British American Tobacco p.l.c. (BTI) Q4 2019 Earnings Report, Transcript and Summary

Good morning, everyone. I'm Jack Bowles, Chief Executive, and with me this morning to present our full year 2019 results is Tadeu Marroco, our Group Finance Director. Before I start the presentation, I will take it that you have all seen and read the disclaimer on Page 2 and Page 3. As usual, at the end of the presentation, there will be an opportunity for you to ask questions. Last March, we set out three clear priorities to transform our business. I am pleased to say that we have made good progress over the last year. We delivered value growth from our combustible business, gaining share globally with enhanced profitability. We are driving a step change in New Categories by launching new products and entering new markets, providing potentially reduced risk products to close to 11 million consumers. Lastly, in September, we announced some important organizational changes, which are largely completed. We have removed a net of 2,300 roles and recruited an additional 350 managers across the organization, creating the capabilities and resources to continue investing in new categories. This marks a significant first step in the journey towards making BAT a stronger, simpler, faster organization better equipped for the future. And this is just the beginning of our journey. Our purpose is clear, we aim to build a better tomorrow by reducing the health impact of our business through offering a greater choice of enjoyable and less risky products. Our 2019 results reflected a strong operational performance across all our key financial and strategic objectives. As you will have seen from this morning's announcement, reported results were impacted by a number of adjusting items, the majority of which were noncash. To help you better understand the key drivers of the strong operational performance, we will focus on constant currency adjusted results for the balance of the presentation, unless stated otherwise. I am delighted to say that we delivered another year of high single-figure earning growth. Revenues and profit were both at the upper end of our guidance range while group value and volume share both grew. Operating margin increased alongside significant investment in New Categories. Our strong New Category revenue growth was achieved despite the impact of the U.S. vapor category slowdown. This demonstrates the strength of our long-term multi-category strategy. Our strong focus on cash generation has supported delivery against our priority to reduce the leverage -- or to reduce leverage. We have announced a 3.6% increase in the dividend, in line with our 65% payout ratio and our commitment to delivering shareholder returns and dividend growth in sterling terms. This means we have delivered on all the commitments we set out last year. In recent years, a key pillar for our value creation has been our approach to sustainability. The known health effects of the cigarettes we sell remain our biggest challenge. However, with the investments we are making to grow our New Category business, we have now close to 11 million people using noncombustible products across 45 countries, including a leading 3.5 million consumers in the EU alone, and this continues to grow. Within our agricultural supply chain, we aim to deliver a positive social impact wherever we operate. We strive for excellence in the management of our environmental footprint and have made some good progress. Since 2010, we have reduced overall carbon emission by 24%, water withdrawal by 34% and reduced waste to landfill by 60%. Finally, we strive to operate to a high corporate governance standard. The broad range of external recognitions we have achieved over the years is a testament to our progress to date. BAT was awarded the Organizational Impact Award in the SEAL 2019 Business Sustainability Awards, putting us in the world's top 50 sustainable companies. 2019 also marks the 18th consecutive year that BAT has been included in the Dow Jones Sustainability Index. And in 2019 was the only company in our industry to have been included in the World Index. In summary, we have made a lot of progress. However, we are aware that there is more to do, and I look forward to telling you more in our Capital Market Day in March. We are delivering on our 3 priorities, and our results today reflect the good progress we have made in building a better tomorrow. It is clear that these results benefit from a very strong performance in combustible, the continued growth in our new category products and an organization that is already faster, more efficient and simpler. Starting with the value growth in our combustible business. Revenue grew strongly, driven by value share gains, strong brands, good pricing and improved geographical mix. Cigarette and THP volume was down 4.4%, reflecting the effect of the previously announced one-off stock reduction in Russia and lower industry volumes in a number of low market values, including Egypt and Venezuela. Excluding these effects, BAT group volume was down around 3%, in line with global industry volume. Looking into 2020, we expect global industry volume to be down around 4%, with the increase reflecting large excise-driven industry volume declines in Indonesia and in Turkey. In combustibles, our strategic brand portfolio continues to perform very well, delivering revenue growth of 5.6% in 2019. Total combustible volume and value share were up 20 basis points. This was driven by strategic brands portfolio volume share gain of 70 basis points, benefiting from migration in Brazil and value share gains of 40 basis points. This now marks the eighth consecutive year of group volume share growth, reflecting a strong track record of superior consumer insights and innovation. Our U.S. Strategic Brands continue to strengthen their position with growth in all key value metrics. We gained share at the corporate level, in premium and with adult smokers aged 21 to 30 years old. At 44%, our leading ASU30 share is now ahead of our corporate share of 35%, demonstrating the strong outlook of the business. The growth in the New Category revenue was driven by a multi-category, multi-market approach. We grew more than 20% globally in each category and delivered double-digit growth across all geographic regions. It is worth noting that New Categories revenue growth, excluding U.S. vapor, was up 39%. This is in line with guidance given at the half year before the U.S. vapor market contracted. In vapor, we strengthened our global position and delivered constant currency revenue growth of 23% despite the turbulence in the market. We saw the category return to sequential growth in key markets in Q4 2019. We welcome the FDA recent actions to clarify U.S. vapor market regulation and support regulation that seeks to provide quality products for adult consumption. We are well positioned ahead of the PMTA deadline in May and look forward to its enforcement. We estimate a potential of £1.5 billion of revenue to become contestable in the U.S. post the deadline. We are in a very strong position and we expect the benefit to materialize in 2021. Turning now to THP. The category grew at a slower rate than previous years, with Japan and South Korea still representing over 60% of the total market. Improved consumer satisfaction for this category will be the key for its future success, given the satisfaction gap relative to cigarettes. Nevertheless, we continue to see good opportunities for THP in specific markets, mainly in markets where low cigarettes strength delivery levels and where there are fewer tobacco and nicotine other alternatives. As a result, our priority is to focus on improving the satisfaction level of our products and to prioritize our investment in selected markets where we identified the greatest opportunities for category growth. Modern Oral is a small but exciting new category that is growing rapidly where it is present, with 70% of the global volume outside of the U.S. We are a global leader, global category leader with a volume share of 47%, with strong marketing and supply chain capabilities. So we are committed to deliver a better tomorrow and we are excited by the opportunities in New Categories. The regulatory environment is dynamic, as shown by the recent actions in Russia and Mexico and the FDA's intervention on vapor. With short-term visibility a challenge, it is important to be agile and responsive. Annual growth rates are difficult to predict. Yet, we are clear on our ambition to achieve £5 billion revenue for New Categories in '23/'24. We must retain the investment flexibility to allocate resources as necessary. This allows us to be in a position of strength to invest in the business or to adapt to developments whilst delivering on our financial targets. We are committed to delivering 3% to 5% revenue growth and continued margin expansion, with the benefits of Quantum providing both the capabilities and efficiencies to support additional investment as required. We are committed to delivering high single-figure adjusted EPS growth and continued strong cash generation to drive further deleverage and dividend growth. Looking into 2020. While vapor markets are showing sequential recovery, they are yet to return to the level reached prior to the U.S. vapor slowdown. While we cannot predict the duration and extent of the coronavirus, we have already seen some impact in our duty-free business and the first signs of New Category supply disruption at retailer level. Whilst these factors are unpredictable, this will make first half New Category revenue growth difficult, given the likelihood of growing out of stock and delayed new product launches. Nevertheless, we do not expect this to impact our ability to deliver on our financial guidance. So in summary, we are performing well, delivering on our three priority areas. The opportunities in New Categories remain exciting. As we consolidate our New Category brands, we are committed to investing further than building the capabilities required. Consumer and market insights clearly demonstrate that our multi-category strategy is key to deliver long-term sustainable growth. This is central to our ambition to create a better tomorrow. I will now hand over to Tadeu, who will take you through 2019 in a bit more details.

Thank you, Jack. As we said at the beginning of the presentation, in 2019, we have again delivered on our financial commitments and we have done this while continuing to invest significant additional resource in our future. Margin improvement of 50 basis points was delivered alongside an incremental £500 million market investment in new categories. Strong free cash flow after dividends of £1.9 billion exceeded our guidance of £1.5 billion. This underscores our ability to sustainably grow the dividend, maintain a 65% dividend payout ratio and simultaneously reduce our leverage by 0.4 times at constant rates. Total revenue grew 5.6%, ahead of our guidance range of 3.5%, driven by the strong performance in combustibles and our growth in New Categories. Profit growth of 6.6% was also at the top end of our guidance range, with growth in revenue and operating margin driven by strong performance across our markets. There was a good performance across the regions. In APME, total revenue grew by more than 5%, driven by good price/mix and growth in New Categories. Value share increased by 30 basis points, led by gains in Japan. Profit from operations grew nearly 8%, with strong growth in Japan and the Middle East alongside additional investments in New Categories. In AMSSA, revenue was up over 9% and value share increased 20 basis points, with a particularly strong performance in South Africa, returning to volume, revenue and profit growth with a reduction in illicit trade. Profit from operations grew 10%, driven by growth in Brazil, Canada, Chile, Nigeria and Mexico. In ENA, revenue grew 5%, driven by strong pricing across the region. Cigarette value share was marginally higher with strong performance from Romania, Ukraine and Russia. Profit from operations was up 3% with good results in Germany, Turkey, Romania and Poland, offset by the impact of the stock reduction in Russia and additional investments in New Categories. Turning to our largest region, the U.S. Performance was strong, with revenue and profits from operations up over 4% and 6%, respectively. This was driven by the combustible business, which grew revenue nearly 4%, reflecting good pricing and the reduction in discounting supported by data analytics. This more than offset volume, which was down 6% on a shipment to wholesale basis. This was against an industry down 5.3%. Looking into 2020, we expect industry volumes to be down around 5%, a slight improvement on 2019. This reflects the benefits of a reduction and the impact from the growth of vapor, largely offset by the impact of legislation raising the minimum age to purchase all tobacco products to 21. Profit from operations grew more than 6%, driven by good revenue growth and cost savings, offset increased market investment behind New Categories. Following the acquisition of Reynolds and the license synergies, mainly procurement, R&D and overheads of over $400 million have been delivered a year ahead of schedule. Operating margin was up 100 basis points to 48.5%. In U.S. vapor, Vuse grew value share and we claimed the number 2 brand position in the market, strongly outperforming the industry in the second half. In the second half, Vuse grew value share over 8 percentage points to 21.2%, driven by the success of Alto with value share up over 12 percentage points to 15.4%. Closed systems now represent 6% of the U.S. vapor markets. Outside the U.S., we strengthened our leadership position in vapor. In ENA, vapor revenue was up 30%, driven by Vype, which grew revenue 110%. We are growing volume and value sharing in all the established vapor markets, including the UK, France and Germany. In newer vapor markets, Vype became a market leader in Hungary, the number 1 brand in Belgium and is showing strong early progress in Spain. Finally, we completed the acquisition of Twisp in South Africa in Q4. This strengthens our network across stores and e-commerce channels and give us market leadership in vapor in South Africa. In THP, Q4 saw the launch of our 3 new glo variants: glo Pro, the first product to use induction heating technology; glo Nano, a design upgrade in place of glo Mini; and glo Sens, a hybrid product. glo Pro has shown good initial traction with consumers, driven by the benefits of its induction technology, with consumers highlighting the more satisfying product experience, boost function and faster ramp-up as key benefits. Regarding glo Sens, after an encouraging launch, we have seen less traction in consumer uptake than we had anticipated. We are improving our in-market execution, broadening device penetration, improving trial to conversion rates and implementing plans to drive better consumer uptake. Overall, THP revenue grew by 23% with consumables volume up 32%. In Japan, we reached a record BAT volume share of total nicotine of 19.2% in January. THP category growth in Japan has fallen from 67% in 2018 to 6.5% in 2019 due to market saturation. In addition, competitive intensity has increased with the proliferation of new product launches. These market dynamics looks set to continue as we move into 2020, with THP category growth in Japan expect to moderate further. Despite this, glo's latest weekly total nicotine share is now up to 5.2%. Elsewhere in ENA, the THP category is still small, with concentration in just 3 markets representing 57%. We are making steady progress from a low base. glo has demonstrated particular traction in Eastern Europe in generally lower tar markets. Category share in the capital cities of Russia, Kazakhstan and Ukraine is now at 10%, 32% and 10%, respectively. Moving on to Modern Oral. In ENA, which accounts for 2/3 of the category worldwide, our Modern Oral revenue was up over 240%. In Sweden, Lyft is the leading modern oral brand with a 58% share of category. And in Norway, BAT is the fastest-growing company modern oral with a category share of 71%. After only 6 months of launch, we are pleased with the performance of Velo in the U.S., having achieved 10% volume share of the modern oral category and 29% share of the growing under 6-milligram category. In 2019, the under 6-milligram segment reached 34% of the category, up 6 percentage points. Having focused our initial launch rollout in the eastern states to test and learn, we are pleased to see significantly higher share performance in this area. We are in constraint with manufacturing capacity of 2 billion pouches. We have yet to fully activate the national support plans, and we'll redeploy the learnings from the initial launching states. In Atlanta, where all the 3 categories are present, we see a strong development of modern oral and vapor with very little traction for THP. In the last 6 months, our U.S. business has grown share of total nicotine in Atlanta faster than nationally. Moving on to operating margin, which was up 50 basis points. The 300 basis points incremental New Category investment was focused on developing and launching new products, platforms and digital capabilities. This helped us drive robust New Category growth in 2019 and has also strengthened our platform to support growth in the years to come. This incremental investment was more than offset by the 390 basis points of margin support. This was driven by pricing and improved geographic mix, gross margin expansion, SKU rationalization. Looking into 2020 and beyond, the benefits of Quantum means that we'll be able to continue to invest for the future and deliver margin expansion. Our key highlights of the group's performance in 2019 was its strong cash generation, resulting in the leverage of 0.5x at current rates and 0.4x at constant rates in line with our guidance. Free cash flow, after dividends of £1.8 billion at constant rates, was driven by operating cash flow conversion of 97%, ahead of our medium-term target of 90% or more. At constant rates, adjusted net debt fell £0.8 billion, driven by our strong cash flow. This was despite £0.4 billion of other cash and noncash items, mainly hedging, and the recognition of a higher lease liability on adoption of IFRS 16, which added £0.6 billion to net debt. At current rates, adjusted net debt reduced by a further £0.9 billion to £41.7 billion due to FX translation, resulting from the strengthening of sterling against the U.S. dollar. In 2020, gross CapEx is expected to be around £650 million, in line with adjusted depreciation. We expect operating cash conversion to be in excess of 90% and remain committed to a 65% dividend payout ratio, with growth in sterling terms alongside continued leverage of the balance sheet. The leverage on the balance sheet continues to be a priority. With current FX rates representing a headwind, we expect to drive adjusted net debt to adjusted EBITDA down to around 3.2x at current rates by the end of the year and then to below 3x by the end, 2021. On a constant basis, adjusted diluted EPS grew 8.4%, delivering on our high single-figure earnings growth commitments. Adjusted diluted EPS was up 9.1% at current rates. Net finance cost at constant rate increased mainly due to short-term funding of working capital movements and interest on leases under IFRS 16. We expect net finance costs to be stable at around £1.5 billion for 2020. Associate income increased due to a good performance from ITC, which was further helped by the Indian tax reform. The underlying tax rate decreased from 26.4% in 2018 to 26% in 2019. I would expect the underlying tax rate for 2020 should reduce further to around 25.5%. This, in combination with a stable net finance costs, means that in 2020, we expect a similar benefit to EPS growth from items below operating profit. We expect another year of high single-figure constant currency earnings growth, with results, in particular, New Category revenue growth weighted to the second half. Based on our current foreign exchange rates, there will be a headwind of around 4% on earnings if FX rates were to remain unchanged for the rest of the year. Thank you. I will now pass back to Jack for his closing remarks.

Thank you very much, Tadeu. To sum up, the business is performing well. We are delivering on our financial commitments and another year of high single-figure constant currency earning growth, whilst at the same time, making significant additional investment for the future. We will continue to focus on our three core priorities to create a better tomorrow. We are transforming the company with the consumer as its center, building strong brands and delivering value from our combustible business, providing the resources to invest significantly behind a multi-category business. Looking ahead to 2020, we are confident of another good year of high single-figure earnings growth. Our confidence in the future of BAT is reflected in another increase in the dividend. Thank you, and I will now open up for questions. Yes?

Gaurav Jain from Barclays. I have a few questions which are all interlinked. So can you talk of the U.S. cigarette volume performance year-to-date? You mentioned that there is a supply constraint, which is now happening in e-cigarettes in the U.S. So is it happening for you as well as for competition? And if it persists, is there a benefit that might happen to U.S. cigarette volumes?

Sorry, we stop there and then we continue after, if you don't mind. Yes, I mean, related to the U.S. market. So of course, I'm not going to go further and beyond what we said earlier, but I think that we do not see any material difference between Q4 and the performance of the business in the beginning of the year. So I think that the U.S. market is coming out nicely of the crisis related to e-cigarettes. Of course, the growth that is happening at the moment did not recover fully what has happened in the second half of last year. But we see a good potential for the U.S. market. On your second question related to the supply disruption, first of all, we have to be cognizant of the fact that it's a terrible thing that is happening related to that coronavirus, and there is lots of dead persons. And we're doing all the support and we're giving all the support that we can to our teams first, but also to all the partners that we're working with, all the manufacturers that we're working with. Most of the factories are now open, yet we see here and there some attention in terms of supply chain and some limited out of stocks in retailers in some geographies. You just have to remember that I'm not going to comment on the potential out of stocks of competition. But as I said, we see some in different places. First of all, we have a very strong business worldwide. The weight of China in our all revenue base is extremely limited. And most, nearly all, our factory footprint on manufacturing for cigarettes is outside of the area of China. And we do not see, at the moment, any inflection point apart from duty-free, which, of course, is impacted by the reduction of number of travelers, but this is extremely marginal in our total business. So that was your first 2 questions. You had more?

Yes. So switching to Modern Oral in the U.S. So you have a 10 percentage share now after 6 months of, or 7 months of being in the market. And there will be the bigger competitor, which will enter the market later this year. So how do you assess success in that market?

Yes. I think what's very important to us is that we're present in 3 categories worldwide and we're growing share in these 3 categories. That's the starting point. So we are not only delivering growth in these 3 categories but also a very strong growth in combustible business. I think that, specifically to oral tobacco, as we said, we are the leader worldwide in terms of oral tobacco and even Scandinavia, that is, I would say, the starting ground of all these products, we are winning against all competition in terms of modern oral. In the U.S. specifically, we have very good performance with the Velo brand, and I said I'm very pleased with the results. We have no constraint in terms of supply. And as Tadeu explained earlier, we took the opportunity to learn on that category, as we do all the time, and we have now a distribution of more than 70% but an active distribution of around 15%. If you take the position that we have, for instance, where all the different categories are present in Georgia and also in Atlanta, we have close to 40% share in oral tobacco. So I think that we have the potential and the runway to continue to accelerate in terms of New Categories.

Nico Von Stackelberg from Liberum. I had a quick question on the dividend growth. My impression was, in a relatively bad year, the dividend would grow about 4%. So it grew a little bit below that. And I was just wondering, could you explain what the rationale was?

As was always, to deliver what we committed, a 65% payout ratio, that's exactly that 65% payout. We have, for sure, very diligence of cash, as you can imagine, and we are striving to deleverage the company. And we assess that it's a good remuneration in terms of the dividend, and we are sticking to the policy that we have set ourselves.

I guess, my second question. I'm curious about product applications in the U.S. and the PMTA...

What, sorry?

The product applications for PMTA. Could you give an overview of what your priorities are in terms of PMTA? Are there certain major categories that you see that you won't be PMTA-ing, for example, tobacco heating products, THP? Will that be lead PMTA product there? And yes, just generally speaking, could you talk about modern oral PMTA?

Yes. I think that our first priority lies on e-cigarette and oral tobacco. We said, repeatedly, we will do tobacco mint and other flavors and we'll select these ones. We want to make sure that we're strong in this environment. And in terms of THP, we already have a product that is in review with the FDA. What's the most important to us is the fact that from, the market that was extremely segmented or extremely atomized in terms of number of players and number of SKUs and open system, now you have in the U.S. a market where 60% of the sales are done in closed system, which plays to our strength. And the second thing is we see that there's a contestable space that is going to happen by consequence of the filtering of the FDA process of $1.5 billion, to which you will have most of the benefit that will come rather in '21 and most of it in '22. Why? Because it will take time to, for the FDA to process all the information that we'll receive. I remind you that we've already put some PMTA applications in the system in order to test the grounds more for the administrative side of it, and just these SKUs represent 150,000 documents and took more than 27 hours to download. So it's going to be a heavy process, and we're going to support the FDA as much as we can, and we are already in contact with the FDA to make sure that this goes as smoothly as possible.

And my final question is on the vapor opportunity in the U.S. for profitability. I mean, I can see how this becomes a profitable segment after PMTA, but could you give any sort of color from your side in terms of how you see the profitability of this category developing, say, on a 5-year view, please?

There are a number of levers that we can action to improve profitability in vapor. One of those is related to the product costs and the whole supply chain. And it's a constant topic for us to review what are the opportunities out there to improve and reduce the cost and improve gross margins. The second one is how can we improve our direct-to-consumer assets, and we're putting a lot of efforts in terms of e-commerce and be more able to reduce the trade margins that as a consequence of that. And there is already a trend, as I explained, in the closed system, which helps us. And for sure, PMTA will open up a contestable space around $1.5 billion. And we believe that we are very well positioned with the products that we have currently and the momentum is there. So I think that this all will play together because this will generate more scale and also revert in improved profitability.

I guess the question is, for my model, in five years from now, what should I be modeling, roughly speaking? Could you provide maybe a range on profitability for the segment?

£5 billion in New Categories. We have to take it step by step. The regulatory environment is evolving rapidly. The level of taxation in the different categories, the three categories, THP, you see that they are growing more and more towards full taxation on tobacco. You have that already in North Asia, you have that already in the U.S. In terms of e-cigarettes, there was a fragmentation of the market that was very important. And now we see that there's a concentration in closed system. There's more product so watch it, that will create a concentration. And as Tadeu said, the fact of having bigger brands, more economies of scale and distribution, that will cost you less because now that we have age verification competitors that has applied, then suddenly, I'm in agreement with our marketing colleagues to go for e-cigarettes into e-commerce. But we have to make sure that we understand, and it's not the time to give guidance related to these things, it's the time for us to take leadership in these different categories and to make sure that we have the right products on the right consumer. What is the most important to me is that because we have been multi-category since many years now, we have reinforced our capabilities. As I said, we've recruited 350 managers in all these areas of New Categories going from product development to design, to insights. We are the only one to have four categories in site that are available to us and have done pilots, market tests and launches that have been successful. Just from memory, ePen 3 and the equivalent of the Alto in Europe is product of the year. That means that the reception from the consumer is extremely good. From that base, we grow share in these three categories and we'll continue to do so.

And final question for me, please. On -- when I look at the large gap between adjusted and reported profits, obviously, a lot of these one-offs are -- they're genuinely one-off in nature, and I appreciate that you've quantified them, which is quite useful, so thank you for that. But I guess the question is, for the year ahead and maybe for the couple of years ahead, could you provide us any sort of color on what the sort of like gap maybe? Or what is the restructuring charge you may foresee? Just generally, if you could explain your thinking on that going forward.

Yes. I think it's important to see on the restructuring. We are increasing from 2018, mainly as a consequence of the project Quantum in the restructuring side. The element of that is just being on the restructuring side. Other than that, the vast majority, like you said, is noncash item and that is difficult to predict. And we -- one of the biggest ticket item there was related to the charge in respect of Québec case, like we have disclosed already in the half year. In terms of cash flow, in 2019, we saw a slight decline in terms of adjusting items compared with the year before. And although we have bigger ticket items to cover in 2020, which is the Quantum itself plus tax case in Russia, we have already been working, and we are not expect to have, to be a bigger trend in terms of cash for next year, given the other actions that we are making. From then, if we have to continue with Quantum, which is a restructuring progress. But it's difficult to estimate the overall adjusting item for there are elements there that are, like you said, very one-off. Yes, San.

Sanath from Morgan Stanley. I have 3 questions, largely on the U.S. market. First of all, you shared your views about the U.S. cigarette volumes for 2020, where you expect it to be, about 5%. Could you just help us understand how you're thinking about the drag or the reduced drag from vaping and the impact of Tobacco 21 on your numbers. And maybe just...

Can I start on that one? Then we go to the other question. So the 2021, it's a very good question. Thank you very much for asking. There, you have already 15 states in the U.S. that are above 21 years old, and we saw that the impact was very minimal. But for a responsible company like us, it's a very good regulation coming forward. Then the second thing is you have to remember that in the U.S., we have a share above 21 years old of 44% annual [indiscernible] so we are better positioned than our current total market share in the U.S. So that was for your first question. Then your second question?

So basically, also from a longer-term perspective, you always said historically that you're adding consumers of nicotine, too. How do you see that evolving in the U.S.? Or have you seen it in 2020 or 2019? And going forward, post '21, Tobacco 21 post-PMTA, how do you see this consumer acquisition going forward?

Yes. I mean, without going too much into detail because that's forward-looking, but what we saw in 2019, with the crisis in terms of e-cigarettes, is that it was not that consumers from e-cigarettes were rushing back to cigarettes, but rather consumers from combustible were less going to e-cigarettes because they had the doubt in terms of the product. I think that the regulatory framework that's been put in by the FDA is a valid one. It's a first step, a very big first step in the right direction and there might be more to come.

And so one of your competitors put out a comment at CAGNY saying by the end of this decade, probably, they'll end up being equal-sized revenues in NGP and combustible in the U.S. Do you feel very strongly about that? Or how do you see the evolution of that market there?

I think I've been very clear at the beginning of my presentation for the first time in terms of our purpose, and I take you back to that one. What's important is we believe, we strongly believe in the quality of our tobacco business, and we strongly believe that you have to have, at the same time, a strong arm in New Categories. We have 3 categories that are important because we don't believe that one size fits all. We do believe that the consumers are having some aspirations in terms of risk-reduced products and that, depending on geographies, depending on culture, depending on excise environment and depending on regulatory environment, you need multiple approaches. Of course, it takes a lot of energy, a lot of resources in order to cope with that. But I think it gives us a head start on all competition across the industry in terms of being successful for the future. And that's why I reiterate, despite the crisis and the scale measures that have happened last year and this year, that we will achieve the £5 billion moving forward as an ambition.

And then I'm cheekily just asking last one. On the leverage you highlighted, you'll be below 3 turns by 2021. Is there a target internally in terms of where you would like to be? Or what's the optimum rate you would like to have?

No, it's a very good question. I'm not going to give a target related to that. What I'm saying is one of the main reasons why we reduced guidance this year, the number of guidance, that we say 3% to 5% in terms of revenue, high single-digit in terms of EPS, the 65% in terms of dividend and the deleveraging is because I want to have a little bit more space to be able to take the opportunities in the market whilst continuing to deliver on the financial metrics of the company and we'll continue to do so. The first year last year, we had a situation that was more difficult. We gave more guidance. I think it's more reasonable now to be in a situation where we have a little bit more space in order to make the right calls for the business and to invest. I'll just remind you that in 2019, we are delivering the financial results, and at the same time, we invested £500 million more in terms of marketing investments, £500 million more. And I will continue to invest in the New Categories at the right pace in order to make sure that our multi-category approach is the right one and it is showing the right approach from the consumers. Thank you. Adam, yes? Sorry, Adam.

Can, as always, can I ask you sort of 3 questions?

Go one by one because they're always very sharp, your questions, I want to make sure.

The first question, can you talk about the, in Japan, you've been very successful in the little cigar category.

Sorry, in the?

With little cigars. This new...

Oh, yes, yes, yes.

Can you talk about how you don't see, well, then, more importantly, how you expect that going forward? That's the first question.

Okay. So let's start with that one. Thank you, Adam. I think that there was, there was a historical thing that was there in Japan, which was, first, low taxation for some cigarette products, normal cigarette products. And that has been closed and it will be closed gradually by the government in Japan. The second thing is there was that opportunity related to these, I would say, mini cigars, it goes in a way but more in the sense of cigarettes and we took that opportunity because, to the difference of other players, we consider that the combustible business is extremely important. And that's why when we speak about our results in Japan, we say 19.1 a share in terms of total nicotine offer on the market. That category, the same way as the lower taxation that has happened historically in Japan, will close and it goes around. That gives us, and it has given us the possibility to continue to grow in that category. I think it was a very useful step towards having a better value share and a better market share in Japan. Did that answer your question, Adam?

I think so, very clearly. Next question, probably the most important question is trade, well, I'll start with another one. In menthol regulation by state...

In menthol regulation by state, are you talking about the U.S.?

Yes. So talking about the U.S., we're now seeing more states at least threatening to ban menthol. How concerned should we be about that?

I think there are 2 things. One is, it's a very good question. One is the fact that the FDA, after so many years, is still allowing menthol in cigarettes and also still allowing menthol in e-cigarettes. And that is extremely recent, so there is no new science related to that. At state level or city level, some decide to ban menthol. Okay, what's happening is that the U.S. is 50 states and the borders are what they are in the U.S. So you see a, I would say, potential acceleration of cross borders. And I don't think that this is going to be something that is extremely sustainable in the future. But I understand why cities or states are taking the view. Are we for it? The answer is no, because we believe in consumer choice, and there is no material scientific evidence that has said that there is a problem related to menthol. Did that answer your question, Adam?

I think so, yes. So the third question, more general. You've spoken before about creating a better process for innovation and a better -- and perhaps more sharp commercial execution around the next-generation products. So can you just talk about how the process of developing new products, how the process is improving? Has any change happened in the last 12 months? How do you expect that to change...

Yes. For sure. I mean, what we have done is we've put a lot of investment in terms of insight. The area also where we've accelerated quite sharply is everything that's related to big data. And the social listening is also a part that is very important. Now further and beyond that, on the definition -- that's about the consumer. Further -- and remember, we're the only ones to have data and information and insight on four categories. Yes? Further and beyond that, what's very important for us is the four Ds of R&D were split in the company before, now they're all in the same place. So there is one body, which is the new category group that is looking at all this, with strong support from IDT, so digital and technology. I think that what it gives us is the possibility to work much better and to understand much better the consumer needs. I think that one of which that is maybe the most important one is the satisfaction that consumers get out of these products. And you know that in THP, for instance, there is 25% of segment share of total nicotine in Japan, and that's the only country in the world. You know that in Korea, it has peaked at a point and it has reduced now to 8% despite players that are there, which includes the local strong company. We know that in Europe, there is only traction in a very limited number of countries. We know that the more you go into the scale of tar and nic, if you go to Canada, for instance, despite the fact that THP has been there three years earlier than e-cigarette, e-cigarette is now much bigger than THP. We know that in the U.S., but that's only the -- in this infancy, we'll see how it will develop. And I'm not undermining the possibility of THP that can grow in the U.S., but the environment does not seem very, I would say, favorable in the sense that you have two other categories that are extremely well-established already. And when we see that two other categories are well established, it's very difficult for the third category to grow. So I think that what we've done in terms of our R&D and our understanding of the consumer has been massively stepped up and we've invested much more money in the course of 2019 in order to make sure that we deliver related to that.

And just to follow up on that, should we expect the same vapor to see important new products? And how, when are we going to see some results of a better process?

Yes. I think, I don't want to go, it's a very good question, Adam. I don't want to go in product definition because then I would give away too much. But yes, the reality is you have now the segment, we're a leader worldwide. You look at the segment itself, the number or the percentage of closed system is there, increasing and very strong. It has a very, very important consequence, which is the regulatory framework and the product stewardship. You have a device that goes with the liquid that goes with the system. This is the future moving forward. After that, you have to make sure that you continue to develop these products. And the products that we have at the moment in the market will evolve in the next 2, 3, 4 years because there are a lot of cost opportunities and improvement opportunities in terms of satisfaction moving forward. Other questions? That would be potentially the last question or last 2 questions from what Mike is telling me from the back.

It's Chas Manso from SocGen. A couple of few, if I may. I'll take one at a time. First of all, a quick one.

I'm French, so you have to go slow.

In Canada, has there been any progress in the discussions? And is it possible to break out what the profitability of Canada was in...

CCAA, CCAA?

Yes.

Yes.

Has there been any progress in terms of forming a resolution?

Yes, we have, the industry is in the process of negotiation through a mediator that was established with the plaintiffs in the, not just in the Ontario but all provinces. We, the latest news we heard is that there was this stay of all the process, it was extended until September. And we are confident that we can be able to come up with a negotiation that represent a growing concern for all the players moving forward. But I cannot say much more about that because it's quite confidential in the process now.

Is there any sort of, you mentioned the extension until September. Is that there for the beginning of the process? Or is there a time frame for a potential resolution?

No, it's just the fact that they have a stay in place, trying to come to a type of agreement. But to be honest, I don't expect anything happening in the short term. I mean, end of the year, eventually a couple of years.

Okay. Secondly, going back to aged tobacco. Clearly, your focus seems to be on Eastern Europe. So just to be clear, in 2020, when the, your investment outside of Japan in tobacco is going to be very much focused on Russia, Kazakhstan, Ukraine.

Yes, I mean, we're going to expand our footprint for the 3 different categories, and we're going to make sure that we're so successful where we're going. I think we'll go step by step. And as I said earlier to the question of Adam, what's extremely important, and so I like the question, what's extremely important is that we have created, in 2018 and 2019, the capabilities and the resources, put in place the resources, so that we are able to continue to grow. Even with the THP and oral, you remember I said last year, we are using our current tobacco machines to do our THP products because I don't want to be in a situation whereby I'm ending up with the CapEx exposure that is much too high compared to the regulatory framework. So I think that Tadeu said very clearly that the CapEx will be in line with depreciation. First year in many years that we are able to do that in 2020, and that's a very good news related to that. So our geographical footprint will continue to expand but we'll speak more about that at the Investor Day.

And lastly, on the sort of regulatory front and such. Is there any sign that people like, organizations like the WHO are moving much more towards the sort of harm reduction view of the world? Or do we remain stuck in a sort of differential world where, in particular, transnational organization still believe in quit or die?

Yes. I think what you have to do, it's a very good question. I think what you have to do is to follow the consumer first. And the consumers are buying the products that we're selling. We have very good products you want ship on these products, and we'll continue to do so. Secondly, we have a very responsible marketing approach to all the activities that we do. Why? Because that is about the sustainability of the group moving forward. And the third thing that is also very important is that we will go step-by-step in the development of these products, and we engage with regulators as required, both the FDA or other bodies across the geographies in which we operate, in order to have the right scientific base that is put forward to them and the right benefit of these categories that is put to them. Okay. Last one? No. So thank you very much. I mean, I must say, as you know, it's my first year as CEO, and before that, I was COO so I know this company very well. I know the muscle that this company has. We have done a lot of restructuring in our business to become faster, simpler and more agile. We're doing it. We're doing it in short terms of time. Why? Because I want to transform this company fast. We have created the foundations in 2018 and 2019 to have a strong base on our tobacco business, very strong base on our tobacco business with huge revenue growth and with value share growth, and we are taking the resources from there in order to grow our New Categories. We have invested £500 million more in 2019 in the New Categories. We grew share in the 3 categories. We have delivered within the guidance, and we'll continue to perform in these New Categories and grow share, of course, there will be skirmishes all over the place because there's always a country that decides that regulatory framework has to change, and there's always a country that will decide that a bit more taxation is required from these different markets. All in all, what we want to create is a better tomorrow for society, for the stakeholders that we have and including the shareholders. We have demonstrated in the last 2 years that despite the waves and despite the negative environment that has been there, we have been able, in 2019, to deliver revenue growth at 5.6%, to deliver the dividend and to make sure that we continue to deliver the deleveraging of the company and we'll continue to do so. Less guidance is the right thing to do because that gives me the flexibility in order to move forward, but we'll give you guidance on the most important elements. Then I will navigate in terms of the different opportunities because it is all the aim of gaining opportunities and flexibility in the organization and our resource allocation. We will continue to deliver, as we said, in 2020, in terms of 3% to 5% and in terms of high single-digit related to EPS.

Thank you very much.