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Good morning, everyone, and welcome to British American Tobacco 2017 Preliminary Results Presentation. I am Nicandro Durante, Chief Executive Officer of British American Tobacco, and with me this morning is Ben Stevens, Finance Director. As always, a warm welcome to those of you who are listening on the conference call or watching via our website, bat.com. As usual, after taking you through the results presentation, there will be an opportunity for you to ask questions. Before I start the presentation, I will take it that you have all seen and read the disclaimer.2017 was a transformational year for BAT. Not only did we deliver on the financials, but we also completed our acquisition of Reynolds American, the largest tobacco deal in history. It's a transformational deal, providing BAT with access to one of the most profitable markets in the world, a unique portfolio of brands and products, and further, it reinforces the long-term sustainability of our commitment to high single-figure EPS growth. I am proud to say that, once again, we have delivered on this commitment. At current rates, adjusted EPS grew 15% and was up 10% on a constant currency basis.This was driven by the continued good performance of our combustible business with the GDBs, the newly acquired U.S. brands and the group's overall growing share. Reported EPS was up over 600%, mainly due to accounting treatment of the Reynolds acquisition. Ben will talk more about this later. 2017 was also a transformational year for us in NGPs. Our expanded vapor business reached an annualized revenue of nearly GBP 300 million, and the strong growth of glo in Japan drove THP revenue from 0 to over GBP 200 million. In total, the combined NGP business delivered GBP 500 million to group revenue on an annualized basis in 2017, meeting the target we set at our Investors Day in October. We are aiming to grow this to over GBP 1 billion this year and to GBP 5 billion by 2022. I am confident of substantially increasing -- exceeding these targets. Our confidence in the future of the business is reflected in the 15% increase in the dividend, which we announced this morning. 2017 was also an eventful year for the industry. Although we saw higher price in most markets, we also have seen significant excise increases in the GCC, Russia, Pakistan and Malaysia over the recent years. These, together with a more aggressive price environment in a number of markets, led to down-trading, continued growth in illicits and industry volume decline. Against this challenging backdrop, BAT once again outperformed the industry. Organic cigarette volume, including THP, was down 2.6% against an industry down around 3.5%. In July, the FDA announced a consultation for new tobacco regulation proposals. We remain very encouraged by the FDA's recognition of the continuum of risk for tobacco products and of tobacco harm reduction as a policy. We have advocated these principles for 20 years, and the support of a regulator is key to the transformation of the tobacco industry. However, this is a new, complicated area, and it will take time to get through the process. We await the publication of the advanced notice of proposed rulemaking and look forward to participate in the consultation process.In Québec, a judgment from the Court of Appeal continues to be expected any time in the class action cases against our Canadian subsidiary. As I've said before, a wide range of outcomes is possible, including a request for leave to appear to the Supreme Court of Canada and the use of Canadian regulations, such as the most suitable way.Finally, at the end of the year, the U.S. corporate tax reform plans were approved. As announced earlier this year, this provides a benefit to the 2018 EPS of 6%, all things being equal. We would expect around half of this to be reinvested in the rollout of NGPs.The highlight of the year was, of course, our acquisition of Reynolds, and I'm delighted to say that the benefits of the deal are already beginning to flow through. With only 5 months' contribution for Reynolds in our numbers and no comparison base available, we are unable to give any financial performance commentary on the business. However, what I can say is that Reynolds is performing very well, with strong share growth in the second half of the year, and the integration is progressing smoothly. Detailed plans have been drawn up for delivery of the synergies. As we said at the end of the deal, we expect cost synergies of at least $400 million. I'm happy to report that savings are flowing through a little earlier than anticipated, and they have already delivered more than $70 million in 2017. This has been driven by the benefits of procurement, the implementation of BAT systems and process into the Reynolds production facilities together with integration of the corporate functions. We remain well on track to deliver our target of at least $400 million in cost synergies by the end of 2020.In addition, we are combining the capabilities of both organizations to fully strengthen our global R&D. We're the only company with a predicated tobacco heating product in U.S. markets. I am pleased to say that a substantial equivalence application for our carbon tipped product has been accepted by the FDA and moved to scientific review. We await a final decision around midyear. We are also making good progress on the development of our SE application for glo in the U.S., and we are on track for a submission to be made this month to be followed by an MRTP application in due course. Finally, we look forward to the FDA's response on our MRTP application for Camel snus, and we are awaiting the scheduling of our TPSAC meeting to review the application later this year.The addition of Reynolds to the business gives us an industry-leading portfolio of brands and products. Given this and the growing importance of NGP to the business, we have expanded our focus from just the GDBs to include the U.S. Drive Brands, our NGP business and our oral product business in the U.S. and the Nordics. All our tobacco products, like snus and U.S. moist snus, have existing epidemiology demonstrating their potential as reduced-risk products. Together with our NGP, we refer to them as potentially reduced-risk products. From 2018, our strategic methods will focus on revenue growth for this expanded Drive Brand portfolio as this is a key measure of success and has come across all 4 product categories. This more closely aligns with our strategy and vision. This expanded portfolio gives BAT an industry-leading range of brands and products spanning the risk continuum that's second to none. Even with the growing importance of NGPs, a significant proportion of the portfolio remains in the combustible cigarette business, which I'm pleased to say that's continued to perform very well. Overall, corporate share grew strongly and was up 40 basis points in 2017, on top of the 50 basis points achieved last year. This was driven by another excellent performance for the GDBs, which grew share by 110 basis points across our key markets outside the U.S. This is now our 7th consecutive year of share growth, with corporate share up a total of 210 basis points over the period and GDBs up 630 basis points over the same period. The U.S. Drive Brands outperformed the U.S. industry, growing share by 40 basis points. Combined together, Newport and NAS are the fastest growing brands in premium. Dunhill held up well in the premium segment but was impacted by down-trading and significant excise increase in many of its key markets, including Malaysia, Brazil and Indonesia. However, share was down only 10 basis points. Kent, Lucky Strike, Pall Mall and Rothmans all grew share, demonstrating the strength of our differentiated brand portfolio and diverse geographic footprint.Our expanded Drive Brand portfolio includes an exciting portfolio of potentially reduced-risk products. Our Tobacco Heating Products cover electronic carbon tip and hybrid products. In Vapor, we have a wide range of open and closed systems under both Vype and VUSE. Finally, the recent acquisition of Reynolds and Winnington extend the portfolio even further into the growing oral tobacco segment with both tobacco and no-tobacco oral products. BAT now has the widest range of potentially reduced-risk products of any tobacco company in the world, with the capability of addressing the widest range of consumer needs. We are therefore the best-placed tobacco company to lead the transformation of the industry and transition the largest numbers of smokers from traditional cigarettes to potentially reduced-risk products.glo is already demonstrating this in Japan. Just 4 months after the national rollout, glo already has 4.1% market share in January despite continued capacity constraints limiting the device to one per store per week. Together with our suppliers, we are building device manufacturing capacity rapidly and anticipate to have an annualized capacity of 25 million units by the end of the year. We expect device capacity to become unconstrained during Q2. Our annualized consumer capacity is already 15 billion sticks, and we are able to increase these to 52 billion sticks by the end of the year. In December, we launched 4 new narrow-stick variants, which had quickly grown to represent 40% of glo sales. glo now has the widest range of products in the market, with a strong pipeline of innovation, including capsule variant and glo mini following later in this year.During 2017, glo was also launched in South Korea, Canada, Russia, Switzerland and most recently, Romania. In South Korea, following its launch in Seoul in August, glo was rolled out nationally. glo continues to grow national share and now reached 0.44%. Share in Seoul has slowed, impacted by a combination of supply constraints and a new competitor entering into the market. We are currently expanding distribution and adapting our marketing model to reinforce our market presence. With a strong pipeline of innovations, we are confident in glo's potential in South Korea. In our trial markets of Canada and Switzerland, we are continuing to refine our marketing model to address the challenge of extremely restricted communication environments and consumer preference for stronger cigarettes. Our recent stick launches in Russia and Romania are showing very encouraging early results. During 2018, we have plans to launch glo in additional 14 markets. Having only entered the THP market in December 2016, we have made excellent progress during '17 and expect to build on this in 2018.We also continue to make good progress in the development of our Vapor business in 2017. Excluding the U.S., Vapor revenue was up 30%. Mainly driven by acquisition, gross margin improved by 10 percentage points, and we are now on track for our Vapor business to break even by the end of '18.We continue to consolidate our leadership position in our key markets. In the U.K., our Vapor business maintained a record share in retail of 40%. In Germany, Vype became the #1 brand in retail with a record 37% share in the channel and an estimated 10% of the total vapor markets. In France, offtake volume was up 1/3. And in Italy, we expanded distribution to national coverage, driving a significant increase in sales. In the U.S., VUSE grew by 16% of revenue, by 29%, following increased distribution of Vype and the launch of [indiscernible]. Commercial performance will be boosted further by the recent launch of VUSE e-commerce platform. Importantly, product performance continued to be highly valued by consumers when tested against direct competitors' products. Our acquisitions in Poland and the U.K. have performed very well. In Poland, CHIC volumes was up over 12%. In the U.K., 10 Motives has grown market share and revenue month-on-month. The integration of the VIP vape store chain in the U.S -- U.K. is progressing well, and a 25% expansion of the footprint is planned for 2018.Finally, the priority for 2018 is our second generation of Vapor products, ePen 3 and Raptor, both of which are due for launch towards the year-end. During 2017, consumer incidence in Vapor across our key markets is estimated to have grown around 40%, with sharper rises in category penetration in a number of emerging markets. Our strong pipeline of second-generation of Vapor products and a growing understanding of Vapor consumers puts us in a strong position to capitalize on this growth.Alongside our growing NGP business, our large and successful oral tobacco business in the Nordics and in the larger U.S. markets provides a further opportunity for smokers to switch to lower-risk products. In 2017, total revenue for oral tobacco grew 16% to nearly GBP 900 million, driven by strong performance in the U.S., Sweden and Norway. In the U.S., Grizzly remains the leader in the growing wintergreen in pouch segments. The brand gained a full point of market share to reach 31.8% in 2017, driven by Grizzly Dark styles, limited edition packaging and powerful equity-building campaigns.In Sweden, we are the fastest growing company, adding 170 basis points over the year to reach a share of 10.3% in December. In Norway, share was up 340 basis points to a record 6.4% in December, driven by the success of Epok, our innovative snus brand. Across the Nordics, we are now the leader in white snus, the fastest-growing segment across the markets, with an 85% share of segment. We expect to launch a non-tobacco variant in the second half and have plans to expand outside the Nordics with these innovative and profitable products. So in summary, in 2017, we completed the Reynolds acquisition and we made excellent progress in NGPs and the wider potentially reduced-risk products portfolio. Our combustible business continued to perform strongly, and we are investing a substantial amount of money in the long-term sustainability of the group.This was all done while delivering on our commitment to high single-figure earnings growth, and this was a truly transformational year. I will now hand over to Ben, who will take you through the details of the results.
Thank you, Nicandro. As Nicandro said in his opening, this year's numbers have been significantly impacted by the accounting treatment of the Reynolds acquisition. Revenue was up 38%, and profit from operations increased by 39%. This reflects the additional volume of 36 billion sticks, revenue of GBP 4.2 billion and profit from operations of GBP 1.3 billion from the inclusion of Reynolds from the date of acquisition. Diluted EPS was up over 600%. You can see from the slide, this was mainly due to a gain of GBP 23.3 billion on the deemed disposal of the associate holding in Reynolds and the deferred tax credit created by the revaluation of the deferred tax liability relating to the acquisition at a reduced tax rate following the U.S. tax reforms. More detail on the adjustments is available in the announcement published this morning, and there's a reconciliation of IFRS to the adjusted numbers in the supplementary slides of this presentation, which are available on our website. I do not propose to go any deeper into the technical accounting details in this presentation, but for those of you who want to go into the detail in more depth, please contact IR after the meeting closes.So for clarity, I'll now focus on the adjusted organic results, which exclude the results of Reynolds and our other acquisitions. Organic volume was down 2.6%. This was mainly due to industry volume decline, in particular, in Ukraine, Brazil, South Africa and Russia, driven by excise increases and illicit trade growth. This includes THP volume of 2.2 billion sticks. Adjusted organic revenue was up 6.5%, or 2.9% on a constant basis, benefiting from higher pricing across the majority of our markets, offset by negative geographic and portfolio mix of around 1.4%. Adjusted organic profit was up 7.8%, benefiting from a 4% currency tailwind. This was a 6% tailwind including the contribution from Reynolds.On a constant basis, profit grew 3.7%. This reflects a stronger second half profit growth of 4.1% against the first half growth of 3.2%. This was anticipated at the interims. Adjusted diluted EPS on a constant basis grew nearly 10% and was up almost 15% at current rates, exceeding our high single-figure EPS growth objective. Turning now to the regions. In EEMEA, adjusted revenue on a constant basis was up 0.6% as price in a number of markets, including Ukraine, Turkey and Iran, more than offset volume decline in the region and down-trading in Russia and the GCC. Volume was down 3.4% to 228 billion sticks. Growth in Nigeria, Turkey, the GCC and Algeria was more than offset by reductions in Ukraine, South Africa, Russia and Iran. Share grew 30 basis points, with good performances from Russia and Turkey, in particular. This is now the fourth consecutive year of share growth in the region. Despite good performances from Ukraine, Iran and Nigeria, constant currency adjusted profit was down 1.9%. This was mainly due to the significant excise increase in the GCC, difficult trading conditions in Russia and the continuing negative impact of transactional foreign exchange on costs. In Russia, trading remains challenging, with increased price competition. This has led to some absorption of excise and down-trading. Share grew 10 basis points, driven by another strong performance from Rothmans, which now has over 10% market share.In South Africa, the weak macroeconomic environment continues to impact trading. However, share was stable, and Dunhill reached a record share of over 15%.Turkey delivered an excellent performance, with growth in revenue, profit and share.Overall, the GDBs had another outstanding year across the region. GDB volume was up 9.9%, driven by good performances from Pall Mall in the GCC, Rothmans in Russia and Kent in Turkey.The ASPAC region posted a good performance, delivering revenue, profit and share growth in a challenging trading environment. Regional volume was down 1.3% as the impact of industry volume declines in Malaysia, Pakistan and South Korea more than offset growth from glo and excellent volume and share growth in Bangladesh. Adjusted revenue on a constant currency basis increased by 1.3% to GBP 4.3 billion. Higher pricing and incremental revenue from glo was offset by negative mix effects. This was mainly as the result of strong growth in lower-priced markets including Bangladesh and significant industry volume decline and down-trading in Malaysia and Pakistan. Although there was significantly increased investment behind glo in Japan and South Korea, adjusted profit on a constant basis was up 2.7% at GBP 1.7 billion, driven by revenue growth and cost savings. At current rates, adjusted revenue was up by 5.7% and profit was 7.7% higher, benefiting from foreign exchange tailwinds, notably the relative movements in the U.S. dollar and the euro against the Japanese yen.Australia delivered a good performance, growing profit and share. In Indonesia, volume was lower, in line with the overall market decline. However, with strong volume growth of 13%, Dunhill and Lucky Strike now represent 97% of our portfolio volume. Profitability increased, driven by cost savings and business efficiencies. Bangladesh had an outstanding performance, with strong volume, profit and share growth.Market share across the region was up 60 basis points, with a good performance in the Global Drive Brands, which grew volume by 1.5%.The Americas faced a challenging macroeconomic environment in 2017, impacting consumption across the region and leading to a significant down-trading in growth and illicit trade. Despite this, at constant rates, adjusted revenue in the region grew 11% and adjusted profit grew 10% driven by Canada, Mexico, Chile, Venezuela and Colombia, more than offsetting decline in Brazil. Volume was down by 5%, largely due to down-trading and industry contraction in Brazil and Argentina and the growth of illicit trade in Chile.In Brazil, volume decline rates moderated compared to previous years as our low-priced brand, Minister, captured a fair share of the down-trading. Canada delivered its fifth consecutive year of profit growth, driven by successful pricing and good cost control. Regional market share was flat, with growth in Mexico, Argentina, Colombia and Chile offset by lower share in Brazil. The GDBs performed well across the region, with volume up by 10.9%. This was driven by the good performance of Pall Mall in Mexico, Lucky Strike in Colombia as well as successful migrations, including Free to Kent in Brazil and Viceroy to Rothmans in Argentina.Western Europe delivered an excellent set of results as economic sentiment in the euros had improved to reach the highest levels since January 2001. Strong performances in Germany, Spain, Poland and Romania were offset by excise absorption in France and Italy. As a result, revenue grew 0.9% on a constant organic basis and was up 7.6% at current rates, mainly due to the relative weakness of sterling to the euro. Volume in the region was up 1.7%, benefiting from M&A. Organic volume was down only 0.8% as growth in Spain, Romania, Portugal, Poland and Hungary was offset by lower volume in Italy and Greece. This significantly outperformed the industry, which we estimate was down more than 2%.Regional share was up 30 basis points, driven by the GDBs, which were up 8.9%. This was driven by good performances by Rothmans in Poland, Lucky Strike in Spain as well as successful migrations in Germany and Poland.Turning now to operating margin. Whilst the margin clearly benefited from the inclusion of Reynolds, I'm pleased to say that after 2 years of reported decline, we've once again returned to operating margin growth. Underlying margin improved by 110 basis points. This was offset by an increase in NGP investment of 70 basis points, leaving adjusted organic operating margin up by 40 basis points, only just outside our target of 50 to 100 basis points per annum. This was driven by ongoing cost savings and efficiencies from the implementation of TaO and OneSAP. It is also after the absorption of a continuing transactional foreign exchange headwind estimated at around 1% of operating profit and after the significant additional investment behind NGPs. M&A in Western Europe is diluted from a reduced margin by 20 basis points. Finally, the inclusion of 5 months of Reynolds added 250 basis points to margin, leaving our full year adjusted operating margin at 39.9%. Although we continue to invest behind the rollout of NGPs and expect 2018 to be a heavy investment year, we remain confident of delivering 50 to 100 basis points of margin improvement on average over the years.As I said earlier, reported EPS benefited significantly from the accounting treatment of the Reynolds American acquisition. A reconciliation from 2017 reported EPS to both 2016 reported EPS and 2017 adjusted diluted EPS is available in the supplementary slides. As you can see here, adjusted diluted EPS of 284.4p at current rates was up 15%, driven by growth in operating profit, the contribution from Reynolds, good results from ITC and a 5% translational currency tailwind.Net finance costs were up significantly as a result of financing the Reynolds transaction. However, the average cost of debt was marginally lower. We expect net finance costs in 2018 to be around GBP 1.5 billion.Despite good results from ITC, the contribution from our associates decreased due to the inclusion of only 7 months of Reynolds. Our effective tax rate was slightly lower than in 2016 at 29.7%. Noncontrolling interests were marginally higher as profit growth in Algeria and Vietnam was offset by decline in Malaysia. I usually give some guidance around the expected full year tax rate. With a full 12 months inclusion of Reynolds and the reduction in U.S. tax rates, I would expect a tax rate for the group of around 27% in 2018.On currencies, if rates were to stay where they are today, the translational FX impact, including a full year of Reynolds, would be a headwind of around 9% on operating profits and a headwind of around 7% on EPS. We would also continue to have a small headwind on transactional FX. We've always said that we don't believe it is appropriate to strip out transactional FX from constant currency performance and only adjusts for translational FX in our numbers. However, in recent years, the scale and speed of devaluation has generated such a significant headwind that comparisons with other companies treating transactional FX differently risk being misleading. As a result, we were forced to quote an estimated impact from transactional currency movements, included in our constant currency figures. Now that transactional headwind has abated to more normal levels, we will no longer be separating it out in our constant currency analysis.Now on to cash flow. Overall, adjusted cash generated from operations was GBP 3,282 million, which is GBP 167 million higher than last year. This was mainly due to higher operating profit driven by the contribution from Reynolds offset by an early MSA payment of $1.8 billion, GBP 1.4 billion, made by Reynolds in December of 2017, as it is deductible at the 35% tax rate. As a result, operating cash flow conversion was lower than last year at 78.6%. However, excluding this early MSA payment, operating cash flow conversion would have been approximately 96%.Depreciation is the main component of noncash items. Excluding the MSA payment, working capital outflows of GBP 93 million were significantly lower than in 2016, which was an outflow of GBP 254 million. Net capital expenditure was GBP 208 million higher than in 2016, largely due to investment in NGPs. We expect gross CapEx in 2018 to be around GBP 1.1 billion.Net interest paid was higher at GBP 1,004 million due to the upfront costs relating to financing arrangements for the acquisition of Reynolds. Tax outflows of GBP 1,675 million, including approximately GBP 550 million of tax flows relating to the U.S. together with slightly lower payments for the rest of BAT due to the timing of payments. Higher dividend payments to minorities are attributable to higher profits in Malaysia in 2016. This delivers adjusted cash generated from operations of GBP 3,282 million. Turning now to financing and shareholder returns. We ended the year with net debt to EBITDA at 4x on an annualized basis, 12 months of Reynolds, as anticipated at the time of the deal. This was 5.3x on an accounting basis. We continue to target reducing this to around 3x by 2019, returning to the upper end of the 1.5x to 2.5x net debt-to-EBITDA corridor in the medium term. Our target credit rating remains BBB+, Baa1 with S&P and Moody's, with the rating currently standing at BBB+, Baa2. The rating is driven by our net debt-to-EBITDA ratio, and we are focused on managing this down. We continue to target a dividend payout ratio of 65%. As part of the transition to quarterly dividends, we have kept the payout ratio higher than our target of 69% to equalize cash payments but intend to gradually return to 65% over time. This remains a floor, not a ceiling. In the face of currency translation headwinds, we will increase the payout ratio so our sterling shareholders receive an increased dividend based on good constant currency performance, as we have done historically.So in summary, the business performed very well in 2017. There were a number of one-off items relating to the Reynolds acquisition, which benefited reported results. Excluding these, constant organic adjusted revenue grew 3%, profit, 4% and adjusted diluted EPS, 10%, exceeding our high single-figure earnings growth target. We continued to outperform the market and have once again grown share, powered by the continued strength of our brand portfolio. With a 15% increase in the dividend backed by EPS growth, we have demonstrated our continued commitment to growing shareholder returns over the longer term. Looking into 2018, the pricing environment remains competitive. Volume shipment phasing in certain markets, including the GCC, and the timing of NGP investments means we expect adjusted profit growth to be skewed to the second half, as in previous years.However, we are confident of another good year of constant currency adjusted earnings growth, with the benefit of the U.S. tax reform providing additional support for shareholder returns and helping to fund significantly increased investment in NGPs. Thank you. And I'll now hand you back to Nicandro.
Thank you, Ben. 2017, was a year which changed the shape of the group. We invested heavily into NGPs with excellent results, and our combustible business has continued to perform strongly. And this is expected to continue in 2018. It is an exciting time for BAT, and we remain confident in our ability to continue to deliver high single-figure earnings growth in the years to come. Thank you. And I'll open up for questions for those of you in the room.
Who'd like to start? You will need a microphone, because the sound system is not working that well. So if you guys can wait for a microphone to get to you.
Alberto Lopez from JPMorgan. A couple of questions from my side. First, how should we think about the investments that you are doing this year beyond 2018? Is that some investments go [ off place ] as we go into '19, '20? Also, if can you give updated details on what exactly are you spending. Is it in terms of device discounts, is it infrastructure, store rollout, et cetera? And then also, I was keen to get your views on Japan since THP is doing very well. What would be your views on how big can THP be in the total Japan market this year? And what would you aspire to capture from that share of the segment?
That's a lot of questions. So I'm going to answer all. So in terms of investment beyond for 2018, as we just mentioned, we are going to use part of the U.S. tax reform for additional investment in BAT. So I expect that, in all, you have an additional, just in THP space, THP and vaping, mainly THP, another GBP 500 million for 2018. So it's a huge investment to allow us to roll out to at least 14 markets for THP and several others for vaping in 2018, because we are capacity-constrained, as you just mentioned. The breakdown of investment in terms of stores and so on and so forth, I don't have this here, but I can supply this later for you. No problem at all. We don't usually disclose the investment in this kind of detail, but I'm sure that you'll find a way of a percentage base to tell you, whatever you got. In terms of Japan, and your question was about Japan, how big the segment is. Well, as you know, the segment is quite substantial in Japan. It's very difficult to predict how it's going to be in 1 year time. But do I see this growing for 30% of the segment of the month? Yes, I see this growing for 30% of the month. I cannot emphasize on how much -- how long it's going on to take it. Talking a little bit about our platforms in Japan, you know that we are capacity-constrained. I think that the numbers are showing that. Despite being capacity constrained, since the national launch in October, we are providing -- we are supplying one device per store per week on a national basis in Japan. And even though, we -- our market share is growing substantially. In December, it was 3.3%. The latest reading that you have for the end of January was 4.1%. So it's growing extremely well. And your question is, how high is high? Because nowadays, we have around 20% of the segment despite the huge constraints that you have in terms of supply and despite the competition has not been constrained, they are unconstrained. I think that you can make a proxy of Sendai. If you look at Sendai, nowadays, our market share -- in Sendai, we are 1/3 of the market, and we are constrained there as well. In the first 6 months of our launch in Sendai, first half of last year, in which we were providing 3 devices per store per week, we got from 0 to 8% in 6 months. But because of the national launch, the launching into 4 prefectures in July, and the national launch, we had to scale it back in Sendai. So we moved from 3 devices per store per week to one device per store per week. And of course, our market share growth slowed from 8% to 10% nowadays. Still, 1/3 of the market. So I think that gives you an idea of how strong the proposition is. Another factor that I'd like to mention is that, as I mentioned early on, I think that the expertise and innovation that we have for combustible can be applied for the consumables. We launched 4 new flavors in December. Two months later, those 4 new flavors, they are 40% of our volume, and the widest range of flavors in the market nowadays is with BAT. But with the constraints that we have in the device, it's very difficult to grow even faster than we are growing. But I think that just shows the strength. And the other important piece of information, if you take out the international launch in October, 60% of the growth of the segment is coming from us despite the device constraint. And that inflow of consumers is higher to our product than the competition's product inside the THP category. So it gives you some signals that we are in a very strong position in terms of product, in terms of device. And I think with the pipeline that we have coming this year, you have glo 2.2 coming in July, when we'll be unconstrained, and probably it's the one that we're going to use for the rollout. And we have the mini coming at the end the year. And we have new flavors coming in the second half as well. I think that you get a very strong position to grow this category beyond the numbers that has been estimated. That's why I said in spite in October, given the tide, of GBP 1 billion for 2018, I think that it is going to be substantially higher this year. A long answer, but that was a long question, anyway. Yes?
It's Alicia Forry from Investec. My question is on the EEMEA region, which was perhaps one of the weaker areas this year. Do you expect the down-trading in Russia, the impact to the excise in GCC, foreign exchange headwinds on the COGS in that region to persist again in 2018, i.e., should we see another year of EBIT being under pressure in this region? And then secondly, I was interested to hear a little bit more about the THP launch in Russia. You mentioned it briefly in the presentation, but any additional color would be appreciated.
Okay. Let me start in the EEMEA in general. It was a difficult year for 2017 for a lot of different reasons. One of those, for example, we saw in Russia excise absorption. It was a very competitive price environment there. It seems that things are getting better for this year. So at least for the price environment in Russia, you see a much better environment. The second one was a substantial excise increase in the GCC. That is a very important market for us, not only for BAT, for other players as well, in which the excise increase demanded us to double price, and one of the reasons that you have a hit in turnover last year, because turnover went down dramatically in the second half of last year in the GCC. And I think that, probably, those are the 2 main reasons for EEMEA being under pressure. And I think that I have to mention as well the transactions headwinds that we had in Russia last year that affected COGS, as you've mentioned. We don't see transactions headwinds for 2018 at the same level in '17. So it's going to ease on that side. For BAT as a whole, we think transactions headwinds is going to be 1% only for 2018, a much better position than it was in '17 and even better than in '16. And if it is going to be at that range, we are now going to report back numbers with and with and without transaction, because BAT doesn't believe that's the right way to report anyway. So that's the COGS element. I think that things should be a better environment for '18, but it's too early to call. So we have to wait a little bit, but it seems that conditions are improving. But don't forget that in the GCC, we are comparing 12 months with a special excise increase against 6 months in the prior year. It's going to affect '18 anyway, not only for us, but all the competitors. But I think the environment is better.
Remember the selling prices had to double in the GCC after the excise increase, so it's been very disruptive to the market.
Yes, the decline in revenue -- in net revenue there was 26%, I think, in the second half because of the unit size and down-trading the market. But we should never lose focus of a good [indiscernible]. Our market share is, I think that's 80 to 10 basis points -- 80 to 100 basis points higher. We had one of the most important segments in the GCC in the value for money. Out of this, we did extremely well with Pall Mall there, and I think that our market share has increased substantially there -- substantially. So when the market picks up again, I think that we'll be in a very good position there. So that's the GCC. Regarding the launch in Russia, it's 6 weeks, so it's too early to call. And we are capacity-constrained as well. We had launched at the end of last year in additional 4 markets, and all of them, like Romania, it's 3 weeks after launch. In Russia, it's 6 weeks after launch. So it's too early to call. But the initial reading of the market is that the markets consuming everything that we have in stores. One device per week per store, and we are selling everything. So it's going very well. We have extremely limited distribution because our focus for 2017 has been in Japan. So we are giving all the supply that we have for Japan because it's a more developed market. So the other markets, like Korea, like Russia, like Romania, we have very limited supply. That's going to be lifted in the second half of this year. I was discussing this earlier on with some of you. It's going to -- we'll be in full supply around March and April, but we have to build capacity in order to be able to respond to the marketing needs -- market needs. So around May and June, we'll be fully unconstrained. And I think -- and that's the reason that we are scheduling all-day launches in the markets at the beginning of the second half of the year, third quarter -- probably third quarter of the year. And then you'll see unconstrained supply in places like Russia, Romania, South Korea and so on and so forth. Then you'll have a better reading about the performance of the brand. But if you look at Japan, as I said, as a proxy, with the numbers that they gave early on, it gives the rationale for the confidence. So That's why I said that the GBP 1 billion, we should substantially exceed, because it's beyond our expectations of the result in Japan. Adam?
Can I ask 3 questions? First of all, you talk about device constraints. Just within your tobacco heating sales, what percentage, roughly, is coming from devices versus the renewables? And related to that, for each sort of consumer you have, how many devices does he or she need to be a glo consumer? So that would be one question, and then I have a couple of follow-ups.
I think the relationship between device and consumers is 1 to 3 in terms of revenue. The percent of device in our sales, to be honest, can I go back to you at the end of the session? And I'll give you a more appropriate number? If not, I will give a very rounded number here. And I will go and get back to you.
Moving on to the U.S., as you look forward, is your priority really operating profit growth, or is it market share progression? In other words, would you be happy in 2018 to have flat share but nice growth of profit? Or would you -- if you have a choice, would you prefer share growth but no profit growth if you had to choose between those 2?
Okay. We are in the business of making money, Adam. We are not in the business of making market share of volume. Market share of volume, our profits should make money. So I don't think that you have this choice, it's either go for market share or go for money. We try to have the right brands in the market with the right consumer propositions so that you drive our market share, that you drive volume, that you drive money. So I don't think that you start to think, okay, let's have less market share here to have a little bit more money. That's not the discussion that we have inside the company. So that's not really at top of my mind. But I think that what BAT has shown in the last years, and if you look at the combustible business, the business model that we have is to have more new innovations in the markets, and I think that we have done extremely well with our portfolio for that. We have been declining in the last years much less than the industry, and this year was not different, driven by the GDBs. The GDBs have grown 600 basis points in 6 years. It's a fantastic performance. And this has helped us to overdeliver the financial results. So that's the strategy for the world and the strategy for the U.S. And it happened with the results of Reynolds last year. They had flat share in the first half. In the second half, they grew -- they had a very good growth in terms of market share. But we'll be competitive in pricing.
And then the final question. If I think about the rest of the world in the round, so not the U.S., not Tobacco Heating Products, in 2015, 2016, you had over 5% organic sales growth. This year, it was 2 point something, which would imply that it's slowed down. And I was just wondering, do you think that slowdown is temporary, or do you think it's permanent? And if we think out the next few years, we're getting back to the sort of 5%, again, excluding Tobacco Heating, excluding the U.S.?
I don't think that you can exclude the U.S yet, because you have to make comparison. I cannot -- I don't think that you have to -- you can exclude THP. THP and combustible, they are categories in which the migration is 100%. So when you leave the combustible category, you go into THP. I don't think that you can exclude that. Then you start saying, let's exclude Japan or let's exclude Russia. You cannot do that. So I have to look that both things together. If not, their management becomes very, very difficult, because the migration for one category is 100% to the other category. And at the end of the day, it's tobacco. So if you look at both categories, because it's how I like to read it, and I think that's the right way to read it, if you look at the price mix, that's the most important thing that we should be discussing here. The price mix of last year was 5.5%. And if you look at the price mix of the last 3 years on average, it was 5.6%. Our matrix is 4% to 6%. It was in the high end of the matrix. So I think the price mix in 2017, despite everything that I said, was solid, was quite good. Of course, there are some concerns, and I have some concerns, because in 2016, the price mix was a little bit higher than usual. It was 6.5%, 6.7%. And there was a decline for 2017. But then a good rationale for that, as I said before, we've had some excise absorption because of competitive environment in places like Italy, France, Russia. We had substantial excise increase that was not passed through price in 2016 in places like Brazil, Malaysia. And you had the issue that I mentioned, turnover, in places like the GCC. Well, despite of that, the price mix was 5.5%. It was at the high end of our matrix. It was quite solid. And it was on par with the average of the last 3 years. And if you take 5 years, you'll see that it was even a little bit higher. So it's not bad. It's very good.I have a question down there, and then I'll go back to you, okay, because you've raised before.
Owen Bennett at Jefferies. Just a few questions on the SE application in the U.S., please. And firstly, are you confident of approval? I think you said around midyear, you should hear? And secondly, can we get any details on commercialization times in place? And then thirdly, could you give us any details on capacity you have in place for the carbon tip, and should it prove popular in the U.S.?
Well, the carbon tip application, the submission was July 2017. We expect the decision to be half 1 2018. Unfortunately, we don't manage this process. FDA manages the process. Our expectation is that half 1 of this year, you'll have FDA making the call. I cannot guarantee that. But our expectation is going to be for half 1 2018. And if half 1 2018 is confirmed, and you are able to launch this product in the market, it's going to happen in the second half. We have plans for that in the United States, and we don't have capacity problems. So that's what I can disclose. I cannot disclose the states and things like that, because these are plans that are quite confidential. But we'll be launching before the end of the year in the United States, and we'll be -- we won't be capacity-constrained in the case of carbon tips. But as I said, it's all dependent on the FDA. It's very difficult for me to tell you when I think that's going to happen. My expectation is half 1, we'll have this going ahead.I have a question here.
Jon Leinster of Berenberg. Actually a few, I'm afraid. First of all, I think you mentioned in passing intense competition in South Korea in terms of the heated tobacco market. Was that a reference to Philip Morris? Or was that a reference to the new product from KT&G?
The reference for the new product from KT&G. Because the size of the company in that market, they have a lot of trading power in order to put forward their propositions. So I think that's more on the South Korea side than anything else. But the main reason for having 0.7% share in South Korea is initial supply as well. As soon as we have unconstrained supply, we think that we'll have the same success in South Korea that we have in Japan. But I was mentioning a second player -- a third player in the category in my comments.
So the product from KT&G seems credible, then.
That, I cannot say. You have to ask KT&G. I think that glo has the best product in the market and has the widest range of flavors in the market. Actually, we have for the brand, as I said, the net inflow of consumers in Japan is positive for glo. So we're extremely excited about what we have in the market. And now our new launch is in terms of consumables and device. That's what I can tell you.
Okay. Second one. When you launch Raptor and some of the other products in the vaping market, do you expect that to cause a step change in the growth of the vaping market in the way that perhaps you ought to in the U.S. market?
That's a very good question. The answer is, yes. And as I said before, in October -- at Investors Day in October, I think that these are groundbreaking developments. I think that it will be -- Raptor, it will be best in class. The initial results of the tests -- the test market that we are going through in U.K. is a very small test market are extremely positive. We think that -- you don't see it in our numbers because we are doing [indiscernible] here and still having the product is available to launch -- for launch. But I think that could be a step -- a very important step in terms of the growth of the category and the growth of our business. So I'm very optimistic about both products. But one of those, you will come at the end of the year, as we said at Investors Day, we will do our city launch maybe at the beginning of the second half of next year. That's Raptor, but it's not coming to the market before the year-end. And ePen 3, we are testing now. Probably at the end of the year, in the second half, we will see a city launch and later expansion for one of the countries. So we're just taking a little bit more time. It's going according to what we said in October, but the timing that it takes to guarantee that we come to the market with the right products, with the right proposition, read consumer's mind, to meet consumer needs. And also, there is an element here of margins. These are going to be products that will be in higher margins. And I think that from the financial point of view, from the market point of view, I'm extremely excited about those developments. And they are going to go through FDA. It's in our plans, as soon as we have the final products, they are going to follow the FDA path. So everything has been met.
And lastly, do you think the health claims or medical claims, do you think that's absolutely key to getting this -- to getting heated tobacco to grow in Europe or, indeed, in the U.S.? Or do you think that's a key competitive tool? Or do you think that's not necessary particularly?
Well, we don't have a medical claim in Japan and Korea. I think that the markets are growing for a lot of different reasons there, and we discussed this several times before. Why did it grow so fast there when you see other markets in the world not growing as fast. As you know, as well as I know, it was launched in Italy at the same time that it was launched in Japan. And just look at the performance of both markets. There are a lot of reasons why it's growing so fast in Japan and Korea. And I'm not going to go back on that because we discussed this so many times before. And I think that this is -- in some markets, can be more important than others. But if you ask me the question, do I think if I had the chance to use this tool, it would be very important. But it's difficult to tell you on a worldwide basis, I think in some of the markets, it's going to more important than others.Can I have one more question before we close the session, if there is one? Yes, one there.
Mirco Badocco at RBC. So you mentioned a total cumulative investment in NGPs of $2.5 billion since 2012. I wanted to know if you can share more -- if you can give more color on how much of that was behind heat-not-burn, how much behind vaping, and the state of CapEx and P&L?
Well, we don't disclose this kind of data to give you a breakdown of the $2.5 billion. And I have to say that some of the research that we do works for both categories. In terms of personnel, it works for both categories. So it's difficult for us to start splitting this. So all the laboratory work, it works for both categories. So we don't disclose this kind of data. So, guys, thank you for coming. We look forward to speaking to you in July at our interim results, and we'll be reporting our new regional structure. So thank you very much for coming.