British American Tobacco : Q&A transcript (121 kb)

CAGNY 2021 Virtual Conference

Post Presentation Live Q&A Session

February 18, 2021

CORPORATE PARTICIPANTS

Jack Bowles

Chief Executive

Tadeu Marroco Group Finance Director

Mike Nightingale Head of Investor Relations

Victoria Buxton

Senior Investor Relations Manager

Questions and Answers

Victoria Buxton, Senior Investor Relations Manager

Good afternoon everybody and thank you for joining us. I am Victoria Buxton, Senior Investor Relations Manager at BAT and with me today are Jack Bowles, our Chief Executive and Tadeu Marroco, our Group Finance Director, who are here to answer your questions.

And with that I will take the first question.

And our first question is, can you give more detail on why you're so confident on hitting your 2025 £5bn New Category sales and profitability targets?

Jack Bowles, Chief Executive

Yeah, let me take that one. Hello everybody, I'm Jack Bowles and I'm here with Tadeu Marroco.

Well, I think the £5bn is in sight now because we have had three years of transformation of the company, we have created all the capabilities that we need. We are multicategory, we are already in THP, in Vapour and in Modern Oral. We have a strong Combustible business in order to fuel the resources that we need for the New Categories.

And in the second half of the year we have accelerated very strongly. So in the second half of 2020 we have increased our volume in the three categories by around 50% and also, we have increased by three million the number of consumers we have, we are now at 13.5 million consumers in New Categories.

And I must say that in the second half of the year we have added two million consumers and in the last quarter, 1.1 million consumers. So we are accelerating strongly. And we believe strongly that the £5bn is in reach in 2025.

Victoria Buxton, Senior Investor Relations Manager

Thank you, Jack. Our second question is BAT's mid-single digit EPS guidance for 2021 reflects continued high NGP investment in the year. When can NGP investments stabilise or normalise? Thank you.

Jack Bowles, Chief Executive

Well I think before Tadeu completes my answer - I think what's very important to see is that we are growing strongly, and we see the year 2021 as a pivotal year where we start to reduce our losses in New Categories.

We have invested £460m more in 2020 and we'll continue on the strong base of investment for 2021. Why? Because as I said we are increasing the number of consumers very strongly, we have a strong springboard going into 2021 and we'll continue to invest behind our categories. But yet again, the losses on New Categories, will be starting to reduce by 2021. Tadeu, do you want to add something?

Tadeu Marroco, Group Finance Director

Yeah, look at the end of the day we will continue to invest in New Categories, but we're going to make more revenues out of the New Categories and hence the losses will start reducing from 2021 onwards.

Just to talk a bit about the guidance, the guidance, I would like just to remind you about two things. One, our guidance includes transactional FX, so we are expecting, based on the current spot rates, a 2% equivalent of operating profit hit in 2021, which is double what we had in 2020. So it's part of the mid-single digit figure, that in reality is a range that we have said.

And the range will depend on the clarity of the uncertainties that we mapped out, global travel retail is one of those, COVID is still very present in a number of markets, specifically in India, where ITC has been impacted by that and as a consequence BAT that report their numbers with a three-month lag gets impact in terms of the kickers on operating profit, from EPS.

The US market is still very uncertain given the circumstances, that's why we haven't provided guidance.

So as we go along all those clouds will be dissipating and we'll be following these up and keeping the markets updated on that.

Victoria Buxton, Senior Investor Relations Manager

Thank you Tadeu. Our next question is, of the £1bn in targeted cost savings what proportion do you expect to reinvest in NGPs?

Jack Bowles, Chief Executive

Well, as I said before, first of all the savings that we are doing we have a target of £1bn and we already at £660m in 2020, so that's beyond what we wanted to deliver in 2020. So we are very strong and very focused on reducing our cost base. I think we will continue to progress in that direction.

Victoria Buxton, Senior Investor Relations Manager

Thank you. And our next question is, can you expand on your ESG strategy?

Jack Bowles, Chief Executive

Yes, I think what's very important in terms of our ESG strategy is that we have a very good foundation already. We are on the Sustainability Index for now more than 18 years. We continue to have ratings that are Triple Bs and we're doing more and more things in terms of ESG. In terms of the E, in terms of the S and the G.

And the programmes and the projects that we are doing are all geared towards our ambition of 2030, which is having for our business and our consumer base 50 million consumers that will be in the Non-Combustible category. Carbon neutral by 2030. And the reduction in terms of single use plastic.

So I think we are very consistent in terms of what we are doing, and we'll continue to do so. So a strong foundation that we have at the moment and we have put ambitious targets in front of us in order to continue to accelerate on this base.

Victoria Buxton, Senior Investor Relations Manager

Thank you. Our next question is Quantum savings for 2020 appear to be running well ahead of the target provided at the H1 stage. Is there scope for additional savings, or is this simply a case of generating savings much earlier?

Jack Bowles, Chief Executive

Well what we've done with Quantum is to put really in the middle of our delivery the fact of saving as much money as we can. But it is also about simplifying our business and increasing the efficiency of that business. So it is both that is happening at the same time. So we are transforming the organisation in order to accelerate the transformation of our business.

And I think that we're ahead, that's very good, and we'll take it as we go along. We'll update on a regular basis, half year and full year, in order to see how we fair. But I think that it's a very strong start in terms of that programme and we'll continue to push very hard, we'll make sure on that.

Victoria Buxton, Senior Investor Relations Manager

Okay. And the next question is, you showed a slide which said that two thirds of the growth towards your £5bn, 2025 New Category revenue target will come from share gains. What will be the biggest driver of those gains, THP or Vapour?

Jack Bowles, Chief Executive

Well what you see at the moment is in terms of the three categories we are growing strongly. We are growing by 50% in the second half of the year in volume, that is a very, very strong result and that's a great springboard moving forward.

In terms of THP we are growing in the second half of 2020 by 59% in volume. In terms of e-cigarettes we're growing by 45%. And in terms of Modern Oral we're growing by 56%. And let me tell you we take the three categories very seriously. And what I can tell you is that these categories because we're a multicategory consumer centric approach we have the whole system in order to know what products to launch in what geography in order to make sure that we have the most efficient portfolio.

So I think that what is important is that we are multicategory, we are growing by 50% in the second half of the year and we'll continue to push very hard related to that.

We have growth in the three categories, and we'll continue to accelerate in different geographies.

Victoria Buxton, Senior Investor Relations Manager

Thank you. And the next question is, have you applied for a PMTA for glo in the US, or do you not think that it's worthwhile given the full flavour nature of the US cigarette market?

Jack Bowles, Chief Executive

We are doing everything that is required in order to make sure that we are on top of our game really towards this. You know, what is very important is to see that also the PMTA progress in terms of e-cigarettes is going to be extremely important and it is going to be a contestable space that we consider has around US$1.5bn in terms of revenue that will become available as we go along.

So as you know we are extremely strong in e-cigarettes in the US and we have already 15 states in the US where we have leadership. Now two years ago nobody would have thought that we would be able to do that. But the reality is we have the capabilities in the market, we have a very strong salesforce, we have a very strong digital platform, and we are doing great progress. So I think that the PMTA process in general gives a level playing field in the US market, which is absolutely fantastic.