British American Tobacco p.l.c. Q4 FY2023 earnings call

Management Statement and Operational Highlights

• New Category Profitability: Reached new category profitability two years ahead of target, with £300M incremental investment in 2023. New categories meaningfully contributing to group results with profitability gains.
• U.S. Combustibles: Commercial plans delivering early volume and value share recovery in premium segments, with Newport and Natural American Spirit showing gains.
• Heated Products: Global patent settlement enables innovation. Launched glo Hyper pro and veo, strengthening innovation pipeline.
• Responsible Development: Re-established corporate and regulatory affairs function, engaging with regulators on differentiated regulation of smokeless products.
• Financial Flexibility: On track to save £1B by 2025, with £500M saved in 2023. Evaluating stake in ITC for capital reallocation; exited 35 non-strategic markets.
• Culture: Refreshed corporate values, new senior management members, including incoming CFO.

Segment Performance

• New Categories: Organic revenue growth of 21%, with Vuse and Velo driving volume-led growth. Reached new category profitability two years ahead of target, with top 10 new category markets generating ~three quarters of new category revenue in 2023 and category contribution margin above 20%.
• Combustibles: Cigarette volume declined 5.3% organically. AME had 13% organic revenue growth driven by Combustibles and New Categories. U.S. Combustibles faced macro pressures but showed early volume and value share recovery in premium segments.
• Heated Products: glo revenue down 2.5% but up 4.1% organically. Launched glo Hyper pro and veo, with veo showing promising results in some European markets.
• Modern Oral: Volume up 33.6%, revenue up 39%. Velo pilot in NY positive, strong in most markets except U.S. with growth in emerging markets like Pakistan and Kenya.

Guidance

• 2024: Expect low-single digit organic revenue and adjusted profit from operations growth, including 2% transactional FX headwind. Second half weighted by macro pressures and illicit vapes in U.S.
• Long-Term: Aim to be a predominantly smokeless business with 50% smokeless revenue by 2035, smokeless revenue to reach ~1/3 of group revenue by 2030.

Risks

• U.S. Market: Macro-economic pressures, growth of illicit single-use vapes, uncertainty around menthol ban impacting U.S. Combustibles.
• Regulatory: Varied regulation of smokeless products, potential underage access and environmental impacts if not managed responsibly.
• ITC Stake: Complexity in regulatory process to reduce stake in ITC, uncertainty around timeline and use of proceeds.

Question and Answer

• Q: U.S. Vapour category growth and U.S. Combustibles normalized volume declines A: Vapour growing substantially, ~29M users, 20%+ growth. U.S. Combustibles volume decline expected to stabilize around 5%-6% post-macro normalization, dependent on enforcement of illicit products.
• Q: ITC stake approvals and heated tobacco EU flavour ban A: Working on regulatory process for ITC stake, unclear timeline but aim to reallocate capital. EU flavour ban impacted Heated Products, but BAT retained/share grew in markets like Czech Republic with veo.
• Q: Newport pricing, new product launches, leverage A: Newport pricing measured, positive early signs. New products in Modern Oral and Vapour, with strong pipeline. Leverage target mid-2x to 3x, focus on cash generation for flexibility.
• Q: glo Hyper Pro pricing, vaping market formalization A: glo Hyper Pro improved, pricing dependent on competitive landscape. Expecting more markets to formalize vaping regulation, supporting Tobacco Harm Reduction, with countries like New Zealand, U.K., Canada showing progress.