Tadeu Marroco: Okay. So let me digest your questions. The first one in the Vapour category. Vapour is growing substantially in the U.S. markets. We believe that we have now around 29 million [indiscernible] Vapours in the U.S. And but most of the growth and I would say that we have grown something like 20% over the last year or so, is concentrate on this illegal modest product in the first place. We believe that there is currently a revenue pool in Vapour around £10 billion in which 60% of that is related to this illegal product. So we have built over time, a very strong Vapour business in the U.S. As you saw in our disclosure, we have reached more £1 billion in terms of revenue. Our level of operating margin now is very similar to cigarettes, not even gross margin, referring to the operating margin.
So it’s a big business in the U.S. that we have built and we are very proud of the efforts. For sure that we are frustrated with the fact that there is no current level playing field in the U.S. We know that the FDA is acting to improve enforcement. We believe that there is much more that needs to be done on that. When they finally finish the conclusion of the PMTAs will be a first step, because then we can see what are the illegal products that shouldn’t be in the market in the first place. But it’s encouraging to see that some states are taking the matter on their own hands and passing bills to try to certificate PMTAs and linking that with products that they will be trying to enforce in their own local markets. We are — as we disclosed in the presentation, all we can to work together with authorities at federal level, state local levels that we involved with ITC.
We still get ITC to that eventually could come to a point where we can see some enforcement at an important level that it would be ideal, I have to say, but there is still a lot to do. But that’s where we stand today on the Vapour in the U.S. Our — on the Combustible side, you are right. There was a lot of change happening over the last, I would say, four years. What we came from just as a reminder for all of us is a decline around 4% to 5% pretty much secular decline on the U.S. market. And then all of a sudden 2020, we saw an uptick of 1%, 1.5% because consumers were in lockdowns and receiving a lot of support at federal level, state level and this whole process has start to wind down in the following two years. And then on top of that, we have this whole process has been exacerbated by the conflict that start between Russia, Ukraine and the inflation that came at the back of that as well and with a lot of a pressure on consumer purchasing power.
So what we are seeing today in the market is a situation where the macros are playing a heavyweight on that. But despite the fact that we are seeing early green shots around levels of unemployment, gas pricing going in the right direction, even inflation now reducing. We still see a lot of a pressure on consumer purchasing power coming from high levels of debt. The cost of debt is still very high, mortgage. And we believe that it will take some time to this whole process to unwind. It’s difficult to predict. We are not giving guidance for 2024, but it’s easy to see that these macros is responsible for at least 2.5%, 3% of the decline in the U.S. market. So my best guess, if you want, for example, after we see some normalization of and we will see that, because economic cycles is always like that.
In the past, we have seen ups and downs. There will be no difference. We believe that the market could well be stabilizing around the 5% to 6% decline as a — with the recognition that are more and more smokers migrate into a poly user products. For sure, that’s the unknown in this whole process is the level of enforcement that the FDA needs to do in terms of modest that has impact, and not just in the Vapour business that I just spoke about, but also in the Combustible business.
Operator: Faham Baig of UBS. Faham, please go ahead. Your line is open.
Faham Baig: Good morning, Tadeu, Javed and Victoria. A couple from me as well, please. Can I begin with the stake in ITC, could you please remind us where we are on the approvals to reduce the stake, the anticipated timeline? And importantly, what we should expect BAT to use the net proceeds for? In other words, could the proceeds be returned to shareholders through a buyback? And secondly on heated tobacco, do you have any early readings on the market impact from the EU Flavour ban, I think you mentioned that BAT was able to retain its share. And in the back, I think you highlighted in Czech Republic your share has actually grown. So could you just maybe give us more color on how’s BAT share faring as glow has historically been over indexed to Flavours? Thank you.
Tadeu Marroco: Okay, sure. Let me start with your question, ITC. And we’re going to use that just to give some background and because it’s important for us to remind where we are coming from. BAT is a very highly cash generative company. Every single year, we are able to generate more than £80 million of free cash flow. So this means that when we consider our growing dividend approach and without any major or material, if you want M&A. On a business as usual base, we are able to deleverage the company around 0.2x, 0.3x, like we just subject to the FX at the year end. We have just demonstrated that through 2023. And the reason why we have said that we want to at least reach the mid of the range is for basically two reasons. One is the world has changed, and we have seen from 2022 an unprecedented increase in interest rates and that culminates with very high levels of the cost of capital compared with where we have been over the last decade, if you want.
And this has even if we expect the interest rates start coming down, we’ve probably not — never been to the point that we were before. So the world has changed. The cost of capital is — its more expensive than it used to be. That’s one point. It’s clear. The second point is very particular to BAT. We still have out there a headwind related to Canada, the CCAA, and I have been very clear and transparent about that. And we have currently something as £2.3 billion of cash trapped in Canada. And once we — and if we finally — and I cannot give much information around the process that is going through with the plaintiffs in Canada. But we will expect the cash to go if we finally come to an agreement with the plaintiffs and also eventually get some material headwind in terms of our earnings moving forward.
So just to illustrate the point in a more simplistic way, if you strip out kind of that completely from our numbers, we would be seeing an uptick in terms of the ratio between 0.2x to 0.3x. So that’s why we need the buffer. And I think that we have a very good plan to organically continue to drive down the leverage of the company, and I have no concerns at all about that. Now for sure that we are trying to find ways to create more flexibility in terms of our capital allocation decision. And the financial flexibility comes for with the problem to try to divest some of the assets that we have in the Group. One of the reasons why we have exit 30 or more than 35 markets, mainly in the last two years, it’s also a consequence of that. We generate some proceeds on that, not really that material.
It has also the benefits that we are now refocused the Group moving forward in terms of resource allocation for the really growth markets moving forward. And this was very good exercise. We continue doing that. But we cannot ignore the fact that the major assets that we have in the balance sheet is the association with the ITC as an associate. So that’s the reason why we are talking about ITC in this release today. We have today, we want to keep a level of influence in ITC that is transforming itself. Based on local legislation, we need to have as a minimum 25% of shareholders should keep their Veto rights. We would like to do in the first phase. And this means that given the fact that we have above 29, there is space for us to reduce our shareholding.
