TIDMBATS
RNS Number : 9914H
British American Tobacco PLC
09 December 2020
9(th) December 2020
BRITISH AMERICAN TOBACCO p.l.c.
2020 Second Half Pre-Close Trading Update
TRANSFORMING, INVESTING AND GROWING
Trading update - ahead of closed period commencing 1(st) January
2021.
Jack Bowles, Chief Executive:
"W e are transforming our business in order to build A Better
Tomorrow. Reducing the health impact of our business through
providing a range of enjoyable and less risky products is the
greatest contribution we can make to society. We continue to be
clear that combustible cigarettes pose serious health risks, and
the only way to avoid these risks is not to start or to quit. BAT
encourages those who would otherwise continue to smoke to switch
completely to scientifically substantiated reduced risk
alternatives. We are growing our New Category business as fast as
possible and we are proud to now have around 13 million
non-combustible product consumers. We are continuing to increase
investment in our three New Categories of potentially reduced risk
cigarette alternatives, capitalising on our momentum, while
continuing to deliver on our financial commitments.
Throughout 2020, our priority has been the health and wellbeing
of our employees. COVID-19 has made this a difficult year for
everyone, and I am proud of the continued commitment and dedication
of our people around the world. It is their hard work that has
ensured we are on track to deliver a strong set of results in 2020,
given this backdrop.
We are confident about the future for BAT and are committed to
our 2025 New Category revenue ambition of GBP5bn.
W hile the environment remains uncertain, due to the continuing
challenges of COVID-19, the business is performing strongly."
We are delivering on our three strategic priorities. We are
growing share(1) in the New Categories, with further increasing
investment in H2, fuelled by continued strong value growth in
combustibles and the benefits of becoming a faster, simpler, more
agile business through Project Quantum. As a result, we are
maintaining 2020 guidance, while providing the following
detail:
-- Constant currency adjusted revenue growth now expected to be
at the high end of the 1-3% range. This incorporates:
o Expected revenue headwind from COVID-19 reduced to c.-2.5%
(previously c.-3%)
o Improved FY 2020 global industry cigarette and THP volume
decline expected of c.-5% (previously c.-7%); US industry expected
to be broadly flat (previously c.-2.5%)
o Absorption of a one-off impact to New Category revenue of
GBP50m, following our decision to withdraw glo Sens from Japan
o The impact of a strong H2 2019 comparator
-- Mid-Single Figure constant currency adjusted diluted EPS growth, reflecting:
o Further spend on New Categories, expected to increase by
c.GBP200m in H2, capitalising on investment opportunities and good
momentum in the business
o The significant negative impact of COVID-19 on associate
income
-- Continued deleveraging of the balance sheet to around 3x
Adjusted Net Debt** to Adjusted EBITDA*** by the end of 2021
-- A dividend pay-out ratio of 65% of adjusted diluted EPS and
growth in sterling terms, supported by a strong liquidity
position
(1) Volume share in THP, Modern Oral and value share in
Vapour
Performance highlights are expected to include :
-- Continued strong New Category share growth(2)
-- Increasing New Category revenue growth in H2, despite a strong prior period comparator
-- Corporate value and volume share, currently up 20bps and 30bps YTD, respectively
-- Strong cigarette price mix at a group level, driven by a
continued good performance in our developed market businesses and
despite lapping a strong prior year comparator
-- A strong performance in our US business, with continued
cigarette value share growth, up 40bps YTD
-- FY 2020 global industry cigarette and THP volume expected to
moderate to c.-5%, reflecting the earlier than anticipated lifting
of the sales ban in South Africa, continued resilience in developed
market volume and improvement in emerging market volume
-- US cigarette industry volume expected to be broadly flat,
following continued volume resilience in the market, down around
-0.4% YTD Oct on a sales-to-retail (STR) basis
-- Growth in adjusted operating margin, while continuing to
increase investment in New Categories, fuelled in part by
accelerated savings from Project Quantum
-- Significant negative impact on associate income from
COVID-19, with the inclusion of results from ITC three months in
arrears
-- Continued expectations for an underlying tax rate slightly lower than 25.5%
-- Strong FY operating cash flow conversion in excess of 90% of
adjusted profit from operations
Applying current foreign exchange spot rates*, we expect a
translation headwind of -3.3% on FY 2020 adjusted diluted EPS
growth, with the impact being -2 to -3% for FY 2021.
Trading update detail:
Continued strong New Category share2 growth and leadership in
device sales with Vuse in the Top 5(3) vapour markets
-- Vuse is the fastest growing international vapour brand
growing 7 ppts v FY 19 to 26% value share YTD Sept in the Top 5(3)
vapour markets
o Vuse/Vype No.1 in device sales in all Top 5 markets with a
device share in excess of 50% across the Top 5 markets
o Vuse Alto value share in the US is up nearly 11 ppts v FY 19
to 19.2% YTD, with total Vuse family value share at 24.1% YTD,
continuing to close the gap on the market leader, and achieving
value share leadership in 7 US states
o Vuse has achieved market leadership in Canada with a value
share of 64% in Oct, reflecting a very successful brand migration
from Vype
-- Glo has reached a 5.9% volume share of total nicotine in
Japan and continues to grow share in ENA, with our category volume
share in the Top 8(4) THP markets now around 15%
o In Japan, glo grew +90bps v Dec 19 to a record volume share of
5.9% in Oct, driven by a strong performance from glo Hyper which
reached 2.3% volume share
o Withdrawal of glo Sens in Japan leading to a one-off revenue
impact of GBP50m in 2020
o THP volume growth expectation of close to 20%, with revenue
expected to decrease, mainly due to the year on year impact of the
withdrawal of Sens and excise harmonisation in Japan
o In Moscow, glo reached a total nicotine volume share of 3.3%
in October and a category volume share of 18%, driven by Hyper
o glo Hyper is now launched in 17 markets with further expansion
planned in 2021
(2) Volume share in THP, Modern Oral and value share in
Vapour
3 Top 5 vapour markets by revenue: US, Canada, UK, France, Germany
4 Top 8 THP markets by revenue: Japan, South Korea, Russia,
Italy, Germany, Romania, Ukraine, Poland
-- Velo/Lyft in Modern Oral consolidates leadership outside the
US and strengthens its position in the US with an expanded
portfolio
o Consolidating Modern Oral category leadership in Scandinavia
with a volume share of 61.5% and 67.0% in Sweden and Norway, and
respective volume share of the total oral market of 4.5% and 14.8%,
up 200bps and 360bps YTD v FY 19
o Velo in the US strengthened with the acquisition of Dryft,
expanding the product range from 4 SKUs to 28, with representation
in the above 6mg segment and additional flavours
o Velo branded Dryft products already launched in Circle K
stores in the US, starting to increase distribution from Dryft's
current limited availability in c.20,000 outlets
o US production capacity build underway, with unconstrained
capacity expected to be reached around mid-2021
Excellent performance in combustibles, with strong price mix and
value and volume share gains
-- Corporate value share up 20bps YTD, with volume share up over 30bps YTD
-- Group FY cigarette volume expected to be ahead of the industry
-- Strategic Brands (now 67% of Group volume) up 30bps YTD in
volume share and up 40bps YTD in value share
US performing strongly, with accelerating value share gains from
Vuse and an excellent combustible performance benefiting from
robust volume and good pricing driving continued value share
growth
-- Expected strong constant currency revenue growth, supported
by both our non-combustible and combustible businesses and strong
price mix, with no acceleration in downtrading
-- Continued strong value share performance, with corporate
value share up 40bps YTD, and premium share up 50bps YTD, driven by
Natural American Spirit and Newport.
-- Strategic Brands volume share up 20bps YTD; corporate volume share up 10bps YTD to 35%
Expected de-leveraging to around 3x adjusted net debt** to
adjusted EBITDA*** by end 2021
-- Expected continued strong operating cashflow conversion in
excess of our target of 90% of adjusted profit from operations for
FY20
-- Expected interest cover in excess of 7x for FY20 and,
following recent successful debt issuances, average debt maturity
above 10 years, with maximum future annual debt maturities no
higher than GBP4bn.
-- Medium-term rating target remains BBB+/Baa1, with a current rating of BBB+/Baa2****
Further strong external recognition of our ESG strategy building
on our BBB MSCI rating, and the recent improvement of our
Sustainalytics score from 28.2 to 27.8 including;
-- BAT was again named in the Dow Jones Sustainability Indices
(DJSI) for the 19(th) consecutive year and was the only tobacco
company to be included in the DJSI World Index in November
-- BAT was included in the Financial Times Diversity Leaders
list for a second consecutive year, with our score increasing from
7.08 to 7.23 in November
-- We were included in the 'A List' by the Carbon Disclosure
Project (CDP) for climate change action for the second year in a
row in November
-- We are launching a sustainability focus report on Human
Rights, tomorrow, December 10(th) , which will be the first by any
company in the tobacco industry
For further information, please contact:
British American Tobacco Press Office
+44 (0) 20 7845 2888 (24 hours) | @BATPress
British American Tobacco Investor Relations
Mike Nightingale / Victoria Buxton / William Houston / John
Harney
+44 (0) 20 7845 1180 / 2012 / 1138 / 1263
Webcast and Conference call - The conference call will begin at
9.00am (BST).
You can access the audio webcast via our website. You can also
listen via conference call by dialling the numbers below, using the
password: BAT Pre-Closing Update
United Kingdom Toll-Free: 0808 109 0700
United Kingdom Toll: +44 (0) 20 3003 2666
United States Toll-Free: 1 866 966 5335
South Africa Toll-Free: 0 800 980 512
A playback facility for the conference call will be available
online via www.bat.com .
Market share data (unless otherwise stated) is at October 2020
and volume data is based on YTD October.
* Current exchange rates of USD/GBP 1.283 as at 7th December
2020
** Adjusted Net Debt is not a measure defined by IFRS. Adjusted
Net Debt is total borrowings, including related derivatives, less
cash and cash equivalents and current investments held at fair
value, excluding the impact of the revaluation of Reynolds American
Inc. acquired debt arising as part of the purchase price allocation
process.
*** Adjusted EBITDA is not a measure defined by IFRS. Adjusted
EBITDA is profit for the year before net finance costs/income,
taxation on ordinary activities, depreciation, amortisation,
impairment costs, the Group's share of post-tax results of
associates and joint ventures, and other adjusting items.
****A credit rating is not a recommendation to buy, sell or hold
securities. A credit rating may be subject to withdrawal or
revision at any time. Each rating should be evaluated separately of
any other rating.
As used herein, volume share refers to the retail sales volume
of the product sold as a proportion of total retail sales volume in
that category and value share refers to the retail sales value of
the product sold as a proportion of total retail sales value in
that category. Please refer to the 2019 Annual Report on Form 20--F
for a full description of these measures, together with a
description of other Key Performance Indicators (KPIs), on page
257.
New Categories comprises Tobacco Heating Products (THP), Vapour
and Modern Oral.
Note on Non -GAAP Measures
This announcement contains several non-GAAP measures used by
management to monitor the Group's performance. For the non-GAAP
information contained in this announcement, no comparable GAAP or
IFRS information is available on a forward-looking basis, as the
effect of adjusting items and rates of exchange, which could be
significant, may be highly variable and cannot be estimated with
reasonable certainty.
The Group's Management Board regularly reviews the measures used
to assess and present the financial performance of the Group and,
as relevant, its geographic segments, and believes that these
measures provide additional useful information to investors.
Certain of our measures are presented based on an adjusted basis
and on a constant currency basis. Please refer to the 2019 Annual
Report on Form 20--F for a full description of each measure
alongside non-financial KPIs, pages 257 to 268.
The principal non-GAAP measures which the Group uses and that
are contained in this announcement are adjusted revenue and
adjusted diluted earnings per share which are before the impact of
adjusting items and are derived from revenue, and diluted earnings
per share, respectively. This announcement also contains adjusted
operating margin, a non-GAAP measure defined as adjusted profit
from operations as a percentage of adjusted revenue and underlying
tax rate, a non-GAAP measure defined as the tax rate incurred
before the impact of adjusting items and to adjust for the
inclusion of the Group's share of post-tax results of associates
and joint ventures within the Group's pre-tax results.
This announcement also contains adjusted net debt and adjusted
EBITDA. The Group uses adjusted net debt and adjusted EBITDA to
assess its financial capacity. The Management Board believes that
these additional measures, which are used internally, are useful to
the users of the financial statements in helping them to see how
business financing has changed over the year.
Adjusting items, as identified in accordance with the Group's
accounting policies, represent certain items of income and expense
which the Group considers distinctive based on their size, nature
or incidence. These include significant items in revenue, profit
from operations, net finance costs, taxation and the Group's share
of the post--tax results of associates and joint ventures which
individually or, if of a similar type, in aggregate, are relevant
to an understanding of the Group's underlying financial
performance. Although the Group does not believe that these
measures are a substitute for IFRS measures, the Group does believe
such results excluding the impact of adjusting items provide
additional useful information to investors regarding the underlying
performance of the business on a comparable basis.
Adjusting items in respect of adjusted revenue refers to the
excise on bought-in goods in 2019 and earlier periods that the
Group acquired and sold, for a limited period and were recorded in
accordance with IFRS as a cost of sale and within revenue, with a
dilutive effect on operating margin. Once the short-term
arrangements cease, the goods will be manufactured by the Group,
and the excise, in accordance with Group policy, will not be
included in cost of sales or revenue - leading to a reduction in
revenue and improvement in operating margin that does not represent
the underlying performance of the Group. As short-term contract
manufacturing agreements in ENA, to which such adjustments relate,
have either ended in 2019 or will be immaterial in 2020, 2019 is
the last year where the Group adjusted for the excise on bought-in
goods.
The Group's management reviews a number of our IFRS and
non--GAAP measures for the Group and its geographic segments at
constant rates of exchange. This allows comparison of the Group's
results, had they been translated at the previous year's average
rates of exchange. The Group does not adjust for the normal
transactional gains and losses in operations that are generated by
exchange movements. Although the Group does not believe that these
measures are a substitute for IFRS measures, the Group does believe
that such results excluding the impact of currency fluctuations
year--on--year provide additional useful information to investors
regarding the operating performance on a local currency basis.
Forward looking statements
This announcement does not constitute an invitation to
underwrite, subscribe for, or otherwise acquire or dispose of any
British American Tobacco p.l.c. ("BAT") shares or other securities.
This announcement contains certain forward-looking statements,
including "forward-looking" statements made within the meaning of
Section 21E of the United States Securities Exchange Act of 1934,
regarding our intentions, beliefs or current expectations
concerning amongst other things, our results of operations,
financial condition, liquidity, prospects, growth, strategies and
the economic and business circumstances occurring from time to time
in the countries and markets in which the Group operates, including
the projected future financial and operating impacts of the
COVID-19 pandemic.
These statements are often, but not always, made through the use
of words or phrases such as "believe," "anticipate," "could,"
"may," "would," "should," "intend," "plan," "potential," "predict,"
"will," "expect," "estimate," "project," "positioned," "strategy,"
"outlook," "target" and similar expressions.
All such forward-looking statements involve estimates and
assumptions that are subject to risks, uncertainties and other
factors. It is believed that the expectations reflected in this
announcement are reasonable but they may be affected by a wide
range of variables that could cause actual results to differ
materially from those currently anticipated.
Among the key factors that could cause actual results to differ
materially from those projected in the forward-looking statements
are uncertainties related to the following: the impact of
competition from illicit trade; the impact of adverse domestic or
international legislation and regulation; changes in domestic or
international tax laws and rates and the impact of an unfavourable
ruling by a tax authority in a disputed area; adverse litigation
and dispute outcomes and the effect of such outcomes on the Group's
financial condition; changes or differences in domestic or
international economic or political conditions (including as a
result of COVID-19); adverse decisions by domestic or international
regulatory bodies; the impact of market size reduction and consumer
down-trading; translational and transactional foreign exchange rate
exposure; the impact of serious injury, illness or death in the
workplace; the ability to maintain credit ratings and to fund the
business under the current capital structure; the inability to
develop, commercialise and deliver the New Categories strategy; and
changes in the market position, businesses, financial condition,
results of operations or prospects of the Group.
Past performance is no guide to future performance and persons
needing advice should consult an independent financial adviser. The
forward-looking statements reflect knowledge and information
available at the date of preparation of this announcement and BAT
undertakes no obligation to update or revise these forward-looking
statements, whether as a result of new information, future events
or otherwise. Readers are cautioned not to place undue reliance on
such forward-looking statements.
No statement in this communication is intended to be a profit
forecast and no statement in this communication should be
interpreted to mean that earnings per share of BAT for the current
or future financial years would necessarily match or exceed the
historical published earnings per share of BAT.
Additional information concerning these and other factors can be
found in the Company's filings with the U.S. Securities and
Exchange Commission ("SEC"), including the Annual Report on Form
20-F filed on 26 March 2020 and Current Reports on Form 6-K, which
may be obtained free of charge at the SEC's website,
http://www.sec.gov, and the Company's Annual Reports, which may be
obtained free of charge from the British American Tobacco website
http://www.bat.com.
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