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

Good morning, everyone. I'm Tadeu Marroco, and I'm delighted to welcome you as BAT's Chief Executive to our half year results presentation. With me this morning is Javed Iqbal, Interim Finance Director. Once we have been through our presentation, Victoria Buxton, our Group Head of Investor Relations, will join us on stage to enable us to take your questions, both over the phone and through the webcast facility. I will begin with our financial highlights for the half year, the progress we are making in our transformation and outline my key areas of focus as Chief Executive. Javed will then take you through our financial performance in more detail. With that, I will take it that you have all seen the disclaimers on Slide 2 and 3. I'm pleased with how BAT has performed in the first half of this year, delivering growing revenue, profit from operations and earnings per share. Our reported results reflect the impact of one-off items in the prior period including impairment of our business in Russia and Belarus, the U.S. DOJ and OFAC provision, restructuring charge relating to Quantum and positive FX tailwinds. We will now focus on constant currency adjusted results, unless otherwise stated. One of the important strengths of our company is the breadth and the scale of our global footprint, enabling us to consistently deliver balanced and sustainable results. In the first half, this is demonstrated by our strong performance in AME and APMEA, offsetting the U.S. Overall, we have delivered an increase in revenue up 2.6%, profit from operations up 3.6% and EPS up 5.3%. I believe this is a resilient performance in today's environment, and we are on track for our full year guidance. I'm particularly pleased with our performance in New Categories, with revenue up nearly 27%, driven by good volume growth and pricing. Consumer number is up over 1.5 million year-to-date. And encouragingly, we are now very close to breakeven. As a result, we continue to transform rapidly with noncombustibles already reaching over 30% of our revenue in 23 markets. This represents nearly 1/3 of the 71 markets where we are currently present in New Categories. And our transformation is even more advanced in many markets. Non-combustibles as a percentage of revenue is already over 30% in France and more than 50% in the U.K., led by Vuse. Over 50% in Japan, Poland and Kazakhstan, led by glo; and over 70% of our revenue in Sweden is now in oral tobacco, driven by our success with Velo. Notably, Sweden is on track to become the first smoke-free market in the EU, with the smoking incidents approaching 5%. With a long-standing history of oral tobacco consumption and the fast-growing Modern Oral category, Sweden is a powerful example of the positive impact of Tobacco Harm Reduction in action. As you know, I have been in my new role for 10 weeks now. During this time, I have been focused on examining how we can sharpen our execution. As a first step, last month, I announced the refreshed Management Board. I would like to highlight 2 important changes. Johan's new role as Chief Operating Officer, focuses on delivering growth with accountability for driving business performance, operational excellence and best-in-class execution. And Kingsley's new role as Chief Strategy and Growth Officer focuses on enabling growth with accountability for strategic development and sharper the consumer focus through an integrated approach to brands. This new structure supports my commitment to build an agile modern and progressive BAT, with a collaborative and inclusive culture, enabling simultaneous performance and transformation. As part of this, we must operate to the highest ethical standards and this must remain a priority for both our employees and our business partners. So let me share some of what I have been doing in my first 10 weeks. One of my immediate priority has been to visit a number of our key markets with my management team. I have to tell you that those visits has been humbling and reassuring in equal measure. BAT is a company with a great heritage. Our 2 biggest assets have always been our people and our brands. I have spent time with our people in these markets, and I have taken the time to listen. What is clear to me is that through the right enablers, our organization is ready, our people are excited about the transformation journey ahead with the opportunity to drive real change, both for BAT and society more broadly. I'm clear that BAT has a unique set of strengths and capabilities already in place. However, we can and must do better in order to evolve and accelerate our transformation. While my management team and I agreed that our multi-category strategy is right, we are also fully aligned on the areas that need greater focus, supported by a more collaborative and inclusive culture. Firstly, recognizing our diverse global footprint, we must set out the organizational focus and priorities in a clear way to ensure we execute flawlessly across all our markets. Sharpened execution is central to our market archetype model, enabling better resource allocation around fewer, bigger priorities that can be measured and for which the markets are accountable. I understand this may seem a little theoretical. So let me bring the model to life with 2 markets, each representing a different archetype. In Bangladesh, we have actively focused on invest on continuing to grow value share, revenue and profitability in combustibles, while we await clarity on New Category regulation. And in Poland, we have over 50% of our revenue is now in New Categories. We continue to grow share, driving strong New Category revenue growth and improved contribution, alongside value from our combustibles business. Every smoker we convert to our New Category brands in Poland is margin accretive to our business. This benefit is further amplified as our share of the market in New Categories exceeds that of combustibles. These 2 markets are clear examples of where the mode is working, by making better resource allocation decisions and delivering strong results. We will replicate this as execution of insights and ways of working across our footprint. Secondly, we have further improved our New Category contribution, reducing losses by GBP 200 million in the first half. Having invested significantly in the base, New Categories are meaningfully contributing to group results, as we benefit from our increased scale. We are now profitable with New Categories in 20 countries, more than doubling the number from the first half of last year. It's important to note that we do not expect our pathway to profitability in New Categories to be linear. We are making active choice to continue to invest in our transformation with levels of investment reflecting our enhanced innovation cadence, further geographic expansion and market openings. With our strong progress to date, I'm confident that we will achieve New Category profitability in 2024. Vuse is a key driver of our performance, with our progress driven by our continued focus on 3 levers of profitability: revenue growth management, COGS reduction and Marketing Spend Effectiveness. Vapour margins have historically been much lower than combustibles, THP and Modern Oral, but we have made great progress over recent years to build a commercially sustainable model with Vuse. Our vapour gross margin is fast approaching combustibles at a group level. In the more established markets, we are already delivering a meaningful category contribution. I'm proud of the strong progress we are making, and I'm confident that our transformation will deliver long-term multi-category growth and returns. My third area of focus is the all-important U.S. combustibles market. In the U.S., we are sharpening our execution with new leadership and enhanced focus, and by activating commercial plans through our broad digitally enabled revenue growth management capabilities. RGM is a dynamic approach to revenue optimization, powered by big data and analytics, enabling a granular view of elasticity curves. It brings together our consumer occasion-driven portfolio, pack price architecture, joint customer business planning, optimize pricing, highly target trade activation and tailored retailer assortment strategies. Ensuring that our portfolio is well positioned to face competitive challenges and deliver profitable growth through all economic cycles. And our commercial plans are already starting to deliver early signs of U.S. combustibles volume share recovery. Our volume share is up 60 basis points since January, driven by 100 basis points increase in the important premium segment. While our progress is encouraging, we will continue to implement our plans carefully and thoughtfully. As a result, it will take time for this to deliver consistent combustibles value growth and returns. Turning to my fourth area of focus, THP, where I'm determined to significantly strengthen our consumer offering. To enable this, we are expanding our capabilities through increasing our investment in people, and building new innovation hubs, including our global device development center in China to drive an enhanced innovation pipeline. As a top priority, we have already reengineering our internal innovation processes. In addition, we are developing an agile innovation ecosystem through external partnerships. And in doing so, increasing the pace of our transformation to drive better returns. Glo Hyper X2 Air, which are currently rolling out is the first step in an exciting accelerated medium-term heated tobacco pipeline. This enhanced innovation pipeline process is enabled by our 4D model. We are well-positioned to leverage across category insights and foresights, meaning we sharply define and prioritize consumer opportunities. We leverage this consumer understanding through a focused discovery phase to validate the consumer proposition. We then develop the commercial offering at an accelerated pace through our internal and external capability network. Before finally leveraging our global scale and capability to fully deploy. This dynamic is underpinned by our revamped product life cycle capability and portfolio management discipline, which enables us to adapt to the economic conditions and competitive environment. Overall, this means better innovations and faster development, generating higher returns on investment. My next area of focus is to lead responsible New Category development. I'm determined to manage external risks thoughtfully and transparently by increasing our engagement with regulators, policymakers and relevant stakeholders as well as leveraging our science. Given this, we do -- we need to have a louder voice. We have now created a new Management Board role to drive more proactive corporate and regulatory affairs. Our activities will follow a science-based approach to regulation to drive a level playing field in our markets. Regulation is a significant barrier to entry across New Categories. While navigating regulations is not new to BAT, we must now focus on developing a more front-footed external approach led by our science. Finally, my sixth focus area is to enhance our financial flexibility. We need to be more agile in the near term to make the right active choice that will deliver long-term sustainable value. I am clear that we will not compromise our commitment to accelerate investment in our transformation. And as I have set out today, I'm also clear on my near-term priorities to enable a more agile and flexible BAT, we will leverage our global portfolio to continue to grow profits and cash, deliver GBP 1 billion of efficiencies over the next 3 years to further fund our transformation and reduce debt to strengthen our balance sheet. In addition, we will seek and evaluate opportunities to optimize capital allocation. We have significantly increased our free cash flow generation with 4 consecutive years of at least 100% operating cash conversion. This has enabled us to return a total of GBP 21 billion to shareholders within this period, while also making good progress on the leverage. We remain committed to continue our 25-year track record of consistent dividend growth, rewarding our shareholders through all economic cycles. And over the next 5 years, we are on track to generate around GBP 40 billion of free cash flow before dividends. As we continue to execute on our transformation, our medium-term financial model for growth will evolve, and we will have more flexibility to allocate our capital to drive returns and reward shareholders by sustainably returning cash through dividends and share buybacks. And with that, I will hand over to Javed, to take you through the details of our results.

Thank you, Tadeu, and good morning, everyone. When I started my journey with BAT 27 years ago as a management trainee in finance in Pakistan, I never thought I would get the opportunity to present BAT's financial results to all of you as Interim Finance Director. Personally, it is a very humbling and a proud moment for me. But more importantly, it is a great testament to BAT's commitment to develop and grow a very diverse global talent pool. When I joined BAT, what fascinated me the most was our international footprint and truly multicultural working environment where everyone gets an equal opportunity to learn, develop and grow in their careers. As a business leader, I am always focused on creating a culture of respect and empowerment or in Tadeu's words, inclusive and collaborative. And this has helped me in having a successful track record of developing high-performing teams and delivering strong and sustainable commercial results. In my role as Interim Finance Director, I'll be working with Tadeu and members of the Management Board to continue to drive the transformation journey of BAT. Some of the areas, which will be in my primary focus are resource allocation, using tools like Marketing Spend Effectiveness and RGM and leveraging our digital hub capabilities and global business services' footprint. We will continue to invest in technology and move further on our digital transformation, making BAT a digitally connected organization. And of course, capital allocation and a sharper focus on cash generation will always be a high priority. Now moving to first half results. Our first half results demonstrate continued delivery and the resilience of our business. We delivered organic revenue growth of 2.8%, with New Category revenue up nearly 27% and Combustible price/mix of 6%. Profit from operations was up 3.6%, with our operating margin up 90 basis points at current FX and 40 basis points at constant FX, driven by the investment in New Category contribution and our continuous focus on efficiencies. Diluted EPS grew by 5.3% or 8.5% on current currency basis. We continue to drive strong New Category revenue growth and are well on track to deliver on our GBP 5 billion revenue target by 2025. This was enabled by progressively building our consumer base, together with capturing consumption moments and growing poly-usage. Non-combustibles now represents 16.6% of group revenue, 1.8 percentage points higher than in 2022. I will now share more details on our key category drivers full market share across our key markets are available in the appendix. In Vapour, we extended our value share leadership, with Vuse achieving 38.3% in the key Vapour markets up 2.4 percentage points. In the U.S., the largest global Vapour market, Vuse strengthened its #1 position, Vuse share grew 5.7 percentage points to reach 47% in tracked channels, and we remain confident in our PMTA submission for Vuse Alto. We welcome the recent FDA actions with regards to illicit synthetic nicotine disposables in the U.S., which we estimate to be more than 50% of the total Vapour market. And we continue to engage with the stakeholders to enforce the removal of unauthorized products. In Canada, France, the U.K. and Germany, we maintained value share leadership in closed systems with the modern disposable segment continuing to accelerate total category growth. This drove strong volume and revenue growth in AME. Outside the U.S., we continue to approach the modern disposable segment in a responsible way with ongoing commitment to under-age Access Prevention, Take-Back schemes and marketing practices. We are making good progress on driving profitability in Vapour, with a positive contribution in 3 of the 5 key markets, driven by increased scale and marketing spend efficiencies. In Tobacco Heating, glo reported revenues was up 10% or 12% on an organic basis. Continued category volume share momentum in key AME markets, including Poland and the Czech Republic was offset by highly competitive markets in Japan and Italy. As a result, glo's THP category volume share was down 110 basis points to 18.2%, while our share of the combined Combustible and THP category continued to grow. As Tadeu highlighted, we have much more to do on strengthen our THP offering, but I'm pleased to say that our newest innovation, glo Hyper X2 Air is delivering positive early results. Our Modern Oral portfolio continued to grow with Velo volume up 33% and revenue up 42%, driven by geographic expansion and innovation. We continue to grow our volume share of Total Oral, while our volume share by Modern Oral category was mainly impacted by our continued prioritization of Vapour in the U.S. as we await the outcome of our PMTA submission for a new Velo product. Outside the U.S., we maintained leadership of the Modern Oral category, and I'm delighted to share that Velo is now the largest oral nicotine pouch brand in Sweden. We continue to see a significant opportunity for Modern Oral in emerging markets with strong growth in Pakistan and a national rollout ahead of plan in Kenya. Now turning to Combustibles. Our volume declined by 5.8%, mainly due to significant excise increases in Pakistan, lower U.S. industry volume and share loss due to our premium positioning. Cigarette price/mix remained strong, up 6%, with price offset mainly by geographic mix. Together, this resulted in 0.2% increase in revenue. Group volume share was up 10 basis points, driven by gains in AME, with stable share in APMEA, partially offset by the U.S. Group value share was down 40 basis points as the impact of our commercial plans in the U.S. and losses in APMEA more than offset growth in AME. We are performing very well in Combustibles outside the U.S. with reintegrated portfolio, refreshed brands and sharpened execution. This demonstrates the benefit of our global footprint and our ability to deliver in the challenging environments. Turning to regions. In AME, Total revenue was up 9%, driven by higher revenue from combustibles with a resilient volume performance and a favorable pricing environment, offsetting some geographic mix headwinds; alongside continued growth across each New Category with revenues up nearly 37%; adjusted profit from operations was up nearly 8%, driven by improved financial performance in key markets, including Germany, Poland, Brazil and Mexico. In APMEA, Total revenue was up nearly 10%, driven by a robust combustibles performance, led by pricing and combustibles volume growth in Bangladesh, alongside continued growth across each New Category with revenue up 15%. Adjusted profit from operations in APMEA was up 9%, driven by strong performances in Australia, Sri Lanka and a continued recovery in global travel retail. In the U.S., Combustible industry volume was down 8.4% in the first half. Beyond market secular decline, industry volume was pressured by a combination of macroeconomic headwinds, driving reduced average daily consumption and downtrading, together with increased poly-usage. Importantly, elasticities remained stable at around 0.4%. On top of the industry contributors, our volume performance was impacted by lower volume share as a result of our more premium skewed portfolio, lapping the benefits of SAP-related inventory phasing in the comparator and the California flavor ban. As a result of our Combustible volume declined 12.4% in the U.S. As Tadeu highlighted, our commercial plans are starting to deliver early signs of sequential volume share recovery. This is supported by the industry premium segment starting to stabilize, with our share of the premium segment growing to its highest point in 3 years, driven by strengthening performance from Newport and Natural American Spirit. In addition, Lucky Strike continues to perform well in the value segment and now has more than 3% share of the total market. In Vapour, Vuse continues to expand its leadership position, driving revenue up 23%. Despite the challenging environment, we have continued to expand our operating margin by 280 basis points, driven by further improving Vuse profitability and continued efficiency savings. In California, the long-term impact of the flavor ban continues to evolve. Menthol products are reportedly still being sold illicitly due to lack of enforcement, and we have also seen elevated flavored volume in surrounding states, despite the industry's best effort to avoid this. Due to our menthol skew, 45% of our portfolio had to be delisted at the end of last year in California. Our Combustible volumes declined around 25% in H1 as many consumers moved to our non-flavored variants and our new FDA-authorized SKUs are performing well. Adjusting for a 13% pre-ban rate of decline, our underlying retention rate in California as a result of the flavor ban has been above 85%. Vuse has performed very strongly in California with 100% retention, despite menthol representing 60% of volume prior to the ban. Driven by the strength of our brand equity, Vuse has retained all of its pre-ban volume as consumers switched to our tobacco pods. As a result, Vuse gained 8.7 percentage point value share in tracked channel versus pre-ban. Overall, nicotine consumption was broadly stable in H1 due to accelerated growth of the illicit modern disposable segment, as consumers continue to access illicit flavored nicotine product. We continue to believe there are more effective ways to achieve tobacco harm reduction than restricting access to flavors that can play an important role in encouraging adults to switch to reduced-risk products. At the same time, we will continue to advocate for and support enforcement activities against illicit products to help ensure that available products adhere to high consumer safety standards and support a level competitive playing field. Returning to group performance. Operating margin expanded strongly, up 90 basis points at current rates and 40 basis points at constant rate. We absorbed headwinds of 2% from both increasing inflationary pressures and transactional FX on profit. This was supported by our strong progress improving New Category profitability and additional efficiency savings. Turning now to EPS. We delivered constant currency adjusted diluted EPS growth of 5.3%. This reflects our resilient operating performance and the benefit of continued strong ITC delivery, which more than offset increased net finance costs and tax. Our cash flow conversion of 72% in the first half puts us well on track for another year of cash conversion in excess of 90%. Due to the timing of leaf purchases and MSA payments, our cash flow is always second half weighted. We expected full year gross CapEx of GBP 550 million below adjusted depreciation and amortization. And we continue to make good progress on deleverage. As guided earlier, this year, our average cost of debt is 4.3%, which is well below the current market rates. And we continue to expect to see the impact of higher rates in our net finance cost in 2023 and moving forward. As a result, we expect full year net finance cost to be around GBP 1.9 billion, subject to both FX and interest rate volatility. Over the next 5 years, this business is on track to generate GBP 40 billion of free cash flows before dividends with cash conversion in excess of 90% and leverage moving towards in the middle of our 2 to 3x net debt-to-EBITDA corridor. This will provide greater business resilience while continuing to support future financial agility. As Tadeu outlined, we remain fully committed to further invest to better execute and deliver our strategy, while also rewarding shareholders throughout. We remain fully committed to our 65% dividend payout ratio over the long term and growth in Sterling terms. Once our leverage target is reached, we will review how to sustainably return cash to shareholders. With that, I'll hand over back to Tadeu. Thank you.

Thank you, Javed. Looking forward, we are on track to deliver our full year 2023 guidance, driven by strong New Category growth, a further reduction in New Category losses, a resilient Combustible performance and continued efficiency savings and strong cash generation. We expect to deliver organic revenue growth of 3% to 5%, excluding Russian Belarus and adjusted diluted mid-single figure EPS growth reflecting incremental New Category investment, continued investment in U.S. combustibles, higher net finance costs, a transactional FX headwind of around 2%, and this will all depend on the timing of the transfer of our business in Russia and Belarus. Extrapolating current spot rates, we expect currency translation to be a 3% headwind on full year adjusted diluted EPS growth. So in summary, I'm pleased with our resilient delivery in the first half and the renewed sense of energy in the business, and I'm confident we are on track for our full year guidance. I'm particularly proud of our ability to perform and transform simultaneously while consistently rewarding our shareholders through growing cash returns. I'm clear that there is much more to do. And together with my management team, we are energized to deliver on our focus areas outlined today in order to accelerate our transformation. Finally, I want to take this opportunity to thank everyone in BAT for their continued strong support and for delivering these results. I'm excited about the opportunities ahead, and I'm confident that we will deliver long-term multi-stakeholder value. We will now be joined on stage by Victoria for the question-and-answer session.

Thank you, Tadeu, and good morning, everybody. [Operator Instructions]. While we wait for questions from the phone line today, I can see that we've already got one for you. Given your 30-year career at BAT and 4 years as Finance Director, what will be different now you are Chief Executive.

Well, first of all, I would like to start saying that I'm very honored to be -- to have been appointed Chief Executive. And -- as you could see, and I have outlined that in my presentation, there is a lot of a single set of strengths in BAT already and they have been always clear since I took over as CEO that we have the right strategy. So we cannot ignore the fact that the world out there has changed substantially. The landscape we operate is much more complex. The macroeconomics are much more challenging. And this will require a sharpened execution. So one of my focus area, clear focus area is how we take much more measures in terms of doing resource allocation across geographies, across categories. That's why the market archetype is a very powerful example. I addressed some of my key focused immediate actions, which relates to increase our resilience in our U.S. Combustible business from the economic cycle point of view, but on the regulatory cycle view as well. So innovations, we have start to change the way we innovate in the group. We want to improve that substantially and then address the gaps that we have around THP. So -- and for sure, return of investment is -- will be a major focus for us moving forward when we make those calls in terms of execution. So the second leg is related to -- I would like to the group to be a much more outward looking. We need to have a more sustainable engaging agenda with the stakeholders, policyholders, regulators, policy makers in order to making sure that we have an informative debate about the landscape where we operate. We refer to that in the presentation. We have to create a level playing field, and there is a lot of desire for many governments to improve in some elements of the New Categories that we agree with. And it's a question of us to have the right discussion. I would like to sharpen up the narrative of BAT and be much more outspoken out there. And being in the front foot means that I have created a new role in the Management Board in Corporate Affairs exactly to give me the backing to be able to do that and to articulate the whole organization to us that go. And thirdly, it's about the culture is -- I genuinely have progressed in the group with -- trying to promote a much more collaborative, very inclusive culture. And that's what I want to see everywhere in BAT. I really believe that this can be very powerful. And I have read early signs that I think that the vast majority of the BAT employees agree with me. So that would be my third area of focus.

Thank you, Tadeu. So we'll now go to the phone line. So I'll pass back over to the operator.

Richard Felton from Goldman Sachs.

My first question is going to be on the U.S. combustibles market. So like today, you referenced early signs of improvement for your business there, but it still remains under quite a lot of pressure. So my question is you've changed leadership of that business about a month ago. What do you think David is going to be doing differently to improve performance going forward for your U.S. combustibles business? Then my second question, also in the U.S., but on your Vapour business, where volume declined by 6.5% in the first half. I'm sure that is a result that you and the team are not satisfied by. So how do you think about restoring volume growth for U.S. Vapour? And I guess, sort of within that, how do you think about the balance between margin volume growth for that part of the business specifically?

Okay. Thank you, Richard. Look, I'm really excited to have David come in as a new CEO of Reynolds. David came with a massive experience on the Combustible side. He was the head of Marketing, looking after the GDBs, the global drive brands that we have in the group for many years, 4, 5 years before he move on and is driving today one of the key areas within Europe. And under his leadership, he was able to put us in a very leading position in Vapour in the key markets in Europe and although Modern Oral. So David brings a mix of experience, which is quite unique, not just in Combustible, but also in New Categories and his style of management pretty much talks in the way I see the company moving forward. So I'm very excited to have him there. And I think that he will do together with the Reynolds team a fantastic job. As you point out is the situation in the U.S. is difficult because at the end, we had the secular decline and elasticity, normal declines that was exacerbated by the macros. The macro is a combination basically of the incentives that came in on federal, state levels that was withdrawn after post COVID. And at the same time with massive inflationary pressures that put a lot of pressure in terms of consumer purchase power. And us being skewed in the premium segment will suffer most And this for sure, there were some other elements to explain our volume decline like SAP rollout. But in essence, we were exposed to a segment that was struggling given the circumstance that we were facing in the U.S. The good news is that we are seeing for the first time, early signs of stabilization of the premium segment, so at the industry level, which is a very positive for us. And also, the action -- the commercial plans that we have put in place is already start to showing up. The improvement that we have seen is quite encouraging in the -- from January to now in terms of our market share improvement in Newport in particular, but also Natural American Spirit, the premium segment as a whole and the group as a whole. So for sure that those economic cycles come and go. What we want to ensure is that when this one finished, we came out of this much stronger when we came in. And that's exactly why we are working with all these commercial plans across our brands. And I think that David will be our great additive for what we need to put in place in the U.S. So that's the -- about David in the U.S. The U.S. Vapour market, you're absolutely right, is quite frustrating, to be honest, to see the whole increase in these unauthorized products, synthetic nicotine products. We believe that they are well ahead of 50% of the Vapour markets today in the U.S., well ahead of that. What is -- and this, for sure, is putting pressure on the overall consumption of the tracked channels when you see the reduction of -- as a group, as an industry, 15%. So BAT performed better and then we had a reduction F. But you see that this is just as a consequence of this exponential growth of this disposable -- nicotine device disposable. If you add that to the mix, it's a completely different ball game. And you will be nowhere near the 15% reduction that we are seeing because we are seeing a lot of traction of smokers actually using this type of products. What is encouraging is that the latest movements from the FDA in terms of trying to issue, for example, MDOs for some of those manufacturers and being very explicit that they are illicit products and even raising our penalty -- panel. So we will be supporting this initiative from the FDA for sure. There is a massive white space for every single percentage points that they are able to reduce. And we are quite, I would say, optimist that this will materialize. Because we know that a lot of the problems that we have in Vapour in terms of assets is coming from the use of these type of products naturally. So I think that there will be a lot of mobilization from different agencies in order to tackle this problem in the U.S. and we'll be willing to see this happening. Okay?

Gaurav Jain, Barclays.

Three questions from me, if I'm allowed. So the first one is the definition of leverage that you have, and I think a lot of investors are very confused that what is the 2x to 3x net debt-to-EBITDA, like is it the way you are reporting adjusted net debt and adjusted EBITDA? We need to make various adjustments like remove Canada EBITDA net cash, then put restructuring charges, remove Russia net debt, add in hybrids. So how are you -- how should we interpret that 2x to 3x corridor?

Do you want to take this one?

So -- yes. So I think this is how we are reporting them right now. So this is how they are reported in our numbers, and we are moving towards the mid of the corridor of 2 to 3 of net debt-to-EBITDA as they are reported in our numbers. And as you see, we have made a good progress from above 3 last year to now reaching 2.6 in the middle of the year. So we remain on track towards -- moving towards that target. So it is as they are reported in our number, not with that adjustments. And just to...

Sorry, continue.

Please go to the second question.

Sure. The second question is the e-cigarette growth, which is happening in the U.S. and a lot of market is moving towards disposables, as you're highlighting. In your view, like including disposables for legal, everything, how much has the e-cigarette market in the U.S. grown? 1H '23 over 1H '22?

Well, we -- it's very difficult to have a full assessment of valuation in the U.S. because you'll note that most of these products are sold in non-tracked channels. They are independent stores, mainly Vapour stores, for example. They are e-commerce that they still can buy these products in the U.S. via e-commerce. So it's very difficult to have a view on that. But if you think, for example, that the valuation of the Vapour market in the U.S. is around GBP 5 billion or slightly even higher than that. The vast majority, like I said, more than 50% should be now clearly occupied by these products.

Sure. And the third and the small question on this ITC hotel spin-off, which has been announced, and you will own about 18% or 19% of that spin-off company. Would you be looking to monetize that stake, or you will remain invested in that company?

Yeah, Gaurav. Look, we were made aware actually yesterday about the decision of the ITC Board to propose this structure of releasing, keeping 40% of shareholders of the hotels and giving the other 60% for the current shareholders. We will know more details about that in the Board meeting that will be held in mid-August, and then we are going to make a decision around that. And as we move along, we'll make a call in terms of what we decide to do, specifically after making the decision in terms of this shareholding that you are referring to.

Nik Oliver of UBS.

Two for me. Just one on the U.S. You talked about the sequential improvement, which is nice to see. But as we look forward, do you still think in a down 4 to 5 is the right algorithm for the U.S. market in total? And then secondly, more group level, were you used to kind of modeling BAT a high single-digit constant FX company? Obviously, more recently, it's been lower given investments in NGPs and Ukraine, et cetera. But as we go forward, should high single-digit constant FX EPS and still be the right algorithm?

Okay. Look, on the U.S. the question -- the first question was...