Hello and welcome to the BAT full year 2022 pre-close conference call. Please note this call is being recorded. You will be in a listen-only mode throughout the call and have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. I will now hand you over to Victoria Buxton, Group Head of Investor Relations. To begin today's conference, please go ahead. Good morning, everybody. I'm Victoria Buxton, Head of Investor Relations. With me this morning is Tadeu Marroco, our Finance and Transformation Director. Welcome to our 2022 second half pre-close conference call. I hope that you are all well, and I'd like to thank you for taking the time to join us this morning, which I appreciate is a very busy day. Before we begin, I need to draw your attention to the cautionary statement regarding forward-looking statements, as well as the notes and disclaimer contained in the trading update. I will now hand you over to Tadeu, who will say a few words on current trading before opening it up to questions. Unless stated otherwise, our comments will focus on constant currency adjusted measures and all share data is year-to-date average to September 2022. Thank you, Victoria. Good morning, everyone, welcome. We are delighted to report this morning that we continue to accelerate our transformation and pace towards A Better Tomorrow. There are three key messages we would like to highlight to you. First, our new category business is becoming a significant contributor to group performance and is driving our faster transformation. Second, we are navigating growing macroeconomic pressures in the second half, enabled by our increased agility, resilience, and Quantum savings. We expect to deliver strong adjusted operating margin improvement in 2022. Third, we are confident in delivering our full-year guidance. Start with our new category business. We added a further 1.1 million ordered consumers of non-combustible products in Q3 to reach 21.5 million and continue to grow. Our new category products are now available in over 60 countries globally, with around 90 country category market combinations. This is driving strong revenue and volume growth, supported by continued market share gains in key markets. We are also making excellent progress reducing new category losses and expect a growing contribution across all new categories and regions for the full year. Our progress is driven by increasing scale, leading to operating leverage and further automation, reducing costs of goods sold. In addition, our growing brand equity has enabled us to increase pricing on both devices and consumables. We are confident in delivering on our targets of GBP 5 billion new category revenue and profitability by 2025, and 50 million ordered consumers of our non-combustible products by 2030. We continue to expand and invest in our new category business with exciting innovations and further geographic expansion in the second half. Our new glo device, Hyper X2, is now rolling out in 19 markets following a nationwide launch in Japan in October. glo Hyper X2 is a further step towards delivering heated product experience with a smaller, lighter device and dedicated boost button for maximum taste satisfaction and is delivering positive early results. In vapor, we have been rapidly rolling out our new disposable product, Vuse Go. In our early launch markets, the U.K. and France, Vuse Go is already number two in the disposable segment. With premium price position volumes which are accretive to our ePod platform. We have been rapidly rolling out Vuse Go over the second half through our broad distribution footprint and consumer reach. It is clear that the disposable segment is accelerating the growth of the vapor category overall with its convenient and flexible formats to encourage further switching for existing smokers. Our well-embedded responsible marketing practices remain as important as ever, with a strict age verification process embedded through training and monitoring alongside take-back schemes and recycle solutions. As our organization continues to transform at speed driven by new categories, we continue to embed ESG across the organization, and we are accelerating our ESG ambitions and targets. I'm delighted that in September we appointed Mike Nightingale, who many of you will know, as our first Chief Sustainability Officer to lead our sustainability and ESG agenda. Recent highlights include our Race to Zero commitment, which is embodied in our low carbon transition plan published in September, and further demonstrating our commitment to halve absolute emissions across the value chain by 2030 and to be net zero by 2050 at the latest. Achieving another Alliance for Water Stewardship certification at our largest U.S. manufacturing facility as we progress towards 100% group certification by 2025. Moving on to group performance. We expect to deliver stronger adjusted operating margin improvement for the full year, despite increased inflation in our supply chain through the second half. This has been made possible through the scale of our brands and increasingly focus on our market investments, supported by robust pricing. In addition, the annualized savings of our three-year Quantum program are expect to be in excess of GBP 1.5 billion by the year-end. Looking forward, we expect the growing impact of inflation on our supply chain to continue. We're focused on mitigating this through our scale and supply chain agility, in addition to our ongoing focus on driving efficiency gains throughout the business. Our business remains highly cash generative. We expect another year of operating cash conversion well ahead of our 90 targets. While expecting net finance costs to increase given the recent speed and significance of global interest rates rise and currency volatility, we will benefit from a 90% fixed debt profile and an average maturity of over 10 years. Altogether, our business transformation is accelerating. Although not immune to growing macroeconomic pressures, we believe we are well-placed to navigate these and are confident in delivering on our full-year guidance. In line with our active capital allocation framework, we are on track to return GBP 2 billion to shareholders through our share buyback program in 2022, demonstrating our commitment to delivering enhanced long-term value for shareholders. Alongside share buybacks, our framework also includes our progressive dividend policy with growth in sterling terms and a medium to long-term payout ratio target of 65%. Maintaining our leverage within our target corridor of 2x-3x adjusted net debt to adjusted EBITDA, while also considering potential bolt-on M&A opportunities. As we said in February, the board will review these capital allocation opportunities annually while taking into account the macroeconomic environment and potential regulatory and litigation outcomes. Applying current exchange rates to the year-end, we expect our leverage to be within our 2x-3x adjusted net debt to adjusted EBITDA corridor, outway at the higher end. Moving forward, given the significance of global interest rate rise and currency volatility, we will aim to reduce leverage towards the middle of this corridor over the medium- term to further support the long-term strength of our business. Turning now to our category performance in detail. As a reminder, all market shares are average year to date September versus full year 2021. Our transformation is accelerating, with Vuse continuing to extend leadership globally in the fast-growing vapor category, achieving 35.7% value share in key vapor markets, up 2.2 percentage points. In the U.S., the largest global vapor market, Vuse continues to strengthen its number one position, reaching 39.3% value share, up 6.8 percentage points, with leadership in 35 states. In addition to our rapid geographic rollout of Vuse Go, Vuse ePod 2+, our first connected device, is performing very well in Canada, where it now represents 72% of all sales in tracked channels. In THP, the continuing momentum of glo Hyper in Europe drove category volume share in key THP markets up 1.6 percentage points to reach 19.5%. In Japan, glo's volume share of the total nicotine market reached 7.3%, up 50 basis points, as smokers continue to switch to THP. In a highly competitive market, our THP category volume share was 20.2%, down 1 percentage point in September. This was ahead of the national rollout of Hyper X2 in October, which is delivering positive early results. Glo continued to grow category volume share across all European markets, with aggregate category share in key THP markets reaching 20.4%, up 4 percentage points. Turning to modern oral. In Europe, we remain the clear market leaders in 50 modern oral markets, with aggregate European volume share broadly stable at 69.1%. Our European leadership is driven by Velo's brand equity and the success of our innovation pipeline, including mini pouches and max ranges. As the modern oral category continues to grow and becomes more established in Europe, we are seeing strong growth in average daily consumption. In the U.S., we have submitted a PMTA for a superior Velo product. We are particularly proud of Velo's performance in Pakistan, now our third-largest modern oral market, where we have rapidly achieved national coverage. Enabled by powerful consumer-centric digital activations, Velo has reached a monthly volume of over 40 million pouches. This progress demonstrates our ability to unlock the significant opportunities for modern oral in emerging markets. In combustibles, full-year global tobacco industry volume is now expected to be down around 2% versus our previous guidance of around 3%, driven by continued post-COVID recovery in emerging markets. Group value share is flat, with gains in the U.S. and APMEA offset by declines in ANZA and Europe. We expect our target portfolio of brands across price tiers to deliver a robust financial performance across APMEA, Americas, and Europe, driven by resilient volumes. While our APMEA performance will also reflect the impact of the sale of our business in Iran in August last year. In the U.S., industry volumes remain under pressure in the second half due to the growing macroeconomic headwinds and post-COVID normalization of consumption patterns. In addition, our revenue performance will reflect the unwind of the prior year inventory of around GBP 200 million. To offset early signs of accelerated downtrading in the U.S. industry in the second half, we have recently activated commercial plans across specific brands, channels, and states. Overall, pricing has remained strong, partially offset by manage geographic mix. In conclusion, it's clear that we are building strong momentum and our A Better Tomorrow transformation is accelerating, which will support a sustainable growing business. We are delivering on our three strategic priorities, driving a step change in new categories, value through combustibles, and simplifying the business through Quantum. Leveraging our increased agility and resilience to combat growing macroeconomic pressures in the second half, we are confident in delivering our full year guidance of 2%-4% constant currency revenue growth and mid-single figure adjusted diluted EPS growth while absorbing a transactional effects headwind of around 2%. Thank you. I will now open the call to questions. Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. That is star one for questions. Our first question today comes from Nik Oliver of UBS. Please go ahead. Hey, good morning, Tadeu and Victoria. Thank you for the questions. Just two from me. I guess one on U.S. volumes, as we're now coming out of the COVID comps. I guess as we look into 2023, is there any reason that we shouldn't expect industry volumes to, you know, move back to the old kind of down 4%-5% trajectory? That was question one. Question two, Tadeu, you sort of touched on this, on capital allocation, but it's a question that we get asked a lot. Obviously the buyback, you know, this year was taken very well. As we move into next year, just any thoughts you can give investors on how you're thinking about, you know, capital allocation into next year? I mean, looking at Visible Alpha, I think most people have about GBP 2 billion of a buyback in their forecast. You know, anything that you could share around that would be super helpful as well. Thank you. Okay, Nik, thank you for the question. Good morning. Starting with the U.S., I think that we have to. Let's take a step back and make an assessment of what's happened in the U.S. over the last few years. If you go back to 2020, we had actually an increase in volumes in the U.S., clearly, as a consequence of the change in consumer patterns at the back of COVID. We have a more normalized 2021 and then a more depressive 2022. If you take an average, at least up to the middle of this year, wouldn't be much dissimilar of the secular decline of 4%-5% in the U.S. market when we average out those three periods. What we have seen, more recently in the second half of the year is basically a bit more of a pressure due to this continued post-COVID normalization of consumer patterns and the growing macroeconomic pressures is starting to impact consumer disposable incomes. You saw, for example, gas prices at certain stage reach a peak, and this all has a. We note that there is a big correlation between that and the sales of cigarettes in the U.S. As a result, we saw also some consumers shift to specific channels like discount and dollars in some states, with early signs of a downtrade at industry level. On the other hand, we know that the U.S. market has a very high level of employment, so very low unemployment rates. The gas price that I mentioned before that has reached a peak now starting to leveling off. As we mentioned in our trade update today, we have recently activated commercial plans with much more continuous deployment of a revenue growth management capability in a more increased target and granular way, more target discount problems. We are well-placed to navigate through that. The U.S. market, as we saw up to the mid of the year, will not be that much similar for the full year. We are not providing any guidance. It's difficult to talk about 2023 because of these contradictory dynamics. From one side, the macroeconomic pressures, from the other side, consumers in full employment, gas pricing coming down. We expect industry volumes to improve in 2023. This, combined with the combination of our commercial activity will probably improve our performance next year from the second half of the year. Our perform probably be more weighted in the second half of the year. Looking the long-term, we are not seeing any material change in terms of medium-term elasticity in the U.S. We believe that the U.S. remains very profitable and highly profitable, attractive FMC markets with elasticity well below the average at the group level, in the global level and affordability second highest globally. This puts us in a very strong position to continue to drive value and combustion to fund our transformation. The other point that I would like to highlight about the U.S. is our excellent performance in vapor. This has really become more and more significant, not just at the group level, like I mentioned before, but also in the U.S. in particular. All the inroads that we are making, not just on the, on the top line of our vapor business in the U.S., but also in the bottom line with activating all the levers that we had mentioned before in terms of COGS, through automation, through changing footprints that's reducing 430 ft. The fact that we have taken less discount, taking more pricing, more the revenue growth management being deployed also in vapor. There's a lot of initiatives being put in place, which we are very pleased with, that has resulted in very improved margins and hence profitability in our vapor business in the U.S. Puts us in a very strong position moving forward. In terms of your second question, which is around the capital location. Well, [with ALGZ], we clearly lay out that our new active capital location framework will be always about us defining every early stage in the year between the four basically priorities to deploy our free cash flow. The first one is a growing dividend with this medium to long-term payout ratio target of 65%. The second one is paying down debts to reduce our leverage and be in the corridor. If anything, the fact that now we have a higher global interest rates, that is a change in what's happened since the beginning of the year. We'll be aiming, like I said in my statement, to get us to, in the medium-term, to the middle of this range of three to two. We also want to do eventually some bolt-ons M&A. We are not expecting anything more significant in that space. It will be pretty much what you have already seen over the last couple of years using our corporate venture capital and creating some foundations, many of them beyond nicotine space. We have the share buyback that I agree with you, was very successful. The reintroduction of share buyback, BAT has always saw value on that. That's the reason why it's part of our active capital location. The board will evaluate this capital location priority on the beginning of next year, as it will be doing on an annual basis. We will take into consideration future potential regulatory impacts. For instance, from time to time, some of you ask me about various legal case like DOJ. You know that we have provided for that. It's difficult. I don't have any update at this point in time, but clearly you have to take into consideration at certain stage that there will be some cash out-cash outlay. That will see double A is the same. I'm not saying that anything is coming in the short- term, but these are the factors that we have to take into consideration together with macroeconomics and making a final call. We'll be doing that at the beginning of the year. We wanna stipulate clearly what will be the priorities for next year. Great. Thank you so much, Tadeu, for that. That's really clear. Thank you. Thank you. We now move on to our next question, which is from Richard Felton of Goldman Sachs. Please go ahead. Good morning today, Victoria. My first question is, you reiterated your guidance in some mid-single- digit constant currency EPS growth this year. Could you just remind us how much impact you're expecting from Russia within that? I appreciate there's lots of complexity involved in transferring your Russia business, could you perhaps give us an update on where you are in that process? You know, should we still have Russia in our estimates for FY 2023? That's my first question. My second one, I mean, you're talking to the accelerated downtrading trends that you're seeing in the U.S. Does that change the way that you're thinking about your overall pricing strategy in the U.S. in the near- term? Then secondly, you've called out, you know, some of the activations and specific things you're doing on certain brands and at the state level. Could you maybe give us a little bit more color on sort of what that actually means and what that is in practice? Thank you. Yeah. Thank you, Richard. Look, starting with the U.S., as I said, we see a lot of pricing potential in the U.S. I don't think necessarily that we'll be seeing change in the patterns of pricing, we will need to be much more targeted in terms of how we deploy revenue growth management. We have a portfolio which is pretty skewed towards the premium, get a bit more subject to these movements of consumers, we have to act accordingly. I think the point is less about our ability to take pricing. It's more about we taking price and being able to recognize some consumer shifting patterns like these, stores of discounts or some states, having a kind of problem that could cope with that. Some more target discount in some individual place, so we can support our brands better in that environment. To it last, it's difficult to understand exactly the dynamic. Like I said, there is and you probably follow this very closely as well. There is speculation that the inflation has already peaked, then the question is how fast we'll take it to bring it down. The fact that we have the oil price now coming to more reasonable levels than earlier in the year. All those things and the full employment that would be very helpful could be supported for consumer purchase power, and we accordingly adjust our activities in the market accordingly. The pricing power of the U.S. is massive, and I don't think that this will necessarily change as a consequence of that. That's the U.S. view. On Russia, this is an unprecedented and complex process with many moving parts, as you can imagine, no? We are working as fast as possible to ensure that we transfer a viable business. Why I'm saying that, because we have a massive operation in Russia. We have not just the head office in Moscow, but we have 75 regional offices, manufacturing facility in Saint Petersburg which employ around 2,500 people. We are for sure focused on supporting our employees and safeguarding their employment. Prior the conflict, you know that we have a rollout now, which is the SAP systems that we have across the group. Our full Russian operations were fully integrated into the group across all areas of the business and system, including supply chain, marketing, report, and IT. What is this? This means that we have now to extract in Russia as a standalone business, and this is incredibly complex. On the IT side, you can imagine how long it takes. We are in negotiations to get the best deal for different stakeholders, including the employees of the company. Difficult to precise the final timing on that. I think that we spoke before when we announced the relevance of Russia in our numbers in terms of 3% of revenue and 1% EBIT in terms of profit. I just want to remind you, until we transfer the business, we need to continue accounting for that in our numbers, consolidating in line with IFRS accounting rules. That's the reason why when we provide the guidance more early in the year, we set the guidance irrespective of the timing of Russia, but something that is not completely under our control, but there are a lot of moving parts at this point in time. Great. Thank you, Tadeu. Thank you. Up next, we have Gaurav Jain of Barclays. Please go ahead. Hi. Good morning, Tadeu. Good morning, Victoria. Three questions from me. One is on this midterm leverage ambition of 2.5x. Is that an ambition for FY 2023 or FY 2025? If you could also just remind me that in your leverage calculation, you do not really put ITC equity income or dividend in the denominator, right? Gaurav, the medium- term is basically the next couple of years. It's not a 2023 target. I'm not providing any 2023 target here. That's why we are considering this as a midterm. It's, we need to consistently continue the leverage in the company, and we believe that, with the scenario that we have currently with higher interest rates, that we'll be better placed in the middle of the corridor than we are now at the high end of the range like we spoke before. Because it puts us in a very volatile position because you know the dynamic of exchange rates, 31st of December when you get translating through all the translation of your debt in a single period of time. We want to be in a more comfortable position, and we want to reduce the levels of debts as well because of the high levels of interest rates now. When we calculate that, yeah, you are right. We are not taking... The ITC is part of our assets in a way, but we are not making any further deconsolidation of ITC in this calculation. Sure, because I think S&P actually puts it in the denominator. That's something which I just thought I would highlight. The second thing I had is on this, you know, on the California flavor ban which will come in two weeks, how should we think about it? Well, look, the California flavored ban would be if anything, an interesting, an interesting experience, I would say, because we. There is always this question about menthol ban coming through in the U.S., what happens, and with the level of exposure BAT has in the U.S. We always try to quote back and make analogies of what has happened in other markets, you know, in terms of Canada, in terms of Turkey more recently, but also Europe. What we have seen in all those markets is that consumers, they smoke first, and they are very loyal to their brands, and not necessarily for a menthol or non-menthol. The level of retention in those markets that have implemented the menthol ban is still very high. That's why we were not always in agreement with these views of levels of exposures too high and so on and so forth. I think that the California experience, given the fact that it's a large state, different from other small states that has already implemented menthol ban in the U.S. California is large enough for us to have a meaningful reading. I think that in the way, this could be an interesting experience to go through. I think BAT is well settled for that. Between the cigarettes and the fact that we are now more and more present and dominating now the vapor market gives also some flags, if whenever those policies coming through. We still believe that's not the right, the right policy for the government to pursue. Based on the experience that we saw in other markets that I just referred to, this is not addressing the purpose that the government had in mind when they put this in place. The tobacco harm reduction agenda is much more effective and efficient to deal with that and other than to implement those types of policies. I think that what we'll be seeing in California will be pretty much confirmation of what we have seen in other parts of the world. Sure. My last question is again, on the U.S. Clearly in 2H you will have a pretty meaningful volume decline in cigarettes, but then your e-cigarette profitability would also be going down. In a way it's a very interesting crossover point, which potentially can answer the question that can NGP growth offset decline in combustibles? My question is that in 2H 2022, will your U.S. EBIT be growing over 2H 2021? You are... That if the U.S. EBIT, the... EBIT, yeah. The profits in U.S. Will you still be growing your U.S. EBIT in 2H 2022 over 2H 2021 because e-cigarette growth offsets cigarette decline? Look, we haven't finished the year, Gaurav, so we don't want to talk specifically about markets there. There is the point that I make about the vapor category in the U.S. is plus is really getting more meaningful. In terms of contribution. This, I'm talking about the U.S., but I'm making a promise to the whole group, and that's why I start with my first point about the comments of the statements and the message that I want to give to all of you is that new categories, and as we said before, is getting more and more meaningful in terms of the group performance. When I mean group performance, I include definitely the group financials, the revenue and the bottom line. The reduction of losses in the case of the total group, and you have been following this closely, is creative for the group. Since 2021 was the first year, that's why we call pivot a year, where we had a reduction of GBP 100 million in terms of loss and we presented the numbers in the half year of 2022. You saw that we could progress even further. What I'm telling you now that for the full year we are expecting this trend to continue and will be a strong part of our group performance moving forward as we said, and we have always said in the past. Sure. Thank you so much. Thank you. Thank you. As a brief reminder, that is star one to pose your questions today. We're now moving on to a question from Rashad Kawan of Morgan Stanley. Please go ahead. Hey, good morning Tadeu and Victoria. Thanks for the time this morning. Just a couple quick questions from me. The first one, there was news a few weeks ago that you withdrew MRTP applications for some of your smokeless portfolio in the U.S. Can you give more detail as to what happened there and your thought process going forward? The second question is, do you have an outlook for U.S. industry cigarette industry volumes for this year? Thank you. Yeah. In the, in U.S. industry volumes for this, we are not providing guidance for the industry itself. What we saw, but what I can tell you is when we came to the half year, we had a decline, I think there was around 9% at that time, and we were having an expectation that the situation would get better in the second half 'cause of a more benign comparator. What we have seen so far is that despite the fact that we have a more benign comparator, we have this macroeconomics waiting more in the second half of the year. That I will leave it there. Okay. We are not providing any guidance on that, but this can give you a kind of a reference plus what you have been seeing in terms of tracking size markets and so on. Our... The withdraw is basically on our is those products. This is basically related to portfolio prioritization. Got it. Thank you very much. Thank you. We move to a further question now from Simon Hales of Citi. Please go ahead. Thank you. Hi, Tadeu. Hi, Victoria. Just a couple of points of clarification, please. Sorry to labor the point and come back to the buyback and medium-term leverage targets again, but I just wanna make sure I'm clear on the go-forward messaging there. If I look at consensus today, the consensus has your net debt EBITDA ratio getting into that middle of the target range by 2024, and that's despite an ongoing GBP 2 billion a year of share buyback assumption. It sounds from what you've said today, you're comfortable with that timeframe. The first question is am I reading that correctly? Just secondly, to clarify, when you calculate your leverage ratio, are you basing it on year-end FX rates, i.e. spot, or are you making any adjustment for average moves in FX during the year? Okay. Just to be clear on the ratio, we calculate all the debt and the balance sheets based on the 31st of December ratio and all the earnings throughout the year. If there is a mismatch between the average rates ex-FX throughout the year and the 31st of December. You reflect this in the ratio. That's why we are so subject to this FX position. When I talk about our expectation being at the high end of the range this year, is assuming the current FX position. The FX here that's matter for the debt side is more the dollar to the pound because the 7% of our debt is dollar denominated. I just want to make this point quite clear for those that are in doubt about. In terms of the consensus, I cannot comment much on consensus. What the point that I'm making here is that every single year the board will make an assessment about all the macroeconomics that we have been and all the litigation case that we have to consider when we make assessments in terms of how we prioritize the allocation of our free cash flow. A lot of you ask me about, for example, the DOJ case. We provide for the DOJ case. I don't have any news on that case, but at least you have a number there ready to have as a reference in terms of provision. These are the type of things that we have to consider. The Canada CCAA. You also have the positions that of cash that we have basically trapped in Canada, which is part of those ratios at this point in time. We have to make consideration in terms of what is the likely scenario for us to come to a settlement and what happen with the cash. These are things that on a yearly basis, we'll be sitting with the board and making further considerations. The fact that we want to get to the middle of the range is more assertive now given the change in terms of the circumstance of the interest rates. The interest rates, you know, as you know, has increased at an unprecedented level in terms of a pace over the last six months. We have to take this into consideration and hence our determination to get to the middle of the range. That's more or less what I'm trying to convene as a message. I'm not trying to make any type of anticipations of the capital gains, but this is a discussion that we are due to have anyway in the year-end results announcement in February. Brilliant. Very helpful. Thanks for the color. Thank you. As there are currently no further questions, I would now like to hand the call back over to you, Tadeu, for any additional or closing remarks. Thank you to all for listening and for your questions. I would like to leave with you with a few final comments. We are now in a period of faster transformation with our well-established multi-category strategy, strong portfolio of global brands, and our resilient, highly cash generative business. This will enable us to further invest in and accelerate the transformation of our business as we continue to build A Better Tomorrow. With that, I look forward to update you further on our transformation at our full year 2022 results presentation on February 9. Thank you very much. Thank you for joining today's call. You may now disconnect.