Non-combustibles drive resilient first half for BAT

British American Tobacco reported a resilient performance in its first-half results on Wednesday, maintaining its full-year guidance under a new chief executive.

The FTSE 100 nicotine giant reported a 4.4% increase in revenue to £13.44bn, or a 2.6% increase at constant currency, driven primarily by the growth in new categories, which saw a 26.6% revenue increase at constant exchange rates.

That progress puts BAT well on its way towards achieving its ambitious £5bn new category target by 2025.

Revenue from non-combustibles now constituted 16.6% of total group revenue, making for an increase of 180 basis points compared to the prior financial year.

The continued strong performance of products lines such as Vuse and Velo, coupled with the activation of commercial plans for Glo and the launch of Glo Hyper X2 Air, contributed to the growth.

Additionally, the firm was enthusiastic about an enhanced innovation pipeline in the new categories segment.

Combustible pricing meanwhile remained strong, with good revenue performances seen in the Africa, Middle East and Asia-Pacific regions offsetting any adverse impact from the US market.

The report did, however, highlight a sequential improvement in the US premium combustibles volume share in 2023, thanks to sharper portfolio management.

In terms of financials, BAT's reported profit from operations jumped 61.4% year-on-year to £5.94bn, with its reported operating margin rising 1,560 basis points to 44.2%.

It did note, however, that the prior period was affected by charges related to Russia and Belarus, provisions related to the US Department of Justice and the Office of Foreign Assets Control, and Quantum.

Adjusted profit at constant currency saw a 3.6% increase, with the adjusted operating margin rising 40 basis points to 44.3%.

Reported diluted earnings per share soared 118% to 176p, while adjusted diluted earnings per share were ahead 5.3% at constant exchange rates.

BAT noted that it recently made significant organisational changes, restructuring its management board in a bid to drive sharper execution, greater collaboration, and agility.

“Having been in my new role for 10 weeks, I'm pleased with the resilient performance of BAT in the first half of 2023 and the renewed sense of energy across the organisation,” said chief executive officer Tadeu Marroco.

“It is a challenging external environment - high inflation and slower global growth are impacting consumers and business.

“Yet our revenue, profit from operations and earnings are all up.”

Marroco said BAT was making progress in new categories, with revenues up 29% and the firm now close to breakeven, with consumers of non-combustible products up 1.5 million compared to the end of the 2022 financial year.

“While it's encouraging to see continued good performance in vapour and modern oral, we recognise more work is required in heated tobacco.

“I remain confident that new categories will deliver a positive contribution in 2024.

“However, we do not expect contribution growth to be linear, as levels of investment will align with the phasing of our big innovation platforms.”

While more focus was required in the US, according to Tadeu Marroco, the company’s sequential performance improvement in the “critical” premium US combustibles business since January was described as encouraging.

“These results are thanks to the hard work by BAT people around the world.

“To help ensure we continue to deliver, the recently-announced management board structure is designed to enhance our strategic capabilities and further embed the collaborative and inclusive culture I want to see everywhere across the group.

“While more needs to be done, I'm excited by BAT's future; our full-year guidance remains unchanged.”

Reporting by Josh White for Sharecast.com.