British American Tobacco PLC 2023 EPS Delivery in line with Guidance

Reiteration of FY23 Delivery In Line with Guidance and Strategy Update

British American Tobacco (LON:BATS) have today provided a pre-close trading update and strategy update.

·      Confirming full year 2023 EPS delivery in line with our guidance

·      Continued strong volume and revenue growth in New Categories, led by Vuse and Velo

·      New Category contribution expected to be broadly breakeven, two years ahead of our original target

·      Strong AME and APMEA growth, reflecting the resilience of our global, multi-category strategy

·      Macro-economic pressures in the U.S. impacting combustibles performance

·      Group organic¹ revenue now expected at the low end of our 3-5% guidance range at constant rates

·      Now committing to ‘Building a Smokeless World’, with 50% revenue from Non-combustibles by 2035

·      2024 investment to accelerate our transformation and secure long-term sustainable growth

Tadeu Marroco, British American Tobacco Chief Executive

“In 2023 we continue to expect another year of delivery in line with our guidance. I am encouraged by the strong performances of Vuse and Velo, delivering strong volume led revenue growth, and increased profitability. As a result, we now expect New Categories to be broadly breakeven in 2023, two years ahead of our original target.

In combustibles, while the U.S. macro-economic environment remains challenging, I am encouraged that our commercial plans are starting to deliver early signs of portfolio recovery. In AME and APMEA we expect to deliver another strong revenue and profit performance, driven by the strength of our well-balanced portfolio of global brands.  Together, this performance demonstrates the benefit of our global footprint, and multi-category strategy.

To accelerate the next phase of our transformation journey, we are now committing to ‘Building a Smokeless World’. We will deploy our global multi-category portfolio to actively encourage smokers to ‘Switch to Better’ nicotine products, realising the multi-stakeholder benefits of ‘A Better Tomorrow^TM‘.

This commitment is demonstrated by our new ambition to become a predominantly smokeless business, with 50% of our revenue from non-combustibles by 2035. With only 10% of the world’s 1 billion smokers currently using New Category products², the long-term opportunity for growth as we deliver on our transformation is vast.

Consistent with our vision to ‘Build a Smokeless World’, and in combination with the current macro-economic headwinds impacting the U.S. combustibles industry, in 2023 we will take an accounting non-cash adjusting impairment charge of around £25bn. This accounting adjustment mainly relates to some of our acquired U.S. combustibles brands, as we now assess their carrying value and useful economic lives over an estimated period of 30 years. Accordingly, we will commence amortisation of the remaining value of our U.S. combustibles brands from January 2024.

Building on our broad-based performance in 2023, I am clear that now is the right time to further invest to accelerate our transformation. We are making active investment choices to strengthen our U.S. business, accelerate innovation momentum in Heated Products globally, and enhance capabilities that support our strategic delivery. These investments will impact in 2024, and alongside continued macro-economic pressures in the U.S., we now expect growth in revenue and adjusted profit from operations of low-single digit on an organic¹ basis at constant rates. We expect a progressive improvement to 3-5% revenue growth, and mid-single digit adjusted profit from operations growth on an organic¹ basis at constant rates by 2026.

We will continue to reward shareholders through our strong cash returns, including our progressive dividend, and, once the middle of our leverage range is reached, we will evaluate all opportunities to return excess cash to our shareholders.

I am confident that the choices we are making today will drive our long-term success and deliver sustainable value for all of our stakeholders.”

Trading Update

Driving profitability³ in New Categories

We have extended our global leadership position⁴ in Vapour with Vuse value share up 100bps, reaching 36.8% in key markets⁵. In the U.S., Vuse has continued to grow value share in measured channels reaching 46.0%, up 500bps. In AME and APMEA, we are achieving strong revenue growth, driven by an increased number of consumers, rising cross category poly-usage⁶ and continued innovation, with Vuse Go now available in 59 markets. We anticipate another significant profitability³ improvement for Vuse in 2023.

In Modern Oral, Velo continues to deliver strong volume led revenue growth and increasing profitability³. Modern Oral is a fast-growing category, driving our volume share of the Total Oral category in key markets⁷ up 110bps, reaching 8.5%. While our global volume share of Modern Oral is down YTD driven by the U.S, we remain confident in securing the PMTA for our Europe-leading Velo 2.0 platform to support longer-term competitiveness in this market. Elsewhere Velo continues to perform strongly, maintaining its clear category leadership in Europe with 67% volume share in key markets⁸, and excellent performances across the rest of AME and recently entered emerging markets in APMEA.

Significantly strengthening Heated Products

glo’s performance in 2023 has been disappointing. Slower industry growth, increased poly-usage⁶ particularly intersecting with Vapour, and heightened competitive activity in Japan and Italy, have resulted in a deceleration in our organic¹ volume and revenue growth in the second half, with YTD volume share down 100bps in key markets⁹ to 18.2%.  Although glo maintains its strong No.2 position globally, performing well in many AME markets including Poland and the Czech Republic, we are working hard to strengthen our innovation pipeline to drive momentum in our longer-term performance.

glo Hyper Air is performing in line with expectations, and we have recently launched veo^TM, a range of non-tobacco consumables in 10 markets in Europe, gaining first mover advantage in this new space, with encouraging early results. We look forward to sharing more details on our accelerated Heated Product innovation pipeline in 2024.

Consistent combustibles value growth

Our global volume share in combustibles is flat YTD, with value share down 40bps, reflecting the impact of our commercial actions in the U.S., partly offset by stronger performances in AME and APMEA.

In the U.S., macro-economic pressures and the continued proliferation of illicit modern disposables have continued to impact combustibles industry volume in the second half of the year, with recent signs of premium segment pressure after a more stable first-half.

While our YTD volume share is down 10bps vs FY22, our commercial plans continue to show early signs of share recovery with a 50bps improvement between January and October driven by Newport, Natural American Spirit and Lucky Strike. We have been clear that recovery in U.S. combustibles will take time, however, we are confident that the actions we are taking will strengthen our portfolio over the longer-term.

Outside the U.S., our combustibles business has continued to perform well. In AME, volume share gains and pricing have driven strong revenue and profit growth. In APMEA, the impact of excise led volume declines in Pakistan has been more than offset by our pricing across the region, and we expect 2023 to be another year of strong revenue and profit delivery.

Enhancing financial flexibility

BAT is a highly cash generative business and we expect to deliver close to 100% operating cashflow conversion in 2023. We are making progress towards reaching the middle of our guided 2-3x adjusted net debt¹⁰ / adjusted EBITDA¹¹ leverage range and expect to be around 2.7x by year end.

We continue to seek and evaluate all opportunities to enhance balance sheet flexibility, including disposals and the exit of non-strategic markets. We remain committed to a progressive dividend, and once the middle of our leverage range is reached, we will evaluate all opportunities to return excess cash to our shareholders.

Strategic Update

We have the right multi-category strategy. Building on our strong progress to date, and to continue to deliver long-term sustainable growth and returns, we are now focused on (i) sharper strategic execution through delivery on fewer, bigger operational priorities, and (ii) driving a more collaborative and inclusive culture, as we build a more agile and modern BAT.

To steer us towards these two objectives, we have refined our strategic direction and ambition. This will drive our priorities and future choices and strengthen our path to long-term profitable growth and sustainable value creation.

These include:

·      Driving a step change in our innovation capabilities and speed to market

·      Making active choices to accelerate our transformation

·      2024 incremental investment to secure long-term sustainable growth

We will provide more details on our refined strategic direction including the KPIs against which we can be measured at our full year results in February.

Driving a step change in our innovation capabilities and speed to market

We have all the right foundations in place. We committed to a multi-category strategy from the outset, recognising that consumer tastes and preferences are not homogenous. In less than a decade, we have built a portfolio of three powerful brands, Vuse, glo and Velo, delivering more than £3bn of revenue. After significant early-stage investment, we are delighted that we now expect our New Categories to be broadly breakeven in 2023, and to be profitable² from 2024 onwards.

Building on our deep cross category consumer insights, we will deliver an enhanced innovation pipeline, by further investing in our people, our science, our IP and our capabilities, driving an innovation focused culture. We will continue to leverage our centres of excellence in Southampton, Trieste and Shenzhen to access wider internal and external strategic partnerships focused on developing consumer-relevant premium propositions.

Making active choices to accelerate our transformation

We will leverage our market archetypes to guide how and where we deploy our products and allocate resources, to deliver long term-value creation.

In the U.S., we have now completed a deep and thorough review of our business. As a result, we have begun and will continue to invest in sharpening our portfolio management, strengthening our route-to-market, and further leveraging our broad, digitally enabled, revenue growth management capabilities. We are confident this will drive quality growth over the longer-term and ensure greater resilience through economic cycles.

In Heated Products, we continue to invest to rejuvenate our momentum with an enhanced cadence of innovation in both devices and consumables. The recent launch of our non-tobacco platform veo^TM is an early sign that this focus, to deliver world-first consumer-relevant innovations, is yielding results.

We are also taking action to strengthen our organisational capabilities. As part of the Management Board changes announced in June, we created the new Corporate and Regulatory Affairs function to increase external engagement with regulators, policy makers and broader stakeholders.

Sustainable success will also be accelerated by a culture of inclusivity and collaboration, an effort led by Cora Koppe-Stahrenberg, our new Chief People Officer. Cora brings a valuable external lens from a diverse range of transforming industries, and she will be focused on driving a more agile and modern BAT.

2024 incremental investment to secure long-term sustainable growth

In 2024 we expect continued headwinds to impact our U.S. business, driven by macro-economic pressures on the combustibles market and regulatory inaction on illicit disposable vapes.

In addition, as highlighted above, we are making active investment choices to strengthen our U.S. business, accelerate innovation momentum in Heated Products globally, and enhance capabilities that support our strategic delivery.

As a result, we now expect low-single digit revenue and adjusted profit from operations growth in 2024, on an organic¹ basis at constant rates. Given planned investment phasing and an expected slow recovery in U.S. macros, we also expect our performance in 2024 to be second half weighted.

We are confident that these are the right near-term investment choices to secure long-term quality growth and they will be made despite transactional FX and inflationary headwinds persisting. Looking forward, we expect accretive New Category growth and stable combustible revenue to continue to drive total nicotine industry revenue growth. This underpins our medium-term guidance where we expect a progressive improvement to a 3-5% revenue and mid-single digit adjusted profit from operations growth, on an organic¹ basis at constant rates by 2026.

Technical guidance for full year 2023:

·      Global tobacco industry volume expected to be down c.3%

·      Low end of 3-5% organic¹ constant currency revenue growth

·      Strong New Category revenue growth with further improvement in category contribution alongside incremental investment

·      Mid-single figure constant currency adjusted diluted EPS growth, including a c.2% transactional FX headwind

·      Translational FX is expected to be a c.3% headwind¹² on full year adjusted diluted EPS growth

·      Non-cash amortisation charge will be treated as an adjusting item

·      Adjusted diluted EPS includes the divestment of our business in Russia/Belarus in September

·      Operating cash flow conversion close to 100%

Notes:

Market share and volume data YTD September 2023 average share growth vs. FY2022 average unless otherwise stated.* 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 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 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 diluted earnings per share, 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  sale of the Group’s businesses in Russia and Belarus, the impact these businesses had 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. 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.

² Global consumer numbers for New Categories and Smokers at an Industry Level. Source: Statista 2023, Kantar Incidence & Track Studies.

³ 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.

⁴ 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.

⁵ Top 5 Vapour markets: U.S. – Marlin, Canada – Scan Data, UK – NielsenIQ, France – Strator, Germany – NielsenIQ. These five markets cover an estimated c.80% of global closed system revenue.

⁶ Poly-usage: Refers to a transitional period for smokers towards complete switching to potentially risk reduced nicotine products during which period such smokers reduce cigarette consumption and choose to consume one or more New Category nicotine products.

⁷ Top 5 Modern Oral markets: U.S. – Marlin, Sweden – NielsenIQ, Denmark – NielsenIQ, Norway – NielsenIQ, Switzerland – IMS. These five markets cover an estimated c.80% of total industry Modern Oral revenue.

⁸ European leadership refers to Top 4 Modern Oral markets: Sweden – NielsenIQ, Denmark – NielsenIQ, Norway – NielsenIQ, Switzerland – IMS.

⁹ Top 12 HP markets: Japan – CVS-BC, South Korea – CVS, Italy – NielsenIQ, Greece – NielsenIQ, Hungary – SZTFH, Kazakhstan – NielsenIQ, Ukraine – NielsenIQ, Poland – NielsenIQ, Switzerland – IMS, Romania – NielsenIQ, Malaysia – IPSOS, Czech Republic – NielsenIQ. The T12 HP markets account for c.80% of total industry HP revenue.

¹⁰ 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.

¹¹ 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.

¹² Based on current exchange rates of USD/GBP 1.26105 as at close on 4 December 2023.

Share growth refers to volume share for HP 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 Heating Products (HP), Vapour and Modern Oral. 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.