British American Tobacco p.l.c. Q2 FY2025 Earnings Call

Good morning, everyone. I'm delighted to welcome you to our 2025 interim results presentation. With me this morning is Soraya Benchikh, CFO; and Victoria Buxton, Group Head of Investor Relations. I will begin with our transformation highlights and the progress we have made against our 2025 priorities. Soraya will then take you through our financial results in more detail, before I return to talk more about our performance outlook and why we are confident in the pathway ahead. We will then take your questions. With that, I would like to draw your attention to the disclaimers on Slide 2 and 3. Let's begin by looking at the positive transformation momentum we are driving. Starting with some highlights. We have delivered group results slightly ahead of expectations, which Soraya will talk about in more detail. Smokeless now accounts for 18.2% of group revenue, up 70 basis points versus last year. And we added 1.4 million smokeless consumers reaching 30.5 million, mainly driven by our continued success in Modern Oral. Our focus on quality growth, balancing top and bottom line delivery has driven a further improvement in new category contribution margin up 280 basis points to 10.6% at constant rates. We continue to enhance our financial flexibility enabling us to make progress on the leverage and reward shareholders with strong cash returns. Alongside our progressive dividends, we recently increased our 2025 share buyback by GBP 200 million to GBP 1.1 billion. I'm proud that we have delivered what we said we would in the first half against our 2025 priorities as we continue to build a track record of delivery. Our quality growth focus is central to our new categories execution to ensure we roll out new innovations in a targeted way while continuing to improve our contribution margin. Driving value from our combustible business is essential to funding our transformation and the U.S. is a key driver of this. I'm delighted with our return to both revenue and profit growth in the U.S. for the first time since 2022, driven by combustibles and modern oral. We remain focused on our proactive approach to regulatory affairs and continue to advocate for science-led level playing fields with robust enforcement for smokeless alternatives. In the first half, we activated Omni in 13 markets globally, with further launches planned for the second half of the year. Importantly, all of this is executed with a strong focus on cash generation, enabling us to continue to deleverage and reward shareholders with strong cash returns. I'm pleased to report a notable increase in energy and momentum across the group. And I would like to thank all our teams around the world who are driving these encouraging results. And with that, I will hand over to Soraya to take you through our H1 performance in more detail.

Thank you, Tadeu, and good morning, everyone. I'm pleased to share that our results on a constant currency basis came in slightly ahead of expectations. Our reported numbers include some adjusting items such as a GBP 575 million reduction in our Canadian provision following an update of the forecasted market performance and the GBP 900 million gain from the partial sale of our ITC investment. To give you a clear picture of our underlying performance, I'll focus on constant currency adjusted metrics, and you can find more detail on the adjusting items and market share data in the appendix. In H1, we delivered a strong performance ahead of our original guidance at the upper end of our 1% to 2% revenue growth range. Group revenue was up 1.8%. Adjusted gross profit rose by 3% and adjusted profit from operations grew 1.9% with adjusted diluted EPS increasing by 1.7%. With a stronger-than-expected H1, we now anticipate full year revenue at the top end of our 1% to 2% guidance. We maintain our APFO guidance of 1.5% to 2.5%, reflecting increased investment in new categories and the stronger U.S. combustibles comparator in H2. Let's now turn to new categories. Revenue was up 2.4%, driven by an outstanding growth in Modern Oral, which was up over 40% and Heated Products, which rose by more than 3%, this was partly offset by a 13% decline in Vapour mainly due to illicit trade in the U.S. and Canada. We are delivering quality growth with gross margin up 250 basis points and contribution margin up 280 basis points, reaching 10.6%. This reflects our targeted investments in high-value markets, a disciplined approach to ROI and the benefits of scale. And I'm really proud of the progress we've made, and we expect momentum to build in H2 with new category revenue growth moving into the mid-single digits for the full year. Modern Oral in AME is a fantastic example of quality growth and action. We are clear category leaders in the region with 63% volume share in top markets. And over the last 4 years, consumer numbers, volume and revenue have more than tripled, making Modern Oral our largest new category in the region by both revenue and contribution with a gross margin already 10 percentage points above combustibles, together with the fastest payback period of just over 1 year. Looking forward, I am confident that Modern Oral will continue to be a key driver of our sustainable growth and profitability, both in AME and globally. Now turning to combustibles. Revenue increased 0.8% with volume decline more than offset by strong pricing across the globe, driving a healthy price mix uplift. We delivered quality growth here, too. Gross profit increased by 2.4% and contribution rose 2.2%, helped by a strong performance in the U.S., favorable price mix and ongoing productivity and simplification gains. I'm especially pleased to see our U.S. combustibles business return to growth for the first time since 2022. This demonstrates the resilience of our combustibles portfolio and strengthens our confidence in hitting our midterm targets. Now looking at the U.S., I am delighted to say we've returned to both revenue and profit growth. In combustibles, our improved portfolio and stronger execution, including enhanced revenue growth management delivered a 3.8% increase in revenue as we lap last year's investment cycle. Volume share rose by 10 basis points and value share by 20. And excluding the deep discount segment where we are not present, our volume share was up 60 basis points. In new categories, revenue grew by 3.9%, driven by the successful launch of Velo Plus which delivered over 380% growth in Modern Oral revenue. This was partly offset by a 12.3% decline in paper impacted by ongoing illicit single-use products. Overall, U.S. revenue grew 3.7% and adjusted profit rose 3.2% led by combustibles, though partially offset by Vuse headwinds and investments in Velo Plus. Tadeu will share more on the U.S. shortly. AME had another solid half. Revenue rose 3.5% with combustibles up nearly 3%, thanks to strong volumes in Brazil and Turkey, with solid pricing. New category revenue grew by 1.3%, including nearly 17% growth in Modern Oral, where we hold a 63% volume share. Offsets came from illicit vapour in Canada and evolving market dynamics post single-use vapour bans in some large markets. Heated Products growth in Poland and Portugal was more than offset by the impact of resource allocation decisions in the Czech Republic, Germany and Romania. Adjusted operating profit grew by over 10%, well ahead of revenue driven by operating leverage and efficiency gains and combustibles, scale benefits and resource allocation in new categories and our accounting treatment for Canada. AME is a true multi-category region, delivering quality growth. In APMEA, fiscal and regulatory headwinds in Bangladesh and Australia outweighed good performances in Pakistan and Nigeria. Total revenue was down 4.8% with combustibles down 7.9%. New category revenue increased 2.5%, driven by Heated Products, growth in Japan and Modern Oral gains in emerging markets, partially offset by vapour, which was impacted by strategic market exits as we shifted our focus to more profitable opportunities. Adjusted operating profit was down 12.3%, mainly due to the challenges in Bangladesh and Australia. Operating margin held steady as we offset inflation and FX pressures with a strong performance in the U.S., higher profitability in new categories and continued cost savings. At current rates, operating margin grew 20 basis points. BAT has a strong track record of cost savings, and we continue to build on it. Since 2023, we've delivered nearly GBP 900 million in productivity savings and are on track to exceed GBP 1.2 billion by year-end. These savings help us manage inflation and foreign exchange impacts while funding innovation in new categories. In H1, we absorbed GBP 166 million in inflation-related costs and a 1% transactional FX headwind on adjusted operating profit. Looking beyond 2025, we remain focused on simplifying combustibles and scaling new categories, targeting an extra GBP 2 billion in cost of goods sold savings by 2030. And to further drive agility and savings, I'm excited to introduce our new Fit2Win program. Fit2Win is a 3-year program designed to simplify the way we work, increasing agility and embedding digital decision-making. While we're still in the planning phase, we're confident it will generate around GBP 500 million in annualized savings by the end of 2028. These savings will support our growth algorithm and fund investments that drive long-term profit and cash flow. Importantly, this is incremental to the GBP 2 billion cost of goods sold target that we announced at our Capital Markets Day last year. We expect associated costs of GBP 500 million over the next 2 years, and there's a one-time investment, GBP 350 million of that will be treated as adjusting starting in 2025 and ending in 2027. I'll share more at our full year results in February. Earnings per share rose by 1.7%, while lower share count supported growth, it was offset by our reduced share of ITC profits and higher net finance costs. Our underlying tax rate was 24.4%, and we expect a full year rate of around 25%, assuming no major changes in prevailing tax rates. Translation FX was driven by sterling strength against most major global currencies with weakening U.S. dollar contributing around 50% of this headwind. Our strong cash generation continues to enhance our financial flexibility. We are on track to deliver more than GBP 50 million in free cash flow by the end of 2030. And we remain focused on our capital allocation priorities, which are investing in transformation, balancing deleveraging with progressive dividends and sustainable share buybacks and selective bolt-on M&A to support our transformation in May, we increased our 2025 buyback by GBP 200 million to GBP 1.1 billion, with GBP 650 million allocated for the second half. To summarize, H1 was ahead of expectations and the momentum we're building through this deployment year gives us confidence in delivering our full year guidance. Key growth drivers include continued strength in the U.S., led by combustibles and Velo Plus, acceleration in new category revenue as glo Hilo and Vuse Ultra rollout and Velo maintains strong global momentum and further gains in new category contribution. With a stronger-than-expected H1, we now anticipate full year revenue at the top end of our 1% to 2% guidance. We maintain our APFO guidance of 1.5% to 2.5% reflecting increased investments in new categories, a stronger U.S. combustibles comparator in H2 and the 1% to 1.5% transactional FX headwind. All of this enables us to invest more in innovation while staying firmly on track for 2026. Our H1 results show strong progress across multiple drivers, reinforcing my confidence in returning to our midterm algorithm of 3% to 5% revenue growth and 4% to 6% operating profit growth. If we exclude the regulatory and fiscal headwinds in Bangladesh and Australia, we're already hitting the lower end of our midterm targets with 3% revenue growth and 4.5% operating profit growth. In addition, I'm also encouraged by the early signs of our premium innovation rollout which Tadeu will now talk about in more detail.

Thank you, Soraya. I would like to outline our confidence in the pathway ahead. The nicotine industry is rapidly transforming and growing as added consumers around the world are increasingly switching to new categories. We have pursued a mood category strategy from the outset which means we are well placed to benefit from these consumer trends, leveraging our world-class insights, innovation ecosystem, brand building and distribution capabilities. We have invested to build a well-established portfolio of global brands across all 3 new categories. In addition, given our global footprint and with a number of our key markets still close to smokeless alternatives, we recognize that we must continue to invest to drive value from combustibles with a well-balanced portfolio of brands across price tiers. Let me now share more detail on our new category launches. Starting with Modern Oral, the fastest-growing new category by far, which is already reaching global scale. Its position on the risk continuum was supported by a recent study which demonstrated that smokers who switch completely to oral nicotine products are exposed to lower levels of toxicants similar to those who quit. Modern Oral is highly successful in both traditional oral markets and new markets with no existing oral nicotine tradition and it's also highly profitable with a fast payback, as Soraya mentioned. Following our successful launches in Pakistan and South Africa, we continue to see an exciting opportunity for Modern Oral in emerging markets given its adaptability and affordability. Modern Oral is becoming a meaningful contributor to our group delivery as Velo continues to grow from strength to strength. We are clear leaders in AME close to 6x the size of our closest competitor and capturing around 60% of category growth, which highlights the further opportunity ahead. Velo is a premium product over-indexing on value and strongly outperforming our peers across the region. Given BAT's European Modern Oral leadership position, we have applied our know-how and capabilities to the U.S. We were already confident that with the right product, we could make performance inroads in the U.S. and that is now being realized with Velo Plus. In the U.S., the Modern Oral category value of around GBP 2 billion has already overtaken the size of the legal vapor market and is expected to almost double over the next 2 years. With the successful launch of Velo Plus, we have a step change in our U.S. performance and are now the fastest-growing Modern Oral brand. Velo Plus is driving triple-digit revenue growth and strong volume share gains. In May, Velo had gained almost 9 percentage points of share since launch. Encouragingly, the latest volume share read from July is above 17%. These results are a testament to the quality of the product, the improved strength and speed of our distribution capabilities and our sharper execution enabled by RGM. We are excited about the opportunity ahead and Velo Plus is already #2 in volume share in 11 states, including New York and Texas, which together represent around 10% of the total U.S. category. And importantly, after investment in the initial launch and rollout phase, we expect Velo Plus to deliver a positive category contribution for the full year 2025. In Heated Products, glo Hilo is a breakthrough innovation that we believe will reshape the way Glo is positioned in the premium segment, which represents over 80% of industry value. Glo Hilo has several new and innovative features, including fresh ramp-up, hitting justified second, a personalized LED screen and connectivity with the myglo app, enabling customized sessions, find my glo and remote locking. Alongside new upgraded consumables with enhanced taste and satisfaction, it is the closest we have ever achieved to replicating cigarettes. At the end of 2024, we launched glo Hilo in Serbia. We integrated the insights and critical learnings into our rollout approach, beginning with our June city launch in Sendai. While very early days, I'm encouraged that both the consumables and devices are resonating well with consumers. Glo Hilo is driving improvements in consumer perception of glo, including brand equity and appealing design. In addition, we have captured 1.5 percentage points of volume share in just a few weeks at a premium price point. Importantly, Hilo is the first time glo will also offer a 2-piece device launching as part of the national rollout in Japan this September. We will continue to roll out glo Hilo in a targeted way in the largest Heated value pools through the second half. It's our belief that premium vapor done right is an untapped opportunity, offering greater differentiation and value generation potential. Vuse Ultra is our initial step, delivering a high-quality and satisfying experience alongside the connected and highly customizable offering. Key features include a small new smart pods, which automatically adjusts the device to consumers' preferable flavor settings, a clear view display to easily track battery and liquid levels, and connectivity enabling find my vape and the device lock further reinforcing Vuse's position as a brand consumers can trust. Vuse Ultra was launched online in Canada at the end of Q1 with a nationwide rollout from June. Initial consumer feedback has been positive. Vuse Ultra is driving a strong improvement in key attributes, including premium, innovative and easy to use, capturing over 2 percentage points of value share since the nationwide launch. We have recently launched in the U.K. and Germany, and we will continue to roll out in a targeted way through the second half. Moving to the U.S., the largest nicotine property pool globally and the cornerstone of our business. This is why returning to growth here has been a key focus area for me. We have invested in strengthening our portfolio, readdressing price gaps and indexation. We have also sharpened our execution, expanding contract coverage, increasing our sales force and improving revenue growth and management and our reward programs through enhanced digital capabilities. I'm delighted we are beginning to see value being created by the actions we have taken to strengthen our portfolio and execution. Our total volume share grew 10 basis points and value share was up 20 basis points. We are seeing broad-based value share improvement across the portfolio. Our value for money brand, Lucky Strike continues to be the fastest-growing U.S. combustible brands with value share up 60 basis points. Value share in our super premium brands, Natural American Spirit is up 10 basis points despite pressure on consumer wallets. And the targeted introduction of a soft pack variant has led to stabilization of the Newport brand family. I believe we have turned an important corner in the U.S. After significant investment, we are well positioned to build on this recovery and deliver sustained contribution to the group performance in 2025 and beyond. Turning to regulation. We are encouraged that at the state level, vapor directory and enforcement legislation has now passed in 18 U.S. states and we look forward to the implementation of these and more robust enforcement. A number of states are now demonstrating that well-constructed regulation can be effective in tackling illicit vapor with Vuse volume returning to growth. In addition, we remain cautiously optimistic about a more proactive approach to illicit vapor enforcement at the federal level. The new administration has been clear that tackling illicit vapor is a key priority, and the FDA has already taken some important first steps updating product classifications, closing loopholes for small shipments and seizing illicit products. While these actions have recently driven more than a 40% reduction in vapor-related shipments to the U.S. due to the long supply chain, we are yet to see any meaningful impact on the ground. As a result, we are not assuming any improvement in the legal vapor market in our 2025 guidance. As mentioned earlier, we continue to focus on sharpening execution, and our digital transformation is a key enabler. Thanks to the strong strategic partnerships, BAT is ahead of the curve. Let me share 4 key highlights. First, we are a global leader in cloud adoption with 85% cloud hosting through strategic partnerships. Second, our pioneering partnership with Microsoft enabled the rapid build of our enterprise data platform, advancing our global data infrastructure through MS fabric and next-gen technologies. This empowers our data-first agile organization enhancing tools like IGM and marketing spend effectiveness. Third, this year, we launched our GenAI lab in Dubai, making BAT the first CPG company in the region's AI hub. We've already deployed use cases like Ask Omni, AI-powered sustainability bots and advanced consumer insight tools. And finally, we have streamlined our strategic technology partnerships, reducing IT run costs by 40%, while maintaining 99.9% uptime. We will continue to drive BAT's digital transformation with our partners, fueling growth, enabling productivity and building a more sustainable business. Our recently announced strategic partnership with Accenture is a clear example of our digital transformation in action. We are transitioning our global shared service to Accenture. This partnership gives BAT access to Accenture's cutting-edge technology ecosystem, including Agentic AI solutions and the strategic collaboration with world-leading technology companies. These capabilities will help us further to simplify our process, accelerate future markets, upskill talents and reduce costs over the medium to long term. In return, BAT's industry-leading expertise in supply networks, we will strengthen Accenture's global supply chain and operations. This is a key step in making BAT a future-ready, digitally enabled organization powered by strategic partnerships. In conclusion, as Soraya highlighted, we are on track to deliver our full year guidance. And looking into 2026, I'm confident that we will build on our underlying momentum with the key growth drivers, including the continued momentum in the U.S., AME and Velo, lapping Bangladesh combustibles headwinds, a further increase in new category contribution and a step-up in efficiencies with our new Fit2Win program to deliver 3% to 5% revenue growth and 4% to 6% adjusted profit from operations growth. And finally, I would like to share a few key takeaways from our results. We have returned to revenue and profit growth in the U.S., a critical milestone. Velo is the fastest-growing brand in the fastest-growing new category with real momentum in the U.S. and globally. And we are increasing profitability across our new category portfolio. Our R&D ecosystem is delivering exciting premium innovations. And we continue to amplify our proactive approach to regulatory affairs to unlock new markets and create a sustainable competitive playing field. At the same time, our digital transformation is accelerating, enhancing execution and unlocking further efficiencies and agility. All of this is executed with a cash focus, returning GBP 17 billion to shareholders over the last 3 years while continuing to deleverage. While there is more to do, I'm confident that we have the right strategy, capabilities and people to deliver a profitable transformation. I'm excited about the future for BAT, and I believe we will deliver long-term sustainable growth and value for all our stakeholders. Thank you for listening. We will now be joined on the stage by Victoria for the question-and-answer session.

Thank you Tadeu and Soraya, and good morning, everyone. I will now hand over to the operator.

And our first question today comes from Simon Hales with Citi.

Two or 3 for me, if possible, please. Tadeu, can you just talk a little bit more about sort of the early performance that you've seen from the glo Hilo launch into Japan. Obviously, you referenced it in your presentation in terms of the recent share gain you're seeing. Qualitatively, what is the feedback you're getting on the ground from those Japanese consumers? How does it vary at all from what you saw in the test market in Serbia? And how should we think about the scale of the rollout into other key markets through the rest of the year? What percentage of your key Heated tobacco markets do you expect to be in by the end of the year? And then secondly, on Modern Oral, clearly, a very strong performance coming through from Velo Plus in the U.S. and you referenced the further share gain that you've seen coming through into July as well. Have you seen any change in momentum for the brand as you exited the quarter and came into July, given that the biggest competitor on the ground is now back on shelf and perhaps being a little bit more aggressive in its point-of-sale promotional activity? And then finally, just really a clarification for Soraya around the Fit2Win program. I think you said that there won't be any upfront costs until 2026 for that program. There's nothing in the second half of the year. Am I right on that?

Okay. Simon, thanks for your questions. In terms of glo Hilo Japan, the feedback has been really positive from consumers. Its portfolio was much more tailored than the ones we have launched in Serbia for the Japanese consumers. We have done a lot of work to get very competitive offers because it's not just about the device. The device is clearly a massive step change from what we have been offering so far in the Japanese market and also anywhere else in the group. But the consumables are also very important. We do believe that we have a new technology on the consumables that, combined with the device heating mechanism, is offering, like I mentioned in my presentation, the closest we can get to smoking a cigarette in an HP product. And this is resonating well with consumers. Remember that in Sendai, we don't have yet the 2-piece device. And yet, we have achieved it in a few weeks, 1.5% at a premium level that we have never been able to compete with glo in terms of consumables pricing. So it's quite exciting about that. In terms of rollout for the rest of the year, we will just start because, like I said, in September, Japan, and we'll be hitting the highest profit pools in the HP category until December, but it will be just early stage. We will probably be seeing the impact of that throughout 2026. Now in terms of Modern Oral, yes, we are extremely excited with Velo Plus. The brand is keeping its momentum. When we launched the brand, as with any new launch in the U.S., we have a price list, we apply some discounts to get consumer trial. We see that once the trial, the level of retention is still being kept at a very, very high level at 70% of retention and we have been reducing the discount since the launch. Despite that, we carry on seeing increases in market share and the repurchase at the point of sale. So all in all, we are very supportive of the future growth of Velo Plus in the U.S. Today, in terms of pricing, if you strip out the leading brand, we are over-indexed to what remains in the market. In terms of value share based on the trend that we are seeing, we are very close to achieving the #2 position. So we are – and we'll be going back to a positive contribution already in 2025, which is a testament that this is a category with the right product, with the right focus and execution, we can have a very short payback. So all in all, very excited about that. So Soraya?

Thank you for the question, Simon. Let me provide some background on Fit2Win. Over the years, we've been effective at reducing costs within the business. Fit2Win is a bit different as it focuses on preparing the organization for the future. We are reviewing many of our key work processes and integrating digital decision-making. We are conducting a comprehensive review of indirect costs and examining our routes to market to ensure they align with our ongoing business transformation. In response to your question about costs, we will incur some in 2025, but this is fully factored into our guidance. The GBP 500 million will represent an annualized saving we aim to achieve by the end of 2028. Additionally, we will seek to reinvest to support the growth of our innovations.

Our next question comes from the line of Damian McNeela from Deutsche Numis.

The first question really is on whether you could provide us a little bit more color on the performance of the vape business in the AME region. I think you sort of flagged some challenges in Canada and also the transition that's happening in some of the bigger markets like the U.K. I was just wondering if you could provide some thoughts on what's happening on the ground and your expectations for vape in those markets over the medium term? And then just on the U.S. vape and just some clarification on the 40% reduction in shipments that you've seen. I guess it's very difficult to have any accurate number. But can you provide us with a sense of sort of what that means in terms of when we might expect to see a change on the ground in terms of illicit availability, please?

Okay. Damian, look, the performance in vaping in AME has been heavily impacted by Canada. The situation in Canada, Quebec, the largest province and where most of the sales are happening, has introduced regulations banning all flavors, but the level of enforcement is basically none. We see an inundation of illegal products on top of that with the big tanks, big disposable brands, which due to top care, we cannot even offer anything similar to that. So as a consequence, we had a strong business. We still performed quite nicely in the tracked channels, but there is a hidden market that is not showing up in the tracked channels that is inundating the market and making it very hard for responsible companies to compete in a level playing field. So as a consequence, the headline numbers of AME get impacted. But one thing that is interesting happening in Europe is that the trend moving from mods to closed systems. And as you imagine, when you buy mods, you're selling a device, so the NTO per unit is higher when you are selling pods in the closed system. So this will translate into an impact in the first moment in the top line of the business. On the other hand, this transition is positive for BAT in the long run. You take the U.K. for example, we have an overall share just over 10% of the vapor business, including mods. When you zoom in into the closed system, we have a 33% share. As this transition consolidates, and you know that the U.K. has just banned mods, the expectation is that we're going to see more and more closed systems replacing mods over time; we should be seeing a return to growth in those markets. The same is happening in France, although France had a large closed system market already, and we have a very strong position in France with close to 60% market share. The same happened in Germany despite the fact there is no ban there. The consumers are naturally migrating from mods to closed systems as the closed systems get better in terms of satisfaction and it’s a better economic and financial equation for consumers because you don't need to buy a device; you just buy pods over time. Another interesting point that we are seeing is that our idea was to explore the introduction of a premium segment like we have in HP, like we have in cigarettes across vapor that is not really there. Vuse Ultra was our first attempt, and we are really encouraged to see the results that we are getting on the ground. It's early days, but we got more than 2% of value share in Canada with all the convoluted situation that I referred to you. We will also be seeing very strong traction in Germany where we have just launched a few weeks ago. We have just launched in the U.K., and we're going to continue to roll out. So that's what is happening in vapor. In the U.S., it's very difficult to predict because what we are seeing on the ground is that some of these key brands are not being found anymore in some points of sale. They are running out of the shelves. But there are so many other offers of these types of products, illegal vapor products, that are basically targeting youth with flavors like bubble gum, rainbow candy, things that absolutely shouldn't be in the market in the first place. We are still seeing those products there. The encouraging fact on this is that the new administration, the new Secretary of HHS, the new chair of the FDA has been very vocal about putting as priorities the annihilation of these irresponsible and non-conformed brands. And not just the narrative, but what we start seeing on the ground, the 40% reduction in shipment is one of the data points. Because we know that some of those manufacturers misdeclare what they are bringing. They undervalue their shipments. So they are well aware of that. They are taking initiatives to cope with that. It's a question of consistency. So from the first angle to your question, we need to see consistent multi-agency work on that, which, for the time being, seems to be the case. At the same time, we need to wait because there is a long supply chain in the U.S. to see a meaningful impact. But this is one side of the equation. The other side of the equation is eventually getting the FDA to address the approval process because the root cause of all these illegality is the fact that U.S. consumers don't get enough smokeless products. That's something else that we hope that the FDA will address over time.

Our next question comes from the line of Rey Wium with Anchor Stockbrokers.

I want to start by mentioning the situation in the U.S. regarding combustible products. It's encouraging to see that the decline in volume has slowed to 7.6%. What are your expectations for the rest of the year? Is there a possibility that this decline rate will lessen further, or do you anticipate stabilizing at this level? Additionally, I would like to ask about Velo Plus in the U.S., which has shown strong performance. Can you provide any updates on Velo 2, which is still awaiting approval? Considering Velo Plus's success, what are your thoughts on Velo 2's potential when it becomes available? Finally, I seek clarification regarding your adjusted EPS figure. You present it as 162p, but I also see a number of 155.5p in your release, which excludes or accounts for Canada and currency adjustments. Could you clarify which figure we should focus on, and explain the underlying numbers? It seems that the adjusted EPS on that basis is actually down 2.4% rather than up, so a clearer understanding would be very helpful.

Thank you, Rey, for your question. Soraya will address the adjusted EPS. In terms of volume across the industry, we are experiencing a slight improvement compared to last year, which was marked by an overall 8.5% decline at this time. This year, the decline is closer to 8%. I do not expect significant changes until the end of the year. Consumers are still facing financial constraints, and confidence remains low. However, this has been somewhat mitigated by lower gas prices. We understand there is an inverse relationship between gas prices and cigarette sales in the U.S., which has been beneficial for volumes recently. Another concern is the potential for increased enforcement against illegal vapor disposable products in the U.S. Some of the weakness observed in the combustible segment is linked to the availability of these products. If enforcement increases, the transition from combustibles to these products may be reduced. Regarding Reynolds, we are pleased with our performance, indicating that our commercial strategies from the past two years are yielding strong results. This is evident in the increase in market share and value share, along with a robust price/mix. We have made some pricing decisions in 2023 and 2024, which will make comparisons for this half-year somewhat softer. Hence, we anticipate a stronger comparison for U.S. combustibles in the second half of the year. Overall, we remain confident about maintaining our momentum. We have always aimed for our revenue to return to a growth rate of 3% to 5%, which requires combustibles to deliver between 1% to 2% growth, with the U.S. contributing between 0% to 1%. We are currently exceeding these expectations. In the medium to long term, if we can achieve at least 0% to 1% growth, combined with contributions from the other regions, we believe we can return to a growth rate of over 2% in new categories. On the combustible side, the key differentiator for Velo Plus is its execution; Reynolds successfully launched the product from scratch to 135,000 outlets within 6 months, which is quite remarkable. Moreover, it adds more moisture to the market. The Velo 2.0 you mentioned also brings increased moisture and has been successful in Europe. This is why we are highlighting this product. While we do not focus much on markets outside the U.S., our Velo brand holds a nearly sixfold volume advantage over the second-ranked brand in that region. Velo Plus has been so successful that it will likely be a complementary addition. Predicting approval timelines is challenging; this ties back to my earlier point. The FDA needs to address the speed of approvals, as there have been millions of submissions over the past five years, yet only a small number of MGOs have been granted, which is insufficient to meet the consumer demand in the U.S., especially as we see more poly users. We hope the FDA can expedite these processes, ensuring that the success we are currently seeing with Velo Plus is sustained alongside our Velo pipeline outside the U.S.

Okay. On the EPS, basically, you're looking at 162.1p, which is on the constant basis. The 155.5p that you see is on a current basis. There is an adjusting item, which is our Canadian adjustment, but Victoria and her team are happy to provide you with a full reconciliation. But the number you should be looking at is 162.1p.

Our next question comes from the line of Gaurav Jain with Barclays.

Three questions from me. So first is on your U.S. cigarette pricing, which was almost 12% ahead of your big competitor, and there was clearly a lot of discussion around double drawback in the U.S. market and in the press releases or all these newspaper articles, Reynolds was mentioned a lot. So could you talk about how double drawback is impacting the U.S. business? How much it has changed on a Y-o-Y basis in terms of contribution to your portfolio? So that's my question number one. And question number two is on your overall e-cigarette strategy, it seems you have exited a few markets, especially in APMEA, like Malaysia, etc., called out. So is there something bigger happening in your overall global e-cigarette portfolio, the way you think about it? And then the last question I have is on your Velo Plus. So amazing growth in the U.S., 1.1 billion pouches in 1H. If we just extrapolate these market share trends, what you are highlighting and what we see in the scanner data, you could be doing like 6x this volume next year, assuming the market keeps growing and you get your fair share. So do you have that kind of capacity? Or will you run into capacity shortages at some point in time?

Let me begin with the drawback. This is a long-established legal framework designed to encourage manufacturing in the U.S. and create jobs, which is exactly what Reynolds is doing. There is a positive effect on our revenue from this legal framework, but we would be experiencing growth regardless of the duty drawback. There are three main factors driving this growth. The first and most significant is our performance; we are increasing our market share and value share while maintaining a strong price mix. We have outperformed the market in terms of volume. Overall, the industry is facing a decline of about 8% to 8.5%, but our decline is less severe. This overall better performance is the primary driver of our growth. Additionally, as I mentioned earlier, we are comparing against a softer period due to some decisions made in 2023 and 2024, which led to inventory adjustments that further contributed to the strong growth rates we are seeing in combustible products. Lastly, the duty drawback is helping Reynolds mitigate the structural volume decline in the U.S. by increasing exports to other markets, which not only generates more jobs but also results in purchasing more leaf to support U.S. farmers. Now, regarding the Velo Plus, it’s important to clarify that the shares we discuss are based on consumer offtake, not shipment shares. You are correct that we are experiencing rapid growth, especially considering we started from a small position at the end of last year, with only about 6% to 7% market share. Our latest data from July indicates we are already at 17%. The launch of Velo Plus, combined with our established presence in this category internationally, has enabled us to expedite machine production. We are well-prepared for the growth we are seeing in Velo Plus and do not anticipate any challenges regarding capacity in the U.S.

Let me try and help a little bit, Gaurav, with the second question. I think you're referring, if I understood correctly, about some of the APMEA resource allocation decisions that we took. It’s basically what we've had to do is prioritize, given that we're rolling out innovations in all three categories. We have a lot of innovations this year with Velo Plus in the U.S., Velo that continues globally, Vuse Ultra, and glo, glo Hilo, which requires a lot of investment. We've made some purely resource allocation prioritization to fund the investments in the largest profit pools. That’s what it is. It’s not really detracting from these markets. It’s just a question of focusing our resources so we can fuel growth across all our innovations.

Part of that involves eventually moving out of Malaysia vapor. Yes, we had to exit Malaysia vapor because that market lost any possibility of enforcement. Without enforcement, competition becomes very difficult. If there’s no level playing field, we need to be strategic in how we allocate our resources, and we will make decisions accordingly. We aim to engage with the government as soon as possible to discuss the regulatory situation. If we're unable to do that, we have to make our decisions, and Malaysia vapor is one of those cases.

Our next question comes from Faham Baig with UBS.

A couple from me, if I may. Firstly, you have now raised top line guidance twice in the past 2 months, but the EBIT outlook continues to be reiterated. Can you dive a bit deeper into where the incremental investments are being spent, which you did not budget for at the start of the year? And how you expect these investments to pay back in 2026? And the second question, just can you remind us where we are on ITC hotels? I know you've given your view on this asset previously. But where are we in the process of divesting that stake, please?

Thank you for that, Faham. Firstly, I think let's say we're very, very pleased with the H1 performance. But I think let me take it from the top line and then talk about the EBIT guidance. The top line, if we look at the 1.8% growth, it's important to remember that we're lapping the investment in H1 in the U.S. So if we looked at the 1.8%, it really equates to 1.4% growth. And that means that we are second half weighted. Because we've got quite a lot of innovations rolling out, as we've mentioned in the presentation. I think it's also important to note that the 1.5% to 2.5% guidance in EBIT has not changed, even though we're at the top line of our NTO growth. We have these innovations, and we're funding the rollouts there. It's not that we didn't anticipate it, but we would like to retain the flexibility to increase the funding to further fuel the growth going into 2026. It's also important to bear in mind that we have had some tariff impacts. It hasn't been significant, but we have absorbed it into our guidance. The main reason is really to preserve the ability to increase our investments behind the innovations. The innovations, as you know, are the Vuse Ultra rollout, glo Hilo that we're rolling out in the second half of this year, and obviously, the continued momentum behind Velo Plus in the U.S. and Velo globally. I don't know if you want to add something?

No, I think that is right. I would just say that we are in a position we have never been in the past. As a company, we have now very competitive product in every single category. It's very exciting. We spoke about that in the CMD October last year, all the efforts, all the strategic partners we are leveraging. We are seeing some of those products now hitting the market. Soraya just referred to them, and it’s a very strong position to be, very pleased with that. But obviously, this requires more discipline in terms of investing, and they will translate into future drivers of growth for the company and which is supportive of our guidance moving forward in terms of top line and bottom line as well. On the hotels, on the ITC hotels, I have said before, I continue saying that strategically speaking, we don't intend to be shareholders in a hotel chain in India or outside India. But the fact is that there are some bureaucratic steps that needs to go through in terms of the way that our shareholders date back to the early 1900s. I gave this explanation before. Sometimes things take longer for us to be able to unlock those shares, get the right approvals in the right forums, in this case, the Central Bank in India in order to be able to transact. Once we are in this position, we'll be thinking about that because this will support us going back to the corridor of 2.5 to 2 times by the end of 2026. We intend to use the proceeds from the hotel to deleverage further the company.

Our final question comes from Andrei Andon with Jefferies.

A couple from me, please. First, in Modern Oral in Europe, you were the beneficiary of the majority of category growth in H1. Could you perhaps tell us more about the actions you've taken to preserve this advantage in Europe given competitors have been increasingly assertive on growth outside the U.S.? And then second, on U.S. Modern Oral, I noticed Velo Plus is already in 135,000 outlets, which I think is ahead of the previous target for fiscal '25. Are there any incremental distribution gains still to come in H2? Or are you happy with the current distribution base?

Okay. Thank you, Andrei, for the question. In terms of Velo Plus, I will start from the second one. We are in 135,000 outlets; we are in a bit more than 9% of the value of the category. We don't really need to go much beyond that. But what we are seeing is there are a lot of retailers that are buying from wholesalers, but they want to have the product and not necessarily is being supported directly by us. It wouldn't be a surprise to see this number going further, but it is already what we consider an optimum number. Our focus now is to improve awareness of the brand because it's still low, which also demonstrates a further potential for the brand and activate trial because once the consumer tries the product, like I said, the level of retention is very high. Remember that Modern Oral in the U.S. average daily consumption is 3 pouches, while in AME as a region it’s 6 pouches and Sweden, which is a very mature market, is 12 pouches. There is a lot of potential growth in terms of the category, provided that you give them a satisfying product, which Velo Plus seems to be addressing right now as we speak. That’s the reason why we consider that the category has the potential to almost double in the next couple of years. In terms of Modern Oral outside the U.S., yes, there is a lot of new competitors coming in, the more established ones, but also new ones because, as I said, it’s the fastest-growing category, new category is also the one that ticked the box in a number of areas; in terms of risk continue, it has probably one of the lowest risks involved. It’s very close to a nicotine replacement therapy. There is no inhalation. In terms of affordability, you can address the likes of emerging markets, for example, because there is no device involved in that. In terms of margins, if anything, even higher than cigarettes. There is a lot of attraction there. What we are doing is just to keep the momentum and being able to offer consumers more innovative products around that and also spend behind the brand building. We have been doing that diligently through a number of years now. Some of the resource allocation decisions we've spoken about are exactly to support the growth of Velo that is going from strength to strength.

Okay. Well, thank you very much for your questions. I'm afraid that's all we've got time for today. The IR team will answer any outstanding questions that remain on the web. And with that, I'll hand back to Tadeu for closing remarks.

Okay. Thank you all for listening today and for your questions. To close, we are on track for our full year guidance, having delivered H1 results slightly ahead of expectations. Looking to 2026, I'm confident we have the right building blocks in place to deliver our midterm algorithm. We will continue to reward our shareholders through strong cash returns, including our progressive dividend and sustainable share buyback and deliver long-term growth and value creation. Thank you again for joining us.