BAT – Interim Business Update: Preview

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Ahead of the FY23 results (to be released on February 8, 2024), BAT will provide an interim business update on December 6, 2023 (Wednesday). At this occasion, BAT will reaffirm (or revise) its FY23 guidance and report YTD September volume & SoM progression for the combustibles and (three) NGP/RRP categories. BAT’s latest FY23 Guidance is 3%-5% (second-half weighted) organic revenue growth and mid-single digit EPS growth. Recall: our “BAT: H1 2023 Results” write-up.

Market will carefully watch 5 key points at the BAT’s Interim Update:

1. US cigarette volume decline

In H1 2023, BAT generated 53.5% 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 H1 2023, BAT reported 12.4% and 17.2% volume decline in cigarettes and traditional smokeless, respectively.

During the H1 2023 earnings release, BAT Management underlined that commercial plans (based on digitally enabled Revenue Growth Management capabilities) were starting to deliver early signs of recovery in the US combustibles share. Recent NielsenIQ data reveals a visible deceleration in BAT’s SoM loss (mainly, thanks to the discount brand, Lucky Strike’s volume gains) without a slowdown in market volume decline. Recall: our “The US: Tobacco Market” write-up.

2. VUSE volume progression in the US

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 products and more affordable brands/alternatives. Recall: our “Illicit Trade – RRPs: The US” write-up.

In H1 2023, VUSE’s US volume declined by 6.5%. For both of BAT’s NGP/RRP targets (break-even in 2024 and £5Bn revenue in 2025), VUSE’s performance in the US is critical. In H1 2023, VUSE US made 60% of BAT’s e-vapor revenue and 31% of BAT’s overall new category revenue. Moreover, the per unit revenue of VUSE in the US is 60% more than the rest of the world (=> over-weight in profitability).

3. glo’s performance in key markets

In H1 2023, 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 (25% lighter than glo Hyper X2) launch. Market would like to see whether BAT is able to remain competitive in the largest and most profitable RRP/NGP category.

4. Deleveraging

In February 2023, BAT shocked the markets by pausing its share repurchase program. Market expects BAT to re-initiate the program when its leverage (Net Debt/Adj. EBITDA ratio) is reduced sufficiently (from 2.89x at the end of 2022) close to the middle of the 2-3x range. Recall: our “Share Buybacks” write-up.

We don’t expect BAT to provide a concrete update on deleveraging. At best, a soft comment (such as, “progress made towards the middle of the 2-3x range”) is likely.

5. Finance costs

In H1 2023, BAT’s net finance costs were up +12.7% to £921Mn (+10.7% on adj. constant currency basis), mainly due to the higher interest expense. The average cost of debt has increased to 4.3% from 4.0% in FY22. In FY22, BAT expects its net finance cost to reach £1.9Bn.

Although we don’t expect BAT to provide any update on finance costs (unless promoted), Market would like to see whether (or not) the financial benefit of reduced debt is washed out by the increasing interest rates.

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