British American Tobacco p.l.c. (BTI) Q4 2017 Earnings Report, Transcript and Summary

Good morning everyone and welcome to British American Tobacco 2017 Preliminary Results Presentation. I'm Nicandro Durante, Chief Executive Officer of American Tobacco and with me this morning is Ben Stevens, Finance Director. As always, a warm welcome to those of you who are listening on the conference call or watching via our website, bat.com. As usual, after taking you through the results presentation, there will be an opportunity for you to ask questions. Before I start the presentation, I will take you that you have all seen and read the disclaimer. 2017 was a transformational year for BAT, not only did they deliver on the financials, but we also completed our acquisition of Reynolds America, the largest tobacco deal in history. This is a transformational deal providing BAT of access to one of the most profitable markets in the world, our unique portfolio brands and products and further it reinforces the long-term sustainability of our commitment to high-single figure EPS growth. I’m proud to say that once again we have delivered on this commitment. At current rate, adjusted EPS grew 15% and was that 10% on a constant currency basis. This was driven by the continued good performance of our combustible business, with the GDBs the newly acquired U.S. brands and the group’s overall growing share. Reported EPS was up over 600% mainly due to a counter treatment of the Reynolds' acquisition. Ben will talk more about this later. 2017 was also a transformation year for us in NGPs. Our expanded vapor business reached an annualized revenue of nearly £300 million and a strong growth of glo Japan drove THP revenue from zero to over £200 million. In total, the combined NGP business delivered £500 million of group revenue on an annualized basis in 2017, meeting the target we set at our Investor Day in October. We are aiming to grow this to over £1 billion this year and to £5 billion by 2022. I’m confident of substantially increasing exceeding these targets. Our confidence in the future of the business reflecting the 15% increase in the dividend, which announced this morning. 2017 was also an eventful year for the industry. Although we saw higher price in most markets, we also have seen significant exciting increases in the GCC, Russia, Pakistan and Malaysia over recent year. These together is a more aggressive pricing environment in a number of market lead to down trading continued growth in illicit and industry volume decline. Against this challenging backdrop, BAT once again outperformed the industry. Organic cigarette volume including THP was down 2.6% against an industry down around 3.5%. In July, the SDA announced, a consultation for new tobacco regulation proposals. We remain very encouraged by the SDA's recognition of the continued of risk for tobacco products and of Tobacco Harm Reduction as a policy. We have located this printed for 20 years and this reported regulator is key to the transformation of the tobacco industry. However, this is a new complicated area and will take time to get through the process. We await the publication of the advantage notice of proposal rule making and look forward to participate in the consultation process. In Quebec, a judgment for the court of appeal continues to be expected anytime of the transaction cases against our Canadian subsidiary. As I have said before, a wide range of outcome is possible, including a request for leave to appear to the Supreme Court of Canada and the use of Canadian regulations such as [indiscernible]. Finally, at the end of the year the U.S. Corporate Tax Reform plans were approved. As announced earlier this year, this provided and benefit to the 2080 PS of 6%. All things being equal we would expect around half of this to be reinvested in the roll out of NGPs. The highlight of the year was of course our acquisition Reynolds, and I’m delighted to say that the benefits of the deal are already beginning to flow through. With only five months contribution for Reynolds in our numbers and no comparison base available we are unable to giving financial performance commentary on the business. However, what I can say is that Reynolds is performing very well with strong share growth in the second half of the year an integration is progressing smoothly, detailed plans have been drawn up for delivery of the synergies. As we said at the end of the deal, we expect cost synergies of at least $400 million. I’m happy to report that figures are flowing through a little earlier than anticipated and have a already delivered more than $70 million in 2017. This has been driven by the benefits of procurement, the implementation of BAT systems and process and into the Reynolds products and facilities together with the integration of the corporate functions. We remain well on-track to deliver the target of at least $400 million in cost synergies by the end of 2020. In addition, we are combining the capabilities of both organizations to fully strength our global R&D. We are the only Company with a predicated tobacco heating product in the West markets. I’m pleased to say that with special equivalence application for our carbon tipped product has been accepted by the FDA and moved to scientific review. We await a final decision around mid-year. We are also making good progress on the development of our SC application for glo in the U.S. and we are on-track for a submission to be made this month to be followed by MRTP application in due course. Finally, we look forward to the FDA’s response on our MRTP application for Camel Snus and we are awaiting the scheduling of our TPSAC meeting to review the application later this year. The addition of Reynolds for the business give us an industry leading portfolio of brands and products giving these and the growing importance of NGP for the business will have expanded or focused from just the GDBs to include the U.S. drive brands our NGP business and our auto product business in the U.S. and the Nordics. All our tobacco products, like it is in U.S. [indiscernible] news have existing epidemiology demonstrating their potential as reduced-risk products. Together with our NGP, we refer to them as potential reduce risk products. For 2018 our expertise we met is a focus on revenue growth for these expanded drive - portfolio, as this is a key measure of success and has come across all four product categories. These more closely aligns with the our strategy and vision. These expanded portfolio gives BAT and industry leading a range of brands and products expanding the [indiscernible] continue that's second to none. Even with the growing quarters of NGPs a significant proportion of the portfolio remains in the combustible cigarette business, which I'm pleased to say that's continue to perform very well. Overall corporate share grew strongly and was up 14 basis points in 2017 on top of the 50 basis points achieved last year. This was driven by another excellent performance on the GDBs, which grew share by 110 basis points across our key markets aside a U.S. This is now our seventh consecutive year of share growth with corporate share-up of total of 210 basis points over the period and GDBs up 630 basis points over the same period. The U.S. drive brands outperformed in the U.S. industry growing share by 40 basis points. Combined together Newport and NAS are the fastest growing brands in premium. Dunhill held up around the previous segment, but was impacted by down trading and significant exercise increase in many of its key markets including Malaysia, Brazil, Indonesia. However, share was down only 10 basis points. Kent, Lucky Strike, Pall Mall and Rothmans all grew share demonstrated a strength for our differentiated brand portfolio and diverse geographic footprint. Our expanded Drive Brand portfolio includes an exciting portfolio of potentially reduced-risk products. Our Tobacco Heating Products cover electronic carbon tip and hybrid products. In Vapor, we have a wide range of open and close systems and under both Vype and VUSE. Finally, the recent acquisition of Reynolds and Winnington extend the portfolio even further into the growing oral tobacco segment with both tobacco and non-tobacco oral products. BAT now has the widest range of potentially reduced-risk products of any tobacco company in the world, with the capability of addressing the widest range of consumer needs. We are therefore the best place tobacco companies through either transformation of the industry and transition the largest numbers of smokers from traditional cigarettes to potentially reduced-risk products. Glo is already demonstrating this in Japan. Just 12 months after the national rollout, glo already has 4.1% market share in January, despite continued capacity constraints limiting the device to one per store per week. Together with our suppliers we are building device manufacturing capacity rapidly and anticipated ahead unrealized capacity of 25 million units by the end of the year. We expect device capacity to become unconstraint during Q2. Our analyzed consumer capacities are already 15 billion sticks and we are able to increase these to 52 billion sticks by the end of the year. In December, we launched four new narrow-stick variants, which had quickly grown to represent 40% of glo’s sales. Glo now has a widest range of products in the market, with the strong pipeline of innovation, including capsule variant and glo mini following later this year. During 2017, glo was also launched in South Korea, Canada, Russia, Switzerland and most recently, Romania. In South Korea, following its launch in Seoul in August, glo was roll out nationally. Glo continues to grow national share and now reached 0.4%. Selling still has its low impact, but [Technical Difficulty] on marketing model to reinforce our market presence. In our trial markets of Canada and Switzerland, we are continuing to refine our marketing model to address the challenge of extremely smooth communication environments and consumer preferences for stronger cigarettes. Our recent stick launches in Russia and Romania are showing very encouraging early results. During 2018, we have plans to launch glo in additional 40 markets. Having only entered the THP market in December 2016, we have made excellent progress during 2017 and expect to build on this in 2018. We also are continuing to make good progress in the development of our Vapor business in 2017. Excluding the U.S., Vapor revenue was up 30%, mainly driven by acquisition, gross margin improved by 10 percentage points, and we are now on-track for our Vapor business to break even by the end of 2018. We continue to consolidate our leadership position in our key markets. In the UK, our Vapor business maintain a record share in retail of 40%. In Germany, Vype became the number one brand in retail with the record 37% share in the channel and an estimated 10% of the total vapor markets. In France, offtake volume was up a thirds and in Italy, expanded distributions and national coverage driving a significant increasing sales. In the U.S., VUSE grew by 16% of revenue by 29%, following increased distribution of Vype and the launch of [indiscernible]. Commercial performance will be boosted further by the recent launch of VUSE e-commerce platform. Importantly, product performance continue to be highly valued by consumers when tested against direct competitors' products. Our acquisition in Poland and UK have performed well. In Poland, CHIC volumes was up over 20% and the UK, 10 Motives has grown market share and revenue month-on-month. The integration of VIP vape start to change in the U.S., UK is progressing well and a 25% expansion of the footprint is planned for 2018. Finally, the priority for 2018 is our second generation of Vapor products ePen 3 and Raptor both of which are due for launch towards the year-end. During the 2017, consuming incidence in Vapor across our key markets is estimated to had grown around 40%, which sharper rises in category penetration in a number of our emerging markets. Our strong pipeline of second-generation of Vapor product and a growing understanding of Vapor consumers put us in a strong position to capitalize on this growth. Alongside our growing NGP business, our large and successful oral tobacco business in the Nordics and in the larger U.S. market provides a further opportunity for smokers to switch to lower-risk products. In 2017, total revenue for oral tobacco grew 16% to nearly £900 million driven by strong performance in the U.S., Sweden and Norway. In the U.S., Grizzly remains the leader in the growing wintergreen and pouch segments. The brand gain a full point on market share to reach 31.8% 2017 driven by Grizzly Dark styles, limited addition packaging and powerful equity building campaign. In Sweden, we are the fastest growing company adding 170 billion points over the year to reach a share of 10.3% in December. In Norway, share was up 340 business points to a record 6.4% in December driven by the success of Epok, our innovative Snus brands. Across the Nordics we are now the leader in white Snus, the fastest growing segment across the markets with an 85% share of segment. We expect to launch a known tobacco brand in the second half and have plans to expand outside the Nordics with these innovative and profitable products. So in summary, in 2017 we completed the Reynolds acquisition and we made to an extent progressing NGPs and a wider potential reduced-risk products portfolio. Our combustible business continues to perform strongly and regarding this a substantial amount of money in the long-term sustainability of the Group. This was all done while delivering on our committed high single-figure earnings growth and this was a truly a transformational year. I’ll now hand over to Ben who will take you through the details of the results.

Thank you Nicandro. As Nicandro said in his opening, this year’s numbers have been significantly impacted by the accounting treatment of the Reynolds acquisition. Revenue was up 38% and profit from operations increased by 39%. This reflects the additional volume of 36 billion fixed revenue of 4.2 billion from profit from operations of 1.3 billion from the inclusion of Reynolds from the days of acquisition. Diluted EPS was up over 600%. You can see from the slide, this is mainly due to a gain of £23.3 billion on the team’s disposal of your associate holding in Reynolds and deferred tax credit created by the revaluation of the deferred tax liability relating to the acquisition as a reduced tax rate following the U.S. Tax Reforms. More details on the adjustments are available in the announcement published this morning and there is a reconciliation of IFRS to the adjusted numbers in the supplementary slides of this presentation which are available on our website. I do not propose to go any deeper into the technical accounting details in this presentation, but for those of you who want to go into the detail in more depth, please contact IR after the meeting closes. So for clarity, I’ll now focus on the adjusted organic results which exclude the results of Reynolds and our other acquisitions. Organic volume is down 2.6% this is mainly due to industry volume decline in particular in Ukraine, Brazil, South Africa and Russia driven by exercise increases and the industry trade growth. This includes THP volume of 2.2 billion sticks. Adjusted organic revenue was up 6.5% or 2.9% on a constant basis benefitting from higher pricing across the majority of our markets offset by negative geographic and portfolio mix of around 1.4%. Adjusted organic profit was up 7.8% benefitting from the 4% currency tailwind. This was a 6% tailwind including the contribution from Reynolds. On a constant basis profit grew 3.7% this reflects the stronger second half profit growth of 4.1% against the first half growth of 3.2% this was anticipated at the interims. Adjusted EBITDA diluted EPS on a constant basis grew nearly 10% and it was up almost 15% at current rates exceeding our high single-figure EPS growth objective. Turning now to the regions, in EMEA adjusted revenue on a constant basis was up 0.6% as prices in number of markets including Ukraine, Turkey and Iran more than offset volume decline in the region and bank trading in Russia and the GCC. Volume was down 3.4% to 228 billion sticks. Growth in Nigeria, Turkey, the GCC and Algeria was more than offset by reductions in Ukraine, South Africa, Russia and Iran. Share grew 30 basis points with good performances from Russia and Turkey in particular. This is now the fourth consecutive year of share growth in the region. Despite a good performances from Ukraine, Iran and Algeria constant currency adjusted profit was down 1.9%. This was mainly due to the significant exercise increase in the GCC difficult trading conditions in Russia and the continuing negative impact of transactional foreign exchange on costs. In Russia trading remains challenging with increased price competition this has lead to some absorption of exercise and down trading. Share grew 10 basis points driven by another strong performance from Rothmans which now has over 10% market share. In South Africa, the weak macroeconomic environment continues to impact trading however share was stable and Dunhill reached a record share of over 15%. Turkey delivered an excellent performance with growth in revenue, profit and share. Overall the GDPs had another outstanding year across the region GDP volume was up 9.9% driven by good performance from Pall Mall in the GCC, Rothmans in Russia and Kent in Turkey. The ASPAC region posted a good performance, delivering revenue, profit and share growth in the challenging trading environment. Regional volume was down 1.3% but the impact of industry volume decline in Malaysia, Pakistan and South Korea more than offset growth from glo and excellent volume and share in Bangladesh. Adjusted revenue on a constant currency basis increased by 1.3% to £4.3 billion higher pricing and incremental revenue from glo was offset by a negative mix effects. This is mainly the result of strong growth in lower price markets including Bangladesh and significant industry volume decline and bound trading in Malaysia and Pakistan. Although as there was significantly increased investment behind growth in Japan and South Korea, adjusted profit on the constant basis was up 2.7% at £1.7 billion, driven by revenue growth and cost savings. At current rates suggest revenue was up by 5.7% and profit was 7.7% higher, benefitting from foreign exchange tailwinds, notably the relative movements in U.S. dollar and euro against the Japanese yen. Australia delivered a good performance, growing profit and share. In Indonesia, volume was lower in line with the overall market decline. However, with strong volume growth of 13%, Dunhill and Lucky Strike now represent 97% of our portfolio of volume. Profitability increased, driven by cost savings and business efficiencies. Bangladesh had an outstanding performance, with strong volume, profit and share growth. Market share across the region was up 60 basis points, with the good a performance in the Global Drive Brands, which grew volume by 1.5%. The Americas faced the challenging macroeconomic environment in 2017, impacting consumption across the region and leading to significant down-trading in growth and illicit trade. Despite this, constant rates adjusted revenue in the region grew 11% and adjusted profit grew 10%, driven by Canada, Mexico, Chile, Venezuela and Colombia more than offsetting decline in Brazil. Volume is down by 5%, largely due to down-trading and industry contraction in Brazil and Argentina and the growth of illicit trade in Chile. In Brazil, volume declined by its moderated compared to previous years, as our low-priced brand Minister captured the fair share of the down-trading. Canada delivered its fifth consecutive year of profit growth, driven by successful pricing and good cost control. Regional market share was flat with growth in Mexico, Argentina, Colombia and Chile offset by lower share in Brazil. The GDB is performed well across the region with volume up by 10.9%. This was driven by the good performance of Pall Mall in Mexico, Lucky Strike in Colombia as well as successful migrations including Free to Kent in Brazil and Viceroy to Rothmans in Argentina. Western Europe delivered an excellent set of results, as economic sentiment in the Eurozone improved to reach the highest levels since January 2001. Strong performance is Germany, Spain, Poland and Romania were offset by excise absorption in France and Italy. As a result, revenue grew 0.9% on a constant organic basis and was up 7.6% at current rate mainly due to the relative weakness of sterling to the euro. Volume in the region was up 1.7%, benefitting from M&A, organic volume was down only 0.8% as growth in Spain, Romania, Portugal, Poland and Hungary was offset by a lower volume in Italy and Greece. This significantly outperformed the industry which we estimate was down more than 2%. Regional share was up 30 basis points, driven by the GDBs, which were up 8.9%. This was driven by good performances by Rothmans in Poland, Lucky Strike in Spain, as well as successful migrations in Germany and Poland. Turning now to operating margin. Whilst the margin clearly benefited from the inclusion of Reynolds. I'm pleased to say that after two years of reported decline, we have once again returned to operating margin growth. Underlying margin improved by a 110 basis points. This was offset by an increase in NGP investment of 70 basis points yielding adjusted organic operating margin up by 40 basis points only just outside our target of 50 to 100 basis points per annum. This was driven by ongoing cost savings and efficiencies from the implementation of [indiscernible] is also after the absorption of a continuing transactional foreign exchange headwind estimated around 1% of operating profit and after the significant additional investment behind NGPs. M&A in Western Europe is diluted from reduced margin by 20 basis points finally the inclusion of five months of Reynolds added 250 basis points to margin even our full-year adjusted operating margin at 39.9%. Although we continue to invest behind the role of NGPs and expect 2018 to be a heavy investment year we remain confident of delivering 50 to a 100 basis points of margin improvement on average over the years. As I said earlier, reported EPS benefitted significantly from the accounting treatment of the rentals America acquisition. The reconciliation from 2017 reported EPS to both 2016 reported EPS and 2017 adjusted diluted EPS is available in the supplementary side. As you can see here, adjusted diluted EPS of 284.4 P at current rate was up 15% driven by growth in operating profit, the contribution from rentals good results from ITC and the 5% translational currency tailwind. Net finance cost were up significantly as a result of financing the rentals transaction, however the average cost of debt was marginally lower we expect net finance cost in 2018 to be around £1.5 billion. Despite good results from ITC, the contribution from associates decreased due to the inclusion of only seven months of rentals. Our effective tax rate was slightly lower than 2016 up 29.7%. Non-controlling interest were marginally higher as profit growth in Algeria and Vietnam was offset by decline in Malaysia. I usually give some guidance around the expected full-year tax rate with a full 12 months inclusion of rentals and a reduction in U.S. tax rates. I would expect the tax rate for the group of around 27% in 2018. On currencies, if rates were to stay where they are today, the translational FX impact including a full-year of Reynolds would be headwind of around 9% on operating profit and a headwind of around 7% on EPS. We would also continue to have a small headwind on transactional FX. We would also continue to have a small headwind on transactional FX. We have always said that we don’t believe it is appropriate to strip out transactional FX from constant currency performance and then only adjusted translational FX in our numbers. However in recent years, the scale and speed of devaluation has generated such a significant headwind that comparisons with other companies speaking transactional FX differently risk will be misleading. As a result, we are forced to close an estimated impact from transactional currency movements included in our constant currency figures. Now that the transactional headwinds is abated to more normal levels, we will move on to be separating it out in our constant currency analysis. Now onto cash flow. Overall, adjusted cash generation from operations was £3282 million which is a 167 million higher than last year. This is mainly due to higher operating profit driven by the contribution from Reynolds, offset by an early MSA payment of $1.8 billion and £1.4 billion made by Reynolds in December 2017, as it is deductible as the 35% tax rate. As a results operating cash flow conversion was lower than last year at 78.6%; however, excluding this earlier at the MSA payment operating cash flow conversion would have been approximately 96%. Depreciation is the main components of non-cash items excluding the MSA payment working capital out phase of 93 million was significantly lower than in 2016 which was an of 254 million. Net capital expenditures was 208 million higher than in 2016 largely due to investments in NGPs. We expect gross CapEx in 2018 to be around £1.1 billion. Net interest paid was higher at 1,004 million due to the upfront cost relation to financing arrangements with the acquisition of Reynolds. Tax [indiscernible] of 1,675 million including approximately £550 million of tax flows relating to the U.S. together with slightly lower payments in rest of BAT due to the timing of payments. Higher dividend payments for minorities were attributable to higher profits in Malaysia in 2016, this delivers adjusted cash generated from operations of £3,282 million. Turning now to financing and shareholder returns. We ended the year with net debt to EBITDA or 4 times on an annualized basis 12 months of Reynolds as anticipated at the time of the deal. This was 5.3 times on an accounting basis. We continue to target reducing this to around three times by 2019 returning to the upper end of the 1.5 to 2.5 net-debt-to-EBITDA corridor in the medium term. Our target credit rating remains BBB+, Baa1 with S&P and Moody's with the rating currently standing at triple BBB+ Baa2. The rating is driven by our net-debt-to-EBITDA ratio and we are focused on managing this down. We continue to target a dividend payout ratio of 65% as part of the transition to quarterly dividends we have kept the payout ratio higher than our targets of 69% to equalize cash payments, but intend to gradually return to 65% overtime. This remains a flow not a sealing in the phase of currency translation headwinds we would increase the payout ratio so our sterling shareholders received an increased dividend based on good constant currency performance as we have done historically. So in summary the business performs very well in 2017 there were a number of one-off items relating to Reynolds acquisition which benefitted reported results. Excluding these constant organic adjusted revenue grew 3%, profit 4% and adjusted EBITDA diluted EPS 10% exceeding our high single-figure earnings growth target. We continue to outperform the market and have once again growing share powered by the continued strength of our brand portfolio. With the 15% increase in the dividend backed by EPS growth we have demonstrated our continued commitment to growing shareholder returns over the longer term. Looking into 2018, the pricing environment remains competitive volume shipment praising in certain markets including the GCC and the timing of NGP investments means we expect adjusted profit growth to be skewed through the second half as in previous years. However, we are confident of another good year of constant currency adjusted earnings growth, with the benefit of the U.S. Tax Reform providing additional support for shareholder returns and helping to fund significantly increased investment in NGPs. Thank you. And I'll now hand you back to Nicandro.

Thank you, Ben. 2017 was a year, which changed the shape of the Group. We invested heavily into NGPs with excellent results and our combustible has continue to perform strongly. And this is expected to continue in 2018. It is an exciting time for BAT and we remain confident in our ability to continue to deliver high single-figure earnings growth in the years to come. Thank you. And I'll open up for questions for those of you in the room. Who would like to start? We need a microphone because the sound system is not working that well. So if you guys can wait for the microphone to get to you?

Thanks Alberto Lopez from JPMorgan. Couple of questions from my side. First, how should we think about the investments that you are doing this year beyond 2018? Is that some investments go off the base as we go into '19-'20? Also as you give little bit of details on what exactly are you spending is it in terms of device discounts, is it infrastructure, store rollout, et cetera? And then, I was trying to get your views on Japan. Since THP is doing very well. What would be your views on how big can THP be as in the total Japan market this year? And what would you aspire to capture from that share of a segment.

That's the questions. So I'll try to answer all. So in terms of investment beyond for 2018. As we just mentioned, we are going to use part of the U.S. Tax Reform for additional investment in BAT. So I expect that in all, we will have an additional just in THP space, THP and vaping, mainly THP another £500 million for 2018. So it's a huge investment to allow us to rollout to at least 40 markets THP and several others for Vaping in 2018, because we are capacity constraint as you just mentioned. The breakdown of the investment in terms of stores and so on and so forth, I don't have this here, but I can supply this later for you. No problem at all. We don't usually disclose the investment in this kind of detail, but I'm sure that you find a way of percentage base to tell you whatever you are. In terms of Japan, and your question was about Japan, how big the segment is? Well, as you know, the segment is quite substantial in Japan. It's very difficult to predict how it's going to be in one year time, but do I see this growing for 30% of the segment of the market. Yes, I see this growing for 30% of the market. I cannot be precise on how long it's going to take it. Talking a little bit about our platforms in Japan. You know that you are capacity constraint. I think that the numbers are showing that despite being capacity constraint since the national launch in October, we have provided we are supplying one device per store per week a national base in Japan. And even though our market share is growing substantially in December over 3.3 the less really that you have for the end of January was 4.1. So its growing extremely well and your question is how high is high, because nowadays we have around 20% of the segment, despite the huge constraints that you have in terms of supply and despite the competition has not been constrained, they are unconstrained. I see that you can make a proxy of Sendai. If you look at Sendai, nowadays on our market share, in Sendai we are one third of the markets and we have constrain there as well. In the first six months of our launch in Sendai, first comes from last year in which you are providing three device finish shorter week. We got from 0% to 8% in six months but because of the national launch, the launching in the corporate sectors in July at a national launch we had scale it back in Sendai. So we moved from three device per store week to one device per store per week. And of course our market share growth is loaded from 8% to 10% nowadays still one third of the market. So I see that this gives you an idea of how strong the proposition is and other factor that I like to mention is that as I mentioned early on, I think the expertise of innovation that you have for combustible can be applied for the consumables. We launched four new flavors in December, two months later those four new flavors they are 40% of volume and their widest range of flavors in their markets nowadays is [indiscernible]. But with the constraint that you have in the devices that is difficult to grow even faster than we are growing. But I see that just shows the split and the other important piece of information is we take up the international launch in October 60% of the growth for 7x coming from us despite the device constraint. And that inflow of consumers is higher to our product that the competition product and we said it there. So it gives you some signals that we are on a very strong position in terms of products, in terms of device and I think with the pipeline that you have coming this year, you have to grow 2.2 coming in July and when in the constraint and probably this is one that will remain there for the rollout. And we have the meaning at kind of the end of the year and you have new flavors come into the second half as well. I think that you will be on a very strong position to growth this category beyond the numbers that has been estimated. That’s why I said despite the October given the tag of £1 billion for 2018, I think that is going to be substantially higher in this year. Long answer, but a good question anyway. Yes.

Hi, its Alicia Forry from Investec. My question is on the EMEA region which however is perhaps one of the weaker areas this year. Do you expect the down trading in Russia the impact of the excise in GCC foreign exchange headwinds on the COGS in that region to persist i.e. should we see another year of EBIT being under pressure in this region and then secondly I was interested to hear even more about the THP launch in Russia you mentioned in briefly in the presentation but any additional color would be appreciated. Thank you.

Okay. Let me start with EMEA in general it was a difficult year for 2017 for a lot of different reasons. One of those for example we saw in Russia excise absorption a very competitive price environment there. It seems that things are getting better, we see a much better environment. The second one was that so discretionary exercise increase with the GCC that's a really important market for us, not only for BAT for other players as well, in which the excise increase demanded us to double price, and one of the reasons that you have a hit in turnover last year, because turnover went down dramatically in the second half of last year in the GCC. And I think that probably those are the two main reasons for EMEA being under pressure and I think that ahead of information as well the transactions headwinds that we had in Russia last year that offset the COGS as we have mentioned. We don’t see transactions headwinds for 2018 mixing levels 2017 so it's going to easy on that side for BAT as a whole we see in transactions headwinds it is going to be a 1% only for 2018 and much of better position that it was in 2017 even better than 2016 and if it’s going to be in that range we are not going to report that numbers with and without transaction, because BAT doesn't believe that's the right way to report anyway. So that's the COGS element. I think that things should be a better environment for 2018, but it's too early to call, so have to wait a little bit but it's been very confusing that are improving but don’t forget that in the GCC while comparing 12 months with this see this posture excise increase against six months of that the prior year it's going to affect 2018 anyway not all products but all the competitors but I think the environment is better.

Remember the selling prices had to double in the GCC after the excise increase has been very disruptive to the market.

Yes, the decline in revenue there in net revenue there was 26% I think in the second half because of the huge exercise they are down trading their markets. But you know you should never lose focus of a good prices now our market share is I see that's 80 to 100 basis points higher, we had found one of the most important segment in the GCC is the value for money, out of this we did extremely well we have Pall Mall there and I think that our market share has increased substantially there. Substantially. So when the market picks up again, I think that we would be in a very good position there so that’s the GCC. Regarding the 19 Russia it's six weeks, so it's too early to call and we are capacity constrained as well. We had launch the date of last year in additional four markets and all of them like Romania is three weeks after the launch, Russia is six week after launch so it's too early to call, but the initial reading of the market is that their market is consuming everything that we have in stores. One, device per week per store, and we are selling everything so it's going very well as we have extremely limited distribution, because our focus for 2017 has been in Japan, so we are giving all the supply that we have for Japan, because it's a more developed markets. So the other markets like Korea or like Russia or like Romania, we have very limited supply that's going to be lift in the second half of this year. I was discussing these earlier with some of you [indiscernible] it will be full supply around March and April but we have to do capacity in order to be able respond to the market needs. So around May and June, we will be fully unconstrained. And I think, that's the reason that we are scheduling all the launches in the market at the beginning of the second half of the year, probably third quarter of the year. And then you will see unconstrained supply in places like Russia, Romania, South Korea so on and so forth. Then you have a better reading about the performance of the brand. But if you look at Japan as I said as a proxy, with the numbers that I gave earlier on. It gives the rationale for the confidence. So that's why I stated that £1 billion it should substantially exceed, because it's beyond our expectation of the results in Japan. Adam.

Hi. Can I ask three questions? First of all, you talked about device constraints. Just within your Tobacco Heating sales, what percentage roughly is coming from devices versus the renewable? And related to that for each sort of consumer you have, how many devices that he or she needs to be glo consumer? So that would be one question. And then I have got a couple of follow-ups.

I think the relationship between device and consumers is one to three in terms of revenue. The percent of device sales, to be honest, can I go back to you at the end of this session? And I'll give you a more appropriate number? If not, I'll give you a very round number here? I'll get back to you.

Thank you. Moving on the U.S. As you look forward, is your priority really operating profit growth or is it market share progression? In other words, would you be happy in 2018 to have flat share, but nice growth at profit? Or would you if you have a choice so would you first share growth, but no profit growth. If you have to choose between those two?

Okay. We are in the business of making money, Adam. We are not business of making market share of volume. Market share of volume, our profits should make money. So I don't see that you have this choice is either go for market share or go for money. We try to have the right brands in the market with the right consumer propositions that should drive our market share, that should drive volume, that should drive money. So I don't think that you start to think, okay, less market share here to have a little bit more money. That's not the discussion that we have inside the Company. So, that's not really top of my mind, but I think that’s what BAT has shown in the last years. And if you look at the combustible business, the business model that we have, it have more new innovations in the market. And I think that we done extremely well of our portfolio of that. We have been declined in the last years much rather than the industry. And this year was not different, driven by the GDB, the GDBs have grown 600 basis points in six years, it's a fantastic performance. And this will help us to over deliver the financial results. So that's this strategy for the world and that's the strategy for U.S. So, I'm very happy with the results of Reynolds last year. They had flat share in the first half. The second half they grew, they have a very good growth in terms of market share, but we will be competitive in pricing.

And then the final question. If I think about the rest of the world and around so no U.S. Tobacco Heating products. In 2015-2016 you had over 5% organic sales growth, this year it was two points something which would imply that it’s a slowdown. And I’m just wondering do you think that slowdown is temporary or do you think its permanent and if we think out the next few years, we are getting back to the 5% again excluding Tobacco Heating, excluding in the U.S.?

I don’t think that you can exclude the U.S. yes because of it then compares. I don’t think that you have to, you can exclude THP. THP and the combustible they are categories in which the migration is 100%. So when you leave the combustible category go through THP I don’t see that you can exclude that then you start saying let’s excludes Japan or let’s excludes Russia, you cannot do that. So I had to look at both things together if not they become very, very difficult because the migration for one category is 100% to the other category and then [indiscernible] tobacco. So if you look at both categories, because it’s how I like to read it, and I think that’s the right way to read it. If you look at the price mix that is the most important thing that you should be discussing here. The price mix of last year was 5.5% and if you look at the price mix of the last three years on average was 5.6%. Our matter is four to six was in the high end of the matter. So I think the price mix in 2017 despite everything that they said was solid, was quite good. Of course there are some concerns and I heard some concerns, because in 2016 the price mix was a little bit higher than usual 6.5%, 6.7% and there was a decline for 2017 but there a good rational for that. As I said before, we have some excised absorption, because of competitive environment in places like Italy, France, Russia. [indiscernible] increase that was not past the price in 2016 in places like Brazil, Malaysia and you had the issue that mentioned turnover in places like the GCC. But despite of that, the price mix was 5.5% was at a high end of our metrics, was quite solid and it was on par with the average over the last three years. And if you take five years, you see that was a little bit higher. So it’s not bad, it’s very good. Thank you. I have a question down here and then I’ll go back to you okay because he raised before.

Good morning Michael Bennet at Jefferies. And just a few question on the SC application in the U.S please and firstly are you confident that at the proven I think you said around mid-year,. And secondly can we get any details on commercialization in place and then thirdly and could you give any details on capacity you have in place for the carbon pit and I’m surely proved popular in the U.S. Thank you.

Well, the carbon tip application, the submission was July 2017, we expect the decision to be half one 2018. Unfortunately we don’t manage this process, FDA manages the process, our expectations is that half one of this year you will have FDA making this, I cannot guarantee that but our expectation is going to before half one 2018. And the half one 2018 is confirmed and you are able to launch dispersing the market is going to happen in the second half we have place for that in United States and we don't have capacity problems. So that's what I can disclose, I cannot disclose the states and things like that because these are plans that are quite confidential, but we would be launching before the end of the year in United States and you won't be capacity constraint in the case of. But as I said this is all dependent on that for the year it's very to confirm me to tell you what I see that's going to happen and my expectations we will have these going ahead. I have a question here.

Thanks. Hi Jon Leinster, Berenberg. Actually a few I’m afraid. First of all I think you mentioned in past, intense of competition in the South Korea in terms of the Heated Tobacco market was that a reference to Phillip Morris or was that a reference to the new products from KT&G?

The reference for new proper KT&G because the size of the company in that market they have a lot of trading power in order to put forward their propositions so I think that's more on that South Korea than anything else, but the main reason for having 0.7% share is South Korea is the initial supply as well. As soon as we have an constant supply we think that you will have the same sales tax in South Korea that we had in Japan. But I was mentioning a second player a third player in the category in my comments.

The product from KT&G seems credible there.

That I cannot say. Actually I do have to ask KT&G I think that glo has their best product in the market and has the widest range of flavors in the market, actually we have with the brand as I've said the net inflow of consumers in Japan is positive for glo. So I'm extremely excited about what we have in the markets and now our new launch is in terms of consumables and device that's what I can tell you?

Second, one when you launch Raptor and some of the other products in the vacant market do you expect that to cause a step change in the growth of the Vype market in the way that actual did in the U.S. market?

That's a very good question. The answer is yes and as I've said before and in October, Investor Day in October, I think that it is a ground breaking developments. I think that ePen 3 and Raptor best into all of the best-in-class the initial results of the test mark that we are going for UK is very small test market at extremely positive. we think that you don’t see now a numbers because we are playing safe here until you have in the prices available to launch for launch but I think that could be a step a very important step in terms of the growth of the category and the growth of our business. So I'm very optimistic about those products but one of those, you will come at the end of the year as we said in the Investor Day we will do a launch maybe beginning on the second half of next year that's roughly but it's not coming to the market before the year-end and ePen 3 we are testing now probably in the year with the second half we will see a launch and later expansion for one of the countries. So we are just taking a little bit more time, it’s going according to what we have said in October but the timing that takes to guarantee that you come to the market with the right strategy with the right preposition in consumers' mind to meet consumer needs. And also there is an element here of margins. These are going to be products that will be in higher margins. And I think that from financial point of view, from a market point of view, I'm extremely excited about those developments. And they are going to go through FDA. This is now plans as soon as we have the final products, they are going to follow the FDA test. So everything has been met.

And lastly, do you think the health claims or medical claims. Do you think that's absolutely key to get in this, to getting heated tobacco to grow in Europe or indeed in the U.S.? Or do you think that's the key competitive tool, or do you think that's not necessary particularly?

Well, we don't have medical claim in Japan and Korea. I feel that market has growing for a lot of different reasons, and we discussed these several times before why to grow so far when you see another markets are not growing as fast. As you know as well as I know, it was once in Italy. At the same time that was once in Japan and it just look at the performance of both markets. There are a lot of reasons why it's going so fast in Japan and Korea. I'm not going to go back on that, because we discussed this so many times before and I think that is in some markets it can be more important than others. But if you ask me the question, do I see if I had a chance to use this tool, use these are important, but it's difficult to tell you in a worldwide basis. I think the some market is going to be more important than others. Can I have one more question before we close discussion? If there is one, yes, one there.

Hi, Mirco Badocco, RBC. So you mentioned a total cumulative investment in NGPs, $2.5 billion since 2012. I wanted to know if you can share more if you can give more color on how much that was behind heat-not-burn? How much behind, vaping and the state of CapEx and P&L?

We don't disclose this kind of data. To give you a breakdown of $2.5 billion and I have to say that some of the research that we do was for both categories and in terms of personnel was for both categories. So it's difficult for us to split indeed and so other laboratory work it was for both categories. So we don't disclose this kind of data. So guys, thank you for coming. We look forward to speaking to you in July at our Interim results and we will be reporting our new regional structures. So thank you very much for coming.