British American Tobacco p.l.c. (BTI) Full Year 2023 Trading Update Conference Call (Transcript)

British American Tobacco p.l.c. (NYSE:BTI) 2023 Full Year Pre-Close Trading Update December 6, 2023 3:30 AM ET

Company Participants

Tadeu Marroco – CEO

Javed Iqbal – Interim CFO

Victoria Buxton – Head of IR

Conference Call Participants

Jacob de Klerk – Redburn Atlantic

Owen Bennett – Jefferies

Rey Wium – SBG Securities

James Edward Jones – RBC

Gaurav Jain – Barclays

Jonathan Leinster – Société Générale

Simon Hales – Citigroup

Operator

Hello, and welcome to the BAT 2023 Second Half Pre-Close Conference Call. My name is Alex, and I’ll be coordinating the call today. [Operator instructions]. I’ll now hand it over to your host, Victoria Buxton, Head of Investor Relations. Please go ahead.

Victoria Buxton

Good morning, everyone. I’m Victoria Buxton, Head of Investor Relations, and with me this morning is Tadeu Marroco, our Chief Executive, and Javed Iqbal, our Interim Finance Director. Welcome to Our Full Year 2023 Trading And Strategy Update Conference Call. I hope you are all well, and I’d admire to thank you for taking the time to unite us this morning.

Before we begin, I need to draw your attention to the cautionary wording regarding forward-looking Statements, as well as the notes and disclaimers contained in the trading update. Unless stated otherwise, our comments will focus on constant currency adjusted measures, and all our share data is year-to-date average to September 2023, versus full year 2022 average. I’d also admire to remind you that there’ll be an opportunity to ask questions later in the call.

And with that, I’ll now hand over to Tadeu.

Tadeu Marroco

Thank you, Victoria. Good morning, everyone, and welcome. I’m pleased to reiterate our full year 2023 EPS guidance, driven by our broad-based performance across categories and markets. Today, in addition to our pre-close trading update, I would admire to begin by sharing some key highlights of the comprehensive strategic review we have now completed. I’m clear that our early commitment to a multi-category strategy is right. I’m also clear that we must continue to make active choices to sharpen our strategic execution through delivery of fewer, bigger operational priorities. To accelerate the next phase of our transformation journey, we are now committing to ‘Building a Smokeless World’. We’ll deploy our global multi-category portfolio to actively encourage smokers to ‘Switch to Better’ nicotine products, realizing the multi-stakeholder benefits of ‘A Better Tomorrow’. This commitment is demonstrated by our new ambition to become a predominantly smokeless business, with 50% of our revenue from non-combustibles by 2035. With only 10% of the world’s 1 billion smokers currently using new category products, the long-term opportunity for growth as we deliver on our transformation is vast.

Consistent with our vision to ‘Build a Smokeless World’, and in combination with the current macroeconomic headwinds impacting the US combustibles industry, in 2023 we’ll take an accounting, non-cash, adjusting impairment charge of around £25 billion. This accounting adjustment mainly relates to some of our acquired US combustibles brands, as we now appraise their carrying value and useful economic lives over an estimated period of 30 years. Accordingly, we’ll commence amortization of the remaining value of our US combustibles brands from January 2024. This non-cash amortization charge will be treated as an adjusting item and does not impact future capital allocation decisions. Work is ongoing as part of our normal year-end process, and we’ll disclose advance details at our full year results in February.

Building on our progress in 2023, I’m clear that now is the right time to advance invest to accelerate our transformation. We are making active investment choices to reinforce our US business, accelerate innovation momentum in Heated Products globally, and improve capabilities that uphold our strategic delivery. These investments will impact in 2024, and alongside continued macro-economic pressures in the US, we now expect low-single digit growth in revenue and adjusted profit from operations on an organic basis at constant rates. Looking forward, we expect accretive new category growth and stable combustible revenue to continue to drive total nicotine industry revenue growth. This underpins our medium-term guidance, where we expect a progressive improvement to 3% to 5% revenue, and mid-single digit adjusted profit from operations growth on an organic basis at constant rates by 2026. We’ll continue to reward shareholders through our strong cash returns, including our progressive dividend, and once the middle of our leverage range is reached, we’ll evaluate all opportunities to return excess cash to our shareholders.

Turning now to current trading. Benefitting from our global footprint and multi-category portfolio, we expect to deliver 3% to 5% percent organic revenue growth, and mid-single digit adjusted diluted EPS growth. Our earnings guidance includes the divestment of our business in Russia and Belarus in September. In new categories, we continue to drive strong volume and revenue growth, led by Vuse and Velo. However, due to the continued weakness of US combustibles, we now expect to deliver group organic revenue growth at the low end of our 3% to 5% guidance range. I’m particularly pleased by our continued strong performances in AME and APMEA, which together we expect will deliver close to double-digit revenue and adjusted profit from operations growth. The continued strength of these two regions, driven by both combustibles and new categories, gives me confidence that once we have restrengthened our US business, our global multi-category strategy will deliver long term sustainable profitable growth.

Turning now to one of the key priorities I set out in the summer, to drive profitability in new categories. After significant upfront investment, since 2020 we have reduced new category losses by £1.1 billion. As a result, we now expect our new category contribution to be broadly breakeven in 2023, and to continue to be profitable3 moving forward. Vapor and Modern Oral are already delivering profitable growth. This continues to give me confidence that we’ll profitably transition our portfolio from combustibles to new categories. In Vapor, Vuse continues to extend our value share leadership, reaching close to 37% value share in key markets, up 100 basis points. Vuse continues to deliver strong revenue growth, driven by an increased number of consumers, robust pricing, and the benefit of growing cross-category poly-usage. We see the fundamentals of the Vapor category as a reduced risk alternative for adult smokers as strongly positive. More adult smokers are switching to Vapor than any other new category, with Vapor and Heated Products equally effective at encouraging smokers to switch. In addition, positive demographics uphold the long-term sustainability of the category.

In the US, our PMTAs for Vuse Alto’s two Tobacco flavor products remain under FDA review. These applications advance build on the foundational science of our successful tobacco flavor submissions for Vuse Solo, Ciro, and Vibe, which received marketing authorizations in 2021 and 2022. We are confident that a successful outcome of the Vuse Alto PMTAs remaining under review with FDA, will be received in the coming months, consistent with the Agency’s most recently communicated timeframe. We are challenging the marketing denial orders received for Vuse menthol variants, including most recently for Vuse Alto. We have received stays of enforcement for FDA’s denial orders. This means that these Vuse menthol products can continue to be marketed and sold while the judicial review process continues. We believe appropriately regulated, flavored vaping products, including menthol, are critical in supporting the migration of adult smokers from combustible cigarettes. Indeed, while FDA did not inquire long-term consumer switching data as part of the PMTA applications for Vuse, interim results of our 24-month longitudinal research for Vuse show that the proportion of Vuse users completely switching from combustibles was higher among those using menthol-flavored products than those using tobacco-flavored products. Globally, the modern disposables segment is driving incremental Vapor category growth. We continue to approach this fast-growing segment in a responsible way in regulated markets, consistently implementing our global under-age access prevention guidelines and take-back schemes for responsible disposal.

Vuse Go is now available in 59 markets, and our recent launches in emerging markets, including Colombia and Peru, are delivering positive results. We expect our Vapor footprint to continue to grow, as regulatory developments in new markets increasingly allow smokers to access authorized, reduced-risk products, which enables our entry. In Modern Oral, Velo continues to deliver strong volume-led revenue growth and increasing profitability. Modern Oral is a fast-growing category, driving our volume share of Total Oral in key markets up 110 basis points, reaching 8.5%. The category is also developing quickly outside the traditional oral areas of Scandinavia and the US, with newer markets now representing a quarter of industry volume. While our global volume share of Modern Oral is down 210 basis points, driven by the large US market, we are encouraged by the strong results from our recent Velo pilot in New York, including a more premium brand expression and design. In addition, we remain confident of securing the PMTA for our Europe-leading Velo 2.0 platform to uphold our longer-term competitiveness in the US. Elsewhere, Velo continues to perform strongly, maintaining its clear category leadership in Europe, with 67% volume share in our top four markets. And we are taking advance steps towards broadening accessibility of our reduced-risk products through unlocking emerging market opportunities. Velo continues to deliver strong growth in Pakistan, driven by increased consumer numbers, and with average daily consumption now close to five pouches per day. In addition, we have accelerated our national rollout in Kenya after a successful pilot assess.

In Heated Products, glo’s performance in 2023 has been disappointing. Slower industry volume growth, increased poly-usage, particularly into the Vapor category, together with heightened competitive activity in Japan and Italy, has impacted our performance. As a result, our organic volume and revenue growth has slowed in the second half, and our volume share is down 100 basis points in key markets to 18.2%. Although glo maintains its strong number two volume share position globally and continues to perform well in a number of AME markets, including Poland the Czech Republic, since becoming Chief Executive, I have been clear that we need to do more to reinforce our innovation pipeline, to drive momentum in longer-term performance. While still early days, I’m excited by the accelerated cadence of our innovation pipeline in both consumables and devices. glo Hyper Air is performing in line with expectations. In addition, we have recently launched veo, a range of non-tobacco consumables, in 10 markets in Europe, gaining first mover advantage in this new space, with encouraging early results. I look forward to sharing more details on our innovation pipeline next year.

Now, turning to combustibles, where our global volume share is flat year-to-date, with value share down 40 basis points, reflecting the impact of our commercial actions in the US, partly offset by stronger performances in AME and APMEA. In the US, combustibles industry volume continues to be impacted by the volatile macroeconomic environment, with premium segment share showing recent signs of pressure after a more stable first-half. Although our volume share is down 10 basis points year-to-date versus full year 2022, I’m encouraged that our commercial plans are delivering early signs of volume share recovery, with a 50-basis point improvement between January and October, driven by Newport, Natural American Spirit, and Lucky Strike. While returning our US Combustibles business to consistent value growth will take time, we are confident that the actions we are taking will reinforce our portfolio over the longer-term. In California, the impact of the flavor ban continues to evolve, with consumers accessing flavored products through illicit channels. We can clearly see the lack of effective enforcement on the ground, with overall nicotine consumption broadly stable year-to-date. Due to our menthol skew, 45% of our combustible portfolio had to be delisted at the end of last year. We activated commercial plans, and are adjusting for a 13% pre-ban rate of refuse, our underlying retention rate in combustibles has been over 80% and over 90%, including the impact of elevated menthol volumes in neighboring States.

Outside the US, our Combustibles business has continued to perform well. In AME, our volume share gains and pricing have driven strong revenue and profit growth. In APMEA, the impact of excise-led volume declines in Pakistan has been more than offset by our pricing across the region, and we expect 2023 to be another year of strong revenue and profit delivery. This demonstrates the benefit of our global footprint, well-balanced portfolio, and our ability to deliver in challenging environments. BAT is a highly cash generative business and we expect to deliver close to 100% operating cashflow conversion in 2023. We are making progress towards reaching the middle of our guided 2 to 3 times adjusted net debt to adjusted EBITDA leverage range, and expect to be close to 2.7 times by year-end. As we set out at half year, we continue to seek and evaluate all opportunities to improve balance sheet flexibility, including disposals and the exit of non-strategic markets. We remain committed to a progressive dividend, and once the middle of our leverage range is reached, we’ll evaluate all opportunities to return excess cash to our shareholders.

Now, turning to our strategic update. building on our strong progress to date, and to continue to deliver long-term sustainable growth and returns, we are now focused on sharper strategic execution through delivery on fewer, bigger operational priorities. In addition, we are building a more collaborative and inclusive culture, as we drive a more agile and modern BAT. To steer us towards these two objectives, we have refined our strategic direction and ambition. This will drive our priorities and future choices. First, we’ll drive a step-change in our innovation capabilities and speed to market. We have all the right foundations in place. We committed to a multi-category strategy from the outset, recognizing that consumer tastes and preferences are not homogenous. In less than a decade, we have built a portfolio of three powerful brands, Vuse, glo, and Velo, delivering more than £3 billion of revenue. And after significant early-stage investment, I’m particularly pleased that we now expect our new categories to be broadly breakeven in 2023, and be profitable from 2024 onwards.

Building on our deep cross-category consumer insights, we’ll deliver an enhanced innovation pipeline, by advance investing in our people, our science, our IP, and our capabilities, driving an innovation-focused culture. We’ll continue to leverage our centers of excellence in Southampton, Trieste, and Shenzhen, in order to access wider internal and external strategic partnerships, focused on developing consumer-relevant premium propositions. Second, we are making active choices to accelerate our transformation. We’ll leverage our market archetypes to guide how and where we deploy our products and allocate resources to deliver long-term value creation. In the US, we have now completed a deep and thorough review of our business. We have begun and will continue to invest in sharpening our portfolio management, strengthening our route-to-market, and advance leveraging our broad, digitally-enabled, revenue growth management capabilities. We are confident this will drive quality growth over the longer-term and ensure greater resilience through economic cycles. In Heated Products, we continue to invest to rejuvenate our momentum, with an enhanced innovation cadence in both devices and consumables. The launch of our new non-tobacco consumables range, veo since September is an early sign that this focus to deliver first-to-market consumer-relevant innovations, is yielding results.

We are also taking action to reinforce our organizational capabilities. We are committed to playing a more proactive role in sharing our science and insights to uphold the development of new category regulation and our contribution to tobacco harm reduction globally. This is incredibly important for both the future development of new categories and also to ensure the proper functioning of existing new category markets. The recent proliferation of illicit disposable Vapor products in the US is a clear example of the importance of effective regulation and enforcement. We calculate that these products now represent over 60% of the US Vapor market, with over 90% of the segment estimated to be in non-menthol flavors, where we are unable to engage. In recognition of the critical role regulation is playing for the future of new categories, as part of the management board changes announced in June, we created the new Corporate and Regulatory Affairs function. The success of our transformation will also be accelerated by a more collaborative and inclusive culture, which is at the heart of my leadership agenda. I’m delighted to welcome Cora Koppe-Stahrenberg to the new role of Chief People Officer. Cora brings a valuable external lens from a diverse range of transforming industries, and she will be focused on driving a winning culture and a more agile and modern BAT. And finally, we are increasing investment in 2024 to ensure our long-term sustainable growth. While we expect continued headwinds to impact our US business next year, we’ll build on our broad-based performance in 2023, by making the active investment choices I have just outlined. We are confident that these are the right near-term investments to ensure long-term quality growth and accelerate our transformation. I look forward to sharing more detail on our refined strategic direction, including the KPIs against which we can be measured at our full year results in February.

Thank you for listening, and I’ll now open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jacob de Klerk of Redburn Atlantic. The line is now open. Please go ahead.

Jacob de Klerk

Morning, guys. Thanks for taking my questions. Just a couple. Just going back to your smoke-free target you said for 2035, will the contribution be evenly split in three categories or continue to be lopsided to Vapor? And then just secondly, how do you expect to preserve profitability in the NGP category if you’re stepping up investment into 2024 specifically behind the DHP category?

Tadeu Marroco

Yes, thank you for the questions, Jacob. Well, look, what we are seeing now currently is that the phenomenon of poly-users is an indication that the smoke-free will be adopted through the different categories. There is clearly, in terms of number of consumption, the more use of Vapor currently, if you take out of the estimated 100 million consumers of these non-combustible products, you have a bit of 60% plus of those users using vaping. But we are also conscious that a lot of them are probably using amongst those categories. So, I don’t think that we can highlight one specific category, and that’s a play in line with our strategies since the outset to be a moot category company, because we always believe because consumers are different, the regulatory environment is different, that we would need to activate the three categories at once. So, I think that we’ll be very well prepared for this future that we have already materialized through happen at this point in time. In terms of NGP, we are – what we are saying is that we expect profitability to come from 2024. So, we’ll be using some of the profit reinvesting back in the new categories, mainly on the Heated Products category specifically, but net-net, will still be a positive outlook in terms of profitability in new categories for 2024.

Jacob de Klerk

Brilliant. And can I just squeeze in one last one? Sorry. There was no cite this time of your £5 billion revenue target in 2025 for NGPs. Is this target still maintained or will the exit of Russia impact this?

Tadeu Marroco

Yes, no, for sure that Russia is a headwind if you want. But we are – we have the ambition to get to the £5 billion by 2025. The major headwind that we’ll be facing is really not the divestment of Russia, but is the continued enhance of these illegal products of modern disposal in the US. US is a big part of our revenue that we have achieved so far. And this just makes it more difficult, let’s put it that way. For sure that the other side of the coin is if we start seeing enforcement, as you would expect in the US from the FDA, this could be a very strong white space that we’ll be ready to approach. But the targets and the ambition is there.

Jacob de Klerk

Thank you very much.

Operator

Thank you. Our next question comes from Owen Bennett of Jefferies. Your line is now open. Please go ahead.

Owen Bennett

Morning, guys. Hope you’re all well. I had a couple of questions, please. The first one on the incremental investment, would you be able to say how much of that incremental investment will be on Heated Tobacco? And then can you outline where on heated that investment will be going? Is it likely to be on additional discounting, or will it be below the line on things admire in terms of education and building these consumer relationships?

Tadeu Marroco

Okay. Owen, the incremental investments, we are highlighting three areas, and they are not very different from what I have been saying. In reality, you’ve heard consistently from me that we – since I took over as the CEO, that there are clearly an a need to reset the US business. So, a lot of these investments will be us continue to build the commercial plans that are needed in the US to change the US into a more consistent long-term business for the group and not just on the making the portfolio more resilient in terms of regulation and economic cycles, but also investing in trade markets, covered, and the investing in the digital capabilities in the US and some other areas that will reinforce the business. So, a lot of these investments will carry on in the US. And the Heated Products is the one that I have singled out since the beginning, because we have a strong performance in new categories overall, and mainly specifically in the Vapor and the Modern Oral. We are very pleased with the progress that we have been able to make in those two categories. But clearly, Heated Products are not there. So, the investment will pretty much be aligned with leveraging some innovations that we want to bring to the market and how you make them more accessible for consumers. We are in a very – we want to reinforce where we play in terms of portfolio of the Heated Products. And the first step has been the introduction of this non-tobacco flavors products in some markets in Europe. We’ll continue to roll out this next year as the ban in flavors tobacco heating start to be adopted by more European markets. So, this will be part of the investment, but also related to some new innovations. For sure that we also want to step up our investments around IPs because this is one area that has been putting us – have constrained us in the past. And that’s why I was referring to our center of innovations in place admire Shenzhen and investments that we are making in terms of leveraging internally and external partnerships to ponder into more compelling products that we could launch in the market.

Owen Bennett

Well, thank you, sir. And then the next question is just on the 2024 guidance, what are you assuming for US vape in terms of, are you assuming any meaningful action on disposables? And then are you also assuming your tobacco PMTA gets approved and you perhaps would see some acceleration on the back of that? Thank you.

Tadeu Marroco

Okay. Yes, 2024, the first point I would admire to highlight is that we expect the two regions outside the US to continue to deliver strongly, and we also expect the new categories, admire I answered in the question before, to make inroads, not just in terms of revenue, but more important in terms of profitability as well. So, these all going in the direction that you would expect to go. There is no doubt that some of the commercial plans that we have start addressing in 2023, you are already seeing the reflection of that in terms of our share performance from January to now, which I disclosed in the statement, has an impact in terms of carryover for 2024. And on top of that, we are answering your question, not assuming any meaningful enforcement from the FDA, because unfortunately, we haven’t been seeing this up to this point in time. Clearly, the FDA, we expect them, first of all to infer the process of the PMTAs in Vapor. So, in concluding that, they’ll be able, let’s put it that way, to start publishing a complete list of legal products. And they haven’t done this so far, which creates a lot of uncertainties in terms of enforcement, because a lot of – when you visit key accounts, for example in the US, they’re still doubtful if that product will be approved or not, because they are still pending some definition from the FDA. So, the first thing is, the FDA needs to be a bit clear in terms of what’s illegal or what’s allowed to be in the market, which they haven’t done. We also believe that they need to really dramatically enhance inspections of retailers, distributors, wholesalers, hold law breakers accountable, which we are not seeing yet employing its most powerful enforcement tools that they have, and eventually drive effective enforcement with coordination with other government law enforcement agencies. So, we are not seeing any of that at this point in time, and improve our assumption for this scheme, which is, underpinning the 2024 is that we are not seeing any meaningful FDA enforcement. For sure, that if we are wrong on that and all of a sudden we start seeing them be much more active and hence open up space in that space in that market, we’ll be benefiting from that. And in terms of the PMTA, we are very confident that they will be approving our tobacco flavors. They took – it seems that they have took kind of right blank approach in terms of menthol, denying all products. They haven’t approved any products of menthol, which is very frustrating to say the minimum because this goes against even their belief in terms of risk continuing and migrating consumers out of cigarette. They just make this more difficult. We hope that with the expedited process of PMTA with some technology to hinder use of youth, they can reassess that and bring it flavors back. But we are very confident that our tobacco flavor products will be approved in the coming months.

Owen Bennett

Okay. And then just on that, with the – I’m assuming kind of you referring to Bluetooth technology. As I grasp, you were hoping to get a new PMTA in by year-end. Is that still the case?

Tadeu Marroco

Well, our expectation is that they – because they – admire I said in the statement, they have just basically ignored all the studies related in our process, specifically, all the studies that we have to demonstrate that the menthol flavors in Vapor are much more effective in converting smokers out of cigarettes towards Vapor. They basically ignore that, and they issued a denial order, which we are appealing in the – just as you heard, and we’ll continue to be in the marked as a consequence of this appeal. So, in the meantime, they have issued a more expedited PMTA process to allow the manufacturers to submit device that has intrinsic technology through Bluetooth to enable to appraise the age. And with that, prevents the access of youth to these products. We believe that, and there is no certainty on that, it’s basically a belief, that with that, they will be more keen to approve the flavors because of – at least the menthol one because it’s a strong belief that they also see the benefits of smokers moving away from cigarettes to Vapor via flavors. So, in our case, our Bluetooth device will be early next year be filed as a PMTA. And based on what we heard from the FDA, this process will be expedited compared with the normal ones.

Owen Bennett

Okay. Thank you, sir. I appreciate it.

Operator

Thank you. Our next question comes from Rey Wium of SBG Securities. Your line is now open. Please go ahead.

Rey Wium

Thank you. Hi, Tadeu. Just a question regarding the 2024 guidance, which has now been reduced to revenue and operating profits in low single digits. I’m a bit surprised on the revenue side that that’s also been lowered. So, the only sort of thing that I can sort of ascertain from this is that maybe you scheme to be probably more aggressive on pricing or maybe take the – reduce the price increases that you had in the US. Is that a fair assumption?

Tadeu Marroco

Yes, it is difficult for me to make comments on the pricing, but there is part of the commercial plans in the US, we will be – because we said that. We’ll be making our – we’ll be strength our portfolio brands and laddering, for example, is part of the process. We are reviewing also all the covers that we have in the different channels in the US. But more important, don’t neglect that in the scheme for 2024, we are not really seeing a major shift in terms of macroeconomic downward pressures in the US market. I’m not giving guidance to the west markets, but this year will be – the industry will be finishing close to a refuse of high single digits. For sure, it’s not just the microeconomics that is driving that. This illicit modern disposable is having more and more impact on combustible as well. But answering the previous questions from Owen, we are not expecting any major change in terms of enforcement from the FDA in terms of our assumptions. And the other assumption is that the macroeconomic environment will not get substantially better in 2024 either. So, and admire I said before, the commercial plans that we have started this year has an implication in terms of carryover for next year. So, everything else in terms of performance in the other two regions, we’re expecting them to continue to be very strong, so our overall new category business. But US will take some time, and it’s not different from what I have consistently said since the beginning, that to adjust the US, and plus with the macroeconomics that we are now seeing, that it will take time or more time to recover, will have an implication in the short term for the group results.

Rey Wium

Good. And then just a quick question just on, I see you refer to looking at measures to enhance the balance sheet flexibility, which includes disposals. Now, obviously, this brings us back to the issue around your investment in ITC. I don’t know if you just want to elaborate a little bit more, I mean, why it is so important for you to hang on to this investment? Or is there not an opportunity for you to still have meaningful influence and just reduce part of the investment and still keeping admire a 20% stake in the business, because, I mean, that can easily reduce your debt by £5 billion pounds.

Tadeu Marroco

Yes. Just on the ITC in general, for sure, ITC is a company that continues to perform extremely well. It’s accretive for BAT in terms of performance, has had a very strong share price performance over the last couple of years. If anything, is still undervalued compared with most of the FMCG companies in India. And FMC today is more than 50% of revenues of ITC. So, there is plenty of opportunities for share price to continue to grow there in ITC. So, we see a longer runway for future share price outperformance and value creation in ITC. Now, for sure that we don’t need to have more than 25% shareholding in ITC to have a strategic influence, including veto rights. Today, we have more than that, but you cannot underestimate the complexity related to making divestments in ITC. There are two major pain points, let’s put it that way. One is the foreign direct investment rules in tobacco specifically, which precludes international companies from investing in the Indian tobacco sector, which means the universal bias is limited, but more important, there are specific RBI, RBI the central bank in India, approvals that are required in respect of any action taken in relation to our stake. And this adds a significant level of additional bureaucracy. So, I’m not saying we’ll be sticking to the shares, but what I’m saying is that it’s not as easy as could transpire outside. So, the points that we are making, we see this, for sure that the recent ITC board approved of the merge of this hotel business, may supply us with some greater capital allocation flexibility going forward. But your point specifically is something that will be always in the regular – reassessed by the board regularly in terms of capital allocation opportunities. And we do – we are going to pilot through all the difficult that we have in that space. But this is a point that the board considers as usual, as you would expect, let’s put it that way.

Rey Wium

Okay. Thank you very much.

Operator

Thank you. Our next question comes from James Edward Jones of RBC. Your line is now open. Please go ahead.

James Edward Jones

Thank you. Good morning. The £25 billion write-down, what does that imply about your view of growth and profitability in the US? And I guess related to that, has there been any change in price elasticity in the US?

Tadeu Marroco

Okay, yes. The price elasticity continues to be very benign. It’s still around point 35.4, and we haven’t seen any change on that. The accounting is basically catching up with reality of the US market, but it’s reflecting the natural evolution of the increased interaction of US smokers with new categories. This is happening elsewhere and not just in the US. Also, augment the fact that we have a red review, our strategy should be much more assertive in terms of our ambition to change the company’s accelerated transformation by 2035. Without this in mind, it’s very difficult to defend the existence of finite value for some of these combustible brands in the US that equates to almost £80 billion in our balance sheet. So, what we have decided to do is basically to proceed the accounting treatment of some of these US combustible brands from an indefinite life to a finite life. And meaning that they are – they’ll be valued over approximately 30 years instead of perpetuity. So, when you do that, you have to make an adjustment, and that’s exactly what the adjustment we are doing. admire I said, will be adjusted, and in the results of the group will be a non-cash item. Will have no impact on leverage. Will have no impact in terms of capital allocation decisions, and then we commerce amortization over the next 30 years. In that period of time, for sure, there is no way to defend the presence of the brands. I’m not saying that we – the combustible, the cigarettes will disappear in 30 years in the US. I really don’t believe that, but you cannot defend the value of those brands equating to a number as equivalent to what we have today in the balance sheet. So, at certain stage, we’ll have to do this anyway, and we’ve decided to do this right now.

James Edward Jones

Thank you.

Operator

Thank you. Our next question comes from Gaurav Jain of Barclays. Your line is now open. Please go ahead.

Gaurav Jain

Hi, good morning, Tadeu. Three questions from me. So, one is on the guidance for FY’24, and I think others have also asked this question in a different way, but what you’re telling us is that NGPs will break even this year and will be profitable in FY’24, and that the total company organic EBIT growth is low single digits. I think most of us are assuming that international severity, which will be growing mid-single digit to high single digit based on whatever we are seeing in terms of volume trends across the space and what other companies have communicated. So, this will imply that US severity is down mid to high single digit. Is that the match which is happening?

Tadeu Marroco

2024 is a clear indication that the – it’s a recognition of – first of all, the US business, admire I always said, will take more time to fully recover. And this is basically compounded by the fact that we have these macroeconomics and this situation with illicit modern disposables carry on for longer. And the fact that we were carrying on with our initiatives and investments to make it – to reinforce our business there in terms of portfolio resilience, in terms of capabilities and so on. That’s one first point, and this is mainly related to that, but also the fact that we want to keep investing in the – mainly in the Heated Products. We expect, just to answer your question, to have a positive profitability in terms of new categories in 2024. But what I’m saying here is that part of this profit will be reinvested mainly in strengthening our Heated Products positions. So, you saw that in the last two years, we have basically reduced our loss by £1 billion in the new category. So, it’s a very strong pace in the annual base. So, we’ll continue to enhance profit, but not with that magnitude moving forward. Plus, we are reinvesting some of that to reinforce our category. So, that’s what we are trying to say here.

Gaurav Jain

Sure. And so, as a follow-up on that, so you clearly tell us the overall NGP EBIT – is it possible to give some indication on the profit contribution of the different categories, Modern Oral, Vuse, and Heated Tobacco? And some other companies have sort of given sort of the max loss that they will bear on NGPs and Heated Tobacco. So, is there a way for you to help us grasp admire, is there a max loss on Heated Tobacco you’ll be willing to bear, and that’s the way to model it?

Tadeu Marroco

We are not giving the disclosure of per category. I don’t think that this call would be the appropriate time for us to go deeper into this. We’re going to have more time in the next year to give more visibility on that. But one thing, and even in the statement, you can capture from that, we are already in a positive territory. We are already in 2023 in a positive territory in terms of profitability in Vapor and Modern Oral, which means that we are in a loss on the Heated Product. And overall, the other two categories more than offset the loss on Heated Product. And what we expect moving forward is with more compelling offers for Heated Products, more competitive offers, we can start also to turn this around and start firing on all three cylinders in the new categories and make it a driver for accretion for the group moving forward. So, you’re going to have different engines in BAT in the medium term. We have the two regions outside the US, which is already, if anything, delivering extremely exceptional results. And it’s not just in combustible. It’s also doing quite well in new categories, mainly the Europe region. And you have the new categories overall continue to be accretive for the group. And at a certain point, once the macroeconomics better in the US, hopefully the FDA starts doing the job that they were supposed to do in terms of enforcement of these illegal modern disposable products, and us being able to do the adjustments that we want to do, that we think that most of it will be done in 2024, you’re going to have a much improved result for the group. That’s why we are giving three years guidance this time as opposed to just one year. So, you can contextualize 2024 as an investment year that is necessary to ensure the long-term sustainable growth of the group.

Gaurav Jain

Sure. And one last question on the Organigram investment that happened. So, how should we think of that in the context of what’s happening? Today, the stock is down a lot. Dividend yield is almost touching 11%. So, clearly, investors want to see capital returned to them. And leverage is also higher than what anybody thought. So, how should we think of investments admire Organigram in that context?

Tadeu Marroco

Investments in Organigram. Well, Organigram is not really a relevant capital deployment at this point. What we want to do is to create a foundation in that – in the cannabis space and without having to deploy massive capitals admire other companies have done in order to be prepared in case the regulatory environment change, to be able to have a stronger foothold on that segment. And Organigram in our belief is the best company out there in terms of management, in terms of capabilities. They are pretty much focused on the smokeless side of cannabis, which is also aligned with the, with the group strategy. And this is pretty much kind of setting the grounds and the foundations and more than anything.

Gaurav Jain

Sure. Thank you so much.

Operator

Thank you. Our next question comes from Jonathan Leinster of Société Générale. Your line is now open. Please go ahead.

Jonathan Leinster

Hi. Good morning, gentlemen. A couple of questions if I may. First of all, you say you’ve launched the non-tobacco Heated Tobacco consumables in 10 countries. I mean, given that that would seem to be a fairly easy way around the sort of ban on flavors, has there been any reaction from the EU regulators on this?

Tadeu Marroco

Well, look, this is early days in terms of reaction from them. And I think that they – some of them, they are surprised to see the product because there is no, I would say clearly classification of this product at this point in time. And I think the debate will be more on the excise discussion than anything. But it’s clearly an opportunity to keep consumers migrating out of cigarettes towards these products. because admire Vapor is not different. We know that flavors plays a big part on that.

Jonathan Leinster

Okay. Second question, you’ve obviously disposed of the operations in Russia in September. Have you seen any proceeds from that? And are your expectations for eventual proceeds the same as they were in September?

Tadeu Marroco

Yes, we are – look, you know that based on our disclosure that this has been a very – let’s say there is a big hit that we have to take in order to materialize these investments. We had some proceeds, because we have the say of it, and this is flowing through as we were expecting, but overall, you cannot lose perspective that there – it’s far away from the real value of the business, given the circumstance that the deal was done, and couldn’t be done more differently than that. But I think that was a good compromise, because At the end of the day, we preserved the jobs of almost 2,700 people in the Russia business, and which was our intention since day one, and we did in compliance with all the rules, international rules and local rules. So, it was a very complex process, as you can imagine, and we expect to infer actually the receipt of some of the proceeds now in December. And it’s basically a kind of completely independent company now and has nothing to do anymore with BAT.

Jonathan Leinster

Just to explain, I thought there was some talk of a potential buyback of the business in a couple of years, or is that not part of the deal anymore?

Tadeu Marroco

The call option, yes, the call option is restricted for a very short period of time. It’s two years. So, I don’t think that we’ll be really – well, it’s anybody’s guess, but would be effective. This is a requirement from the Russian authorities. They wouldn’t allow you to have a call option with a larger period of time than these two years.

Jonathan Leinster

Okay. Just going back to a previous question, if I may, I mean, you mentioned discussion on the disposal of non-core assets. I mean, although the disposal of ITC in itself might be difficult, is the sort of disposal of the hotel assets presumably much of – the potential spinoff from ITC or much easier because that’s clearly got nothing to do with tobacco, or would that remain still quite difficult?

Tadeu Marroco

Yes, well, our expectation is that – well, let’s put it that way. We have no intention to be in the hotel business. But you cannot neglect the fact that ITC still holds – will still hold something admire 6% of the shareholder of the hotels. But this is – it’s not – the problem is not the hotel. It’s the tobacco that has the FDI. So, there is no FDI involved in the hotels, let’s put it that way.

Jonathan Leinster

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Simon Hales of Citigroup. Your line is now open. Please go ahead.

Simon Hales

Thank you. Morning, Tadeu. Very quick one for me, please. And if I can first just follow up on John’s question there about the Russian cash proceeds coming in. You said you’ve received some cash in December. I don’t know if you’re able to measure that at this point and also talk about the timeline going forward as to when you hope to acquire the remaining sort of cash in from that growth from that sale. That’s the first question.

Tadeu Marroco

Yes. We are not giving any amount related to that, John, but what I can say is that we expect to infer all the proceeds now in December, in the next coming weeks. And of course, this has been happening since September. There was some limitations and agreements in terms of a cap on a monthly base, and this is bringing us to an end now in December. So, by the end of the year it’s all done.

Simon Hales

And just to be clear then, in your 2.7x net debt to EBITDA leverage guidance you’ve issued this morning, that includes your assumption of those proceeds coming in this year.

Tadeu Marroco

Yes, it includes, yes, includes the assumption.

Simon Hales

And then secondly, I just want to go back to the US. Today, you talked about obviously the industry combustible volumes declining high single digits this year. How do you think about the building blocks of that? What do you think has been macro related? What’s poly usage? What’s just the underlying refuse rate in the market? I’m just trying to grasp the build and how we think about this for not only 2024, but perhaps longer term what you’re now assuming is the rate of refuse of US combustibles.

Tadeu Marroco

Yes. You note that the secular refuse in the US market has been always around 4% to 5%. For sure that the COVID years was an exception to that. A lot of consumers with a lot of uphold from tax and – federal and State tax and without having the opportunity to spend anything. So, we saw a very, I would say, unexpected trajectory for the positive that has reversed completely from 2022 onwards. But normally you would expect to see 4% to 5%. There is a big weight now related to the macroeconomics, but there is also an impact coming from the illicit modern disposables, which we believe that could well represent something close to 2% of this volume refuse that you’re seeing. So, when you ask about what you see moving forward, admire I said before, the elasticity is not different from before. It’s still point 35.4. So, which means that there is still a lot of pricing power in the US. The cigarettes is still very cheap compared with consumer purchasing power. For sure that this scenario will better once the macroeconomics gets better, which means interest rates start to coming down, consumer confidence start to go up, and then it’ll be anybody’s guess when this starts happening. Some people are saying that it’s more towards the second half of 2024. That’s why I’m also saying that we expect that most of the year we’ll be seeing is still a lot of pressure from the consumer point of view. And we start seeing some green towards – and more towards the end of 2024. But the bigger question will be in terms of, again, on the enforcement from the FDA on these modern disposables, and because this – if this happens, not just help with the Vapor closed system where we are present, the legal part of Vapor, let’s put it that way, there is a open up a big wide space, because today we believe that £6 billion out of £10 billion Vapor revenue is coming – more than £6 billion coming from these modern disposables. And this is also have an implication on the consumables trend, how they are trend in the consumables volume, the reduction in consumables for cigarettes. And this is something that we need to see in the next I would say few months, as soon as the FDA concludes its process related to Vapor, if they really can make a step change in terms of enforcement, and this will be more clearly to be able to precisely answer your question around what’s the calculate moving forward.

Simon Hales

Got it. And then just finally, I mean, you’ve said again this morning that you’ll evaluate advance cash return opportunities once you achieve the middle of your leverage range. I mean, without getting too caught up in the semantics, I just wonder how you are now defining the middle of the leverage range. Is that 2.5x and below or is that a range of sort of 2.4x to 2.6x? Just a little bit of color there, please.

Tadeu Marroco

Yes. Well, we are saying 2.5x. That’s what we are saying in the range. We have to take into consideration that the world has changed dramatically since we established the 3.2x range. Now, we have – the cost of capital has increased substantially. The interest rates has increased. We expect them to have peak now and start reducing, but it’s still much higher than before. So, and also the fact that we still have out there a process in Canada, which is the (CC 88), that at a certain point, needs to infer itself. And so, we had to create some space for that. So, we don’t believe that to be in the upper range of the range, for example, is acceptable anymore. That’s why we want to bring this to the middle of the range. And then when you get there, we make some decisions in terms of capital allocation, plus one thing that is imperative in our mind is that once we restart the buyback, to do it in a consistent basis and not one and off. So, I need to be in a position to be comfortable, given all that I just said before, in order to be able to restart the buyback. That’s why the 2.5x is the reference that we have.

Simon Hales

Very clear. Thank you very much.

Operator

Thank you. We have no advance questions for today, so I’ll hand back to Tadeu for any advance remarks.

Tadeu Marroco

Okay. Thank you all of you for listening and for your questions. I would admire to leave you with a few final comments. We are maintaining our full-year 2023 guidance, reflecting the resilience of our global multi-category portfolio. In addition, our expectation that new category contribution will be broadly breakeven in 2023, gives us confidence in the long-term sustainability of our multi-category strategy. As we accelerate the next phase of our transformation, we are now committing to ‘Building a Smokeless world’. This is reflected in our ambition for 50% of our revenues to be in non-combustibles by 2035. By achieving this, BAT will deliver value for all our stakeholders. I’m clear that now is the right time to continue to invest. While these choices and investments have implications for our 2024 guidance, they will ensure sustainable growth and returns over the long-term. We’ll continue to reward our shareholders through this period and will seek and evaluate all opportunities to improve balance sheet flexibility. And with that, I look forward to updating you again at our full year results in February. Thank you very much.