British American Tobacco Shines: Resilient Growth & New Categories Triumph

  • British American Tobacco reports resilient half-year performance despite challenging economic conditions.
  • New Categories revenue grows by 26.6% (at constant FX), on track for £5 billion target by 2025.
  • Improved U.S. premium combustibles volume share and stronger sustainability efforts contribute to positive outlook.
British American Tobacco

British American Tobacco p.l.c. (BATS), one of the world’s leading tobacco companies, released its Half-Year Report for the first six months of 2023, showcasing a robust performance and notable progress in its New Categories segment. Despite facing headwinds from global economic challenges, the company remains optimistic about its full-year outlook.

Strong Revenue Growth and New Categories Progress

The Half-Year Report indicated a 4.4% increase in revenue for British American Tobacco, with a growth rate of 2.6% at constant foreign exchange (FX) rates. Key to this growth was the impressive performance of the New Categories segment, which reported a significant 26.6% increase in revenue at constant FX rates. This development puts the company on track to achieve its £5 billion New Category revenue target by 2025.

Additionally, revenue from Non-Combustibles rose to 16.6% of the Group’s total revenue, an improvement of 180 basis points compared to the previous fiscal year (FY22). The company’s focus on New Categories resulted in a £201 million increase in Group profit, indicating a positive trajectory towards reaching its New Category profitability target by 2024.

Encouraging U.S. Performance and Improved Portfolio Management

British American Tobacco’s U.S. premium combustibles business demonstrated sequential performance improvement since January 2023, highlighting the success of sharper portfolio management strategies. As a result, the company’s premium combustibles volume share in the U.S. showed early signs of stabilization. Despite challenging conditions in the U.S. market, the company’s global footprint helped offset revenue declines through strong performances in other regions.

Enhanced Sustainability Efforts

The company also emphasized its commitment to sustainability, building on its Double Materiality Assessment. Collaboration across the value chain has been intensified to drive progress towards sustainability targets, including Scope 3 emissions and biodiversity.

Financial Performance and Dividends

Reported profit from operations surged by an impressive 61.4%, with a reported operating margin of 44.2%. On an adjusted basis, profit increased by 3.6% at constant FX, with an adjusted operating margin of 44.3%. Diluted earnings per share (EPS) witnessed significant growth of 118% to 176.0p, while adjusted diluted EPS rose by 5.3% at constant FX.

Shareholders received an interim dividend of 230.9p per ordinary share for the year ending 31 December 2022. The May 2023 quarterly dividend, amounting to 57.72p per ordinary share, was paid to shareholders on the UK main register and South Africa branch register on 3 May 2023 and to holders of American Depositary Shares (ADSs) on 8 May 2023. The remaining quarterly dividends will be paid on the applicable record dates.

Outlook and Future Prospects

Despite global challenges such as high inflation and slower economic growth, British American Tobacco’s Chief Executive, Tadeu Marroco, expressed confidence in the company’s performance and progress. He highlighted the strong momentum in New Categories, with revenues up 29% and consumers of Non-Combustible products increasing by 1.5 million compared to FY22. While more focus is required in the U.S., the sequential improvement in the premium U.S. combustibles business is encouraging.

Marroco acknowledged that the journey towards New Category profitability might not be linear due to investment phases in innovation platforms. Nevertheless, he remains optimistic that New Categories will make a positive contribution in 2024. The restructured Management Board is expected to drive sharper execution, enhanced collaboration, and an inclusive culture across the Group, further bolstering the company’s prospects.

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