British American Tobacco (NYSE:BTI) (BAT (LON:BATS)), in its latest earnings call, laid out a bold vision to transform into a predominantly smokeless business by 2035, with 50% of revenue coming from non-combustibles. The company plans to absorb a non-cash impairment charge of approximately £25 billion in 2023 due to a strategic shift away from certain US combustible brands. Despite this, BAT is optimistic about its future, expecting low-single digit revenue and adjusted profit growth in 2024, with a progressive improvement to 3% to 5% revenue and mid-single digit adjusted profit growth by 2026. The company also expects its new category contribution to reach profitability from 2024 onwards.
Key Takeaways
- BAT is steering towards a smokeless future with a strategic goal of 50% revenue from non-combustibles by 2035.
- A significant non-cash impairment charge of £25 billion will be taken in 2023 for certain US combustible brands.
- Revenue and adjusted profit from operations are projected to grow in the low-single digits in 2024, with further improvements by 2026.
- New categories are anticipated to break even in 2023 and become profitable in the following year.
- The company reported a volume share recovery in its US business and strong performance in AME and APMEA regions.
Company Outlook
- BAT is investing in its US business and global heated products, aiming to enhance its strategic delivery and innovation capabilities.
- The company is committed to its £5 billion revenue target for New Generation Products (NGPs) by 2025.
- BAT plans to achieve a leverage ratio of 2.7 times by the end of 2023 and expects to deliver close to 100% operating cashflow conversion.
Bearish Highlights
- glo's performance in the heated products category has been below expectations due to slower industry growth and increased competition.
- The US Combustibles business had to delist 45% of its portfolio in response to the flavor ban in California.
- BAT is cautious about the lack of meaningful enforcement from the FDA and assumes the macroeconomic environment in the US will not see substantial improvement.
Bullish Highlights
- BAT has seen a 10 basis point improvement year-to-date in volume share, with a 50 basis point increase from January to October.
- The company is confident in the approval of their tobacco flavors through the PMTA process and plans to file a PMTA for a Bluetooth device.
- Investments in intellectual property and innovations are expected to result in the launch of compelling new products.
Misses
- The write-down of £25 billion reflects the reduced valuation of US combustible brands due to market changes.
- The US severity is expected to decline in the mid to high single digits in 2024.
Q&A Highlights
- CFO Marroco discussed the company's strategy to be more assertive in its transformation by 2035.
- The company is considering the disposal of non-core assets, including hotel assets.
- Marroco confirmed that the company's leverage range's middle is now defined as 2.5x.
- The company plans to restart the share buyback program once the leverage range is reached.
In summary, British American Tobacco (ticker: BATS.L) is navigating a complex market landscape with a clear strategy to pivot towards a smoke-free future. The company's financial health remains a top priority, with an emphasis on maintaining a strong balance sheet and delivering shareholder value through strategic investments and cost management. The earnings call underscored BAT's resilience and adaptability as it prepares for the challenges and opportunities ahead.
InvestingPro Insights
British American Tobacco (BAT) is charting a course through a changing tobacco industry landscape, emphasizing a shift towards non-combustibles and a strong financial strategy. In light of this, recent data and insights from InvestingPro suggest a nuanced picture of the company's financial health and market position.
InvestingPro Data indicates that BAT has a market capitalization of $64.17 billion and is trading at an attractive P/E ratio of 5.86, which is adjusted to 5.51 for the last twelve months as of Q2 2023. This low earnings multiple may appeal to value-oriented investors. Additionally, the company's revenue has grown by 7.01% over the last twelve months as of Q2 2023, signaling robust financial performance despite the industry's headwinds.
InvestingPro Tips highlight several strengths of BAT, including a perfect Piotroski Score of 9, which suggests a healthy financial state. Additionally, the company's high earnings quality is evident, with free cash flow exceeding net income, and a significant dividend to shareholders that has been maintained for 26 consecutive years. These factors are particularly relevant as BAT seeks to balance its transformation with financial stability.
For readers interested in a deeper dive into the financials and strategic positioning of British American Tobacco, InvestingPro offers additional insights. Currently, there are 13 more InvestingPro Tips available, which can provide a more comprehensive understanding of the company's outlook. For those looking to take advantage of this information, InvestingPro subscription is now on a special Cyber Monday sale with a discount of up to 60%. Plus, use coupon code sfy23 to get an additional 10% off a 2-year InvestingPro+ subscription.
In summary, the financial metrics and expert tips from InvestingPro underscore BAT's commitment to delivering shareholder value while navigating its strategic pivot. The company's low valuation multiples, strong dividend history, and impressive profit margins paint a picture of a business that, while facing sector challenges, is underpinned by a solid financial foundation.
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