British American Tobacco p.l.c. (NYSE:BTI) Q4 2023 Earnings Call Transcript

British American Tobacco p.l.c. (NYSE:BTI) Q4 2023 Earnings Call Transcript February 8, 2024

British American Tobacco p.l.c. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Tadeu Marroco: Good morning, everyone. I’m delighted to welcome you to our 2023 Preliminary Results Presentation. With me this morning is [Technical Difficulty] Finance Director and Victoria Buxton, Group Head of Investor Relations. I will begin with our financial highlights and the progress we have made against our key areas of focus this year. Javed will then take you through our financial performance in more detail. I will return to talk more about our glidepath to Building a Smokeless World, before we move to the Q&A session. With that, I would like to draw your attention to the disclaimers on Slides 2 and 3. So let’s begin with our 2023 performance. Our reported results reflect the impact of the non-cash impairment charge taken mainly against our acquired U.S. brands.

We will focus on constant currency adjusted results, unless otherwise stated. I am pleased that BAT has delivered a resilient performance, in line with our guidance, reflecting the benefit of our global multi-category strategy. The breadth and scale of our global footprint, enables us to consistently deliver balanced results. This is demonstrated by our strong performances in AME and APMEA, delivering combined double-digit revenue growth offsetting the U.S. Overall, we have delivered, organic revenue up 3.1%, which excludes Russia and Belarus from both periods. Profit from operations up 3.1%, or 3.9% organically and diluted EPS up 4%, with organic growth up 5.2%. I am particularly pleased with our performance in new categories, with revenue up nearly 18%, and 21% organically, with Vuse and Velo delivering strong volume led revenue growth.

Our consumer numbers reached 23.9 million, excluding 1.5 million consumers in Russia. We added over 3 million consumers year-on-year with 1.1 million in Q4 alone. At the half year, I shared a clear set of objectives to sharpen our execution and build a more modern and agile BAT. Over the last six months, working together with our broader teams, we have made good progress across these six areas of focus. I will now share some of the highlights. First, I am delighted that we have reached new category profitability two years ahead of our original target. This has been achieved, while continuing to invest an incremental 300 million pounds in 2023 for future growth. Our new categories are meaningfully contributing to group results, as we benefit from increased scale, with strong profitability gains driven by Vuse and Velo.

We have sequentially improved our new category contribution from a peak loss of £1.1 billion in 2020, to a small profit position in 2023, reflecting a £400 million improvement last year. It’s important to note that while we expect new category profitability to continue to improve each year, due to the phasing of investments, the improvement in contribution year-on-year will not be linear. We made strong progress in our top 10 new category markets, which generated about three quarters of our new category revenue in 2023, with category contribution margin now above 20%. The performance of these markets demonstrates that revenue continues to grow at pace. Gross and contribution margins are expanding strongly with scale; and absolute margin levels are moving closer to the level of our Combustibles business.

This profitability at scale give us confidence in our direction of travel as we expand our new category footprint. And it also provides a clear line of sight for our pathway to profitability in less established markets moving forward. Our second focus area has been to return our U.S. Combustibles business to consistent value growth. Our commercial plans are already starting to deliver early signs of volume and value share recovery. Our volume share is up 40 basis points since January, driven by a 160 basis points increase in the premium segment. In addition, we are delivering value share gains, up 20 basis points since January driven by a 60 basis point increase in our premium share, to reach our highest level in three years, driven by Newport and Natural American Spirit.

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Q&A Session

I want to share some more color on the actions we are take in the U.S. In premium, we have invested in Newport soft pack, creating a laddered portfolio, which has driven an acceleration in Newport’s share of the premium segment. We are working through the targeted execution of this on a state-by-state basis, with a broader roll out planned in 2024. Lucky Strike is the fastest growing cigarette brand in the market, and just three years after launch reached 4% national volume share at year-end. In addition, we are sharpening our execution, increasing the number of trade reps by around 10%, further strengthening and simplifying our route to market and upgrading our digital analytics. We are confident that these actions will further strengthen our portfolio over the medium to long-term.

Turning to my third area of focus, Heated Products where I am determined to significantly strengthen our portfolio. Our recently announced global patent settlement is an important step forward, allow us to further develop improved products and innovations in the Heated Products space over the medium term. Meanwhile, I am excited about our newest hyper launch, which delivers a total system upgrade. Our new device, glo Hyper pro, is a more premium offering with new heat technology and longer lasting sessions. Our new supertob consumables have been redesigned to significantly improve both taste and flavour delivery. In addition, we have launched our first to market tobacco-free consumables veo, with herbal substrate, in 11 European markets. And while it is still early days, we are seeing some promising results, including volume retention for our Heated Products in these markets.

These new launches are early examples of our improved innovation pipeline. And we are further strengthening our R&D. Adding new capabilities, such as Device Engineering and fully integrating our global teams to form a more collaborative network. In addition, we are partnering with external industry leaders in complementary areas such as battery technologies and electronics manufacturing, to accelerate our pipeline. We continue to execute our product lifecycle management model with discipline enabling us to launch stronger innovations at speed. There is still work to do, but I am confident that we now have the right capabilities in place to drive a more rapid and meaningful innovation pipeline moving forward. My next area of focus is to lead responsible new category development.

We need to gain a broad acceptance of our Tobacco Harm Reduction agenda and encourage a fact-based discussion on nicotine amongst key stakeholders. That’s why I re-established our corporate and regulatory affairs function and added a new management board position. We are clear that science should guide the development of regulation. This is why we believe that each smokeless product category should be regulated differently, proportionate to the associated risk and according to the evidence base. I am determined to manage our transformation responsibly and transparently, through increasing our engagement with regulators, policy makers and other relevant stakeholders. The irresponsible marketing practices we see in some markets are totally unacceptable and we call for the support of governments and regulators to more effectively distinguish between responsible and irresponsible players.

This will create a level playing field, addressing important issues such as underage access and environmental impacts. We are seeing encouraging progress with new category regulation around the world, including recognition of the role of Tobacco Harm Reduction in major markets like the U.K. and New Zealand. New markets opening up to make a smokeless alternatives accessible for consumers. And a growing multi-category footprint with 55 markets now regulating more than one new category. I am proud of our more foot fronted engagement and advocacy actions taken in the U.K., when we launched a multi-channel media campaign urging for better regulation enforcement around vaping products, so the vaping industry can support making smoke free Britain a reality.

Looking ahead, we plan to launch our refresh and responsible marketing principles and code, demonstrating our commitment to a responsible new category approach. Effective enforcement is critical to the development of functional new category markets. We are deeply concerned by the continued proliferation of illicit single-use Vapour products in the U.S., which we estimate represent over 60% of the Vapour market. There are multiple levers available to government agencies, state and local authorities to ensure proper regulatory enforcement. During 2023, we saw a modest escalation in action against illicit products including almost 4 million units captured or refused entry into the U.S. and about 5 million U.S. dollars in fines issued by the FDA.

However, it’s clear that much more needs to be done. Our U.S. teams are actively engaging with government agencies, and federal and state law authorities, using all tools available to drive better enforcement and, importantly, a level playing field. A recent example of progress is Louisiana, which has passed a state law establishing a directory of Vapour products which have either received, or genuinely have a PMTA pending. Several other states have enacted similar laws with more bills pending. I am also encouraged that the U.S. International Trade Commission has taking up our complaint and is investigating the import of illegal single-use Vapour products. While we have not seen any meaningful impact nationally to date, we can clearly see that the pressure for effective enforcement is building.

Now, moving on to my fifth focus area to enhance our financial flexibility. We continue to deliver efficiencies through our established continuous improvement mindset. We are on track to generate at least £1 billion of additional savings by 2025, with nearly £500 million already saved in 2023. This has played a critical role in offsetting the inflationary pressures. We continue to seek and evaluate all opportunities to enhance balance sheet flexibility. And, as part of this, we regularly review our stake in ITC. We recognize that we have a significant shareholding which offers us the opportunity to release and reallocate some capital. Our shareholding in ITC has existed in one way or another since the early 1900s and was subject to numerous share capital change and regulatory restrictions.

We have been actively working for some time on completing the regulatory process required to give us the flexibility to monetize some of our shareholding and reallocate some capital. We will update you on this at the earliest opportunity. In addition, we are further optimizing our geographic footprint, and have exited around 35 markets. This is in line with our plan to exit non-strategic Combustibles markets, where we don’t see a near-term opportunity to execute our new category strategy. This means we will be selling fewer cigarettes annually, with a limited impact on our P&L and resources are reallocated into higher return markets. We have significantly increased our free cashflow generation, with four consecutive years of at least 100% operating cash conversion.

This has enabled us to return a total of £26 billion to shareholders over the last five years. We have made good progress on de-leverage, ending the year at 2.6x adjusted net debt to adjusted EBITDA, closer to the middle of our 2x to 3x target range. Over the next five years, we are on track to generate around £40 billion of free cash flow before dividends. As we continue our transformation, our medium-term financial model will evolve. This will give us increased flexibility to allocate our capital to drive returns and reward shareholders and includes continuing our 20-year track record of progressive dividend growth. Once the middle of our leverage target is reached, we will evaluate all options to return excess cash to shareholders, including the introduction of a sustainable share buyback.

Moving onto my last area of focus, to develop a more collaborative and inclusive culture. Guided by our refreshed corporate values, I am clear that building on our strong foundations of integrity, collaboration and inclusivity, we will drive the culture we need to successfully transform BAT. As part of this, I am delighted to welcome our new Executive and Non-Executive Senior Management members. They all bring diverse, high-quality industry knowledge and experience. Soraya Benchikh, our incoming CFO, will start in May, and I would like take this opportunity to express my thanks and appreciation to Javed for stepping up as Interim Finance Director alongside his ongoing role as Director, Digital and Information. In summary, we have made significant progress on each of these areas of focus.

However, there is more to do. I’m confident that the choices we have made are building strong foundations for future growth, and will deliver sustainable value for all our stakeholders, while we continue to reward shareholders with strong cash returns. And with that, I will hand over to Javed to take you through the detail of our results.