Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- British American Tobacco PLC (BTI, Financial) added 1.4 million smokeless consumers, reaching a total of 26.4 million.
- Smokeless products now account for 18% of group revenue, up 1.4 percentage points from the previous year.
- The company reported a GBP165 million increase in new category contribution and a nearly 10 percentage point increase in category contribution margin.
- British American Tobacco PLC (BTI) initiated a sustainable share buyback program, enhancing financial flexibility.
- The company expects an acceleration in second-half performance, driven by new category launches and US investments gaining traction.
Negative Points
- Group revenue was down 0.8%, and profit from operations decreased by 0.9%, reflecting macroeconomic headwinds and targeted investments.
- The US market faced significant challenges, with total revenue down 7% due to the impact of illicit vapor products and declining combustibles performance.
- Volumes in combustibles declined by 6.9% on an organic basis, driven by wholesaler inventory movements in the US and supply chain disruptions in Sudan.
- The vapor category in the US was negatively impacted by illicit single-use vapor products, leading to a loss of market share.
- The company faced higher amortization and impairment charges following the decision to start amortizing US acquired combustible brands from January 2024.
Q & A Highlights
Q: On the US combustibles market, if I compare to '21, where you laid out the impacts to the market, what you have in the full year, the key deterioration is coming from higher elasticities. Is that purely from increased poly-usage, you think? Or is it just less volume of smokers are cutting back given the pricing environment, a weak sentiment overall? I guess have you seen a material change in consumer elasticity in US combustibles?
A: We are not seeing a massive deterioration in terms of elasticity in cigarettes. The impact is from a difficult macro environment, high inflation, and high interest rates, which put low-income consumers under financial stress. Additionally, the proliferation of illegal vapor single-use products in the US is a significant factor. We are seeing some early signs of improvement in macroeconomics, which could positively impact the market in the medium term.
Q: On Modern Oral in the US, the acceleration we're seeing is a bit of a surprise. Is it just about the brand refresh you've done? Are you benefiting a little bit from the shortages by one of your peers there?
A: The improvement is primarily due to our new brand expression, which we piloted in New York last year and saw traction before any competitor distribution issues. Recent competitor issues may have helped, but our growth was already evident, leading to a national rollout in Q1 this year. Additionally, our new Grizzly offer is gaining traction.
Q: If I look at your FX guidance, there is a 4% headwind. Is BAT considering targeting dollar or pound EPS growth instead of just constant currency EPS growth?
A: We are confident in driving EPS growth on current terms. However, given the transactional FX impact and the devaluations in emerging markets, it can be challenging to offset all that in the short term. In the medium term, we should be able to deliver EPS growth on a current basis.
Q: Your heated tobacco volumes are down, and your e-cigarette business is also down. Does it make sense to direct more investments into e-cigarettes and away from heated tobacco?
A: The decline in AME is impacted by stock movements due to regulatory changes. Adjusted for that, AME showed strong growth. We are confident in our improved competitive position in THP, driven by new product innovations and IP agreements. We believe continued investment in both categories is warranted.
Q: Could you remind us of your PMTA pipeline for e-cigarettes in the US and how Vuse is performing internationally?
A: We have PMTAs approved for tobacco flavors of Alto, Vuse, Ciro, and Solo. We are disputing the menthol version and have submitted a PMTA for our age-gated device, including some fruit flavors and menthol. We are hopeful for expedited approval given the age verification technology.
Q: On vapor outside of the US, where volume was down almost 10% in H1, what are the drivers, and are they one-off or structural?
A: The decline is primarily due to regulatory changes in Canada, specifically Quebec's new legislation without enforcement. Excluding Canada, AME grew 15% in revenue. We have exciting new products launching in markets like New Zealand, Korea, and Indonesia, which should drive future growth.
Q: How are you balancing revenue growth versus improving profitability in new categories?
A: Our priority is to balance top and bottom line growth by targeting investments in categories and geographies with momentum and value. We have increased category contribution and expanded margins. We will continue targeted investments, especially in the second half, while focusing on margin accretion.
Q: Could you provide more details on the increased poly-usage and its impact on conversion rates between vapor and heated tobacco?
A: We don't see a significant difference in conversion rates between vapor and heated tobacco. Vapor is 65% of consumption in the non-combustible space and is growing fast. The increased poly-usage is driven by the growth of Modern Oral and illegal vapor products.
Q: On US vapor, what is the impact of increased enforcement efforts by the FDA on disposable products?
A: We estimate a 2% decline in cigarette volumes due to illegal vapor products. Enforcement is critical, and we are advocating for the FDA to conclude the PMTA process and provide clarity. Louisiana's comprehensive regulation is a positive example, but more needs to be done in other states.
Q: On the US combustibles business, what is a reasonable level of contracted coverage, and how happy are you with the progress in the commercial organization?
A: We are satisfied with our current coverage and commercial plans, including expanding our sales force and data analytics. We are seeing improvements in volume and value share and are well-positioned to benefit from macroeconomic improvements and enforcement on illicit products.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
