British American Tobacco Industries, p.l.c.

Good morning, everyone. I'm Victoria Buxton, Group Head of Investor Relations, and with me this morning are Tadeo Morocco, our Chief Executive, and Soraya Bencik, our Chief Financial Officer. Welcome to our 2025 first half pre-closed conference call. I hope you're well, and I'd like to thank you for taking the time to join us this morning. Before we begin, I need to draw your attention to the cautionary statement regarding forward-looking statements, as well as the notes and disclaimer contained in the trading update. Unless stated otherwise, our comments will focus on constant currency adjusted measures, which include adjustments related to profit from our Canadian combustibles business. All share data is year-to-date average to March 2025 versus full year 2024 average. I will now hand over to Tadeo with a reminder that, as always, there'll be an opportunity to ask questions later on in the call.

Thank you, Victoria. Good morning, everyone, and welcome. Our revenue performance year to date is slightly ahead of our previous guidance, and we now expect to deliver full year revenue growth of 1% to 2%, supporting 1.5% to 2.5% adjusted profit from operations growth in 2025. I'd like to begin with four key takeaways from today's update. First, I'm very pleased that we expect to return to revenue and profit growth in the US for the first half and the full year, driven by strengthening combustibles delivery and an excellent modern oil performance led by the successful VeloPlus launch. Second, I'm excited about the new categories innovations we are rolling out in a target way as part of our deployment here. and which we expect to accelerate our H2 revenue performance. Third, I'm encouraged by our quality growth progress, balancing top and bottom line delivery, and prioritizing investments to the largest profit pools. Through this, we expect to continue to improve new category contribution margin in the first half and full year. And lastly, I'm pleased that we continue to enhance our financial flexibility, driven by strong cash conversion and the recent partial monetization of our ITC stake, enabling an increased share buyback to £1.1 billion in 2025. Our financial discipline will also drive further cost savings and smart reinvestment. Together, this underpins our commitment to delivering our mid-term algorithm in 2026. Let's start with combustibles, where we have continued to offset volume declines with robust price mix and efficiency gains. Volume and value share in top markets are down 10 base points, respectively, with gains in the US offset by APMEA and heightened competitive activity in key AME markets. The US macroenvironment remains challenging. In addition, the ongoing proliferation of illicit single-use flavored vapor products is continuing to impact the pace of combustible's industry volume decline. As a result, industry volume remains under pressure, down around 9% year-to-date on a sales-to-retail basis, and down around 11% excluding the deep discount segment where we are not present. Within this context, I'm delighted that we expect our U.S. combustibles business to return to both revenue and profit growth in the first half. Our commercial actions, investment in our portfolio, and improved execution are driving improved volume and value share performance, both up 10 basis points. Excluding the deep discount segment, we are not present. We gained 60 base points of volume share driven by natural American spirit and luck strike, which remains the fastest growing U.S. combustible brand. Overall, we are encouraged by the continued traction of our investments, which we expect to drive a return to U.S. financial growth for the first time in three years. In AME, we have continued to deliver resilient combustibles performance with robust pricing driving revenue and operating profit growth, led by strong delivery in Brazil, Turkey, and Romania. In APMEA, growth in key markets, including Pakistan, is expected to be more than offset by deck size and regulatory headwinds in Bangladesh and Australia, as previously highlighted. Both markets are seeing significant industry volume declines year to date. In Bangladesh, consumers have been stretched following an increase in VAT and supplementary duties across a broad range of products and services in January's unprecedented interim budget, alongside the largest ever annual increase in the minimum price of cigarettes. As a result, tobacco has been one of the sectors most affected. In Australia, sustained excise increase above inflation for many years, alongside new tobacco regulations representing the biggest reform since planned packaging 2012, are accelerating industry volume declines ahead of another planned excise increase in September. As a result, we expect this ineffective government policy to further accelerate legal industry volume decline and continue to significantly fewer illicit trades, which already represents over 75% of nicotine usage. Together, we continue to expect these headwinds to impact 2025 group revenue growth by around 1% and group APFO growth by around 2%. Moving to new categories. In modern oil, Velo continues to deliver an excellent performance and we expect a strong double-digit revenue growth. Velo continues to gain volume share up 360%. 350 basis points to 29.7% in top markets across this fast-growing category. I'm excited by the successful launch of VeloPlus in the US, driving triple-digit revenue growth and strong market share gains. VeloPlus reached close to 12% volume share in April, driving almost 15% share of total modern oil in the US, up from 6% last year. Launched in late 2024, VeloPlus is now available in around 110,000 outlets, representing over 80% of the modern oral value pool. These results are a testament to both the quality of the product and also the improved strength and speed of our distribution capabilities, and I want to thank our US and Velo teams for their ongoing dedication to driving this momentum. We believe our continued leadership in EME, with 64% volume share of the modern auto category, reflects our superior portfolio with continued strong financial performances in Scandinavia, the UK and Poland, and we have more innovations planned for 82. In heated products, we expected low single-digit revenue growth in 81. Glow's volume share was down 90 basis points in top markets, impacted by a highly competitive environment in Japan and the continued phase-out of our legacy SuperSlims platform, alongside actions we have taken in AME to focus resource allocation in the largest profit pools. In AME, volume share was down 10 base points with continuous strong performance in Poland, Czech Republic and Spain and a stable share performance in Italy, offset by competitive dynamics in Germany and Romania. We are encouraged by the early performance of our new premium Glow Hilo range, including our first two-piece device in Serbia, and continue to gain consumer insights and critical learnings ahead of its phased rollout in key markets through the second half, which we expect to drive an acceleration in our performance. In vapor, views continue to be impacted by the proliferation of illicit vapor products in the US and Canada. Views maintained global value share leadership in track channels across top markets. While we had US value share leadership at 50%, legal industry volumes are down mid-teens year to date. While we are cautiously optimist regarding recent leadership change at FDA and CTP, it is still early days. We do not expect any meaningful impact from federal or state regulation and enforcement actions on our 2025 performance. Looking ahead, we are encouraged that at the state level, vapor directory and enforcement legislation has now been passed in 17 states. And we look forward to the implementation of these and more robust enforcement. In AME, our value chain tracker channels was up 10 basis points. the impact of illicit headwinds in Canada was more than offset by growth in Europe, up 40 basis points, where we are the fastest growing in the rechargeable segment, which returned to growth last year. Altogether, we expect our vapor revenue to decline by mid-teens in H1, driven mostly by continuing illicit headwinds and our sharpener focus on the largest profit pools. We expect an improved H2O revenue performance driven by the phased rollout of our new premium vapor product, VIUS Ultra, and continued target resource allocation. We have been rolling out VIUS Ultra in Canada since the end of Q1, and we are encouraged by the early consumer response to our differentiated, connected, and highly customizable offering. Altogether, we expect low single-digit new categories revenue growth in each one, impacted by illicit vapor in the US and Canada. For the full year, we expect an acceleration to mid-single-digit growth, mainly driven by the rollout of new category innovations in key markets from the middle of the year. Excluding the impact of the US and Canada vapor markets, we expect double-digit revenue growth for the full year. Turning to cash. BAT is a highly cash generative business, and we expect to deliver operating cash conversion in excess of 90% again in 2025, reflecting strong cash discipline and a laser focus on returns. I'm pleased with our progress in increasing financial flexibility, driven by continuous strong cash flow generation and the recent completion of a partial monetization of our stake in ITC, enabling us to increase our share buyback by 200 million to 1.1 billion pounds in 2025. Due to the time of LIPF purchase and MSA payments, our cash flow is always second half weighted. We continue to focus on the leveraging and we expect to be back within our target 2 to 2.5 times adjusted net debt to adjust the BTA range by the end of 2026. To conclude, before we move to Q&A, we are making good progress, led by a return to growth in the US and excellent momentum in Northern Ireland globally. While there is still more to do, I'm certain that the choice we have made and the actions we are taking are the right way forward. Our year-to-date revenue performance is slightly ahead of our previous guidance. We are now on track to deliver 1% to 2% revenue growth and 1.5% to 2.5% adjusted profit from operations growth for the full year, with the second half waiting. Our guidance for 2025 includes our current assessment that we expect a minimal direct impact from enacted tariffs. While the situation remains fluid and negotiations are ongoing, we continue to closely monitor developments And in the U.S., specifically, we benefit from a majority locally sourced supply chain and domestic manufacturing production, and we are working on mitigating actions to minimize any potential impact as necessary. We also continue to closely monitor the evolution of macroeconomic policy on consumer demand and purchasing patterns, both in the US and globally. And while it is still early days, to date we have not seen any material change to pre-existing consumer trends. I'm excited about the future for BAT and confident that we will return to our mid-term algorithm in 2026. We are committed to delivering long-term sustainable growth and value for all our stakeholders, while rewarding shareholders through strong cash returns, including our progressive dividend and sustainable share buyback. Thank you for listening. Soraya and I will now be very happy to take your questions.

Thank you. Ladies and gentlemen, if you would like to ask a question on today's call, please sign it by pressing star 1 on your telephone keypad. Again, that is star 1 for your questions today. And our first question comes from James Edward Jones from RBC. Please go ahead. Your line is now open.

Good morning, guys. Peter, is there any significance in the change of wording around the dividend? I think previously you referred to being committed to increasing the dividend in sterling terms, and that has changed to a progressive dividend. Should we read anything into that?

No, not really. That's exactly the meaning about progressive dividend in our views. It's about a continued growing dividend in sterling terms.

Got it. Thank you very much.

Thank you. And up next, we have a question from Gaurav Jain from Backlease. Please go ahead.

Hi, good morning, Taddeo. Good morning, Soraya. So a couple of questions from me. So the first is that you have upgraded your revenue growth guidance from 1% to 2%. But your new category revenue guidance is below what consensus was. Now, I know that you never gave a guidance for new category revenue earlier, but would you be able to help us bridge the gap? Like where exactly is the upgrade to full year revenue coming from?

Yeah, the combustible business is doing better, mainly in the U.S., from what we were originally expecting. And that's the reason why we are changing from circa to one to two. This is not flowing through to the bottom line because we want to make sure that we have the right resource to carry on on the deployment plans that we have set ourselves for 2025.

And, Gaurav, if I can just add a little bit of color on new categories. I mean, the upgrade in NTO is primarily the U.S. combustibles doing better. But in new categories, although we have a decline in vapor, we have very, very strong growth in VLO, pretty much everywhere. So I think in that headline number, there is a mixture of a very strong performance of VLO in the U.S. and internationally, as well as, but unfortunately, it's offset by the decline that we're seeing in VAPOR.

Thank you. My second question is on interest expense. So your interest expense guidance has not changed, even though, you know, pound has trended. So, you know, of course, it impacts your reported financials, but then it helps you on the debt side and interest expense. And then we have also sold some ITC stakes. So you have received some cash from it, about a billion pounds you're using to deliver. So why isn't the interest expense guidance not changing?

You are referring to the interest expense of 1.8? Yes, exactly. It's still the same, Gaurav, of 1.8? Yes.

So my question is, why isn't it? becoming better because the pound is appreciated. It should have a beneficial impact on interest expense. And then the ITC state sale has also netted you some cash. So leverage is lower, so your interest expense could have been coming down.

Yeah, but look, this is all rounded numbers, no? And we just conclude the operations in ITC. The refinance costs are a bit higher than what we had planned before. So there is still a lot of volatility, as you can see in the market in terms of you know, 10 years bond in the US and all that. And so there is, we are taking a more cautious approach to repeat what we have said before in terms of interest rate. And if there is any variance, we will update in this in the two term. But at this point in time is around the number around 1.8. And we don't want to, we don't see the need to change that.

No, we haven't changed the forecast, Gaurav. And the ITC sale, we've just actually completed now. So it hasn't had a significant impact on the net finance costs.

Sure. And then the final question is on the ITC stake, whatever is left now. So how should we think about it? And, you know, of course, the lower the stake becomes, the bigger the argument that it is a financial stake and not a strategic stake. So how should investors think about the ITC stake?

No, the ITC stake is still for us a strategic investment. It's not a financial investment. And I explained this in the past. India, because of the size of the markets, the demographics, the potential GDP per capita growth that we are seeing, the fact that ITC is a very well-oiled and run company, and leader in distribution, leader in tobacco, in cigarettes. And we have a multi-layer relationship with ITC coming back for many years. And as you know, we have some inter-party relations with them in LEAF, in IT. And we have an expectation that new category can be a big factor in the Indian market in the future. And we want to preserve, as a consequence, a relevant stake in ITC. So we keep our two board directors. So we have influence on the board. And what we did is the bank board from time to time assess all the circumstance we have in terms of our capital structure. Obviously, there was an opportunity now to increase the buyback. We think the company is very undervalued. and uh and at the same time uh create some more buffers for us to cope with the with the canadian settlement that will happen in our view uh in the second half of the year and this is will be a headwind for us in terms of uh the leverage numbers as you know because uh you know the settlement means that all the cash trap there will have to to be paid down to the plaintiff so This is basically a decision to allow us to have financial flexibility to beef up a bit more the buyback and at the same time ensure that we get to the leverage corridor that we are aiming for between two to two and a half by the end of next year.

Amazing. Thank you so much.

Thank you, Gaurav.

Thank you. And from UBS, we now have Farhan Beya with our next question. Please go ahead. Your line is open.

Good morning, everyone. I'll stick with two questions, please. I want to go back to VeloPlus in the U.S. What data points provide you with confidence that VeloPlus' share momentum can be maintained post pricing normalizing and the leading brand fully returning back on shelf.

The key indicator is the try and retention. The levels of retention is very high. And we are seeing a very good response from consumers in different geographies within the US and different types of consumers. We have just now about to launch a new variants of VeloPlus with 3MG that was not in the market before. So we are quite confident that we can keep the momentum for the future.

And the second question sort of sticks with this sort of synthetic nicotine products. We noticed you recently acquired a flavored disposable vapor brand in the US. I appreciate it was a fairly small acquisition, but are you able to maybe share the plans to commercialize the product? and also where you estimate the current size of the disposable vapor category is in the U.S. and your share in that category.

Yeah, look, the marketing, the vapor marketing in the U.S., we estimate to be around $9 billion in revenue. And 70% of that is the illegal flavored products. And... So we made this acquisition, which is an attempt actually to understand a bit more the dynamics of these markets. There is no firm plan for us to commercialize the product at this point in time. We will be piloting this product in the next few months and understand the dynamics in terms of of of cannibalizations and the source of business and making a final call in terms of how we position that in our portfolio. And obviously, we are also looking for some measures with I would say moderate optimism with the new administration that could bring some more enforcement to the markets that today has been dominated by products that should be in the market in the first place. So the legal side of vapor is unfortunately reducing by meetings and that's exactly what is driving the views performance because we don't have a level playing field today in the US because unfortunately the vapor category that is growing is exactly in the space of these illegal flavor products and not the legal closed systems where we are present with views.

Perfect. Thanks, guys.

Thank you. And up next, we have a question from Ray William from Anchor Stockbrokers. Please go ahead. Your line is open.

Thank you. Hi. I just want to get back to the guidance. Like I say, you upped the revenue guidance. but yet the EBIT guidance is pretty stable. So that implies a bit of a margin squeeze. So I was just wondering, it looks like what I can read between the lines that the US business should be doing quite better on the margin side. So where is the, or what is behind this guidance of a reduced margin? Is it mainly because of apnea that's been very bad?

No. Just talking about the APFO and the second half of the guidance that we put, I think the important thing to understand here is that our margin is not guided lower. What is, we don't have a flow through because this is, as we said, this is our deployment year. So we're second half weighted in terms of rolling out of the innovations. So, basically, we didn't want to jeopardize or compromise the investments behind the rollouts, because we were rolling out GloHelo in the second half, we continued to roll out VeloPlus, and then we have UseUltra. But our margins will be expanding, both on new categories, on contribution margin and gross margin level. So that's primarily the reason why there hasn't been flow-through from the NTO upgrade, slight upgrade, to the APFO line. It's purely because of the reinvestment in the second half, even though the upgrade is primarily driven by the combustibles. I hope that's clear. But in terms of margin, we're not guiding down.

Okay. I just want to get back to the U.S. It looks like the U.S. performance is pretty strong on the combustible side. So you talk about a 10 basis point market share gain. So I just want to know, you know, if you talk about the overall market still down 9%. So... Are we, for a change, going to see maybe your volumes looking a little bit better than the overall market, given the market share gain? So that's my first, yeah. Okay, okay.

Go ahead, yeah.

No, no, I'll ask a follow-up after the answer.

First of all, the performance in the combustible is a consequence of all these investments that we call commercial plans over the last 18 months, two years. Just as a reminder, we have done, you know, we create a laddering of brands, mainly the new ports. We increased the coverage from 83% to 88% in the market. We increased our sales force by 10%. We work on the price relativeness to make it more competitive as well and bring back the competitiveness that we have lost in 2021. So we are, and we have invested a lot in terms of data as well and direct to consumer and customers. with reward programs and so on and revenue growth management. So this is a consequence of all those measures that have been put in place. But one thing that we cannot lose perspective is that we are not present basically in the deeper discount. And the size of decline in the deeper discount is actually higher than the full industry. So by the time we spoke about around 9% of the industry decline, the deeper discount actually, excluding the deeper discount, the decline is around 11%. So you have to compare our Reynolds volume against that reality. And in that case, we expect to perform better than the industry, excluding the deeper discount. But the overall industry is getting impacted by these elements where Reynolds is not present. Hope that is clear.

Excellent. And then just a final one. Maybe if you can just give us a little bit more color about where your focus will be on the rollout of Glow Hilo in the second half of the year. Presumably, on the list will be Japan, but I just want to hear from you. What the plans are.

Yeah, we are not disclosing, but you would expect, because we spoke about being focused on the biggest value pools. And these are these markets, like you said in your reference. But we will be targeting those high value markets for TH, for HP in the second half of the year.

Thank you very much.

Okay. Pleasure.

Thank you. And from JP Morgan, we now have Philip Spain with our next question. Please go ahead. Your line is open.

Good morning. Thanks very much for taking my questions. Just firstly, just going back to the U.S. combustibles performance, given, I suppose, the volume decline still implied to be in the high single-digit range, in terms of what's offsetting that to get back to revenue growth, can you just talk through how much pricing you've taken versus the mixed side as well that could be benefiting? And then just on the velo as well in the U.S., how are you feeling about capacity here given the very strong growth over the last few months? Is there a need to invest to add more capacity or are you happy with what you have at the moment? Thanks very much.

Okay, I'll start with Vilo. We are happy with the capacity we have. Remember that BAT being a global organization, we were able to mobilize machinery from outside the US and onshore in the US. So we have a very good capacity installed now in our factory in Tabacoville in the US. from where we are producing veal, so this is not a constraint for us. And your second point, the pricing has been strong in the US because the affordability is still there when you compare the price of cigarettes vis-a-vis consumer average pricing in the US. Obviously, consumers are more under pressure because of the macroeconomics and the flourish of these illegal vapor products that have an impact on combustible. But we are also seeing some better performance in brands like Newport, which explains a bit of the value increase that we are seeing there, which helps with the top line as well.

Thank you very much.

Thank you. And we now move on to the question from Bastien Algod from Bank of America. Please go ahead.

Good morning. Thank you for taking my question. We have recently seen an improvement at the industry level in U.S. combustibles. Whether consumer sentiments remain soft and the shelf lease, it seems to have increased. So what's driving this slight improvement since a few months? That's my first question.

Yeah, the U.S. is – remember that the oil price has – gas price has reduced substantially in some states in particular. And not everywhere, but in some states. And there is always this correlation, you know, in the sense that reduction in gas price is more supportive of – sales of cigarettes. So this is one of the mixed indications. From one side, consumer confidence, you are right, is still in the low. But on the other side, the gas price has improved in the sense that has reduced and give some more support for sales of cigarettes. But it's early days. We haven't seen impact on the tariffs on our previous trends, like I referred to in my opening. But we have to wait for a bit more months to see how this pans out. The full year guidance is still around more or less what we have seen in the previous year.

Okay, perfect. Thank you. And I have a second one on transactional effects for 2026. Now, given the weak dollar compared to last year, do you expect to have any, I would say, less negative headwinds compared to this year, 1.5% starting next year on your margin?

Sorry, the transactional effects that you're talking about is for this year?

No, for next year. Do you expect any improvement compared to this year?

I think this year it's important to note that in our numbers we have one and a half, let me start with that, one and a half percent of transactional effects. And where this is coming from, 65% is really coming from our key markets, Turkey, Nigeria, and Japan. So do we expect an easing of this next year? We expect similar levels, really. That's what we will expect. be looking at in our forecast. But this is what's driving primarily the 1.5% transactional effects that we have included within our numbers this year.

Perfect. Thank you.

Thank you. And our next question now comes from Rashad Kavan from Morgan Stanley. Please go ahead. Your line is open.

Hey, good morning, guys. Thank you for taking my questions. Just a couple for me, please. So on the U.S., first of all, combustibles, you had some inventory headwinds, obviously, in the first half last year that you're cycling through this first half. Are there any inventory moves to be aware of this year? Otherwise, is it fair to assume volumes will be significantly better than industry declines in the first half, given the comp base here? And I appreciate you said positive revenue. in U.S. combustibles in H-1. I wasn't sure for the full year, are you saying positive revenue for combustibles or for the U.S. as a whole?

Thank you. So you're right. You're going to have a benefit on the inventories because we are back to normality this year. So the comparator last year will translate into a better volume performance than you would otherwise expect. And my comment about going back to top line growth is not just for the half year, but also for the full year incombustible and the overall company as well.

Perfect. Thank you very much.

Thank you. We now take a question from Simon Hills from Citi. Please go ahead, your line is open.

Thank you, morning Soraya, morning Victoria. So just a couple from me please. Today, can you just go back to the tobacco category a little bit and talk about your confidence in Glowhilo as we look into the rollout for the second half. What data points have you seen from the consumer feedback in Serbia over the last few months versus perhaps when you updated us back at the full year results? So just interested in any anecdotal incremental confidence you've got there. And then secondly, just on Velo in the US, I think you said in your opening remarks that you're now in outlets covering, I think, 80% of the value pool. Would you expect to see that close to 100% by the end of the year?

Okay. On GlowHilo, this is clearly a breakthrough for Glow in terms of our platform. And because we have a new heating mechanism, we have a new consumables that brings much more satisfaction. We have a new display and we have connectivity. So it's a number of areas of improvement compared with the current platform that we have in the market. Despite the fact that we don't have the optimum portfolio that we'll be launching in the second half in the different other markets, in Serbia, the pilot that we have done with the portfolio that we have currently, we are already seeing a 50% increase in new consumers from the previous globe platform. coming from FMC and competition. And remember that this will be the first time ever that we'll be able to participate in the above WAP, the above weighted price segment of HP, which is where 80% of the value sits. because we're going to have our two-piece device and we'll be able to position the consumables in a price segment that we haven't had the chance to do before. So when you pull all this together, this translates into the excitement that we have about the launch of this new platform. When we, in terms of VILU, today we have 110,000 outlets presence. We expect to be around 130,000 outlets. And with that, a big chunk of the value of the category will be covered. We will be satisfied to get to this level by the end of the year.

Brilliant. Thank you.

Thank you. As there are currently no further questions in the queue, I would now like to hand the call back over to you, Tadeo, for any additional or closing remarks.

Okay. Thank you for joining us and for your questions. I hope that we will take away this key message from today. First, we are committed to driving value for our combustible business, which is key to funding our transformation. The U.S. is an important driver of this, and I am encouraged that we are returning to growth there for the first time in three years. We have continued to deliver robust combustible pricing across all three regions. In new categories, I'm delighted with the successful launch of VeloPlus in the US and continued strong growth of Velo globally. We expect our new category revenue growth to accelerate in two as we roll out exciting innovations in key markets alongside the further improvement in profitability. With this momentum, I'm confident that we will return to our midterm algorithm in 2026. Thank you again for joining us, and I look forward to updating you further at our half-year results on July 31st.