumer doesn't need to face all this increase in price. So as we've proved in the past, we have been inflationary pressure because we forget that because it's a long way since the financial crises that we are seeing low levels of inflation and all that anyway. But I'm from Brazil. I came from Brazil. I know how inflation works quite well. Believe me. And this industry has been always navigated quite well on inflationary pressure. So we are not immune to it, but I think that we -- that's why we are confident to validate our targets for this year anyway.

One down here.

Yes. So 2 parts. The first part is to clarify something that you were just mentioning. What have been your incremental insights on the U.S. consumer over the last 6 to 9 months as inflation becomes increasingly pressure on the pocket? And then to the ESG question, a surprise to hear $1 billion of spend on ESG in the first half of the year. Can you help me understand directionally how much of that kind of runs through the P&L through expenses versus capital investment? What are kind of like a simple pie chart of the investment allocation of how that $1 billion is kind of spend? Is it really R&D? Is it sales force? That would be helpful.

Yes, yes, sure. Look, the 1 billion is our P&L. We are not talking about CapEx. And this is a combination, I would say, something like 20% of that on the discounting because the discounting for us has been a good strategy that worked well. Remember, in some of those markets, we have been second. If you go back 3 years ago, when Joel was leading in the U.S., clearly, everybody was telling us we will never be able to get anywhere close to Joel. And today, we are the leaders in the market in the U.S. And one of the reasons why we're able to do that is not just because we have the better product in the U.S., but also because we were able to acquire consumers. So these consumer acquisitions for them to trial as a product has to do with levels of discounts. We usually don't discount the consumables, either tobacco heating product or vapor but with discount device at the first moment. And then after that, if you go to the U.S. today, the levels of discounting device of views is no where what it was before. So we still have a lot of geographic expansion happening as we speak not just in U.S. vapor. It's not the case, but more necessary in the THP on the market. So discount is still a number that plays a role. But the biggest spend is in R&D. We have step up our investments in R&D. We have just opened up a new hub in China to be closer with suppliers. So we are able to develop a stronger pipeline and making sure that for every single of these categories, we have a rhythm of reaching at every single year with novelties in the market. And that's what you expect to see BAT moving forward. So we have a step-up clearly the investments in R&D. And then we have the usual marketing spend that you would expect in a way that is much brighter than we used to be in combustible. But today, you can do the sponsor shipping place like from Formula 1, you can do above the line, you can do below the line in those social media things that was impossible even to get closer to in combustible. Okay. And by the way, we expect to invest more in the second half, as I said, last week because we are coming to the market with new launches, new marketing activations to making sure that we keep the momentum going.

Right. The time is at 0, but we've got coffee next, and I'm going to take advantage of that by asking one more question. And it's a regulatory question. So we've got the mental debate in the -- so if you look at the U.S., depending where sterling is it would be 50% of your business this year. We've got the mental question, we've got the comments around minimally addictive that were made this week in nicotine in cigarettes. And then we've got the age situation in the U.K., which you could argue from a U.K.-centric perspective is positive for you guys, but I think based on comments Kingsley has made in the press that you would be against that age transition in the U.K. So the question is, where do you feel we sit from a regulatory perspective in the industry. I appreciate that's a global question more complicated than that. But could you help us frame how BAT thinks about the regulatory environment?

Well, we believe that the debate will be much more science-led in the future. And that's one of the reasons why we have invested so much in science in these new categories because clearly, these products are much less hard than combustible. Unfortunately, we still have entities like WHO that has a different view. But what we are seeing more and more in different markets is that we are getting traction in this understanding. The U.K. is a very good example very progressive markets. Now the governments out there in their report, the report you are referring to, they also say that they should stimulate vaping. And by the way, vapor today for BAT is 40% of our revenue. That's what people don't capture. The size of the price for us and I'll talk more a bit financial areas CFO anyway, is Europe, BAT has been very predominant in the low value for mine of cigarettes. We will never be able to develop really strong premium pipeline of combustible brands. So the migration to those categories for us is massively accretive. Tobacco heating products and vapor and all that. So -- but on the regulatory front, if you see more and more cases France, for example, the Institute of Cancer in France is very supportive of vaping already. They came out very loudly about that. New Zealand that wants to do the very draconian age on they're cigarette. They are also very supporting vapor. FDA, they clearly see the risk continue. They have done MRTPs for tobacco heating products. They have already approved PMTA for vaping, which is a recognition that those products are much less harmful than tobacco. So I think that what we'll be seeing over time is that a more science-based discussion, and hopefully, more and more governments understand that instead of going for big excise hikes, for example, that's what it makes is basically bring illicit trade or going for draconian measures like levels of nicotine that we don't even know how to do it properly, to be honest. Then you get into this whole area of genetic modified leaf and all that's the whole check on that is much more effective to implement a clear tobacco reduction, a harm reduction strategy. And that's where -- and that's why I was referring to Sweden. That's why you really make the big inroad in tackling the combustible problem. Okay.

Great. I've exhausted my time, I've taken a bit more time than I should have done Tadeu. Thank you very much, and thank you, everybody else.

Thank you. Thank you.