BAT – H1 2024 Pre-close: Preview

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Ahead of the H1 2024 results (to be released on July 25, 2024), BAT will provide an interim business update on June 4, 2024 (Tuesday). At this occasion, BAT will reaffirm (or revise) its FY24 guidance and report YTD April volume & SoM progression for the combustibles and (three) NGP/RRP categories.

Market will carefully watch six key points at the BAT’s Interim Update:

1. US cigarette volume decline

In FY24, BAT generated 54.7% of its operating profit in the US and more than 90% of BAT’s US revenue is associated to the traditional products (cigarettes & smokeless) – which are under massive volume pressure. In FY23, BAT reported 11.3% and 10.9% volume decline in cigarettes and traditional smokeless, respectively.

Recent NielsenIQ data (12 weeks to May 18, 2024) does not reveal any improvement in the US market conditions. For BAT, 10.8% volume decline, partially compensated by 4.4% price/mix improvement, resulted in 6.9% turnover decline. For the overall market, 10.1% volume decline, partially compensated by 4.6% price/mix improvement, resulted in 6% turnover decline. Thereby, BAT slightly underperformed the overall market in the period.

The key US market (alone, more than half of the BAT’s earnings) handicaps BAT in a way that what happens elsewhere (as great as it might be) becomes irrelevant in terms of overall investor sentiment. Pre-close update is unlikely to deliver any encouraging news in this regard. Yet, one positive development for BAT: US Menthol ban is now postponed for an indefinite amount of time.

2. VUSE volume progression in the US

In FY23, VUSE sales in the US generated 57% of BAT’s global e-vapor revenue and close a third of its overall RRP revenue. Although VUSE preserves its distant leadership in the (legal) US e-cigarette market, e-cigarette sales volume is increasingly shifting to the untracked channels (lower-tier retailers not covered by Nielsen as well as online and specialty stores) that offer (unauthorized) flavored disposable vapes and more affordable brands/alternatives. Recall: our “Illicit Trade – RRPs: The US” write-up.

According to the recent NielsenIQ data (12 weeks to May 18, 2024), overall e-vapor category and VUSE volume are down 16.7% and 14.9%, respectively. In other words, VUSE is now under-performing even BAT’s traditional tobacco products in the US.

VUSE’s performance in the US is critical for both the 2025 NGP/RRP target (£5Bn revenue) and the NGP/RRP category to remain profitable (recall BAT’s reference to “nonlinear progression towards NGP/RRP profitability” even after achieving the break-even).

3. glo’s performance in key markets

In FY23, BAT reported a (relatively) muted growth in the heated tobacco category due to the share losses in the largest & most competitive markets (Japan, Italy and S. Korea). BAT already promised a share recovery thanks to the activation of commercial plans and glo Hyper X2 Air & glo Hyper Pro launches. Market would like to see whether BAT is able to remain competitive in the largest (by turnover) and most profitable RRP/NGP category. Although a complete reversal in the heated tobacco category is unlikely in the short-term, we expect some sequential improvement in glo’s performance.

One quick note on VELO: as long as the VELO PMTA is pending US FDA review (a prerequisite for strengthening the US product portfolio), the news flow would be focused on the continued leadership of VELO in the international markets – which has limited/no impact on the investor sentiment (i.e. a well-known fact).

4. Deleveraging

At the end of FY23, BAT reported £33.94Bn adjusted net debt and 2.6x net debt / adjusted EBITDA ratio. In March 2024, following the ITC stake sale and re-initiation of the share repurchase program, BAT announced a new leverage target range of 2-2.5x adjusted net debt / EBITDA (instead of 2.5-3.0x). In April 2024, BAT ran a cash-capped debt tender offer – eliminating £1,826Mn debt in exchange of £1,200Mn payment (“0.657 cents a dollar”). In the light of these developments, we expect BAT’s net debt / adjusted EBITDA ratio (mid-2024) at 2.4-2.5x (i.e. at the high end of the 2-2.5x target range).

Recall that deleveraging is key to have in place a sustainable share repurchase program, to tame the increasing net finance costs and to be ready for a strategic acquisition.

5. Share Buybacks

Following the ITC stake sale, BAT announced a modest £1.6Bn share repurchase program (~3% of share capital): £700Mn in 2024 and £900Mn in 2025. For further details: Share Buybacks.

Roughly half of the £700Mn budget (for 2024) has already been spent in the first 2.5 months of the program. Market expects an increase in the 2024 share repurchase budget – based on the (anticipated) proceeds of the ITC Hotels stake sale and the reduction in leverage. Allegedly, this is the most important point to watch out in the Pre-close Trading Update.

6. FY24 Guidance

BAT’s latest FY24 Guidance is low-single digit organic revenue and adjusted operating profit growth. Moreover, the performance is expected to be second half weighted given planned investment phasing and expected slow recovery in the US macros. For further details: BAT: FY23 Results

Expectations are at a rock-bottom level for BAT. Sell-side consensus for FY24 is already lowered to no top-line and bottom-line growth. There is room for BAT to beat expectations in terms of FY24 Guidance. However, considering the tough operating environment (not only in the US or EU, but also, increasingly so, in the Emerging Markets), will they be able to?

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