British American Tobacco p.l.c. Q4 FY2020 earnings call

• Transforming BAT amidst COVID, prioritizing employee health with no redundancies or furloughs.
• Focus on reducing health impact through less risky products, encouraging switch to reduced risk alternatives.
• Increased investments in new categories, with around 30 million consumers in non-combustible products.
• Vapor, THP, and Modern Oral categories showing strong performance, with Vuse/Vype leading in vapor, Hyper strong in THP, and Modern Oral growing outside the US.
• ESG recognition including being named in Dow Jones Sustainability Index for 19th consecutive year, and inclusion in Financial Times Diversity Leaders list.
• Operational agility enabled by organizational transformation to navigate COVID challenges.

Combustible: Driving value and on track to deliver savings of at least £300 million from Quantum. Vapor: Vuse/Vype is the fastest growing international vapor brand, with value share growth in top five markets by over 7 percentage points to 26% year-to-date, number 1 in device sales in all top five markets. THP: Hyper has strong performance in Japan, with total nicotine volume share nearly 6% in October and Hyper reaching 2.3% nicotine share, expected to grow THP volume close to 20% in 2020. Modern Oral: Growing strongly outside the US, acquisition of drift strengthens position in the US, expanding distribution of Dryft products from 20,000 to around 100,000 outlets by end of first half 2021.

• Expect to deliver revenue growth at the top end of the 1% to 3% guidance range due to strong pricing and reduced COVID revenue headwind.
• Continue to expect Mid-Single Figure constant currency adjusted diluted EPS growth despite increased new category investments.
• Expect translation headwind of 3.3% on full-year 2020 adjusted diluted EPS, with impact expected between 2% to 3% for 2021 applying current foreign exchange spot rates.
• Further increase new category investments in second half by close to £200 million, total additional new category investments in 2020 around £450 million.

• Illicit trade issues in some emerging markets like South Africa, where illicit trade rate increased from 52% to close to 60% due to extended period without selling cigarettes.
• Impact of COVID on supply chain, marketing activation disruption, and closure of shops in certain markets affecting revenue.
• Challenges in some emerging markets like Pakistan, Sri Lanka, and South Africa where stick sales are predominant and recovery from illicit trade is difficult.

Q: On glo in Japan, does Hyper cannibalize existing glo and why total glo market share not risen?

A: There is some cannibalization, but the glo family is growing as a whole, with total category market share slightly above 20% now compared to below that in the middle of the year.

Q: Can you give idea of capacity in US Modern Oral by mid-2021?

A: We have established capacity, inherited third party supply capacity from Dryft acquisition, and bringing in a machine to reinforce capacity, aiming to be unconstrained with at least 60 million by mid-2021.

Q: Thoughts on FY 2021 volume outlook, especially in US?

A: Very volatile to predict now, new government in US, fiscal stimulus discussions, and COVID still ongoing; will have more firm view by year-end results in February.

Q: Are high single digit EPS growth and new category revenue of 5 billion by 2025 incompatible?

A: No, we have savings from project quantum and strong combustible business generating funds for new category growth, with momentum in new categories giving reassurance to achieve targets.

Q: Why not start share repurchases today?

A: Believe best to strengthen balance sheet now, will review capital allocation again by end of 2021 when leverage reaches around 3 times.

Q: Factors holding back revenue growth this year?

A: Global travel retailer impact, South Africa being unable to sell cigarettes, disruption in emerging markets like Mexico, Pakistan, Sri Lanka, netting to 2.5% turnover impact.

Q: Competitive landscape in US Modern Oral?

A: Very competitive segment, testing marketing mix in Circle K to compete, optimistic about extending offers and competing in above 6 milligrams segment.

Q: Impact of local menthol bans in US?

A: Not seen much impact as consumers circumvent, FDA not expecting menthol ban or nicotine control enforcement soon, and examples outside US show preparedness if menthol ban comes.