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

Hello, and welcome to the BAT 2023 Second Half Pre-Close Conference Call. My name is Alex, and I'll be coordinating the call today. [Operator Instructions] I now hand over to your host, Victoria Buxton, Head of Investor Relations. Please go ahead.

Good morning, everybody. I'm Victoria Buxton, Group Head of Investor Relations. And with me this morning is Tadeu Marroco, our Chief Executive; and Javed Iqbal, our Interim Finance Director. Welcome to our Full Year 2023 Trading and Strategy Update Conference Call. I hope that you're all well, and 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 wording regarding forward-looking statements as well as the notes and disclaimers contained in the trading update. Unless stated otherwise, our comments will focus on constant currency adjusted measures, and all our share data is year-to-date average to September 2023 versus full year 2022 average. I would also like to remind you that there'll be an opportunity to ask questions later in the call. And with that, I'll now hand you over to Tadeu.

Thank you, Victoria. Good morning, everyone, and welcome. I'm pleased to reiterate our full year 2023 EPS guidance, driven by our broad-based performance across categories and markets. Today, in addition to our pre-close trading update, I would like to begin by sharing some key highlights of the comprehensive strategic review we have now completed. I'm clear that our early commitment to our multi-category strategy is right. I'm also clear that we must continue to make active choice to sharpen our strategic execution through delivery of fewer, bigger operational priorities. To accelerate the next phase of our transformation journey, we are now committing to building a smokeless world. We will deploy our global multicategory portfolio to actively encourage smokers to switch to better nicotine product realizing the multi-category, the multi-stakeholder benefits of a better tomorrow. This commitment is demonstrated by our new ambition to become a predominantly smokeless business with 50% of our revenue from noncombustible by 2035. With only 10% of the world's 1 billion smokers currently using New Category products, the long-term opportunity for growth as we deliver on our transformation is vast. Consistent with our vision to build a smokeless world and in combination with the current macroeconomic headwinds impacting the U.S. combustible industry, in 2023 we will take an accounting noncash adjusting impairment charge of around GBP 25 billion. This accounting adjustment mainly relates to some of our acquired U.S. combustible brands as we now assess the carrying value and useful economic lives over an estimate period of 30 years. Accordingly, we will commence amortization of the remaining value of our U.S. combustible brands from January 2024. This noncash amortization charge will be treated as an adjusting item and does not impact the future capital allocation decisions. Work is ongoing as part of our normal year-end process, and we will disclose further details at our full year results in February. Building on our progress in 2023, I'm clear that now is the right time to further invest to accelerate our transformation. We are making active investment choice to strengthen our U.S. business, accelerate innovation momentum in Heated Products globally and enhance capabilities that support our strategic delivery. These investments will impact in 2024 and alongside continued macroeconomic pressures in the U.S., we now expect low single-digit growth in revenue and adjusted profit from operations on an organic basis at constant rates. Looking forward, we expect accretive New Category growth and stable Combustible revenue to continue to drive total nicotine industry revenue growth. This underpins our medium-term guidance, where we expect a progressive improvement to 3% to 5% revenue and mid-single-digit adjusted profit from operations growth on an organic basis at constant rates by 2026. We will continue to reward shareholders through our strong cash returns, including our progressive dividend, and once the middle of our leverage range is reached, we will evaluate all opportunities to return excess cash to our shareholders. Turning now to current trading. Benefiting from our global footprint and multi-category portfolio, we expect to deliver 3% to 5% organic revenue growth and mid-single-digit adjusted diluted EPS growth. Our earnings guidance includes the divestment of our business in Russia and Belarus in September. In New Categories, we continue to drive strong volume and revenue growth, led by Vuse and Velo. However, due to the continued weakness of U.S. combustibles, we now expect to deliver group organic revenue growth at the low end of our 3% to 5% guidance range. I'm particularly pleased by our continued strong performance in AME and APMEA, which together we expect will deliver close to double-digit revenue and adjusted profit from operations growth. The continued strength of these 2 regions, driven by both Combustibles and New Categories, gives me confidence that once we have restrengthened our U.S. business, our global multi-category strategy will deliver long-term sustainable profitable growth. Turning now to one of the key priorities I set out in the summer to drive profitability in New Categories. After significant upfront investments, since 2020, we have reduced New Category losses by GBP 1.1 billion. As a result, we now expect our New Category contribution to be broadly breakeven 2023 and to continue to be profitable moving forward. Vapour and Modern Oral are already delivering profitable growth. This continues to give me confidence that we will profitably transition our portfolio from Combustibles to New Categories. In Vapour, Vuse continues to extend our value share leadership reaching close to 37% value share in key markets, up 100 basis points. Vuse continues to deliver strong revenue growth, driven by an increased number of consumers, robust pricing and the benefit of growing cross-category poly-usage. We see the fundamentals of the Vapour category as a reduced risk alternative for adult smokers as strongly positive. More adult smokers are switching to Vapour than any other category, with Vapour and Heated Products equally effective at encouraging smokers to switch. In addition, positive demographics support the long-term sustainability of the category. In the U.S., our PMTAs for Vuse Alto two tobacco flavor products remain under FDA review. These applications further built on the foundational science of our successful tobacco flavor submissions for Vuse, Solo, Ciro and Vibe, which received marketing authorization in 2021 and 2022. We are confident that the successful outcome of the Vuse Alto PMTAs remaining under review with the FDA will be received in the coming months, consistent with the agent's most recently communicated time frame. We are challenging the marketing denial orders received for Vuse menthol variants, including most recently for Vuse Alto. We have received stays of enforcement for FDA Denial orders. This means that the Vuse menthol products can continue to be marketed and sold while the judicial review process continues. We believe appropriately regulated flavor vaping products, including menthol are critical in supporting the migration of adult smokers from combustible cigarettes. Indeed, while FDA did not request long-term consumer switching data as part of the PMT applications for Vuse, interim results of our 24-month longitudinal study for Vuse showed that the proportion of Vuse users completely switching from Combustible was higher among those using menthol flavor products than those using tobacco flavor products. Globally, the modern disposable segment is driving incremental vapor category growth. We continue to approach this fast-growing segment in a responsible way in regulated markets, consistently implementing our global underage assets prevention guidelines and take back schemes for responsible disposable. Vuse Go is now available into 59 markets and our recent launches in emerging markets, including Colombia and Peru are delivering positive results. We expect our vapor footprint to continue to grow as regulatory developments in new markets increasingly allow smokers to access, authorize it, reduced risk products, which enables our entry. In Modern Oral, Velo continues to deliver strong volume-led revenue growth and increasing profitability. Modern Oral is a fast-growing category, driving our volume share of the Total Oral in key markets, up 110 basis points, reaching 8.5%. The category is also developing quickly outside the traditional oral areas of Scandinavia and the U.S. with newer markets now representing 1/4 of industry volume. While our global volume share of Modern Oral is down 210 basis points, driven by the large U.S. market, we are encouraged by the strong results from our recent Velo pilot in New York including a more premium brand expression and design. In addition, we remain confident of securing the PMTA of our European leading Velo 2.0 platform to support our long-term competitiveness in the U.S. Elsewhere, Velo continues to perform strongly, maintaining its clear category leadership in Europe with 67% volume share in our top 4 markets. And we are taking further steps towards broadening accessibility of our reduced risk products through unlocking emerging market opportunities. Velo continues to deliver strong growth in Pakistan, driven by increased consumer numbers and with average daily consumption now close to 5 pouch per day. In addition, we have accelerated our national rollout in Kenya after a successful pilot test. In Heated Products, glo's performance in 2023 has been disappointing. Slower industry volume growth, increased poly-usage, particularly in the vapor category together with heightened competitive activity in Japan and Italy has impacted our performance. As a result, our organic volume and revenue growth has lowered in the second half and our volume share is down 100 basis points in key markets to 18.2%. Although glo maintains its strong #2 volume share position globally and continues to perform well in a number of AME markets, including Poland and the Czech Republic, since become Chief Executive, I have been clear that we need to do more to strengthen our innovation pipeline to drive momentum in long-term performance. While it's still early days, I'm excited by the accelerated cadence of our innovation pipeline in both consumables and device, glo Hyper Air is performing in line with expectations. And in addition, we have recently launched veo, a range of non-tobacco consumables in 10 markets in Europe, gaining first-mover advantage in this new space with encouraging early results. I look forward to sharing more details on our innovation pipeline next year. Now turning to Combustibles, where our global volume share is flat year-to-date, with value share down 40 basis points, reflecting the impact of our commercial actions in the U.S., partially offset by stronger performance in AME and APMEA. In the U.S., Combustible industry volume continues to be impacted by the volatile macroeconomic environment with premium segment shares showing recent signs of pressure after a more stable first half. Although our volume share is down 10 basis points year-to-date versus full year 2022, I'm encouraged that our commercial plans are delivering early signs of volume share recovery with a 50 basis points improvement between January and October, driven by Newport, Natural American Spirit and Lucky Strike. While returning our U.S. Combustible business to consistent value growth will take time. We are confident that the actions we are taking will strengthen our portfolio over the longer term. In California, the impact of the flavor ban continues to evolve with consumers assessing flavored products through illicit channels. We can clearly see the lack of effective enforcement on the ground with overall nicotine consumption broadly stable year-to-date. Due to our menthol skewed 45% of our Combustible portfolio had to be delisted at the end of last year. We activated commercial plans and adjusting for a 13% pre-band rate of decline. Our underlying retention rate in Combustible has been over 80% and over 90%, including the impact of elevated menthol volumes in neighboring states. Outside the U.S., our Combustibles business has continued to perform well. In AME, our volume share gains and pricing have driven strong revenue and profit growth. In APMEA, the impact of excise lead volume declines in Pakistan has been more than offset by our pricing across the region, and we expect 2023 to be another year of strong revenue and profit delivery. This demonstrates the benefit of our global footprint, well-balanced portfolio and our ability to deliver in challenging environments. BAT is a highly cash-generative business, and we expect to deliver close to 100% operating cash flow conversion in 2023. We are making progress towards reaching the middle of our guided 2x to 3x adjusted net debt to adjusted EBITDA leverage range and expect to be close to 2.7x by year-end. As we set out at half year, we continue to seek and evaluate our opportunity to enhance balance sheet flexibility, including disposals and the exit of nonstrategic markets. We remain committed to a progressive dividend, and once the middle of our leverage range is reached, we will evaluate all opportunities to return excess cash to our shareholders. Now turning to our strategic update. Building on our strong progress to date and to continue to deliver long-term sustainable growth and returns, we are now focused on sharper strategic execution through delivery of fewer, bigger operational priorities. In addition, we are building a more collaborative and inclusive culture as we drive a more agile, modern BAT. To steer towards these 2 objectives, we have refined our strategic direction and ambition. This will drive our priorities and future choice. First, we will drive a step change in our innovation capabilities and speed to market. We have all the right foundations in place. We committed to a multi-category strategy from the outset recognizing that consumer taste and preference are not homogenous. In less than a decade, we have built a portfolio of 3 powerful brands, Vuse, glo, Velo, delivering more than GBP 3 billion of revenue. And after significant early-stage investment, I'm particularly pleased that we now expect our New Category should be broadly breakeven 2023 and be profitable from 2024 onwards. Built on our deep cross-category consumer insights, we will deliver an enhanced innovation pipeline by further investing in our people, science, our IP and our capabilities, driving an innovation-focused culture. We will continue to leverage our centers of excellence in Southampton, Trieste and Shenzhen in order to assess wider internal and external strategic partnerships focused on developing consumer-relevant premium propositions. Second, we are making active choice to accelerate our transformation. We will leverage our market archetypes to guide how and where we deploy our products and allocate resource to deliver long-term value creation. In the U.S., we have now completed a deep and thorough review of our business. We have begun and we'll continue to invest in sharpening our portfolio management, strengthening our route-to-market and further leveraging our broad digitally enabled revenue growth management capabilities. We are confident this will drive quality growth over the long term and ensure greater resilience through economic cycles. In Heated Products, we continue to invest to rejuvenate our momentum with an enhanced innovation cadence in both device and consumables. The launch of our non-tobacco consumer range veo since September is an early sign that this focus to deliver first-to-market consumer relevant innovations is yielding results. We are also taking action to strengthen our organization capabilities. We are committed to playing a more proactive role in sharing our science and insights to support the development of New Category regulation and our contribution to tobacco harm reduction globally. This is incredibly important for both the future develop of New Categories and also to ensure the proper functioning of existing New Category markets. The recent proliferation of illicit disposal of vapor products in the U.S. is a clear example of the importance of effective regulation enforcement. We estimate that these products now represents over 60% of the U.S. vapor markets with over 90% of the segment estimated to be non-menthol flavors where we are unable to participate. In recognition of the critical role regulation plan for the future of New Categories as part of the management Board change announced in June, we created a new corporate and regulatory affairs function. The success of our transformation will also be accelerated by a more collaborative and inclusive culture, which is at the heart of my leadership agenda. I'm delighted to welcome Cora Koppe-Stahrenberg to the new role of Chief People Officer. Cora brings a valuable external lens from a diverse range of transforming industry, and she will be focused on driving a winning culture and a more agile modern BAT. And finally, we are increasing investments into 2024 to secure our long-term sustainable growth. While we expect continued headwinds to impact our U.S. business next year, we will build our broad-based performance in 2023 by making the active investment choice I have just outlined. We are confident that these are the right near-term investments to secure long-term quality growth and accelerate our transformation. I look forward to sharing more detail on our refined strategic direction, including the KPIs against which we can be measured at our full year results in February. Thank you for listening, and I will now open up the call to your questions.

[Operator Instructions] Our first question comes from Jacob De Klerk of Redburn Atlantic.

Just a couple. Just going back to your smoke-free target you said for 2035. Will the contribution be evenly split in 3 categories or continue to be lopsided to vapor. And then just secondly, how do you expect to maintain profitability in the NGP category if you're stepping up investment into 2024, specifically behind the THP category.

Yes. Thank you for the question, Jacob. Well, look, what we are seeing currently is that the phenomena of poly-users is an indication that the smoke-free will be adopted through the different categories. There is clearly, in terms of number of consumption the more use of vapor currently. If you take out of the estimated 100 million consumers of these noncombustible products, you have a bit of 60% plus of those users using vaping, but we are also conscious that a lot of them are poly using amongst those categories. So I don't think that we can highlight 1 specific category, and that's play in line with our strategy since the outset to be a multi-category company because we always believe because consumers are different, the regulatory environment is different that we would need to activate the 3 categories at once. So I think that we'll be very well prepared for this future that we have already materialized to happen at this point in time. In terms of NGP, what we are saying is that we expect profitability to come from 2024 so we will be using some of the profit reinvesting back in the new categories, mainly on the Heated Products category specifically, but net-net will still be a positive outlook in terms of profitability in New Categories for 2024.

And can I just squeeze in 1 last one, sorry. There was no mention that some of your GBP 5 billion revenue target in 2025 for NGPs. Is this target still maintained? Or will the ex Russia impact this?

Yes. No, for sure, that's Russia, it's a headwind, if you want. But we are -- we have the ambition to get to the GBP 5 billion by 2025. The major headwind that we'll be facing, not -- is really not the divestment of Russia, but it's the continued increase of these illegal products of modern disposable in the U.S. U.S. is a big part of our revenue that we have achieved so far. And this just makes it more difficult, let's put it that way. For sure that the other side of the coin is if we start seeing enforcement as we would expect in the U.S. from the FDA this could be a very strong white space that will be read to approach. But the target and the ambition is there.

Our next question comes from Owen Bennett of Jefferies.

I had a couple of questions, please. The first one on the incremental investment, would you be able to say how much of that incremental investment will be on heated tobacco, and then can you outline where on heated that investment will be going? Is it likely to be on additional discounting? Or will it be below the line on things like in terms of education and building these consumer relationships?

The incremental investments, we are highlighting 3 areas. And they are not very different from what I have been saying. In reality, if you've heard consistently from me, that we -- since I took over as a CEO, that there are clearly a need to reset the U.S. business. So a lot of these investments will be us continue to build the commercial plans that are needed in the U.S. to transform the U.S. into a more consistent long-term business for the group and not just on making the portfolio more resilient in terms of regulation and economic cycles, but also investing in trade markets covered and investing in the digital capabilities in the U.S. and some other areas that will strengthen the business. So a lot of these investments we will carry on in the U.S. And the Heat Product is the one that have singled out since the beginning because we have a strong performance in New Categories overall and mainly specifically in the Vapour and Modern Oral. We are very pleased with the progress that we have been able to make in those 2 categories. But clearly, Heated Products are not there. So the investment will pretty much be aligned with leveraging some innovations that we want to bring to the market and how you make them more accessible for consumers. We are in a very -- we want to strengthen where we play in terms of portfolio of the Heated Products. And the first step has been the introduction of these known tobacco flavors products in some markets in Europe. We'll continue to roll out this next year as the ban in flavors tobacco heating start to be adopted by more European markets. So this will be a part of the investment, but also related to some new innovations for sure that we also want to step up our investments around IPs. And of course, this is one area that has been putting us -- have constrained us in the past. And that's why I was referring to our center of innovations in place like Shenzhen and the investments that we are making in terms of leveraging internally and external partnerships to reflect into more compelling products that we could launch in the market.

And then the next question is just on the 2024 guidance, what are you assuming for U.S. rate in terms of, are you assuming any meaningful action on disposables. And then are you also assuming your tobacco PMTA gets approved and you perhaps would see some acceleration on the back of that?

Yes, the 2024, the first point I would like to highlight is that we expect the 2 regions outside the U.S. to continue to deliver strongly. And we also expected the New Categories like I answered the question before, to making roads, not just in terms of revenue, but more important in terms of profitability as well. So this is all going in the direction that you would expect to go. There is no doubt that some of the commercial plans that we have started addressing in 2023, you're already seeing the reflection of that in terms of our share performance from January to now, which I disclosed in the statement has an impact in terms of carryover for 2024 and on top of that, we are answering your question, not assuming any meaningful enforcement from the FDA because unfortunately, we haven't been seeing this up to this point in time. Clearly, the FDA we expect them, first of all, to conclude the process of the PMTAs in Vapour. So in concluding that, they will be able, let's put it that way, to start publishing a complete list of legal products, and they haven't done this so far, which creates a lot of uncertainties in terms of enforcement because a lot of -- when you visit key accounts, for example, in the U.S., they're still doubtful if that product will be approved or not because they are still pending some definition from the FDA. So the first thing is the FDA needs to be a bit clear in terms of what's illegal, what's allowed to be in the market, which they haven't done. We also believe that they need to really dramatically increase inspections of retailers, distributors, wholesalers, hold lawbreakers accountable, which we are not seeing yet, employing it's most powerful enforcement tools that they have and eventually drive effective enforcement with coordination with other government law enforcement agencies. So we are not seeing any of that. So at this point in time and enhance our assumption for this plan, which is underpinning the 2024 is that we are not seeing any meaningful FDA enforcement. For sure if we are wrong on that and all of a sudden, we start seeing them be much more active and hence, open up space in that space, in that market. We will be benefiting from that. And in terms of the PMTA, we are very confident that they will be approving our tobacco flavors. They took -- it seems that they have took kind of right blank approach in terms of menthol, denying all products, they haven't approved any products of menthol which is very frustrating, to say the minimum because this goes against even their belief in terms of risk continue and migrating consumers out of cigarette. They just make this more difficult. We hope that with the expedite process of PMTA with some technology to prevent the use of youth, they can reassess that and bring its flavors back. But we are very confident that our tobacco flavor products will be approved in the coming months.

Okay. And then just on that with the -- I'm assuming kind of you're referring to Bluetooth technology. As I understand, you were hoping to get a new PMTA in by year-end. Is that still the case?

Well, our expectation is that because like I said in the statement, they have just basically ignored all the studies related in our process specifically, all the studies that we have to prove that the menthol flavors in vapor are much more effective in converting smokers out of cigarettes towards vapor. They basically ignore that and they issued the deny order, which we are appealing in the just as you heard, and we will continue to be in the market as a consequence of this appeal. So in the meantime, they have issued a more expedited PMTA process to allow the manufacturers to submit device that has intrinsic technology through Bluetooth to enable to assess the age and with that prevents the access of youth to these products. We believe that -- and there is no certainty on that. It's basically a belief that with that, they will be more keen and to approve the flavors for us of at least the menthol one because it's a strong belief that they also see the benefits of smokers moving away from cigarettes vapor via flavors. So in our case, our Bluetooth device will be early next year, be filed as a PMTA. And based on what we heard from the FDA, this process will be expedited compared with the normal ones.

Our next question comes from Rey Wium of SBG Securities.

Just a question regarding the 2024 guidance, which now been reduced to revenue and operating profit to low single digit. I'm a bit surprised on the revenue side that that's also been lowered. So the only sort of thing that I can sort of determine from this is that maybe you plan to be probably more aggressive on pricing or maybe try to reduce the price increases that you had in the U.S.? Is that a fair assumption?

Yes. It's difficult for me to make comments on the pricing. But there is a part of the commercial plans in the U.S. we will be -- because we said that we will be making our -- we will strengthen our portfolio of brands and laddering, for example, is part of the process. We are reviewing also all the coverage that we have in the different channels in the U.S. And but more important, don't forget that in the plan for '24, we are not really seeing a major shift in terms of macroeconomic downward pressures in the U.S. market. I'm not giving guidance to the U.S. markets, but this year will be -- the industry will be finishing close to a decline of high single digit, for sure. It's not just the macroeconomics that is driving that, this illicit modern disposable though is having more and more impact on combustible as well. But answering the previous question from Owen, we are not expecting any major changing in terms of enforcement from the FDA, in terms of our assumptions. And the other assumption is that the macroeconomic environment will not get substantially better in '24 either. So and like I said before, the commercial plans that we have started this year has an implication in terms of carryover for next year. So everything else in terms of performance in the other 2 regions, we are expecting them to continue to be very strong. So our overall New Categories business. But U.S. will take some time, and it's not different from what I have consistently said since the beginning that to adjust the U.S. and plus with the macroeconomics that we are now seeing that will take time or more time to recover, we will have an implication in the short term for the group results.

Good. And then just a quick question just on -- I see you referred to looking at measures to increase the balance sheet flexibility, which includes disposals. Now obviously, this brings us back to the issue around your investment in ITC. I don't know if you just want to elaborate a little bit more. I mean, why it is so important for you to hang on to this investment? Or is there not an opportunity for you to still have meaningful influence and just reduce part of the investment in store keeping like a 20% stake in the business. I mean that can easily reduce your debt by GBP 5 billion.

Yes. Just on the ITC in January, for sure, ITC is a company that continues to perform extremely well. It's accretive for BAT, in terms of performance, has had a very strong share price performance over the last couple of years. If anything, is still under value compared with most of the FMCG companies in India, and FMCG today is more than 50% of revenues of ITC. So there is plenty of opportunities for share price to continue to grow there, in ITC. So we see a longer runway for future share price of performance and value creation in ITC. Now for sure, that we don't need to have more than 25% shareholding in ITC to have strategic influence, including veto rights. Today is we have more than that. But you cannot underestimate the complexity related to making divestments in ITC. There are 2 major pain points, let's put it that way. One is the foreign direct investment rules in tobacco specifically, which precludes international companies from investing in the Indian tobacco sector, which means the universal bias is limited. But more important, there are specific RBIs, RBIs is Central Bank in India, approvals that are required in respect of any action taken in relation to our stake. And this adds a significant level of additional bureaucracy. So I'm not saying we will be sticking to the shares. But what I'm saying is that it's not as easy as could transpire outside. So the points that you make, we see this for sure that the recent ITC Board approval of the demerger of this hotel business may provide us with some greater capital allocation flexibility going forward. But your point specifically is something that's will be always in the regular -- reassessed by the Board regularly in terms of capital allocation opportunities, and we do, we're going to navigate through all the difficulties that we have in that space, but disappoint that the Board is considered as usual, as you would expect, let's put it that way.

Our next question comes from James Edwardes Jones of RBC.

The GBP 25 billion write-down, what does that indicate about your view of growth and profitability in the U.S. And I guess related to that, has there been any change in price elasticity in the U.S.?

The price elasticity continues to be very benign. It's still around 0.35, 0.4 and we haven't seen any change on that. The accounting is basically catching up with reality of the U.S. market. But this reflecting the natural evolution of the increased interaction of U.S. smokers with New Categories. This is happening elsewhere and not just in the U.S., also augment the fact that we have already reviewed our strategy to be much more assertive in terms of our ambition to transform the company accelerated transformation by 2025. With all this in mind, it's very difficult to defend the existence of a finite value for some of these combustible brands in the U.S. that equates to almost GBP 80 billion in our balance sheet. So what we have decided to is basically to move the accounting treatment of some of these U.S. combustible brands from indefinite life to a finite life. And meaning that they are -- they will be value over approximately 30 years instead of perpetuity. So when you do that, you have to make an adjustment. And that's exactly what adjustment we are doing. Like I said, it will be adjusted and in the results of the group will be a noncash item. We have no impact on leverage. We have no impact in terms of capital allocation decisions, and then we commerce amortization over the next 30 years. In that period of time, for sure, there is no way to justify the presence of the brands. I'm not saying that the combustibles -- the cigarettes will disappear in 30 years in the U.S. I really don't believe that. But you cannot justify the value of those brands equating to a number as equivalent to what we have today in the balance sheet. So at a certain stage, we have to do this anyway, and we have decided to do this right now.

Our next question comes from Gaurav Jain of Barclays.

Three questions from me. So one is on the guidance for FY '24. And I think others have also asked this question in a different way. But what you are telling us is that NGPs will breakeven this year and will be profitable in FY '24. And that the total company organic EBIT growth is low single digits. I think most of us are assuming that international cigarette EBIT will be growing mid-single digit to high single digit based on whatever we are seeing in terms of volume trends across the space and what other companies have communicated. So this will imply that U.S. cigarette EBIT is down mid- to high single digit. Is that the math which is happening?

The 2024 is a clear indication that it's a recognition of, first of all, the U.S. business, like I always said, will take more time to fully recover. And this is basically compound by the fact that we have this macroeconomics and the situation with the illicit modern disposable carry on for longer and the fact that we are carrying on with our initiatives and investments to make it -- to strengthen our business there in terms of portfolio resilience, in terms of capabilities and so on. That's one first point. And this is mainly related to that, but also the fact that we want to keep investing mainly on the Heat not and the Heated Products. We expect just to answer your question, to have a positive profitability in terms of New Categories in 2024. But what I'm saying here is that part of this profit will be reinvested mainly in strengthening our Heated Product positions. So you saw that in the last 2 years, we have basically reduced our loss by GBP 1 billion. And in the New Categories. So it's a very strong pace in an annual base. So we will continue to increase profit, but not with that magnitude moving forward, plus we reinvest some of that to strengthen our category. So that's what we are trying to say here.

Sure. And so as a follow-up on that, so it clearly tells us the overall NGP EBIT. Is it possible to give some indication on the profit contribution of the different categories, Modern Oral, e-cigarettes and heated tobacco? And some other companies have sort of given, sort of the max loss that they will bear on NGPs and heated tobacco. So is there a way for you to help us understand like is there a max loss on heated tobacco you will be willing to bear and that's the way to model it.

We are not giving the disclosure per category. I don't think that this call would be the appropriate time for us to going deeper into this. We're going to have more time in the next year to give more visibility on that. But 1 thing, and even in the statement, you can capture from that, we are already in a positive territory -- we are already in '23 in a positive territory in terms of profitability in Vapour, Modern Oral, which means that we had a loss on the Heated Product. And overall, the other 2 categories more than offset the loss on Heated Product. And what we expect moving forward is with more compelling offers for heating, probably more competitive offers. We can start also to turn this around and start firing all 3 cylinders in the New Categories and make it a driver for creation for the group moving forward. So you're going to have different engines in BAT in the medium term. We have the 2 regions outside the U.S., which is already if anything, delivering extremely exceptional results. And it's not just in combustible, it's also doing quite well in New Categories, mainly the Europe region. And we will have the New Categories overall continue to be accretive for the group. And at certain point, once the macroeconomics improve in the U.S., hopefully, the FDA starts doing the job that they were supposed to do in terms of enforcement of these illegal modern disposable products and us being able to do the adjustments that we want to do that we think that most of it will be done in 2024, you're going to have a much improved result for the group. That's why we are giving a 3 years guidance this time as opposed to just 1 year. So you can contextualize the 2024 as an investment year that is necessary to secure the long-term sustainable growth of the group.

Sure. And one last question on the Organigram investment that happened. So how should we think of that in the context of what's happening today, the stock is down a lot, dividend yield is almost touching 11%. So clearly, investors want to see capital return to them and leverage is also higher than what anybody thought. So how should we think of investments like Organigram in that context?

Investments in Organigram. Well, the Organigram, it's not really a relevant capital deployment at this point. What we want to do is to create a foundation in the cannabis space and without having to deploy massive capitals like other companies have done in order to be preparing case the regulatory environment change to be able to have a stronger foothold on that segment. And the Organigram in our belief is the best company out there in terms of management, in terms of capabilities. They are pretty much focused on the smokeless side of cannabis, which is also aligned with the group strategy. And this is pretty much a kind of setting the grounds and the foundations and more than anything.

Our next question comes from Jonathan Leinster of Societe Generale.

A couple of questions, if I may. First of all, you say you've launched the non-tobacco, heated tobacco consumables in 10 countries. I mean, given that would seem to be a fairly easy way around the ban on flavors. Has there been any reaction from the EU regulators business?

Well, look, this is early days in terms of reaction from them. And I think that some of them, they are surprised to see the product because there is no, I would say, clearly classification of this product at this point in time. And I think the debate will be more on the excise discussion than anything. And but it's clearly an opportunity to keep consumers migrating out of cigarettes towards these products because like vapor is not different. We note that flavors plays a big part of that.

Okay. And Second question, you obviously disposed the operations in Russia in September. Have you seen any proceeds from that? And are your expectations for eventual proceed the same as they were in September?

Yes. Look, you know that based on our disclosure that this has been a very, let's say there is a big hit that we have to take in order to materialize these investments. We had some proceeds because we have the sale of it, and this is flowing through as we were expecting. But the overall, you cannot lose perspective that is far away from the real value of the business, given the circumstance that the deal was done and couldn't be done more differently than that. But I think that was a good compromise because at the end of the day, we preserve the jobs of almost 2,700 people in the Russia business and which was our intention since day 1 and we did in compliance with all the rules, international rules and local rules. So it was a very complex process, as you can imagine, and we expect to conclude actually the receivable of some of the proceeds now in December. And it's basically a kind of completely independent company now and has nothing to do anymore with BAT.

Just to clarify, I thought there was some talk of a potential buyback of the business in a couple of years? Or is that not part of the deal anymore?

The call option. Yes, the call option is restricted for a very short period of time is 2 years. So I don't think that will be really well, is anybody guess, but it will be effective. This is a requirement from the Russia authorities. They wouldn't allow you to have a call option with a larger period of time than these 2 years.

Okay. Just coming back to a previous question, if I may. I mean, in discussion on the disposal of non-core assets. I mean, although the disposal of ITC in itself might be difficult, is the sort of disposal of the hotel assets presumably much -- the potential spin-off from ITC much easier because that's clearly got nothing to do with tobacco or would that remain still quite difficult.

Yes. Well, our expectation is that -- well, let's put it that way, we have no intention to be in the hotel business, but you cannot forget the fact that ITC will still hold something like 6% of the shareholder of the hotels. And but this is -- it's not -- the problem is not the hotel, is the tobacco that has the FDA. So there is no FDA involved in the hotels, let's put it that way.

Our next question comes from Simon Hales of Citigroup.

Three quick ones for me, please. And if I can first just follow up on John's question there about the Russian cash proceeds coming in. You said you've received some cash in December. I don't know if you're able to quantify that at this point and also talk about the time line going forward as to when you hope to receive the remaining sort of cash in from that growth from that sale? That's the first question.

We are not giving any amount related to that, but what I can say is that we expect to conclude all the proceeds now in December, in the next coming weeks. And of course, this has been happening since September. There was some limitations and agreements in terms of a cap on a monthly basis, and this is bringing us to an end now in December. So by the end of the year, it's all done.

And just to be clear then, in your 2.7x net debt to EBITDA leverage guidance you've issued this morning that includes your assumption of those proceeds coming in this year?

Yes, it includes, yes. Includes the assumption.

And then secondly, I just want to just go back to the U.S. And today, you talked about obviously the industry combustible volumes declining high single digits this year. How do you think about the building blocks of that? What do you think has been macro related? What's poly-usage? What's just the underlying decline rate in the market? I'm just trying to understand the build and how we think about this for not only 2024, but perhaps longer term, what you're now assuming is the rate of decline of U.S. combustibles?

Yes. You note that the secular decline in the U.S. market has been always around 4% to 5% for sure that the COVID years was an exception to that. A lot of consumers with a lot of support from tax and federal and state tax and without having the opportunity to spend anything. So we saw a very, I would say, an expected trajectory for the positive that has reversed completely from 2022 onwards. But normally, you would expect to see 4% to 5%, there is a big wait now related to the macroeconomics, but there is also an impact coming from the illicit modern disposable which we believe that could well represent something close to 2% of this volume decline that you are seeing. So when you ask about what you see moving forward, like I said before, the elasticity is not different from before. Is it still 0.35, 0.4 so which means that there is still a lot of pricing power in the U.S. The cigarettes is still very cheap compared with consumer purchasing power. For sure that this scenario will improve once the macroeconomics gets better, which means interest rates start coming down, consumer confidence starts to go up and then we have anybody guess when this starts happening. Some people are saying that is more towards the second half of 2024. That's why I'm also saying that we expect that most of the year we will be seeing still a lot of pressure from the consumer point of view, and we start seeing some green shoots at more towards the end '24, but the bigger question will be in terms of, again, on the enforcement from the FDA on these modern disposables. And because this -- if this happens not just help with the vapor closed system where we are present, the legal part of the vapor, let's put it that way. There is a -- open up a big white space because today, we believe that GBP 6 billion out of GBP 10 billion vapor revenue is coming -- more than GBP 6 billion coming from these modern disposables. And this also have an implication on the consumables trend, how they are trending, the consumable volume, the reduction in consumables for cigarettes. And this is something that we need to see in the next, I would say, few months as soon as the FDA concluded its process related to vapor, if they really make a step change in terms of enforcement, and this will be more clearly to be able to precisely answer your question around what's the estimate moving forward.

Got it. And then just finally, you've said again this morning that you'll evaluate further cash return opportunities once you reach the middle of your leverage range. I mean we're just getting too caught up in this frantic. I just wonder how you're now defining the middle of the leverage range. Is that 2.5x and below? Or is that a range of sort of 2.4x to 2.6x. Just a little bit on that, please.

Yes. Well, we have seen 2.5x. That's what we are saying in the range We have to take into consideration that the world has changed dramatically since we established the 3x to 2x range. We have -- the cost of capital has increased substantially. The interest rates has increased, we expect them to have peaked now and start reducing, but it's still much higher than before. So and also the fact that we still have out there a process in Canada, which is the CCAA that at certain point needs to conclude itself. And so we had to create some space for that. So we don't believe that to be in the upper range of the range, for example, is acceptable anymore. That's why we want to bring this to the middle of the range and then when you get there, we'll make some decisions in terms of capital allocation. Plus one thing that is imperative in our mind is that once we restart the buyback to do it on a consistent basis and not one and off. So I need to be in a position to be comfortable, given all that I just said before in order to be able to start -- restart the buyback. That's why the 2.5x is the reference that we have.

We have no further questions for today. So I'll hand back to Tadeu for any further remarks.

Okay. Thank you for all of you for listening, for your question. I would like to leave you with a few final comments. We are maintaining our full year 2023 guidance, reflecting the resilience of our global multi-category portfolio. In addition, our expectation that New Category contribution will be broadly breakeven 2023, give us confidence in the long-term sustainability of our multi-category strategy. As we accelerate the next phase of our transformation, we are now committing to building a smokeless world. This is reflecting in our ambition of 50% of our revenues to be noncombustible by 2035. By achieving this, BAT will deliver value for our stakeholders. I'm clear that now is the right time to continue to invest. While this choice and investments have implication for our 2024 guidance, they will ensure sustainable growth and returns over the long term. We'll continue to reward our shareholders throughout the spirit, and we will seek and evaluate our opportunities to enhance balance sheet flexibility. And with that, I look forward to updating you again at our full year results in February. Thank you very much.