British American Tobacco : Q&A transcript (0.2 mb)

DB Global Consumer Conference

Q&A session

June 9, 2021

C O R P O R A T E P A R T I C I P A N T S

Kingsley Wheaton

Chief Marketing Officer

David O'Reilly

Director, Scientific Research

Jennie Galbraith

Head of Environment, Social and Governance

Mike Nightingale

Head of Investor Relations

D E U T S C H E B A N K M O D E R A T O R

Gerry Gallagher, sell-sideanalyst

Mike Nightingale, Head of Investor Relations

Thank you. So first up a huge apology to people who are listening, for a second time around we seemed to have further problems with the feed, and I am now Gerry Gallagher, apparently. So I'm going to try and ask the questions that Gerry would have asked, you'll have to bear with me as I'll have to search through a little bit of stuff to find the questions.

I think the first question Gerry was going to ask is that accepting there are one offs in the trading update that you've announced Kingsley, yesterday morning. The revenue guidance seems to have gone up, but the EPS guidance [audio jumping] this year, Kingsley?

Kingsley Wheaton, Chief Marketing Officer

Thank you, Mike and good afternoon, everybody and apologies on our behalf for the difficulty with the connections, we'll do our best to work through this Q&A.

Yes, thank you Mike, we were very pleased in the pre-close trading update to be able to raise guidance on revenue for 2021. And that's a mark of the acceleration of our A Better Tomorrow strategy and our multi-category strategy playing out.

With regard to your specific question on earnings, obviously we've taken the opportunity, given the momentum and the acceleration in New Categories to put more marketing investment behind the further acceleration and momentum of those New Categories. We had a really good quarter for consumer acquisition in Q1, with an additional 1.4 million consumers, taking us to 14.9, so nearly 15 million consumers of our non- combustible products.

And a couple of other things which are in there as well, a little bit of negative geo mix as we see a recovery in some of our developed markets, particularly on the comparisons with 2020 through the depth of COVID. Some limited impact of transactional exchange and also a little bit to do with associate income and given the COVID situation in India.

But I think the key driver if more marketing investment to capitalise on the acceleration and the momentum we're seeing in our New Categories business.

Mike Nightingale, Head of Investor Relations

Thank you, Kingsley. Could you expand on Jacks comment that 2021 is a pivotal year, and what does this mean that we can expect over the next few years?

Kingsley Wheaton, Chief Marketing Officer

Absolutely, Mike, and I think Jack is absolutely right, 2021 is a pivotal year for BAT. I think about the three priorities that Jack has laid out for the

business, value from Combustibles, the step change in New Categories and a simpler, faster organisation. So the question is are we delivering on those and are those accelerating?

Well, I think the answer is abundantly, yes. We have a profitable and highly cash generating business. We're able to drive value from Combustibles and actually a key contributor, along with New Categories performance that that revenue growth is also the value that we're driving from Combustibles.

We're increasingly digitalising the organisation and I think that there's no doubt that BAT is a more digital technology enabled organisation these days than it's ever been, and I think we're really embracing that in terms of accelerating our transformation.

In turn, we're seeing growing share positions across our key Vapour, THP and Modern Oral markets, that has enabled us to accelerate the acquisition of consumers to the 1.4 million I talked about, where there are consumers there's volume, where there's volume there's revenue, and over time we have a clear pathway to profitability.

So our job is to create products that consumers love, for them to be assured products, backed with great science and stewardship and build really strong global brands and that's what we're doing.

And I think the reason it's a pivotal year is the strategy is accelerating, what's exciting is that the three categories that we have, all of them are growing, they're all strong and it's as if we have sort of three engines if you like of the strategy fired up, partnering with the value that we're able to deliver from Combustibles. So I think this is a pivotal year and I think we're well on our way.

Mike Nightingale, Head of Investor Relations

Okay, I think related to that is a question from the floor actually. How do you prioritise investments, both capex and A&P behind the three categories, Vapour, THP and Modern Oral?

Kingsley Wheaton, Chief Marketing Officer

Yeah, well we have pretty sophisticated market mapping tools. If you think about New Categories, generally they are working in the sort of northern hemisphere markets on a sort of swath from America, through Canada, West Europe that's the sort of Vapour heartland. Then through into Southern and Central Europe and the CIS and Northern Asia, where it becomes progressively more tobacco heating.

And obviously if you think about our multi-category strategy it's good, I think for three reasons. The first reason is that consumers are not homogenous, consumers are different everywhere, tastes and preference vary. The regulatory landscape is different everywhere, and in some

markets some categories are able to grow where others aren't, so Japan would be a good example of that. And finally I think by having those three categories that inherently mitigates, if you like, the risk of our growth going forward.

So as we think about prioritising investment, we're trying to prioritise based on the highest revenue growth and margin growth opportunities for the future of the business. I think our job is to be a sustainable higher growth business, to accelerate that growth, and our prioritisation therefore is what gives us the best chance to grow the business, hit the £5bn target 2025, to hit our 50 million consumer target by 2030. So that's how we think about prioritisation.

Mike Nightingale, Head of Investor Relations

Thank you, Kingsley. So one for Jennie now, does meeting your ESG targets have any implications for margins? How does BAT think about that, do you care - by that I mean ESG considerations may mean that margins and profits could be lower, but the associated multiple could be higher and therefore more value is created for shareholders?

Jennie Galbraith, Head of ESG

Yeah, sure, so I think there are two parts to that question. Firstly, we're investing to grow the number of non-combustible consumers as fast as we can. And secondly, we're investing to deliver the rest of our ESG targets.

So I think in terms of harm reduction, non-combustible consumers, we've worked really hard to put in place all of the capabilities that we need to win, so this is consumer insights, digital, distribution. And now we've largely got these in place, we expect to be able to still increase our spend on New Categories but reduce their loss over time. In fact New Categories will now contribute to earnings growth for the first time.

I think in other areas of ESG we do have a fully costed guide path to meet our targets. And yes, obviously there is investment required, but it's really important not to think about this as just one additional one-off cost. The embedded approach that we take to ESG, that I spoke about in our presentation means that many of these costs are absorbed into our existing ways of working. So whether it's through our field technicians and enhanced training and monitoring on child labour, or by replacing plant, fleet or machinery as part of our scheduled upgrades.

We also expect to see efficiencies of scale, particularly as we scale up New Categories. And we're also exploring lots of new technologies and materials, both with start-up entrepreneurs and with our existing supplier base.

So you're absolutely right, ESG does also result in savings, and we see it as a real value add. So there are efficiencies in removals, things like carbon reduction, energy efficiency, removing plastics from the packaging, changes to freight, all reducing savings. And plus all of these efforts also create a really compelling consumer proposition, with our brands with purpose. And they also help us attract and retain the very best talent.

So yes, there's investment required, but this is fully costed. But we prefer to focus on the value that ESG delivers to building a strong business for the future.

Mike Nightingale, Head of Investor Relations

Thank you, Jennie. One for David now, David, in your presentation you highlighted that nicotine does not cause cancer. Maybe I've been around the industry too long, but nicotine not causing cancer is up there with tobacco has real pricing power, there's lesson number one for the tobacco analyst. To what extent does having to highlight that very basic point, illustrate the size of the task the industry has in terms of New Categories and getting key stakeholders on side?

David O'Reilly, Director of Scientific Research

Well, thanks for the questions, it's a good question. There is a lot of focus on nicotine at the moment, not just in BAT but elsewhere. The science if very clear on nicotine. I mean nicotine, whilst it can be additive, has a very good safety profile. And that's not just me saying it, it's other organisations, including the WHO.

The problem is the perception around the safety of nicotine, and you know research, time and time again, shows that not only do consumers and the public misperceive the safety profile of nicotine, but also public health professionals, including medical doctors.

And so whilst that's disappointing it's also an opportunity, because you know by publishing good science, by communicating the science, you know we and others hope and anticipate that we can change that. That whilst nicotine is addictive, it's the products of combustion that cause smoking related diseases. And that's why our New Category products in VELO, Vuse and glo, which don't rely on combustion are reduced risk products and that we back that up with science.

Mike Nightingale, Head of Investor Relations

Thank you, David. Another one for Kingsley. Kingsley, in your presentation you said that you want to be defined not by the products you sell, but by the consumer needs you meet. Could you explain and expand on that please?

Kingsley Wheaton, Chief Marketing Officer