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

Good morning, everybody, and welcome to the BAT 2024 Capital Markets Day. I'm Victoria Buxton, Group Head of Investor Relations. Thank you for taking the time to travel to Southampton to join us at our new innovation center. It's great to see so much interest in BAT, both from new faces and familiar faces. And I'd like to wish a warm welcome to all viewers who are joining us online today. Before we start, I'd like to draw your attention to the following cautionary statements, which apply throughout the day. BAT is transforming. Since our last Capital Markets Day, we have a new management team, a refreshed strategy and over 15 million more consumers of our smokeless products and much, much more you'll hear about during the course of the day. During the sessions today, you'll see how the BAT teams are focused on building a smokeless world by reducing the health impact of our business and enabling BAT to deliver long-term sustainable value to its stakeholders. Joining us today are many of our BAT colleagues from across the business and members of our management Board. So please do ask a lot of questions during the course of the day. The presentations will start shortly, and I will return later to introduce the breakout sessions. We will be here in this room until 12:15 when we will then move to the first breakout. The webcast will be paused at that point until we return at 2:55 p.m. for our afternoon presentations. I am now delighted to hand over to my colleague, Dr. James Murphy, our Director of Research and Science. James has played a critical role in our transformation from the start, and as you will hear, is passionate about our tobacco harm reduction journey. James, over to you.

Thank you, Victoria, and a very warm welcome to our guests who are both with us in person and joining virtually today. I joined BAT 20 years ago on the promise of the company's ambition to be the first tobacco company to successfully launch a new generation of tobacco products that would, over time, be recognized by public health as reduced risk. BAT has come a long way in the subsequent 20 years in terms of ambitions and no more so right here on our Southampton campus. This very building you're sitting in today was once the primary manufacturing department part of the Southampton factory. In this very building, tobacco was processed and sent across to the secondary manufacturing department to make cigarettes. Over the intervening years, this site has become synonymous with our transformation. First prototyping and assessing, first use vapour products in the early 2010s, the development of glo in the mid-2010 and finally, Velo in the late 2010s. This Southampton campus has transformed alongside our strategy and no more so than this innovation center, which was opened in March 2024 by our Chief Executive. Today, you sit in the central hub of our global innovation ecosystem, and we are excited to welcome you, display our capabilities and illustrate how we are building a portfolio of innovative, commercially and environmentally sustainable smokeless products that will enable us to build a better tomorrow through a smokeless world. You will also get to see the other side of our transformation: our people, our most valuable asset. And today, we have around 800 scientists and engineers on this very site, part of a global R&D community of around 1,750 people. You will hear much more on these topics later today. But for now, I hope you have an informative and enjoyable day. Thank you. [Presentation]

Hello, everyone. It was lovely to see some of you yesterday night. For those of you who has just arrived today, a warm welcome to our innovation hub here in Southampton as well as for those that are watching via the webcast. We -- I -- my management board and I, we are very excited to have the opportunity during this day to talk to you about our business, the capabilities that we have been building and the progress that we have been making towards our ambition, and more importantly showcase of some of the key BAT talents that we have in the group. So it's been almost 18 months, actually, that I have since been appointed as Chief Executive at BAT. This was a moment of pride for me after spanning -- a career spanning more than 3 decades and a great opportunity to bring focus and discipline to the execution of our strategy. Since I became the Chief Executive, we have set a compelling ambition for the future and to be a predominantly smokeless business by 2035, and I have become more and more confident in our ability to achieve our ambition in the next decade. And why do I say this? Well, first of all, we are in a growing industry, executing a multi-category strategy that give us a unique position to grow in all attractive value pools. We also have dramatically improved our capabilities in consumer insights and foresights and innovation and have built foundations for our future beyond nicotine. Our disciplined quality growth model is already delivering in Europe, and our investments in the U.S. have set us well for the American business to replicate our European success and to be the cornerstone of our future growth. We have the science capabilities to substantiate tobacco harm reduction and the front-footed approach to help shape our regulatory landscape. And as Soraya will present at the end of the day today, we have a disciplined approach that will ensure that we delivered quality revenue growth, cost optimization, smart reinvestment in new categories and cash returns in order to deliver upon our midterm algorithm. And as we are well on our way to resetting the culture of the business to enable our top-class talent to deliver on our transformation. So in short, I'm confident that we have the right strategy, that we have the capabilities to deliver and that we have the right people to deliver profitable transformation. Now let me deconstruct this story for you. I do believe that we have the right strategy. I said that since Day 1. However, when I became CEO, I felt we needed to be more specific about what a better tomorrow means, and more importantly, how we will deliver it. As such, one of my first priorities was to refresh our strategy with a clear focus on what needs to be done. The 3 pillars of this strategy contain clear focus areas that our -- is for us our executional compass. It's a clear focus on what we call quality growth, is a front-footed effort to ensure a sustainable future and improving an already dynamic business, all underpinned by our group values. I was very clear from Day 1 that our focus on execution and our culture transformation were critical to our sustainable future. So in line with this, I made some change in the management board to be aligned with this vision. As evidence of this today, you will be hearing from Cora, our Chief People Officer, on the progress that we have made. And you will also be hearing [indiscernible] and meeting a broad range of BAT people here today. So I'm sure that this will -- they will highlight BAT's exceptional talent and personify BAT's cultural transformation in action. So as I mentioned earlier, the strategy is already beginning to deliver. And we have a good foundation to build towards our ambition. Despite the challenge that you are all aware of, we have already came a long way in our journey to build a smokeless world. In the first half of 2024, 18% of our group revenues came from smokeless products. And if you strip out, exclude the U.S. combustible business, which is a fair comparator to some of our peers, today 27% of our revenue come from smokeless products. Is this as much or as fast as I would want? The answer is no. But this is far ahead of most of our peers. And we have now built a strong base upon which to grow. Since Day 1, I was clear, we had many areas of opportunities, but also areas for improvement. With that in mind, I defined 6 short-term priorities for the business. Over the last 12 months, working together with our broader teams, we have achieved a lot across those 6 areas of focus. We will touch on some of these highlights in more detail as we go through the day today. But among all the initiatives, I would like to highlight some of those. We have achieved profitability of our new category business 2 years ahead of our plan. We have made targeted investments in the U.S. combustible business with early signs of improvement. We have improved our financial flexibility and initiated a sustainable buyback program and continued strong cash generation and the sale with a partial stake in our ITC associate. And we have launched Omni, our manifesto, for building a smokeless world. While there is still much more to do, for sure, we are making good progress. And I'm confident that the choice we have made and the actions we are taking are the right way forward for BAT. One thing that will not change is our commitment to strong cash returns, as we have demonstrated even through more challenging macroeconomic periods, with over GBP 30 billion returned to shareholders since 2018. And as Soraya will detail at the end of the day, we remain committed to our progressive dividend policy as well as sustainable buyback program. As I look forward, there are 10 key reasons why I fundamentally believe in the future growth prospects of BAT. I will now take a time to explain these reasons to you which will be the essence of the presentations and exhibitions you will see during the day. My first reason to believe is that new categories consumers have more than doubled since 2018. But this is only the start. There is still a huge pool of more than 1 billion potential combustible consumers with the opportunity to switch to new categories if they decide to and have the chance to do so. As consumers increasingly switch to new categories, the value of the nicotine industry is going at an accelerating pace. Within that, new categories will be the driver of the growth. So BAT is positioned well in a growing value industry, which, if anything, is expected to accelerate in the years to come. The second reason, I believe, in the future of BAT is that multi-category is a reality today, meaning that with our multi-category strategy, BAT is positioned to succeed in all attractive value pools. The growth of new categories has been driven by changing consumers' preference with consumers now choosing multiple alternatives to traditional combustible products. More and more consumers are moving to poly-usage with different patterns in different geographies based on regulations, based on consumer taste profiles and the availability of the products in the market. There is no clear winner with users typically using different categories, including combustibles. A multi-category strategy can sometimes be difficult to execute, believe me, as it requires material upfront investments and take longer to be developed. However, a multi-category approach can provide deep insights and foresights about consumers, as Julian will explain in his presentation, given the ability to innovate in smokeless offers across categories. So how is BAT positioned in this environment? Well, as I mentioned, I believe BAT is best positioned given the multi-category approach that we have taken since Day 1. Our portfolio of combustible and noncombustible brands is well placed to meet consumers' preference and are at a scale where we can drive additional value and efficiencies. Combustibles remain the solid cash-generative core of our business and despite global volumetric decline as consumers shift towards smokeless products. With Velo, we are the clear leader in Modern Oral outside of the U.S. With 45% of the business now outside traditional oral markets. And as you will hear from -- later from David, we have started making inroads in the U.S. market. Vuse is the global value share leader in vapour and the leading brand in the U.S. and has been profitable for several years. And here, as Zafar will explain later, we have significantly improved our innovation pipeline. In heated products, I have acknowledged our past challenges. However, I'm confident that we are now turning the corner with glo Hyper Pro, and there are out there opportunities ahead that should drive significantly better market and financial performance from the heated product business, as you will hear from Luciano. As you can see, our consumer-led strategy has left us with strong brands and products in all categories, and puts us in a great position to adapt to changing consumer demand that will emerge over time. The multi-category strategy requires new capabilities work in harmony. Because of this, we have completely rebuilt our innovation ecosystem with seamless integration between consumer insights and foresights, science and consumer activation. Over the last 18 months, we have made improvements related to IPs, product life cycle management, technical expertise, data integrity and science. And we believe that we now have unique capabilities leveraging our external partners to develop breakthrough innovations. We will showcase those capabilities today to you. The third reason to believe in BAT's future is that we know our consumers, and we think better than anyone. As you'll hear from Julian in a moment, we have significantly improved, transformed and modernized our insights and foresights capabilities to face the new consumer reality, fueled by a decade of multi-category experience. This means that we have actionable insights to address current consumer needs and foresights to guide future innovation plans. The fourth reason to believe is that, as I mentioned earlier, we have transformed our entire innovation ecosystem. This has allowed us to step-change our product portfolio in the past 18 months and to create a winning innovation pipeline across the new categories that we will start to roll out over the coming months. You will hear more detail from that from Zafar and Luciano on this transformation later today. The fifth reason to believe is our quality growth imperative, which is a vital part of BAT's strategy with a balanced focus on top and bottom line, that's what quality growth means. I'll go into a bit more detail here in this session to illustrate how our quality growth imperative is driving results in action and how prioritization and focus is now transforming our business in Europe. So first, as a background, Europe is a truly multi-category region, driven by both consumer preference to switch to new category products and the presence of appropriate regulation. This is driving an increasing number of new categories consumers and the reduction in the number of smokers. This is particularly true in the younger age cohorts with close to half of other nicotine consumers under 30 now choosing new categories from less than 30% back in 2020, confirming the sustainable future growth potential of the new categories. In Europe, more than 1/3 of total nicotine consumers are actively using new categories. While all new categories convert combustible consumers, it should be noted that vapour, where BAT is the industry leader, is the most successful category in converting combustible consumers to Solo's new category users. And BAT has played an active role in driving the new categories footprint expansion in Europe. Today, we sell at least 1 category product in 44 markets across Europe, covering the vast majority of the European new categories gross margin pool. Now all the 3 new categories are margin-accretive for BAT in Europe. Heated product consumables are almost 2x more profitable than combustibles. Vapour products are over 1.5x more profitable and more than or about -- more than 4x more profitable than combustibles. And the reason for this is that BAT is historically strongest in Europe in the value for money and the low segments of combustibles, which make the size of the price for BAT particularly high to convert combustible consumers to smokeless offers. An individual analysis of our performance in each category demonstrates the progress we have made in Europe. In heated products, we managed to reverse the category share decline we recently experienced and returned to growth in key markets on the back of the rollouts of glo Hyper pro device and Velo our non-tobacco consumable. Vuse continues to be -- to lead in Europe, establishing itself as a premium brand that consumers can trust. And we are clear leaders in Modern Oral in Europe. We have performed strongly wherever we have launched, established Velo as a fantastic brand, which consumers love. The key thing to note here is that Modern Oral is the fastest-growing category in Europe, and it's also where BAT is the strongest. New categories, driven by our quality growth focus have been game-changers of our business in Europe, as illustrated in this chart. New categories growth has both enabled our European business to substantially over-deliver on our group medium-term revenue guidance and it has enabled material increase in absolute category contribution on the back of scale and efficiencies. And as Soraya will show later today, this growth has led to significant improvements in gross profit across many key European markets over the past few years. We have now 18 markets in Europe, where the revenue of our smokeless business accounts for 30% or more of total revenues. The European experience demonstrates the growth potential of our strategy when appropriate regulations are in place. Wherever we have a regulatory environment supporting a level playing field, the transformation is happening and is happening fast. In summary, a balanced focus on top and bottom line is transforming our business in Europe with financial [ deleverage ] which will never be possible to replicate in the old combustible model. So you can see the new categories have been a game-changer for the growth prospects of many of these European markets for BAT. So the next reason to believe in BAT's future is the U.S., which remains the cornerstone of our future. And as David will show later, 1/3 of the global nicotine value pool is located in the U.S. With the industry continued to grow at pace. Our successful transformation in Europe demonstrates our ability to effectively compete on a level regulatory playing field, which, as Jeff will explain later, we are working hard to achieve in the U.S. And I'm confident that with the investments and work that we have now done, we will be able to capitalize on the significant U.S. market opportunities. As you know, over the last 18 months, we have focused on a back-to-basics approach in the U.S. to improve our performance. We have done the investment in executional capabilities, worked very hard on the culture, and we've increased participation in the U.S. white space. Although there is still a lot of work to be done, we are beginning to see early signs of return on our previously planned investment, U.S., as we move towards value creation. Our combustible's performance is improving in a challenging market. We continue to be national leaders in vapour with views, and we have invigorated our performance in Modern Oral with the relaunch of Velo. Dave and Jeff will present in more detail our performance and plans in the U.S. later today. They will also explain our progress and challenge in engaging for greater illegal vapour enforcement in the U.S. Close to 70% of the U.S. vapor revenues are in illegal flavored products, which means there is about a GBP 6 billion market that BAT today is unable to address. BAT is actively supporting more effective track enforcement of illegal vapour and the variety of state governments have taken some action to identify and to a lesser extent, enforce illegal vapour restriction. Needless to say, that is both a huge opportunity for BAT and an engagement challenge that is on the top of our priority list for government engagement globally. In summary, we have a fantastic business in the largest nicotine pool in the world with great untapped white space opportunities. And this leads me to my seventh reason to believe. In the U.S. and the rest of the world, effective regulation will be pivotal to ensure a level playing field and to allow consumers to migrate from combustible to smokeless offers if they decide to continue using nicotine. Because of this, we have built the scientific capabilities to substantiate tobacco harm reduction and have taken a more front-footed approach to stakeholder engagement. To be clear, we strongly believe the regulators should use tobacco harm reduction as the key strategy to pursue this objective. Regulators who do not engage in this area has seen rapid growth of illegal products that will slow the pace of transformation that society needs. The recent Omni launch is an example of BAT's continued thought leadership in tobacco harm reduction and our ability to draw a clear pathway to build a smokeless future based on a science and sensible regulation. In conclusion, we are pursuing a more proactive engagement with global regulators with encouraging progress on regulatory change in some areas, and we will continue to engage proactively in the future. The eighth reason to believe is about the foundations we are building for the medium and long term, beyond nicotine. Our beyond nicotine portfolio has been developed in a measured way with early signs of success leveraging our deep understanding of the adult consumers as well as our science, R&D and distribution capabilities. Our approach to ventures beyond nicotine is smart, is focused and efficient. We are not in a rush to embark at a large scale on this journey. And you'll see and hear about our approach in the exhibitions and lab tours later today. You will also be introduced to [ Ryde ] on your table, basically. An adult wellness and stimulation shot product that has shown early signs of success in pilot markets in Australia, Canada and the U.S. Beyond [ Ryde ], we are also excited about the minority investments that we made through our Venture Vehicle, VTV and direct investments to create a foundation in cannabis from which we can learn. My ninth reason to believe is about BAT's global footprint, which provides resilience, resilience against economic cycles and geopolitical unrest. And our multi-category focus and scale, which provides the agility to address shifts in consumer demands across new categories. On top of this, there are incremental white space growth areas which we are investing and prioritizing accordingly. As you can see from this chart, the white space are related to the U.S., Modern Oral and currently illegal vapour categories, which together amounts to circa GBP 80 billion revenue. The other white space on the premium position in heated products and vapour and key markets unlocks such as Brazil and Turkey, where we cannot, as it stands today, sell any of these products. Our ability to open up some of these opportunities, plus our global footprint and our multi-category approach adds up to a compelling and [ basic ] medium-term algorithm, delivering both earnings growth and shareholder returns. In summary, we are targeting 4% to 6% operating profit growth from 2026. We will be able to achieve this growth rate with 0% to 2% combustible growth, given the strong growth opportunities that we have with the new categories. With our also increasing financial flexibility, allowing BAT to balance between growth, margin, continued deleveraging and shareholder returns. Soraya will give more details later in the session on BAT's growth algorithm, which is quite unique and exciting given what I have just said. The final and really important reason to believe, especially for me, as a Chief Executive is the truly inclusive culture we are building at BAT. With new outside talent brought into the company, living by BAT's core values every day in a collaborative, responsible and agile fashion. In short, we are transforming our culture, and we have the talent to deliver. Cora will tell you more about this later. So we are looking forward to show you throughout the day how change has been happening, that we are doing even more to transforming every day and that we are clear on what needs to do to build an exciting future and that we know what it means for our business and financial sustainability. We will also showcase to you throughout the day the great people we have in this business. In the end, it's the quality of our people that bring our strategy and plans to life and that passion for the business that makes the real difference in driving us towards a smokeless world. At this moment, I would like to thank them for bringing us to where we are today. I could not be more excited about the future. Please come with us on that journey. I will now hand over to Julian Prynn, I'm going to introduce Julian who will take you through the step-change we have done in consumer insights and foresights. Thank you very much.

Thank you very much, Tadeu, and good morning, everyone. It's great to see you all here and to connect with those online. I've been Head of Insights & Foresights here in BAT for the last 18 months, 27 years in the group in a mix of both insights, but also more generalist strategy and marketing director roles around the world. So we start this quality growth section with consumer insights because the consumer is at the heart of our BAT strategy, as you've just heard from Tadeu; and also because everything that we do in marketing and innovation starts with consumer insights. And perhaps that sounds obvious and superfluous. But I can tell you, having been here for a pretty long time, that is true now than it's ever been before. Also, insights is the traditional strength of BAT that we've now rediscovered, and we've rediscovered it at a time when it's more valuable and beneficial than ever before because of the speed of change in the multi-category environment. Above all, we've significantly enhanced our insights capabilities fueled now by a decade of multi-category experience. We have a new insights team with better ways of working, modernized approaches and frameworks for taking insights into action. We're now generating clearer, more actionable briefs for our R&D and category teams and we're seeing the benefits already in terms of better marketing and innovation outcomes from the improved strength of our innovation pipeline, from better pretest results and from the early performance of recent launches. So to put simply, we really know our consumers. We've got a great heritage and we've stepped up our capabilities, and this is giving us exciting opportunities. I'll now briefly explain how we're doing this and why it's so important and exciting. So BAT has always had consumer insights in its DNA, and it's always been linked to a philosophy of providing consumers with the best range of choices. And that's obviously more relevant now than it's ever been in the multi-category context. Previously, our cigarette insights powered our Global Drive Brand portfolio strategy against a one-size-fits-all alternative. And that drove exceptionally strong results, sustained over many years and continuing today. It did take us time to adjust and evolve our insights approach to the new world and we acknowledge that. But now with a significant revamp from a decade of multi-category experience, we're now providing clear and exciting direction for our category and R&D teams. And that in today's multi-category world is even more valuable and beneficial given the increased complexity and the greater opportunities to provide those wider ranges of choices. This blend of our strong heritage of insights enabling consumer choices, together now with our new category experience and revamped insights is a powerful combination. And our multi-category approach is fundamental to this. The multi-category perspective and experience gives far stronger consumer understanding. And this powers better outcomes and stronger results. Three examples of why our multi-category approach is important. Firstly, different consumers in different markets and in different segments within markets have different needs and preferences, and that's best met through different categories and offers. And understanding this holistically allows us to develop and target the right offers to the right people at the right places. Secondly, growing poly-use requires a holistic understanding of consumer needs in different moments and a portfolio of products and categories to meet them, not possible through a single category focus. And thirdly, we're finding that insights that we identify in single new categories have relevance beyond to the other new categories as well. A few examples include the evolution of flavor preferences that we identified first in vapour, but we see having relevance to all of the new categories in different ways. Similarly, we identified an insight around how consumer needs and preferences evolve with time in category year-by-year, first identified in Modern Oral, relevant in all the new categories in different ways, again. Also, the opportunity of increasing the tobacco harm reduction awareness and understanding to increase smoker conversion is critical across categories and the importance of protecting simplicity and ease of use in the context of technological advancements, extremely important. Now we've got better at integrating these insights and giving us huge synergies from our multi-category strategy. And this gives us deeper, more actionable insights, which in turn, power better performance and marketing outcomes. And we've adapted our insights approaches to better reflect and benefit from this. Firstly, we modernized our base insights tools. These are obviously not new or unique. What's new is the way we do them and the way we use them, all enhanced to better reflect the multi-category poly-use context and also exploiting AI and digital for faster, more powerful and cost-effective insights. Three examples. Firstly, segmentation, always been a key tool notably 20 years ago powering the Global Drive Brand cigarette portfolio strategy, but now it's better encapsulating cross-category poly-usage and the resulting drivers of choice. It's also better connected to consumer moments and better able to project into the future. And this enables us, for example, to both grow depth of usage among category -- new category consumers in modern segments where they're already widely using new categories. And at the same time, to understand the needs in more traditional segments to overcome the barriers to new category adoption, while, meanwhile, importantly, maximizing our value of cigarettes. Secondly, consumer labs. These are long-term consumer panels that enable direct authentic consumer engagement as a valuable complement to traditional and digital data tracking. Again, not unique or completely new, but globally integrated and digitally connected now. And this enables us to do consumer co-creation and early stage evaluation of innovations to enable better consumer relevance from the very start of the innovation process and to flag early signals of problems and potential benefits going forward. It also enables tracking of consumption behavior over time as consumers make the journey from Solo cigarette usage often initially to poly-use and eventually into Solo's new categories. Thirdly, digital track. Digital track has been a step change for us in the last 18 months in our digital insights, incorporating integrated online, search, social media and reviews, now globally integrated across 15 markets and across new categories, powered by AI, which, for example, helps us to identify themes and to understand sentiment to make sense of powerful -- what otherwise would be an overwhelming amount of data. For example, in the first 12 months, we've seen 0.5 million searches, 0.75 million social posts and 120,000 reviews about new categories by consumers just in the initial 10 markets that we deployed in. Being continuous and unstructured, this gives us faster insights into, firstly, emerging trends; secondly, product, innovation needs, delighters and pain points; and thirdly, fast post-launch tracking and competitor intelligence. Digital track enables us to provide our R&D and marketing teams with direct access to authentic consumer content in real time, a game-changer for us in terms of consumer centricity and speed. These modernized insights tools give us a better base for more actionable cross-category insights, and they feed into new action-oriented insights frameworks and I'll show 2 examples of these now, starting with demand moments. So demand moments is a build on occasions and moments, which we've been using for many years, like many other companies, in our case, for about 15 years. But that became much, much more important in the poly-use context and we needed something more actionable. So the new demand moments framework goes beyond occasions to really uncover preferences, opportunities, behaviors and context for deeper understanding of the why behind the moments of consumption across nicotine categories. It enables clear briefs for category and R&D teams for both product and also communications development. In short, demand moments brings us a better understanding of poly-usage and brings more depth and actionability to occasions. And I'll now play a short video to explain this concept. [Presentation]

We know the relative size and fit for each of these demand moments for each category and brand and the consumer preferences for each. And we also now have a better understanding of consumer journeys where some demand moments act as new category gateways, typically a rediscovery of moments that were lost to cigarettes, while others are more entrenched cigarette heartlands, where we've got more work to do to encourage new category adoption. Actionability comes from understanding the product requirements, met and unmet, in each demand moment, which feeds into R&D directly for product development as well as also from a library of consumer-generated digital content that provides actionable stimulus for creative development and consumer engagement. I'll now play another short video to show you some examples of some real consumers describing their demand moments experiences. [Presentation]

So demand moments have given us a load of insights and learnings; for example, how high-level requirements for things like convenience translate subtly differently from one moment to another, and we can action that directly. Secondly, how one demand moment seems to be the key for unlocking the whole. And thirdly, a mismatch between the typical thinking and communication of some demand moments compared to the consumer reality based on their digital postings. Actioning insights from demand moments enables us to improve both our new category user acquisition as well as our share of new category users' daily consumption moments. And that's an equally important driver of volume and value growth. Demand moment also leads to the second action framework, which is our new horizon innovation spaces. This gives more direction and focus to our new category innovation pipeline against 6 priority opportunity spaces based on forward-looking insights and foresights. It enables us to better think ahead and get ahead critically important for us given the speed of change in new categories. They were produced by integrating multiple insight sources including a greater focus on ex category consumer trends, future projections across nicotine categories and also early signals from our digital track that I just talked about, and our new Shenzhen-based insights team. One of the spaces deals among other things with a consumer desire identified across new categories to adjust consumption experiences, making them personalized for the individual and customized adjusting for different moments, and you'll hear this referred to later. The spaces were elaborated and linked to demand moments, segmentation into detailed R&D briefs. And these were produced together through collaboration with our category colleagues and via consumer co-labs, with co-creation as I described earlier. We're already seeing improved results from this consumer-centric approach with multiple innovation projects across categories, improved pretest results, earlier identification of potential and of required improvements and positive early results from recent launches that will be described later. I'll now show you some high-level examples of insights feeding into specific innovation developments. The first example is a Vuse innovation with very positive pretest results. Examples of high-level insights that fed into this development include an unmet need identified for premium sophistication in vaping with specific guidance for both design and features, opportunities and directions for how to significantly enhance taste and flavor sensation experiences, how to address consumer usage anxiety and the associated strong appeal of informative user-friendly screens. Also a desire for customization by moment and concerns about environmental impact and underage use. These insights and others, obviously, with further details, were actioned into design, and that's led to very strong pretest results, which Luciano will talk more about later. The next example is a recent launch glo Pro, which was recently launched with very strong results, early results in market. High level insights from this include consumer needs for more taste satisfaction and immediacy for more cigarette-like sensorials, for more discretionary style for better device appeal and for customization for different demand moments. Also, the appeal of informative screens to improve ease of use in various ways and the need to address device cleaning as a consumer pain point. All these and other more granular insights were actioned by the team into the successful launch, which Luciano will talk about. And a final example is Velo where we've had multiple new developments, which were all fed by Insights. It includes various insights into how new Modern Oral users struggle with new rituals and intense sensorial experiences. How taste familiarity is key for consumer acquisition and how that differs depending on which category people are coming from and how more experienced users seek more choice in flavors and higher sensation in specific ways and a general need for more differentiation and standout as well as more responsible offers in this category. Again, all actioned in various ways and incorporated into Velo's pipeline, which Luciano will talk about, and you'll see examples of later. So to bring this to life, a final short video showing you real consumers feeding back to us on real products at various stages of development. [Presentation]

We now have a new insights team with a new way of working and a fully reintegrated global insights community with deep cross-functional collaboration. Our now more dynamic culture is oriented around the delivery of fast forward-looking output, driven by a spirit of continuous improvement and the humility to lean into what we don't yet know. The insight team is again now aspirational, attracting the best talents from across the business and beyond. And it's all underpinned by; one, common sense, not everything requires multiple revalidations and data points and decimal places for faster decisions; two, the importance of seeing things in their wider context, for example, generational change and ex category consumer trends; and three, the pursuit of ever greater simplicity and actionability because it's all outcome-focused for commercial impact. So wrapping up, as you've heard, we've significantly enhanced our insights capabilities fueled by a decade now of multi-category experience. We're happy with the progress, and this will continue because insights by definition has to be about continuous learning and improvement. We now have better, deeper, faster consumer understanding, directly feeding into better briefs for R&D and category teams, and we're already seeing the impact and the benefits. Firstly, the improved strength of our innovation pipeline; secondly, exciting improvements in pretest results; and thirdly, better early performance of recent launches, all things you'll hear more about in the rest of today because it's all outcome obsessed, better faster insights for better products for better commercial results. And as one of the key recipients of our insights, Zafar will now explain how we are accelerating our R&D innovation delivery. [Presentation]

Good morning, and a very warm welcome to our Southampton Innovation Center. I am Zafar Khan, with over 28 years of professional experience in BAT. I worked at local, regional and global levels in operations, commercial and R&D roles. It is absolutely my pleasure to be here with you today. Tadeu shared our A Better Tomorrow vision, and I will share how we, in the new categories, are indeed supported with our innovation-obsessed mindset. To achieve this, we have transformed the entire innovation ecosystem now composed of strategic development and open innovation partners. The ecosystem is orchestrated by technical centers of excellence, deliberately located based on access to the best knowledge and talent. This has allowed us to step-change our product portfolio in the market with compelling product offers designed around consumers' needs. It is also enabling a winning innovation pipeline across all our new categories. At the very onset of our transformation journey, we clearly identified three opportunity areas where we would need to step up. One, we were a very inward focused and weren't fully connected to the external innovation networks. Two, our internal organization needed an upgrade in size, technical skills and organizational accountability. And three, we were siloed by category with limited cross-category sharing and, in many cases, duplicating efforts. These became our priorities to fix. Now along with our strategic suppliers, we are investing over GBP 700 million this year in smokeless innovation. This is 2x our previous levels and a serious commitment from both us and our strategic partners. Benchmarking across industries tells us this is at the highest level across the comparable landscape considering a relatively low maturity of the market category. As the space matures over the coming years, we expect to land somewhere in between CPG and tech companies. The suppliers investing almost as much as us to augment BAT innovation is truly unique to us. Tadeu shared this slide, I'll explain it in a little more detail. Just 6 years ago, we started with 1 innovation center in Southampton and 2 small manufacturers in China. We now have transformed into 3 innovation centers fully upgraded. Today, we are here in our brand-new Southampton innovation center. We have 2 strategic partners, and in addition, 50-plus development partners for products, materials, technologies and services. Our open innovation partners include specialized venture capital firms, start-ups and universities. And we have 2 fast moving -- our first-mover manufacturing sites where we validate the processes and technologies. Once again, as Tadeu emphasized, we took a multi-pronged approach. Our global reach and proximity to the network in Asia makes us truly unique versus competition. I will now introduce our 2 strategic partners. BYD is one of the most advanced technology companies in the world. They are the biggest EV company in the world with true excellence in batteries. They are also a huge player in the consumer electronics space, high-tech components, material sciences, finishing and power management. Smoore, our other strategic partner is the #1 player in aerosol generation technology. They have excellence in automation and have also expanded into heating products. They have been making very, very strong investments into R&D across new technologies with a proven track record on innovation. Both these suppliers have big global footprint, as we speak. We now have access to the cumulative strengths of both these 2 strategic technology powerhouses and 50-plus development partners. This gives us unique preferential status on certain technology and projects. At the same time, within BAT, we have 100-plus years of in-depth knowledge and experience on consumables, blending, liquids and flavors. On top, we are overlaying our science and harm reduction ambition, putting both these capabilities together has resulted in a very advanced ecosystem. In fact, we've now taken this to the next level with joint co-located teams at each other's premises. This is giving us a strong competitive edge in the industry. We will now watch a video showing our ecosystem with BYD and Smoore. [Presentation]

Now to orchestrate this unique ecosystem, we've had a step change in our internal capabilities. We doubled our resources with over 250 new members recruited from the best tech industries. Listed are some of the industries they've come from. Within the last year, we redeployed the teams with almost half our R&D members, changing their roles or locations. This is absolutely unprecedented for us. The teams have reorganized under tech centers of excellence, for example, materials, hardware, software, active substrates, flavors, et cetera. You will see some of these labs during the tours today. And the IP Insights & Foresights and science teams have been strengthened and fully integrated across all our sites. This has been a massive game-changer. We now have 1 innovation center across multiple locations with cutting-edge technical expertise. Now Julian brilliantly explained the consumer insights and foresights capabilities we have in place, transforming consumer needs into real products that our consumers can touch, experience and be delighted with. The consumer opportunity spaces are at the start of our innovation cycle through cross-functional ideation sessions by category. During the development stage, we use internal and outside-in ideation cycles with the entire ecosystem on a very regular drumbeat frequency. This enables a robust technology road map that eventually translates into the product pipeline. What makes the outcome unique is the ability to share our multi-category learnings across categories. This gives us macro trends to enable a medium- to longer-term pipeline and enables us to access open innovation networks for ideas and solutions. Now for a controlled and predictable innovations delivery, a strong product life cycle management process is at its very foundation. And we, therefore, redefined the complete end-to-end process from defined with Julian and the commercial category teams own, going through discover, develop, deploy and then all the way to delist at the end of the product's life. The focus for each stage, as you can see, is clearly identified. Ownership and cadence of the processes is at the top level of the organization, with metrics categorized under sufficiency, efficiency and speed. Testing and deployment is carefully planned through pilot launches with a fail-fast approach embedded in the process. Synchronization across categories through our rhythm of innovation enables optimal prioritization, resource allocation and responsiveness in our global rollouts. Through our synchronized multi-category approach, we are able to focus on fewer, bigger and better rollouts globally. At the same time, we see IP as a competitive edge. Our enhanced focus internally, complemented by preferential access to the supplier patent portfolio have made our all-round position much more robust. We continuously measure our IP portfolio asset value versus competition to remain ahead. As an outcome of the entire process, we now have a portfolio of 200-plus innovations in our pipeline, a 4x increase versus 2022. This is the menu card of technology blocks we have in our arsenal across the categories. From this technology menu card, these are just some of our significant breakthrough technology blocks we have already launched in key consumer opportunity territories across all categories. These cover technology enhancements for better control and user interface. Consumable improvements for better satisfaction and flavor territories, including natural nontobacco substrates, and our approach to underage access prevention and enhancements like battery removability to manage environmental concerns. We are very proud of the step-change on our in-market products across the 3 categories. In HP, glo has achieved our best-ever consumer test results with our Hyper Pro device. It has the best user interface through the screen, a first in the category. We have the best nontobacco consumable range in the market. In vapour, Vuse occupies the most advanced and premium space in the rechargeable segment, thanks to our best-in-class aerosol generation heating system. And in Modern Oral, Velo has the broadest and the most stable flavor portfolio in the category. So it is once again our unique end-to-end ecosystem that has enabled us to achieve these which Luciano will share in more detail. As Tadeu shared at the very onset, we have dramatically improved our capabilities. Now I will go for a complete recap of our compelling global innovation ecosystem. Our strategic supplier relationships have been a true game-changer. It has put us in a very competitive position through commitment through hard investments, specialized technical skills and our joint development projects. We have had a significant step-up in our end-to-end internal capabilities, including our infrastructure, people and processes. And our comprehensive multi-category presence is giving us a huge leverage from insights, all the way to deployment and technology options to choose from. Translating these into hard numbers, our offering becomes even more compelling, doubling our innovation spend and in-house technical skills, a massive uplift in our collective patent portfolio. In 2024, we will be launching 50 projects, which is over 2x our best ever year. And our ready technology block strength has quadrupled to 200-plus. It is these that give us the confidence and the readiness to deliver our vision of a better to tomorrow. Thank you very much. It is now time for a quick coffee break. So please do feel free to have some refreshments which are available at the far end of the room. I also invite you to visit the Omni stand to hear about BAT's evidence-based resource on tobacco harm reduction. And also please visit the [ Ryde ] stand to hear about and sample our new innovative shots brand. These stands will be open throughout the day, and we will restart presentations at 10:35 a.m. Thank you very much. [Break]

Good morning, everyone. I was planning to start by talking about football today. As my team, Argentina, won 6-0 yesterday. But given that my boss is Brazilian, I will skip that part. My name is Luciano Comin. I'm the Chief Marketing Officer. Welcome back to the plenary session. So prior to the break, Julian and Zafar have shared with us our differentiated approach to our transformation journey. I am very confident that we have a bright future ahead of us with better insights and foresights, as Julian presented, with a new R&D setup and with our fantastic brands and products that I will present. We are very well positioned to drive quality growth and deliver our vision of a smokeless world. I will use the next 30 minutes to give you an update on our new categories, and then Vincent will share our plans on combustibles. When we started our transformation journey towards smokeless world back in 2017, it was very clear to us that there will not be a single solution to convince smokers to switch out of cigarettes. It was clear that we will need to explore multiple avenues to respond to the different consumer expectations, different regulations and different market realities. And this intuition has proven to be right. This is why I am convinced that our multi-category approach, though clearly more demanding, it is the right one. It is a winning one. Today, I will provide you with an update on the 3 equally important categories. Vapour, our largest and growing category, where Vuse is the global leader, and we have significant untapped premium potential. Heated products, also significant in terms of revenue with the value segment growing fast, but where the premium segment, it is by far the biggest growth opportunity. And Modern Oral, which is, and I believe it will continue to be the fastest-growing category. Velo is growing and the market leader in Europe, and we have an encouraging momentum in the U.S. So let me start with the vapour category. The vapour category is critical in our transformation agenda. It is the biggest category and continues to grow. It is clearly not stable and still subject to some disruptions and regulatory challenges and it is still not yet a level-playing field, but it's a category that we are very confident about. Let me share a few facts about the category. First, vaping is, and we believe it will continue to be the biggest category in terms of number of consumers, achieving an estimate of 110 million users by 2030. Second, vaping is as good, if not better, than heated products in converting smokers out of cigarettes. You can see on the blue bars in that chart, the percentage of active users, both for vapour and heated products who stopped smoking on a daily basis. Third. Rechargeable glo systems is back to growth. So after 2 or 3 years of exponential growth of disposables, that trend has changed and now glo systems are back on growth. Four. Regulation and enforcement are key to unlock the potential of this category. Today, there is around GBP 8 billion of revenue that is not accessible to us, all that as a consequence of inappropriate regulation and/or lack of enforcement. Five. This category is critical to build trust. Today, 60% of the smokers believe that vaping is as bad, if not worse, than smoking. So we believe in the importance of informed choices and that is essential for regulators and public health to educate consumers about the relative risk of vaping compared with smoking. And finally, we think there is a big premium opportunity within this category. Today, only 3% of this category is premium, very different from most FMCGs. And we believe, based on the profile of the vaping consumers, that the premium opportunity should be at least 30% of this category. So all these dynamics make vapour a cornerstone of the transformation out of cigarettes and reinforces the need for more regulation in this still chaotic category. We have an opportunity to help shape regulation in the right way. So let me now focus on our brand, Vuse. Vuse has been in the market for more than 10 years. And over this time, we learn about the category and we learn about the consumers. And it is 10 years where we have been growing at a CAGR of 86% in terms of volume. We already have a track record of success but we cannot stand still, and we are very clear of what we need to double down to expand our leadership. Our brand Vuse is based on 3 pillars. We want to build a strong and powerful brand that our consumers will love; we want to lead and own trust, as I already explained how crucial brand trust is in this category; and we want to build a profitable brand, crafting and owning a nonexisting premium segment. Vuse is the leading brand in this category with more than 40% share of market globally within the [indiscernible] universe. And Vuse is even stronger if we focus on rechargeable glo systems and given that glo systems are growing, this should play in our advantage. Finally, when consumers talked about Vuse's key strength, they will mention modernity, high-quality, premiumness and trust. And talking about trust, we want to continue leading this category by innovating responsibly, not only in the way we communicate our brand but also in the way we manufacture our products and in the performance standards that underlie our products. And that is why we can claim 99% less toxicants than cigarettes in all our products. Now not all vapes can say the same. All our flavors and descriptors are targeted to adults. We have accidental access prevention in all our devices. We have age-verified connected platform in all our premium devices in markets where regulations permits. And we are committed to have removed old battery in all our glo systems by the end of 2025. Not all vapes can say the same. To be competitive, we need to provide our consumers with a range of products. We are currently focusing on 3 pillars: disposables position as a convenient, potentially reduced risk alternatives to switch smokers, rechargeable glo systems to enhance brand equity and a differentiated and connected device to build our premium positioning. These products will all share the same technology, our new ceramic heater. And all the e-liquids will be produced in the U.S. And though we're going to be able to claim 99% less toxicants than cigarettes. First, let me talk about Vuse Go, our product for the disposable segment. Our latest launch Vuse Go 2.0 was introduced in May of this year. And based on consumer research, it is substantially better than our previous products, Vuse Go 1.0 and better than our closest competitor. It has already been introduced in 24 markets, and we will continue to roll it out during the rest of the year. And as you can see on the chart, it is already gaining share in all our key markets. Then Vuse Go Reload, our new single rechargeable system, with a new device and new pots introduced in June of this year. This product is now in 18 markets, and we will continue to roll it out until the end of the year. Again, you can see some of the results in the chart below. With regards to our premium products, we are introducing a brand-new device called Vuse Ultra. Vuse Ultra will be our initial step in offering consumers premium and super premium vaping products. Vuse Ultra is a new vaping solution that reaches the next level in terms of performance. And as Julian has explained, this product was designed based on our consumer insights and developed by our innovation ecosystem. Vuse Ultra exemplifies what we believe that we can offer vaping consumers a responsible, high-quality, high-satisfaction solution for discerning vapers. As you can understand, as this product is still not in the market, I can't reveal more details. All the above mentioned will contribute to improve the value creation and the journey has already started. Vuse gross margin to revenue ratio is improving. In 2023, our ratio was 51% coming from 25% in 2021, and it has already improved to 60% in the first half of this year. We are focusing our efforts and 85% of all our investments in vaping goes into the top 20 markets. And the number of profitable markets among our top 20 markets. We had 10 in 2023 and we are expecting to have something between 13 and 14 markets profitable among our top 20 this year. In summary, we are confident that Vuse is in a great quality growth journey. Vapour is the largest category and growing. Vuse is the global brand leader. We think we have a winning portfolio, and we have an untapped premium potential. And with Vuse, as a leader, we see vapour being critical pillar of our transformation to a smokeless world. Let me now move to the next category, heated products, an important category to support the transition of other smokers away from cigarettes, a category more mature than vapour, maybe more limited in terms of its long-term potential, but a category where we still, at BAT, have opportunities to significantly improve our position. Let me start with some thoughts about the category. First, heating products is the biggest category in terms of revenue. We expect the category to achieve GBP 10 billion by the end of this year. Second. 80% of the category revenue is concentrated in just 9 markets. All of them developed markets. This category, different from vaping and Modern Oral, has not been successful so far to penetrate the developing world. Third. The category growth has been slowing down, mostly as a consequence of more heated product consumers poly-using across new categories both with vaping and Modern Oral. And finally, 80% of the category revenue is in the premium segment, where BAT's share is relatively small. We have started our glo journey back in 2016. And despite many constraints, we are today the second biggest brand in the category and the leaders in the affordable segment. Now it is not a secret that we are not where we would like to be and that we had some challenges in the past. Also, it is true that we haven't been able to develop a product capable to compete effectively in the premium segment. But that is about to change. We are very clear on where to focus going forward. We need to build a robust innovation and product pipeline and improve the performance of our products. We have to continue to lead in the affordable segment. All the competitors in this category, including the market leader, are playing in this segment and the segment is growing. We have to make sure that we continue to be the leaders in this segment. And we need to be able to compete in the premium segment. Not only it is by far the biggest segment today, we also believe it will continue to be the biggest segment by 2030. So as a consequence of that, we are focusing now on 2 different platforms: Hyper, our historical platform and the one we will use to keep leading the affordable segment; and what is new. After many years of work and consumer insights together with our new innovation ecosystem, we are going to introduce a breakthrough innovation technology to compete and to win in the premium segment. Let me start with Hyper platform, and to share with you our latest and exciting launch of Hyper Pro. Hyper Pro was launched during the first quarter of this year, and it is, by far, our best-performing product. Let me start by showing you a video. Let's run the video, please. [Presentation]

Hyper Pro has been the first step of our redefinition of glo heated product experience. Hyper Pro is packed with a lot of critical innovations and displays the first outcomes of our improved capabilities. The development of this product was based on consumer insights and the understanding of pain points, as Julian presented -- explained during his presentation. And although it's still early days, we are already seeing some encouraging news. Hyper Pro is attracting more premium adult consumers into our franchise. We see increased consumption in all our key markets versus our old devices. And we have a better brand retention, and we see the first signs of share growth. Again, still early days, but it's always good to see initial positive signs in all our key glo markets. But as I mentioned, we want to compete in the premium segment. This is where the biggest opportunity is. So we are going to be introducing a new premium glo platform in 1 market before the end of this year. So we say hello to glo Hilo. glo Hilo is a breakthrough new system that will reshape the way glo competes in the heated products. We will have a one-piece device and for the first time, a 2-piece device. And as I mentioned, we will do a first launch during this year and then roll out in some key markets in 2025. Today is just a teaser. I know you want to know more, and I would love to tell you more. Actually, just for you to know, it took me 2 weeks to convince my lawyers to put that picture there. So bear with me. But the product is still not in the market, and as you can understand, I cannot reveal more details. Having said that, some consumers have the chance to discover and use glo Hilo. And here is some of the things they told us. Consumers are excited with the offer in hand, they recognize some of the special features and they appreciate the technology and the premiumness. So glo is ready for another step-change during 2025, and we are all very excited about it. So in summary, heating product is the biggest category in terms of revenue today. The value segment is growing fast, yet the premium remains the biggest opportunity. Hyper Pro is showing positive signs. And in 2025, we will introduce glo Hilo, our first premium platform. Last, but clearly not least, Modern Oral or nicotine pouches, the most recent, but maybe the most promising and exciting of the 3 categories. For sure, a category, that will be a cornerstone of the transformation to a smokeless future. Let me start with a few facts about the category. First, Modern Oral is the fastest-growing category by far, growing between 2022 and 2024 at a rate of 31% in terms of users and much faster than the other 2 categories. Second. It is already reaching global scale. We expect this category to be of a similar size in terms of revenue of the other 2 by 2030. Third. As Tadeu mentioned, this category is very profitable and margin-accretive versus combustibles. And finally, there are many markets out there, especially in the developing world, where the category is not present. And we believe that with proper regulation, we can accelerate this growth even further. BAT has actually been the driving force behind the initial expansion of this category outside of the Nordics and BAT has been instrumental in shaping the category the way it is today. So we acquired a small business in Sweden back in 2017. And a year later in 2018, Velo was only in 3 markets with a revenue of GBP 47 million. Only 4 years after that, Velo has already presence in 34 markets, delivering a revenue of more than GBP 0.5 billion. This year, we are already in 44 markets and our revenue continues to grow. With Velo, we have a very clear ambition. We want to lead this category globally. And we will focus on 3 pillars: keep building our brand, keep developing our product and innovation pipeline and making sure that we have a portfolio to win in the U.S., by far the biggest market. And at the same time, we will keep rolling out our brand in the rest of the world. So let's take a minute to see what Velo is about. Let's play the video, please. [Presentation]

Velo is a wonderful brand. The team has done a great job building a massive asset for the growth in Modern Oral space. We have built a very distinctive brand with our really wonderful positioning, while building and educating consumers on the key category benefits. Velo has the strongest brand equity within the category, being the market leader in terms of brand strength in all the markets outside of the U.S. In the U.S., there are still some work to be done, but it is the biggest opportunity. And supporting the brand, it is a unique portfolio of products tailored to offer Modern Oral solutions for new switchers and experienced users. We have a range of new markets without oral nicotine experience with a range of more than 30 flavors in 2 nicotine levels, 4 milligrams and 6 milligrams. And we have a portfolio of more than 40 flavors across all the nicotine levels from 4 milligrams to 17 milligrams. And over 80% of all our products has been evaluated by consumers on par or superior versus our closest competitor. We believe that we have the best brand and the best product in this category. But we see ways to further improve and expand our ranges for the benefit of the category and BAT. We are now working on technologies for flavor stabilization. We are about to introduce in a test market a premium Velo range with a differentiated can and a differentiated pouch, both protected by IP, and we are also exploring the moderation territory with 0 nicotine and other alternative actives as just 2 examples. With all this, we have successfully achieved clear global market leadership with Velo, with an impressive 65% market share outside of the U.S. and growing. In the U.S., there is a positive share momentum with a refreshed Velo mix. Velo in the U.S. now has achieved 7.5% market share. And in August, more than 16% share of market in New York, where we first introduced this new mix. As you may know, U.S. Velo product is not the superior product that we have in Europe. We await the outcome of the PMTA for the superior Velo products that we have filed 2 years ago. And we remain confident in this product [indiscernible] underpinning this PMTA. If we have managed to achieve global leadership with this product internationally, we don't see why the U.S. will be any different. As we are waiting for the FDA authorization for our global product, we are going to introduce at the end of this year a new product in our Velo portfolio in the U.S., Velo+. Velo+ is a more competitive product with a wide range of flavors and nicotine levels, and it will be live in the U.S. before the end of this year. David later will expand on this. Finally, and with regards to our global expansion, we are today in 44 markets, as I mentioned earlier, and we are planning to introduce Velo in another 10 markets next year. But after that, they will still have 36% of our combustible volume base still to cover. In summary, modern oral is and will continue to be the fastest-growing category. Today, we are clearly market leaders outside of the U.S. and growing share in a growing category. We have a winning global mix with what I believe is the best product and the best brand out there. And we are bringing the European learnings to the U.S., and we have an encouraging growth momentum and much more to come. And that concludes this brief update on our plans in new categories. I will invite you to visit our category stance, where you will be able to see and experience our products and to exchange your views with our team of experts. As I said at the beginning, I am very confident that we have a bright future ahead of us. Now I will hand over to Vincent to talk about our plans in combustibles. Thank you.

Thanks a lot, Luciano. Good morning, everyone. So I am Vincent Duhem. I'm the Global Head of Combustibles and I'm very, very happy to be here today. So as you've seen from my colleagues this morning, our transformation to a Smokeless World will spare absolutely no effort. But some consumers are still making the decision to smoke. And we will continue to serve these consumers. We will continue to compete in the Combustibles category. And by doing so, we will generate the resources required to fund the transformation. So today, I'd like to demonstrate the resilience of our combustibles category. Our Combustibles business is performing well and gaining volume share. And more important, the value creation algorithm works, as stated earlier today and will continue to work. All this is made possible by a broad set of capabilities. Our portfolio of brands, diverse and balanced across price tiers. Our commercial setup, one of the strongest in FMCG, allowing us to reach a very large number of customers and adult consumers around the globe, our product and manufacturing expertise. We are very clear on the opportunities, both in terms of consumer trends and in terms of geographies. And we are consistently reviewing the way we invest, and we will continue extracting operational efficiencies as we've done in the past years. So in few words, we believe that we have a clear path to create value well into the future. So I'd like to double-click and I will start with our combustible algorithm. I think we can definitely rely on a strong foundation to build on. Our 2023 organic revenue is strong at GBP 22.4 billion, with very positive dynamics in AME and APMEA regions, compensating for some of the investments that we've been doing in U.S. If we look back, despite disruptions we've been delivering consistent revenue growth at plus 1.3% CAGR over the last 3 years and even a very robust plus 3.8% outside of U.S. Critically, the core value equation of our combustible engine is very solid. We have a price/mix delivery, which has been consistently ahead of the volume decline. Behind this equation, we have the strength of our portfolio. These assets span across all price points and they provide us with a unique ability to respond to various consumer dynamics. And the rejuvenation work done in the last 2 years on the portfolio is already translating into volume share growth. So in short, we do have a very resilient value algorithm, and we will ensure a sustainability for the years to come. Now behind this performance, our capabilities built over more than a century that gives BAT some critical position to sustain the combustible delivery. BAT is today one of the most effective and efficient FMCG companies in the world, when it comes to reaching customers and adult consumers at a very large scale. With more than 12 million outlets delivered and more than 100 million consumers served every day, BAT as one of the largest reach of the FMCG world. On the product side as well, we can lean on an incredible expertise, both in terms of developments and manufacturing of Combustibles products across the world. Our community of farmers and product experts is a massive asset to consolidate our strength in the category. And I should highlight that this expertise and this vertical integration are key enablers, when it comes to the visibility and the control over our costs and over our sustainability ambitions. And besides, I'm sure you will appreciate that these capabilities are also a solid foundation for our transformation in new categories. Now to continue delivering in the context of an industry with expected volume decline, focusing where it matters is key. Julian earlier did share some of the tools we use to understand our consumers, understanding these dynamics is paramount because the combustible category is still fluid. 1/3 of adult smokers smoke more than one cigarette variants and 16% of all smokers every single year change their cigarette of choice. These serve as many opportunities to compete. So where do consumer go? We see 3 main destination. The first one is to a lower price offer, driven by a search of a better value for money. The second is on the contrary and importantly, towards a premium offer in a search for brands or product offering different experience. The third is a choice of a flavored cigarettes. Now our focus is also about where to put the resources and the energy in which markets to deliver the value we expect. And for that, we use a market archetype classification that guides our level of investment and activities, especially within the top 15 markets that represent roughly 80% of our revenue today. With this knowledge of the combustible dynamics, we are not only ready to extract the value from combustible, but also to drive the transition of our smokers to new categories. Now if we look forward, we are confident that we have clear opportunities to continue delivering sustainable value from Combustibles. With our brands, we have strong assets. They are designed to respond to consumer preferences and they are kept relevant and up-to-date. Over the years, we have also learned how to stretch these assets up and down the price ladder to follow consumer choices. And importantly, we design responsibly -- proposition that responds to the regulatory evolutions. We will continue sharpening the way we invest using our market architect methodology to optimize the resources. And we will keep on looking for all opportunities to further streamline the portfolio and to drive productivity initiatives across all products and all factories. The algorithm is very well understood, and we are on track to sustain its delivery moving forward. As I mentioned, at the core of the value algorithm are the brands and products that we offer to consumers. I'd like to share a brief video update on the portfolio. [Presentation]

So BAT's strength in combustible is largely the function of our portfolio of brands. And this portfolio is very unique. We have 8 focused brands, out of which 3 are U.S. brands that represent roughly 80% of the Combustibles revenue. And we have also some local brands still very sizable that we drive more locally or originally. The diversity of our brands is a chance. It gives us a unique ability to respond to more and more demanding adult smokers, but also to cover all price points and all segments. So I'd like to focus on some of the most recent initiatives. First, Lucky Strike. This is the fastest-growing global BAT brand. Lucky has successfully expanded in the flavor space, as you know, and we have reached a leading position in many markets in this segments. But Lucky is also one of the most iconic tobacco brands and a real reference, when it comes to authenticity and tobacco expertise. Kent is our global innovation brands for decades now, and Kent is pursuing it's journey to develop new formats and to stretch its offers into premium price points. So as you can see here into more affordable propositions. Dunhill. So Dunhill is the true premium tobacco brand. It's a brand that has been the symbol of quality and refinement for more than a century. And it's a key contributor to the value content creation. We will continue to demonstrate Dunhill's excellence in tobacco and Opus, the super premium offer that you can see here on the screen, I think it's a great illustration of this ambition. Pall Mall is our largest brand in volume terms, and it has a very important role to play now in our portfolio to serve the smokers that are looking for great value for money. Pall Mall is a brand that is committed to deliver the best smoke at the best price. And Pall Mall selects our new line, I think, exemplifies these commitments. Last but not least, Rothmans. It's a successful brand with a very strong footprint in the EMEA region. Rothmans is offering to consumers the sophistication of a brand with a very rich past at an affordable price. Rothmans will continue building it's strong legacy, exploring new avenues to create value with offers like the one you can see here on the screen with Rothmans Nano. In U.S. as well, we do have a very strong brand to compete with. Newport, the largest brand in value -- in terms of value for BAT is defending its very strong position with a successful expression in soft-pack. With Camel, we continue exploring the world of tobacco with a new Black Series range offering a new, more premium Camel experience to discerning consumers. And at Natural American Spirits, the most premium of our offers in U.S. will continue deploying its authentic tobacco expressions and in particular with expansion of the successful organic tobacco variant's. Now importantly as well for U.S., and David will talk a bit more about it. We make sure that our portfolio is fit for all potential regulatory changes in the future. Now as I mentioned earlier, the strength of the portfolio goes beyond our focused brands. We can lean on very strong local icons be a locally, originally and which have the benefit of having very deep local routes that resonates with local consumers. Nevertheless, when we respect these local routes, we power these brands with all the expertise in terms of product or brand management that we've developed with global brands. And on the screen, you see the example of 3 successful local brands, [ thereby ] Capstan and [ shots ] that have been combining their strong regional heritage with the know-how and the learnings accumulated with Pall Mall. And by doing so, we optimize the assets and the local and the global strength. The strategy is already successfully in motion in all regions. And I wanted to pick 2 markets today to illustrate. Brazil first. Brazil has gone through a complete portfolio transformation coming from a collection of aging local brands, and turning it into a range of very -- 4 very strong brands, fully updated and now with the relevant innovation for Brazilian consumers. With this transformation and after 100 years of existence, the Brazilian portfolio is fully reinvented and continues to deliver growth in terms of market share, volume, revenue. In Romania as well, our brands keep on improving their competitiveness. It's a great example on the how to win with our strong assets in different consumer segments. The team has been able to reignite our growth in premium segment with the new innovations to lead in aspirational premium segments with Kent laddered range and to accelerate our growth in the -- with the latest Pall Mall brand refresh in the low segments. And similar success has been also achieved in other key markets. In Bangladesh, or Pakistan, for example, we retain our leadership despite very strong competitive pressure. In Mexico, where we've built a consistently winning portfolio in the last decade, we keep on innovating and nurturing our key brands with a lot of passion. Now beyond the top line value creation, we have also, for now several years, developed a very disciplined approach to productivity and simplification with [ self-esteem ] and we will continue these efforts. In terms of productivity, we are focused on generating savings through flexible sourcing and contracts with a specific attention on leaf and blends, which represent a critical portion of our cost base. Our market strategy approach is also guiding us to optimize our investment behind products according to the role of the market in our growth algorithm. In terms of simplification, we are clearly not standing still. We continue streamlining the amount of live grades, blends, formats, reducing unnecessary complexity, so we continue to rationalize our operations in combustibles. All these efforts combined have made possible a sustained performance over the last few years. We've been able to drive top line value despite the expected volume decline and to mitigate inflation and FX tensions out there on cost of goods, on overheads, allowing us to deliver a growing margin over time. In conclusion, we believe that we have a solid and resilient algorithm and combustibles. We can rely on a team of combustibles talents across functions, and expertise built over more than a century, a very large reach and a unique portfolio of brands. With that, we will remain competitive by satisfying adult consumers across price and product segments. We will continue extracting value through our revenue growth management and premium portfolio mix opportunities. We will continue looking for cost efficiencies and simplification opportunities. And combined, with the disciplined management of our resource allocation, we believe that BAT Combustibles will continue being a stepping stone to our wider transformation ambition. Thank you. I would like now to invite David Waterfield, President of Reynolds America to talk about U.S. opportunity.

Thank you, Vincent. Well, good morning, everyone. Thank you for joining us here today. I'm David Waterfield. As Vincent just said, I'm the President of Reynolds. I will be joined on stage by my colleague, Jeff Raborn, who's Executive Vice President for Law and External Affairs. As you know, the United States is the largest, most valuable nicotine market outside of China. With over 60 million adult consumers, of which almost 40 million are using nicotine across a range of product formats. The U.S. market is the cornerstone of BAT's strategy and is at the forefront of industry transformation globally. Our business is well positioned to capture value and deliver growth in attractive revenue pools with a multi-category portfolio, of leading brands, market scale, strong capabilities and talented teams. Over the past year, we have navigated headwinds in the U.S. combustibles category, making investments that have delivered signs of recovery for our performance. And these investments have been completed. In new categories, we have remained leaders in the legal U.S. vapour market with Vuse and continue to innovate with new product introductions this year. Our modern oral performance has been reinvigorated with the launch of the new Velo mix and the introduction of Grizzly nicotine pouches. In 2025, we will further build on our momentum this year. The biggest challenge by far, the biggest challenge in the U.S. remains the lack of effective regulation and enforcement, which results in an uneven playing field, where illegal products are widely available. Our investments in the U.S. business have increased the resilience of our portfolio to both compete commercially and ensure readiness for potential future regulation. The U.S. business is well positioned to capture the growing opportunity in the market and lead our transformation into a smokeless world. Now allow me to share more details. The U.S. is the world's largest, most valuable nicotine market, which is undergoing profound transformation as a result of changing consumer preferences. The total nicotine revenue pool is GBP 41 billion, growing at a CAGR of plus 2.5% between 2021 and 2023. The growth was driven by consumer demand for vapour and more recently, nicotine pouches or what we also call modern oral. This sizable and growing contestable space is being created by almost 40 million consumers, who are probably using nicotine products across categories. The U.S. market represents 1/3 of the global nicotine value pool and is at the forefront of industry transformation, making it the ideal market for BAT's mission to build a smokeless world. Now if we take a longer perspective back to 2017, when BAT fully acquired Reynolds, we can see that total nicotine revenues have grown 40%. That's up from GBP [ 29 billion ] in 2017 to [ GBP 41 billion ] now, while smokeless has grown GBP 10 billion or 280% since 2017. This significant increase in nicotine revenues is primarily a consequence of shifting adult tobacco consumer demand for new modern product formats. Who wouldn't want to compete in such an enormous growth opportunity with scale and winning capabilities. We certainly do. Now maintaining the same perspective on the period since acquisition, so going back to 2017. Let's now focus on the combustibles category. Industry volume declined during this period by 6%. Price mix was 7%, which led to a marginal revenue growth at 1.2%. Now projecting into the future, which we can all agree is not an exact science. We expect industry combustible revenues to remain resilient at around plus 1% for the rest of the decade. Now why do we think that? Well, we consider the current volume decline of over 9% to be abnormal. And with macroeconomic improvement, we expect a moderation of both down trading and the current combustibles decline rates, although a higher level of decline in the recent period of 6% should be expected, primarily due to increased Poly-use. In addition, we see that combustible affordability in the U.S. market still holds true. With the average U.S. pack of cigarettes costing $8.30, which is lower when compared to other developed countries like Canada, U.K., France or Australia. Our U.S. portfolio of brands, including Natural American Spirit, Newport and Camel in premium, Pall Mall and Lucky Strike in value compete in more than 90% of the revenue and more than 95% of the total profit pool across all price segments. Our brands will be competitive in either an up-trading or down-trading market. Now turning to new categories. Vapour is estimated to be a GBP 9 billion revenue pool in 2024, of which GBP 1.5 billion is rechargeable closed systems, that GBP 1.3 billion is open system and approximately GBP 6 billion is single-use vapour products. Notably, today, almost 70% of the Vapour revenue pool is what we call a gray market, comprised of either illegal products or products which claim to have PMTAs pending. But given that the most recent deadline for synthetic nicotine products to remain in the market with a PMTA submission was May 2022, we can estimate that a large proportion are illegal today. With an estimated 25 million Vapour consumers in the U.S. compared to 34 million Combustible consumers, we expect that Vapour will continue to grow and play a key role in the industry's transformation driven by an increasing consumer demand. By 2030, Vapour revenue is projected to grow by GBP 5 billion to an anticipated revenue pool of up to GBP 14 billion. Again, this is a projected consumer demand irrespective of enforcement. Modern Oral nicotine pouches, while smaller in size are also expected to show strong growth from GBP 1.7 billion in 2024, up to potentially GBP 7 billion by 2030. And the revenue growth in both categories is profitable with significant margins already demonstrated at scale. Now to participate in the transformation of the U.S. market, and the unrivaled growth opportunity, it helps to have scale. The acquisition of Reynolds in 2017 provided BAT with exactly that scale. In addition to the accumulated revenue and profit growth, not to mention the cash and a dividend, the capabilities acquired and further built on provides scale to fully participate in the future U.S. growth. Examples of scale projection include a consumer reach up to 50 million consumers through retail and digital, trade coverage and relationships with 186,000 contract partners, significant science and regulatory capabilities to meet the ever shifting regulatory requirements, an extensive portfolio of approximately 5,000 patents and pending applications and a consolidated and increasingly agile manufacturing footprint. Our U.S. business has a proven track record of building and managing multi-category portfolio of brands. From maintaining strong positions in combustibles across all price segments, to launching the Grizzly brand 23 years ago to building Vuse Alto to over $1 billion business with profitable leadership in the legal Vapour category. And now more recently, with Grizzly and Velo our U.S. business has the capabilities to compete in a rapidly changing consumer market. And the magnitude of these fast evolving trends is significant. We estimate that 52% of combustible consumers are poly using with other nicotine categories. Overall, 64% of all nicotine consumers in the U.S. are using or poly using a new category product. Multi-category consumer choices have long been the U.S. strategy, and it is clearly the future direction of the market. This puts us in an excellent position to compete and win. Now as I'm sure many of you are aware, it was necessary to invest this year to strengthen our U.S. Combustibles business and address our performance. The issues with our portfolio are fully understood, and the previously announced investment has now been completed. As we lap these commercial initiatives, we are confident we will see an improved financial performance in Combustibles in 2025. We have built resilience into the portfolio, not just for economic cycles, but also for potential future regulation. This comprehensive program of planned commercial activities covered a range of actions, including portfolio-wide price realignment. Addressing affordability pressure on our premium Newport brand with soft-pack, addressing the heightened down trading due to the economic situation with Lucky Strike, for example, expanding our trade contract coverage by 5 percentage points to up to 88% of industry volumes and growing market share in those newly contracted outlets, and also investing in scale digital reach for enhanced promotional effectiveness. These commercial actions are already delivering improved performance, particularly in share of premium, and share of market, excluding deep discount, where we are not present. As a reminder, we play in 90% of the market for revenue and over 95% of the cigarette market for profit. The results we have achieved have broadly brought our performance back in line with the rest of the market. And as you -- you can see on the table on the right, there are continued signs of volume and value share recovery. In Vapour, we continue to strengthen our leading Vuse brand in rechargeable closed systems. With leadership in 40 states and over 50% national share in tracked channels Vuse is BAT's largest and most profitable new -- category business in the world. This year, we introduced the prismatic series to reinforce Vuse as the premium benchmark in the market. And the early signs are promising. As Prismatic achieved 1.2% value share in August, having only been launched in July this year. At the same time, we introduced SENSA, our zero nicotine single-use product designed to offer adult nicotine consumers more choice as their preferences evolve. Our research indicates nearly 1 million adult nicotine consumers already enjoy zero nicotine products in the U.S. And today, these products were available in over 30 states. Last, but by no means least, we have reinvigorated our performance in Modern Oral, the fastest-growing category in the U.S. market growing 63% this year. The refreshed Velo mix, which included packaging and communication upgrades was first parted in New York, growing volume share from 9%, 1 year ago to 16% by August this year. National rollout commenced in the first quarter of this year and volume share has increased from 4% to approximately 7%, stabilizing as we taper discount support which is a proven practice in the market to establish distribution and drive trial. We also introduced our Grizzly Modern Oral offer in June to maximize the value of our most popular traditional oral brand in the U.S. Our consumer insights confirm the strong potential of the proposition, which has achieved almost a share point of the Modern Oral market with a -- within 3 months of launch. Now enhancing our modern oral portfolio is a major focus for the U.S. business. As we look to replicate the leadership position we achieved in other markets around the world, as you've heard earlier today. In 2025, we will introduce our Velo+ offer, which has a higher moisture profile, a broader flavor range and more nicotine strengths. We know that adult nicotine consumers want superior product choices from trusted brands. And based on our research, Velo+ offers precisely that, a superior product experience. We expect that this strong product offering, combined with our marketing capabilities and scale will allow us to capture more of the modern oral growth in the U.S. Beyond Velo+, we continue to innovate and have an extensive pipeline of PMTAs already submitted for Velo. These pipeline products build on our expertise from our leading Velo product in Europe with enhancements to reflect the preferences of the U.S. nicotine consumer. We have really exciting plans ahead for Modern Oral, and we look forward to sharing more in due course. Now as a sidebar, it's also important to note that we evaluate the complete range of U.S. new category growth opportunities. And in regard to heated tobacco products, we remain skeptical on whether the characteristics of the U.S. market are favorable for its development. Heated product success has been correlated to tar and nicotine content in cigarettes, smokers with preferences for high-strength combustible products in markets like Canada, have been less likely to switch to heated products and smokers in low-strength markets. And bear in mind, the U.S. tire level is amongst the highest globally. We do not see the same opportunity for heated products as we do for Vapour and Modern Oral. However, we have submitted PMTAs and MRTPAs for our Globe products, and we will be ready to compete. Now I'd like to turn it over to my colleague, Jeff, to provide us with an overview of the U.S. regulatory environment.

Good morning. It's my pleasure to be here today. I will focus on the illicit enforcement aspect of the regulatory environment, where we have engaged credibly and effectively for well over a year. So we have 50 pending PMTAs in case you didn't know, and more marketing grant orders, 22 of them than anyone else in the industry. So no one has more interest in this than we do. Now it's been a long road, and it will remain a long road, but we are starting to see progress on the enforcement front. For example, FDA has proposed a rule requiring tracking numbers for import, which will help customs and border protection to stop illegal shipments. The creation of a multi-agency task force with FDA, DOJ, ATF, the U.S. Marshals, the postal service and the FTC is very good. Both of these things we have pushed for over the last 12 to 18 months. Also, FDA has ramped up frequency of its warning letters, seizures and monetary penalties. Almost 1,500 letters in 2024 alone with 50% of them aimed at single-use products. It was in the 1% range. Seizures are up year-over-year by almost 250% and monetary penalties are up as well. Now one of the things that led to this progress is that there's been significant pressure on FDA from both the media and congress. The media coverage of the THR issue generally, the notion that Vapour products present 95% less toxicants, but FDA has denied 99% of all PMTAs, combined with the explosion of illicit products drove federal and state officials to take notice. There have been multiple house and senate hearings where Democrats and Republicans, both sides of the aisle, pushed FDA officials on why the delay in enforcement. State governors, Attorneys General and state legislators have begun to take note as well, and I'll talk about that next. So while there has been much progress, much more needs to be done to make it commercially meaningful in light of how the market continues to change, as you can see on the chart, the geek bar image on the slide, these LED screens were nonexistent in January of this year in the U.S. So we believe these products cannot be compliant with the current rules and regulations, which is one of the reasons why we've taken the proactive step of filing 2 complaints with the International Trade Commission, both of which were accepted and investigations have begun. We had our temporary exclusion order hearing 2 weeks ago on the patent complaint, which focuses on 35 manufacturers. And our general exclusion order hearing in the PAC DAC complaint will be in February of '25, this focuses on about 30 manufacturers. Now none of this is fast enough for our liking. But again, combined with the other pressures, we are hopeful and optimistic that we will see more effective enforcement as we move forward. But that's not all. We've also taken the issue to the states, where 14 have enacted some form of enforcement legislation in the last 2 years. Louisiana has proven to be the most effective model. It requires PMTAs to be on file with its directory, a manufacturing fee, licensed retailers may purchase only from licensed suppliers and penalties for violations are tied to law enforcement pay. Now not all states are created equal, and they're not the same, of course. For example, Alabama and Oklahoma had the PMTA on-file requirement, but no enforcement funding or mechanism. That was proposed in this year's sessions in both of those states, and we expect it will be proposed again next year. And we are optimistic for improved enforcement in all of the 14 states. In fact, 10 states pass directory or enforcement bills in 2024. Now speaking from experience, this is a big deal. When you consider how difficult it is to get multiple states in the same legislative session to pass similar bills. These 14 states with enforcement laws now in place cover approximately 30% of industry volume, and we expect there to be more states in 2025 to pass these laws. And we are seeing how commercially meaningful that can be. So in Louisiana. Since implementation, you see 28% growth in the legal Vapour market and a 91% reduction in tracked channels for single-use illicit products. That has translated into faster growth for views in both volume and market share. Louisiana shows it is possible, and we believe this will become more effective in both Louisiana and in the other 13 states as well as any additional states that come online during the 2025 legislative sessions. I look forward to any questions you might have in the Q&A. But at this point, I'll turn it back over to David.

Thanks, Jeff. So to conclude, we see a resilient Combustibles value pool in the U.S. driven by the strength of our brand portfolio. Alongside this, we continue to see a tremendous opportunity. There is a GBP 14 billion revenue pool, which is growing strongly up 11% since 2022 alone, driven by a changing consumer preference for noncombustible nicotine products. Approximately 40 million consumers are participating in these dynamic new categories or 64% of the total nicotine consumer population. Today, some of these spaces are contestable to our U.S. business, for example, oral and some are not, i.e., nicotine Vapour products that disregard regulation. Now imagine if you will, a set of circumstances in which the regulatory process is efficient and effective at bringing scientifically substantiated products to market faster. And now imagine the regulations have forced and the illegal product availability across the United States is significantly reduced versus today. Now consider that Vuse as a leading brand in both the U.S. and in the Rest of the World is able to compete on a level playing field, and that Velo can replicate its proven track record in Europe in the United States with products that adult nicotine consumers prefer. Now if you consider the future growth projected, our business capabilities, our brands and our scale to achieve a significant share of this growing revenue pool. Well, then it will be clear what building a smokeless world looks like in the U.S. and how our businesses [ positions ] to win in the world's most valuable nicotine market. Thank you.

Thank you, David and Jeff, and to all of our morning presenters. We will now start the first of our 2 Q&A sessions today, and so I'd like to ask today, David, Jeff, Luciano and Zafar to come on stage. [Operator Instructions].

Faham Baig, UBS. Certainly a lot to digest. Two from me to begin with, I guess, Luciano first. I think you mentioned you expect more limited long-term potential in heated tobacco compared to the other 2 categories. Maybe could you expand on that and what you mean by it and sort of balance it with the investments that you're making in that category?

Yes. So first, it's very difficult to say because as you know, all these categories are moving extremely fast. But what we have seen in the last 12 months is that the category of heated products is slowing down its growth in the main markets. And the main reason is because these consumers are probably using more and more with vaping and modern oral. And that is happening more and more. So that's one reason. The second reason is because we think so far with the technology available, the potential for heated products in the developing world is less because the cost of the device is more expensive. So we see that, especially in the developing world, both vaping and modern oral are growing much, much faster. And all the attempts of introducing THP products in developing worlds, so far is not working. So that's one thing. To your second part of your question is, we will still invest in THP. Basically because although we are leaders in the value segment, we have almost nothing in the premium segment, where 80% of the revenue is. And with this new product that I cannot talk about, we think we have a lot of potential to compete and to win a bigger space, where 80% of the revenue is. So we will keep investing. We are very confident on the product we have. But in the terms of long-term potential, we think and we believe that both vaping and modern oral will have more potential long term.

The second question is the bifurcation between the U.S. and Europe. So I think you presented 33% of revenues in the U.S. are now smokeless. And clearly, that's having an impact on cigarette volumes being down roughly 10%. But if we take a look at Europe, where I think 36% of your revenues are smokeless. Cigarette volumes are flat in some markets, even growing. So could you maybe expand on why Europe isn't seeing the same decline in cigarettes compared to the U.S. where next-generation products are still doing reasonably well?

See the U.S. is a very unique situation on the macroeconomics as well because you have to go back to the pandemic year in 2020. There was a lot of support from consumers, mainly low-income consumers on the federal level, state level, consumers didn't have any ways to even spend the money. So all of a sudden, you saw a category that has a secular decline of 4%-ish, 4% to 5% growing up in 2020. So very different as per net way. And this whole thing changed dramatically in a u-turn from 2022 onwards. Levels of inflation went up substantially. Interest rates went up substantially. All this money from federal state level was taking out and consumers start to having more discretion to spend I think that, that aggravated in the U.S., in particular, the consumption of this cohort of consumers and not just in the cigarette space, but also in other industries as well. And then on top of that, this got exacerbated by the proliferation of illegal vapors, which is not the same scale that you see also in Europe. So I think that the circumstance in the U.S. are different in that perspective.

Any other questions? Richard.

Richard Felton from Goldman Sachs. My first question is for David, and it's a question on U.S. Vapour, which you spoke about reaching [ GBP 12 billion to GBP 14 billion ] market size by 2030. So I'd be interested to know what assumptions you make to get to that number specifically, what kind of regulatory framework do you envisage? Are there flavors in the market or not?

Yes. Thanks for the question. That trajectory is based on no expectation on enforcement. So we're just looking at pure consumer-driven demand. You can see all of the demographic age breakdowns, how consumption incidence is evolving. You can see the preferences in the market. So we're not overlaying on that a change in the current regulatory scenario. That's just pure consumer-driven demand. And the key, as Jeff was explaining the key is to address this incredibly large gray market so that BAT can compete in it and gain a share of that.

Great. And then second question is on your R&D and innovation model, specifically on Vapour. And my question is around SMOORE, which is your main innovation partner, but I understand also partners with some of your competitors and has some of its own consumer brands that I suppose it competes with Vuse. So my question is, how do you -- first of all, is that long term, is that the right innovation model for BAT in Vapour. And then secondly, if it is, how do you ensure that incentives are aligned that when you drive innovation with your partner, that is specific innovation for Vuse that's differentiated to your competitors?

Okay. Putting it into perspective, the SMOORE relationship? SMOORE, yes has its own brand, but they are primarily focused in the open systems. It's a brand called Vaporesso. Our big tobacco competitor that deals with them is Altria in the U.S., which is a brand called NJOY for the U.S. only. Now how do we -- how have we transformed this strategic relationship, and that is the fundamental crux of this question. Our relationship with them is based on joint developments? It's based on exclusivity on projects. It's based on joint investments into projects. And hence, that gives us a runway with them that they have agreed to share. Now they don't have any plans or any current intention in this very, very sort of decentralized or spread Vapour space to build a brand of their own in that space. They don't have any intention as at now, and they do not have the ability to have that kind of a distribution scale either. So currently, our relationship is quite tight. It's been like that for the last 5 to 7 years with them, including the U.S. They also don't have any PMTAs or any further flexibility in the U.S. So they go through us. And that is the crux of it. Whether they're going to go into marketing product with other companies they have the freedom to do that. But when we talk of exclusivity on technology or new technology, that is where we are covered.

Gaurav Jain from Barclays. So Tadeu, a question for you. So your financial algorithm is not changing. So the revenue growth is at still 3% to 5%. EBIT growth is still 4% to 6%. But you have shown a slide, which suggests that the industry revenue growth rate is accelerating, what it used to be, let's say, a few years ago, it was 3.5%. Now it's 4.5% and also the profitability of NGPs is much higher than cigarettes. So how is BAT benefiting from this entire transition and financial numbers?

Well, yes, I think that's the -- what we are trying basically the industry is heading that direction. And it's our -- which is, I would say, is compared with other FMCGs, there are not many that could say that, that we are expecting this type of a value growth for the future. That's the first point. The second one is the fact that there will be different components to this growth. We expect combustible to be less so. That's why when I open up the 3 to 5, I said, well, combustible will probably be between flattish to 2% and most of the growth coming from new categories. And we are actually expose a lot for combustible mainly on the U.S. side. So this is another equation for us. But the 3% to 5% is supportive, not just by the industry move, but what I call that is very unique for BAT is this potential white space that I was referring to. Because when Luciano talks about 80% of the value THP is why we are not basically present. This is a white space for us, if you get it right. When we talk about GBP 1.7 billion revenues in modern oral in the U.S. where we are just starting this is another big white space for us or even the GBP 6 billion in terms of illegal products in the U.S. that could be. So I think that's what we are saying, getting some of those right. I don't need all of them right. We should be comfortable with in the range of 3% to 5%. And this should translate into the 4% to 6% and I always call the attention that 4% to 6% include transaction FX because this not a kind of a one-off effect. It's every single year, there is transaction FX has been the case for years now. And so if you talk in a currency neutral base will be even higher than the 4% to 6%. So I think that is a very compelling algorithm that's not just supported by the trends that we are seeing from the industry side, but also for the opportunity, specifically for BAT to leverage on all these capabilities that we have created and start sharing with you today.

And a question for Luciano. So this 9 MG Velo product, which you are saying you will launch in Q4 in U.S. Does it have a PMTA? Or how are you launching all these new products when they were likely not present pre-2020?

David will answer that.

Yes, let me take that. So we acquired a product that was on the market in 2022. They had submitted a full PMTA submission by the deadline of May 2022. And we acquired fully that product. We're very confident in the submission that was made. We're exceptionally confident about the product and the product quality and what we expect from it. But that's what we needed to do to move forward is to acquire a product that allows us to not just keep waiting for -- well, obviously, we know what a great product is. We sell it every day in Europe. We would like that in the U.S., but that has to go through the process with the FDA, so this was an opportunity that we couldn't turn up, and that's what we'll be bringing to market very shortly.

So this is a synthetic nicotine product?

Correct.

And will this be like one of the first synthetic negate products you will be launching? Like how are you approaching the entire synthetic nicotine this space? Is this something you would want to go more aggressively in?

Well, we'll look for -- we'll continue to look for opportunities, if they have evidence of being on the market and if they have a good submission on those products, Obviously, nicotine derived from tobacco and synthetic nicotine from a chemical point of view, they're the same. There was obviously a deadline of May 2022. So people needed to have good products on the market by that time. Obviously, we see in the market today, many people don't, but this one did. So that's why we acquired it.

Any other hand, Damian?

Rae Maile from Panmure Liberum. I hope Jerry Abelman doesn't take this too personally, but I'm delighted in looking at the line up today, there's no update on litigation, which is quite a big change for the last 25 years' worth of these events. I wonder in the absence of that, though, you could just touch on Canada and the situation with respect to the group action class -- action, whatever you want to call in Canada because I know the most recent stays only for a month as all the other ones have been rather longer.

Yes. Well, look, the CCAA deal negotiation precludes us to make, as you can understand comments about what has been discussed and because we are bound by confidentiality. But there are 3 principles that I have always referred to and they are valid that we make sure that we get out of this negotiation. One is a local deal with the Canadian subsidiary is not a PLC deal. So whatever negotiate come out of the CCAA is to be paid and afforded by ITCAN our BAT subsidiary in Canada. That's the first one. The second one is a combustible deal. So it's not a noncombustible. So all type of earnings coming from noncombustible results of this deal. And the third one needs to be a comprehensive deal that encompass all the past, future and not a piecemeal in terms of plant tips, needs to be very comprehensive. Now the other point that I have been made in always is that CCAA because a lot of people making an analogy between that and MSA. And the -- they are very distinct realities. If you go back to the U.S. of the 90s, when we have the MSA, first, there was no illegal product in the U.S. the price elasticity very low, the excise incidents very low in the U.S., which means that the industry actually price up and then things move on. If you go back to -- you go now to the reality in Canada today is completely opposite. 1/3 of the market is illegal. We have a very high level of price elasticity and excise is very high. So this means what? So what I'm trying to say to you all, that's what I have been saying so far. There will be two major impacts for us: One, the cash that has been trapped since 2019, this will go as soon as we come with the plaintiff. And this has an impact, not in gross debt of VAT, but in net debt, and as a consequence of leverage that is calculated from the net debt; The second point because of the analogy that I just made on the MSA, there will be some earnings haircut, material earnings haircut for the future because the cash trapped in the Canada today will be enough to pay for all the penalty and there will be some payments, future payments. Now I don't know how many of you are aware of, but the court in Canada publicly said a few days ago that they are willing to up to the 12th of December to put in front of the creditors provide them to vote. So I would expect from any time from now until the 12th of December to hear back from -- in terms of what the proposal is, and I will make sure that the three principles that I was referring to are factoring in, and then we're going to make a full assessment of the details behind that. So with all this uncertainty and the lack of I would say, more details that I can provide at this point in time. What we have been doing for a time -- for some time now is providing all the visibility for all the investors, analysts about what Canada -- BAT Canada means for us as a group in terms of revenues, in terms of profit, in terms of impact on leverage. I said that the impact on average circa 0.3x. And you have all the detail around profits. And I always say, look, the best way for you is to start stripping out the whole Canadian business out BAT numbers, so you can have a look at what is the group shape looks like moving forward. And then we see what -- where we land, and then we have much more clarity from the point of time that they put this proposal through to have a more, I would say, a conclusive discussion around that. But I think that is getting closer now and then definitely than was before.

Martin Stewart from Allianz. Across the various presentations, there's a theme of the GBP 6 billion, I would say. If you have the right regulation, how much of the GBP 6 billion falls within your offering? And how much would you view as being a success to pick up?

You're talking about the GBP 6 billion revenue pool of Vapor in the U.S...

Yes.

for disposal? Yes. Well, that poll is today not available to us. We don't have those products. And as I said, we believe the vast majority of product shouldn't be on the market. So what would it take is for that regulation to be enforced. So that volume that is currently being sold in an illicit manner to disappear. And then obviously, there are products with pending PMTAs or an MGO in the case of salt tobacco. That we would obviously further develop and further build out and take the space over time. That would be the plan. We have, as Jeff mentioned, we have a large of PMTAs with improved products, more choice. So the idea would be to win in that enormous pool of revenue. But to do so today, we need the PMTA is to be expedited in an efficient and effective way. And we need the rules enforced in the market. So there's a level of playing field. And we don't have that today.