Ahead of the event, BAT re-confirmed its FY24 and medium-term financial targets: “on track to deliver low-single digit organic revenue and adjusted operating profit growth in 2024” and “progressive improvement to 3%-5% organic revenue growth and mid-single digit (4%-6%) adjusted operating profit growth, on an organic, constant currency basis by 2026”.
Moreover, BAT announced that a larger translational FX headwind (c.5%) is expected on FY24 operating profit based on the spot £/$ exchange rate of 1.3075 – instead of the c.4% stated at the H1 2024 results release.
BAT 2024 Capital Markets Day
BAT re-iterates its ambition to become a “predominantly smokeless business by 2035”. In H1 2024, 18% of BAT’s revenue is from smokeless – 27% if US combustible revenue is excluded (i.e. on a comparable basis with PMI).
BAT’s 5 strategic priorities are:
(1) Drive profitability in New Categories
(2) Consistent US combustibles value growth
(3) Significantly strengthen Heated Tobacco
(4) Lead responsible New Categories development
(5) Enhance financial flexibility.
New Category Growth & Profitability:
The number of New Category (Smokeless ex-traditional smokeless products) consumers has been growing14.7% per annum (p.a.) since 2018, adding 50+ million new consumers and reaching to 101 million in H1 2024. Including the poly-usage, vapes, heated tobacco and nicotine pouches are used by 74, 28 and 16 million users in H1 2024, respectively and experienced 16%, 20% and 70% per annum growth over the past 5.5 years, respectively.
Transformation (to RRPs / NGPs / Smoke-free products) will speed up the (total nicotine industry) revenue growth: from 3.8% p.a. in the 2017-23 to 4.6% p.a. projected in the 2024-35 period. Moreover, New Categories are margin accretive: for instance, on a stick equivalent basis in Europe, e-vapour, heated tobacco and nicotine pouches offer 1.6x, 1.9x and 4.1x times unit gross profit (£ per ‘000) to BAT compared to combustibles (note: premium-positioned IQOS offers 2.5x times gross profit to PMI at the global level).
In e-vapor, BAT’s Vuse is the global value leader with 40.4% aggregate share (YTD August 2024) in top markets. In nicotine pouches, BAT’s Velo is the market leader outside the US with 45% volume share. In heated tobacco, BAT’s glo is the global #2 with improving performance since the glo Pro launch.
The US Market:
US remains the cornerstone of BAT’s future. With £41 billion nicotine revenue pool, US represents a third of the global total market (ex-China) and generates 43% and 54% of BAT’s global revenue and operating profit, respectively. Momentum in combustibles is improving in terms of both premium share and overall combustible share (- while the overall market volume is set to decline ~9% this year). BAT is the distant category leader in the legal vape market with 50.8% value share. However, (illicit flavored) disposable vapes now represent ~70% of the total vape market in the US (£6 billion). In parallel to the improved regulatory enforcement, BAT has a significant value to grab in the US vape market. For further details: Illicit Trade – RRPs: The US.
BAT’s share in modern oral category improved from 4.2% in June 2023 to 7.5% in August 2024 (- driven by the ZYN stock-outs much more than the “refreshed proposition”). Moreover, BAT is planning to launch a synthetic nicotine containing version of Velo, called Velo Plus, in December 2024 in the US. Velo Plus will offer a wider palate of flavors, higher nicotine strength and a more moist experience. BAT stated that Velo Plus has a pending PMTA submitted before the deadline, meaning that it can stay on the market while its application is under the US FDA review (note: this statement creates more questions than clarification). Synthetic nicotine is typically used by smaller vape and nicotine pouch manufacturers as a means to avoid a lengthy and costly application process with the US FDA. For further details: Synthetic Nicotine Derivatives.
BAT expects the combustible revenue to grow +1% p.a. in the US between 2024 and 2030. Meanwhile, the expected growth rate for vapes and nicotine pouches are +8% and +20% p.a., respectively, in the same period. Thereby, in 2030, BAT foresees a market size of £12-14 billion for vapes (vs. £9 billion in 2024) and £5-7 billion (vs. £1.7 billion in 2024) for nicotine pouches in the US.
BAT underlines the importance of the 2017 Reynolds acquisition as the US market is growing faster than the rest-of-the-world (in terms of revenue and operating profit) and Reynolds offered new capabilities to the BAT Group. Nevertheless, BAT didn’t touch base on the long-standing investor concerns about the timing of the acquisition, deal structure and price paid.
Heated Tobacco Category:
Heated tobacco is the largest of the new Categories in terms of revenue (£10bn in 2024). BAT remains the leader in the value (discount) segment with 58% segment share – despite the overall category share decline experienced in 2023. Moreover, the recent glo Hyper Pro launch (December 2023) resulted in a step change in consumer experience and improved BAT’s volume share in key markets, including Japan and Italy.
Nevertheless, recognizing the importance of pivoting to the lucrative premium segment (more than 80% of the overall heated tobacco category, in which BAT has only 2% segment share), BAT will launch a premium heated tobacco platform, glo Hilo, in one market by the end of 2024 with further geographical expansion planned in 2025. glo Hilo is a two-piece device with a separate charger and (consumable) holder, similar to the core IQOS platform. glo Hilo will allow BAT to compete in the premium heated tobacco segment, closing an important portfolio gap. glo Hilo consumables will be priced at parity to IQOS consumables.
New Category Development:
Including the fully-allocated investments made by the strategic partners, BAT spent £700 million on smokeless innovation in 2023 – i.e. double the spending made in 2021. BAT’s innovation spending corresponds to 21% of the smokeless revenue – similar to the spending in the Pharma industry (15%-25%) and more than the Tech (10%-15%) and CPG (%1.5-2.5%).
BAT underlines the substantial improvement achieved in its innovation ecosystem and discloses Smoore and BYD Electronics as the two key innovation partners. Smoore also partners with Altria (NJOY). More on Smoore: Smoore: Business Update.
Financial projections:
BAT targets 3%-5% overall revenue growth over the medium term with 0%-2% growth in combustibles (price/mix improvements more than offsetting the volume decline) and strong double-digit growth in New Categories.
BAT targets sustainable 4%-6% operating profit growth over the medium term (in 2026 and beyond), fueled by improving New Category profitability (scale efficiencies & premiumisation) and supported by strong productivity savings (more than £1.2 billion in 2023-25 and an additional £2 billion in 2026-30) and stringent administrative cost management (committed to maintain overheads at 7% of the revenue going forward).
In order to track progress made in “profitable transformation to a predominantly smokeless business by 2035”, BAT now defines a Transformation Scorecard with 8 metrics:
BAT expects to generate in excess of £50 billion Free-Cash Flow (FCF) by 2030 (over a 7-year period), including more than £8 billion FCF per annum from 2026 onwards. BAT will make targeted investment in business transformation and continuously review its footprint & portfolio to drive cashflows. 4 pillars of BAT’s cash allocation priorities are: (1) Progressively increasing dividend, (2) 2.0-2.5x net debt/EBITDA (leverage) ratio, (3) Bolt-on M&As (vaguely defined as “we are always looking for opportunities”), (4) Sustainable share buybacks (current £1.6 billion program is financed by the ITC stake sale). For further details: Share Buybacks: BAT.
Link to British American Tobacco Investor Presentation: BAT Capital Markets Day October 2024
