27 JULY 2022 – INTERIM RESULTS
BRITISH AMERICAN TOBACCO p.l.c.
HALF-YEAR REPORT TO 30 JUNE 2022
NEW CATEGORIES GROWTH DRIVES FASTER TRANSFORMATION
|
PERFORMANCE HIGHLIGHTS |
REPORTED |
|
ADJUSTED |
|||
|
|
Current |
Vs 2021 |
|
Current |
Vs 2021 |
|
|
|
rates |
|
|
Rates |
current |
constant |
|
Cigarette and THP value share |
|
+10 bps |
|
|
|
|
|
Cigarette and THP volume share |
|
flat |
|
|
|
|
|
Consumers of non-combustible products1 |
20.4m |
+2.1m |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (£m) |
£12,869m |
+5.7% |
|
£12,869m |
+5.7% |
+3.7% |
|
Revenue from New Categories (£m) |
£1,283m |
+45.4% |
|
£1,283m |
+45.4% |
+45.0% |
|
Profit from operations (£m) |
£3,678m |
-25.0% |
|
£5,645m |
+7.8% |
+4.9% |
|
New Category contribution (£m) |
|
|
|
£(222)m |
-56.1%^ |
-55.4%^ |
|
Operating margin (%) |
+28.6% |
-11.7 ppts |
|
+43.9% |
+90 bps |
+50 bps |
|
Diluted EPS (pence) |
80.8p |
-42.9% |
|
167.4p |
+8.6% |
+5.7% |
|
Net cash generated from operating activities (£m) |
£3,221m |
+42.9% |
|
|
|
|
|
Adjusted cash generation from operations (£m) |
|
|
|
£2,137m |
+60.2% |
+64.2% |
|
Cash conversion (%) |
+87.6% |
+41.7 ppts |
|
+77.3% |
+10.6 ppts |
|
|
Borrowings (£m) |
£44,875m |
-0.3% |
|
|
|
|
|
Adjusted Net Debt (£m) |
|
|
|
£39,990m |
-1.2% |
-7.5% |
The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on pages 55 to 60, with reconciliations from the most comparable IFRS measure provided. Note – 1. Internal estimate. ^Improvement in New Categories contribution as losses reduce by 56.1% (or 55.4% at constant rates of exchange)
|
Faster Transformation |
HY Results |
|
· New Categories revenue up 45% to £1,283m* · Non-combustible product consumers increased by 2.1m to 20.4m, with 14.6% of Group revenue delivered by non-combustible products, up 2.2 ppts from FY21 · Vapour revenue up 48%*, Vuse extended global category value share leadership, becoming U.S. No.1 · glo revenue up 44%*, with glo hyper volume share gains in Europe · Modern Oral revenue up 37%*, driven by Velo, with continued volume share leadership in Europe · All New Categories grew revenue faster than volume · New Category contribution losses reduced by over 50% to £222m |
· Revenue up 3.7%* led by New Category growth · Combustible revenue up 0.6%* against a strong U.S. comparator, price/mix was up 4.8% · Cigarette value share up 10 bps · £1.5bn Quantum savings delivered six months early, expect to deliver in excess of £1.5bn by end of 2022 · Adjusted profit from operations up 4.9%* includes an adverse transactional FX impact of 1.5% · Adjusted operating margin up 90 bps · Adjusted diluted EPS up 5.7% to 163.0p* · Operating cashflow conversion of 77%, reflecting continued excellent cash generation · Reported results mainly reflect charges in respect of Russia and the DOJ/OFAC investigations |
Jack Bowles, Chief Executive:
“I am very proud that our continued New Categories growth momentum is driving Faster Transformation, with revenue growth of 45%* in the first half of 2022, on top of 51%* growth in FY2021. We are delivering both strong operational performance and transforming the business.
I am especially proud that the number of consumers using our non-combustible brands has passed the milestone of 20m in the first half. Our A Better Tomorrow purpose, partnered with our well-established multi-category strategy, continues to drive growth.
Our three strong, global New Category brands underpinned our revenue performance, with non-combustibles now representing 14.6% of revenue. Revenue growth was ahead of volume growth in all three New Categories. We are confident in delivering £5bn New Category revenue, and profitability, by 2025.
Furthermore, New Category contribution improved by over 50% in H1, with losses reduced by £281m* in the period alongside a continued increase in investment in our transformation, with a total of £1.1bn invested in New Categories in the first half.
From an innovation perspective, the second half promises to be exciting. We are launching our new glo system proposition, hyper X2, and a new consumables range in the THP category, where we are enjoying strong growth. In addition, we continue to build on our international leadership position in Vapour, expanding our portfolio with the launch of Vuse Go, our new disposable Vapour platform. This will be scaled-up and rolled out into a number of new markets following our successful UK pilot launch in the first half of 2022.
Our combustibles business continues to grow value share enabled by robust pricing. In addition, we have delivered £1.5bn Quantum savings six months early, and our progress continues. We now expect to achieve in excess of £1.5bn by year end.
We have a strong and resilient portfolio in the U.S., growing value share in both combustibles and vapour. We continue to grow our premium value share in combustibles and to date we see no acceleration of downtrading in our combustibles portfolio.
We are not immune, of course, to the increasing macro-economic pressures, exacerbated by the conflict in Ukraine. However, we are well positioned to navigate the current turbulent environment due to our powerful brands, operational agility and continued strong cash generation.
I am very pleased that, thanks to the hard work and commitment of BAT employees all over the world, we are delivering our operational performance and business transformation at pace in a challenging environment.
With this strong start to the year, I am confident in achieving our full year guidance. While understanding that there is more to do, these results demonstrate the strong progress we are making in our Faster Transformation towards A Better Tomorrow.”
* at constant rates of exchange
CHIEF EXECUTIVE'S STATEMENT
FASTER TRANSFORMATION OF OUR BUSINESS
“During the first half of 2022, our Faster Transformation demonstrated the benefits of our multi-category strategy. Our A Better Tomorrow purpose, which drives a reduction in the health impact of our business, is based on our three core beliefs:
· Rigorous science should underpin our portfolio of reduced-risk products**†;
· Product innovation is essential to satisfy evolving global consumer needs; and
· Sustainability is at the centre of our business decisions and heart of our strategy.
We continue to make substantial investments in our science and R&D and have built a substantial body of science to support our New Category products, including pioneering clinical studies of glo and Vuse.
· Based on over 135 of our own studies, and third-party data across emissions, toxicology and the growing body of clinical and population studies, we believe our products are scientifically substantiated as reduced risk**† compared to smoking and that this science supports the role and use of these products in Tobacco Harm Reduction.
· The science shows that, for Vuse and glo harmful components are 90-99% less than cigarettes, with toxicology between 95% to 99% less. For Velo, studies show it contains less harmful components than snus.
Further to our vapour portfolio expansion, in July 2022, we launched our new THP innovation platform – glo hyper X2 – a smaller, lighter, induction heating device with an ergonomic design and separate boost button. This platform will be enabled by a re-designed Neo consumables range. The roll-out has started in Japan, with rapid roll-outs to other markets planned in the second half of 2022.
We continue to take an active approach to reducing our environmental impact, having signed up to the UN-backed Race to Zero campaign. I am pleased to report that we now have 18 certified carbon neutral^ manufacturing and commercial facilities with two added in the first half of 2022.
Driving even Faster Transformation, while navigating the macro environment, will be our priority during the second half of the year. The strength of our New Category portfolio, combined with our focus on science, innovation and sustainability, underpins our confidence in delivering another strong year in 2022.”
FINANCE & TRANSFORMATION DIRECTOR'S OUTLOOK STATEMENT
TRANSFORMING AND DELIVERING
“ Our first half performance demonstrates our delivery and our Faster Transformation in action. We continue to build on our momentum, supported by our New Categories becoming a greater driver of Group performance.
We continued to invest in our transformation, with over £1 billion invested in New Categories in the first half. In addition, we improved the contribution from New Categories, with losses down for the second consecutive period, reducing by a further £281 million, at constant rates. Our New Category business is already delivering a positive financial contribution in 9 markets.
Progress at our state-of-the-art Innovation Hub in Trieste, Italy also continues. The Hub will host a New Categories manufacturing site, innovation lab and digital centre of excellence.
Strong pricing in combustibles and value share growth, up a further 10 bps, continue to fund our transformation. U.S. combustible volume was down 13.4%, mainly due to industry volume decline which reflected the impact of macro factors, including higher fuel prices and a return to more normal consumer consumption patterns post COVID.
Adjusted operating margin growth of 90 bps was supported by a further c£275 million of Quantum savings in the first half of 2022. We now expect to achieve in excess of £1.5 billion annualised savings by the end of 2022. Reported results were impacted by impairment charges in respect of Russia assets (£957 million, as described on pages 33 and 34), a charge of £450 million related to the investigation in respect of alleged historical breach of sanctions (described on page 20) and other charges recognised related to Quantum (including the exit from Egypt and planned factory closure in Singapore), with reported EPS down 42.9%.
On an adjusted, constant currency basis, EPS was up 5.7% reflecting our continued strong performance, absorbing the impact of a very strong comparator in the U.S., and the sale of our business in Iran in August 2021. While we are not immune to the current macro environment, we are confident in our full year guidance, irrespective of the timing of the transfer of our Russian business.
We expect to generate £40 billion of free cash flow before dividends over the next five years. With our active capital allocation framework, we are committed to delivering enhanced long-term value for shareholders. We have already repurchased 37.7 million shares at a cost of £1.3 billion as part of our £2 billion share repurchase programme for 2022. Liquidity remains strong with average debt maturity close to 10 years, and 90% of our debt is fixed. Our medium-term rating target remains BBB+/Baa1, with a current rating of BBB+ (negative outlook)/Baa2 (stable outlook)***.
In summary, our robust first half results give us confidence in our full year guidance. We are making strong progress towards our Faster Transformation and building a sustainable Enterprise of the Future.”
On track for FULL YEAR 2022 guidance:
· Global tobacco industry volume expected to be down c.3.0% partly due to the U.S., Turkey and uncertainty over Russia / Ukraine.
· Constant currency revenue growth of 2-4% and continued strong progress towards £5bn New Category revenue in 2025.
· Mid-single figure constant currency adjusted EPS growth, including continued expectation of c.2% transactional FX headwind.
· Expected translational FX tailwind of c.6% on full year adjusted diluted EPS growth.
· Operating cashflow conversion in excess of 90%. Adjusted net debt/Adjusted EBITDA expected within our 2-3x corridor.
· Commitment to dividend growth in sterling terms and our long-term 65% dividend pay-out ratio.
** Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk-free and are addictive.
*** A credit rating is not a recommendation to buy, sell or hold securities, and may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.
† Our vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products including Velo, Grizzly, Kodiak, and Camel Snus, which are sold in the U.S., are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.
^ Carbon neutrality relates to Scope 1 & 2 greenhouse gas (GHG) emissions, achieved by a combination of initiatives, including energy efficiency, emissions reduction, renewable energy use, the purchase of renewable energy certificates and offsetting.
GROUP OPERATING REVIEW
TOTAL GROUP VOLUME and REVENUE
|
For six months ended 30 June |
Volume (unit) |
Revenue (£m) |
|||||||||
|
|
|
Reported |
|
At constant rates |
|||||||
|
|
2022 |
Change |
2022 |
2021 |
Change |
|
FX |
2022 cc |
2021 |
Change |
|
|
|
Unit |
% |
£m |
£m |
% |
|
£m |
£m |
£m |
% |
|
|
New Categories |
|
|
1,283 |
883 |
+45.4% |
|
(3) |
1,280 |
883 |
+45.0% |
|
|
Vapour ( 10ml units / pods mn) |
292 |
+18.6% |
617 |
398 |
+55.2% |
|
(27) |
590 |
398 |
+48.2% |
|
|
THP (sticks bn) |
11.0 |
+30.4% |
497 |
359 |
+38.6% |
|
20 |
517 |
359 |
+44.2% |
|
|
Modern Oral (pouches mn) |
1,770 |
+10.1% |
169 |
126 |
+34.2% |
|
4 |
173 |
126 |
+37.0% |
|
|
Traditional Oral (stick eq bn) |
3.9 |
-4.9% |
598 |
558 |
+7.2% |
|
(37) |
561 |
558 |
+0.6% |
|
|
Total Non-Combustibles |
|
|
1,881 |
1,441 |
+30.7% |
|
(40) |
1,841 |
1,441 |
+27.8% |
|
|
Cigarettes (sticks bn) |
303.4 |
-4.0% |
|
|
|
|
|
|
|
|
|
|
OTP incl RYO/MYO (stick eq bn) |
8.2 |
-11.0% |
|
|
|
|
|
|
|
|
|
|
Total Combustibles |
311.6 |
-4.2% |
10,774 |
10,527 |
+2.3% |
|
(188) |
10,586 |
10,527 |
+0.6% |
|
|
Other |
|
|
214 |
207 |
+2.9% |
|
(10) |
204 |
207 |
-1.9% |
|
|
Total |
|
|
12,869 |
12,175 |
+5.7% |
|
(238) |
12,631 |
12,175 |
+3.7% |
|
|
Cigarettes and THP (sticks bn) |
314 |
-3.1% |
|
|
|
|
|
|
|
|
|
Use of the term “cc” refers to the variance between the 2022 performance, at 2021 exchange rates, against the 2021 performance.
New Category consumables volume was up in all three categories. Combustibles volume was down 4.2% as growth in markets including Pakistan, Brazil, and Bangladesh was more than offset by the sale of the Iranian business in 2021 and lower volume in the U.S., Turkey, Nigeria, Germany and Denmark. Volume was also lower in Ukraine where, due to the conflict, the Group temporarily ceased manufacturing and all sales activity (see page 19). Cigarette and THP volume share was in line with 2021, as growth in APME (driven by Japan and Bangladesh partly offset by Saudi Arabia and Australia) was offset by the U.S. where the Group continued to drive for value growth. Duty paid industry cigarette volume was estimated1 to be down c2.5% in the first half of 2022.
On a reported basis, revenue was up 5.7% to £12,869 million driven by strong revenue growth in New Categories, up 45%, supported by continued robust pricing in combustibles (with price/mix of 4.8% supporting value share gains of 10 bps). Excluding a foreign exchange tailwind of 2.0%, revenue was up 3.7% on a constant currency basis.
Revenue from non-combustibles now represents 14.6% of Group revenue, up from 12.4% at FY 2021, reflecting the Group's focus on transforming the portfolio of products to New Categories.
PROFIT FROM OPERATIONS, OPERATING MARGIN AND CATEGORY CONTRIBUTION
|
For six months ended 30 June |
Reported PfO (£m) Operating Margin (%) |
Adjusted PfO (£m) Adjusted operating margin (%) |
||||||
|
|
2022 |
2021 |
Change |
Adj |
FX |
2022 cc |
2021 |
Change |
|
Profit from Operations (PfO) |
3,678 |
4,907 |
-25.0% |
1,967 |
(155) |
5,490 |
5,235 |
+4.9% |
|
Operating Margin |
28.6% |
40.3% |
-1,170 bps |
|
|
43.5% |
43.0% |
+50 bps |
|
PfO delivered by: |
|
|
|
|
|
|
|
|
|
New Categories Contribution |
|
|
|
|
|
(225) |
(506) |
-55.4% |
|
Rest of Group Contribution |
|
|
|
|
|
5,715 |
5,741 |
0.6% |
Use of the term “cc” refers to the variance between the 2022 adjusted performance, at 2021 exchange rates, against the adjusted 2021 performance.
Profit from operations on a reported basis was down 25.0% at £3,678 million, with reported operating margin down 11.7 ppts to 28.6%. This was driven by impairment charges of £957 million recognised in respect of the Group's decision to transfer its Russian operations (as explained on page 20 and pages 33 and 34), charges related to the Group's restructuring programme Quantum of £310 million (including the exit from Egypt and planned factory closure in Singapore), and a charge of £450 million recognised in respect of the DOJ and OFAC investigations into alleged historical breaches of sanctions (see page 20).
Adjusted profit from operations and adjusted operating margin
Adjusted profit from operations at constant rates was up 4.9%. Strong revenue growth, improved contribution from New Categories as losses reduced by over 50%, and further savings of c.£275 million delivered through Quantum were partly offset by the absorption of a 1.5% transactional foreign exchange headwind. Adjusted operating margin grew 90 bps or 50 bps at constant rates of exchange.