British American Tobacco plc (LON:BATS) has announced its latest trading statement.
· On track to deliver FY24 guidance with H1 delivery in line with our expectations
· Expected H2 acceleration driven by the phasing of innovation in New Categories, and the benefits of H1 investment in U.S. commercial actions and related wholesaler inventory movements
· We are driving a further improvement in New Category profitability1 through our Quality Growth focus on a more balanced top-line and bottom-line delivery
· In Combustibles, U.S. commercial plans continue to gain traction despite a challenging macro-economic backdrop; in AME and APMEA we gained volume and value share, with robust H1 pricing
· Good AME performance reflecting the benefit of our multi-category portfolio; H2 weighted APMEA performance due to the phasing of New Category launches, and a strong H1 comparator
· Partial monetisation of our ITC stake enabled the initiation of a sustainable share buy-back
· Strong cash conversion with our leverage2 expected to be within our narrowed target range of 2.0-2.5x by year-end 2024.
Tadeu Marroco, British American Tobacco plc Chief Executive:
“Our year-to-date performance is in line with our expectations, and we are on track to deliver our guidance of low-single digit revenue and adjusted profit from operations growth on an organic3, constant currency basis in 2024.
As previously highlighted, we expect our performance to be second-half weighted, mainly driven by wholesaler inventory movements related to continued investment in our U.S. commercial actions, as well as the phasing of new launches. Our guidance also reflects ongoing macro-economic pressures, particularly in the U.S. market and continued lack of effective enforcement against the growing illicit vapour segment. As a result, we expect our H1 revenue and adjusted profit from operations to be down by low-single digits on an organic3, constant currency basis.
We are sharpening our execution and making targeted investment choices to drive our medium-term sustainable growth algorithm. We are investing to sustainably strengthen our U.S. business, accelerate innovation momentum, and enhance capabilities that support our strategic delivery.
These investments will set the business up for a stronger future. While there is still more to do, I am confident that our actions are working, and I am encouraged by our continued traction in U.S. Combustibles, initial performance of glo Hyper Pro and enhanced consumables in early launch markets as well as the continued success of our non-tobacco range veo in Europe.
Our focus on Quality Growth is starting to drive accelerating returns on more targeted investments across all three New Categories, particularly HP and Modern Oral. As a result, we expect to deliver further improvement in New Category profitability1 for both the first half and full year.
In addition, we continue to prioritise shaping a sustainable future and call for more appropriate regulation and enforcement of New Categories, particularly in the U.S. Vapour market.
BAT is a highly cash generative business, and we are committed to continuing to reward shareholders with strong cash returns. I am pleased with our progress in enhancing financial flexibility driven by continued strong operating cash conversion and completion of the partial monetisation of our ITC stake, enabling the initiation of a sustainable share buy-back.
Looking forward, we expect growing momentum in the second half, enabled by the investments we are making today. As we continue our journey towards building a Smokeless World, guided by our refined strategy, we will progressively improve our performance to deliver 3-5% revenue, and mid-single digit adjusted profit from operations growth on an organic3 constant currency basis by 2026.”
Our outlook is underpinned by the following three key areas, where we are making tangible progress:
1. Combustibles: U.S. commercial actions gaining traction; volume & value share gains in AME & APMEA
Group cigarette volume share in key markets4 is up 30 bps. Value share is down 10 bps mainly due to adverse geographical mix and the implementation of commercial plans in the U.S.
While the U.S. macro environment is showing some early signs of recovery, consumers remain stretched, with combustibles industry volume down c.9% YTD. As previously highlighted, we expect our H1 performance to be impacted by continued investment in our commercial actions and related phasing of wholesaler inventory movements, with the latter expected to unwind in H2. We have now completed the majority of our previously announced commercial initiatives, which continue to gain traction, including:
· Strong performance of Newport soft-pack in key investment states, which together with further share gains in Natural American Spirit, has driven our volume share of the premium segment up 40 bps; and
· Lucky Strike continues its strong growth record, maintaining its position as the fastest growing combustibles brand in the U.S., with the branded value segment now gaining volume share and deep discount share gains slowing.
We have continued to deliver robust pricing, value and volume share gains in AME and APMEA. Key markets driving H1 financial delivery include Germany, Romania, Pakistan and Mexico.
2. Strengthening innovation driving New Category momentum
2.1 Vuse: Continued global value share leadership5; U.S. illicit single-use vape headwinds persist
We maintained global value share leadership at 41.1% in key markets6, with gains in AME (up 20 bps) offset by the U.S. (down 90 bps).
In the U.S. we maintained value share leadership in tracked channels at 51.5%, however we expect that our financial performance will be impacted by the continued growth of illicit single-use vapes.
We continue to call for more appropriate regulation and enforcement to tackle illicit products in the category, and we welcome signs of increasing action, including:
· Proposed vapour directory and enforcement bills in 20 states, enacted in 3 states to date; and
· Encouraging early signs of illicit products volume decline in Louisiana, the first state to implement a vapour directory and enforcement legislation in October 2023, with Vuse Alto capturing the majority of the volume outflow back into the legal segment.
Our value share performance in AME was driven by France, Germany and Poland. More broadly in AME, we are seeing continued poly-usage7 benefiting the vapour category.
This month, we are starting to roll out our new single-use vapour product, Vuse Go 2.0, featuring enhanced taste and design, and a removable battery, with substantial further roll-outs planned through the remainder of 2024. As a result, in combination with further innovation roll-outs under the closed system format, we expect an accelerating volume and revenue performance in H2.
2.2 glo: Innovation pipeline starts to drive category volume share recovery across key markets8
glo has started to deliver sequential category volume share improvement since January in key markets8, with year-to-date volume share down 20 bps to 16.8% (versus down 110 bps in 2023), driven by encouraging early consumer response to our new innovations glo Hyper Pro and improved consumables. glo Hyper Pro is an important first step into the premium HP segment, with comparable price positioning to other premium products.
· Category volume share stabilisation versus the prior year in our focus markets of Japan and Italy
· Continued strong performances in key AME markets, Poland and Czech Republic
· veo, our non-tobacco consumables range, now launched in 17 markets, strongly outperforming competing products with further roll-outs planned through the remainder of the year.
We expect our H1 volume and revenue performance to be impacted by a stronger comparator relating to our price repositioning in Japan and Italy in mid-2023, and the phased roll-out of our newest innovations which will be completed across our key markets by the end of H1.
As a result, we expect our positive share momentum to continue, and to drive an improving organic3 volume, revenue and profit1 performance in H2.
2.3 Velo: Strong revenue and profit growth – continued leadership outside the U.S.
Velo’s volume share of Total Oral in key markets9 is up 80 bps at 10.3%, driven by strong Modern Oral category growth.
Our volume share of Modern Oral was down 10 bps to 27.0% in key markets9, mainly driven by the weight of the U.S. market.
· In AME we maintained our leadership position, reflecting our strength in both established oral markets like Sweden, Denmark and Norway, and our strong momentum in newer launch markets including the UK and Poland
· In the U.S. we are encouraged by early results from the phased roll-out of our refreshed Velo brand expression, with volume share of Modern Oral stabilising at 4.5%, driven by 13.5% volume share in our New York pilot, up 280 bps
· In addition, following positive consumer testing, we have started to roll out Grizzly Modern Oral nationally in the U.S., building on the growing trend of Traditional Oral consumers moving to Modern Oral
We also see significant opportunity for Velo in emerging markets, with continued strong volume performances in Pakistan and South Africa.
As a result, we expect Velo to continue to deliver a strong financial performance in H1 and FY24.
3. Enhancing financial flexibility
BAT is a highly cash generative business, and we expect to deliver operating cash flow conversion in excess of 90% again in 2024, enabled by our continuous improvement mindset and further optimising resource allocation.
In March, we completed the monetisation of a 3.5% portion of our ITC stake, enabling the initiation of a sustainable share buy-back, starting with £700m in 2024 and £900m in 2025.
We are making good progress on deleverage and expect to be within our narrowed leverage target range of 2.0-2.5x adjusted net debt / adjusted EBITDA2 by year-end 2024.
Technical guidance for full year 2024:
· Global tobacco industry volume expected to be down c.3%
· Low-single figure organic3 constant currency revenue growth, with H2 weighted New Category growth
· Low-single figure organic3 adjusted profit from operations growth, including a c.2% transactional FX headwind
· H2 weighted Group revenue and profit growth
· Translational FX headwind on adjusted profit from operations growth is expected to be c.4% for half year and c.4% for full year10
· Operating cash flow conversion in excess of 90%
Webcast and Conference call – The conference call will begin at 8.30am (BST)
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 British American Tobacco’s website: www.bat.com.
