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British American Tobacco PLC
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Hello and welcome to the BAT half year results for 2019. [Operator Instructions] Please note, this is being recorded. I'll now hand you over to Jack Bowles, Chief Executive. Please begin.
Good morning, everyone. I'm Jack Bowles, Chief Executive. And with me this morning is Tadeu Marroco, who from Monday, will succeed Ben Stevens as Finance Director. I would like to take this opportunity to thank Ben for his immense contribution to the group over a career spanning nearly 30 years. As you all know, at the end of this week and after 11 years on the Main Board as Finance Director, Ben will be retiring. He leaves with the best wishes of the whole board for a long and happy retirement. Before I start the presentation, I need to highlight the disclaimer on Page 2 and Page 3, which I will take as read. As usual, at the end of the presentation, there will be an opportunity for you to ask questions. As we said in March, we are focusing on transforming the business by: delivering value growth from our combustible business; driving a step change in new categories; and making BAT a simpler, faster organization better equipped for the future. We are sharpening our operating model and reducing complexity. This is providing the capabilities and resources to invest in new categories and to grow operating margin. Our review of the organization is well advanced. We are looking at the numbers of business units, reducing organizational layers and simplifying processes, while further leveraging our shared services center. We will update you on our progress when appropriate. Turning now to the results. I'm very pleased with the half year. We have a strong performance in combustible and industry dynamics remains robust. Our combustible business continues to drive the financial performance of the group, and we are performing well. We have continued to grow value share and our volume share is improving. In the new categories, revenue was up 27%, and we are on track to deliver full year revenue growth around the middle of our 30% to 50% guidance range on a constant currency basis. Over 9 million consumers already enjoy our potentially reduced-risk products. While I recognize there is more to do, we expect a strong acceleration in the second half. This is driven by the impact of the full year of additional investments and new product launches, which I will cover in more details later. In addition, we set some stretching guidance at our Capital Market Days in March. I am pleased to say we are delivering on our financial objectives. Revenue, margin, profit and EPS growth are all in line with the guidance. We have done this while, at the same time, significantly increasing investment in the business. Cash and deleveraging the business is a clear focus for us in 2019. We continue to be confident of reducing our leverage by 0.4 turns, excluding currency translation. Overall, the business is performing well, and we are on track for a good year. I will now pick up some of the key themes of the first half in a little bit more detail. As I said, we have a strong performance in combustible. Total cigarette and THP volume declined 3.5%, broadly in line with the estimated industry decline. We continue to expect our overall industry volume to be down around 3.5% for the full year. Cigarette price/mix was strong at 7%, driven by a good pricing environment. Corporate value share is up 10 basis points, and the strategic brand portfolio delivered strong growth, both in volume and in value share. Corporate volume share improved in Q2 and share in the first half is now level with last year. This was achieved even though we have reduced our combustible SKUs by 10% over the last 12 months, excluding the TPD implementation in Europe. In the U.S., we are winning where it matters, with growth in value share, premium share and ASU30 share. This was driven by good performance from Newport and NAS, which both grew volume share in the premium segment. Revenue and profit both grew strongly. This was driven by good pricing, reduced discounting and improved mix. There were some additional benefit from the timing of expenditure and the FX of the Vype recall last year. Volume was down 6%, mainly due to the industry contraction as we concentrated on building value share against volume share. This was against an industry down 5.4%. Following the additional price increase taken in June, we now expect full year industry volume to be down around 5.5%. The U.S. regulatory agenda continues to follow a robust process and is, therefore, moving slowly. There have been no material development in the U.S. FDA regulatory agenda on neither menthol or nicotine. In vapor, we believe we are well-positioned to meet the new May 2020 deadline for PMTA submissions. As I said at the Capital Markets Day, I am looking to drive a step change in our new categories' performance. I firmly believe that a truly global group like BAT needs to be strong in THP, Vapor and modern oral. I'm pleased to confirm that we expect to deliver on our guidance of new category revenue growth around the middle of our 30% to 50% guidance range on a constant currency basis. In the first half, new category revenue grew 27% on a constant currency basis. Vapor revenue was up 58%, with good performance from Vype in Europe and Canada and VUSE in the U.S., this was despite Q1 VUSE sales being impacted by the Vype restocking and trade uncertainty around potential vapor regulatory development. Modern oral is the fastest developing [ of ] the new categories. We grew revenue by nearly 300%, mainly due to the growth in ENA and new launches, including Lyft in Russia. I am very excited by our rollout plans for Velo in the U.S., which started last week. THP consumables revenue was up 15%. Device sales were scaled back in anticipation of the launches of glo pro and glo nano in the second half. As a result, THP revenue rose 4%. This is expected to accelerate significantly in the second half, driven by new product launches. As you will see later, we have a lot of activities planned for the remainder of the year and we expect a strong second half. Before we go into some of the details on new categories, I would like to talk about our brand portfolio. Following the acquisition of Reynolds, we have the opportunity to rationalize our large new category brand portfolio, focusing on core drive brands and fewer SKUs. We have, therefore, decided, subject to regulatory consideration, to consolidate and rationalize our Vapor, THP and modern oral brand portfolio into 3 global brands. In Vapor, this will be VUSE; in THP, this will be glo and in modern oral, Velo. This consolidation will be completed by the end of 2020. This will allow us to focus our resources and internationalize our consumer propositions, creating strong global brands. I will now move on the new categories in more details based on the existing brand lineup. In Vapor, VUSE Alto is performing well in the U.S. and is up 320 basis points since the beginning of the year. Awareness for the brand is still low at 30%, and active distribution is only around 25%. So there is significant opportunity for further growth. Our focus is therefore on building VUSE brand through increased digital and face-to-face consumer activity. We have a significant uplift in support planned in the second half. In ENA, we continue to lead the category. In the U.K., Vapor represents 25% of the total nicotine market, and we have a value share of 39%. Vype achieved a record value share of 11.6% in June. This was driven by the success of Vype ePen 3, which grew value share by 410 basis points. In France, Vype reached a value share of 17.3%, led by ePen 3. We are now the #1 player in the retail vaping market in France. Elsewhere, in Germany, Vype reached 12% share of total Vapor consumers. In Canada, Vype reached 21% value share, driven by the successful launch of EPOK at the beginning of the year. In modern oral, we are growing share rapidly in both the established oral tobacco markets in Scandinavia and new oral markets like Denmark and Switzerland. We are market leader in the modern oral category in both Sweden and Norway, with the 57% and 73% volume share, respectively. As you can see from this line, this is driving strong growth in our share of the total oral category in both markets. In Switzerland and Denmark, we are also leading the development of the category with our modern oral offerings achieving 42% and 67% volume share of the total oral category, respectively. Modern oral is an exciting, fast-growing category with significant consumer appeal. There are no device requirements and no limitations on where and when consumers can enjoy the products. We believe the category has significant untapped potential. We are performing extremely well, with revenues up almost 300% in the first half. Ultimately, new categories are all about expanding our share in the total nicotine spend by consumers. I'm delighted to say, BAT remains the fastest-growing nicotine product company in Japan. Our overall share of the total nicotine market grew by 80 basis points this year. In July, we reached a weekly record of 18.3%, up 160 basis points. This has been driven by growth in both THP and consumer -- combustibles. glo is performing well in Japan, where THP now represents 24.4% of the market. glo has captured 28% of segment growth since Q4 2018. Share in June is 5%, up 30 basis points despite significant competitor activities. In other markets, we have made good progress in a short period of time. However, let's remember that Japan alone continues to represent more than 60% of worldwide THP volume. As a consequence, we will first prioritize Japan for our THP innovations, followed by launches in ENA. We have a strong pipeline of product launches and marketing support plan across new categories in the second half. glo nano is our new slimmer device addressing affluent explorer consumers' demand for a stylish day usage product. glo pro utilizes induction heating technology. This delivers better satisfaction and a rapid heating for a quicker taste release. glo sens combines vaping technology with real tobacco, creating a bridge between THP and Vapor for a satisfying full taste experience. We plan to launch glo pro, glo nano and glo sens in Asia in the second half. These new products, combined with our newly launched flavor will deliver consumers better satisfaction and design. We are the only company to offer flavor capsules in Japan, which already represents 22% of our sales. We also have significant Vapor activities planned for the second half. We will begin rolling out a new global brand positioning and campaign, unifying VUSE and Vype and supporting the migration of the portfolio to VUSE brand by the end of 2020. This will be backed by significant increased brand-building activities. Following our consumer segmentation, we are further strengthening our Vapor product portfolio. In the U.S., we plan to roll out a 2.4-milligram nicotine variant of Vuse Alto to address an emerging segment for lower impact products. In addition, we have just commenced our special promotion offer of $0.99 for Vuse Alto power kit. This is in response to the current competitive pricing environment and to drive awareness and trial. We also plan to launch an upgraded device for ePen 3 with better battery life and improved functionalities, together with the new range of flavors. Finally, we are excited by the modern oral opportunity in the U.S., and we have ambitious plans for Velo, our modern oral nicotine products. The rollout is already underway with the rapid distribution expansion, supported by digital, radio and TV advertising and direct consumer engagement. In addition, we expect the outcome of our MRTP application for Camel snus by the end of the year. This could give us a major opportunity to further develop this important potentially reduced-risk product category. Outside the U.S., we have a number of new market launches for EPOK and Lyft planned in the second half. So in summary, we have significant activities planned, spanning all 3 of our new categories, and we are confident that this will drive an acceleration of our growth in the second half. I will now hand over to Tadeu, who will take you through the financials in a little bit more detail.
Thank you, Jack. I'm delighted to be taking over from Ben as Finance Director. I have worked with Ben for many years, and he has been a great mentor to me. I'm honored to be succeeding him. My focus will be on delivering a stronger, simpler, faster organization, ensuring we can free up resource for investments, while generating cash to delever the balance sheet. As we grow our new categories business, I'll be driving an efficient and effective resource allocation to ensure we maximize returns on investments. This is vital as the complexity of our multi-category business increases. This virtual cycle will increase operating margin, supporting our ambition to expanding margin by 50 to 100 basis points per year. It will also drive the 0.4x annual reduction in leverage x currency we are targeting, further increasing investments and delivering investor returns. I will now turn to the numbers. Revenue grew 4.1% on an adjusted constant currency basis. This was driven by strong adjusted revenue growth of 5.2% in strategic combustibles. I should remind you that combustibles still represents 92% of our business. There was a good performance across the regions on an adjusted constant rate basis. In APME, volume including THP was down 2.3%, and revenue grew 1.6%, with pricing was partially offset by lower sales of THP devices ahead of new product launch planned for H2. Despite increase in marketing investment, profit from operations was up 4.6%. In AMSSA volume was down 3.5%, and revenue was up 7.5%, driven by strong pricing and higher revenue from new categories. Profit from operations was up 0.8%, with good performance in Canada, Nigeria and Kenya, partially offset by significantly increased marketing investments. In ENA, volume declined by 4%. Revenue was up 4.6%, with good price in combustibles and a more than doubling of our revenue in new categories. Profit from operations was marginally higher due to the impact of increased investments in new categories. As Jack has already covered, in the U.S., we had a good performance. Revenue grew 3.7%, driven by strong pricing, reduced discounting and improving mix. Profit from operations grew 11.2%, benefiting from the timing of investment and MSA costs, and the prior year comparator impacted by the Vype recall. Overall, we plan a significant increase in new category spend in the second half, in particular in the U.S. in support of VUSE Alto and the rollout of Velo. This will result in a more balanced performance across the regions for the full year. I'm delighted that after several years of transactional FX impacts, we are back on a path of consistent margin growth. On an adjusted basis, margin grew 110 basis points ahead of our guidance. This was after absorbing the increase of investment in new categories, which was a headwind of 110 basis points. We made good progress on margin. We are on track to deliver on our guidance of 50 to 100 basis points of margin improvement for the full year, alongside the increasing investment we are planning for the second half. Our growth in adjusted revenue and good cost management delivered a 5.9% increase in constant currency profits from operations. At constant rates, adjusted net debt at the half year was GBP 2.1 billion higher than the year-end 2018 levels. This was driven by the timing of the MSA payments, which, of course, in the first half, and the implementation of IFRS 16, which increased reported net debt by GBP 0.6 billion. First half operating cash conversion was 66%, reflecting the normal timing of MSA payments in the first half. This is similar to H1 2018, if we adjust for the impact of the early MSA payment in December 2017. We expect a strong second half cash performance, with a full year operating cash conversion in excess of 90% and a net CapEx of around GBP 800 million, allowing us to meet our targets of GBP 1.5 billion of free cash flow after dividends. We are committed to delever at 0.4 turns to a ratio of 3.6% at the end of 2019, excluding the impact of currency translation. This is based on the delivering strong EBITDA growth and free cash flow after dividends of GBP 1.5 billion. We remain committed to growing the dividend and a payout ratio of 65%. On a constant basis, adjusted diluted EPS grew 7.1%, delivering on our high single figure earnings growth commitment, with a currency tailwind of 1.7% points, adjusted diluted EPS was up 8.8% at current rates. This was driven by growth in operating profit and a good performance from ITC. Net finance costs increased mainly due to the lower investment income and the impact of translational FX from the relative weakness of sterling against the U.S. dollar. We continue to expect the full year net finance charge to be around GBP 1.5 billion. We also expect an effective tax rate of 26% this year, down from the 2018 level of 26.4%. On currencies, if rates were to stay where they are today, the translational FX impact on full year results would be a tailwind of around 3% on operating profits and EPS. So this was a strong first half, with revenue, margin, profit and EPS all delivering in line with the guidance we gave. In March, I stood up and gave stretching financial guidance for the full year, and I can confirm that we are on track to deliver against this. In constant currency, we expect revenue growth in the middle upper half of our 3% to 5% range; adjusted profit from operations growth in the upper end of our 5% to 7% range; and continue to deliver on high single figure earnings growth. Thank you, and I will now pass back to Jack for a few closing remarks.
Thank you, Tadeu. In summary, I am determined to make BAT a winner in all nicotine categories, transform the business and build BAT a stronger, simpler and faster organization. Our combustible business is performing very well. Pricing is strong and market declines are in line with historical levels. We continue to build on our strong position in combustible tobacco. As we step change in new categories, we will build stronger global brands and provide consumers with great new potentially reduced products, increasing the opportunities for our 150 million consumers to enjoy our products. We have work to do in new categories. But I'm excited by our pipeline of product launches for the second half and into next year. I am confident we will deliver a strong second half, with full year revenue growth around the middle of our 30% to 50% guidance range. I am committed to delivering high single figure adjusted diluted EPS growth on a constant currency basis, strong cash flow and tight cost control, while investing further in the brands and capabilities to build a global, multi-category business. I'm looking forward to a strong second half and delivering on the full year guidance we gave in March. Thank you. I will now open up for questions.
[Operator Instructions] Our first question is over to the line of Owen Bennett at Jefferies.
I just had a couple of questions on the reduced risk in the U.S. And so I've see your recent Nielsen numbers and enjoy -- seems you're having a bit of success. So just some comments on that. And then secondly, you spoke about moving to $0.99 for the Vuse power kit. Is that something that everyone has done at the moment in terms of moves to that price point?
Yes. I mean, thank you for the question. I'm not going to comment on the competitive activities. But what I can tell you is that Alto is performing well, that there are some price commissions in the market, and we'll respond accordingly in limited geographies. And that we'll make sure that we continue on our path of growing Alto in the U.S. market. The brand is growing strongly. We will do more investments in the second half, as we said in the presentation, and we'll make sure that the VUSE brand is growing significantly in H2.
Okay. And then just a quick follow-up. So I mean, obviously, Altria have reported numbers, they're talking kind of -- they're talking up the opportunity around IQOS in Egypt and say there's quite a significant opportunity there. I was just wondering, to that extent, why you continue to be quite quiet around plans for Eclipse/REVO. I know you said you want to focus on modern oral, but it just seems a bit strange to me to ignore it tactically or at least be a bit more vocal around your ability to compete in that segment if you needed to.
I think you have to consider of the fact that the categories that are emerging and strong in the U.S. are already established, like the Vapor category. Then on top of that, we see a great opportunity in oral tobacco, no devices, you can use it everywhere. And that we consider that this should be the 2 points of focus for the time being. We have a product that is there in the U.S., and I prefer to focus my resources and make sure that we're successful in the vaping category. That is the biggest category in terms of new categories at the moment. And oral tobacco, that has a lot of potential moving forward.
We are now over to the line of Gaurav Jain of Barclays
So the long-term U.S. volume market decline was recently updated by Altria from -- to minus 4% to minus 6%, and they gave a number of reasons, including higher cannibalization of e-cigarettes, also high costs taking off in the U.S. Do you have any view on how the long-term U.S. cigarette volume declines pan out? And how should that impact your long-term EBIT growth in the U.S.?
Thank you very much for your question. Our view related to the market goes through the end of the year, I would say, 5.5%, around 5.5%. Why? Because there has been an additional price increase in July. That's the inflection between the previous guidance and the 5.5% that we're giving now. We don't see any major shifts in terms of the e-cigarette development in the U.S. And also, we see that since the beginning of the year, the price of petrol has increased significantly from $2.50 to $3.90 recently -- to $2.90, sorry, recently. And these are the major drivers in terms of the size of the market. After that, we'll have to see what happens with the pricing in the market. And with the development of e-cigarettes and oral tobacco in the market.
Sure. If I can ask a question on leverage. So you are reiterating your leverage reduction targets. And investors are worried about your high leverage in the context where the industry is changing so rapidly. Is there an opportunity for you to accelerate your leverage production target, maybe by reducing dividend growth or through working capital improvements? Or -- there is a margin gap between you and Altria in the U.S. So when can that be closed?
Yes. We are. We have plans to even strengthen our cash generation from next year onwards. We have -- I think that we have opportunities. We guide this year that we will be above 9% conversion. We think that for next year onwards, we can be a bit more optimizing working capital and CapEx and bring this target to at least a [ 95% ] growth. And this will give us the reassurance of the GBP 1.5 billion of free cash flow after dividend generation. You have to consider that over time as the profit grows, this number also will be growing over time. So we are pretty confident that with the combination of strong cash generation, like this BAT today with the stronger earnings that we have already guided, we will be able to deliver at 0.4. And by the end of 2020, we should be very close to the 3 tiers in terms of ratio.
Sure. And if I can ask one last question around Velo relaunch in the U.S. So the margins on your smokeless tobacco products are pretty high. Is there a risk that Velo is going to cannibalize your own business before it goes into the growth opportunity which is available in the market?
No, we see that there is a lot of complementary because of the new movements of users from consumers, so we don't see this as a direct cannibalization at all. It's very different from THP. And we -- actually, we have actually very strong margins also in these type of products. I know that in the U.S. combustibles is also high, but we are less concerned about that because we don't see this level of cannibalization being that much.
We are now over to the line of Adam Spielman at Citibank.
So my first question is really about marketing spend. You said that in the first half, U.S. profits were perhaps a little bit higher than usual because of reduced marketing spend. And then you sort of said in the second half, marketing spend will increase in the new categories. So one question is, are you able to quantify in any way at all, the impact of the reduced marketing spend in the first half and equally in the second half? So that would be my first question.
Adam. Actually, we didn't reduce marketing investments in the U.S. in the first half. What we were saying is that in the second half, we have further increased market investments. The performance in the U.S. was pretty much driven by the fact that we have a very strong pricing with less discounts, improving mix. We grew value share by 30 basis points, so this all contributed. And on top of that, we had some timings of one-offs that I would say, related to the Vype recall. Remember that we are lapping a semester-less deal where we had to stop selling the product, and at the same time, we had the write-off costs related to the recall. And on top of that, we had MSA charts, movements that also impact favorably the U.S. in the first half. What we said is that in the second half, we don't have these one-offs in the first. And on top of that, we're increasing further the investment behind new category, in the U.S. specifically.
Are you able to quantify that in any way at all? Are you -- the increase in investment?
Well, the only thing I can say to you is that these one-offs that we have in the -- if you strip out the one-offs in the first half of the U.S., you still would give us a kind of high single-digit operating profit. But it will not be the double-digit that you are seeing in the report today. But you'll have to take into consideration as well that there was some movement in terms of one-offs in other regions. So I expect at the end of the year, that we'll have a much more balanced profits across the regions in BAT.
And I suppose, that perhaps answers what was going to be my next question, because my next question was going to be if your marketing spend goes up in the second half, is there anything to offset that with lower costs to ensure that you get your guidance? And so is there [ half-year ] one-offs? Or how should we think about what offsets the increase in marketing?
Adam, this is Jack. I think your question is very important. I mean, what we want to do is to invest the right amount of money in the business. We have new launches that are coming through, and want to make sure that we'll put sufficient resources related to that. The second point is, we're very committed to delivering the financials for the full year. And we have the space to continue to invest more in the second half of the year. And we believe that the offers that we have for the consumers for the second half are very powerful to look at the different segments that we're going after. I think that we have the possibility to deliver the financial results and to invest. Of course, as you are saying, we are doing huge efforts in terms of cost base. There is a reorganization of the company that we are undertaking, as we speak. But also, we reduced the number of SKUs, as I said, in combustibles. We're reducing the number of SKUs in new categories, and we are making sure that we're sweating our cost base as hard as we can.
That's very clear, Jack. So one final question for me. I noticed that if I look at your new category sales, half-on-half, they're quite volatile. So an example of that is, that if I think about e-vape let's say, in the U.S., it was quite low in the first half of last year, but it jumped up a bit. And sequentially, it's fallen a bit. I guess that has to do with pipeline effects. And I was just wondering whether -- and I assume there are going to be more pipeline effects in the second half as you launch new products in Japan and also some of the new e-vape products globally. And I was just wondering if you could sort of talk to us in any way, if you can somehow disaggregate what is sort of really going on an underlying basis versus pipeline filling? Because as we do our models, it's quite confusing, seeing this volatility in the line items.
In this specifically in the U.S., the major driver for the variance that you are referring to is related to Vype recall. Because if you strip it out, the numbers will be very different when you compare second half 2018, first half of '19. So you have to take this into consideration. There is elements of pipeline, but I don't think that the element of pipeline would be as strong as to justify any major swings the one -- as the one that you refer to.
What you have to do, consider then is -- that's why we gave a guidance of 30% to 50% in average in the years to come. What is important to consider is there is a lot of fluctuation related to new launches, our new launches, competitive launches. That creates a distortion on the monthly basis. Nonetheless, we confirm, and we affirm that we're going to deliver around 40% -- around the middle of the range of 30% to 50%. That's important to us and we're putting a lot of efforts related to that. I vividly remember your question at the Investor Day where you said that we have to make sure that we can balance additional investment and not only delivering financial results at the end of the year. That's what we are doing. I took your advice, Adam.
We are now over the line of David Hayes at Societe Generale.
So I'm going to give the first of 3 questions, if I can. Firstly just on pricing, the outlook for the full year. I wonder whether you can tell us what percentage of pricing you've already taken for this year? And what the outlook is for pricing, therefore, for the full year? Secondly, you just mentioned, again, about the cost savings and the reduced SKUs as you rationalize the portfolio. Is that having any effect on volume negative to deal with -- will that have any effect on volumes negative in the second half as you view that process? And then thirdly, just on the FDA update on nicotine amounts. So both you and/or -- obviously seem very confident that there won't be any more updates before the end of the year. I just wonder whether you take that sort of to mean anything in terms of what's going to be the outcome of any proposals.
Okay. Sorry, I was trying to get the first question first and the others. But I'm going to pick up two, the one -- the first one and the last one. The second one, I didn't hear so I leave it to Tadeu. The first one was related to the pricing, where are we in the pricing? We are at 78% of our pricing in the first half of the year. So that's a very strong position, and we're happy with that position. So still some to go for the second half of the year. The second thing is related to the FDA. Very clearly, as we said during the presentation, I would say, the doomsday scenario that has been spoken about in the last 3 years is not yet materializing. We are very confident in the robustness of the process of the FDA in terms of our regulatory framework. And we do not hear, at the moment, any significant movements related to neither nicotine reduction, nor menthol ban. Of course, there will be some things happening in terms of e-cigarettes in the U.S. market. But we consider -- and we consider rather than but -- and we consider that we will be in a good space for the new deadline that has been fixed, which is the summer of 2020. I think that we have a robust portfolio that continues to grow, and we have opportunities to grow further and beyond, as I said, for e-cigarettes, especially for Alto, we have a brand awareness of around 30% and an active distribution in the market of around 25%. That gives us a lot of space to invest and to grow the brand in the U.S. The third question, I didn't hear, I'm sorry, because I was trying to get the questions one after the other. Tadeu?
I think that you can confirm, I think that you are referring to the volumes and implication of the volumes on price due to the pricing? Is it right?
No. It was more actually about the SKU rationalization, the portfolio rationalization which, obviously, is helping the cost save generation. It's just that as you go through that process does that have a negative volume impact for either -- have you seen that? Or does it have an impact negatively in the second half as you rationalize the portfolio and take some of those SKUs out of the market?
Yes, the -- we don't see any major impact from rationalization of the portfolio in volumes. What is -- what we are seeing is that there are some specific markets where, for different reasons, mainly related to tax increase. And we are losing volume in the very low value, low-margin markets, like, for example, Bangladesh, where we had an excise increase in the second half of last year, which raised the floor of the [ mark ] by 30% and the elicit trade grew tremendously, sharply in that period. And the market went down 10% and we are market leaders there. Venezuela, where we also are market leaders, and there is a massive issue related to the economic and social problems in Venezuela right now. In Asia, it also took some pricing in the low ends are hitting us where we were leading in the low end of the segments. So this is a drag that could add up to -- close to 2% of our report, 3.5% now. And the big part of this drag will probably continue over time, because these are situations that we don't see unwinding for the rest of the year. But as I said at the beginning, they are very low margin, low value, and there is minimal impact in terms of the group financials related to those volumes. In terms of the portfolio rationalization, we are not seeing any downsized material related to that.
We are now over to the line of Nico Von Stackelberg at Liberum.
You basically said that you were not aware of plans for the FDA to advance the rulemaking process on nicotine. Now the FDA or former members of the FDA have publicly said that they expect a preliminary rule is to leave the FDA for HHS. And Altria also said the FDA may publish a nicotine rule by the end of the year. So just trying to appreciate maybe addiction is coming into play here. But -- so what's the difference between your view and Altria's and sort of what's been said? Then I have 2 more questions. So maybe just one at a time.
Yes. Thank you very much. Yes, I mean, the FDA, as we said, did not make any moves related to neither nicotine nor menthol, nor we do not hear anything about that very clearly. In terms of nicotine -- in terms of e-cigarettes, sorry. Of course, I mean, we've always said that we need a more efficient regulatory environment related to e-cigarettes, especially related to the epidemic of underage usage. We have been always extremely clear that we will not have some activities in there and that our marketing code that we have in the company is very strict related to that. We never have been ever considered as promoting our products to underage smokers or underage users, and we'll continue to do so. In terms of further regulatory activities related to e-cigarettes, we are very well equipped with the approach that we have in the market to respond to these kind of evolutions. And as, for instance, the evolution that happened related to 2020 and the new deadline, then we're ready to cope with that. We are a strong company with a very strong R&D and with very strong capabilities in the U.S. to respond to that environment.
Okay. And next question is on cash generation in general. So you've given some numbers here. And they are quite adjusted. And I was just sort of wondering if you could maybe help out on just a statutory basis, maybe, or statutory on a constant rate basis. But could you just help me with the cash flow from operations in terms of where you see that by -- through the end of the year? Of course, MSA payments, I'm not interested in the MSA payments. I've realize that was a bit technical for the first half, but the working capital was a little bit lower than I'd expected. So just can you help me square that, please?
Yes. Nick, we have a distorted and difficult to read of the cash flow because of the MSA payment that was done in December '17. That impacts the first half of last year when you compare this period with the previous periods. But if you take this apart, and we try to do that when we report on a normalized base, that is basically one movement, a higher movement in terms of working capital. This is basically inventories movement. Our conversion this time was around 66%. Last year was slightly better, was around 70%. As we expect it should be ahead of 90%. I would say, I'd expect to be very close to between 94%, 95% for the end of the year. And from next year onwards, like I said before, we are targeting a threshold of 95% in terms of conversion of operating cash flow.
Excellent. And finally, just a quick one. We've discussed this before, back in March. But the PMTA for glo. I was just sort of wondering, do you have an update here? And I mean, it seems like it's taking a little while to get that application through. Why is it taking so long? Is it sort of like thinking around which product do you PMTA? Or -- yes, what is the general thinking there?
PMTA of THP?
Yes, exactly. THP in the U.S. So glo, yes.
It's a good question. I mean, we already have a product that went through PMTA, so we are covered with that. I do consider that the objective is to have the best product that is put in the PMTA, and it takes a bit of time. I'm not concerned related to that because the market in the U.S. is already very strong in terms of new categories. And the leading categories are, by far, e-cigarettes for sure, where our performance is improving. And oral tobacco, that is something that we see as a very big potential in the U.S. So I'm not concerned related to that for the time being.
Before going on to the next line, which is Richard Taylor at Morgan Stanley. [Operator Instructions] And Richard, over to you.
Firstly, can you give us an update on the developments for modern oral in Europe ex Scandinavia? So any positive developments we should be thinking about there?
First of all, I mean, we are having a very good performance in Scandinavia, even in traditional snus markets, where snus can be up to 50% of the total market. It's a category that is growing because there is a consumer need related to that. The second thing is from the experience that we have in Switzerland, we saw that the category is growing very fast. And now that, that category of oral tobacco is bigger than THP in Switzerland. Last point, as I said -- as I highlighted in the presentation, we are doing some trials in Russia at the moment. And we see that after some weeks, we have 25% of the category. So we do consider that we have extremely good products. We have very good IP also related to these products. And we have the capability to rollout. The benefit of this category, as we all know, there is no devices and the margins are extremely good. So we do believe that the potential outside of Scandinavia is big. And that's why we're launching Velo in the U.S., and we expect strong results for the second half of the year related to Velo launch in the U.S.
That's very helpful. And then, how should we think about the phasing of the investments in terms of U.S. versus the rest of the world through the rest of the year, please?
This would be a competitive information. So I would not go there. But what I can reaffirm is that we've invested more in the first half of the year. Also slightly more in combustible business in order to make sure that we continue to do the right job in combustible business. So we did not reduce the investment in combustible business. We've increased it slightly in the first half of the year. And then we will roll out the different plans that I've presented earlier through the presentation. And it's not a question of allocation of resources between the U.S. and the rest of the world, but more covering the consumer needs and doing the right launches for the different new innovations that we have. We will have also, for 2020, a stronger pipeline in order to be successful in the market.
Okay. And that's very clear. And then these 2 questions are related. So the 2 last questions are related. It would be very helpful if you can give us guidance on your expectations for net debt-to-EBITDA for the full year on a mark-to-market basis. I can see the currency-adjusted basis, but it will be very helpful on a mark-to-market thesis. And then, I suppose, just as a follow-up to Gaurav's question earlier. Jack, at your Investor Day, you said you wanted to prioritize deleveraging. On the write-down, you're saying that the huge debt allows me to bring a sense of urgency and focus to the people of BAT. It looks like growing EBITDA faster is your plan A. But it isn't really speeding up the deleveraging. So what are the options should we be thinking about? Is there accelerated cost savings? Is it something with the dividend? Is it in brand sales, asset sales? It would be great if you could give us some color into your thought process here, please.
Yes. I mean, let's start from -- let's start from the beginning. First, we are doing a lot of efforts in term -- I will not give breakdowns of direction related to that because that's forward-looking. But we're doing lots of efforts in terms of our cost base. As I said, we're reorganizing the company to be more effective and efficient organization, and to declutter the organization. That will bring some savings. We are doing a lot of efforts in terms of reduction of our CapEx moving forward, because we've done a lot of investment in the last 2 years in terms of CapEx. Now it's time to harvest on that. And we're going to continue to reduce the number of SKUs in both new categories and combustibles in order to free up some cash. All the other options, I'm not going to comment on because it's not the right time to do it.
Just on your request, Richard. I can even tell you where we stand now, but it's really not helpful because BAT is a very cash-generative company at the second half of the year because we are just lapping the MSA payments. And a lot more of cash will come -- will be generated until December. And also, we expect to have a stronger second half in terms of earnings compared with the first half. And -- so we are on track to deliver the GBP 1.5 billion free cash flow after dividends. And with the stronger earnings in the second compared with the first half, deliver the upper range of our guidance in terms of earnings, that we'll be able to [ delever ] at the 0.4 at currency neutral. But as you likely point out, the December -- 31st of December is a key date for us in terms of exchange rates. So everything that I can say from that is pure speculation.
We have time for one final question. So we are going to go to the line of Gerry Gallagher at Deutsche Bank.
I had more of a comment to make, rather than the question. I couldn't let today's call go by without mentioning Ben on behalf of the investment community. On behalf of everybody on this call, and those that can't make it, I just want to offer Ben all the very best for long and fulfilling retirement. And I'm very conscious that a number of people on this call haven't been involved in BAT as long as I have, and a number of other people who are have with the company. So I just wanted to outline for those people what Ben has been up to, through his career at BAT, just so that they can understand the impact and the very positive impact he has had on the business. Now as Jack said, Ben joined in 1990, but I think it's important for people to understand that as -- Ben is far -- been far from a career accountant. He's had roles in marketing. He's run the business in Pakistan and Russia. He's run Corporate Affairs. Ben was in charge of merging Rothmans and BAT in 1999, which is a transaction that happened very quickly after the demerger of the insurance businesses in 1998. And my recollection of the time was that, that deal was kept incredibly tight amongst the few people at BAT. And for Ben to take that up and do the excellent job of integration he did, I think, is extremely commendable and noteworthy. That was one of BAT's major acquisitions we've seen over the last 20 or 30 years. Ben has also been in charge of strategy, M&A and IT. And in 2004, he went off to run the European business, before becoming the CFO of the business in 2008, 11 years ago, and that's something that I will come back to in a second. Clearly, a CFO can't be judged and shouldn't be judged by the numbers alone. Far from it. But I just want to highlight one, which is one that most people would say Ben has got most control over, and has had also in a number of his roles in the past. The year before Ben became CFO, the margin of BAT was 30.5%. The margin at the end of 2018 was 42.6%. And I think he's, as we've heard today, set the business up to be in a position where post his retirement, the business is in good shape to continue to drive the margin of the business higher, whilst maintaining the momentum sustainable in the top line of the business. I think that needs to be commended. One final point I do want to make. You may recall when [ Ritander ] retired, I said to Ben that he should be very worried, because I've known him longer and he's been around longer in terms of exposure to the investment community. Well, the reality is, I've got nothing that I can say that can -- to wind Ben up, but I think the reality of that, and the reason for that is you've been a decent bloke, and I've had a lot to do with you over the years, but I have enjoyed our time together. As a CFO of a business like BAT over 11 years, you've had 22 half year and full year results. But the reality is, you've had a lot more than that. If nothing other than before very recently, you have the quarterly updates as well. I hate to think how many questions you've had from people on this call and people in the past and you've handled them all with extremely good grace, when we all know that some of them were, if not stupid, pretty close to stupid. And the grace with which you dealt with them on each and every occasion is to be commended. So with that, Ben, my very sincere, and on behalf of everybody, sincere wishes for you, your family as you move forward into the next stage of your life. Thanks very much, Ben. Good luck.
Thanks, Gerry. I appreciate your comments.
Thank you very much, Ben. Yes, an amazing career with BAT and best of luck for your retirement and using your magnificent new boat. Thank you very much for listening. If you have any follow-up questions, please contact the Investor Relations team. I'm looking forward for a strong second half and delivering on the full year guidance we gave in March. We look forward to speaking to you in February next year at our preliminary results announcements. Thank you very much.