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.