• Group Revenue Growth: 1.3% increase.
• New Category Revenue Growth: 8.9% increase.
• Adjusted Operating Profit: 1.4% increase.
• Diluted EPS: 3.6% increase.
• Smokeless Revenue Contribution: 17.5% of group revenue.
• Smokeless Consumers: Increased by 3.6 million to 29.1 million.
• Category Contribution Margin: Increased by 7 percentage points on an organic constant rates basis.
• Adjusted Gross Profit: Expanded by GBP400 million.
• US Revenue Decline: 3.4% decrease.
• AME Revenue Growth: Nearly 5% increase.
• APMEA Revenue Growth: 5.4% increase.
• Operating Cash Conversion: Exceeded 100% for the fifth year.
• Leverage: Reduced to 2.4 times.
• Free Cash Flow Expectation: Over GBP50 billion between 2024 and 2030.
• Cost Savings Target: GBP1.2 billion by year end, with an additional GBP2 billion by 2030.

• Warning! GuruFocus has detected 5 Warning Sign with BTI.

Release Date: February 13, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• British American Tobacco PLC (NYSE:BTI) reported a 1.3% growth in group revenue and an 8.9% increase in new category revenue, indicating strong performance in emerging product lines.
• The company achieved a 3.6% increase in diluted EPS, reflecting effective cost management and operational efficiency.
• Smokeless products now account for 17.5% of group revenue, with a significant increase in consumer base, showcasing successful diversification efforts.
• The company has initiated a sustainable share buyback program and announced a 2% growth in dividends, demonstrating commitment to shareholder returns.
• British American Tobacco PLC (NYSE:BTI) has made significant progress in reducing leverage to 2.4 times, enhancing financial flexibility and resilience.

Negative Points

• The company faced challenges in the US market, with a 3.4% decline in revenue due to macroeconomic pressures and illicit Vapour products.
• Vapour revenue fell by 2.5%, impacted by weak enforcement against illicit single-use vapes in the US and Canada.
• The company anticipates significant headwinds in Bangladesh and Australia, which are expected to impact 2025 group revenue growth by 1% and APFO growth by close to 2%.
• In Australia, new tobacco regulations and excise increases are expected to further accelerate legal industry volume decline.
• The company is dealing with a GBP6.2 billion provision for Canada's CCAA proposed plan, reflecting ongoing legal and regulatory challenges.

Q & A Highlights

Q: Could you clarify the factors that will result in the US growing, despite a challenging macro environment and illicit vape enforcement? A: Tadeu Marroco, CEO, explained that the US is expected to return to growth due to a lower base in 2024, market share gains, and investments in trade coverage and digital capabilities. The success of Velo-plus in new categories will also support growth. However, challenges in the legal Vapour market remain a headwind.

Q: Can you provide insights into Velo-plus's market share and distribution strategy in the US? A: Tadeu Marroco stated that Velo-plus accounts for about 7% of the total volume share, with a strong presence in New York. The product's higher moisture content resonates with various consumer types. Currently, Velo-plus is available in 75,000 outlets, with plans to expand to 110,000 by April.

Q: Why is Bangladesh's profit impact different from Pakistan's past excise tax increase? A: Tadeu Marroco explained that Bangladesh's ad-hoc excise increase, coupled with VAT and duty hikes on over 100 products, has significantly affected affordability. This differs from Pakistan, where the government took actions to mitigate illegal market growth after initial excise shocks.

Q: What gives you confidence in achieving the midterm guidance by 2026, and how does US performance factor into this? A: Tadeu Marroco highlighted investments in innovation, such as glo Hilo and Velo-plus, and a more supportive macroeconomic environment in the US. The expectation of improved enforcement against illicit Vapour products also contributes to confidence in achieving the guidance.

Q: What are your plans for the ITC hotel stake, and how does it fit into your capital allocation priorities? A: Tadeu Marroco stated that BAT does not intend to be a long-term shareholder in the hotel chain. The company plans to divest the stake at the right moment to maximize shareholder value and use the proceeds to achieve leverage targets by 2026.

Q: Can you provide details on the improvement in new category profit contribution? A: Soraya Benchikh, CFO, mentioned that the improvement was driven by revenue growth management, cost optimization, and a focus on high-profit pools. The company achieved a 500 basis point increase in gross margin for new categories, with significant contributions from tobacco heating products and modern oral.

Q: What are the implications of illicit Vapour growth outside the US, and how does it affect your investment strategy? A: Tadeu Marroco noted that the biggest challenges are in the US and Canada, with some markets like France and New Zealand managing Vapour well. Despite challenges, Vapour remains a significant opportunity for converting smokers, and BAT continues to advocate for proper regulation and enforcement.

Q: Could you explain the new tobacco regulations in Australia and their impact? A: Tadeu Marroco described the regulations as the most significant change since plain packaging in 2012, including new health warnings and pack format changes. These regulations, combined with ad-hoc excise increases, have contributed to the rise of the illegal market in Australia.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.