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British American Tobacco PLC (NYSE:BTI)
Q1 2020 Earnings Call
Jun 9, 2020, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Mike Nightingale -- Investor Relations

To begin, I need to draw your attention to [Technical Issue]

Thank you, and good morning, everyone. Welcome to our 2020 First Half Pre-Close Conference Call. With me this morning is Tadeu Marroco, our Finance Director. I hope you're well and I'd like to take this opportunity to thank you for joining us this morning.

Before we begin, I need to draw your attention to the cautionary statement regarding forward-looking statements contained in the trading update. And as a quick reminder, in addition to this call, Jack Bowles, Chief Executive, and Tadeu will host a fire-side chat such at the Deutsche Bank Conference at mid-day today [Phonetic] U.K. time, which will be available on bat.com as a webcast. There are no presentation materials for either event.

I will now hand over to Tadeu, who will share a few short words on current trading before opening up to questions. Unless otherwise stated, our comments will focus on constant-currency adjusted measures and volume share data to April 2020. Thank you.

Tadeu Marroco -- Finance Director

Thank you, Mike, good morning everyone and welcome. I hope you are all keeping safe and well. COVID-19 is having an unprecedented human and economic impact. It is, thanks to the hard work and dedication of our teams around the world that to date BAT has been able to navigate this difficult and volatile times and continues to be a highly resilient business.

Our focus throughout this period has been on four key priorities. First, our priority has been to safeguard the safety and security of our people by implementing safe working practice and acting quickly and responsibly, whenever employees have become ill. Second, we have focused on maintaining supply chain continuity by building excess stocks at all points in the chain, leveraging our network and manufacturing footprint, and implementing well-prepared business continuity plans. As a result, we have faced no significant factory shutdowns, aside from where they have been mandated by governments. We are also leveraging our distribution and manufacturing capabilities to support the wider community at this difficult time.

Third, we have continued to invest behind our brands, while remaining on top of changing consumer behaviors during the lockdowns, downs targeting our marketing activities accordingly [Phonetic]. And finally, we have treated our people friendly. We have made no redundancy, nor furloughed any employees, and as a result of the crisis, and we have continued to pay all our employees in full despite the challenge to the business.

As you can see from today's announcement, this approach is being rewarded by a resilient business performance. While the trading environment is extremely volatile and unpredictable, the business continues to perform well, building on a very strong performance in 2019. This is demonstrated by the fact that we are growing share in combustibles, together with the new categories across all four regions. In addition, price mix continues to be strong. Elasticities remained unchanged and we see little evidence of accelerated down-trading. In the context of the continuing challenges of COVID-19, we are on track for a good performance in the context of a very challenging circumstance.

We also remained focused on our three strategic priorities: driving value growth from combustibles, investing to deliver step change in new categories, and transforming the business to create a stronger, simpler, more agile BAT. The progress we have made against these three priorities has positioned us well for continued delivery in the current environment.

Around 75% of our revenue comes from the developed markets, where results have been strong. Our research has shown that consumption in these markets is trending in line with or slightly ahead of last year, and pricing has remained strong. Emerging markets has been more pronounced to the impacts from COVID, including in Bangladesh, Vietnam and Malaysia. In addition, factory closures and other lockdown measures have persisted for longer than anticipated, particularly in South Africa, Mexico and Argentina. In South Africa, there is no sign of the tobacco sales ban being lifted, despite our ongoing lobbying efforts.

With these uncertainties likely to continue into the second half, we now expect the global industry volumes to be down around 7% this year. This, together with the previously announced impact on international travel retail sales, means we now anticipate a total headwind of around 3% from COVID-19 on full-year 2020 constant-currency adjusted revenue, offsetting the otherwise resilient performance of the business. As a result, we expect the full-year constant-currency adjusted revenue growth of 1% to 3% and mid-single-digit adjusted earnings-per-share growth.

The good performance of our business is borne out in our share growth with corporate volume share up 50 basis points year-to-date, the strongest performance in recent years. And value share up 20 basis points. Our global Strategic Brands continued to support that growth, with both volume up 30 basis points and value share up 40 basis points.

Demand in the U.S. remains resilient. Fewer consumers are switching from combustibles into vapor and gas prices are lower, with sales-to-retail volumes down around 2% year-to-date May. We now expect U.S. cigarette industry volume to be down around 4%, compared to our previous guidance of around 5%, and have not seen evidence of an acceleration in down-trading or in the growth of the deep discount segments. Against this positive market backdrop, our business is performing strongly and we expect strong constant-currency revenue growth in the U.S. in 2020.

Volume and value shares are up 10 basis points and 30 basis points respectively, and U.S. corporate share reached a record 35%, the highest since the Reynolds acquisition. Our premium brands Natural American Spirit and Newport continued to drive this growth, with value shares up 10 basis points and 30 basis points respectively.

Moving on to New Categories. We continue to invest in new categories and expect to make further progress toward our GBP5 billion revenue ambition during 2020, but growth this year will be slower as a result of COVID-19. COVID-19 has disrupted consumer activation plans in New Categories, reducing overall industry growth rates. It has also led to scaling back or postponement of some launches as well as some supply disruption and out-of-stocks earlier in the year.

While the vapor category continues to recover following the global slowdown in second half last year, the U.S. market remains below historical levels. However, traffic to our New Categories' websites is up significantly and internet sales have more than doubled. As a result, we now anticipate reaching the GBP5 billion new category revenue targets in 2025.

Nevertheless, I am pleased to say that we continue committed to see the benefits of our multi-category approach and sustained investments in the business, with share growth in all three categories. Now to list in vapor, with Vuse growing value share in all key markets, expanding on our leadership position in France and Germany. In the U.S., total Vuse brand share has grown to 26.2% with Alto share up 570 basis points to stand at 21.1% share. Meanwhile, in the U.K., Vype continued to gain share. And in France and Germany, it expanded its leadership position. Vype also remains the fastest-growing brand in Canada.

We are also growing [Phonetic] value sharing in THP. We recorded a strong performance in Japan, with glo total nicotine volume share up 30 basis points to 5.4%. glo Pro has been an important source of THP growth and the recent digital launch of glo Hyper has also been encouraging with it already reaching 40 basis points of volume share, after [Phonetic] less than a month. glo Hyper has also been soft-launched in Italy, Romania, Russia and Spain with good early results and it will be fully activated in Japan in Q3.

Lastly, Modern Oral, we have continued to strengthen our global position with 14.1% volume [Phonetic] share growth in Sweden and Norway. In the U.S., Velo is holding its share in the sub-6 milligram segment at 29%, with total volume share at 9-5%. Our activation plans for filling the Western states have been disrupted by COVID-19.

Turning now to the balance sheet, we remain firmly committed to reducing leverage. We continue to expect strong operating cash flow conversion in excess of 90% for 2020 and to make progress over the year to reduce leverage. With an impact of COVID-19 lowering EBITDA growth in 2020, we now anticipate net debt to EBITDA to reduce to around 3 times by the end of 2021.

To summarize, the business continues to perform well, given the extremely volatile and unpredictable trading environment. Despite the unprecedented challenge we all face, we expect to deliver mid-single figure of adjusted diluted EPS growth on a constant-currency basis. If FX rates would remain as at June 5, full-year adjusted diluted EPS growth would face a currency translation headwind of around 1% in the half year and around 2% for the full-year. We are delivering on our priorities: we are driving value growth in combustibles; we are continuing to invest behind this growth and in the New Categories, and we are transforming the business. In the context of a very challenging year, we are on track for a good performance and remain committed to our 65% dividend pay-out policy.

Thank you and I will now open the call to questions.

Questions and Answers:

Operator

[Operator Instructions]

The first question in the queue comes from the line of Adam Spielman from Citi. You are now unmuted, please go ahead.

Adam Spielman -- Citigroup -- Analyst

Hello. Thank you and good morning. First of all, thank you for that clear press release. Just I have two sets of questions. So, one of the question is really around, this question about the lockdown impact versus the recession impact. And in particular, you called out, stellar growth in emerging markets and I'm talking about, not due to the lockdown in South Africa, when you're talking about Malaysia, Vietnam and Bangladesh. You say that you're not seeing, sort of, rise in down-trading, but can you explain exactly what's happening there, because I would guess at least, that with higher unemployment, low wages, particularly for casual workers, you would see basically reduced demand. And so, a little bit of color on that would be very helpful.Then, I've got a separate question on glo, but we can come to that.

Tadeu Marroco -- Finance Director

Okay. Adam, what we are seeing in those particular markets is pretty much the disruption caused by very stringent lockdown measures. You have to remember a number of those markets are stick sales markets. And then, when we have stringent measures like curfew that we saw in a number of markets, you just promote a market disruption of the distribution and sales of these products in the market.

Another factor is that a lot of the consumption in these markets are social consumption. So, you go to Vietnam, for example, one of the markets that you are referring to, and a number of the consumption happens in HoReCas, pubs restaurants, where people get together and smoke. And they were all completely shutdown. So, that's -- and some of those measures took longer than we were expecting. So, in that context that we highlight some of this particular challenge that we faced and we are still facing in some markets.

Adam Spielman -- Citigroup -- Analyst

I suppose a follow-up question to that is to what extent are you concerned that with lower income, particularly for informal workers, particularly in emerging markets, we'll start to see an impact on demand in the second half?

Tadeu Marroco -- Finance Director

I think that the best way to approach that is reflecting our portfolio. We have -- this is not the first recession that we have been through, we had something similar of the same dynamics, let me put it that way, 10 years ago. And from that, today, I would guess that we are much better prepared today, because at the end, we have a much more balanced portfolio than at that time. Our Global Drive Brands now represents something like 68% of our total portfolio. We have very strong brands in each of the different price points. So, we have very good brands in low and value-for-money. So, we are well-prepared in that context.

The other point that we will be making use more and more is the capability that we have created over the last few years in terms of revenue growth management, and having database of our consumers' information with the price elasticity that we can price differentiate it by different geographies in a particular country. We have been doing that, very expensive being in developed markets like Australia and the U.S. We can even price differentiate it by postcode for example in some of the case in those markets. And we are rolling out this capability now for emerging markets as well.

And on top of that, we have to consider that a lot of support is being given, fiscal stimulus by governments. And we have, in some of those markets, a big problem related to illicit trade. So, in some of those markets actually, we are seeing a benefit of some of those lockdowns. If you go to Brazil for example, where you will note that illicit is a persistent problem for many years now. Most of these products come from Paraguay. And with the border closed and the lockdown in place, we are seeing actually an increase in volumes in Brazil markets as a consequence of that. So, there is a lot of dynamics, different dynamics in place.

Adam Spielman -- Citigroup -- Analyst

Okay, thank you very much for that. And then, secondly, can I turn to glo Hyper? Is there any color you can give on this, and specifically it always seem to me an incredibly important launch for you. Is it living up to expectations? Is it exceeding them? Any color on glo Hyper would be very appreciated. Thank you.

Tadeu Marroco -- Finance Director

It's yes. The answer is yes. We are very excited with this launch. We just achieved, I mentioned, 0.4% up to the reading that we had, end of May. The latest reading actually is 50 basis points growth in something like six weeks and just on the digital activation, because we were most of the time in emerging plan in Japan, so we couldn't really activate property the brand. All the insights that we have been receiving from consumers in terms of conversion, in terms of satisfaction, they are much ahead of the current products that we have in the market, even glo Pro which was already a bigger upside compared with the previous version of glo.

So, we are excited about this launch. We are rolling out now in places like, like I mentioned before, in Europe, in Russia. And yeah, the only problem that we are facing, as I mentioned, is the disruption in some of our activation. So, from one side, it helped us to be even better in terms of our digital activation. On the other side, it's difficult sometimes to convert consumers when you don't have the ballpark stores opened or your stores opened, then it's very difficult to contact consumers more directly. But in terms of the product, we believe that is a real step change from what we had so far.

Adam Spielman -- Citigroup -- Analyst

Okay, thank you very much. That's all for me for now.

Tadeu Marroco -- Finance Director

Thanks, Adam.

Operator

Thank you. The next question comes from the line of Gaurav Jain from Barclays. You are unmuted, please go ahead.

Gaurav Jain -- Barclays -- Analyst

Thank you. Good morning.

Tadeu Marroco -- Finance Director

Hi, good morning.

Gaurav Jain -- Barclays -- Analyst

I have three questions. My first question is on South Africa. Can you please dimensionalize the impact of that? And also for how long are you factoring in the ban in your guidance on volumes, on revenue and EPS?

Tadeu Marroco -- Finance Director

Gaurav, South Africa is -- by the time we released the RNS in April, we were expecting the ban in cigarettes, in tobacco in general, to be lifted by May 1, while this has been announced previously by the President of the country. So, a few days later, and we saw that. By the time, we were reaching that May 1 deadline, they decided to extend the ban and there is no sign, as you know, to be lifted. We are now in Level 3. We were expecting them to be relieved to [Phonetic] Level 3 from 1st June. This didn't happen. And that we are now the only product actually that's been banned in South Africa. So, as you can imagine, the illicit trade has took cover the country, because they had already a previous problem with illicit trade.

We don't mention financials on in individual markets, but just to give you an idea and you can work backwards from there, the government is losing in terms of capex collection approximately ZAR1.5 billion on a monthly basis from the industry. So, this is -- at current exchange rates, approximately GBP75 million, so it's -- in a very needed period of time. So, in our projections, we are giving a range exactly to cope with this type of volatility. It's difficult really to predict, at this point in time, precisely to have a specific date where we will resume to sell the product. And so, that's the reason we provide a range from now on.

Gaurav Jain -- Barclays -- Analyst

Sure. That's very helpful. My second question is on the U.S. market. So, you have upgraded the volume guidance to minus 4%, and you are highlighting that till May, volumes are minus 2%. So, this will imply that 2H volumes are down minus 6%, when comps are very easy. So, why wouldn't the volumes be even better than minus 4%, like what are the factors we should keep in mind?

Tadeu Marroco -- Finance Director

Look, the U.S. market is a consumer. If you note, that the first half is somewhat impacted by consumer pantry loads in Q1. We saw some of this behavior carry on just, even before -- even after March, because of the uncertainties in terms of lockdowns in a number of states. Now the whole situation is easing, but we don't know exactly how the consumer buying pattern will be moving forward, when we have the lockdown eased.

The other point that you have to bear in mind is that we had an additional trade day in the first half of the year, which will not repeat in the second half. And then, we know that there is a lot of unemployment in the U.S. But at the same time, there is a lot of fiscal stimulus, and there is a lot of reduction in terms of discretionary consumption from consumers. Because when they were in lockdown, they actually didn't have the chance to go out and and go to cinemas and restaurants and so on. So, it's difficult to predict exactly what will happen in the second half, but if you go back to normality, then we would expect some of this fiscal stimulus will not persist longer. And then, again the consumers will have other competitive expenditures to make it and a bigger noise around the price increase that we might see in the second half as well.

So, there are a number of factors now. And given the circumstance that we are living around COVID, that makes us very difficult to predict. But you are right, we are in a -- we will be finishing the first half in a better position than the full-year guidance and the second half is basically to be prudent to deal with them all, of all those factors that I just referred to.

Gaurav Jain -- Barclays -- Analyst

Okay. That's very, very helpful. And my last question is on the EU menthol ban, which came on 20 May. Like have you seen any major impact on markets like Poland and U.K., any major shifts because of availability of competitor heat-not-burn products and menthol variants, anything that you can shed light on?

Tadeu Marroco -- Finance Director

Yeah. It's very early days, as you mentioned. It just came through. And we haven't seen any major change. We are selling a lot of them, in terms of vaping. I was referring to the vaping industry not coming back to the previous levels that we saw by summer '19 in the U.S., but that's not the case in the case of U.K., France, for example, that the industry has already grown beyond what we saw in 2019. Internet sales in vapor also has more than doubled in this period of time and we are very pleased with that. This could well be, also being boosted by the menthol ban and the people searching for different alternatives, consumers search for different alternatives. But it's difficult now at this point in time to know exactly what -- in a short period of time.

One market that I would like to point out that had introduced menthol ban since beginning of the year is Turkey, as you probably know. And our brand is doing extremely well and that's another reference point that we have. We always quoted Canada before. We said that the level of a retention, very high from consumers, because they first had smokers and then they smoked menthol. And the level of retention in Canada was more than 90%. The same happening in Turkey and our share actually is growing strongly in Turkey at the back of Kent. So, we are very pleased with the performance in that particular market. We are now Number 2 in the market.

Mike Nightingale -- Investor Relations

Thanks a lot.

Operator

Thank you. The next question comes from the line of Owen Bennett from Jefferies. You are unmuted, please go ahead.

Owen Bennett -- Jefferies -- Analyst

Good morning, guys.

Tadeu Marroco -- Finance Director

Hi, Owen.

Owen Bennett -- Jefferies -- Analyst

Just a one question from me. I was just hoping to get some more specifics on the slower New Category sales development to the GBP5 billion getting pushed out. It does appear you're blaming the U.S. tax free development. I was just wondering is that the case and is it solely in vapor in the U.S. and are you making any changes to your assumptions around the market share development in vapor in that market as well?

Tadeu Marroco -- Finance Director

Yes. There are number of factors playing in that space, Owen. We said at the year-end results that we, being a new category and unregulated category, there were a lot that we were learning from that category. So, you were seeing disruption from regulatory front and we highlighted that at the year-end result. One that comes to mind is more than Norway and Russia, that we're growing nicely. And in Alberta [Phonetic] that we had a local competitor introducing a product, which was 15 times more strength in terms of nicotine than ours in a competitive responsible base and the government decided to ban completely the category. And now we are reengaging to regulate the product, but this takes time. The same happened with vaping in Mexico at the back of the value crisis in the U.S. So, the regulatory volatility, we pointed out at the year-end results.

The second one, we were already facing in February, the disruption in terms of supply chain coming from China today is completely coming back to normality. But at that time, we had been disrupted, and then we faced some out-of-stocks in some geographies that have now completely been recovered. And then, on top of that, we were seeing all these activation issues that we are having and the launch plans that we have mainly on the THP side. The vaping market that you are referring to, in the U.S., it's right, it hasn't come back. Just to give you some numbers, Today, we still are trading on average on a monthly basis something close to 15% to 20% lower than the peak that we saw in 2019. We expect the industry to recover. in our projection, we went on finishing the Q4, 40% higher than we started the Q1 of 2020. But overall, this year means that we probably expect an industry down around 9% in 2020.

We are not seeing the same in the outside the U.S. Canada actually is another market -- I just quoted U.K. and France, but Canada is another market that we are seeing higher industry volume compared with the previous year. But the U.S. is a big market, as you know. So, when you pull all these together, we were saying that it will be a slower growth this year. And the consequence is basically one year, that you are losing, and the adjustment that we're making to -- that is just to reflect that [Phonetic].

The more important thing is the underlying performance that we are having. We are growing in every single category in every single market year to date, where we are present, with no exception. So, we're extremely pleased with the performance of vapor. We have more than doubled our share in the U.S., which is the biggest market, and we are very confident that we will continue growing throughout the year in the U.S. We are also doing extremely well in Canada, just increasing the leadership in France, and we are doing well as well in Germany with leaders in closed systems. And in the U.K., we had solidification of our performance. So, vapor for us is doing extremely well.

Modern Oral continues to grow in the Nordics. You saw our performance is already 14% [Phonetic] share in Norway and 4% share in Sweden, very strong strongholds of traditional oral. And we are doing pilots in emerging markets, going for sachets, for example, that we can sell less quantity. Instead of a box of 20 nicotine pulps, you can sell two, three, and make it much more affordable for markets, where stick sales of cigarette is more predominant. And in THP, we have already reached the more than 2%, 2.4% in Moscow and around 2% in cities like Kiev, and doing extremely in Kazakhstan with more than 30% of the segment share in Kazakhstan.

And we have glo Hyper, like I mentioned before to Adam, that we are very encouraging with the first signals that it's relayed to. And one point that I would like to make to all of you, is it would be easy for us to actually to hold on to their high single-digit figure and that we were talking before. But I don't think that this would be the right thing to do for the business. We have a growth momentum, we want to continue growing, and we want to continue investing in the New Categories. So, the reason why we are making all these adjustments is basically to get out stronger than we were getting into this crisis. And I think that, that's what will be recognized once we go through this.

Owen Bennett -- Jefferies -- Analyst

Perfect. Very helpful. Thanks very much.

Tadeu Marroco -- Finance Director

Okay.

Operator

Thank you. The next question comes from the line of Jon Leinster from Societe Generale. You are unmuted, please go ahead.

Jon Leinster -- Societe Generale -- Analyst

Thank you very much. Good morning, gentlemen.

Tadeu Marroco -- Finance Director

Good morning.

Jon Leinster -- Societe Generale -- Analyst

Couple of questions. One, you've obviously mentioned that currency translation is a 2% headwind. But is there any significant problem in terms of currency transaction or is that something that is likely to come through next year?

And secondly, on the cash flow, you've mentioned, sort of, 90% cash conversion ratio this year will be pretty much unchanged. Are the components of that also pretty much unchanged? Is there any variations would you expect perhaps working capital to be a slightly more negative, but reductions in capex, or is that frankly just completely unchanged on prior expectations? Thank you.

Tadeu Marroco -- Finance Director

Okay. Regarding our currency transaction, we will have a higher currency transaction hit this year. There is no doubt about that. Last year, we had GBP130 million. We expect at least to double that this year. And we are -- saying that we have much less exposure to currency transaction than we were three years ago because of the footprint of the -- seeing [Phonetic] now more exposure to developed markets and less to emerging market. Remember that the emerging markets is more or less 25% of our earnings. So, the level of exposure that we have today is much less. We've some of those markets we hedge. And you rightly told, you will be feeling this impact more toward the next 18 months or 12 months. And we'll be recovering through price like we always did.

All the numbers that I would like to highlight, we don't eliminate transactional FX. All the numbers that we quote includes the transactional FX, where we believe that's the right way of doing that. But the message here clearly is that it's less exposed than before and we will be managing through hedging. Some of those marks are very difficult to hedge and this will be managed through a pricing over time.

In terms of the conversion, we worked on capex. And I mentioned that last year we were bringing capex to the level of depreciation, so there will be no leakage there. This clearly helps. We will have some pressure in terms of working capital, mainly for the half year, although the half-year numbers -- I wouldn't expect the conversion to be much dissimilar to the previous year because we managed to offset that higher supply inventory. Basically, the investment that we are making in working capital to cope with all these uncertainties come from COVID. We managed to offset that by other measures in the working capital. So, conversion for the half year will be pretty much similar to year ago, one year ago. And then, for the year, we will be managing through capex. That will be another lever. And we are always reviewing and putting a lot of efforts, as you can imagine, because our focus has been pretty much on the cash generation to reduce the debt and be able to the deleverage the company as fast as we can. So, we always try to find ways to offset any type of pressures. So, it will not be different this time.

Jon Leinster -- Societe Generale -- Analyst

Okay. Thank you very much.

Operator

Thank you. The next question comes from the line of Alan Erskine from Credit Suisse. You are unmuted, please go ahead.

Alan Erskine -- Credit Suisse -- Analyst

Hey. Good morning, everyone. Two questions from me. The first one is a big picture. I mean clearly COVID-19 has a lot of uncertainties attached to it. A number of consumer companies chose as a consequence to withdraw guidance, but you didn't. And yet six weeks later from the AGM statement you've had to revise guidance. I guess my question is, can we feel comfortable that in this new guidance that you've built in some, shall we call it wiggle room for unexpected events. I think Adam mentioned earlier maybe down-trading getting worse. And so, we can feel comfortable that in September, whenever you're not coming back with another revision to the guidance. So that's my big picture question.

And then, just my second question is, when I look at the impact on volume, I mean as you highlight, it's largely related to emerging markets. And if anything, your U.S. business seems to have been a bit better than expected. So, I'm just slightly puzzled why the volume impact is also dissimilar of the revenue impact.

Are you not seeing a positive mix effect from the way the volumes have plateaued? Thank you.

Tadeu Marroco -- Finance Director

Okay. Look, Alan, yes, you are right. We decided to keep the guidance. We were one of the few to do that. We believe that this would be easier to be more transparent for our shareholders and investors to understand exactly well how this impact [Phonetic] of BAT was facing from COVID-19. By the time, we released the guidance in April, we had a limited picture mainly on the emerging markets. The situation deteriorated unfortunately over the last six weeks. We spoke about the markets in Asia, but the same happened in the Latin America. In Argentina, for example, the lockdown in the factory took longer than seven weeks and Mexico still closed. We had to activate a number of contingency plans in those markets and that cost more money in terms of supply chain costs and so on, so forth.

As I said before, we could stick to the guidance that we provide, but we don't think that this would be the right thing to do for the business. Because at the end, we are very conscious about continue investing to leverage the momentum that we are facing, mainly on New Categories and also in combustible, and doing the right thing for the business in the medium term. So, the algorithm that we have hasn't changed at all. Our growth algorithm is exactly the same. we have turned down a bit this year to cope with this unprecedented circumstance that we are facing. With all the focus that we have in terms of the leverage, in terms of the dividends, in terms of being able to to grow New Categories, to continue very, very healthy business in combustible, these are all there. This hasn't changed anything.

So, in terms of your question, that it would be much more comfortable to have taken it out, but then you don't need to actually explain anything in terms of the guidance. But we believe that to provide this transparency is the right thing to do, it's, we create some wiggle room in terms of the range that we provide. Now, for sure that we are seeing and we are assessing a very different pattern between markets at this point in time. So, the developed markets, the likes of U.S., Europe, Australia, Japan, Canada, very, very different in terms of impact, in terms of -- from the emerging markets. So, the volumes are pretty much in that emerging market space. If you see the volumes, if I break down these different patterns of volumes, markets you'll see that in the developed markets, the reduction is pretty much in line with historical levels. And the big hit is coming from the emerging market, even though everything that I have explained so far.

So, I cannot assure you that that's the case, because we are in a very unstable situation. We don't know if there will be another peak happening in terms of the virus in some of those markets and very draconian lockdowns again. But with that apart, we believe that we create another space in this range that we just update the market with.

And in terms of the volumes, yeah, the price mix is even strong. Some of those volumes are very rich volumes. Like, for example, GTR, they have a very, very big, heavy mix for us in terms of value and hits us in the turnover as well. But the 3%, I think that the 3% impact that we are seeing, I think that we could easily distribute these in terms of one-third related to the impact of the GTRs that we had quoted before and another third in terms of these emerging markets that we saw, the difficulty in terms of stringent lockdowns, in the stick markets, in the social consumption that reduced in the likes of Asia that I referred to. And another third in the likes of extended lockdowns or even distribution brands in South Africa and Mexico and Argentina. So that's where we get to the 3% overall growth number. We are highlighting a lower number than that in our target because we are seeing some of that being offset by the performance in developed markets. So, I think, that's the more or less the story that we come up with in terms of this revised guidance.

Alan Erskine -- Credit Suisse -- Analyst

Super. Thank you.

Operator

Thank you. The next question comes from the line of Alicia Forry from Investec. You are unmuted. Please go ahead.

Alicia Forry -- Investec Securities -- Analyst

Hi. Good morning, Tadeu. I'm just wondering, I appreciate it may be difficult for you to quantify, but I'm just curious how much of your business globally you think might be exposed to social environments, like the HoReCa channel? Just curious how that might impact your business during this time, how meaningful it is?

And then my second question is on the margin headwinds during this disruptive period. I understand that the headwinds that you expect are primarily due to your decision to continue investing in the New Categories business through the slowdown, but there's clearly been an increase in costs in the tobacco side of the business as well. I was wondering if you could comment on those costs that you're seeing in the tobacco business associated with the lockdowns and how quickly might those fall away as lockdowns ease. That would be -- those are my questions. Thank you.

Tadeu Marroco -- Finance Director

Okay. Look, on the margin side, we have -- for us to be able to -- from one to three until deliver the mid-EPS target, so we will need to get a good operating margin growth and we are expecting a good operating margin growth. But we have been working in terms of making the Company more agile, faster, empowered and this was all done at the back of Quantum that we started the last year. And Quantum, as I mentioned in the beginning of the year, is bringing good savings this year, it's GBP300 million.

We also have a Quantum too for 2021, 2022 and we are trying to bring forward some of those savings as well as much as we can. And this will help us to continue investing while being able to cope with some of those extra costs that I was referring to. Supply chain clearly is a extra cost, not just in terms of working capital, but in terms of logistics costs because when you have, for example, to activate the factory in Chile as opposed to supply the Argentina markets or in Mexico that we have our factory supply in Canada and we have a role to supply from our factories in Brazil and Chile, these bring cost, these bring extra costs. And so we will be able with this exercise that we were very fortunate to start last year to cope with that and still be in a position to continue investing behind the New Categories and deliver this revised guidance that we are now making public in the market.

In terms of the -- on the HoReCa, the HoReCa, on the emerging markets, consumption is a very social event. So -- and I was quoting that. And these are the place where we suffer most. What we have seen is that, little by little these spaces are being opened up. You saw, for example, in Europe, France, for example, you saw already cafes in place and Italy is the same, it's happening now. So I think that's a -- it's not a major concern at this point in time. If things move in that direction, for sure that's nobody knows this -- if there is another spike coming in or not, but some of those emerging markets are very subject to the HoReCa channels. And in other markets like the U.S., for example, it's pretty much convenience stores that where 7% of the cigarettes sold. So it's less of a problem in that particular space.

And again, it's -- that's why you see a lot of differentiation between the patent that we have been so far seeing in terms of volumes in developed, mature and emerging markets. This is part of the explanation.

Operator

Okay. Thank you. We'll move onto the next question from Nico Von Stackelberg from Liberum. You are unmuted. Please go ahead.

Nico Von Stackelberg -- Liberum -- Analyst

Hi. Good morning. Just a quick question on the guidance for the topline. So, I remember the guidance was at the lower end of the 3% to 5% range. So let's call that 3.5%. And then you say there is around a 3% headwind on topline due to COVID. So that suggests you end up flat to maybe plus 1%. Am I right in thinking that? So why is the target 1% to 3%?

Tadeu Marroco -- Finance Director

Well, Nico, the target is 1% to 3% basically to -- for us to have space, to face eventually some unknowns that we -- given the circumstances that we are living. I cannot be precise in terms of turnover at this point in time because at the end, it's still a lot of uncertainties out there in terms of the pace of recovering some of those markets that were badly hit. And South Africa is a good example, I think it's the most extreme example where we are not being able to sell one stick of cigarette since the beginning of April. And -- but that's the only reason why we are saying that. And the reason why we decided to revise it downwards this guidance that we promoted, we released at the end of April, it's pretty much because of the extension of some of those lockdowns.

South Africa, I explained the situation there, but this also happened in place like Argentina and Mexico where we are still seeing the factory closed at this point in time. And some of the broader group of emerging markets in terms of consumption patterns related to, again, the disruptions in lockdown, that's the reason why -- it caused the present Global Travel Retail we are -- add new by April. We knew that some of the emerging markets were suffering disruptions that we had, at that time, revised the volumes guided to minus 5%, but the reality is that these impact in emerging market was even bigger than we first thought.

Nico Von Stackelberg -- Liberum -- Analyst

Okay. Can I ask two other questions? One, could you -- I know there's a lot of uncertainty in the U.S. on pricing. Can you give me any feelers for what you expect in the second half and what you're specifically looking out for and how you think it plays out? And then secondly, can I ask about the GBP5 billion target for NGP revenue? Do you think that's really incentivizing the right behavior to be pushing for revenues? And I appreciate if you focus only on profit, it's not going to give a chance for this category to mature and to block them. But at the same time -- well, it would seem that putting a profitability target maybe five years out might help encourage investment in the categories that should reasonably deliver the returns on capital over time, and not just pushing for sales at the end of the day. Do you have any view on that?

Tadeu Marroco -- Finance Director

Okay. Nico, look, I think that we cannot associate the GBP5 billion push for one year with any financials decision. The reason why we are bringing down the target for mid is exactly to create the space for us to continue investing. So, we are not compromising investments behind the New Categories. But we have to realize that those categories are very new to the world, some of them completely unregulated.

So, what we saw in the U.S., for example, at the back of last year, with this all issue around the new pandemic and around that is just a consequence of an unregulated product. And this has implications that is difficult to foresee. It's the same happening to the Modern Oral when the local player goes then and making -- commercializing them in very irresponsible way, a product that should never be in the market in the first place. So they are unregulated categories and this -- and as a consequence, volatile, difficult to predict.

This has nothing to do with our decision to invest more or less. We are continually investing. We are continually working hard in our pipeline. The whole organization is mobilized to make a step-up in New Categories, it's one of the priorities that Jack setup since the beginning. And as I said, our underlying performance is very strong.

Now, we have prudently moved this to 2025 as a consequence that we actually are facing a very difficulty year where the slowing growth will have -- it's a mathematics thing. If certainly there's slower growth in one year, given the fact that it was a very close already, we will have an implication. It's just to -- but it has nothing to do with the mobilization of the Group and has nothing to do with the decisions around investments. We continue to be doing all possible to, first, improve the quality of our pipeline and I think that we are demonstrating this by the performance. Second, we are working hard to get all the insights we need in terms of consumer to get even to promote a better efficiency in terms of marketing investments and we are getting better and better in that. So, where we allocate our investments behind New Categories. We are making big inroads on that. And third, we are doing all the support necessary to create the global brands and you are seeing some migrations already happening in the Modern Oral space toward Velo. And we're also seeing some migration happenings, kind of, now, we're just moving to Vuse. So, things are happening as we said and we continue doing that. So, I don't think that we need to link the the GBP5 billion 2025 to any financial space or decision related to that. Be assured that the whole Group and whole organization is mobilized around to make it happen as fast as we can.

On the pricing, it's difficult for me to make an assumption on what's happened. Last year, we had [Indecipherable] price. It was a bit of a normal compared with the previous years. That was basically a two price pattern and we really have to see what happens in the second half. We probably have another price happening there. But the fact is that the market is really strong as well. So, we have to see how this would pan out.

Nico Von Stackelberg -- Liberum -- Analyst

Okay, all right, thank you.

Operator

And now for our last question in the queue from the line of Patrick Folan from Redburn. You are unmuted, please go ahead.

Patrick Folan -- Redburn -- Analyst

Yeah, good morning guys.

Tadeu Marroco -- Finance Director

Good morning.

Patrick Folan -- Redburn -- Analyst

Just two questions for me, please. Looking at the overall full-year cigarette volume, value share grew less than volume share. So, is that down-trading, is it geo mix or is it discounting [Phonetic]? And then secondly, you talked about the impact in the emerging markets and considering the situation in Brazil, are you seeing any change in trading in Brazil. Is there a more pronounced illicit impact?Just those two, thanks.

Tadeu Marroco -- Finance Director

Okay. Let's start with Brazil. Yes, we are seeing, year-to-date, an increase in sales around 6% in the market, 6% to 7%. And as I said, this has also to do with the fact that -- and in Brazil, although the economy situation is really, I would say, heating the country badly, we haven't seen these levels of disruption in terms of lockdowns that we saw in any other markets that we spoke about. And then, in Brazil, we have these external supply of illicits coming mainly from Paraguay, when we have the borders closure. You just create disruption in that flow [Phonetic] and this translates into more of a legal consumption in the market. So, we are seeing an increasing in volumes there.

It will be also helpful for the government to reconfirm how important it is to take measures against illicit trade, because this is the immediate reaction they face in terms of the tax collection increase, which is a very positive side. And the point is just, and the price is just a consequence of the volumes being more focused on the -- we are seeing more of the market share growth happening in emerging markets. One thing that is we're seeing every time there is a lockdown and the market comes back, we are able to gain a lot of traction. And because we have been planning ahead of that and in some of those markets, we have direct distribution, that's very helpful as well.

So, we have a very strong plan to recover as much ground as possible. This is paying off and we will see most of this market share growth coming from the emerging markets. And thus, there is nothing to do with down-trading. It's just a geographic way, that it's happening.

Patrick Folan -- Redburn -- Analyst

Thanks.

Operator

Thank you. There are no further questions. So, I'll now hand the call back to Tadeu Marroco to close the call. Thank you.

Tadeu Marroco -- Finance Director

Before I give my final remarks, the only comment I would like you to take with you, I think that we are leaving a kind of dawning moment. We're just as stronger as we will probably try in the future and BAT will be adapting. So, what we are trying to do now is being adapted to that and we will continue investing and we will continue growth in this new normal. And for us, the priority is continue growing our business and keep investing, doing the right thing for the business. So, I would like to thank you all for your time today.

Just a few words for you. In summary, we are a strong business. The environment is very unpredictable as you would know. But we are performing well against this backdrop. We are building a better tomorrow. We continue to invest in the business in both combustible and New Categories. We are delivering on our own three key priorities. We are delivering value from combustible. We are driving a step change in New Categories and we are transforming the business. Despite the challenges we all face with COVID-19, I'm very excited by the future potential of BAT and our confidence is reflected in our continued commit to our 65% dividend pay-out policy.

So, I thank you again for joining us today. Look forward to speaking to you over the next couple of days, and of course, in July at our interim. So, stay well, stay safe, and bye, bye.

Duration: 56 minutes

Call participants:

Mike Nightingale -- Investor Relations

Tadeu Marroco -- Finance Director

Adam Spielman -- Citigroup -- Analyst

Gaurav Jain -- Barclays -- Analyst

Owen Bennett -- Jefferies -- Analyst

Jon Leinster -- Societe Generale -- Analyst

Alan Erskine -- Credit Suisse -- Analyst

Alicia Forry -- Investec Securities -- Analyst

Nico Von Stackelberg -- Liberum -- Analyst

Patrick Folan -- Redburn -- Analyst

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