British American Tobacco forecasts strong H2 growth and new categories innovation

British American Tobacco Plc (LON:BATS) has announced its latest trading statement.

·      Confirming FY24 delivery in line with our guidance

·      H2 acceleration in line with our expectations, driven by New Categories innovation phasing, the benefits of H1 investment in U.S. commercial actions and unwind of wholesaler inventory movements

·      We expect to deliver improved New Category and Combustibles revenue growth in H2 versus H1

·      Further improving New Category profitability¹ through Quality Growth focus and smart re-investment

·      Strong >90% cash conversion with leverage² at the high end of our target range of 2.0-2.5x by year-end 2024, also impacted by recent USD strengthening

·      We support the proposed Canadian CCAA settlement in the mediator’s and monitor’s plan of arrangement, and we are hopeful of securing a conclusion for the benefit of all stakeholders

Tadeu Marroco, British American Tobacco Chief Executive

“We are on track to deliver our 2024 guidance, demonstrating the strength and resilience of our business. Our second-half performance acceleration is driven by the phasing of New Categories innovation, the benefits of investment in U.S. commercial actions and the unwind of wholesaler inventory movements.

In October, I was delighted to host our Capital Markets Day together with our management team in our Innovation Centre in Southampton. This event demonstrated how BAT’s science, innovation, breadth of capabilities and people can combine to achieve a Smokeless World and deliver long-term sustainable value for all our stakeholders. We continue to make progress towards our ambition of becoming a predominantly Smokeless³ business by 2035.

Our Quality Growth imperative is delivering higher returns on more targeted investments across all three New Categories, and that prioritisation and focus is already transforming our business in Europe. We are making further progress increasing profitability¹ across New Categories, and I am particularly pleased with the improvements in Heated Products and Modern Oral.

In the U.S., I am encouraged that our investment approach, taken over the last 18 months to strengthen our business, is working, despite a challenging macro-economic backdrop. Through our commercial actions, we have invested in our portfolio and improved our executional capabilities. With these previously announced plans now completed, we can prioritise driving sharper execution and opening incremental white space, related to Modern Oral.

We continue to prioritise shaping a Sustainable Future and call for more appropriate regulation and enforcement of New Categories, including Vapour in the U.S. and Canada.

We are making good progress and while there is still more to do, I believe that the choices we have made and the actions we are taking through this investment year are the right way forward for BAT.

As previously highlighted, we do not expect the journey to our mid-term guidance to be linear. Building on the strong foundations we have established, I am confident that we will deliver an improved underlying performance as we move from investment to deployment in 2025. In addition, we expect to have more clarity on the financial impacts of CCAA in Canada when we provide our 2025 guidance with our FY24 results in February.

We will continue to reward shareholders through strong cash returns, including our progressive dividend and sustainable share buy-back, and we remain committed to returning to our mid-term guidance of 3-5% revenue and mid-single digit adjusted profit from operations growth on an organic⁴ constant currency basis by 2026.”

Our outlook is underpinned by the following three key areas, where we continue to make progress:

1. Combustibles: U.S. commercial actions continuing to gain traction in H2; volume & value share gains in AME & APMEA

·      Benefits of H1 investment in U.S. commercial actions and unwind of wholesaler inventory movements, together with robust pricing across all three regions, has driven improved Combustibles organic⁴ volume and financial performance in H2

·      Volume share up 20 bps in Top markets⁵.  Value share down 20 bps, mainly due to adverse geographical mix and implementation of commercial plans in the U.S.

·      U.S. industry volume down c.9% YTD reflecting continued macro-economic pressures and the impact of illicit single-use Vapour products

·      U.S. commercial actions gaining traction with volume share flat and value share down 30 bps

·      Continued volume share and value share gains in AME and APMEA

2. Improving New Category performance in H2

2.1 Vuse: Continued global value share leadership⁶; U.S. illicit single-use vape headwinds persist

·      Global value share leadership maintained at 40.3% in Top markets⁷, incl. U.S. tracked channels at 50.7%

·      Our U.S. financial performance continues to be impacted by the illicit Vapour market

o  Actively supporting more appropriate regulation and enforcement to tackle illicit products

o  In Louisiana, further encouraging signs that Vapour enforcement works – driving strong legal Vapour industry gains with Vuse capturing the majority of the flowback

·      In AME, we are seeing continued New Categories poly-usage⁸ benefiting the Vapour category

o  Value share leadership maintained at 31.6%, with strong performances in Spain, France and Germany, more than offset by the impact of illicit growth in Canada post Quebec flavour ban

o  Excluding Canada, value share in AME up 90 bps

o  In Mexico, we continue to monitor the progress of legislation seeking to ban vapour products

2.2 glo: Innovation pipeline starts to drive performance acceleration in H2

·      New innovations glo Hyper Pro and enhanced consumables are driving improved organic⁴ volume, revenue and profit¹ performance in H2 versus H1

·      glo continues to show early signs of category volume share improvement in Top markets⁹, with volume share down 30 bps to 16.8% (versus down 110 bps in 2023)

·      Category volume share improvement versus 2023 in Italy; in Japan, our new glo Hyper Pro consumables continue to gain volume share, up 110 bps, partially offsetting the decline of our legacy consumables range, resulting in total decline of 40 bps

·      Continued strong performance in AME, with category volume share up 10 bps driven by Poland and the Czech Republic, reaching 34.8% and 18.1%, respectively

·      veo, our non-tobacco consumables range, continues to perform strongly

2.3 Velo: Strong volume, revenue and profit¹ growth; continued leadership outside the U.S.

·      Strong volume, revenue and profit¹ growth driven by the continued success of Velo in established oral markets, and strong momentum in newer launch markets incl. the UK and Poland

·      Velo’s volume share up 180 bps to 11.2% of Total Oral and up 110 bps to 28.2% of MO in Top markets¹⁰

·      Clear category leadership in AME, reflecting the strength of our brand equity and superior portfolio

·      In the U.S., our refreshed Velo brand expression and Grizzly Modern Oral are performing well and have re-invigorated our performance with volume share up 180 bps to 6.3%

·      Expanding our U.S. portfolio with Velo Plus, a more competitive product with a broad variety of flavours and nicotine levels – the nationwide roll-out is underway

3. Strong cash generation

·      On track to deliver operating cash flow conversion in excess of 90% again in 2024, enabled by our continuous improvement mindset and further optimising resource allocation

·      We expect to be at the high end of our leverage² target range of 2.0-2.5x adjusted net debt / adjusted EBITDA² by year-end 2024, also impacted by recent USD strengthening

Technical guidance for full-year 2024:

·      Global tobacco industry volume expected to be down c.2%

·      Low-single figure organic⁴ constant currency revenue growth

·      Low-single figure organic⁴ adjusted profit from operations growth, incl. a c.1.5% transactional FX¹¹ headwind

·      Expected translational FX¹¹ headwind of c.4.5% on full-year adjusted profit from operations

·      Net finance costs now expected to be c.£1.6bn, subject to FX¹¹ and interest rate volatility

·      Gross capital expenditure in 2024 of c. £600 million

·      Operating cash flow conversion in excess of 90%

Webcast and Conference call – The conference call will begin at 8.30am (GMT)

You can access the audio webcast via our website. You can also listen via conference call by dialling the numbers below. Quote the password ‘BAT trading update’ when prompted by the operator.

UK Toll-Free: 0808 109 0700

UK-Toll: +44 (0) 33 0551 0200

South Africa Toll-Free: +27 80 098 0512

USA Toll-Free: +1 866 580 3963

USA Toll: +1 786 697 3501

A playback facility for the conference call will be available online via www.bat.com.

Market share and volume data YTD September 2024 average share growth vs. FY2023 average.

¹ New Category profitability at category contribution level: Profit from operations before the impact of adjusting items and translational foreign exchange, having allocated costs that are directly attributable to New Categories.

² Leverage refers to the ratio of adjusted net debt to adjusted EBITDA.

Adjusted net debt is not a measure defined by IFRS. Adjusted net debt is total borrowings, including related derivatives, less cash and cash equivalents and current investments held at fair value, excluding the impact of the revaluation of Reynolds American Inc. acquired debt arising as part of the purchase price allocation process.

Adjusted EBITDA is not a measure defined by IFRS. Adjusted EBITDA is profit for the year before net finance costs/income, taxation on ordinary activities, depreciation, amortisation, impairment costs, the Group’s share of post-tax results of associates and joint ventures, and other adjusting items.

³ Predominantly Smokeless refers to our ambition to achieve 50% of Group revenue from our smokeless products by 2035. Smokeless refers to Non-Combustibles, including Vapour products, Heated Products, Modern Oral pouches and Traditional Oral.

⁴ Organic: To supplement the British American Tobacco’s results presented in accordance with International Financial Reporting Standards (IFRS), the Group’s Management Board, as the chief operating decision maker, reviews certain of its results, including revenue, and adjusted profit from operations, at constant rates of exchange, prior to the impact of businesses sold or held-for-sale in the case of revenue and adjusted profit from operations. Although the Group does not believe that these measures are a substitute for IFRS or other operating measures, the Group does believe that such results excluding the impact of businesses sold or to be held-for-sale provide additional useful information to investors regarding the underlying performance of the business on a comparable basis and in the case of the sale of the Group’s businesses in Russia and Belarus, the impact these businesses had on revenue and profit from operations. Accordingly, the organic volume and financial measures appearing in this document should be read in conjunction with the Group’s results as reported under IFRS and other operating measures.

⁵ Top 8 Combustibles markets: U.S. – Marlin, Germany – NielsenIQ, Japan – CVS, Romania – NielsenIQ, Brazil – Scanntech, Mexico – NielsenIQ, Bangladesh – IMS, Pakistan – Retail Access. These eight markets cover an estimated c.60% of Combustibles industry revenue.

⁶ Vuse leadership: Based on Vuse closed systems consumables value share in the Top 7 Vapour markets.

* Based on the weight of evidence and assuming a complete switch from cigarette smoking. “Reduced-risk” products are not risk free and are addictive.

† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to Food and Drug Administration (FDA) regulation and no reduced-risk claims will be made as to these products without FDA clearance.

⁷ Top 7 Vapour markets: U.S. – RSD, Canada – Scan Data, UK – NielsenIQ, France – Strator, Germany – NielsenIQ, Poland – NielsenIQ, Spain – Logista RA. These seven markets cover an estimated c.90% of global closed system industry revenue.

⁸ New Categories Poly-use (“NC Poly-use”): Refers to the consumption of two or more potentially reduced-risk tobacco or nicotine product categories by adult consumers who do not consume any Combustibles products.

⁹ Top 9 HP markets: Japan – CVS-BC, South Korea – CVS, Italy – NielsenIQ, Germany – NielsenIQ, Greece – NielsenIQ, Hungary – SZTFH, Poland – NielsenIQ, Romania – NielsenIQ, Czech Republic – NielsenIQ. These nine markets account for c.80% of total industry HP revenue.

¹⁰ Top 7 Modern Oral markets: U.S. – RSD, Sweden – NielsenIQ, Denmark – NielsenIQ, Norway – NielsenIQ, Switzerland – IMS, UK – NielsenIQ, Poland – NielsenIQ. These seven markets cover an estimated c.90% of total industry Modern Oral revenue

¹¹ Based on current exchange rates of USD/GBP 1.2798 as at close on 9 December 2024.