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

Hello, and welcome to the BAT Pre-Close Trading Update. I will now hand over to Victoria Buxton to begin today's call. Thank you.

Good morning, everybody. I'm Victoria Buxton, Group Head of Investor Relations. And with me this morning are Tadeu Marroco, our Chief Executive; and Soraya Benchikh, our Chief Financial Officer. Welcome to our 2024 first half pre-close conference call. I hope you're all well, and I'd like to thank you for taking the time to join us this morning. Before I begin, I need to draw your attention to the cautionary statement regarding forward-looking statements as well as the notes and disclaimer contained in the trading update. Unless stated otherwise, our comments will focus on constant currency adjusted measures and all share data is year-to-date average to March 2024 versus full year 2023 average. I will now hand over to Tadeu. And as a reminder, there will be an opportunity to ask questions later in the call.

Thank you, Victoria. Good morning, everyone, and welcome. Let me begin by welcoming our new CFO, Soraya Benchikh, who joined us last month. This is a return to BAT for Soraya who spent over 2 decades contributing to our strategic direction, working across 3 continents before moving to Diageo in 2019. Soraya is a great addition to our leadership team, bringing an external perspective and the wealth of senior leadership and financial experience. I'm looking forward to working closely together to drive our strategic agenda and financial returns. I will now hand over to Soraya, who will share a few introductory comments.

Thank you, Tadeu, and good morning, everyone. I am very excited to be back at BAT at what I see as a pivotal time in our transformation journey. Having just arrived, I'm looking forward to engaging with you over the coming months and sharing more details about my key priorities. As Tadeu highlighted, I have enjoyed an extensive global career within BAT both in finance and general management in markets and regions that offered a wide variety of different challenges, but also opportunities mostly in the combustible space. When I left, our new category business was small at group level with only around GBP 1 billion of revenue and was still loss making. Over the last 5 years, our new categories have become a material driver of our performance, delivering over GBP 3 billion of revenues and becoming profitable 2 years ahead of target. One of my first priorities as CFO is to ensure we continue to effectively manage the increased complexity of our multi-category business. And we will achieve this through our strategic focus on quality growth, driving a more balanced top and bottom line performance, enabling us to deliver consistent and sustainable financial results and enhance cash returns for our shareholders. I will now hand back to Tadeu, who will talk you through our current trading.

Thank you, Soraya. Our performance year-to-date is in line with our expectations and we are on track to deliver our guidance of low single-digit revenue and adjusted profit from operations growth on an organic constant currency basis in 2024. As previously highlighted, we expect our performance to be second half weighted, driven by wholesale inventory movements related to continued investment in our U.S. commercial actions as well as the phasing of new launches. Our guidance also reflects ongoing macroeconomic pressures, particularly in the U.S. markets. As a result, we expect our H1 revenue and adjusted profit from operations to be down by low single digits on an organic constant currency basis. I'm particularly pleased that we have continued to make good progress driving new category profitability and expect this should continue in the second half as we deliver accelerating returns on our more targeted investments, particularly in heated products and modern oral through our quality growth focus. Now turning to combustibles. We are -- while our group volume share is up 30 basis points, driven by a good performance in AME and APMEA and the stabilizing performance in the U.S. Value share is down 10 basis points, reflecting adverse geographic mix and the impact of our commercial actions in the U.S., partially offset by stronger performance in AME and APMEA. The U.S. macroeconomic environment remains challenging, with consumers continuing to feel stretched driven by slower-than-expected growth, stubborn inflation and interest rates remaining high. In addition, the ongoing proliferation of illicit flavor single-use vapors and lack of effective enforcement is continued to impact industry volumes. As a result, combustible industry volume is down around 9% year-to-date and around 11%, excluding the deep discount segment where we are not present. Looking at the broader macro context, we see some early positive macro indicators with real wage growth and strength in the aggregate household balance sheets. In addition, consumer confidence has started to track more positively since the end of last year. While the recovery is slower than we had expected at our results in February, we continue to expect some improvements in macros as we move through the second half, which is expected now to benefit our 2025 delivery. As previously highlighted, we expect our H1 performance should be impacted by continued investments in our U.S. commercial actions and related phasing of wholesale inventory movements with the latter is expected to unwind in the second half of the year. We expect the majority of investments in our previously announced commercial initiatives to have complete -- been completed by the end of H1, and are encouraged by their continued traction. This underpins our confidence in our H2 weighted performance. Our price investment and laddering strategy, including the introduction of Newport soft-pack in key states, together with the continued strong performance of Natural American Spirit has driven a further sequential improvement in our premium segment volume share, up 40 basis points year-to-date. In addition, we are sharpening our execution to further strengthen our portfolio over the medium to long term by increasing the number of trade representatives by around 10%, further expanding our retail contract coverage and upgrading our digital data analytics. While at the industry level, the premium segment remains under pressure, the pace of volume and share growth in the deep discount segment has been sequentially slowing over the last 12 months. This is benefiting the branded value segment, mainly driven by Lucky Strike, which remains the fastest growing U.S. combustible brand. In AME and APMEA, we have continued to deliver robust combustibles pricing with both regions delivering value and volume share gains year-to-date. And key markets driving our H1 financial performance in these regions include Germany, Romania, Pakistan and Mexico. Moving to new categories. In vapor, Vuse maintained global value share leadership at 41.1% in tracked channels in key markets with gains in AME up 20 basis points, offset by the U.S., down 90 basis points. While we held our U.S. value share leadership at 51.5%, our financial performance has been impacted by the continued growth of illegal single-use vapors. Our value share performance in AME is driven by France, Germany and Poland. More broadly in AME, we have seen continued poly-usage benefiting the vapor category. This month, we are starting to roll out our new single-use vapor Vuse Go 2.0, featuring enhanced taste and design and a removable battery with substantial further launches planned through the remainder of 2024. As a result, in combination with further innovation rollouts under the closed system format, we expect accelerating volume revenue performance in the second half. In heated products, glo's volume share of segment in key markets has sequentially improved since January, with year-to-date volume shut down just 20 basis points versus our 110 basis points decline in 2023. This improvement has been driven by the encouraging consumer response to our new innovations glo Hyper Pro, with enhanced consumables in early launch markets and the continued strong performance from our non-tobacco range, veo. Enabled by the IP settlement with PMI early in the year, Pro is an important first step in our ambition to significantly strengthen our performance in heated products. Pro is our first device to compete in the premium segment, which represents around 7% of industry value with comparable price position to other premium products. In Japan, our volume share has significantly improved, down just 20 basis points year-to-date versus a decline of 170 basis points in 2023, driven by the national rollout of Pro and consumables during Q1. In addition, in May, we launched our new consumables with stick seal technology combining the same enhanced tobacco flavor and satisfaction as our newer range with improved features resulting in no debris and requiring less cleaning after use. Similarly, in Italy, glo's volume share has stabilized year-to-date, down 10 basis points versus a decline of 108 basis points in 2023. This follows the launch of Pro at the start of the year with the rollout of our enhanced consumables range from April expected to provide further share growth momentum. In Poland, glo's share was up 50 basis points, driven by the launch of Pro and consumables in early Q1. And in Czech Republic, while our volume share was flat year-to-date, our performance reaccelerated following the launch of glo Hyper Pro in March. Veo was the first no tobacco heated product in all 17 markets where it has been launched and is strongly outperforming competing products in every market. With just 9 European markets having implemented the flavor ban in October 2023 and implementation in remaining markets phased through 2024, we are confident that veo will continue to drive positive share momentum. We expect our H1 volume and revenue performance to be impacted by a stronger comparator relating to our price reposition in Japan and Italy in the middle of last year and the phased rollout of our new innovations this year. Despite this, we expect our volume and revenue performance to strongly accelerate in the second half, driven by the early consumer response and step up in sequential volume share in markets where our innovations have been launched. We are starting to drive a more balanced top line and bottom line delivering heated products supported by the more premium price points achieved by our latest innovations. As a result, we expect a strong improvement in category contribution in both H1 and for the full year. Moving to Modern Oral. Velo continues to deliver a strong financial performance. Modern Oral is a fast-growing category, driving our volume share of total oral in key markets, up 80 basis points, reaching 10.3% with Velo continuing its strong international performance. Our leadership in AME with 65% volume share of the Modern Oral category reflects the strength of our position in both established oral markets like Sweden, Denmark and Norway, and also our strong momentum in newer launch markets, including the U.K. and Poland. The category continues to develop quickly with newer markets now representing 1/4 of industry volume. While our volume share of Modern Oral in key markets is down 10 basis points, driven by the large U.S. market, we are encouraged by early results from the phased U.S. rollout of our refresh Velo brand expression with volume share of Modern Oral stabilizing at 4.5%, driven by 13.5% volume share in our New York pilot, up 280 basis points. In addition, following positive consumer testing, we have started to roll out Grizzly Modern Oral nationally in the U.S. building on the growing trend of traditional oral consumers moving to modern oral. We continue to take further steps towards broadening accessibility of our new categories through unlocking emerging market opportunities and Velo continues to deliver strong volume growth in Pakistan and South Africa. Turning to regulation. I am determined to manage our transformation responsibly and transparently. We continue to prioritize shaping a sustainable future and continue to call for more appropriate regulation and enforcement of new categories. In the U.S., while we need to see more action to drive a meaningful impact at the national level, we welcome the growing momentum across multiple enforcement levels. 20 states have proposed vapor directory and enforcement bills to tackle illicit products, while legislation enacted in 3 states today. In Louisiana, the first state to implement both a vapor directory and enforcement legislation in October 2023, we are seeing early signs of illicit products volume decline with Vuse Alto capturing the majority of the volume outflow back into the legal segment. In addition, a further 8 states have also passed enforcement legislation in 2024. The FDA in collaboration with the U.S. Customs and Border Protection has issued over 450 vapor-related import refuses this year. The FDA continues to update a red list of illicit products should be detained at the border, which now includes scope for entire manufacturers and distributors rather than only specific SKUs. The International Trade Commission continues to investigate our complaint into these illicit products, given the majority, if not all, are imported to the U.S. through a handful of ports. Our U.S. teams continue to actively engage with government agencies and federal and state law authorities using all the tools available to drive better enforcement. While we are optimistic that these actions will create a more level playing field in time, given the scale and proliferation of these products, which we estimate to represent over 60% of the total U.S. vapor markets and the phasing of enactment of recent state regulation, we do not expect government engagement actions to have any meaningful impact on our 2024 performance or guidance. Federal authorities in the U.S. recently announced that additional time is needed to consider the impact of the proposed U.S. federal menthol ban. We continue to believe that the weight of scientific evidence available does not support a ban on menthol and that there are more effective ways to reduce tobacco harm. Turning to cash. BAT is a highly cash-generative business, and we expect to deliver operating cash flow conversion in excess of 90% again in 2024, enabled by our continuous improvement mindset and further optimizing resource allocation. In addition, I am pleased with our progress in enhancing financial flexibility, driven by our continued strong cash flow generation and the completion of a partial monetization of our stake in ITC, enabling the initiation of sustainable share buyback starting with GBP 700 million in 2024 and GBP 900 million in 2025. We are making good progress on the leverage and expect to be within our narrowed target range of 2 to 2.5x adjusted net debt to adjusted EBITDA by year-end 2024. We are pleased that following our 2023 full year results, S&P revised their outlook from negative to stable based on our deleverage progress, continued positive momentum in new categories, including profitability 2 years ahead of the original targets and our narrowed leverage corridor. In addition, in March, Fitch upgraded our rating to BBB+ stable outlook. In April, we completed a liability management exercise to repurchase some long-dated bonds. We utilized surplus cash to create extra leverage headroom by targeted bonds from 2040 to 2055, priced well below full value. The transaction was well received and allowed us to upsize our initial scope. Through this, we bought back GBP 1.8 billion worth of bonds with a cash spend of GBP 1.2 billion, which means around GBP 600 million of net debt reduction. To conclude, before we move to Q&A, our year-to-date performance is in line with our expectations, and we are on track to deliver on guidance. I'm clear the investment decisions we are making will set the business up for a stronger future. While there is still more to do, I'm confident that our actions are working and I'm encouraged by our continued traction in the U.S. combustibles, performance indicators of glo Hyper Pro with enhanced consumables in early launch markets and the continued success of veo in Europe. Together with the phasing of Vuse Go 2.0 rollouts lapping a more favorable comparator in AMI and the unwind of U.S. wholesale inventory phasing, we expect an acceleration in our group volume revenue and profit performance in the second half of the year. Looking forward, guided by our refined strategy, we will further build on our delivery in 2025 as we move towards 3% to 5% revenue and mid-single-digit adjusted profit from operations growth on an organic constant currency basis by 2026. Thank you for listening, and I will now open up the call for -- to your questions.

[Operator Instructions] Our first question comes from the line of Rashad Kawan from Morgan Stanley.

Two for me, please. First one on the U.S., you talked about signs -- early signs of recovery in that market, but it's slower than you had expected at the start of the year today. You talk a bit about what you're seeing on the ground, any change in consumer sentiment? And in terms of inventory moves, are they related to the commercial actions you've taken or just kind of normal phasing that you expect to unwind in H2? And then second question, I know, obviously, you reset expectations on top line and EBIT for the next few years in December of last year. You've announced the CMD in October. I know it's a few months away, but can you give us a brief preview of what we can expect? Is it new targets, drawing out certain geographies, new categories, et cetera?

Okay. Thank you for the question. On the U.S., when I mean that the performance is not aligned with what we expect in the beginning of the year. We -- at that point in time, we were expecting a bit earlier interest rate reduction, which didn't materialize. We are now seeing the potential interest rates, the reduction more towards the end of the year. There is a lot of the sentiment, consumer sentiment that is linked with a stretch, which comes from different fronts, but also from the interest rate side. We have seen from past economic cycles that when interest rates start to come down, household balance sheet stature strengthening and the consumer sentiment stature turning to more positive. You see a reflection of that in consumption of our products. So it's just the fact that this stubborn inflation and the consequence Fed initiative to prolong the interest rate at this current level will put some more pressure than we were originally expecting. Although in our guidance, as I said in February, we will really not expect any meaningful improvement from the macros at this point in time. If anything, the elasticity of cigarettes in the U.S., we continue to see around 0.4. So the U.S. is still one of the most affordable markets for cigarettes in the world when you compare consumer purchasing price and the price of cigarettes, which is very supportive of pricing. And the price environment has been, I would say, very solid in the U.S. market, which is a positive. And in the -- we are seeing, as I mentioned in the -- just a few minutes ago that there are some signs of reduction of the increase of the deeper discounts, which is more favorable. And we are very, I would say, positively encouraged by the performance of our commercial plans that we have put in place since 2023. We saw I mentioned here the increase in our premium share, our initiatives in terms of laddering of new port is working as we expected. We are now in 19 states with very good results there. Basically, we stabilized the share of the whole family, keeping consumers within the family. Natural American Spirit has continued to strengthen from strength. And Lucky Strike, as I said, is the best brand performance today in the U.S. So I'm quite confident that we're going to get out of this economic cycle in a stronger position than we're getting with the change we have done for our portfolio, making it much more resilient and also a change on the ground in terms of sales force coverage and improvement in data analytics and so on. So that's from the U.S. side. In terms of the inventory movement, it's part of the commercial plans. And this equates to something close to 2% of our volume. So you would expect to see our performance deteriorate around 2% volume equivalent than it should be in the half 1 to be unwinded in the second half. So our performance in the second half will be better as a consequence of that. And that's one of the reasons why we have our performance skewed towards the second half. If you were to adjust by these movements in inventory, our overall performance in H1 at a group level would be pretty much flattish in terms of revenue as opposed to a lower single-digit decline that we have mentioned today. So I think it is important to make this point. In terms of the CMD, we are still setting up the agenda, but what we would like to explore is basically how we're going to deliver our algorithm. So we're going to talk more about the algorithm moving forward, giving a bit more of detail, linking this with the strategic pillars of our revised strategy, quality growth, sustainable future, dynamic business and also showing all the progress that we have been making over the last I would say, 12 months at least or in terms of our innovation and -- which will be hitting the ground and as we speak, is already happening every single category that we are present, which will create a stronger momentum for us in the second half. One of the reasons and the drivers that we expect our performance in the second half weighted. So we want to demonstrate this and showcase this to our audience in the CMD as well. And there will be some other elements to that, that we are just finalizing, okay?

[Operator Instructions] And our next question comes from the line of Faham Baig from UBS.

Three questions from my side. The first one, just going back to the U.S. Are you seeing any signs of a slowdown in the adoption rate of the vapor category in the U.S.? And what do you estimate the current substitution impact is from the growth of the illicit vapor category?

Well, if anything, we are still seeing the vapor category growing in the U.S. Year-to-date, around 11%, but it's growing at the expense of the legal vapor category. So our legal vapor category is coming down around 10%. The illegal vapor is growing, still it is not with the same magnitude as before, but is it still something like 20%, giving you the more or less 13% that I was referring to. So vapor as a category is growing very strongly in the U.S., has continued to be the case. But that's why we were calling for the FDA to really step up the enforcement side of it because the -- most of the growth, if everything, every growth is coming from the illegal products with the unintended consequence that we know that exist.

And then just moving on to heated tobacco, where you seem to have stabilized your market share. Are you expecting that market share in heated tobacco to turn positive, particularly in the larger markets of Japan and Italy, in the second half, where you've highlighted the innovations are now present. And if you could also share some of the consumer feedback on these new innovations relative to competitor products that would help us?

Yes. Yes. Definitely, we expect the share to carry on improving in the second half of the year. And there are a number of innovations that are hitting the market in not necessarily at the same time, in different times. The first one is the -- basically the device itself. Like I said, we are, for the first time, getting to the premium segment, and this reflects in the price of the device as well. But device, they have basically they have been receiving very strong feedback in the way that consumers are interacting with them because they have what we call easy view display, which is something very innovative that no other device had in the market. They have a boost button that increased substantially the heating profile, which translates into more satisfaction. And in our case, it's an improvement compared with the previous one, but they also have longer sessions on that. And the early signs that this is result in better conversion compared with the previous device generations in 2 months post launch. We also see more satisfying consumables. And these nontobacco products that we're launching in Europe is actually outperforming competitors in that sense. We were the first in the market and the product is resonate quite nicely and giving a stronger momentum for us, mainly in those markets where the ban on tobacco heated products has already been implemented, which are not all the markets, it was although the ban with stipulated from October 2023. Some markets has postponed, some others who still are dealing with the old stocks. But as this starts to phase out, and this will be the case as we approach the second half of the year. We will see more of the positive impact of veo in those markets. So overall, this should contribute for us to continue to see share improvement, mainly in the major markets of HP in this case.

And then the final one, could you maybe discuss the combustibles performance outside of the U.S., both in terms of volume growth and pricing that you expect in the first half? And also where you are on the market exit plan of 20 billion sticks that you highlighted early last year?

Yes. We -- the combustible, we are very pleased with the performance in combustible. If you follow BAT in the last 2 years, we have been broadly flat as more decline in volume share in combustible. We are up now 30 basis points. So it's clearly recovered. This is happening mainly outside the U.S., in the APMEA and the AME regions. And also the -- and we see very good traction in very key markets for us, like the likes of Brazil, the likes of Pakistan, they are all delivering very nicely numbers in terms of share for us. The price environment has been very supportive and this is reflecting in terms of value share improvement that we are seeing outside the U.S. as well. So all in all, it's a very strong performance for sure that we have seen disruption in some markets. Sudan, for example, is a market where we couldn't sell 1 stick for months, and we couldn't even produce the products there in that market. And we saw some other disruptions happening here and there. And we are also lapping exit of several markets, like I mentioned before. And the quantification of those markets more around the GBP 30 billion in terms of volume. But the vast majority is Russia and Belarus that we do adjust something like GBP 26 billion. So the balance is coming from these other markets that also impact the headline numbers of us, volumes for BAT with very minimal financial implications related to those particular GBP 4 billion.

Your next question comes from the line of Philip Spain from JPMorgan.

My first one was just going back to the U.S., and I appreciate all the color you've given already, but I just wanted to understand in your guidance for the second half, what level of improvement in the overall U.S. combustibles industry, are you assuming compared with the 9% decline year-to-date? And then my second question is in Louisiana, where you've seen the new regulations come in. Can you talk about the level of volume declines you've seen within illicit? Any kind of numbers around that you gave would be really helpful. And then in terms of what products customers are switching to within nicotine, whether it's switching to some of your vapes or to Modern Oral and as well within vape, whether customers are switching to tobacco flavors or mental flavors? Any kind of color you could give around that would be really helpful.

Yes. Okay. The U.S., we are not expecting any -- at industry level, any major change in the second half. And we have to remind ourselves that there are 2 major drivers behind the decline of 9% in the U.S. market. One is the macroeconomics, like we spoke before. We are not foreseeing any macro change substantially coming mainly from the interest rates. Of course, we are now projecting this to have more towards the end of the year. And the other one is the illegal vapor market that we note that impacts around 1.9% of this decline that we have seen in the U.S. market. And again, this one, despite a lot of activities happening, a lot of rhetoric, if you want. But we are encouraged mainly from the state's movement, but a lot of them are coming in place mostly from January 2025 onwards. So we are not considering or taking into consideration any major upside coming from there either. So as a consequence, in terms of BAT performance, we have this 2% unwind of volumes that would be supportive for us in the second half. We will be doing better than the market in the second half because we are doing worst in the first, so as a consequence of compensating that. And also the fact that we are seeing the impact for the rest of the year of the commercial plans that we have been putting in place. So our sequential market share carries on growing. For example, if you compare our position from December to now, we have grown already 10 basis points. So we expect this to materialize into more supportive volumes for us in the second half of the year. And also the plans that we have been putting in place in terms of coverage, in terms of sales force and all that. So we expect the consumable part -- combustible part of the U.S. in 2024, be better than in 2023, okay? So financially, we expect in the full year 2024, combustible be improved compared with 2023 for BAT. For sure that the U.S. will still be a drag coming mainly from vapor. Because if you remember, in 2023, we had a big driver of our results in the U.S. was related to vapor, and this came to a halt now because of the proliferations of these illegal products. And until we see some concrete measures in the market, we still have to wait to see us returning to meaningful growth on vapor. But that's what will be the biggest drag in the U.S. in 2024, not the combustible compared with 2023. We'll be still down because of the commercial plans we have put in place and the macroeconomics, but it's better than 2023. So in terms of the state's measure Louisiana, we are seeing a reduction of high single-digit volume decline in the illicit vapor and it's around 20%, at least or a bit more than 20%. And Vuse has gained the vast majority with 7% of that. And most of this is really sticking within the vapor category. That we have been seeing. We have to consider that it's early days, early observations and -- but that's the dynamic that we have been seeing so far.

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

Just a clarification. You mentioned earlier on the U.S. inventory situation. in the first half that have an impact of 2%. Is it 2% of U.S. volumes or 2% at group level? So I just want to clarify that first.

No, no. It's U.S. volume. Whatever is the market -- yes.

Okay. Of course, no I was just -- otherwise, it's been a particular mech.

No, no, no. It's going to stay, it's not that much.

Okay, excellent. And then I just want to know if you can talk a little bit about -- I mean, listen the talk last year was obviously about the imminent menthol ban in the U.S. And obviously, it looks like it sort of suffered a political headwind or a tailwind for you. I don't know if you can just talk a little bit more of your expectations there, if we're going to see anything or is it going to be a situation that's going to be pushed beyond the elections?

Yes. Look, it's very hard to make this prediction at this point in time. One thing that I hope that authorities in the U.S. are closely monitoring is what's happened in California. Because California, after the implementation of the menthol ban, the nicotine consumption barely moved. And what happened is basically a migration to an exponential increase of these illegal products of vapor that is manufactured outside the U.S. So -- and on top of that, we are seeing problems in terms of illegal products coming from Mexico borders, which is something very new in the U.S. we see, for sure, cross-border, but we also see self-mentholation with some health hazard consequence for consumers. So there are a number of unintended consequence that is showing more clearly now with implementation in California. And what we have seen outside the U.S., we spoke about that several times, the likes of Canada, 99% of consumers stay smoking non-menthol brands in the Europe, 93%, the other 7% -- 70% move to vapor and still using nicotine. So there are clearly better, much better ways to address that the cigarettes in the U.S., which is embracing tobacco reduction in a way that we could create a level playing field and stimulate innovation so we can educate and help consumers to migrate out of cigarettes as opposed to introduce something that brings so much unintended consequence. So what we are doing in the meantime is making sure that we get all the learnings that we have in California. We are working in terms of our own portfolio. And I mentioned that in the past, that we -- the work we are doing in our portfolio of cigarettes in the U.S., it should transform them much more resilient in terms of macroeconomic cycles, but also in terms of potential regulatory change. But I cannot speculate more than that.

[Operator Instructions] Our next question comes from the line of Richard Felton from Goldman Sachs.

So it's a follow-up on the illicit vapor category, please. So I believe that sort of both yourselves and your main competitor in the U.S. had been talking about the growth of the illicit vapor category being roughly a 200 basis point headwind on combustible volume growth. So my question is, for the step, Louisiana and the other states where you are seeing enforcement against the illicit vapor category. Does that headwind so they get removed and you're seeing better combustible trends as well as illicit vapor consumers moving to Vuse. Any sort of observations or learnings from those states and understanding sort of the interplay with the combustibles category would be very helpful. Then my second question, are you able to share any more color on how the settlement with Philip Morris has impacted your ability to innovate in the THP category. And any specific examples of what you're able to do now that you previously weren't able to do would be very helpful.

Okay. Look, I think the example, the experience in Louisiana is very tiny at this point in time for us to come to major conclusions. And it's basically -- what we are seeing basically is the move towards legal markets of vapor. And it's very early days. We might be seeing some movement back to cigarettes, but this is not what we have been seeing so far, it is mainly the movement towards the legal vapor market. But like I said, I wouldn't take much conclusions at this point in time, with the magnitude of the estate and the timing that the measures has been put in place. In terms of -- the settlement with PMI is confidential, no? And -- but one thing that I can say is it gives BAT the possibility to have a bit more freedom to innovate within some extra boundaries. And this will -- we believe that will be what we need to make us a bit more competitive in the market, and this is already happening. And it's not just about the settlement with PMI is about all the efforts that we are creating ourselves. We have invested in innovation hubs, here in the U.K. in South Hampton. We have invested in innovation hubs in Shenzhen, and we have been very strong in terms of connecting with very key exclusive strategic suppliers, so we can leverage the R&D from there as well. So it's a combination. It's an ecosystem of innovations and capabilities. IP is just an element of that and obviously, the settlement with PMI helps in that sense, but it's not just the reason why we expect to be more competitive in the future.

Your next question comes from the line of Simon Hales from Citi.

So just 2 for me, please, today. Firstly, if you could just talk a little bit more about the newly refreshed Velo brand in the U.S. perhaps what is the latest consumer feedback you're hearing relative to some of the competitor offerings in the market? And you talked about the phased rollout in the U.S. from here where are we at across the U.S. do you expect to see by the end of the year? That was the first question. And then secondly, I want to just ask you a little bit more about just the share buyback program. You've clearly said again this morning, you're committed to a sustainable buyback. I appreciate you've outsourced the execution of the current share buyback program, but it looks to me that you're already halfway through the GBP 700 million cash return this year. If you were to continue with the recent daily run rate of buyback, you could be complete with this buyback by sometime in July. How do we think about -- how you think about sustaining that buyback after that? Could we see you pull forward some of the 2025 buyback plan into the second half of this year? Or should we just expect perhaps a more evenly phased sort of buyback through the rest of this year with the current buyback plan?

Yes. Okay. On the buyback, the -- it's -- we executed a buyback using various methods with our banks and we intend to be in the market continuously with minor exceptions if needed. In 2024, we -- so this year, we intend to conclude the GBP 700 million tranche of our buyback by 31st of December 2024 and not significantly earlier. We do expect certain days to have different trading volumes depending on market conditions. So it's not entirely helpful to extrapolate on a daily average. That's the only thing I have to say to you. So there is no expectation that we finish earlier on the buyback. On Velo, we have a revamped expression of the brand with the quoting that is pretty much aligned with the category. We believe that we have a competitive product because a blind test shows this and the best -- and we are receiving positive response back from consumers. And we are encouraged mainly from the New York pilots, where we have now achieved 13.5%, which is well ahead of our average of 4.5% on a nation basis. So in May, we have concluded the replacement of the old Velo for this new expression, refreshed expression. And we are very, I would say, cautiously optimistic that we will be making big inroads compared with where we are today as we move forward. We are also very -- looking forward to get Grizzly Modern Oral in the market. We know that there is this transition from traditional oral to Modern Oral. Grizzly is a fantastic brand with very loyal consumers. And the first signs are positive from the retail point of view, we are launching nationally on the 10th of June, and we expect to reach 51% of the modern oral industry by the end of 2024. So I'm going to be able to give you certainly in the CMD October and -- but again, in the half year, I can give you a bit more color of how those 2 initiatives with the modern oral in the U.S. are going.

There are no further questions. So I will now hand back to Tadeu Marroco for some closing remarks.

Okay. Thank you all for listening and for your questions. I would like to leave you with a few final comments from my side. Our transformation is well underway. We continue to make good progress driving new category profitability, delivering accelerating returns on our more target investments. I'm confident that our actions are working and that building on our strong foundations of integrity, collaboration, inclusivity, we will drive the culture we need to successfully transform BAT and deliver long-term moat stakeholder value. I reminded that tomorrow, I will be participating in a fireside chat at the Deutsche Bank Global Consumer Conference at 10:15 a.m. U.K. time. Audio from the event will be streamed live on our website with replay available after the event. And with that, I look forward to update you again on our progress at our half year results on 25th of July, and welcoming many of you in person to our Capital Markets Day in our innovation -- new innovation center in South Hampton, the 16th of October. Thank you very much. Stay well.