管理層發言
Good morning, everyone. I'm delighted to welcome you to our 2026 Interim Results Presentation. With me this morning is Javed Iqbal, Interim CFO, and Victoria Buxton, Group Head of Investor Relations. I will begin with our transformation highlights. Javed will then take you through our financial results in more detail. Finally, I will return to talk more about our performance outlook and why we are confident in the pathway ahead given the clear momentum we are building. We will then take your questions. With that, I would like to draw your attention to the disclaimers on Slide 2 and 3. Let's begin by looking at our transformation momentum. Starting with some highlights from H1. Smokeless now represents 19.8% of group revenue, up 160 basis points versus last year. We added 4.1 million smokeless consumers over the last 12 months, taking the total to 35 million. This progress is mainly driven by Modern Oral industry growth, where the strength of the Velo brand continues to resonate strongly with consumers. Our first half results were in line with expectations, supported by a strong multi-category delivery in the U.S., excellent Velo momentum across all three regions and a resilient combustibles performance in the U.S. and AME. Our disciplined focus on quality growth continues to improve returns through more targeted investments with New Category contribution up 55% at constant rates. As previously guided, we expect adjusted profit from operations to accelerate in H2, driven by improvements in AME and APMEA. Our second half weighting will also benefit from the phasing of Fit2Win savings. Finally, we continue to generate strong cash returns. We expect to be within our 2 to 2.5x target leverage corridor by year-end, while continuing to reward our shareholders with our progressive dividend and GBP 1.3 billion share buyback in 2026. I'm encouraged by the momentum we are building as we transform BAT. New categories are becoming an increasingly meaningful contributor to group performance, reinforcing our confidence in sustainable delivery moving forward. After a period of investment and transition, returning to our algorithm for the full year is an important milestone. It reflects the progress we have made in reshaping the business and provides a stronger foundation for long-term value creation. With that, I will hand over to Javed, who will take you through our financial performance in more detail.
Thank you, Tadeu, and good morning, everyone. I'm pleased to share that we delivered results in line with expectations on a constant currency basis. This performance was mainly driven by strong U.S. multi-category delivery and the acceleration in new category growth. Our reported results reflect some adjusting items, the majority of which are non-cash, including approximately GBP 800 million, primarily reflecting annual amortization of our U.S. trademarks, a GBP 370 million one-off adjustment related to Fit2Win, of which around GBP 230 million is non-cash, and a GBP 149 million credit following the settlement of historical litigation. To give you a clear view of our underlying performance, I will focus on constant currency adjusted metrics and, where relevant, adjusted for Canada. You can find further detail on adjusted items and share data in the appendix. We continue to build momentum in the first half, reinforcing our confidence in delivering our full year guidance. Group revenue increased by 2.9%. Adjusted gross profit rose 3.8%. Adjusted profit from operations grew 3.5% and adjusted diluted EPS was up 7.9%. Let's now turn to New Categories. Revenue growth accelerated to 18%, driven by another outstanding performance from Modern Oral, which was up 66%. Vapour revenue increased 5.3%, driven by the U.S., where we returned to double-digit volume and revenue growth. This was partially offset by a decline in heated products with glo revenue down nearly 12%, impacted by inventory movements and competitive intensity in the value segment. We continue to deliver quality growth with gross profit up over GBP 120 million and category contribution up 55%, reaching GBP 269 million. This reflects our disciplined approach to investment and increasing scale benefits. We remain committed to investing behind profitable growth in Vapour and heated products, specifically where we are becoming increasingly selective about where we deploy our resources, which Tadeu will talk more about later. Now turning to combustibles. Combustible volumes were down 4.7%, with growth in Pakistan and Turkey more than offset by continued industry volume decline in other key markets and the impact of market exits in Cuba and Mozambique. Revenue grew 2.1%, driven by robust price/mix of 6.8%. Growth in the U.S. and AME more than offset a slower-than-expected recovery in APMEA as fiscal and regulatory pressure persist. Adjusted gross profit and category contribution both grew ahead of revenue, driven by a strong performance in the U.S., positive price/mix and our continued focus on cost optimization. Combustible remains a powerful value engine for the group, delivering robust returns and continuing to fund our transformation. Our resilient performance reflects the breadth of our global footprint, the strength of our portfolio and disciplined execution. Turning to our regions, starting with the U.S. We delivered a strong multi-category performance, driving total revenue up 8.5% and adjusted operating profit up 10.1%. New Category revenue increased by nearly 60%, driven by continued success of Velo Plus, which grew more than 200%, and Vuse, which returned to double-digit volume and revenue growth. In Combustibles, revenue grew 5%, driven by robust price/mix, including the benefits of excise duty drawback and positive trade inventory movements. Value share declined by 40 basis points and volume share was down 80 basis points, reflecting continued industry growth in the deep discount segment and heightened competitive activity since Q4 last year. We have actively responded to this trend, investing behind our portfolio and further strengthening our commercial execution. As a result, we have held our volume share since January. Looking into the second half, we expect an acceleration of investment to support the launch of Velo Max and Vuse flavor pods as well as behind our Combustible portfolio in a highly dynamic market. Tadeu will talk about this in more detail later. In addition, we expect our strong H1 growth to moderate in H2 as positive inventory movements do not repeat, and we lap a stronger comparator. In AME, total revenue growth was 0.9% with combustible up 2.5% and New Category up 1.9%. This was partially offset by lower direct leaf sales, reflecting our continued focus on higher return, more profitable areas. Combustible revenues were driven by strong delivery in Brazil, Turkey and Mexico and robust price/mix. This was partially offset by our exit from Cuba and increased competitive pressures in Germany and Romania, where we have taken targeted actions to strengthen our portfolio. In New Categories, Modern Oral revenue was up 22%, driven by the strength of our portfolio across both established oral markets in Scandinavia and newer growth markets, including the U.K. and Poland, which now account for around 50% of our Modern Oral revenue in the region. Heated Product revenue declined by nearly 11%. Growth in Romania and Portugal was more than offset by lower revenue in Italy and Poland due to heightened competitive activity in the value segment. Looking ahead, we expect to strengthen our value proposition with the next-generation Hyper Pro+ in the second half of the year. We are also encouraged by the continued momentum of glo Hilo, which is performing well in the premium segment. Vapour revenue declined 14%, mostly impacted by regulatory changes in Poland as we continue to focus our investment on larger industry value pools. Adjusted operating profit increased 1.1%, supported by continued resilience in Combustibles and quality growth in Velo and Vuse. This was partially offset by investments in Heated Product behind our innovations rollout. We expect performance to accelerate in H2, driven by our targeted commercial actions and the benefit of the rollout of new category innovations. Turning to APMEA, where our recovery has been slower than expected. Revenue was down 6.3%, primarily driven by combustibles. While we continue to drive growth in key markets, including Pakistan and Indonesia, this was more than offset by the challenging regulatory environment and the impact of illicit volume in Bangladesh and Australia, alongside the timing of inventory movements in Vietnam. Modern Oral revenue increased by 43%, driven by our first-mover advantage and category leadership across emerging growth markets. These include Japan, Pakistan, South Africa and Global Travel Retail, highlighting the increasing opportunity for the Category and for Velo. Heated Product revenue declined 13%, impacted by material inventory movements and heightened competitive intensity in the value segment in Japan. Encouragingly, glo Hilo continues to build momentum in the premium segment. And with Hyper Pro+ launching in Japan in Q3, we expect an improving share performance in H2. Vapour revenue declined 28%, reflecting strategic market exits and more selective resource allocation. Adjusted profit declined 16.5%, mainly due to headwinds in key combustible markets. Looking ahead, we expect further sequential performance recovery in H2, supported by our commercial actions and investments in both Combustibles and New Category and a softer comparator in Australia. Turning now to our group operating margin, which was up 30 basis points to 43.7%. We successfully offset inflationary pressures with a strong performance, higher profitability in New Categories and continued cost savings. At current rates, operating margin expanded by 10 basis points. We are making good progress with Fit2Win, our transformation program to build a leaner, faster and more data-driven BAT. We have identified a further GBP 100 million of optimization savings, resulting in an incremental one-off GBP 100 million cash investment to support delivery. In addition, to further drive New Category growth, we have also completed a comprehensive review of our manufacturing assets and machinery. Through this, we have identified opportunities to upgrade to more efficient next-generation technologies and state-of-the-art machinery to support future growth and productivity and to accelerate our transformation. As a result, we have recognized a non-cash charge of nearly GBP 230 million in the first half. Altogether, we now expect GBP 700 million of annualized savings by 2028 with GBP 500 million to be delivered by 2027. Total one-off costs are now GBP 950 million with GBP 840 million to be treated as adjusting. We continue to expect the majority of the cost to be incurred this year with the balance in 2027. Bringing it all together, earnings per share increased by 7.9% as growth in operating profit was supported by 4.4% growth from earnings kickers. This outperformance was primarily driven by lower net finance cost, reflecting repayment of debt with proceeds from the partial disposal of ITC stake in May last year and higher operating cash conversion in H1. Looking ahead to the full year, we now expect net finance cost to be around GBP 1.65 billion with an underlying tax rate between 24% and 25%. As a result, we have upgraded our full year EPS guidance with earnings kickers expected to be moderate as we annualize the benefit of lower debt levels. Strong cash generation continues to enhance our financial flexibility and support disciplined capital allocation. We remain on track to be within our 2 to 2.5x leverage target range by year-end and to deliver more than GBP 50 billion of free cash flow by 2030. We continue to focus on our capital allocation priorities, which are: investing in transformation, balancing deleveraging with progressive dividend and sustainable share buybacks and selective bolt-on M&A to support our transformation. To summarize, H1 was in line with expectations, and we are on track to return to our midterm algorithm for the full year with profit second half weighted. Key drivers for H2 include mid-teens New Category revenue growth led by Velo and Vuse, driving a further improvement in New Category contribution, an acceleration in performance in AME, further sequential recovery in APMEA and strong H1 U.S. growth moderating due to increased investment, lapping a stronger comparator and as positive inventory movements do not repeat. We expect H2 performance to be further supported by the positive phasing of Fit2Win benefits. As previously guided, we expect revenue and operating profit to be at the lower end of this range for the full year, absorbing around 1% transactional FX headwind and reflecting active investment choices, including the rollout of Velo Max and Vuse flavors in the U.S., scaling glo Hilo and Hyper Pro+ launches as well as increased combustible investment in the U.S. and other key markets. And finally, we now expect full year EPS growth to be towards the middle of our 5% to 8% range. Thank you. And with that, I'll hand back to Tadeu.
Thank you, Javed. Looking ahead, I'm encouraged by the momentum we are building as we return to our algorithm and continue to transform BAT. We are entering the next phase of our journey from a position of strength with accelerating financial delivery, increasing New Category profitability and a clear pathway to long-term growth and value creation. With that context, I want to share more detail on our progress, looking at the topics we get asked about most by you, our investors. Starting with the sustainability of our multi-category delivery in the U.S. Across the market, adult nicotine consumer behavior is changing in a significant way. BAT is fully aligned to where these consumers are heading with our unique multi-category portfolio of number one or number two share positions across all categories. As a result, we are now the fastest-growing company in total nicotine. Our total nicotine volume share increased by 110 basis points year-to-date, fueled by new categories, with Velo driving around 90% share of Modern Oral value growth and Vuse delivering over 100% share of Vapour value growth. My message here is clear. We believe we are the best positioned to win in total nicotine and continue to capture value in the world's largest nicotine value pool. I will now take you through the U.S. by category. Starting with Combustibles, where we continue to balance disciplined investment with sustainable value creation. Industry volume continued to improve in the first half, declining 4.9% on a sales-to-retail basis. This was supported by moderating solus consumption decline trends, slowing outflow to illicit Vapour supported by regulatory enforcement actions and the expansion of deeper discount into tracked channels, which we expect the industry to lap in the second half. Our focus remains on driving value and share from our Combustibles business, and we continue to deliver strong financial performance in H1, as Javed highlighted. Against this backdrop, we have seen heightened competitive activity from Q4 last year. We have already taken actions to further sharpen our portfolio management, strengthen our route to market and leverage digital revenue growth management capabilities. In addition, we have been actively investing to strengthen our portfolio, and we are starting to see encouraging results. Targeted investments have been supporting Newport in premium, and we have also been strengthening Camel. Together, Lucky Strike and Pall Mall Select continue to drive both volume and value share gains in branded value, which combined with expanding our Doral brand coverage to five states is strengthening our presence and competitiveness at the low end of the market. As a result, we have held our volume share since January, and we will continue to actively invest behind our portfolio in the second half. Second, I'm often asked about the regulatory and enforcement landscape in the U.S. And I'm pleased that we are starting to see recent actions having an impact on irresponsible illicit operators while also providing responsible legal manufacturers a pathway to bringing scientifically backed products to market. We are now seeing multiple government measures beginning to address the long-standing balance between the legal market and illicit operators. First, around half of Vapour industry volume is now covered by state directory and enforcement frameworks. Second, more than 18 million unauthorized Vapour products have been seized through federal cross-agency collaboration. Third, the FDA is taking actions to improve regulatory compliance for foreign manufacturers. And finally, attorneys general continue to increase pressure on illicit Vapour sales channels and payment providers. Importantly, these actions have supported the legal Vapour industry return to growth in H1. We are also encouraged by the FDA's new prioritization guidance, which supports a pathway for both Vapour flavors and Modern Oral innovation. Taken together, these developments support a more level playing field. In U.S. Vapour, Vuse continues to strengthen its leadership position. We extended value share to a record 55.9% in the first half and now hold more than double the share of our nearest competitor. Building on this leadership, we will begin a phased rollout of new adult-focused Vuse flavors, broadening consumer choice and leveling the competitive playing field, starting in Q3 with distribution to approximately 25,000 outlets. We will execute this expansion in a disciplined manner, upholding our high standards of product quality, retailer compliance and underage access prevention. Distribution will be carefully targeted as we work with retailers to secure their commitment to adult-only sales supporting category sustainability. Altogether, this gives us confidence in Vuse's ability to sustain growth and further strengthen its competitive advantage in the world's largest Vapour markets. Third, I'm often asked about the growth opportunity ahead in Modern Oral globally. In the U.S., I'm excited about expanding our Velo portfolio in the rapidly growing markets. Velo Plus continues to deliver an outstanding performance with our overall Modern Oral volume share now 31% and value share nearly 26%. In addition, we are capturing around 90% of category value growth, demonstrating both the strength of the product and brand together with the effectiveness of our commercial execution. Building on this success, we are expanding the Velo portfolio to capture a broader range of adult consumer preference, including launching some limited editions and Velo Plus variants. And starting Q3, we will launch Velo Max, a higher moisture product and our latest innovation in the U.S. This will further expand our offer across two new strengths and four new flavors, complementing our existing portfolio and providing an incremental lever of growth. Velo is the clear global number one brand in Modern Oral, the fastest-growing category with the lowest risk profile. We continue to expand Velo's footprint as regulatory clarity improves with 32 markets having now adopted category regulation, more than double the number versus 2024. Our clear leadership position continues to strengthen, underpinned by strong growth across all three regions and the successful execution of our premiumization and innovation strategy. Our scale advantage continues to widen. In the first half, BAT shipped 7.9 billion pouches. And across our top markets, our Modern Oral volume share increased by over eight percentage points to reach 39%. As the category continues to grow at pace, we believe our superior product portfolio supported by continuous innovation, scale, brand strength and regulatory capabilities will become increasingly important competitive advantages. In AME, BAT is a clear category leader with 62% volume share across top markets, making us nearly seven times larger than our nearest competitor. This leadership position is underpinned by our superior brand equity scores, 40% higher than our closest competitor in Europe, supporting our premium brand positioning and reflected in our 68.5% value share. We continue to drive strong volume-led revenue growth. And importantly, this growth is becoming increasingly broad-based. Around 50% of our revenue comes from outside the Nordics, where the category continues to develop with growing incidence and consumption, supported by expanded distribution, growing category adoption and the strength of the Velo brand. Innovation remains a key differentiator. Through Velo Shift, we are expanding our premium positioning. Progress in Sweden and Switzerland is encouraging with Shift capturing 1% of value share in Sweden and 1.5% in Switzerland within a few months of launch. Altogether, our strong momentum gives us confidence in our ability to continue driving sustainable profitable growth and value creation in Modern Oral. Fourth, I'm asked about our key drivers of performance improvement in Heated Products. We are resetting glo's performance with a sharper, more disciplined approach. Industry volume growth moderated further in the first half, reflecting excise-driven disruption in Japan and continued consumer poly-usage across Vapour and increasingly Modern Oral globally. At the same time, competitive intensity has stepped up. Against this backdrop, we are focusing our investments where we see the strongest consumer opportunity and the best return potential in what remains a significant GBP 9 billion value pool. We are scaling glo Hilo to build premium growth and strengthening our value proposition with Hyper Pro+. In addition, we are concentrating resource behind priority markets in a more selective way. Through this, our focus is clear. We set our performance and we build share momentum in H2 through innovation-led growth and disciplined execution. glo Hilo is beginning to demonstrate the benefits of our premiumization strategy. Launches across nine target markets cover around 70% of industry volume. This provides a strong platform for future scale with around half of consumers new to the glo platform. In addition, we are strengthening glo's brand equity as we establish our presence in the premium segment. This is translating into tangible commercial progress with volume share increasing across key markets and particularly strong momentum in Poland. We continue to focus on scaling glo Hilo through generating trial, targeting consumers of premium Combustibles and Heated Products while building awareness to unlock further growth. And finally, bringing it all together, as we build on our momentum, we see a clear pathway to improved growth in 2027. Our delivery will be supported by four key drivers: First, continued strong new category revenue growth led by continued momentum in Modern Oral, U.S.-led Vapour delivery and a more targeted approach in Heated Products. Second, consistent Combustibles delivery supported by further recovery in APMEA and targeted investment to sustainably drive Combustibles value and share globally. Third, continued strong profit conversion, reflecting improving new category returns and ongoing cost savings. And fourth, EPS accretion from share buybacks, lower finance costs and continued strong cash generation. To conclude, by focusing investment on our highest return opportunities, we are delivering quality growth through our multi-category portfolio, supported by sharper execution, enhanced capabilities and disciplined resource allocation. Through this, we are driving higher returns and building a more resilient business. At the same time, we are enhancing financial flexibility, enabling continued investment in our transformation together with delivering strong cash returns. And I'm confident in our strategy, our execution and that BAT is well positioned to deliver long-term value for our shareholders. Before we move to Q&A, let me leave you with some of the key themes shaping BAT's next phase of growth and value creation. We look forward to sharing more at our Capital Markets Day in September. Thank you for listening. And I will now hand over to Victoria to introduce the questions-and-answer session.
Thank you, Tadeu and Javed, and good morning, everyone. Operator Instructions: Tadeu and Javed will be very happy to take your questions, and I will now hand over to the conference call operator.
分析師問答
The first question is from Andrei Andon-Ionita from Jefferies.
Two for me, please. Firstly, on U.S. e-Vapour, do you see the illicit enforcement tailwind continuing into early H2? And also for the launch of Vuse Ultra in H2, could you give us a bit more color as to what we should expect in terms of number of outlets targeted and the types of flavors that we should expect to see on the market? And then on U.S. Combustibles, you registered plus 5% top line growth in H1, significantly ahead of the U.S. Combustibles framework of value flat to plus 1% growth. How should we think in the context of this H1 performance about the U.S. combustibles algorithm for the full year 2026?
Okay. Thank you, Andrei, for the question. I'll start with the Combustible numbers. Yes, you rightly point out that the 5% performance in H1 is well ahead of what the algorithm would suggest. We highlight the fact that we had some trade movements that have been beneficial in H1 that will be unwound in H2. This equates to something close to 2% of the 5%, so underlying performance is more like 3%. Clearly, we have momentum in H1. Duty drawback is part of the 3%, but it's not a major part of it. Most of the performance is organic performance, let's put it that way. Obviously, as we highlighted in the presentation, we intend to continue to invest behind our portfolio as we progress in the second half of the year. We are clearly seeing the dynamic of the low discount segment in the U.S. continuing to grow, and we will try to become more competitive in that space as well. So I would expect to see more moderate performance in the second half of the year, particularly in combustibles in the U.S., that should reflect in a number much closer to the algorithm, maybe a bit still higher than the 0 to 1 that we have, but not as high as we saw in the first half of the year. So that's the combustible part. On the Vapour part, it's very encouraging what we are seeing from state enforcement. It's 50%. It's the first time that we saw the legal Vapour market coming back on a very modest base, but still we have seen in the last few years a decline of the legal market year after year. It's hard to predict exactly what happens next. I would suggest with all the initiatives that I highlighted during the presentation that we could expect to see at least a similar type of environment. I don't think that will be, I would say, significant. I'm more encouraged by the prioritization guidance from the FDA because these allow legal American manufacturers to offer substantiated high-quality products for adult nicotine smokers in the U.S. And this translates into our ability to bring back flavors in the market and having a more level playing field because you cannot forget the fact that on one side, there is an element of enforcement that is important, and there is clearly, mainly from the state levels, an uptick on enforcement levels, but the root cause of illegality is not just about lack of enforcement — it's about lack of a level playing field. Having a higher level playing field will also be very important. So I would expect to continue to see some more traction from the legal Vapour market. In terms of your question on...
Flavors and how we roll out.
Yes. How we roll out? We mentioned that this will be in two phases. In Q3, we'll be reaching approximately 25,000 outlets. And why are we doing it this way? Because we have been very thoughtful in the way that we are rolling out flavors back in the market. We want to make sure that retailers do the ID scan before they sell the product to make sure that we have no youth accessing this product. There is a commitment and a compliance methodology that we have put in place. That's the reason we are very thoughtful in the way that we are rolling this out. So the idea is to go in Q3 with 25,000 outlets. In Q4, there is another round of 25,000, but we will be building from there.
The next question is from Faham Baig from UBS.
A couple from me as well. Starting with nicotine pouches in the U.S. Could you maybe help us with the speed of launching Velo Max in terms of the distribution stores as well as the likely economics compared to Velo Plus? And of course, you've now seen competition launching their own improved versions of nicotine pouch products. How have you seen this impacting competitive and category dynamics thus far? The second question is on full year 2026 guidance. Maybe if you could just help elaborate on some of the moving parts that you expect to see in the second half in terms of how the 2.9% organic sales growth develops. What could maybe see it do better? What could maybe see it do worse? And what are the key items that you're going to be monitoring?
Okay, Faham. On nicotine pouches, we have a very well-established network from Velo Plus in the U.S. We'll be launching Velo Max within that network, and it's just a question of the normal time that it takes to distribute in a continental country like the U.S. This will probably be faster than what it took us to distribute Velo Plus because we now have a well-established network. That was not necessarily the case when we first introduced Velo Plus. The idea is to use Velo Max as a complement to Velo Plus. Commercially speaking, we will consider our competitors' positions, and we want to make the product as competitive as possible and give consumers the chance to try it. We believe that it is an enhanced product: it has higher moisture, different strengths and flavors, and it will address some consumer needs that Velo Plus is not currently positioned for, for example higher strength levels and different flavors. That's the reason we say distinct flavors will complement the portfolio. We feel very confident about Velo and the product that we have in the market. It's a competitive market and will become more competitive, of course. We see the strength of Velo Plus supporting growth against competitive launches. I do believe that we have all it takes with the capabilities we have built and the products that we have, now complemented by Velo Max, to support the position that we have in the market. So in terms of the building blocks for the second half of the year, and obviously for APMEA, we expect better performance in the second half than in the first half. It's clearly a recovery story. H1 2026 for APMEA was already better than H2 2025. H2 2026 will be better than H1 2026 because we will be lapping a softer comparator, for example in places like Australia. If you remember well, they implemented a very draconian regulation that accelerated illicit trade in Australia in the second half of last year. We'll be lapping that. So this will be more positive and will be a driver for the second half. AME has been investing heavily, mainly behind combustible and Heated Products, and we expect also to have some improvement in the second half. And in the U.S., we discussed the U.S. earlier. I don't expect the 5% combustible performance to carry on for the rest of the year given the investments we need to make in the combustible portfolio. All in all, that's the reason why I expect a more positive second half overall for the group leading to a full year top line at the low end of our range.
I think similarly, the same will be the case for the building blocks for the adjusted profit from operations (APFO) line as well. As we guided, we see a very strong performance in the U.S., but we will see stronger performance from AME and APMEA versus H1 and slightly less performance in the U.S. So if you add this all together, we are again at the lower end of our algorithm for the full year. But this is the first time we are entering the algorithm. And as I highlighted earlier, our EPS guidance will see the overall impact slow down over the full year, but we will see a strong kicker. That is why we have guided on the upgrade of our EPS guidance to the middle of the range.
Just on that point, Javed, I want to complement because I received some questions about the low end of the range. We are thinking about the long-term sustainability of the algorithm. We are making the right investments for the business for sustainable growth: investing in combustible in the U.S. and some other key markets, investing in Modern Oral across the world, and resetting our HP business, which requires investments with the launch of glo Hilo. We also have an opportunity in Vapour in the U.S. that we haven't seen in many years. So we are doing the right things for the business for the long run. As we always said, this is a year to go back to the algorithm, and we position ourselves at the low end to give us the possibility to make the right investments to make this a sustainable story moving forward, and I'm very confident that that will be the case.
Our next question is from David Roux from Morgan Stanley.
My first question is just on Combustibles. At the trading updates in June, I think the business sort of downgraded its expectation for the global cigarette industry volumes from minus 2% to minus 2.5%. I think at the time, you noted this was predominantly driven by Bangladesh. It now seems the business has lowered its assumption again to now minus 3%. What is driving this latest sort of reduction in the outlook for cigarette volumes for the industry? Has Bangladesh deteriorated further? Or are you now seeing broader weakness across other markets? And then my second question is just on Velo in the U.S. It's a two-part question. Following the rollouts of Velo Max through the rest of this year, how many SKUs across strengths and flavors do you expect to have across the total Velo platform by the end of this year versus where we are today? And then the second part of this is your key competitor in the U.S. on nicotine pouches recently received a modified grant order to market using a reduced harm claim. Do you think this modified grant order really moves the needle in terms of marketing? And is this something that you'll be pursuing for Velo?
So let's address the first combustible question. The move from minus 2.5% to minus 3% is basically Brazil-driven. We had a massive excise shock in Brazil. The new excise-driven prices come into place on the 1st of August. This is a meaningful price increase, and obviously, this will have implications for the size of the market. It's a big market. Bangladesh is also a big market, but this latest change is primarily due to Brazil. On Velo, we have already three strengths in Velo Plus. We will add another two strengths with Velo Max, so we'll have a total of five strengths across the Velo family. What encouraged us in terms of the FDA's prioritization guidance is that we will be able with more certainty to bring more innovative products to the market in due time, which hasn't been the case for many years. You know that we have been filing PMTAs and being there for a long time. This is about to change with the new guidance. So for the time being, with the launch of Velo Max we'll have five different strengths within the Velo family as we stand today. In terms of your comments on the questions on...
The PM.
Yes, PMTA and MRTPA. First of all, I think that MRTPA for Modern Oral is welcome for the category. I don't think that there is any major immediate commercial benefit for any particular SKU or product in the market. We do have MRTPA applications for Velo as well, so we might be in a position to receive one of those in due time. But it's less about the short-term commercial opportunity in the local market, and more about what it means for the advocacy of the category, mainly coming from a market like the U.S. with the FDA. I think that is very important. As you know, we have been very ahead in discussions with a number of stakeholders in order to properly regulate the category because we see the category as the lowest risk category within the new categories, given there is no inhalation and no tobacco. It's the closest you can get to an RT-type product. We have now 32 regulated markets for the category, more than double versus 2024. A number of those markets sit in Europe, which is also very important. Events like MRTPAs being delivered by the FDA are positive overall. It's less about the commercial impact in the local market and more about the advocacy of the category outside the U.S. and internationally.
Our next question is from Damian McNeela from Deutsche Bank.
A few for me. Firstly, on the new categories portfolio. I think you've made the decision to exit some markets in vape and reprioritized in heated. Can you indicate whether that work is now complete or whether there are still markets that you're looking at around the viability of those categories? Second, can you provide a bit more information on what specifically is happening in the German Combustibles market with regards to increased competition? And if there is anything you can do to combat that increased competition? And then the last one is a follow-up on Faham's question earlier. Are you able to provide any indication of relative pricing for Velo Max in the U.S. when it launches, please?
Okay. On the price of Velo Max, we are not giving any indication of price. On Germany, what we have seen over the last couple of years is an increase in private label brands in the German market. More recently, that growth has stabilized, but this created down-trading pressures in the market that we obviously had to react to. We are not seeing private label growing at the pace we saw previously; it now seems more stable. That's the dynamic over the last 18 months. In terms of Vapour exits and our refocus on Heated Products, we decided to exit certain markets in Asia where we don't see either a proper regulatory environment and/or enforcement. As a consequence, there is no financial return for a legal company like BAT because we would be competing with illegal products where there is no level playing field. We decided to pull out of a number of markets that we originally entered when we expected regulation to become effective and enforcement to follow. That did not happen in some cases, so we pulled back. That's why you see negative Vapour numbers in APMEA in particular as a consequence of those exits. In AME, it's more a consequence of a change in legislation in Poland that makes it completely not viable to be present in the Vapour market anymore, and also in the U.K. where policy changes have meant a very strong presence of illegal products. We will continue reassessing markets, but most of the exits have already been actioned. There may be some residual impact in H2 this year, and as we lap these decisions into next year, the impact should become less evident.
Our next question is from Pallav Mittal from Barclays.
I had a technical issue earlier, so apologies if I missed it. But firstly, on the U.S. Combustibles business, volumes are better and price mix is a touch lower versus what you were expecting. You said duty drawback is not a major part of it in terms of the mix. Can you quantify the volumes that are seeing the benefit from double duty drawback? And is it sequentially increasing? Or has that now stabilized? And secondly, on your Vapour business in Europe, it has been under pressure over the last couple of years. Recently, you highlighted issues in Poland, et cetera. How should we think about that European vape business in the medium term?
On Vapour in Europe, the major drag on the numbers is related to Poland. We have been in strong positions in places like Germany, which is a very important Vapour pool. Vuse Ultra, for example, is making big inroads there. In other markets like France and Spain, we have a lot of competition. But we also have a strong pipeline that will reach the market in H2. So we feel confident in our ability to sustain our leadership position in Vapour in the markets we have selected to participate in. On the combustible industry more broadly in the U.S., we have seen a reduction in the levels of decline. A lot of that has to do with growth in the low-end segment of the category, which is actually growing rather than declining. We see less migration out of cigarettes towards illicit Vapour for two reasons. One, accessibility and availability of illicit products have become more constrained as more states have passed legislation; now around 50% of volume is sold under state directories and enforcement frameworks. Two, there are still a lot of solus combustible users who don't want to migrate to Vapour. This creates a dynamic that is more favorable than in the past. It's hard to predict how it will evolve because there are external factors, for example correlations between oil prices and cigarette consumption, and geopolitical events could have an impact. We haven't seen that yet in H1. The inventory movements had an impact of around 2% of revenue in H1 that will be lapped in H2. So the H1 combustible performance in the U.S. was skewed by inventory and trade movements, which is why we expect H1 to moderate in H2, while AME and APMEA deliver stronger sequential performance.
Duty drawback.
And we don't give specific guidance on duty drawback. It will form part of the elements we consider when we put in place our plans.
The duty drawback in the first half was not very meaningful. In the second half, we will not be giving explicit guidance on duty drawback, but it will be one element taken into consideration in our planning and will be reflected in our top line numbers as appropriate.
Our next question is from Rey Wium from Anchor Stockbrokers.
If I may just start off by saying Victoria actually looks brilliant in red. Shows there's an opening there. I just want to get back to the guidance — very strong performance on EPS, up 5.5%. Now if I look at your guidance, you've talked about EPS in the middle of the range. So that brings basically 6.5%. You talked about translation impact negative 2% to 3%. So that brings us back to sort of adjusted EPS around about 4%. Am I more or less correct doing that assumption? So actually overall implies a bit of a slowdown in the EPS growth for the year. And within that, you mentioned the U.S. will be a bit slower and the other two regions will be a bit stronger. I just want to know whether that summary is spot on. And just also on that, the New Category growth, you guide for mid-teens growth. You had 18% in the first half. Do you expect an improvement in Heated Products, which was down 12%? And are you expecting some acceleration in Vapour?
I think if you look at the profit performance of H1 and our guidance for the full year, it will move in the right direction, which means a more positive impact on EPS. But you're right that once we take into account the FX impact, our adjusted EPS would be in the range of 4% to 4.5%, which is, as a reminder, one of the best EPS performances of BAT in recent years, and we are very confident. As I highlighted earlier, this is mainly driven by the kickers below operating profit, mainly lower net finance cost and also the cash conversion. We have benefited from debt repayment from the proceeds of the ITC disposal. We are delivering a high cash conversion in H1, and we are on target to deliver above 95% cash conversion for the full year. But yes, you are right that our adjusted EPS would be more than 4%, around 4.5% on a current basis.
On New Categories, Vapour will see phased Vuse flavor rollouts, but remember this is a phased approach and much of the benefit will be felt in 2027. We will also be lapping the exit of one competitor in the U.S. that happened in the second half last year. For Heated Products, I don't expect a material change in the financials for the remainder of the year, though we expect to recover share through the actions we are putting in place. Velo is the main driver of mid-teens New Category guidance; we are lapping a much stronger comparator in the second half because we had significant rollout and growth in the prior period, so that moderates the full year growth rate to mid-teens.
Our final question today is from Richard Felton from Goldman Sachs.
Two questions from me please. The first one on U.S. Vapour specifically. As we think about the competition between Vuse and the illicit segment, what are the gaps as it relates to flavors, devices and price points? And which of those gaps can you now close as a result of the FDA prioritization guidance? Second, on free cash conversion: it's a little bit stronger than we normally see from BAT in H1. What are the drivers of that? Is it just phasing between periods, or does that point to potentially better cash conversion on a full year basis too?
On Vapour, our main focus is convenience channels. In tracked channels, illicit presence is smaller — around 12% of the channel — but most illicit sales are through independents and vape stores. The gaps are not just flavors; the illicit market offers large devices and high-capacity tanks with an enormous number of puffs that would never be allowed or compliant. These big devices dramatically lower cost per puff and are unsafe because as you increase puffs the device materials can degrade and contaminate the vapor. Those illegal products have no regard for product safety standards. You can find devices claiming tens of thousands of puffs. We will never compete on those terms and we should not — those products should be removed by enforcement. The gaps we can close are in the convenience store channels where we have been unable to sell flavors since January 2021. We will be reintroducing adult-focused flavors into those channels with distribution controls, ID checks and retailer commitments, and that will substantially close the convenience channel gap. The overall impact on the total illicit market remains to be seen and will depend on enforcement and the extent to which the market adjusts, so I do not want to provide a definitive estimate now.
Two points on cash conversion. One is the benefit from lower net financing cost, which was driven by debt repayment from the proceeds of the ITC partial disposal. More importantly, I'm proud of the work the finance team and our commercial colleagues have done to keep focus on cash as much as we do on profit. That focus has delivered higher cash in H1, which gives me confidence that for the full year we will deliver another year of more than 95% cash conversion.
Yes. I wouldn't assume much more than that we will have another strong year of cash conversion in line with our track record. The H1 performance gives us more confidence that it will be another year of very strong delivery.
Thank you. With this, I'd like to hand the call back over to Victoria for any additional or closing remarks. Over to you, ma'am.
Thank you. Well, thank you very much for all the questions from the telephone lines. I'm afraid we are out of time, and therefore, we'll not be able to get to the online questions, but the IR team will respond directly to those who sent questions in. And now I'd like to hand back to Tadeu for closing remarks.
Okay. Thank you all for listening today and for all your questions. To close, our H1 results were in line with our expectations, and we are on track to deliver our full year guidance with EPS now expected to be towards the middle of our 5% to 8% range. We will continue to reward our shareholders through strong cash returns, including our progressive dividend and sustainable share buyback, and deliver long-term growth and value creation. Thank you again for joining us. I look forward to seeing many of you in September at our Capital Markets Day.