BAT – H1 2024 Pre-close Update

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Ahead of the H1 2024 results (to be released on July 25, 2024), BAT provided an interim business update on June 4, 2024 (Tuesday). The key highlights are:

– On track to deliver FY24 guidance (i.e. low single-digit revenue and adjusted operating profit growth) with H2-weighted financial delivery

– Revenue and adjusted operating profit down by low-single digits in H1 2024

– Strategic discipline and focused investment driving positive momentum; acceleration expected in H2 2024 driven by the phasing of RRP launches and the wholesaler inventory movements related to continued investment in US commercial actions

– Further improvement in New Category profitability in H1 2024 and FY24 through “Quality Growth” focus on a more balanced top-line and bottom-line delivery

– ITC stake sale enabled the initiation of a sustainable share buy-back

– Strong cash conversion with leverage expected to be within the narrowed target range of 2.0-2.5x by year-end 2024

– Mid-term target: progressively improve the performance to deliver 3-5% revenue and mid-single digit operating profit growth by 2026

– Capital Markets Day on October 16 (the last one was on March 18, 2020)


– USA: Commercial plans continue to gain traction despite a challenging macroeconomic backdrop; combustibles industry volume down ~9% YTD

– USA: Completed the majority of commercial initiatives; Strong performance of Newport soft-pack in key investment states, which together with further share gains in Natural American Spirit => volume share of the premium segment up +40 bps; Lucky Strike (“branded value”) as the fastest growing combustibles brand in the US ahead of deep discount brands

– In AME and APMEA, BAT gained volume and value share with robust H1 pricing (strong financial delivery in Germany, Romania, Pakistan and Mexico)

– Share in key markets: volume up +30 bps, value down -10 bps (mainly due to adverse geographical mix and the implementation of commercial plans in the US)

E-vapor (VUSE):

– Continued global value share leadership with 41.1% SoM in key markets with gains in AME (up +20 bps) offset by the US (down -90 bps)

– 51.5% value share in tracked channels in the US; however, the financial performance is impacted by the continued growth of illicit single-use vapes (now expected to be over 60% of the total category); E-vapor category in the US will be a bigger drag than combustibles in terms of FY24 financial delivery

– Encouraging early signs of illicit products volume decline through State Directory Bills; Vuse Alto capturing the majority of the volume outflow back into the legal segment in Louisiana (first state to implement a vapour directory and enforcement legislation in October 2023)

– AME performance was driven by France, Germany and Poland; continued poly-usage benefiting the vapour category

– New single-use vapour product: Vuse Go 2.0, featuring enhanced taste & design and a removable battery

Heated tobacco (glo):
– Sequential category volume share improvement across key markets: YTD volume share down 20 bps to 16.8% (versus down 110 bps in 2023), driven by encouraging early consumer response to glo Hyper Pro and improved consumables (comparable price positioning to IQOS)

– Category volume share stabilization in Japan and Italy; continued strong performances in key AME markets, Poland and Czechia

– veo, non-tobacco consumables range, now launched in 17 markets, strongly outperforming competing products

– H1 volume and revenue performance to be impacted by a stronger comparison relating to the price repositioning in Japan and Italy in mid-2023 and the phased roll-out of innovations (to be completed across the key markets by the end of H1)

Nicotine pouches (VELO):
– Continued leadership outside the US: volume share of Modern Oral down 10 bps to 27.0% in key markets, mainly driven by the weight of the US market

– USA: encouraged by early results from the phased roll-out of refreshed Velo brand expression, with volume share of Modern Oral stabilizing at 4.5%, driven by 13.5% volume share in the New York pilot (up +280 bps); started to roll out Grizzly Modern Oral nationally in the US, building on the growing trend of Traditional Oral consumers moving to Modern Oral

– AME: maintained our leadership position, reflecting strength in both established oral markets like Sweden, Denmark and Norway, and strong momentum in newer launch markets including the UK and Poland

– Emerging market opportunity: continued strong volume performances in Pakistan and South Africa

Technical guidance:

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

– Translational FX headwind on adjusted operating profit expected to be c.4% for half year and c.4% for full year

– Operating cash flow conversion in excess of 90%

We note:

Although not unexpected, “low-single digit decline in revenue and operating profit in H1 2024” is hard to swallow. Starting from the H1 2024 Pre-close Conference Call, market will be looking for cues (data & statements) confirming the H2 2024 recovery.

There is no meaningful improvement in the US combustible market and, for the first time, BAT openly stated that VUSE’s deteriorating financial performance (due to the rampant illicit disposable growth) is now even a bigger drag than the combustibles in the US. Moreover, growth elsewhere (outside the US) failed to avoid a top- and bottom-line decline in H1 2024. Nevertheless, none of these should come as a surprise: recall our BAT – H1 2024 Pre-close: Preview write-up.

There is only one (potential) element of surprise in the release: commercial investments made for the turnaround in the US market & heated tobacco category seem to more significant than initially disclosed.

Post-publishing note:

At the DB Global Consumer Conference, BAT listed the drivers of H2 2024 acceleration (i.e. recovery from a low single-digit revenue and operating profit decline in H1 2024):

– Phasing out the unfavorable impact of the inventory movement in the US (equivalent to 2-2.5% of the US volume in H1 2024; overall group revenue would be flattish when adjusted for the inventory)

– US combustible revenue (progression) to be better than FY23 (note that US combustible revenue was down -6.9% in FY23); to be (partially) offset by the worsening performance of e-vapor in the US (note that e-vapor was a key driver of profitability for Reynolds in FY23)

– Roll-out of RRP innovations & consequent performance improvement: single-digit revenue growth in H1 2024 to be improved to double-digit growth in H2 2024

– Continued strong performance in AME (reflecting the benefit of multi-category portfolio)

– Improved performance (driven by RRP launches) and a weaker H2 2023 benchmark in APMEA

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