British American Tobacco p.l.c. Q2 FY2023 earnings call

Management Statement and Operational Highlights

• Strategic Commitment: Committed to 'Building a Smokeless World' with ambition to be predominantly smokeless by 2035, aiming for 50% of revenue from non-combustibles by 2035.
• Strategic Review: Completed strategic review, focusing on fewer, bigger operational priorities. Investing to accelerate transformation, including strengthening US business, innovating in Heated Products, and enhancing capabilities.
• Financials: 2023 EPS guidance maintained; new categories expected to be broadly breakeven in 2023, with Vapor and Modern Oral already profitable. Recorded £25 billion non-cash impairment charge related to US combustibles brands, commencing amortization from Jan 2024.

Segment Performance

• Vapor: Vuse extends value share leadership, reaching close to 37% value share in key markets, up 100 basis points. Driven by increased consumers, robust pricing, and cross-category poly-usage. Strong revenue growth.
• Modern Oral: Velo delivers strong volume-led revenue growth and increasing profitability. Volume share of Total Oral in key markets up 110 basis points to 8.5%. Strong in Europe, with 67% volume share in top four markets, and growing in emerging markets like Pakistan and Kenya.
• Heated Products: glo's performance disappointing due to slower industry volume growth, increased poly-usage to Vapor, and competitive activity. Volume share down 100 basis points in key markets to 18.2%. Launched non-tobacco consumables veo in 10 European markets.
• Combustibles: Global volume share flat, value share down 40 basis points. US impacted by macroeconomic environment and flavor ban, but AME and APMEA performing well.

Guidance

• Reiterated full year 2023 EPS guidance. Expect low-single digit organic revenue and adjusted profit from operations growth in 2024. Medium-term guidance (by 2026) for 3%-5% revenue and mid-single digit adjusted profit from operations growth.
• 2023 organic revenue growth expected at low end of 3%-5% range due to US combustibles weakness; AME and APMEA expected to deliver close to double-digit revenue and adjusted profit growth.

Risks

• Macro-economic headwinds impacting US combustibles industry.
• Illicit modern disposable Vapor products in US, representing over 60% of market, limiting participation in non-menthol flavors.
• Uncertainty around FDA enforcement and PMTA approvals for Vuse products.
• Complexities in divesting non-strategic assets like ITC due to foreign investment rules and regulatory approvals.

Question and Answer

Q: About smoke-free target and NGP profitability A: Tadeu says focus on multi-category, NGP expected profitable from 2024.

Q: On £5B NGP revenue target in 2025 A: Impacted by US illicit products, but ambition remains.

Q: Incremental investment in Heated Products A: Investments in US, Heated Products innovation, IP, and market access.

Q: 2024 guidance and US vape action A: Expect US headwinds, no major FDA enforcement assumed, confident on tobacco PMTA approval.

Q: Balance sheet flexibility and ITC investment A: ITC performs well, divestment complex due to regulations.

Q: £25B write-down and US growth A: Accounting change for US combustibles brands, moving to finite life amortization.

Q: NGP EBIT profit contribution by category A: Not giving per category details, but Vapor and Modern Oral profitable, Heated Products in loss but improving.

Q: Organigram investment A: Foundation for cannabis smokeless segment, aligned with strategy.

Q: Russia disposal proceeds and EU reaction to non-tobacco Heated Products A: Proceeds expected in Dec, EU reaction early, excise debate.

Q: Cash proceeds from Russia sale and leverage A: Proceeds included in 2.7x leverage guidance, US combustibles decline factors.

Q: Leverage range middle definition A: Middle of range is 2.5x, considering changed market conditions.