British American Tobacco p.l.c. Q4 FY2022 earnings call

Management Statement and Operational Highlights

• New Categories Progress: Grew non-combustible consumer base to 22.5M in 2022 (30% CAGR since 2018), aim for 50M by 2030. Built two £1B global brands (Vuse, glo).
• ESG Initiatives: Achieved renewable energy use targets 3 years early, increased target to 50% by 2023, 2023 Bloomberg Gender Equality Index inclusion, CDP "A" rating.
• Quantum Program: Delivered £1.9B annualized cost savings over 3 years, embedded new ways of working.
• Russia/Belarus Business Transfer: Advanced discussions with joint management distributor consortium to complete transfer in 2023, prioritizing employee support.
• Diversity and Talent: Attracted over 3000 new capabilities hires, 47% female new hires, new hire turnover below market norms.

Segment Performance

• Non-Combustible (New Categories):
  • Since 2018, non-combustible product consumer base grew at a CAGR of 30%, reaching 22.5 million in 2022 with over 4 million added in the last 12 months. New Category revenue CAGR is 33% since 2018, aiming for £5 billion revenue by 2025. Non-Combustible revenue was 15% of Group revenue in 2022, up from 7% in 2018.
  • Vapour: Vuse had 40%+ revenue growth for 3 consecutive years, value share 35.9% in key markets, 40.9% in US.
  • THP: glo had over 25% revenue growth, volume share 19.4% in key markets.
  • Modern Oral: Velo had 40%+ constant currency revenue growth in Europe, launched PMTA for new Velo product in US, strong in Pakistan.
• Combustibles: Volume declined 5.2% in 2022, revenue down 0.6%, value share flat, volume share down 20 bps. Strong in US and APME, impacted in Europe and AmSSA.

Guidance

• 2023 Outlook: Organic revenue growth 3%-5%, adjusted mid-single figure EPS growth (3.5%-6.5% range), second half weighted performance. Confident in achieving New Category profitability in 2024, one year early.
• Balance Sheet: Prioritizing deleveraging to move towards mid of 2-3 times net debt/EBITDA corridor, reviewing share buybacks during the year.

Risks

• Regulatory Uncertainty: FDA regulations in the US, including flavor bans in California and PMTA approvals for e-cigarette products.
• Macro-Economic Headwinds: Impact on US combustible market volume and pricing, inflationary pressures.
• Russia/Belarus Business Transfer: Uncertainties around completion of transfer and its impact on financials.

Q: On the U.S. combustible performance, how to disentangle industry inventory moves and share losses?

A: Most of the gap is related to the unwind of stock addition, and the market is resilient with price elasticity at 0.4%.

Q: Thoughts on no new buyback now and what would need to change?

A: Focused on cash generation, deleveraging to create resilient balance sheet, reviewing share buybacks during the year.

Q: Impact of California flavor ban on portfolio?

A: Too early to tell, but brands are doing well, will navigate in next few months.

Q: Expect on glo Hyper PMTA in U.S.?

A: PMTA in progress, will take time, confident in long-term New Categories growth in U.S.