British American Tobacco plc (LON:BATS) has announced its 2023 H1 Pre-Close Trading Update.
On track to meet full year guidance
Tadeu Marroco, Chief Executive:
“I am delighted to provide this first trading update since becoming Chief Executive.
Firstly, let me address a frequently asked question: Will there be a change in our strategy? No. I am clear that the strategy we created in 2019 is right. I am confident that we can execute it successfully.
Our commitment to building A Better TomorrowTM, by reducing the health impact of our business through a multi-category portfolio of reduced-risk products*† remains. Put simply, smokers must have access to better choices. This is already a reality for smokers who have made the switch to our reduced-risk products*†. It also represents a commitment to our consumers who continue to smoke and are yet to make that transition.
I often hear A Better TomorrowTM being referred to as our strategy, when in fact it is our purpose. They are not one and the same. Our strategic aim is to progressively transform our portfolio by actively encouraging adult smokers to switch to less risky products*† compared to smoking; a transformation delivering long-term multi-stakeholder value.
We have reached a point in our transformation where sharper execution and greater emphasis on fewer, bigger priorities that deliver meaningful returns is required. We will use our market archetype model, which identifies different stages of New Category maturity to guide us, ensuring our priorities deliver on our strategy and are well articulated with clear business outcomes defined.
I am pleased with our performance in a number of key areas. We increased the number of consumers of non-combustible products1 by a further 900,000 in Q1, driving good revenue growth and further reducing losses of New Categories means we are on track to deliver our £5bn revenue ambition in 2025, with profitability in 2024, irrespective of the timing of the transfer of our Russian and Belarusian businesses.
Outside the U.S., combustible brands have been performing well as we address portfolio gaps and optimise pricing. Consistently driving value from our combustibles brands is critical, as they deliver substantial cash returns and generate value to fund New Categories and our transformation.
We are also making good progress towards de-leveraging our balance sheet, supporting our ambition to sustainably return excess cash to shareholders.
That said, there are operational issues that will have my focus. Our performance in U.S. combustibles has been disappointing. Returning combustibles to consistent value creation is critical to our multi-category strategy in the U.S. We are taking action, and while it will take some time to carefully and thoroughly implement our plans, our volume share has grown sequentially since the start of the year.
glo has had an underwhelming start to 2023, albeit recent momentum is more encouraging. glo Hyper Air is a step forward in what promises to be an exciting pipeline ahead.
I am determined to manage external risks thoughtfully and transparently through continuing to increase our engagement with regulators, policymakers, and relevant stakeholders. I have made it clear to my senior management team and the organisation that we must operate to the highest ethical standards, and this topic must remain a priority for both our employees and business partners.
2023 is going to be complex and exciting in equal measure. BAT has a wonderful heritage. I am committed to building a new, modern BAT – one that is agile and progressive, inclusive and collaborative. It is our exceptionally talented people, our pipeline of innovation and portfolio of winning brands, that will ensure we perform and transform simultaneously. I have great confidence this can be achieved.
We continue to maintain our full year 2023 guidance.”
Trading update detail
Sharpening execution in combustibles and the U.S.
o Group cigarette volume share up 10 bps and value share down 40 bps, mainly due to the implementation of commercial plans in the U.S.
o Outside the U.S., we have been performing well with reinvigorated portfolios, refreshed brands and sharpened execution supported by optimised pricing offset by some geographic mix
o The U.S. industry premium segment shows early signs of stabilisation with our premium volume share sequentially growing since the start of the year
o In California, the longer-term impact of the flavour ban currently remains difficult to assess. Menthol products are reportedly still being sold illicitly due to lack of enforcement; and we have also seen elevated flavoured volume in surrounding states
o Our full year volume performance will be second-half weighted in the U.S., given the H1 volume impact of SAP-related inventory phasing
We have extended Vuse’s global leadership2
o Vuse value share up 2.8 ppts, reaching 38.8% in key Vapour markets3, driven by extended volume and value share U.S. leadership
o Continuing to approach the growing modern disposables segment in a responsible way; Vuse Go is now available in 40 markets
o Establishing Vuse platforms in Emerging Markets, including Colombia and Peru, with encouraging early results
glo performance improvement after a disappointing Q1
o glo THP category volume share down 1.1 ppts to 18.2% in key markets4
o Continued category volume share momentum in some key European THP markets offset by the highly competitive markets in Japan and Italy
o As part of our enhanced innovation pipeline, we recently launched our glo Hyper Air platform in four key European THP markets, with further roll-outs planned for H2
Velo cements European leadership, good progress in Emerging Markets
o Velo remains Modern Oral volume share leader in 15 European markets, with Velo Mini and Velo Max continuing to demonstrate our commitment to innovation
o Velo volume share of Total Oral was up 70 bps, while volume share of Modern Oral was down 1.8 ppts to 28.5% in key markets5 mainly driven by the U.S.
o Pakistan growth continues and we have rolled-out nationally in Kenya
Full year 2023 guidance
o Global tobacco industry volume expected to be down c.3%
o 3-5% organic6 constant currency revenue growth, with performance expected to be H2 weighted; reported growth impacted by timing of the transfer of the Russian and Belarusian businesses expected to close in 2023
o Strong New Category revenue growth with further improvement in category contribution alongside incremental investment
o Mid-single figure constant currency adj. diluted EPS growth, with c.2% transactional FX headwind
o Translational foreign exchange is expected to be c.-1% headwind7 on full year adjusted diluted EPS growth, and c.4% tailwind7 on half year adjusted diluted EPS growth
o Operating cash flow conversion in excess of 90%
Webcast and Conference call – The conference call will begin at 9.15am (BST).
You can access the audio webcast via our website. You can also listen via conference call by dialling the numbers below, using the password: BAT
UK Toll-Free: 0808 109 0700
UK-Toll: +44 (0) 33 0551 0200
South Africa Toll-Free: 0 800 980 512
USA Toll Free: +1 866 580 3963
USA Local: +1 786 697 3501
A playback facility for the conference call will be available online via www.bat.com.
British American Tobacco attends Deutsche Bank Global Consumer Conference on 7 June 2023
Tadeu Marroco, Chief Executive, will be participating in a fireside chat at the conference at 8.15am UK / 9.15am CEST on 7 June. The event will be streamed live, audio-only, via our website www.bat.com.
A playback facility will also be available online.
Market share and volume data YTD April 2023, share growth v FY2022.
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
† Our vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products, including Velo, Grizzly, Kodiak, and Camel Snus, which are sold in the U.S., are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.
1 The number of consumers of Non-Combustible products is defined as the estimated number of Legal Age (minimum 18 years, U.S.: 21 years) consumers of the Group’s Non-Combustible products. In markets where regular consumer tracking is in place, this estimate is obtained from adult consumer tracking studies conducted by third parties (including Kantar). In markets where regular consumer tracking is not in place, the number of consumers of Non-Combustible products is derived from volume sales of consumables and devices in such markets, using consumption patterns obtained from other similar markets with adult consumer tracking (utilising studies conducted by third parties including Kantar). The number of consumers is adjusted for those identified (as part of the consumer tracking studies undertaken) as using more than one BAT Brand – referred to as “poly users”. Target market for acquisition is existing adult smokers/nicotine users.
The number of consumers of Non-Combustible products is used by management to assess the number of consumers regularly using the Group’s New Category products as the increase in Non-Combustible products is a key pillar of the Group’s ESG ambition and is integral to the sustainability of our business.
The Group’s management believes that this measure is useful to investors given the Group’s ESG ambition and alignment to the sustainability of the business with respect to the Non-Combustibles portfolio.
2 Based on Vuse estimated value share from reduced-risk products in measured retail for Vapour (i.e., total Vapour category value in retail sales) in the Top 5 Vapour markets.
3 Top 5 Vapour markets: U.S. – Marlin, Canada – Scan Data, UK – Nielsen IQ, France – Strator, Germany – Nielsen IQ. These five markets cover an estimated c.80% of global closed system revenue.
4 Top 12 THP markets: Japan – CVS-BC, South Korea – CVS, Italy – Nielsen IQ, Greece – Nielsen IQ, Hungary – NDN, Kazakhstan – Nielsen IQ, Ukraine – Nielsen IQ, Poland – Nielsen IQ, Switzerland – IMS, Romania – Nielsen IQ, Malaysia – IPSOS, Czech Republic – Nielsen IQ. The THP 12 Top markets were adjusted in H1 2023, with more established THP markets Kazakhstan, Romania, Switzerland and Malaysia introduced and Russia removed in advance of the planned exit this year. Accordingly, glo’s category volume share for 2022 was rebased on the new T12 definition (excluding Russia) from 19.4% to 19.2%. The T12 THP markets account for c.80% of total industry THP revenue.
5 Top 5 Modern Oral markets: U.S. – Marlin, Sweden – Nielsen IQ, Denmark – Nielsen IQ, Norway – Nielsen IQ, Switzerland – Scan Data (excl. SPAR, Top CC and Alligro). These five markets cover an estimated c.80% of total industry Modern Oral revenue.
6 To supplement the Group’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 volume, revenue, adjusted profit from operations and adjusted operating margin, at constant rates of exchange, prior to the impact of businesses sold or held-for-sale. Although the Group does not believe that these measures are a substitute for IFRS 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 expected sale of the Group’s businesses in Russia and Belarus, the impact these businesses have on revenue and profit from operations. Accordingly, the organic financial measures appearing in this document should be read in conjunction with the Group’s results as reported under IFRS. We also provide in this release the reconciliations of volume to organic volume, revenue to organic revenue at constant rates of exchange, profit from operations to organic adjusted profit from operations at constant rates of exchange and operating margin to organic adjusted operating margin at constant rates of exchange. In 2021, the Group sold its Iranian business. However, as the Iranian business was not significant to the user’s understanding of that year’s or subsequent years’ financial performance, management did not treat the sale of Iranian business as an organic adjustment.
7 Based on current exchange rates of USD/GBP 1.24825 as at close on 2 June 2023.
Share growth refers to volume share for THP and Modern Oral and value share for Vapour
As used herein, volume share refers to the estimated retail sales volume of the product sold as a proportion of total estimated retail sales volume in that category and value share refers to the estimated retail sales value of the product sold as a proportion of total estimated retail sales value in that category. Please refer to the 2022 Annual Report on Form 20‐F for a full description of these measures, together with a description of other Key Performance Indicators (KPIs), on pages 322 and 323.
New Categories comprises Tobacco Heating Products (THP), Vapour and Modern Oral. Our products as sold in the US, 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.
New regional structure restatements
The Group’s results for the six-month period ended 30 June 2022 and year ended 31 December 2022, are presented below to reflect the implementation of the previously announced regional structure. This will provide a consistent basis for the organic performance measurements of the Group for the six-month period ending 30 June 2023 and year ending 31 December 2023. These are provided prior to the announcement of the Group’s half-year report for the period ending 30 June 2023 (due to be released on 26 July 2023).
The information provided also includes the Group’s results on an organic basis, reflecting the ongoing expectation with regards to the transfer of British American Tobacco’s operations in Russia and Belarus.
While these reclassifications affect the presentation of regional results, they do not affect the Group’s reported income statement, balance sheet, or cash flow.
