British American Tobacco p.l.c. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Transformation Momentum: Group results were slightly ahead of expectations. Smokeless accounted for 18.2% of group revenue, up 70 basis points year-over-year. New category contribution margin improved to 10.6%. The share buyback was increased to GBP 1.1 billion.
• New Categories: Modern Oral is the fastest-growing new category, with Velo Plus showing strong growth in the U.S. Glo Hilo and Vuse Ultra were launched with positive consumer feedback.
• Digital Transformation: BAT has partnerships with Accenture and Microsoft, a GenAI lab in Dubai, and has reduced IT run costs by 40% while maintaining 99.9% uptime.
• Regulatory: Proactive approach to regulation, with 18 U.S. states having vapour directory and enforcement legislation. The FDA has taken actions on illicit vapour, though impact on the ground is awaited.

Segment Performance

• New Categories: Revenue increased by 2.4%, driven by Modern Oral (over 40% growth) and Heated Products (over 3% growth), while Vapour declined by 13% due to illicit trade in the U.S. and Canada. Gross margin rose by 250 basis points, and contribution margin increased by 280 basis points to 10.6%.
• Combustibles: Revenue grew by 0.8%, with volume decline offset by strong pricing globally. The U.S. combustibles business returned to growth for the first time since 2022.
• U.S.: Revenue grew by 3.7% and adjusted profit rose by 3.2%, led by combustibles and the strong performance of Velo Plus.
• AME: Revenue increased by 3.5%, with combustibles up nearly 3% and new category revenue up 1.3% (including nearly 17% growth in Modern Oral).
• APMEA: Revenue declined by 4.8%, with combustibles down 7.9%, but new category revenue increased by 2.5% (driven by Heated Products and Modern Oral in emerging markets).

Guidance

• Full year revenue is expected at the top end of the 1%-2% guidance range. APFO guidance remains 1.5%-2.5% due to increased investments in new categories and a stronger U.S. combustibles comparator in H2.
• Anticipates new category revenue growth to move into the mid-single digits for the full year. Confident in delivering 3%-5% revenue growth and 4%-6% adjusted profit from operations growth by 2026.

Risks

• Illicit trade continues to impact Vapour in the U.S. and Canada, affecting revenue. Regulatory challenges in some markets pose hurdles. Delays in FDA approvals may slow product rollouts.

Question and Answer

Q: Feedback on glo Hilo Japan launch, Modern Oral Velo Plus momentum, Fit2Win costs A: Positive feedback on glo Hilo Japan, with strong consumer response. Velo Plus momentum remains strong with high retention rates. Fit2Win costs are included in the guidance and will deliver GBP 500 million annualized savings by 2028 Q: Vapour performance in AME, U.S. vape shipments A: Vapour in AME impacted by Canada's regulatory environment with illicit products inundating the market. U.S. vape shipments reduced by 40% due to enforcement issues, but impact on the ground awaited Q: U.S. combustible volume, Velo 2, adjusted EPS A: U.S. combustible volume decline easing, with gas price reduction providing some support. Velo 2 complementary to Velo Plus. Focus on constant currency adjusted EPS of 162.1p Q: U.S. cigarette pricing, e-cigarette portfolio, Velo Plus capacity A: Drawback positively impacting U.S. cigarette business. Resource allocation on innovations in e-cigarette portfolio. Velo Plus capacity adequate to support growth Q: Modern Oral Europe advantage, U.S. Velo Plus distribution A: Actions taken to preserve Modern Oral's advantage in Europe. Velo Plus distribution sufficient, with focus on awareness and trial to drive further growth