2026 First Half Pre-Close Conference Call Transcript

Victoria Buxton, Group Head of Investor Relations

Good morning everyone, I’m Victoria Buxton, Group Head of Investor Relations, and with me this morning are Tadeu Marroco, our Chief Executive, and Javed Iqbal, our Interim Chief Financial Officer.

Welcome to our 2026 first half pre-close conference call. I hope you are all well, and I would like to thank you for taking the time to join us this morning.

Before we begin, I need to draw your attention to the cautionary statement regarding Forward-Looking Statements, as well as the notes and disclaimer contained in the trading update. Unless stated otherwise, our comments will focus on constant currency adjusted measures, which include adjustments related to profit from our Canadian combustibles business¹, and average year-to-date share data is to March 2026 versus full year 2025 average.

I will now hand you over to Tadeu with a reminder that as always, there will be an opportunity to ask questions later in the call.

Tadeu Marroco, Chief Executive

Thank you Victoria.

Good morning everyone, and welcome.

We continue to drive good momentum into 2026 and remain firmly on track to deliver our full-year guidance.

I would like to begin with four key takeaways from today’s update:

• First, we expect to deliver strong revenue and profit growth in the U.S., supported by ongoing combustibles delivery, growth in Vapour and an excellent performance in Modern Oral. We are now the fastest growing² company in total nicotine, reflecting the strength of our multi‑category portfolio and execution, in the world’s largest value pool. Our broad-based momentum, together with the FDA’s³ recent prioritisation guidance improving market access for scientifically substantiated reduced‑risk products… reinforces my confidence in our sustainable financial delivery.
• Second, we expect New Category revenue growth to accelerate to mid-teens in H1 and for the full year, driven by Modern Oral in all three regions, a return to growth in vapour for the first time in two years  and continued traction with our innovation roll-outs across New Categories.
• Third, we expect further improvement in New Category contribution⁴, driven by Modern Oral and Vapour, fully aligned with our Quality Growth discipline.
• And finally, we remain on track to reach our net debt to EBITDA leverage⁵ target of 2 to 2.5 times by year end, while continuing to deliver sustainable shareholder value through our progressive dividend, and a sustainable share buy-back programme, with 1.3 billion pounds underway in 2026.

Let’s start with New Category dynamics.

The global nicotine industry continues to transform and grow, as adult smokers increasingly switch to New Categories.

Effective regulation and enforcement are critical to supporting sustainable New Category growth, and advancing Tobacco Harm Reduction^*†.

We continue to engage proactively, and on an evidence-led basis with key stakeholders, including governments, health authorities and regulators, to help shape effective regulatory and enforcement frameworks for New Categories.

The Tobacco Harm Reduction journey is already well advanced in markets such as Japan, Sweden and the U.S., where the FDA has been at the forefront of recognising the risk continuum.

We welcome the FDA’s recently published prioritisation guidance as an important step toward effective enforcement, and expanding market access for responsible industry players. 

We have long advocated for increased enforcement and a return to a regulated marketplace that is not overrun with illicit products. Providing a clear and consistent pathway for scientifically substantiated less risky products to reach the market, will support continued progress toward a Smokeless America. 

We are reviewing the guidance in full, assessing its implications, and engaging with the FDA on implementation, while actively evaluating our commercial and resource allocation priorities.

Leveraging Reynolds’ significant U.S. scale, precision execution, deep trade relationships, strong operations footprint and expanding digital capabilities, puts us in a unique position to capitalise on this opportunity, drive growth and capture outsized value in the U.S.

We are actively preparing our future Modern Oral and Vapour portfolio for market. Execution is scheduled to begin in H2, with a phased and disciplined roll-out, balancing speed with rigour. We are scaling operational readiness and leveraging new regulatory pathways to accelerate delivery over time. Importantly, we remain committed to a science-led approach, to ensure responsible and sustainable growth.

Reaching the scientific review stage of the PMTA³ process represents a meaningful quality threshold, and we believe this approach can support a more level playing field, more targeted enforcement against bad actors, and greater transparency across the industry.

We are confident in the strength of our science and portfolio. Through our continued participation in the Modern Oral PMTA pilot, we see a clear pathway to marketing authorisations for our leading higher‑moisture products.

Additionally, we are encouraged that the Center for Tobacco Products has indicated it intends to use the learnings from this programme to inform a broader, replicable approach to expediate review beyond the Modern Oral category.

Our sustainable growth in the expanding nicotine industry is driven by six core capabilities.

These are underpinned by over 120 years of tobacco industry expertise, enhanced by our leading science, technology and strategic partnerships.

By leveraging our:

• Deep cross-category insights;
• World-class science and stewardship;
• Unique R&D ecosystem;
• Global distribution;
• Regulatory expertise; and
• Digital capabilities…

We have built a well-established and differentiated portfolio of global brands with premium product offerings across all three New Categories.

Modern Oral is by far the fastest growing New Category globally and the lowest risk^*†, containing 99% fewer toxicants^** when compared to cigarettes.

We expect industry revenue to almost triple by 2030, with Velo outpacing category growth.

Modern Oral is already a meaningful and growing contributor to Group revenue and profit, supported by high levels of profitability and fast payback.

This year, we expect to deliver strong double-digit revenue growth, as Velo extends our category volume share leadership, gaining 740 basis points year to date to reach 38.2% across top Modern Oral markets⁶.

In the U.S., Velo Plus, the fastest growing Modern Oral brand, has strengthened its Number 2 share position and continues to drive material share gains. Year to date we gained 10.4 percentage points of total volume share of Modern Oral to reach 28.4% and 9.9 percentage points of total value share to reach 23.1%. Encouragingly, Velo Plus is capturing 100% of category value growth year-to-date and has already achieved category share leadership in seven states. As a result, we expect a strong U.S. Modern Oral financial performance this year.

These excellent results reflect the strength of our products, branding and distribution capabilities, underpinned by a consistent seventy percent repurchase rate since launch at the end of 2024.

In AME, we are the clear category leader, selling at a premium price point and strongly outperforming competitors, at close to six times the scale of the nearest peer, and we continue to capture over 60% of category growth, highlighting the further opportunity ahead.

Our latest innovation, Velo Shift, is designed to ‘reshape’ the Modern Oral experience, with a new comfort pouch design, five new distinct sensory flavours, and a differentiated Hexcan, designed to stand out on the shelf.

Trading at a premium to the core Velo range, Velo Shift is delivering incremental share gains in Sweden and early traction in Switzerland, supporting a targeted roll‑out strategy, with further market expansion through 2026.

We are global leaders in Vapour, which remains the largest New Category in terms of number of adult consumers, and continues to demonstrate strong conversion effectiveness.

Vuse continues to extend global value share leadership in tracked channels across top markets⁷, up 1.3 percentage points to reach 44.4%.

While the Vapour category continues to be impacted by the proliferation of illicit products, we are encouraged by continued performance recovery in the U.S., the world’s largest vapour market. Year to date Vuse has gained 4.2 percentage points of value share to reach 56%, driving positive volume and revenue growth in H1.

This recovery has been supported by a competitor exit last year which benefitted the second half, and good progress on state level enforcement, which built through 2025, with Vapour directory and enforcement legislation covering around 50% of the industry by December versus just 8% in January.

We now expect U.S. Vapour to deliver double digit revenue growth in H1 and full year. Looking forward, we are confident that Vuse is well positioned to benefit from stronger enforcement over time at both federal and state levels.

In AME, while our value share declined 1.5 percentage points, we maintained European leadership and continue to build a premium segment through Vuse Ultra.

We expect revenue delivery in H1 to be adversely impacted by regulatory headwinds in the UK and Poland.  

In APMEA, our performance will reflect the lapping of prior year strategic exits from markets where regulation and enforcement do not support a responsible, level and competitive playing field.

Altogether, we expect mid-single digit revenue growth in H1 and full year driven by the U.S.

In Heated Products, glo’s volume share was down 1.6 percentage points in top markets⁸, mainly driven by Japan, with APMEA down 2.1 percentage points. In AME, volume share was down 70 basis points.

While there is more work to do, our focus is clear: delivering innovation‑led performance improvement in the largest profit pools.

We have streamlined our commercial footprint to accelerate scale with glo Hilo in priority markets; and initiated a Hyper platform reset with Hyper Pro Plus in the value segment. We expect headline delivery to be adversely impacted by material inventory movements in Japan and continued competitive intensity in the value segment in key markets. As a result, H1 and full year revenue is expected to be down low double-digit… with an improvement in H2 share performance, driven by greater glo Hilo scale and phased Hyper Pro Plus roll‑outs.

glo Hilo is designed to establish glo in the premium segment, which represents over seventy percent of industry value. We continue to focus on generating trials, targeting premium consumers in the combustibles and HP spaces, through online and in-person activations. This is translating into premium share⁹ progress in key markets reaching 2.6% in Japan, 8.8% in Poland, 1.5% in Italy, and 1.1% in Romania in March.

glo Hyper Pro Plus further strengthens our value proposition, delivering meaningful upgrades to the consumer experience and reinforcing competitiveness in the value segment, offering:

• Quick start
• Longer standard session length, and
• Connectivity.

We are rolling‑out in Q2 in Italy, Romania and Greece with broader expansion planned through the second half to markets including Japan.

Turning to combustibles. While our volume share in top markets¹⁰ was down 30 basis points, with value share down 20 basis points… we continued to deliver a resilient financial performance, offsetting volume declines with robust price/mix and efficiency gains.

Our U.S. value share declined 20 basis points and volume by 80 basis points, driven by growth in the deep discount segment, and heightened competitive activity in Q4 2025. Since January we have held share as we continued to actively invest in our brands, increasing targeted promotions across all price tiers, and expanding Doral in key states where the deep discount segment is more active.

The pace of industry decline has moderated, down by around 5% year-to-date, on a sales to retail basis, mainly driven by deep discount brands. Our portfolio continues to deliver value growth driven by our targeted commercial activities in the more profitable segments of the market. This is resulting in sustained positive momentum in both revenue and profit growth in H1.

We expect our U.S. combustibles performance to be first half weighted as we lap a stronger prior year comparator in the second half, and we continue to invest in targeted commercial activities to drive sustainable value.

In AME, we have continued to deliver a resilient financial performance, with robust pricing driving revenue and operating profit growth, led by strong delivery in Brazil and Türkiye. We have also taken actions to strengthen our portfolio in Germany and Romania.

In APMEA, while progress has been slower than previously anticipated in H1, we expect a sequential improvement versus H2 2025 and our performance to stabilise through the year.

Bangladesh remains a dynamic environment ahead of the upcoming budget, and while Australia continues to be a headwind, the drag is reducing year on year.

Within our traditional portfolio, we expect a resilient H1 combustibles performance to be partly offset by lower direct leaf sales versus the prior year, reflecting our continued focus on higher‑return, more profitable areas.

Turning to cash…

BAT is a highly cash generative business, with operating cash conversion¹¹ expected to exceed 95% again in 2026, reflecting our strong cash discipline and a clear focus on returns.

Due to the timing of leaf purchases and MSA payments, our cash flow is always second half weighted.

Our financial flexibility continues to improve, and we are on track to deliver more than 50 billion pounds in free cash flow¹² by the end of 2030.

We continue to focus on de-leveraging⁵, and we expect to be within our targeted 2 to 2.5 times adjusted net debt to adjusted EBITDA range by year-end.

As we transform, I remain committed to delivering sustainable shareholder returns through our progressive dividend, which dates back 27 years, and a sustainable share buy-back programme.

To conclude, before we move to Q&A…

Our full year guidance remains firmly on track, led by continued U.S. delivery and New Category momentum.

We continue to expect a H2 weighted Group profit¹, driven by stabilising our performance in APMEA and the increasing realisation of Fit2Win savings through the year.

We are making good progress with our Fit2Win programme, and remain on track to deliver 600 million pounds of annualised savings by 2028, with 500 million pounds expected to be delivered by the end of 2027.

We are closely monitoring developments in the Middle East. There is no significant impact on the Group at this time, and we have comprehensive Business Continuity Plans in place to manage cost and supply‑chain pressures. However, the broader macroeconomic and geopolitical backdrop is dynamic, increasing the risk of volatility in consumer sentiment should uncertainty persist.

While there is more to do, I am confident that the choices we have made and the actions we are taking, position BAT well for the future.

I am excited about the opportunities ahead and confident in our ability to deliver long‑term, sustainable growth and value for shareholders.

Thank you for listening.  Javed and I will now be very happy to take your questions. 

Q&A

Moderator

Thank you. If you wish to ask a question at this time, please signal by pressing *1 on your telephone keypad. If you wish to cancel your request, please press *2, and please make sure the mute function is switched on to allow your signal to reach our equipment. Again, it is *1 to ask a question. Now the first question is from Andrei Andon from Jefferies. Please go ahead.

Andrei Andon-Ionita, Jefferies

Hi, good morning. Tadeu, Javed, and Victoria. Thank you very much for taking my questions. Two from me, please. Firstly, in the release today, you cited some downtrading trends in H1'26 in U.S. combustibles. Could you perhaps give us a bit more colour on how you expect these trends in U.S. combustibles to evolve in H2'26? And then secondly, in U.S. next-generation products, where is the company at the moment in terms of production capabilities for Velo Max and also for age-gated flavoured vapes? And then could you also perhaps give us an indication about the expected timing of these innovations as to when they could hit the market and then when we could potentially be seeing a tailwind from these innovations?

Tadeu Marroco, Chief Executive

Yeah. Thank you, Andrei, for the question. On the U.S. combustible, what we saw at the end of last year was a very, very, I would say intense, competitive activity in the market and on top of a lot of the activations of brands in the deep discount throughout 2024, 2025, sorry. So, the reflection on the share that you see in our numbers now in H1 in reality materialises from these activities that happened more in Q4 last year, and since January, we started taking actions on that. One of those is related to the rollout of Doral where it makes sense. I always said that we have been very thoughtful in terms of how to deploy Doral because 95%, 93% of the value of the category combustibles sits outside the deep discount, and we were very, very conscious not to promote a value destruction movement within our own portfolio, but we are confident with the pilots that we have done that there are opportunities to expand Doral on a value accretive basis, and we are doing this right now.

We also have been much more active in terms of promotions to cope with this intense activity that we saw in the market, and our share, as consequence has been stable since January. So I'm not expecting to see any different trend for the rest of the year. So I would expect the share to be stable at the back of all the initiatives that we have been taking on the combustible side. In terms of the next generations, obviously we are very, I would say, supportive of the latest movement done by the FDA. It's clearly a regulatory pathway that should help to restore more balanced regulated markets, reducing the impact of illicit products over time. As you know, we have always consistent advocates for strong enforcement, and the progression to scientific review represents a meaningful quality threshold with a more level playing field. So, we are actively engaged with the FDA, like I mentioned in my opening here, and the idea is to bring Velo Max, as we said before, to the market.

We should be in a position to do that by summer. The idea is to do it between August - September and we are also enhancing our age verification controls, targeting high-compliance retail environments, and maintaining a clear outward-focus position in order to activate flavoured Vapour commercialisation, in order to ensure responsible growth aligned with the regulatory expectation. So we expect to see some flavours in Vuse in Q3 this year, and that's one of the reasons why, together with the higher levels of enforcement that is already happening at the state level, but now with the FDA now willing to publish a list of products that should be allowed in the market that should be contributing to enforcement as well on top of allowing products in scientific review and we do have flavoured Vapour products in scientific review. We are at the back of that, raising our expectations in terms of performance of vape in the U.S. to double-digit, which should translate into mid-digit growth for the group for the first time in the last two years, which is quite favourable for the whole New Category momentum.

Javed Iqbal, Interim Chief Financial Officer

I think just one addition, that in terms of the question on capacity, we have done enough capacity investments across the U.S. supply chain footprint. So, we don't foresee any challenge of supplying the continuous growth of Velo Plus or any future launches in the second half of this year. So, there is no capacity challenge we foresee right now.

Andrei Andon-Ionita, Jefferies

Brilliant. Thank you very much

Moderator

Our next question is from Faham Baig from UBS. Please go ahead.

Faham Baig, UBS

Good morning, team. Hopefully you can hear me clearly. I have two questions as well. Firstly, on your expectations on the FDA's guidance on enforcement priorities, could you maybe remind us of how you assess the size of this opportunity, particularly in Vapour, where as you said earlier, the illicit products currently dominate? And the second question is really on guidance. You've clearly delivered a strong start to the year, especially in New Categories. Could you maybe expand on your assumptions regarding the potential impact from Middle East uncertainties in the second half and whether this is a conservative assumption given the limited disruption you have seen thus far?

Tadeu Marroco, Chief Executive

Okay Faham. Look, on the Vapour market we always saw and we have assessed that the vast majority of the Vapour market in the U.S. is dominated by the responsible illegal players and we always quote a number close to 70%. This hasn't changed. This translates to a number around £7 billion of value related to that.

We clearly see that states have passed some legislation and remember that I refer to 50% of the Vapour market today sits in states where some sort of legislation has passed, but they vary among states. For those that have implemented very comprehensive enforcement tools with directories and with fines and with clear enforcement in place we clearly saw a decline in the illegal market and consequential return to growth of the legal market in a more meaningful way.

This is very encouraging because even those states that hasn't been passed as comprehensive legislation, we can always refer back to those that have been more successful. So they are open to legislate and they’ll probably be taking measures as we go along to improve even further. So this is very supportive.

At federal level now with publishing a very clear list of products that are in the discretion of the FDA not to enforce, which are basically in scientific reviews or MGOs that they have in place. We will allow, for example, products that we are still seeing traditional channels be taking out completely. So these are very supportive.

Obviously the more important measure on this is allowing the responsible players that have products in scientific review to introduce in a responsible manner some flavours back to the market which improves the level playing field.

Emerging regulatory mechanisms such as the supplemental PMTAs provide also opportunities to expand portfolios more efficiently. So these are all very positive and the size of the prize, like I said, is very high.

In terms of the guidance, the reason why we are keeping the low-end, we refer to the Middle East. You are rightly point out that what I said and we declared that in the trading update. We haven't seen a meaningful impact so far.

Remember that in terms of supply chain costs, two thirds of our costs are either labour or leaf related that not immediately get impacted by the high energy cost or freight cost. But on the other hand, our major concern is impact on consumer sentiment. And despite the fact that we haven't seen any material change in that direction so far, we are all aware that there is a correlation between gas price, for example, and sales of cigarettes in the U.S. and this is a watch-out that we have to see how we progress through the year.

I'm not sure if I would call conservative. I think that we are sticking to what we said in terms of guidance. We are delivering exactly what we said and the scenario is still very uncertain in that direction. The other element that I mentioned is the fact that APMEA recovery is not as fast as we first thought. We expect the region to stabilise throughout the year and so H1 in '26 will be better than H2 '25 and the H2 '26 will be better than H1 '26, but it's a drag. It's still a drag for 2026, which we don't expect to be the case anymore in '27 onwards. And that's the reason why we are keeping the guidance, which is exactly what we said.

Faham Baig, UBS

Thanks Tadeu.

Moderator

Thank you. We'll now move to our next question from Pallav Mittal from Barclays. Please go ahead. Pallav, please go ahead, the lines open. Thank you.

Pallav Mittal, Barclays

Hi, good morning. So a couple of questions. Firstly on APMEA. So I mean, you have mentioned the performance is sequentially better, but it has been slower progress than expected. So can you just help us understand which markets have been worse versus your expectation and then what gives you this confidence that you can stabilise the operations in the second half? That's the first one.

Then secondly on heat-not-burn, low double-digit decline for the full-year. Is it fair to assume that the change from low single-digit, mid single-digit decline earlier to this low double-digit guidance is mainly due to the issues in Japan destocking? Can you also comment within that whether Europe heat-not-burn is growing or is that declining as well?

Tadeu Marroco, Chief Executive

Let me address the heat-not-burn and then I’ll touch on the APMEA.

Yeah, heat-not-burn, our underlying performance, which is a share loss of 1.6 percentage points is basically a consequence of the fact that we had launched glo Hilo just at the very end of last year. That's the first thing. So we didn't have the presence in the premium subcategory as we do now. Also, that we saw a much increased competitive activity and mainly in the value side of the category where we were pretty much present and dominant with Hyper Pro. Just now that we are now updating our offer in that particular subcategory.

So we expect as a consequence to see share improvement in HP as we move along throughout the year. Hilo is doing the role that they were supposed to do and they is growing in every single market that we have launched and the new Hyper Pro device and together with consumables will give us what we believe is a very strong position on that.

Obviously we are also taking some measures in terms of coping with this competitive activity with more discounts that end up impacting also the top line of the category. But the major drive behind this low double-digit decline is related to the adjustment in stocks in the main distributor in Japan. I don't think that it will be a one-off but will not be a rebound in the second half. So this will carry on throughout the year and that's the reason behind the low double-digit revenue decline in HP.

Now in terms of APMEA, Bangladesh is the market that is already suffering the consequence of a massive excise hike last year.  In a way, it’s not a big surprise. We also need to see how the government will address budget season that is coming now in a few weeks’ time. But we are seeing a lot of softness in the market to a point that our global cigarette forecast now has reduced from 2% to 2.5% is exactly Bangladesh driven, and obviously we are exposed because of the leadership position that we have in Bangladesh.

And this is the major reason for a lower pace of recovery. As we come along the second half, we'll be lapping big issues that we faced in Australia that most of the decline we saw last year happening in the second half. So the comparator will be much softer compared with the first half of this year. And on top of that, we are seeing good progress in other markets in APMEA that give us the confidence to see stabilisation as we go along through the year.

Pallav Mittal, Barclays

Sure. If I can just squeeze one more in, a question on Vuse in the US. So clearly at the full-year results, you were talking about flattish expectations for the full-year. Now given that you're expecting double-digit growth, is it mainly due to the new product launches that you are highlighting to come in the third quarter or is the underlying market sort of improving?

Tadeu Marroco, Chief Executive

No, the underlying market is actually improving. The level of enforcements that we are seeing, from the state level mainly, is really having a favourable impact and gives us some confidence that combined with the new offers that will come to the market as we go along. But remember that for this year it will be more the last quarter of the year, so it will not be the driver behind the double-digit expectation, but will be helpful obviously, but the underlying performance is the one that is supporting that.

Pallav Mittal, Barclays

Sure. Thank you.

Moderator

We'll now take our next question from Emmanuel Satori from Kepler Cheuvreux. Please go ahead.

Emanuele Sartori, Kepler Cheuvreux

Hi. Good morning, Tadeu, Javed and Victoria. Thank you for taking my question. I have just two, please. So the first one on New Categories and particularly U.S. Modern Oral. Can you help us bridge the acceleration between volume and pricing? I'm pleased to see that Velo Plus driving very strong share gains, but how much of the expected mid-teens New Categories' revenue growth is volume led versus pricing? Or is there any promotional normalisation and especially in the US.

Just trying to see if... are you seeing value share converging towards volume share or there's still a meaningful gap and strong promotional activity?

My second one then will be on the global cigarette industry volume that you now see down on 2.5% compared to the previous guidance at 2%. I heard you mentioned Bangladesh. Is that the main driver or are there any key drivers behind the update? Thank you.

Tadeu Marroco, Chief Executive

Thank you for the question. So in the last one, yes, it's basically Bangladesh. The major reason behind this revised guidance for the global combustible business. On Velo Plus I would say that most of the growth is volume driven and remember that we have started Velo with the price index to the leading brand at 65% because we need to activate the brand and we need to generate trial and today we sit between 90% to 95% of the price index and obviously this also has helped us to reduce the gap between market share and value share. I quote both of them in my script. We are in 28-ish in terms of market share, 23-ish in terms of value share.

So it's much closer than was before. But I have to say that most of the driver behind the revenue generation is volume driven. The volumes are pretty strong on a weekly base.

Emanuele Sartori, Kepler Cheuvreux

Thank you. If I just may add a follow up there, do you have any target in mind on market share in U.S. Modern Oral in the next 12, 18 months?

Tadeu Marroco, Chief Executive

Look, I think that the more exciting part of this category is the growth of the category as a whole. And this is a category that I have been saying that for a while, the potential of growth in terms of incidence growth and also average daily consumption growth is really, is expressive in the U.S., because in terms of average daily consumption, we see in the Nordics an average of 8 to 10 pouches... 12 pouches in the Nordics in the likes of Sweden. And we see something like 6 to 8 in Europe. And today is still 3.6 pouches per day in the U.S.. So we know that as the category gets a better product and now with the pilot and the latest guidance from the FDA, we'll probably be seeing overall better products in the U.S. market. We expect the category to carry on growing and growing very fast. And that's what will be behind our expectation to see the category to triple by 2030.

That's for me is more important. We have already taken leadership worldwide of the category. So Velo is the leading brand worldwide with 38% category share in the major markets. And we have all the possibilities to carry on in that leading position. And that's for me what's important in having the fastest growing brand in the fastest growing category of New Categories in the world today.

Emanuele Sartori, Kepler Cheuvreux

All right. Clear. Thank you so much.

Moderator

Our next question is from Bastien Agaud, Bank of America. Go ahead.

Bastien Agaud, Bank of America

Good morning. Thank you for taking my question. You just talked about pouch consumer and the difference between Europe and the U.S.. Just on Europe, do you... The category growth that you see, is it no more driven by a slight increase in pouch consume per consumer, or do you still manage to grow the consumer base? And the second part of my question is since the U.S. should have better quality products, as you mentioned, do you think that over the long term, the potential for the U.S. in term of pouch consume per consumer, it's possible that it can be higher than in Europe?

Tadeu Marroco, Chief Executive

Sorry. So can you repeat the second question?

Bastien Agaud, Bank of America

Sure. Is it possible that the number of pouch consume per consumer in the U.S. could be higher than in Europe over the long term.

Tadeu Marroco, Chief Executive

Ah, okay.

Bastien Agaud, Bank of America

... given that we should have higher quality product in the U.S.? Yes.

Tadeu Marroco, Chief Executive

I see. I see. I see what you mean. Okay. Look, just to address your first point, there is an increase in the base of consumption in the U.S., and actually that's what is behind our numbers of non-combustible users that we have this target of 50 million, reach 50 million to... By 2030, and we are well on track on that. And if you see the amount of users that we grew last year, we saw a lot of that coming from a Modern Oral specifically in the U.S.. So clearly there is an expansion of the base, not just the everyday consumption. If you go back when we launched Velo Plus where daily consumption was around 2.6 pouches, today's 3.6 pouches. So it's not the major driver behind it. The driver is back, actually the base of consumer. So that's the first thing.

The second thing, the U.S. like the Nordics is a market where traditional oral was already present. And when I say that Europe has an average of 6 pouches per day, there are a number of markets in Europe that has no oral tradition, like the UK for example, which is part of that. So in Sweden that there was an oral tradition, is at 12 pouches per day. So it wouldn't be impossible to imagine that U.S. that has a tradition oral base to go beyond Europe at 6 pouches per day. So if I had to guess, I would say something in between what Europe is today and Sweden's today.

Bastien Agaud, Bank of America

Perfect. Thank you very much.

Moderator

Thank you. And we will now take our final question today from Simon Hales from Citi. Please go ahead.

Simon Hales, Citi

Thank you. Good morning Tadeu, Javed, and VB. Two or three for me if you don't mind please. Firstly, today you obviously you said something with regards to the Middle East, you haven't seen any significant impact to date. I suppose where you have potentially seen some impact is probably around the duty free business. Am I right to assume that's what you mean by no significant impact so far, or have you seen any impact in changing or changing consumer behaviour in the U.S. as a result of the movement in gas prices we've seen? And so that's the first question.

Secondly, on the U.S., obviously you've talked about the rollout, the selective rollout of Doral into the deep discount segment. How do we think about that as we move into the second half? Is there more you're going to do there or do you think you've made the selective rollouts that you need to do?

And then just the final question was around profitability on the New Categories business, particularly U.S. for Velo and Vuse as we look forward, given that you're hopefully going to have Velo Max in the market in the second half at some point, some new flavours on Vuse. Should we expect to see some impact on profitability from those products?

Tadeu Marroco, Chief Executive

Okay. So the first point, just to be very clear, we haven't seen any impact so far in terms of the U.S. consumer behaviour as a consequence of the higher price of gas. I was just referring that the past records, now if you go back, we saw some correlation around higher gas price, and a more soft consumption and that's the, I would say, watch out, that we have to bear in mind. You're absolutely right. The biggest impact has been duty-free that end up impact APMEA as well, it's one of the reasons why we are seeing some of the recover not be as speed as we first thought. And obviously some costs in the supply chain, which is more related to freight and some of these energy costs that start to flow through some of the raw material, which is not really at this point meaningful for the business.

And given my point about most of the cost sits within labour and leaf, we don't see a major impact on the cost side this year. The only watch-out is on the consumer confidence and hence these previous correlation that we saw before. But again, it still should be materialised. We haven't seen this yet. So that's the first point.

The second one, the rollout of Doral will be accelerated or not depending on the economics. As we have price increase in some states for example, we turn into a position where it becomes more feasible from our perspective to launch a deeper discount. So I would expect the rollout to states to carry on in the second half of the year. We had the two pilots in last year. We are now rolling out in additional six states, and I wouldn't discount to roll out to more states as we go along, depending on the economics of all that.

And obviously it's not just about the Doral activation, but also how we activate the rest of our portfolio. But my point before is that we don't expect to see any further deterioration, our share position, given the reaction that we have already start taking. And lastly, in terms of the profitability, we don't see major change in terms of gross margin. We have already a very, very healthy gross margin business in Vapour in the U.S., not just at a gross margin level, but EBITDA level. So these will be very accretive in terms of overall category contribution and Velo Max also will have a dynamic which will be similar to Velo Plus on a per pouch base.

So we are not expecting to see and we just probably be benefiting for more volume, because this will be complementary to our portfolio in terms of the offers, and I think that we'll be working on that direction of strengthen our portfolio of Modern Oral in the U.S., which is exactly what we want. I always get questions about, "Well, are you concerned about the competitive, the higher level of competitor in Modern Oral market in the U.S.?" And the answer is no because I have faced all this competition outside the U.S., and we have been able to carry on leading the category outside the U.S.. So I don't see why there is no reason of not achieving that in the U.S. if we have the right level playing field. So I welcome that, and because we are very confident in the portfolio that we have.

Simon Hales, Citi

Thank you very much.

Moderator

Thank you. This was the last question today. With this, I'd like to hand the call back over to Tadeu for any additional or closing remarks. Over to you, sir.

Tadeu Marroco, Chief Executive

Thank you for joining us today and for your questions. I’d like to leave you with these key messages.

• First, our U.S. business continues to drive strong revenue and profit¹³ growth, driven by a truly multi-category performance. This broad-based momentum, together with FDA’s recently published prioritisation guidance providing a clear and consistent pathway for scientifically substantiated less risky products to enter the market… reinforces my confidence in our sustainable future delivery.
• Second, our New Categories are gaining traction. We expect revenue growth to accelerate to mid-teens for both H1 and the full year, led by Modern Oral and a return to growth in Vapour for the first time in two years, alongside further improvement in profitability⁴.
• Third, we are on track to achieve our 2 to 2.5 times net debt to EBITDA leverage⁵ target by year end, while continuing to deliver sustainable shareholder value through our progressive dividend, and a sustainable share buy-back programme.
• Finally, while there is more to do, with this momentum, I am confident that we will sustainably deliver our mid-term algorithm.

Thank you again for joining us, and I look forward to updating you further at our Half-Year results on July 30th. I hope many of you will join us at our Capital Markets Day at our U.S. headquarters in Winston Salem at the end of September.