REG - British Amer.Tobacco - Pre-Close Trading Update and Strategy Update

British American TobaccoAnnouncement

06/12/2023 07:00

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RNS Number : 7937V  British American Tobacco PLC  06 December 2023

06 December 2023

 

Reiteration of FY23 Delivery In Line with Guidance and Strategy Update

·      Confirming full year 2023 EPS delivery in line with our guidance

·      Continued strong volume and revenue growth in New Categories, led
by Vuse and Velo

·      New Category contribution expected to be broadly breakeven, two
years ahead of our original target

·      Strong AME and APMEA growth, reflecting the resilience of our
global, multi-category strategy

·      Macro-economic pressures in the U.S. impacting combustibles
performance

·      Group organic(1) revenue now expected at the low end of our 3-5%
guidance range at constant rates

·      Now committing to 'Building a Smokeless World', with 50% revenue
from Non-combustibles by 2035

·      2024 investment to accelerate our transformation and secure
long-term sustainable growth

Tadeu Marroco, Chief Executive

"In 2023 we continue to expect another year of delivery in line with our
guidance. I am encouraged by the strong performances of Vuse and Velo,
delivering strong volume led revenue growth, and increased profitability. As a
result, we now expect New Categories to be broadly breakeven in 2023, two
years ahead of our original target.

In combustibles, while the U.S. macro-economic environment remains
challenging, I am encouraged that our commercial plans are starting to deliver
early signs of portfolio recovery. In AME and APMEA we expect to deliver
another strong revenue and profit performance, driven by the strength of our
well-balanced portfolio of global brands.  Together, this performance
demonstrates the benefit of our global footprint, and multi-category strategy.

To accelerate the next phase of our transformation journey, we are now
committing to 'Building a Smokeless World'. We will deploy our global
multi-category portfolio to actively encourage smokers to 'Switch to Better'
nicotine products, realising the multi-stakeholder benefits of 'A Better
Tomorrow(TM)'.

This commitment is demonstrated by our new ambition to become a predominantly
smokeless business, with 50% of our revenue from non-combustibles by 2035.
With only 10% of the world's 1 billion smokers currently using New Category
products(2), the long-term opportunity for growth as we deliver on our
transformation is vast.

Consistent with our vision to 'Build a Smokeless World', and in combination
with the current macro-economic headwinds impacting the U.S. combustibles
industry, in 2023 we will take an accounting non-cash adjusting impairment
charge of around £25bn. This accounting adjustment mainly relates to some of
our acquired U.S. combustibles brands, as we now assess their carrying value
and useful economic lives over an estimated period of 30 years. Accordingly,
we will commence amortisation of the remaining value of our U.S. combustibles
brands from January 2024.

Building on our broad-based performance in 2023, I am clear that now is the
right time to further invest to accelerate our transformation. We are making
active investment choices to strengthen our U.S. business, accelerate
innovation momentum in Heated Products globally, and enhance capabilities that
support our strategic delivery. These investments will impact in 2024, and
alongside continued macro-economic pressures in the U.S., we now expect growth
in revenue and adjusted profit from operations of low-single digit on an
organic(1) basis at constant rates. We expect a progressive improvement to
3-5% revenue growth, and mid-single digit adjusted profit from operations
growth on an organic(1) basis at constant rates by 2026.

We will continue to reward shareholders through our strong cash returns,
including our progressive dividend, and, once the middle of our leverage range
is reached, we will evaluate all opportunities to return excess cash to our
shareholders.

I am confident that the choices we are making today will drive our long-term
success and deliver sustainable value for all of our stakeholders."

Trading Update

Driving profitability(3) in New Categories

We have extended our global leadership position(4) in Vapour with Vuse value
share up 100bps, reaching 36.8% in key markets(5). In the U.S., Vuse has
continued to grow value share in measured channels reaching 46.0%, up 500bps.
In AME and APMEA, we are achieving strong revenue growth, driven by an
increased number of consumers, rising cross category poly-usage(6) and
continued innovation, with Vuse Go now available in 59 markets. We anticipate
another significant profitability(3) improvement for Vuse in 2023.

In Modern Oral, Velo continues to deliver strong volume led revenue growth and
increasing profitability(3). Modern Oral is a fast-growing category, driving
our volume share of the Total Oral category in key markets(7) up 110bps,
reaching 8.5%. While our global volume share of Modern Oral is down YTD driven
by the U.S, we remain confident in securing the PMTA for our Europe-leading
Velo 2.0 platform to support longer-term competitiveness in this market.
Elsewhere Velo continues to perform strongly, maintaining its clear category
leadership in Europe with 67% volume share in key markets(8), and excellent
performances across the rest of AME and recently entered emerging markets in
APMEA.

Significantly strengthening Heated Products

glo's performance in 2023 has been disappointing. Slower industry growth,
increased poly-usage(6) particularly intersecting with Vapour, and heightened
competitive activity in Japan and Italy, have resulted in a deceleration in
our organic(1) volume and revenue growth in the second half, with YTD volume
share down 100bps in key markets(9) to 18.2%.  Although glo maintains its
strong No.2 position globally, performing well in many AME markets including
Poland and the Czech Republic, we are working hard to strengthen our
innovation pipeline to drive momentum in our longer-term performance.

glo Hyper Air is performing in line with expectations, and we have recently
launched veo(TM), a range of non-tobacco consumables in 10 markets in Europe,
gaining first mover advantage in this new space, with encouraging early
results. We look forward to sharing more details on our accelerated Heated
Product innovation pipeline in 2024.

Consistent combustibles value growth

Our global volume share in combustibles is flat YTD, with value share down
40bps, reflecting the impact of our commercial actions in the U.S., partly
offset by stronger performances in AME and APMEA.

In the U.S., macro-economic pressures and the continued proliferation of
illicit modern disposables have continued to impact combustibles industry
volume in the second half of the year, with recent signs of premium segment
pressure after a more stable first-half.

While our YTD volume share is down 10bps vs FY22, our commercial plans
continue to show early signs of share recovery with a 50bps improvement
between January and October driven by Newport, Natural American Spirit and
Lucky Strike. We have been clear that recovery in U.S. combustibles will take
time, however, we are confident that the actions we are taking will strengthen
our portfolio over the longer-term.

Outside the U.S., our combustibles business has continued to perform well. In
AME, volume share gains and pricing have driven strong revenue and profit
growth. In APMEA, the impact of excise led volume declines in Pakistan has
been more than offset by our pricing across the region, and we expect 2023 to
be another year of strong revenue and profit delivery.

Enhancing financial flexibility

BAT is a highly cash generative business and we expect to deliver close to
100% operating cashflow conversion in 2023. We are making progress towards
reaching the middle of our guided 2-3x adjusted net debt(10) / adjusted
EBITDA(11) leverage range and expect to be around 2.7x by year end.

We continue to seek and evaluate all opportunities to enhance balance sheet
flexibility, including disposals and the exit of non-strategic markets. We
remain committed to a progressive dividend, and once the middle of our
leverage range is reached, we will evaluate all opportunities to return excess
cash to our shareholders.

 

Strategic Update

We have the right multi-category strategy. Building on our strong progress to
date, and to continue to deliver long-term sustainable growth and returns, we
are now focused on (i) sharper strategic execution through delivery on fewer,
bigger operational priorities, and (ii) driving a more collaborative and
inclusive culture, as we build a more agile and modern BAT.

To steer us towards these two objectives, we have refined our strategic
direction and ambition. This will drive our priorities and future choices and
strengthen our path to long-term profitable growth and sustainable value
creation.

These include:

·      Driving a step change in our innovation capabilities and speed to
market

·      Making active choices to accelerate our transformation

·      2024 incremental investment to secure long-term sustainable
growth

We will provide more details on our refined strategic direction including the
KPIs against which we can be measured at our full year results in February.

Driving a step change in our innovation capabilities and speed to market

We have all the right foundations in place. We committed to a multi-category
strategy from the outset, recognising that consumer tastes and preferences are
not homogenous. In less than a decade, we have built a portfolio of three
powerful brands, Vuse, glo and Velo, delivering more than £3bn of revenue.
After significant early-stage investment, we are delighted that we now expect
our New Categories to be broadly breakeven in 2023, and to be profitable(2)
from 2024 onwards.

Building on our deep cross category consumer insights, we will deliver an
enhanced innovation pipeline, by further investing in our people, our science,
our IP and our capabilities, driving an innovation focused culture. We will
continue to leverage our centres of excellence in Southampton, Trieste and
Shenzhen to access wider internal and external strategic partnerships focused
on developing consumer-relevant premium propositions.

Making active choices to accelerate our transformation

We will leverage our market archetypes to guide how and where we deploy our
products and allocate resources, to deliver long term-value creation.

In the U.S., we have now completed a deep and thorough review of our business.
As a result, we have begun and will continue to invest in sharpening our
portfolio management, strengthening our route-to-market, and further
leveraging our broad, digitally enabled, revenue growth management
capabilities. We are confident this will drive quality growth over the
longer-term and ensure greater resilience through economic cycles.

In Heated Products, we continue to invest to rejuvenate our momentum with an
enhanced cadence of innovation in both devices and consumables. The recent
launch of our non-tobacco platform veo(TM) is an early sign that this focus,
to deliver world-first consumer-relevant innovations, is yielding results.

We are also taking action to strengthen our organisational capabilities. As
part of the Management Board changes announced in June, we created the new
Corporate and Regulatory Affairs function to increase external engagement with
regulators, policy makers and broader stakeholders.

Sustainable success will also be accelerated by a culture of inclusivity and
collaboration, an effort led by Cora Koppe-Stahrenberg, our new Chief People
Officer. Cora brings a valuable external lens from a diverse range of
transforming industries, and she will be focused on driving a more agile and
modern BAT.

2024 incremental investment to secure long-term sustainable growth

In 2024 we expect continued headwinds to impact our U.S. business, driven by
macro-economic pressures on the combustibles market and regulatory inaction on
illicit disposable vapes.

In addition, as highlighted above, we are making active investment choices to
strengthen our U.S. business, accelerate innovation momentum in Heated
Products globally, and enhance capabilities that support our strategic
delivery.

As a result, we now expect low-single digit revenue and adjusted profit from
operations growth in 2024, on an organic(1) basis at constant rates. Given
planned investment phasing and an expected slow recovery in U.S. macros, we
also expect our performance in 2024 to be second half weighted.

We are confident that these are the right near-term investment choices to
secure long-term quality growth and they will be made despite transactional FX
and inflationary headwinds persisting. Looking forward, we expect accretive
New Category growth and stable combustible revenue to continue to drive total
nicotine industry revenue growth. This underpins our medium-term guidance
where we expect a progressive improvement to a 3-5% revenue and mid-single
digit adjusted profit from operations growth, on an organic(1) basis at
constant rates by 2026.

Technical guidance for full year 2023:

·      Global tobacco industry volume expected to be down c.3%

·      Low end of 3-5% organic(1) constant currency revenue growth

·      Strong New Category revenue growth with further improvement in
category contribution alongside incremental investment

·      Mid-single figure constant currency adjusted diluted EPS growth,
including a c.2% transactional FX headwind

·      Translational FX is expected to be a c.3% headwind(12) on full
year adjusted diluted EPS growth

·      Non-cash amortisation charge will be treated as an adjusting item

·      Adjusted diluted EPS includes the divestment of our business in
Russia/Belarus in September

·      Operating cash flow conversion close to 100%

 

For further information, please contact:

 

Media Centre

+44 (0) 20 7845 2888 (24 hours) | @BATplc (https://twitter.com/BATplc)

Investor Relations

Victoria Buxton: +44 (0)20 7845 2012

Amy Chamberlain: +44 (0)20 7845 1124

Yetunde Ibe: +44 (0)20 7845 1095

John Harney: +44 (0)20 7845 1263

Jane Henderson: +44 (0)20 7845 1117

 

Webcast and Conference call - The conference call will begin at 8.30am (GMT)
You can access the audio webcast via our website. You can also listen via conference call by dialling the numbers below, using the passcode: 103695

UK Toll-Free: 0800 358 1035

UK-Toll: +44 20 4587 0498

South Africa Toll-Free: +27 80 017 2952

South Africa Toll: +27 87 550 8441

USA Toll-Free: +1 855 979 6654 / +1 800 249 2588

USA Toll: +1 646 787 9445 / +1 646 664 1960

 

A playback facility for the conference call will be available online via
www.bat.com (http://www.bat.com)
.

 

Market share and volume data YTD September 2023 average share growth vs.
FY2022 average unless otherwise stated.* Based on the weight of evidence and
assuming a complete switch from cigarette smoking. "Reduced-risk" products are
not risk free and are addictive.

(†) Our vapour product Vuse (including Alto, Solo, Ciro and Vibe), and
certain products, including Velo, Grizzly, Kodiak, and Camel Snus, which are
sold in the U.S., are subject to FDA regulation and no reduced-risk claims
will be made as to these products without agency clearance.

(1) To supplement the Group's results presented in accordance with
International Financial Reporting Standards (IFRS), the Group's Management
Board, as the chief operating decision maker, reviews certain of its results,
including volume, revenue, adjusted profit from operations, and adjusted
diluted earnings per share, at constant rates of exchange, prior to the impact
of businesses sold or held-for-sale. Although the Group does not believe that
these measures are a substitute for IFRS measures, the Group does believe that
such results excluding the impact of businesses sold or to be held-for-sale
provide additional useful information to investors regarding the underlying
performance of the business on a comparable basis and in the case of the
sale of the Group's businesses in Russia and Belarus, the impact these
businesses had on revenue and profit from operations. Accordingly, the organic
financial measures appearing in this document should be read in conjunction
with the Group's results as reported under IFRS. In 2021, the Group sold its
Iranian business. However, as the Iranian business was not significant to the
user's understanding of that year's or subsequent years' financial
performance, management did not treat the sale of Iranian business as an
organic adjustment.

 

(2) Global consumer numbers for New Categories and Smokers at an Industry
Level. Source: Statista 2023, Kantar Incidence & Track Studies.

(3) Profitability at category contribution level: Profit from operations
before the impact of adjusting items and translational foreign exchange,
having allocated costs that are directly attributable to New Categories.

 

(4) Based on Vuse estimated value share from reduced-risk products in measured
retail for Vapour (i.e., total Vapour category value in retail sales) in the
Top 5 Vapour markets.

 

(5) Top 5 Vapour markets: U.S. - Marlin, Canada - Scan Data, UK - NielsenIQ,
France - Strator, Germany - NielsenIQ. These five markets cover an estimated
c.80% of global closed system revenue.

(6) Poly-usage: Refers to a transitional period for smokers towards complete
switching to potentially risk reduced nicotine products during which period
such smokers reduce cigarette consumption and choose to consume one or more
New Category nicotine products.

(7) Top 5 Modern Oral markets: U.S. - Marlin, Sweden - NielsenIQ, Denmark -
NielsenIQ, Norway - NielsenIQ, Switzerland - IMS. These five markets cover an
estimated c.80% of total industry Modern Oral revenue.

(8) European leadership refers to Top 4 Modern Oral markets: Sweden -
NielsenIQ, Denmark - NielsenIQ, Norway - NielsenIQ, Switzerland - IMS.

(9) Top 12 HP markets: Japan - CVS-BC, South Korea - CVS, Italy - NielsenIQ,
Greece - NielsenIQ, Hungary - SZTFH, Kazakhstan - NielsenIQ, Ukraine -
NielsenIQ, Poland - NielsenIQ, Switzerland - IMS, Romania - NielsenIQ,
Malaysia - IPSOS, Czech Republic - NielsenIQ. The T12 HP markets account for
c.80% of total industry HP revenue.

(10) Adjusted net debt is not a measure defined by IFRS. Adjusted net debt is
total borrowings, including related derivatives, less cash and cash
equivalents and current investments held at fair value, excluding the impact
of the revaluation of Reynolds American Inc. acquired debt arising as part of
the purchase price allocation process.

 

(11) Adjusted EBITDA is not a measure defined by IFRS. Adjusted EBITDA is
profit for the year before net finance costs/income, taxation on ordinary
activities, depreciation, amortisation, impairment costs, the Group's share of
post-tax results of associates and joint ventures, and other adjusting items.

 

(12) Based on current exchange rates of USD/GBP 1.26105 as at close on 4
December 2023.

 

Share growth refers to volume share for HP and Modern Oral and value share for
Vapour.

As used herein, volume share refers to the estimated retail sales volume of
the product sold as a proportion of total estimated retail sales volume in
that category and value share refers to the estimated retail sales value of
the product sold as a proportion of total estimated retail sales value in that
category. Please refer to the 2022 Annual Report on Form 20‐F for a full
description of these measures, together with a description of other Key
Performance Indicators (KPIs), on pages 322 and 323.

 

New Categories comprises Heating Products (HP), Vapour and Modern Oral. Our
products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak, and Camel
Snus, are subject to Food and Drug Administration (FDA) regulation and no
reduced-risk claims will be made as to these products without FDA clearance.

 

 

Note on Non-GAAP Measures

This announcement contains several forward-looking non-GAAP measures used by
management to monitor the Group's performance. For the non-GAAP information
contained in this announcement, no comparable GAAP or IFRS information is
available on a forward-looking basis and our forward-looking revenue and other
components of the Group's results, including the revenue generated from
combustibles and adjusting items, cannot be estimated with reasonable
certainty due to, among other things, the impact of foreign exchange, pricing
and volume, which could be significant, being highly variable. As such, no
reconciliations for this forward-looking non-GAAP information are available
and we are unable to: present revenue before presenting New Category revenue
or organic constant currency revenue; present profit from operations before
presenting adjusted profit from operations on an organic basis at constant
rates or present earnings per share before presenting constant currency
adjusted diluted earnings per share.

The Group's Management Board regularly reviews the measures used to assess and
present the financial performance of the Group and, as relevant, its
geographic segments, and believes that these measures provide additional
useful information to investors. Certain of our measures are presented based
on an adjusted basis and on a constant currency basis. Please refer to the
2022 Annual Report on Form 20‐F for a full description of each measure
alongside non-financial measures, pages 322 to 336.

One non-GAAP measure which the Group uses and that is contained in this
announcement is adjusted diluted earnings per share which is before the impact
of adjusting items and is derived from diluted earnings per share. This
announcement also contains operating cash conversion, a non-GAAP measure
defined as net cash generated from operating activities before the impact of
adjusting items and dividends from associates and excluding trade loans to
third-parties, pension short fall funding, taxes paid and after net capital
expenditure, as a proportion of adjusted profit from operations.

Adjusting items, as identified in accordance with the Group's accounting
policies, represent certain items of income and expense which the Group
considers distinctive based on their size, nature or incidence. These include
significant items in, profit from operations, net finance costs, taxation and
the Group's share of the post‐tax results of associates and joint ventures
which individually or, if of a similar type, in aggregate, are relevant to an
understanding of the Group's underlying financial performance. Although the
Group does not believe that these measures are a substitute for IFRS measures,
the Group does believe such results excluding the impact of adjusting items
provide additional useful information to investors regarding the underlying
performance of the business on a comparable basis.

The Group's Management Board reviews a number of our IFRS and non‐GAAP
measures for the Group and its geographic segments at constant rates of
exchange. This allows comparison of the Group's results, had they been
translated at the previous year's average rates of exchange. The Group does
not adjust for the normal transactional gains and losses in operations that
are generated by exchange movements. Although the Group does not believe that
these measures are a substitute for IFRS measures, the Group does believe that
such results excluding the impact of currency fluctuations year‐on‐year
provide additional useful information to investors regarding the operating
performance on a local currency basis.

In addition, this announcement contains organic revenue, which is a non-GAAP
measure that is before the impact of businesses sold or held for sale and is
derived from revenue.  This announcement also contains organic adjusted
profit from operations, which is a non-GAAP measure that is before the impact
of adjusting items and the impact of businesses sold or held for sale and is
derived from profit from operations.

Forward looking statements

References in this announcement to 'BAT', 'Group', 'we', 'us' and 'our' when
denoting opinion refer to British American Tobacco p.l.c. (BAT PLC) and when
denoting business activity refer to BAT Group operating companies,
collectively or individually as the case may be.

 

This announcement does not constitute an invitation to underwrite, subscribe
for, or otherwise acquire or dispose of any BAT PLC shares or other
securities. This announcement contains certain forward-looking statements,
including "forward-looking" statements made within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995. These statements are often,
but not always, made through the use of words or phrases such as "believe,"
"anticipate," "could," "may," "would," "should," "intend," "plan,"
"potential," "predict," "will," "expect," "estimate," "project," "positioned,"
"strategy," "outlook", "target" and similar expressions. In particular, these
forward-looking statements include statements regarding (i) the bullets under
"Reiteration of FY23 Delivery In Line with Guidance and Strategy Update", (ii)
the Group's expectations for New Categories profitability, (iii) the Group's
expectations for revenue and adjusted profit from operations growth in 2024,
 on an organic basis at constant rates, (iv) the Group's expectations for
revenue and adjusted operating profit growth, on an organic basis at constant
rates by 2026, (v) the Group's expectations for 2023 results, (vi) the Group's
confidence in securing the PMTA for the Velo 2.0 platform, (vii) statements
under the headings "Technical guidance for full year 2023:", (viii) the
Group's  leverage range target and expectations for year-end and (ix) the
Group's intention, once the middle of its leverage range is reached, to
evaluate all opportunities to return excess cash to shareholders. These
include statements regarding our intentions, beliefs or current expectations
concerning, amongst other things, our results of operations, financial
condition, liquidity, prospects, growth, strategies and the economic and
business circumstances occurring from time to time in the countries and
markets in which the Group operates.

All such forward-looking statements involve estimates and assumptions that are
subject to risks, uncertainties and other factors. It is believed that the
expectations reflected in this announcement are reasonable but they may be
affected by a wide range of variables that could cause actual results and
performance to differ materially from those currently anticipated.

 

Among the key factors that could cause actual results to differ materially
from those projected in the forward-looking statements are uncertainties
related to the following: the impact of competition from illicit trade; the
impact of adverse domestic or international legislation and regulation; the
inability to develop, commercialise and deliver the Group's New Categories
strategy; adverse litigation and dispute outcomes and the effect of such
outcomes on the Group's financial condition; the impact of significant
increases or structural changes in tobacco, nicotine and New Categories
related taxes; translational and transactional foreign exchange rate exposure;
changes or differences in domestic or international economic or political
conditions; the ability to maintain credit ratings and to fund the business
under the current capital structure; the impact of serious injury, illness or
death in the workplace; adverse decisions by domestic or international
regulatory bodies; changes in the market position, businesses, financial
condition, results of operations or prospects of the Group; and direct and
indirect adverse impacts associated with climate change and the move towards a
circular economy.

 

Past performance is no guide to future performance and persons needing advice
should consult an independent financial adviser. The forward-looking
statements reflect knowledge and information available at the date of
preparation of this announcement and BAT undertakes no obligation to update or
revise these forward-looking statements, whether as a result of new
information, future events or otherwise. Readers are cautioned not to place
undue reliance on such forward-looking statements.

 

No statement in this announcement is intended to be a profit forecast and no
statement in this announcement should be interpreted to mean that earnings per
share of BAT PLC for the current or future financial years would necessarily
match or exceed the historical published earnings per share of BAT PLC.

 

Additional information concerning these and other factors can be found in BAT
PLC filings with the U.S. Securities and Exchange Commission (SEC), including
the Annual Report on Form 20-F and Current Reports on Form 6-K, which may be
obtained free of charge at the SEC's website, http://www.sec.gov
(http://www.sec.gov) , and the Group's Annual Reports, which may be obtained
free of charge from the British American Tobacco website http://www.bat.com
(http://www.bat.com) .

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