British American Tobacco p.l.c. Q4 FY2024 earnings call

• Transformation momentum: 2024 was a key year in transformation, navigating market challenges and improving second-half performance.
• Financial flexibility: Initiated sustainable share buyback, reduced leverage to 2.4 times, and announced 2% dividend growth.
• US business progress: Commercial plans in US completed, performance accelerated in second half, with new category growth driven by Glo, Hyper Pro, and Velo Mix.
• Innovation ecosystem: Improved innovation ecosystem led to new category growth acceleration in second half, with Q4 launches including Velo Plus.
• Quality growth focus: New category contribution up GBP251 million, category contribution margin up 7 percentage points on organic constant rates basis.
• Cost savings: Achieved close to GBP900 million in savings over last two years, on track for over GBP1.2 billion by year end.
• Culture transformation: Building a culture of integrity, collaboration, and inclusivity, with progress on diversity and inclusion agenda.

Smokeless accounts for 17.5% of group revenue, up 1 percentage point versus last year, with 3.6 million new consumers reaching 29.1 million. Vapor, the largest new category globally, saw revenue fall 2.5% in 2024 due to illicit market challenges in the US and Canada. Heated products saw Glo revenue up nearly 6%, driven by Glo Hyper Pro and refreshed Velo Mix. Modern Oral was the fastest growing new category, with revenue growing 53% in 2024 and volume share up 130 basis points. Combustibles volumes declined 5% organically, but volume share grew 20 basis points.

• 2025 guidance: Expect revenue growth of around 1%, supporting APFO growth of 1.5% to 2.5% adjusted for Canada, including a 1.5% transactional FX headwind. Second half weighted for revenue and profit as new category innovations are deployed.
• 2026 target: Committed to returning to 3% to 5% revenue and 4% to 6% APFO growth adjusted for Canada at constant rates, driven by improving US performance, solid AME performance, and strong Velo growth globally.

• Illicit vapor enforcement: Weak enforcement against illicit single-use vapes in US and Canada distorts competition and impacts legal market.
• Macroeconomic pressures: Affordability issues and macroeconomic conditions impacting consumer spending.
• Regulatory challenges: Harsh regulations in Bangladesh and Australia, such as VAT increases in Bangladesh and new tobacco regulations in Australia, impacting industry volume and profitability.

Q: Could you clarify factors resulting in US financial performance recovery?

A: US recovery due to lapping lower base in 2024, investments in trade coverage, digital capabilities, and strong performance of Luck Strike and Newport brands, along with growth of Velo Plus.

Q: What are plans for ITC hotel stake?

A: BAT has no interest in being a long-term shareholder and will divest the stake to maximize shareholder value and reach leverage targets.

Q: How does Canadian settlement impact capital allocation?

A: Canadian settlement is being worked through, with current estimate of liability, and BAT will balance capital allocation between progressive dividends and sustainable share buybacks to return to target leverage range by 2026.