| British American Tobacco p.l.c. |
| Preliminary results for the year ended 31 December 2023 |
| Building a Smokeless World |
Summary
– Revenue down 1.3%, up 3.1% on an organic basis (at constant rates), driven by New Categories organic revenue up 21.0% (at constant rates) and resilient pricing
– Strong volume led New Category revenue growth – driven by Vuse and Velo, with revenue from Non-Combustibles now 16.5% of Group revenue, up 170 bps vs FY22
– New Categories achieved profitability in 2023 (at a category contribution level), two years ahead of original target and contributing a £398 million increase to Group profit, at constant rates of exchange
– Global settlement with Philip Morris International Inc. (PMI) that resolves all ongoing patent infringement litigation between the parties related to our Heated Products (HP) and Vapour products
– Total Combustibles organic revenue up 0.6% (at constant rates), with organic price/mix of +6.1% offset by lower volume and geographic mix mainly due to macro-economic pressures in the U.S. impacting the premium segment
– Strong performances from AME and APMEA, demonstrating the benefit our global footprint and multi-category strategy
– Reported loss from operations of £15,751m (with reported operating margin down 95.8 ppts to -57.7%) – impacted by a £27.6 billion non-cash impairment charge mainly related to our U.S. business (£27.3 billion)
– Adjusted organic profit from operations up 3.9% at constant rates, adjusted organic operating margin up 40 bps to 45.6%
– Reported diluted EPS at -646.6p; adjusted organic diluted EPS up 5.2% at constant rates
– Operating cash flow conversion 100% – organic adjusted net debt / adjusted EBITDA down to 2.6x
– Dividend growth of 2.0% to 235.52p, in line with our progressive dividend increase approach
– Continued ESG progress – 2023 MSCI rating upgraded to A (2022: BBB), achieved targets for water withdrawn and waste generated two years early
Tadeu Marroco, Chief Executive
“2023 was another year of resilient financial performance and delivery in line with our guidance, underpinned by our global footprint and multi-category strategy, despite a challenging macro-environment.
New Categories delivered continued volume-led revenue growth and increased profitability, driven by Vuse and Velo. As a result, our New Categories portfolio has turned profitable two years ahead of our original target.
In combustibles, our commercial plans in the U.S. are enabling early signs of portfolio recovery. AME and APMEA performed well, with a strong revenue and profit performance, led by our well-balanced portfolio.
Our refined strategy commits us to ‘Building a Smokeless World’, a predominantly smokeless business, with 50% of our revenue from Non-Combustibles by 2035. Consistent with this vision, and taking into account the current macro-economic pressures impacting the U.S. combustibles industry, the growth of illicit single-use vapour products and uncertainty around a potential menthol ban in the U.S., we have taken a non-cash impairment charge of £27.3 billion, mainly relating to our acquired U.S. combustibles brands.
We are investing to strengthen our U.S. business, accelerate innovation momentum, and enhance capabilities that support our strategic delivery. We expect these investments, together with the U.S. macro-economic pressures, will impact 2024. Thereafter, we will progressively build to deliver 3-5% organic revenue, and mid-single digit adjusted organic profit from operations growth by 2026 on a constant currency basis. We are committed to continuing to reward shareholders with strong cash returns throughout this period.
I am confident that the choices we have made will drive our long-term success and create sustainable value for all our stakeholders.”
| Performance highlights | Reported | Adjusted1 | Adjusted1 Organic2 | ||||
| For year ended 31 December 2023 | Current | vs 2022 | Current | vs 2022 | vs 2022 | ||
| rates | (current) | rates | (constant) | (constant) | |||
| Cigarette and HP volume share | -10 bps | ||||||
| Cigarette and HP value share | -50 bps | ||||||
| Non-Combustibles consumers3 | 23.9m | +3.2m | |||||
| Revenue (£m) | £27,283m | -1.3% | £27,283m | +1.6% | +3.1% | ||
| Revenue from New Categories (£m) | £3,347m | +15.6% | £3,347m | +17.8% | +21.0% | ||
| (Loss)/profit from operations (£m) | £(15,751)m | -250% | £12,465m | +3.1% | +3.9% | ||
| Category contribution – New Categories (£m)4 | £17m | n/m | n/m | ||||
| Operating margin (%) | (57.7)% | -95.8 ppts | +45.7% | +60 bps | +40 bps | ||
| Diluted (loss)/earnings per share (pence) | (646.6)p | -322% | 375.6p | +4.0% | +5.2% | ||
| Net cash generated from operating activities (£m) | £10,714m | +3.1% | |||||
| Adjusted cash generated from operations (£m) | £7,824m | +2.9% | |||||
| Cash conversion (%) | (68.0)% | -167 ppts | +100% | -40 bps | |||
| Borrowings5 (£m) | £39,730m | -7.9% | |||||
| Adjusted Net Debt (£m) | £33,940m | -7.4% | |||||
| Dividend per share (pence) | 235.52 | +2.0% | |||||
The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed from page 51, with reconciliation from the most comparable IFRS measure provided.
Notes: 1. See page 31 for discussion on adjusting items. 2. Organic measures exclude the performance of businesses sold (including the Group’s Russian and Belarusian businesses) or acquired, or that have an enduring structural change impacting performance that may significantly affect the users’ understanding of the Group’s performance in the current and comparator periods to ensure like-for-like assessment across all periods. 3. Internal estimate, excluding Russia and Belarus, see page 45. 4. New Categories contribution is positive in 2023 at £17 million (at current rates of exchange), turning from a loss of £366 million in 2022. Accordingly, the movement is deemed not meaningful (or n/m) in % terms. 5. Includes lease liabilities.
Sharpening our Vision and Strategic Execution
Tadeu Marroco, Chief Executive
When appointed as Chief Executive, I was clear that the fundamentals of our strategy remain correct. However, we need to clarify our vision and strengthen our execution.
We are therefore refining our A Better TomorrowTM purpose, with a vision to ‘Build A Smokeless World’.
Our vision is clear and focused on migrating cigarette consumers to reduced-risk*† alternatives.
At the same time, we will manage our cigarette business responsibly, enabling the returns to continue to invest in growing smokeless alternatives.
Leading in adult consumer choice is the cornerstone of our vision. Consumers are not choosing a single alternative to smoking, and BAT is very well positioned in all three of the main alternatives to smoking:
– Vuse is the global market leader in Vapour, a category that is the fastest growing alternative to smoking;
– glo, our HP brand, is the global #2 brand in a category that is a strong substitutional offer; and
– Velo is a leading Modern Oral brand in a rapidly growing category with the lowest toxicant profile of all New Categories.
We have refined our strategy, enabling sharper execution with a clear organisational line of sight across three strategic pillars:
– Quality Growth: Focused on more balanced top-line and bottom-line delivery, built on the strength of our global brands and innovation;
– Sustainable Future: Our first-class science, more active external engagement and regulatory focus driving our future sustainability; and
– Dynamic Business: A modern and progressive organisation, that is both efficient and effective in its operations, is data driven and creates the greatest financial flexibility possible to invest and generate cash returns.
I am pleased with the progress made across each of our key focus areas in 2023, each aligning with our strategic pillars:
– Drive profitability in New Categories: Reaching profitability (on a category contribution basis) two years ahead of our original target;
– U.S. combustibles value growth: Delivering sequential volume and value share growth since January 2023;
– Significantly strengthening Heated Products: Launching our first-to-market tobacco-free offer, veo, and the launch of glo Hyper pro in Italy and Poland, combined with the recently announced global settlement with PMI that resolves all ongoing patent infringement litigation between the parties related to our HP and Vapour products.
– Lead responsible New Category stewardship: Taking a pro-active, science-driven approach to external affairs, as demonstrated by our campaign in support of the ambition for a smoke-free Britain, through appropriate and responsible Vapour regulation; and
– Enhance financial flexibility: Delivering our fourth consecutive year of 100% operating cash conversion, enabling us to return a total of £26.2 billion to shareholders since 2019.
A key part of our Dynamic Business pillar is financial flexibility, disciplined capital allocation and strong shareholder distributions. We remain committed to our 25-year track record of consistent dividend growth, rewarding our shareholders through all economic cycles.
Over the next five years, we expect to generate around £40 billion of free cash flow before dividends.
In addition, we continue to pursue all opportunities to enhance balance sheet flexibility and, as part of this, we regularly review our stake in ITC. We recognise 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 is subject to numerous share capital changes and regulatory restrictions. We have been actively working for some time on completing the regulatory process required to give us the flexibility to monetise some of our shareholding and will update you at the earliest opportunity.
It is an exciting time to be part of BAT and I look forward to working with my colleagues around the globe to Build a Smokeless World and drive A Better Tomorrow™.
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
†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.
2024 Outlook
– Global tobacco industry volume expected to be down c.3% mainly due to the U.S. and Indonesia.
– Low-single figure organic revenue* growth and continued progress towards our 2025 £5 billion New Category revenue ambition.
– Low-single figure organic adjusted profit from operations growth*, including an expected c.2% transactional FX headwind.
– Performance expected to be second half weighted given planned investment phasing and expected slow recovery in U.S. macros.
– Expected translational foreign exchange headwind of 3% on full year adjusted profit from operations growth.
– Operating cash flow conversion in excess of 90%.
– Progress towards the middle of our 2-3x adjusted net debt/adjusted EBITDA corridor*.
– Commitment to dividend growth in sterling terms*.
* at constant rates of exchange.