Good morning, everyone, and welcome to our 2022 interim results presentation. I'm Jack Bowles, Chief Executive of BAT and with me this morning is Tadeu Marroco, our Group Finance and Transformation Director. Before I start the presentation, I take it that you have all seen the disclaimers on slide two and slide three. As usual, once Tadeu and I have taken you through the presentation, there will be an opportunity to ask questions. I would like to take a few moments here to express our deep concerns and sadness for everyone affected by the conflict in Ukraine. While we continue to work towards the transfer of our local Russian business, we remain focused on our 2,500 people we employ in Russia and safeguarding their future employment. This is an extremely complex undertaking and we'll provide an update on our progress as soon as we're able. Thank you. Turning now to our interim results. I'm proud to say that we are both transforming our business and delivering robust results. At the same time, we are successfully navigating an increasingly challenging macro environment in 2022, while delivering superior shareholder returns with our growing dividend and GBP2 billion buyback. In the first half of this year, we have built on an excellent momentum in 2021. I am proud that we are making strong progress transforming the business from cigarettes to lower-risk alternatives for smokers, while at the same time driving our other ESG priorities. We have now reached a milestone of over 20 million consumers of our noncombustible products. We grew New Category revenues by 25% in constant currency and we have delivered more than a 50% reduction in New Category losses, alongside a continued increase in New Categories investment to a total of GBP1.1 billion in the first half alone. This strong…

Thank you, Jack. I'm delighted to share more detail on how our first half performance demonstrates our faster transformation in action. Our reported results were impacted by a number of one-off items, including close to £1 billion non-cash impairment of our Russian business which is now classified as an asset held for sale; a provision of £450 million recognized in respect of the DOJ and OFAC investigations into legit historical breach of sanctions; and restructuring charge driven by project Quantum. We expect these to reduce next year following the completion of the current project. Further detail on performance ex-Russia can be found in the appendix. To better understand the key drivers of our performance, we will focus on constant currency adjusted results, unless otherwise stated. In the first half, we delivered revenue growth of nearly 4%, driven by new category growth of 45% and continued strong combustible price mix of 5%. Combustible volume was down 4.2%, impacted by a combination of the sale of our business in Iran in August last year and lower year-on-year industry volume in the US reflecting macro pressures including high fuel prices and inventory movements. With continued value share growth and robust pricing, our combustible business delivered a resilient operational performance. Profit from operations was at 4.9%, while absorbing a 1.5% headwind from transactional FX. This drove adjusted EPS, up 5.7% or 8.6 percentage on a current currency basis. Our free cash flow before dividends of £2.3 billion was well ahead of last year, illustrating our continued focus on cash conversion. I'm particularly pleased that for the first time revenue growth in all three categories exceeded strong volume growth, with the growing equity of our three global drive brands enabling us to take pricing in all three categories. All this is supported by a clear…

Thank you, Tadeu. So, in summary, we are making strong progress. We are delivering on the operational priorities we set three years ago, and we are continuing to deliver robust financial results, driven by: continued strong growth and improving profitability in New Categories, the resilience of our combustible business, continued savings driven by Quantum and strong cash generation. At the same time, we are successfully transforming our business at pace with great momentum in New Categories. Our faster transformation is well underway, driven by our multi-category strategy. We are delivering on our Purpose. We are building a better tomorrow by transforming BAT to a high growth, multi-category, consumer led, CPG, with a reduced impact on public health and ESG at its core. I am confident this will create value for all our stakeholders. Thank you for listening. And I will now open up to questions.

The first question comes from the line of Richard Felton from Goldman Sachs. Please go ahead.

Yes. Good morning. Thank you for taking my question. I think -- see US volume down 13.4%. So obviously, you've highlighted the impact of inventory phasing. Are you able to quantify what the net impact of those various inventory phasing movements were for H1? Then, if we think about the 10% industry volume declines, you're lapping a tough comp base, gas prices are rising, that's obviously, weighed on your performance this year. But as you think about industry volumes for combustibles in the US over the next few years, are there any reasons why you don't think it should return to the 3% to 4% volume declines that we're used to seeing historically? That's my first question, and I've got a follow-up on New Categories after.

Okay. So, I'll take the second part. Tadeu will take the first part. I mean, the industry volume in the US, as I always said in the previous calls, you always have to consider a three-year average in order to see what's happening in the US. Of course, there has been some stock movements at the end of last year due to potential taxation and a lot of things that happened in the end of last year. But if you look at the overall trend, in terms of the US market on a three-year basis, you see that, of course, there is the post-COVID impact where the market was much stronger in the -- especially, in the two years that has passed. And now we are seeing a softer market in the first half of the year. You see a bit of recovery in the July results. But I think that what you have to consider is, one, we have a very strong portfolio. Two, we are growing premium share. Three, our brands are extremely robust in all price points and we don't see down trading currently in our portfolio or acceleration of down trading in the industry. So, we have to go step-by-step. We have generated a profit increase of 5% in the US. The New Categories, especially e-cigarettes is taking more consumers and that's good because we're making money in e-cigarettes. So, I think that the comparator is softer in the second half of the year, but we have to be prudent. We have to consider the numbers as they come. And as we know, we have a very strong position in the US market. We'll continue to grow on that both on combustible. Value share is growing by 30 bps, which is an extremely good number. And at the same time, we are very strong in terms of New Categories in the US. Tadeu?

Yes. In terms of the numbers of brands compared with the market, you have to remember that last year we delivered a number ahead of the market and we made the point about the stocks that were built at the back of some uncertainties in terms of tax increase, the price increase that happened at the end of the – at the beginning of the year and so on and so forth. So we said that there will be some unwind happening this year. This partially happened in the first half of the year. And I would say that between the 13% to 10% of the market you would consider that half of that was the – some of the unwinds that happened already in H1. The other half is the fact that we have declined our market share by 20 basis points like we mentioned, although we have already increased month-on-month, since January 40 basis points and so we have been recovering that. But if you take the average of – compared with the full year 2021, we have a market share down. So I think that half you could attribute to the difference.

So we have if you want a 30 bps increase in terms of value share and there is strong pricing also since the beginning of the year from across the industry. I think that we're in a very good position to continue to perform very well in the US. As I said, I mean we're growing profit by 5%.

Great. Thank you. And my second question is on your New Category business and thank you for giving us a bit more disclosure on the contribution. It looks like you're making quick progress towards our breakeven target but my question is on gross margins for vapour. Now if I cast my mind back to your CMD at the start of 2020, you said that you were making about 40% gross margin on vapour, which at that stage is quite a long way below THP or your Modern Oral business. Now since then you've made good progress on trade margins, you're talking about COGS efficiency, you're taking pricing. Is it possible to give us an update on where those gross margins for vapour are today? Is it in line with your other new category businesses yet? Thank you.

Yes, yes. I mean first before Tadeu will give you more details. I think what is important is three years ago people thought that we would not be able to get a strong position in terms of new categories. We have demonstrated that multi-category, new categories was the way to go. And we are demonstrating last year with a growth of 50% in – 51% in revenue and 45% in the first half of the year with a total number now of consumers of 20 million with a growth of more than 2 million in the first half of the year, which is even better than last year, that we are absolutely capable of driving our growth and that we have very strong brands. And at the same time we've reduced the losses by 50% in the first half of the year £281 million. So I think that this demonstrates that not only we are very effective in terms of our COGS, we are very effective in terms of our consumer acquisition costs and we are very well able now to take pricing across the board in the three categories, making sure that we deliver profitability at pace and that we meet all our targets for 2025.

Richard, we are really pleased with the progress in the new categories as a whole. In terms of our holistic view on that well for the first time like we highlighted in the presentation, we have been seeing revenue ahead of volume growth in all of the three categories. We have a 45% revenue growth at the back of 51% when we closed the 2021. So the growth continued at a very accelerated pace. In terms of gross margin overall, the increase in this half compared with the full year is on the likes of 7%. So we have grown gross margin of the three categories ahead of the revenue growth as well which is very pleased. So we – in terms of vapour we have been doing a strong progress at the back of revenue growth management. We are taking price. We are reducing discounts on device. We are working hard on the COGS, the automation that we highlighted in the presentation, the trade margins that we quoted. So we – if you the 40% that you are quoting you strip out the discounts on device on the consumable side. Today we are more on the 50%. So we have progress against this 40%. And overall, we have been progressing in all three categories and we are now with a business that has already passed these levels of investment creating the foundations. And we are now in terms of operating leverage and trying to get to a level of scale that will allow us to keep on track on those margin improvements not just in vapour but across the categories.

And you saw also – if I may add, you saw also that not only we're taking pricing across the three categories. But on top of that we have a pipeline of innovation for the second half that is extremely strong. And we'll put in place all these new launches in the months to come. And I think that that pipeline is extremely strong. Consumer base, different categories, different objectives and innovation across the board with the speed in terms of development of innovation that has increased dramatically. And as Tadeu referred in his presentation, we have doubled the investment in the last few years in terms of R&D and we're really motoring through our development and getting very, very strong position. So the balancing act between the financials and the consumer acquisition is working very well and we'll continue to accelerate in the second half of the year.

Thank you very much. Perfect.

The next question comes from the line of Gaurav Jain from Barclays. Please go ahead.

Hi. Good morning, Jack. Good morning, Tadeu. So three questions from me.

Good morning.

So see if I look at in other companies, which are thought of as NGP leaders in the industry, their EPS growth has been at low to mid-teens over the last two, three years. And if I look at your delivery today NGPs are now 10% of overall revenue and then you are also reducing losses. You have -- Slide 38 clearly points out the margin improvement which is happening. Why wouldn't your EPS growth -- once share repurchases are layered in, why wouldn't your EPS growth accelerate to low to mid-teens at some point of time in the next three years?

Well, first of all, thank you for recognizing our strong performance in terms of new categories. And I must say that our financials are very robust in terms of the profitability of the business moving forward. And we have scaled up in the last three years. And I think that -- I mean, we have a certain number of kickers, but yet at the end of the day it will take a little bit more time. But the reality is we have a very, very strong business and we continue to move forward.

Yes. Gaurav, look we spoke about the capital allocation framework that's back in the year-end result in 2021 beginning of the year. And we want to consider on any given year, what are the circumstances that we see ourselves. We have clearly recognized the value of share buyback. And this is something we have done in the past. We have now restarted the program, but we also want to create some reserves so to do some M&A bolt-ons that will be important mainly on the beyond equity space that you know that we have this ambition to go in that space as well to accelerate the transformation of the company. We also want to keep the dividend growth in sterling base and to pay down debt so we can keep within the three to two times corridor. So, we will have to consider all those effects on any given year and we have to see how this translates, because today the reality is that the kickers of the group not as high as it used to be in the past because Reynolds now is part of the subsidiary. So it's part of the operating profit of the group. And so it's difficult to start to speculate for the future in terms of impact. But we have a very sound business. This transformation that we are now calling faster transformation this chapter that we are going through our journey of the transformation. It means that the new category will be more relevant to the group results you're absolutely right. You're going to see and we said that exactly that that we will see our group revenue more impacted by the progress we make in new categories. Our bottom line more impacted by the progress we make in new categories. So this is not new news. This is something that we have already said before. And we will continue going ahead and we see what's happened on the kicker side considering the capital allocation decisions that we might have to do in the future.

So we have a very high level of cash conversion. And also I mean we're doing a £2 billion share buyback as we speak and we're at £1.3 billion in the first half of the year. Step-by-step.

Sure. Thank you. Now my second question is on the dynamics in the US e-cigarette market. So you have given this number on Slide 25, the disposables industry value share of 22%. So is this all synthetic nicotine? And what percentage of this will be flavored? And if we have this clamp down from the FDA on the synthetic nicotine market could a big chunk of this move to you over the next six months to 12 months?

Well, I mean, the good thing -- I mean, there are different elements in there. One is, yes, they are all synthetic nicotine because you cannot do flavors without synthetic nicotine. That was the past. Now the FDA says that synthetic nicotine is in the remits of the FDA. So now they are starting to put in place all their activities in terms of control and implementation. The trade in the US is extremely dynamic and we'll also start to take some positions related to that. So I think that what is important to consider is that there is more people that are coming to vaping which is great. That we have a very strong brand with Vuse in the US that we're leaders in more than 34 states in the US that everybody thought that we would not be successful with Vuse in the US and we are the leaders now. We are the leaders and the market continues to grow. There was the EVALI crisis. Of course the market has recovered. Now it's growing by 3%, 4% since the beginning of the year, and we are continuing to take positions in there. So I would say that the disposable is something that is addressed by the FDA and that brings more people to the category, which is in turn without flavors will benefit to the category where we are leader and we're continuing to increase our leadership. And we're taking a lot of pricing. And by the way competition has started to follow us on pricing, which is a very good news also. So it's all an acceleration in terms of the potential of new categories in the US. Remember that in the US new categories already represents more than 21% of the market yeah. So it is already a market that is extremely strong in terms of new categories.

And my last question is again on the US market and given the strength of Vuse. So look your cigarette price mixers plus 11%. You have lost some share. Now if Vuse continues to execute so well do you really need to take as higher pricing and lose volume share, or would you rather take less pricing and gain volume share on cigarettes as well and you let Vuse's growth and the EBIT swing from Vuse drive your overall U.S. EBIT growth?

Yeah. First of all, thank you very much for recognizing that we have a very strong position on our combustible business and as I always said the three priorities for the company is value in combustibles step change in new categories and simplifying the business. On the value of the combustibles, I mean, we are growing in the US 30 bps in terms of value share and we are losing a little bit of share. I'm not concerned with that. We look always at the right balancing act in between the two. Where I'm very pleased is that our premium share is growing and we have very strong brands at the upper end of the portfolio. And we have now also with Lucky Strike at the bottom, a very strong brand that is more than 2% of the market now. So I have a good visibility. But what we said always is that, we have a pricing strategy and pricing tools in the US that allows us to go extremely granular. So when we look at e-cigarettes and when we have the leadership, I'm always going to do the call between the pricing and the competitive situation. I think that the demonstration that we have made in the last 12 months even is that you can continue to grow your position in the US in terms of e-cigarette and increase your profitability through pricing consumer acquisition automation reduce our COGS also. And the competition is following our pricing. So, I think that, we're in a very good situation where you have to always adapt and analyze the market. But I think that the trends are extremely positive for us.

Thanks a lot, Jack.

Thank you very much.

The next question comes from the line of Rey Wium from SBG Securities. Please go ahead.

Hello, Jack, Tadeu, hope you are well? I basically have three questions. I just want to know in terms – I mean, I just want to address this improvement in the next-generation product margin. So if we look at it the losses have been reduced by 55%. So in terms of – if we can talk about a glide slope I think you still said aim to be profitable by – in aggregate by the 2024, 2025. So to me it looks like if this trend continues it may be a bit earlier. And maybe just in that is there a risk of – that you need to spend more as a result of the growth in the vapour disposables? So that's my first question. The second one I just...

Sorry, let's start with the first question because then you know I'm French and three questions is always difficult for me. So let's go step by step. So your first question is related to?

I just want to know sort of the glide slope.

Yes, yes. Okay, so on – yes. Thank you. On that one you have always to consider that this is a very dynamic environment. These categories were not existing even a few years ago. So we have a very good performance related to our different categories. We are taking pricing. But at the same time we are improving our COGS we are automating and we're doing much better in terms of consumer acquisition. At the same time, the innovation pipeline costs money and we're going to spend the money as we go in order to continue to expand our position. Two years ago we were nowhere to be seen in THP that is 50% of the market in of the total market of THP worldwide is in Europe. We are nowhere. Now we have 18% in average in terms of share. So I will continue to invest the money. But as the base is much stronger the cost of acquisition of consumer is better. But competition will not sleep. They will continue to do price discounting. They will continue to do launches. And I think that, we're very well positioned. That gives me a bit more space to be able to operate and the target is 2025. So we'll take it as we go. First is about consumer acquisition and the efficiency and the reduction of cost of consumer acquisition and getting more traction in terms of our positions in the three categories and have innovations to launch in the three categories. But altogether you saw last year we reduced our losses by £100 million. And this year in the first half of the year we are accelerating quite nicely. This gives me the muscle, the space and the blood in order to be able to grow fast in terms of new categories. 45% growth in the first half of the year on the back of 51% for the full year last year on revenue growth. I think that that's stellar and 2.4 million consumers in the first half of the year additional. So we're even breaking results and records of last year.

Excellent. Then just on to the combustible. So I'm just curious it looks to me you have a bit of share pressure in markets such as Australia, Brazil, Mexico. How do you plan to address that?

Yes. I think that when you look at our position in terms of combustible, first of all, it's a very robust position. What you have on top of that is a portfolio that is extremely strong. And what you see is that the elasticities are playing in our favor. So of course, you will lose a little bit of share here and there and increase your value share. Australia is a specific example whereby taxation was changed in the last year. That has created a bit of vacuum related to the Australia industry as such and there were some scale issues in terms of pricing. We fought back we recovered market share and we're in a very strong position in Australia now. So I think that we have a very strong position in Australia and we are the leaders there. In terms of Brazil, our share is still stellar. We are more than 73% share in Brazil. And we have benefited from the COVID environment where the market was closed and the reduction of illicit that's very normal. Now you are a bit on the back of the post pandemic. So there is a bit of rebalancing but nothing to be concerned of. The reality is we have a very, very strong business in Australia -- in Brazil. And we have rebalanced our portfolio with Global Drive Brands launches and we have rearticulated our route to market in terms of sales force and we have a lot of efficiencies that are coming through in that market.

And I just want to know -- just want to clarify, regarding the treatment of Russia and Belarus. You're treating it as a discontinued operation. So I just want to clarify that for modeling purposes, we need to remove Russia and Belarus from the -- well the whole of 2021 and the first half of 2022, correct?

No. this is not being treated as discontinued operations. We still have control of the operation in Russia. We are in the process of transferring the business. So it means that we are trying to execute options to find a new buyer, local buyer there and that can take over the business and carry on. And so what's happening is as we have the intention or right to transfer the vision that was already communicated based on IFRS 5, we had to put assets on held on sale and as a consequence we have to revalue the business which we are now attributing a new value for that given the circumstance the difficult -- because as you know it's a very complex environment. So the impairment that you see is basically us reassessing the value of those assets that are now for sale, but there is no discontinued operation because we still keep control of the business until we transfer fully their business.

Okay. So just to clarify, you will keep the Russian operations in the FY 2021 numbers and until it's being sold in 2022?

Yes, until it's been sold in '22, once we sell the business and then we start providing a kind of organic view where we strip them from the base as well. But until we do that it's part of the numbers.

It's a very big situation and a very complex situation.

By the way if you see the appendix, in the appendix of the presentation, you will see a kind of picture of how it looks like on the group numbers, if you have done that, if we have transferred the business hence there will be no rush anymore in the base of 2021 and '22. You can see the underlying numbers on the appendix.

Yes. That's actually what triggered my question whether we need to strip Russia out retrospectively.

It's just a reference for you.

But as you see in that table I mean the trends are absolutely similar and this was to give more clarity to everybody in terms of understanding with and without.

Thank you, very much.

The final question comes from the line of Jon Leinster from Societe Generale. Please go ahead.

Hi, good morning gentlemen. Yes, I've got two or three questions as well please.

Everybody has three questions this morning, so go slowly one by one.

Analysts only do things in 3s. Going back to a sort of previous question the vape price mix plus 25% in the period a very strong number. Is that driven -- clearly there's been some price increases, but are we seeing a general decline in the level of device and the product discounting from everybody including yourselves and competitors, or is that driven a lot by the change in trade margins?

It's a bit of both. I think that when you have products that are more effective, efficient and recognized by the consumer your cost of acquisition reduces because then your brand is part of the repertoire of the consumers. And then suddenly you are in a much better situation. Also there is more pricing which is good. And we're continuing to grow on all our different positions. Tadeu you want to add?

Yes. Look the US in vapour is a major weight for our numbers. And of course it's a massive market. And in the US, we are doing exactly what we said we were going to do. And we are in the phase now of scale. So we don't need all the discount that we used to have in the past on the device. So, there is much less discount on device than we used to. And we are also taking pricing because we now, we have put in place all these revenue growth digital tools that we have for cigarette also in the new categories in vapour. So, we can be very granular in terms of where we increase the prices, based on the competitive landscape. And we are, as we speak at 125 index to the second player in the market. So, we are taking clearly pricing in the US and reducing discounts and this all helps in the revenue that you are seeing. When you go outside the US the strength of our leadership position is allowing us to have a much more strong competitive power in terms of negotiations with key accounts. And this allow us to move for example from front margins to back margins that translates into moving away from a specific percentage of revenue as a margin to pay for performance and this is all reflecting lower trade margins and that's exactly what is happening at this point in time. It's a combination.

Yes, lower consumer acquisition cost better margins and more efficiency in terms of COGS plus more pricing and strong brands. I mean that's the very good equation we are in at the moment and we'll continue to move forward.

And just out of interest, what sort of level of trade margins are you moving to? And how would that compare to other fields, particularly cigarettes?

Of course, the trade margins are much higher than on cigarettes. But what we see is that there is a conversion in time that will happen and that will take some time. But we'll see improvements on a regular basis related to that. And you have to remember that also the other element that is very important is, you pay much more taxes on cigarettes than you pay on other categories which is normal because these are reduced risk products. So that works also in the equation in terms of the financial delivery. I think what's very important is, we said three years ago that it's multi-category approach that there are different consumer moments, different geographies and you need different portfolios. It was more complex for us at the beginning to establish three categories. But at the end of the day, when you look at it today, last year we grew 51%. This year -- half year we grew 45%. We're having now 20 million consumers which is extremely comparable to other companies out there. And we are planning through and we're able to take pricing in the three categories and do efficiency in COGS and consumer acquisitions and taking pricing. So, I think that we have a well-balanced portfolio that is responding to the consumers and we can play in full all the tools that we have in combustible pricing to understand exactly how it works and start to reduce discounting and that's extremely, extremely powerful for us moving forward because we want to do a lot of additional innovation in the next period. And we showed you during the presentation that, we have a lot of innovations that are coming through in the second half of the year. That cost more, yes. But nonetheless we have a reduction of 50% of our losses in new categories. So that's going really in the right acceleration where we have the momentum and we're accelerating on that momentum. Pivotal year, last year accelerating on the momentum in 2022, 2023.

Just to follow up on that. Just -- do you expect in the second half that the decline in losses in NGP will be anywhere near the level of the first half, given that you -- I think there's a considerable number of launches in the second half?

Well take it step-by-step. We're not going to give guidance on that for the second half of the year. Where we give guidance we'll deliver our financial algorithm and the corridors that we spoke about. And we will make sure that we are actively supporting these new launches in the balanced way in terms of the balancing act with investment and financials.

Okay. And lastly, you clearly made a £450 million charge for the U.S. investigation. Presumably that will be a cash cost at some point?

We're not -- absolutely not in a position to be able to speak about that matter, as it stands for very obvious reasons. We decided that it was prudent to take a provision. And we'll take it from there.

Yeah. It is a no at this point in time, but the fact is that our corridor of three to two is kept independent of the impact that this might have.

All right. Okay. Thank you very much.

A prudent accounting approach.

Thank you very much.

There are no further questions. So I will hand the call back to your host, for some closing remarks.

Well, thank you very much for taking the time with us today. I must say that what is extremely important is that these results show that we are transforming the business and delivering robust results. I'm extremely confident in our full year guidance. With the great new category momentum that we have, we are on track for our 2025 targets. And our transformation is well on the way. It's led by the new category growth and our pathway to profitability and also a very strong combustible business. We are migrating, the consumers from combustibles to new categories. Last year we had one billion packs that were carrying advertising promotions or information for smokers to move to new categories. This year it's going to be two billion. And I want to continue to migrate, the consumers from one category to the other. The profitability, the margins, and the cost of acquisition of new consumers with the new categories that we have and we're the only ones to be in three categories and established in there, demonstrates that BAT is changing rapidly and it's powered by our people our ethos and the determination that we have to make a very clear commitment to delivering for all our stakeholders, all our stakeholders. We take ESG extremely seriously. We take our business extremely seriously. We are growing at pace. And we'll continue to do that. So in a nutshell, I'm extremely excited about the future of BAT and that 2022 first half comes on the back of a very strong 2021, where we grew in all the different categories including combustible. And we'll continue to do so. So it's about value in combustible. It's about step change in new categories. It's about simplifying, the business. So we are growing value share in the first one. As we said, we did in 2021, we'll do in 2022, step change in new category, 51% growth last year, 45% on a bigger base in 2022 and £1.5 billion that is -- was £1 billion then went to £1.5 billion and now we say that we will deliver more than that. So thank you very much for your patience with us in the last three years. I think we're getting into a very strong position of which I would not even call it foundation I will call it a springboard to move forward. So thank you very much for listening.