2023 H1 Pre-Close Trading Update: On track to meet full year guidance
06 June 2023
Trading update – ahead of closed period commencing 26 June 2023
Tadeu Marroco, Chief Executive:
“I am delighted to provide this first trading update since becoming Chief Executive.
Firstly, let me address a frequently asked question: Will there be a change in our strategy? No. I am clear that the strategy we created in 2019 is right. I am confident that we can execute it successfully.
Our commitment to building A Better TomorrowTM, by reducing the health impact of our business through a multi-category portfolio of reduced-risk products*†remains. Put simply, smokers must have access to better choices. This is already a reality for smokers who have made the switch to our reduced-risk products*†. It also represents a commitment to our consumers who continue to smoke and are yet to make that transition.
I often hear A Better TomorrowTM being referred to as our strategy, when in fact it is our purpose. They are not one and the same. Our strategic aim is to progressively transform our portfolio by actively encouraging adult smokers to switch to less risky products*†compared to smoking; a transformation delivering long-term multi-stakeholder value.
We have reached a point in our transformation where sharper execution and greater emphasis on fewer, bigger priorities that deliver meaningful returns is required. We will use our market archetype model, which identifies different stages of New Category maturity to guide us, ensuring our priorities deliver on our strategy and are well articulated with clear business outcomes defined.
I am pleased with our performance in a number of key areas. We increased the number of consumers of non-combustible products1 by a further 900,000 in Q1, driving good revenue growth and further reducing losses of New Categories means we are on track to deliver our £5bn revenue ambition in 2025, with profitability in 2024, irrespective of the timing of the transfer of our Russian and Belarusian businesses.
Outside the U.S., combustible brands have been performing well as we address portfolio gaps and optimise pricing. Consistently driving value from our combustibles brands is critical, as they deliver substantial cash returns and generate value to fund New Categories and our transformation.
We are also making good progress towards de-leveraging our balance sheet, supporting our ambition to sustainably return excess cash to shareholders.
That said, there are operational issues that will have my focus. Our performance in U.S. combustibles has been disappointing. Returning combustibles to consistent value creation is critical to our multi-category strategy in the U.S. We are taking action, and while it will take some time to carefully and thoroughly implement our plans, our volume share has grown sequentially since the start of the year.
glo has had an underwhelming start to 2023, albeit recent momentum is more encouraging. glo Hyper Air is a step forward in what promises to be an exciting pipeline ahead.
I am determined to manage external risks thoughtfully and transparently through continuing to increase our engagement with regulators, policymakers, and relevant stakeholders. I have made it clear to my senior management team and the organisation that we must operate to the highest ethical standards, and this topic must remain a priority for both our employees and business partners.
2023 is going to be complex and exciting in equal measure. BAT has a wonderful heritage. I am committed to building a new, modern BAT – one that is agile and progressive, inclusive and collaborative. It is our exceptionally talented people, our pipeline of innovation and portfolio of winning brands, that will ensure we perform and transform simultaneously. I have great confidence this can be achieved.
We continue to maintain our full year 2023 guidance.”
Trading update detail
Sharpening execution in combustibles and the U.S.
o Group cigarette volume share up 10 bps and value share down 40 bps, mainly due to the implementation of commercial plans in the U.S.
o Outside the U.S., we have been performing well with reinvigorated portfolios, refreshed brands and sharpened execution supported by optimised pricing offset by some geographic mix
o The U.S. industry premium segment shows early signs of stabilisation with our premium volume share sequentially growing since the start of the year
o In California, the longer-term impact of the flavour ban currently remains difficult to assess. Menthol products are reportedly still being sold illicitly due to lack of enforcement; and we have also seen elevated flavoured volume in surrounding states
o Our full year volume performance will be second-half weighted in the U.S., given the H1 volume impact of SAP-related inventory phasing
We have extended Vuse’s global leadership2
o Vuse value share up 2.8 ppts, reaching 38.8% in key Vapour markets3, driven by extended volume and value share U.S. leadership
o Continuing to approach the growing modern disposables segment in a responsible way; Vuse Go is now available in 40 markets
o Establishing Vuse platforms in Emerging Markets, including Colombia and Peru, with encouraging early results
glo performance improvement after a disappointing Q1
o glo THP category volume share down 1.1 ppts to 18.2% in key markets4
o Continued category volume share momentum in some key European THP markets offset by the highly competitive markets in Japan and Italy
o As part of our enhanced innovation pipeline, we recently launched our glo Hyper Air platform in four key European THP markets, with further roll-outs planned for H2
Velo cements European leadership, good progress in Emerging Markets
o Velo remains Modern Oral volume share leader in 15 European markets, with Velo Mini and Velo Max continuing to demonstrate our commitment to innovation
o Velo volume share of Total Oral was up 70 bps, while volume share of Modern Oral was down 1.8 ppts to 28.5% in key markets5 mainly driven by the U.S.
o Pakistan growth continues and we have rolled-out nationally in Kenya
Full year 2023 guidance
o Global tobacco industry volume expected to be down c.3%
o 3-5% organic6 constant currency revenue growth, with performance expected to be H2 weighted; reported growth impacted by timing of the transfer of the Russian and Belarusian businesses expected to close in 2023
o Strong New Category revenue growth with further improvement in category contribution alongside incremental investment
o Mid-single figure constant currency adj. diluted EPS growth, with c.2% transactional FX headwind
o Translational foreign exchange is expected to be c.-1% headwind7 on full year adjusted diluted EPS growth, and c.4% tailwind7 on half year adjusted diluted EPS growth
o Operating cash flow conversion in excess of 90%