British American Tobacco p.l.c. (BTI) Q4 2020 Earnings Report, Transcript and Summary

Hello, and welcome to the British American Tobacco 2020 Full Half Pre-Close Trading Update. My name is [Molly] and I’ll be you coordinator for today’s events. Please note that this call is being recorded and for the duration of the call your lines will be in listen-only. [Operator Instructions] I would now like to hand the call over to your host Mike Nightingale, Head of Investor Relations to begin today’s conference. Thank you.

Thank you, [Molly.] Good morning everyone. I’m Mike Nightingale, Head of Investor Relations. And with me this morning is Tadeu Marroco, our Finance Director. Welcome to our full-year 2020 pre-close conference call. Just before we begin, I need to draw your attention to the cautionary statements regarding forward-looking statements contained in the trading update. I will now hand over to Tadeu who has a few short words on current trading before we open up to questions. Unless otherwise stated, our comments will focus on consent currency adjusted measures. Over to you, Tadeu.

Thank you, Mike. Good morning everyone and welcome. Thank you for joining us this morning. In 2020, we are transforming BAT and continuing to grow the business against the challenging global backdrop caused by COVID. Throughout the year, our priority has been the health and well being of our employees. We have made no redundancy of furloughs as a result of the crisis, and we have continued to pay all our employees in full. It is the commitment and dedication of our people around the world that has ensured that we are on track to deliver a strong set of results in 2020. We are committed to building a better tomorrow delivered by our continued focus on the three strategic priorities. Reducing the health impact of our business through providing a range of enjoyable and less risky products is the greatest contribution we can make to society. We continue to be clear that combustible cigarettes pose serious health risks. And the only way to avoid this is to not start or to quit. BAT encourages those who would otherwise continue to smoke to switch completely through scientifically substantiated reduced risk alternatives. We are continuing to increase investments and to drive a step change in new categories. We are very proud to now have around 30 million consumers in non-combustible products. We are growing value sharing vapor, volume sharing THP, and delivering strong revenue growth in Modern Oral. Our new category revenue performance is accelerating in the second half despite a strong prior period comparator. We are continuing to drive value in our combustible business and are on track to deliver savings of at least 300 million from Quantum. In addition, the radical transformation of the organization and increased agility brought about by new ways of working have enabled us to quickly and effectively adapt to navigate the challenges caused by COVID. The business is performing strongly against an environment which remains uncertain due to the global pandemic. We are on track to deliver on our 2020 guidance. Cigarette and THP volume has improved over the second half, driven by continued resilience in the developed markets and some improvements in emerging markets such as Brazil, Bangladesh, and Turkey. We expect to outperform industry volume, which we now expect to be down around 5% decline, with U.S. industry volume broadly flat. Given this continuous strong pricing and reduced fully revenue headwind for COVID of around minus 2.5%, we now expect to deliver revenue growth at the top end of the 1% to 3% guidance range. In this improving trading environment and thanks to our strong cash generation and tight cost management, we have taken the opportunity to further increase new category investments in the second half by close to £200 million. This represents a total additional new category investments of around £450 million in 2020. We continue to expect to deliver Mid-Single Figure constant currency adjusted diluted EPS growth. This is despite the further increase in new category investment, absorption of a one-off impact of new category revenue of 50 million, following our decision to withdraw glo Sens from the Japanese market. The effect of a strong prior period’s comparator, and associate income from ITC that is significantly negatively impacted by COVID. We expect the translation headwind of 3.3% on full-year 2020 adjusted diluted EPS with the impact expected to be between 2% to 3% for the full-year 2021 applying current foreign exchange spot rates. Turning now to trading in the new categories. In vapor, Vuse/Vype is fastest growing international vapor brand growing value share of its top five markets by over 7 percent points to 26% year to date. The brand has now achieved value share leadership in closed systems in four of the five large vapor markets, exceeding 50% value share in two of them. Vuse/Vype is Number 1 in device sales in all top five markets with device volume share in excess of 50%. In the U.S., Vuse is the fastest growing brand with 24% value share of total vapor year-to-date driven by auto at 90%. Vuse continues to close the gap on the market leader and has achieved valley share leadership in seven states. Vuse also took markets leadership in Canada in August, having commenced the brand migration from Vype in May. Canada is the first market within the top five to migrate to Vuse and achieved 100% [rotation rate.] Market share for Vuse at the end of October reached 64% driven by the success of Epok. Migration to Vuse in the remaining top five markets will be completed during 2021. In THP, the continued success of Hyper was reflected in global reaching records total nicotine volume share in Japan of nearly 6% in October with Hyper reaching 2.3% nicotine share. Hyper has maintained a conversion rate in excess of 50%, two times higher than any previous glo product. Glo continues to grow volume share in inner with a THP category share of around 15% across the top eight markets. In Moscow, Hyper drove gross volume share of total nicotine show records 3.3% in October, and was the top performing THP brand across all tracking social performance metrics. We expect growth of close to 20% in THP volume in 2020, reflective of the successful launch of Hyper in Japan in April, and its subsequent rollouts into key cities in [indiscernible]. THP revenue is expected to be down, mainly due to the year-on-year impact of the withdraw of Sens and excise harmonisation in Japan. In Modern Oral, we continue to grow strongly and to consolidate our leadership position outside the U.S. In the U.S., in November, we announced the acquisition of drift. The acquisition significantly strengthens our position, expanding our portfolio from [indiscernible] and flavors. It also enabled us to participate in the segment above 6 milligram nicotine, which represents 6% of the category. The Modern Oral category in the U.S. has benefited mostly from geographic expansion by all the key market participants and currently represents around 1% of the U.S. nicotine markets. Velo branded Dryft products have now been launched online and into distribution in Circle K stores in the US. We expect to expand the distribution of the Dryft products from 20,000 to around 100,000 outlets by the end of the first half. We are of 2021. We are building capacity and expect to be unconstrained around mid-2021. In [inner], we are consolidating our clear leadership position with share growth in all key markets. We are achieving conversion rates from trial to regular used of over 50% and have higher average daily pouch consumption than the category average. In summary, we are entering 2021 with good momentum across all three new categories, with some exciting new launches planed. In vapor, we are launching a Bluetooth enabled version of Vuse providing electronic age verification. The product will be launched in Canada, as a pilot market in the first half of 2021. Our Vuse Alto PMTA submission in September also included age verification technology. Also in early 2021, in-line with our ambition to explore and to broaden our portfolio beyond nicotine, we are planning a City test of a CBD vaping product in the UK. And in Modern Oral to better meet consumer needs we are leading with the launch of the first mini pouches with a recyclable can in Sweden, Norway, Slovakia, and Switzerland. We plan to expand to at least 10 markets by Q1 2021. We also aim to make all our Modern Oral cans outside the U.S. recyclable in the first half of 2021. We will continue to lead in innovation in our multi-category approach. Moving to driving value from combustibles. Our excellent performance is underpinned by resilient industry volumes, particularly in developed markets with BAT outperforming the industry. Continued strong price mix drove global value share in sub 20 basis points and our strategic brands value share up 40 basis points. The U.S. business continues to perform strongly with an excellent performance from views and good pricing combustibles. Corporate value share is up 40 bips and premium share is up 50 bips year-to-date. This is driven by natural American spirits and Newport's. We are growing share in the branded value segments. And to date, we have seen no accelerated down trading. Moving to the balance sheet, we maintain our strong liquidity profile following recent successful debt issues. We remain committed to our targets to reduce adjusted net debt to adjusted EBITDA to around three times by end 2021, and maintain our 65% dividend payout ratio. This will be achieved through continued strong operational cash conversion in excess of 90% of adjusted profits from operations. Turning now to ESG, which is central to our strategy. I'm pleased to report that we have recently received further external recognition building on our BBB MSCI rating and the recent improvements on our Sustainalytics score from 28.2 to 27.8. BAT has again been named in the Dow Jones Sustainability Index for the 19th consecutive year, and is the only tobacco company to be included in the DJSI World Index. BAT has been included in the Financial Times Diversity Leaders list for a second consecutive year with our score increasing from 7.08 to 7.23. We have also been included in the A List by the Carbon Disclosure Project, CDP, for climate change action for the second year in a row. Finally, tomorrow, we are launching a sustainability focused report on human rights, the first by any company in the tobacco industry. In conclusion, the business is performing strongly during this challenging circumstance and we are on track to deliver on our guidance. We are investing, delivering, and transforming the business. Thanks to our continued focus on our three strategic priorities. We are growing [share in] new categories driven by innovation and increase in investments supported by considered value growth in combustible and the benefits of project quantum. These enable us to both deliver on our financial commitments and become a faster, simpler, more agile business. In summary, we are delivering on our three strategic priorities. We now have around 30 million consumers in noncombustible. We are investing an additional 450 billion in new categories and continue to leverage the company. We are committed to our and better tomorrow purpose. Thank you. I will now open the call to questions.

Thank you. [Operator Instructions] First question comes from the line of Jon Leinster calling from Societe Generale. Please go ahead.

Good morning, gentlemen.

Hi, John.

Hi. Few questions, if I may. First question is on glowing Japan? I think at the interim results, you said your exit rate in June was sort of 5.9%. And then you say here, it's sort of high in October of 5.9%, with Hyper having risen from 1.3 to 2.3. I mean, does that imply that Hyper is just cannibalizing existing glo? And, you know, why is the market share – why is the total share of glo not really risen in a segment that is truly risen within total market? That’ll be my first question.

Okay, John. Look, the point that reading in the middle of the year was a one ad hoc reading, weekly reading that we quoted at that time of 5.9. And in this one, now in October is a more robust reading throughout the end of the month. We are clearly growing as a family. There is some cannibalization, but our total category, market share is growing as well in Japan, and now it’s slightly above the 20% mark. And we were below that, by the by the by the middle of the year. So there is a, clearly a growth expansion on the whole glo family and the glo Hyper is outperforming within that.

Okay. And secondly, I think you mentioned that you don't expect to be capacity constraint in U.S. Modern Oral by the middle of 2021; can you give us some idea of what that capacity would be?

Well, we have a, we have a very well established capacity in our current SKUs. And as part of the Dryft acquisition we are also inheriting third part supply capacity for the current Dryft volumes and we are bringing a machine from an outside also to reinforce our capacity in the U.S. So, when we mean to be unconstrained is basically a combination of all those three, eventually move some capacity from the current one to the [drifter format], but also be able to reach at least 60 million by mid of next year, which we believe that would be a good capacitor to fulfill our plans and go above that in the subsequent period.

Thanks. And lastly, if I may, obviously South Africa was, you know, was rather bizarrely shut for a long time. Now it's reopened, has the market moved back to the legal market or is there still significant problems with illicit trade?

Well, South Africa market we have to consider that before the crisis the government was doing massive inroads in illicit. In 2019, for the first time, in many, many years, we thought, a reduction on the illicit trade, given the enforcement of the new government that has been assuming power that time. And clearly, for the first time BAT in many, many years was growing, volume was growing, turnover was growing, share growing [indiscernible], and all of a sudden, this came to a halt in the end of Q1 this year. So, the illicit at that time has been dropped back to the likes of 52%. And then you'll have you know, this extended period of time without being able to sell any cigarettes. The illicit have dominated the markets, new network were established as a consequence of that. And now the level of illicit is higher than was before as you would expect, because it takes some time for these networks to be dissemble again, and the government be refocused on what they have done before. So, as we speak today, we saw an increase in illicit rate from the likes of 52% before to close to 60. And the government now needs to go back and do what they have done before the pandemic, which is a clear demonstration that when we have the willingness. There are ways to tackle that, and we'll be supporting for sure.

Okay, well, thank you very much.

The next question comes from the line of far off the chain column from Gaurav Jain calling from Barclays. Please go ahead.

Good morning, Tadeu. Thank you for taking my questions.

Good morning.

I have two questions. Number one is, would you be – can you share your initial thoughts on FY 2021 volume outlook, especially in the U.S.?

Well Gaurav, 2021, you'll note that today is still very volatile for us to make predictions now. We have a new government in the U.S. There are now discussions about fiscal stimulus, the COVID crisis nowhere near the end. We have a bright light at the end of the tunnel, but it's still a long months to go, in terms of the vaccine, but still a long months to go to be – the vaccine should be rolled out. And it's very difficult to – at this point in time to have a firm prediction about the volumes. The fact is that 2020, we saw, as you saw in our statement, a very solid the U.S. market is a number of factors that are impacting in a favorable way, the U.S. markets, but it's very early to call, we expect to do a more firm view on the U.S. market by our year-end results in February.

Thank you. My next question is, you know your two long-term objectives. One is high single digit EPS growth, and the second is, new category revenue of 5 billion by 2025, that would imply that new category revenue growth would be like £700 million per annum, versus the 200 million, 300 million growth that we have seen in the last two, three years. It doesn't require a significant step-up in [indiscernible] growth rate and investment. And, again, the question I'd like to ask is that, are these two goals incompatible with each other?

No, I don't think that they are. And we clearly have prepared the company to allow us to generating the savings that we need. That's why we launch a project quantum. We also have a very, very strong combustible business, as you know. And these both factors will be generating the funds necessary to fulfill the growth of new categories. You have to take into consideration that 2020 is a very particular year. We had, for example, a number of headwinds in 2020 new categories that materialize the COVID impact on supply chain in the first quarter, as a consequence of the shutdown in China, like we spoke in the half year results. The closure of shops in Japan, you know happen again, and the second lockdown in Europe. In marketing activation disruption, we have more than [auto ban] in Russia at the end of 2019, beginning of this year that we [had to lab]. And we had also the impact of glo Sens that we caught about. So, there were a number of factors the vapor industry is still recovering from the valley crisis in the U.S. and also the new legislation, [the FDA] at the beginning of the year. So, I think that we cannot read much through the numbers in absolute terms in 2020 in terms of [NTO], but the most important thing is just to understand and to recognize the momentum that we have in all those categories. As we quote before, we are growing share in every single of those categories. In vapor, we are we are really leading four out of the five top markets and making big inroads in the U.S. In Modern Oral, is just solidifying our leadership outside the U.S. In the U.S., now with would have much more competitive offers to consumers. And in THP, we are getting close to 20% of volume growth despite the headwind of glo Sens. So, I think that's this gives us the reassurance that we'll be able to achieve our 5 billion target by 2025. And at the same time, continue delivering our financial average, as soon as the first one, as the pandemic is over.

Sure. Thank you. And my last question is just on share repurchases, like you have mentioned that maybe like 2%, 3% cost of debt and equity free cash flow yield is north of 10% leverage. Once we adjust for the associate, and it's not really 3.2x, the corporate leverage is much lower. So why not start buying back the stock today?

Well, look, this – the capital location is a subject we will be reviewing on a constant basis. We believe that the best thing we can do for the next year is to strengthen our balance sheet. We have done a very good exercise recently in terms of liability management that change the shape of profile of the death moving forward quite nicely like we point out in the announcement. We believe that the best way to remove the rate of our shareholders at this point in time is to keep the dividends as it is, is part of the DNA of the company. And we also want to continue vesting in our M&A business, new categories business through eventually some M&A’s like we just did with Dryft in the U.S. By the time we get to the end of 2021, and we reach there around three times leverage, we'll be reviewing again the capital location. And if the circumstance persist as it is to date, because I agree with you about the undervalue of the company, we’ll be, you know, reconsidering all those points again by then. Okay.

Thanks a lot.

The next question comes from the line of Alicia Forry calling from Investec. Please go ahead.

Hi, good morning Tadeu. My first question is on the guidance. The global volumes look to down about 2% better than you’re previously expecting, and that's with a SKU [Technical Difficulty] on the higher price mix developed market. So, I'm surprised that the top line guidance was not raised by more than the roughly 1% you've indicated. So, I appreciate you've touched on a few factors holding back a revenue growth this year, but could you perhaps be a bit more specific on which factors have primarily held back?

Yeah, sure Alicia. Look, like we articulated a bit in the half year, there are three major drags for BAT this year. The first one is the global travel retailer. Although the volume is not that much material, there is a massive value intrinsic to those volumes and the business, if anything was completely decimated. The second one is, South Africa is a big market for us in terms of – because we are leaders, and we couldn't sell one stick of cigarettes since the end of April until in the second half of August. So, it was a big blow in terms of revenue, and weakness that we saw many emerging markets. There are a lot of disruption, mainly, that happening there in the first half of the year. The likes of Mexico, the likes of Pakistan, and Sri Lanka, markets where stick sales are predominant. And this was a big drag that was difficult to recover. We had some upsides, like you refer to, the developed markets clearly outperform in this crisis, and our performance in the U.S. in particular as well was very beneficial. But this all nets to this 2.5 impact that we are quoting in terms of turnover. And so, that's what – it lies behind the numbers.

Okay. Thank you. My second question is on Modern Oral in the U.S., obviously a very exciting growth category. Many companies are involved in developing this space. Can you characterize the competitive landscape that you're seeing there? And has there been any change in competitive dynamics there in particular with regard to price mix?

Yeah. Look, there, yeah, you said this is a very fast growing segment, although is still 1% of the U.S. nicotine pool. And it's important to quote that because, you know, we have to put things into perspective. If you look from – they are the more development developer, traditional Oral markets, the likes of Norway for example, Modern Oral is now reaching 20% of the – a bit more of 20% of the market. And in Sweden, for example, is something like [80%], where it's similar to the west that's closer to the 10%. It's a very competitive category, like you referred to. We have players investing with new products. And we – in our case in particular, we were not able to compete freely across the whole scope of the category because we were limited with the office that we had in place. So, we are testing. The reason that we are now in Circle K is actually to test our marketing mix to make it as more competitive as possible. And in order to be able to roll-out the rest of the [Country] from beginning of next day onwards. I think that we'll see how this pans out. And we are very optimistic in terms of the possibility to extend our range of offers from 4 SKUs to 28 as you can imagine, and be able to compete in a segment of above 6 milligrams that we were not before. So, have to see and I think that it’s a bit early to make a prediction in terms of price mix. I think that the moment is old players are trying to compete, trying to increase distribution. And more important now is to have the right marketing mix in place.

Thank you. And if I could just ask a final one, can you update on anything that you're seeing in the U.S. market with respect to various [local menthol bans]? What impact if any, are you seeing on consumer behavior in those areas where there has been [local menthol bans]?

Well, where they have been, in reality, we haven't seen much impact, because at the end of the day the consumer end up circumvent that and buying in other geographies close by or by commerce, if possible. So, there was no really implications in terms of sales. And we still believe that the FDA is the body that is the one responsible to make these type of calls. And we can see in the priority list of the FDA, we are not expecting to see either menthol ban or nicotine control enforcement in anytime soon. In reality, we are seeing for example, based on the latest youth research incidents in terms of use of menthol in cigarettes and vaping, that was a remarkable reduction from the – compared with the previous year, which just takes the pressure off. And another point that I would like to make around that is that as time passed by, and you start having examples of menthol being outside the U.S., you can use this as a kind of a reference for the future. And we just saw this year, for example, the introduction of menthol ban in Turkey, in January this year, and as you know, in May in Europe, and in both of these cards in Turkey, the level of retention was even higher than 100%. In our case, we gain market share, because we had a differentiated product in Turk with a differentiated future. In Europe, we had also made a retention above 100%, because we weren't present in the new category space. And we saw that out of the cigarettes, we had a retention of 91%, some 2%, 3% decide to quit completely the category and the balances decide to move to new categories where 7% move to vapor, where like we just spoke about we were very strong. As a consequence of that, in terms of nicotine retention, we were more than 100% than we were before the menthol ban. And if you now make an analogy of those circumstance back to the U.S., you see that Newport, which are our largest menthol brand in the U.S. is the one that has the seventh percent of the franchise in a differentiated format with 100 millimeters length that cannot be copied. As you know, the FDA has frozen old specification of cigarettes since 2007. So, you cannot launch in new SKUs in the market. And it has also the lowest level [mentholation] in the market. And we are present and making big in-roads in the new categories. So, I think that in the future, if we see a menthol ban coming in the U.S. we will be well prepared and those facts are happening outside the U.S. is a clear indication for that.

Thank you.

Next question comes from the line of Sanath Sudarsan calling from Morgan Stanley. Please go ahead.

Hello, good morning all. [Indiscernible] on the level of investment to do, you've done a very good job recruiting new consumers this year. The levels keep higher. How should we think about what seems to be the right level of overall in this category going forward? Particularly interested about, you know, are you're still maintaining the 5 billion revenue ambition by 2025? But what should it mean in terms of profit for the shareholders? And then secondly, could you just briefly touch upon how your emerging market [indiscernible] is shaping up post all the restrictions? Are you seeing down trading? Are you seeing brand migration? Are you seeing more [indiscernible] away from the illicit market? Could you just give us more general view of the emerging market consumer please? Thank you.

Okay. So, there’s a lot of questions. So, let me try to address them. Look, we are very pleased with the performance on the noncombustible consumer’s base. We have 30 million, it is almost 30% more than a year ago. As you know, we have the ambition to reach 50 million by 2030 that we released in our – set out in our revised strategy back in the [indiscernible]. And it's important that to recognize that today, there are already more than 80 million of those non-combustible consumers out there. And we have 30 million of that. So, there is a read today, a massive contestable space for us to go after. And this is what means that gives the confidence that we are able to achieve the 5 billion by 2025. Because given the strength of our portfolio of – in the new categories, and the contestable space that are already there today, and if anything we will continue increasing over time, will give us all day indications that we are able to achieve that and start accelerating our growth from next year. In terms of profit for shareholders, I do believe that we have done the – we have invested a lot in the new categories in the first three years in building the necessary capabilities to be successful. The likes of, you know, IP’s, the designs, digital innovations, and so on, so forth. More recently, we have a resource to locate this level of investments through more consumer facing type of investments. And we think that we have the right level is a consequence now of year-after-year, is a consequence now to see the revenue growing faster. In reality, we expect that we have reached the peak in terms of losses in our P&L in new categories in 2020, which means that for 2021 onwards, there are new categories. We expect to be more EPS accretive, and this together with our cost agenda that we articulated at mid-year in terms of the quarter and the full-year, last year, we expect to generate the two leavers necessary for us to continue delivering our financial algorithm while transforming the business. Now, in terms of your emerging markets, as it is today is a bit of a mix of the basket case here in terms of mixer – is a mixed case, because we have countries like Brazil, for example, perform extremely well. We have seen double digit volume growth in Brazil this year, as a consequence of interruption of a illicit flow from Paraguay. Remember that a lot of those emerging markets has been impacted by illicit and illicit if anything is to still grow, is growing slightly lower this year, but it's still above the previous year. The likes of Pakistan, for example, is growing; the likes of Indonesia now more recently because of the excise and so on. So, we have markets where we can control illicit like Brazil is a typical example, performing extremely well. And where you cannot, like South Africa was an extreme example; still with a lot of work to do in terms of recovering that space that we lost. So, I think that at the end of the day, it's a very mixed picture out there, but overall we are seeing some spots of good performance. We called today Turkey, we talked to Bangladesh, and Brazil, which is trying to offset some other studies or [more negative view].

Okay. Thank you very much.

[Operator Instructions] The next question comes from the line of Rey Wium calling from SBG Securities. Please go ahead.

Hi, Tadeu. I'm just curious if you maybe can just elaborate a little bit more on South Africa. I mean, if we now take, since you have been allowed back in the market? What is your market share, for instance, relative to what it was in the same month in the prior year? Are you down or – what I understood is that, you know, the illicit side is still while it has gained a foothold and it's struggling, you know to dismantle that. Is this a correct assumption?

Yeah, there is though – actually, the problem with the South Africa market is not about market share. The problem is, is the whole market because they illicit like I mentioned before. We had this problem related to the incidence of illicit growing from the likes of [Technical Difficult] very close to 6%. Our share is pretty much flattish throughout the period, when you saw our performance and we had been growing a share, like I mentioned before until Q1 2020. So, we enter in a very strong momentum just before the COVID crisis. And we are able to – we were able to get at that level broadly, after the crisis went through. The problem is, the size of the market, because of the illicit now got some, you know, make some inroads, because of this networks of that were established in those months that there was no legal sales of cigarettes. This needs to be this menthol, and – but I have to say, the problem to tackle illicit in South Africa, the government has demonstrated in the past that it is possible to be done. So, we are very optimistic that with the learnings that they had before COVID, they could reassess that and making again, inroads tackling illicit problem in South Africa.

Good. Then, I just have a question regarding in the agro new products category revenue, I know your longer-term or medium-term target, I think is 30% to 50% a year. In the first half I think it was like 15%. So, based on what you have said about the £15 million hit in Japan, and tobacco heating products revenue down, are we going to get a bit of an acceleration into the second half revenue versus the first half, and probably falling short of that 30% target? I just want to get an idea of the ramp up, you know, until we get to sort of growth rate, you know, [indiscernible]?

Yeah. No, we didn't provide guidance for new categories into revenue growth for this year 2020. We had a 12% increase in the first half of the year. And we are saying that we accelerate in the second half. And despite the headwinds coming from glo Sens, for example, we are – and all the points that I mentioned before, we are expecting to perform better in the second half than we did in the first half. And that is the comment that is we want to make at this point in time. But my points that I raised before, is that we had to be cautious that this was a very particular year, a very difficult year, given all the backdrop that I highlight before. We were for example, in until recently with all our vapor stores closed again across Europe, a second lockdown. And we have problems in the first half, and so on. So, we had to put this into context now.

Okay. And then finally, I just want to put to back on the spot about the share buy backs. Did I understand it correctly that you said that, once you get to the net debt-to-EBITDA around about 3x you would probably then put it back on the table to consider. I just want to get a sort of a broad idea at what sort of labels share buybacks could be a feature again?

Well, I think that we're getting very ahead of the game here. As I said, capital allocation is constantly being reviewed. We are very clear for the year to come that we want to strengthen our balance sheet. Hence, the leverage, the component to the levels that we have said before, and we want to continue investing in new categories and continue doing the dividends of the [65%] payout as we have been saying for a while. So, what I said is that for sure, by the time to get to – we get to this level of the leverage around 3x you'll get more flexibility and hence you have to put all those things back on the table, but this will depend in terms of the evaluation of the company at that time as well. So, a number of factors [indiscernible].

Yeah. Okay. Excellent. Thank you.

Thank you.

The next question comes from the line of Alan Erskine calling from Credit Suisse. Please go ahead.

Good morning, everyone. Just two questions for me. One, a point of clarification on the 2.5% impact of COVID-19, and obviously some elements are very easy to quantify, like travel, retail, etcetera, some harder to quantify. I mean, I would imagine that certainly some of the better performance in the U.S. is because people have more discretionary income to spend, they have more home time, and similarly, Northern Europe will have benefited from tourists spending at home. So, I think Tadeu you indicated that the two 2.5 was a net number. And that that was your best guess of what all of those easy to quantify and less easy to quantify impacts were. I just want to, sort of clarify that that is the case. And then my second question is just, you know what learnings have you had from the failure of glo Sens? I mean, clearly, you didn’t work through it into the launch of that, what disappointed you, what went wrong with that product? Thank you.

Thank you, Alan. Look, your first question. You’re absolutely right. It's very hard to disentangle all those different elements. You see the U.S., for example, market that is performing quite well this year. And saw that one of the big impacts that is responsible for that is related to the vaping slow down and stopping the outflow to cigarettes, we know that. There were, for example, shipment days that were beneficial this year, oil price, a very low price and we know about the correlation between our price and the sales of cigarettes. So, there are a number of effects other than the potential fiscal stimulus and all that because you saw that the fiscal stimulus withdraw in July and the volume was still holding on very nicely throughout the second half. And the same happened in many other markets. For example, we were in Mexico, Argentina, where it was very, very badly hit by COVID, and hence the sales, we were able to be able to come back to the markets in a much more agile way, and making inroads in terms of shares that mitigate some of that. So, this 2.5 is a really, really consolidated figure related to that. So, that's the first question. The second point, well, look, I think that the glo Sens just to remind us, the glo Sens was the use of basically two different consumables. One is tobacco, and the other is the liquid part that we're running out at different times and were clearly complicated for consumers, while the satisfaction was not optimal, either. So, we gave all the support to increase the penetration that was a key metric for us in the first half of the year, but we find the site to withdraw the product to avoid being distracted to a very successful glow hub Hyper launch. I think we have fundamentally changed our [battery testing], our consumer validation methods to prevent such failures in the future. But one pointer is important. But this is a consequence of trying to be leading, leaders in innovating and we can be successful as we demonstrate being through the glo Hyper being the first in the market with induction technology, or not as was the fact of glo Sens. The importance is to learn fast and to improve for the following launches.

Thanks, guys.

Thank you.

We have no further questions coming through on the phone lines. So, I'd like to hand the call back over to Tadeu Marroco to close the call. Thank you.

So, thank you everyone. So, in summary, just to leave the mess with you all. The business is performing well in challenging circumstance. We are guiding to the top end of our 1% to 3% revenue range, and we are capitalizing on strong momentum in the business to invest a further 450 million in our new categories. We have been, as you saw, making big, big inroads in terms of our non-consumable, combustible product consumers growing almost 30% to 30 million now. Vapor Vuse has increased substantially its value share across the top five markets in THP. We expect in the top eight markets now to be above 50% of the category. Any Modern Oral or Velo/Lyft has consulted the leadership outside U.S. and the Dryft acquisition, significant strength, how U.S. positioned. The business is performing well, we are on track to deliver on our mid-single-digit constant currency growth guidance. Let me tell you, if we – we could have delivered high single figure EPS this year in 2020. However, we are clear that continue to invest behind new categories is the right thing to do for the business. And we want to leverage on the momentum that we have. We are investing, we are delivering, we are transforming the business, and we are committed to our purpose to build a better tomorrow. So, thank you. I look forward to speaking to you all in February at the prelims and I wish you and your families a very Happy Christmas. Thank you everyone.

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