British American Tobacco p.l.c. Q4 FY2025 Earnings Call

Good morning, everyone. I'm delighted to welcome you to our full year 2025 results presentation. With me this morning, Javed Iqbal, Interim CFO; and Victoria Buxton, Group Head of Investor Relations. highlights. Javed will then take you through our financial results in more detail. Finally, I will return to talk more about our performance outlook and why we are confident in the pathway ahead given the clear momentum we are driving. We will then take your questions. With that, I would like to draw your attention to the disclaimers on Slide 2 and 3. So let's begin by looking at the positive transformation momentum we are driving. Starting with some key highlights. We added 4.7 million smokeless consumers bringing our total to 34.1 million, mainly driven by our continued strong performance in modern Auto. This marks our strongest growth acceleration to date and positions us well for 2026. We delivered 2025 group results at the top end of guidance driven by resilient delivery in combustibles and an excellent performance from Velo in all three regions. Our disciplined focus on quality growth continues to improve returns on more targeted investments with the new category contributing now up 77% at constant rates. Alongside this, we remain committed to investing behind our premium innovation launches, supporting long-term value creation. We continue to deliver strong cash returns for shareholders. In addition to our progressive dividend in December, we announced an increase to our share buyback to GBP 1.3 billion in 2026. Looking ahead, we are confident in returning to our midterm algorithm this year with accelerated momentum through the second half of 2025, positioning us well for continued delivery. I'm proud that we have delivered on all of our 2025 priorities and I want to thank our teams around the world for driving these encouraging results. Our performance reflects the clear momentum we are driving as we continue to build a track record of delivery. I'd like to take a moment to highlight two areas from last years that stand out to me. First, the return to both revenue and profit growth in the U.S. for the first time since 2022. A significant milestone driven by stronger combustibles performance, a return to revenue growth in vapor in the second half, and modern oral. As a result, we grew 30 basis points of combustibles value share. Second, we are delivering quality growth in new categories, launching premium innovations in each category while delivering a return to double-digit revenue growth in the second half and category contribution growth, up 77% for the full year. The progress we made in 2025 reinforces my confidence in our future delivery. And with that, I will hand over to Javed to take you through our 2025 performance in more detail.

Thank you, Tadeu, and good morning, everyone. I am pleased to share that we delivered results at the top end of guidance on a constant currency basis. The performance was driven by a return to growth in the U.S., a robust performance in AME, and the strength of modern oral globally. Our reported numbers reflect some adjusting items, including nearly GBP 1.6 billion, mainly related to the annual amortization of our U.S. acquired trademarks, a net credit of GBP 524 million, following a change in the forecasted outlook for the Canadian combustible industry. We also recognized a gain of nearly GBP 900 million from the partial monetization of our ITC stake. To give you a clear view of our underlying performance, I will focus on constant currency, adjusted and where applicable adjusted for Canada metrics. You can find further detail on adjusting items and share data in the appendix. We delivered group results at the top end of guidance, supported by accelerated momentum through the second half. Group revenue increased by 2.1%. Adjusted profit rose 3.4%, adjusted profit from operations grew 2.3%, and adjusted diluted EPS was up 3.4%. Let's now turn to new categories revenue grew by 7% driven by outstanding growth in modern oral, which was up strongly by 48% with heated products up 1%. This was partially offset by a nearly 9% decline in vapor, mainly due to continued illicit pressures in the U.S. and Canada. Our second half performance showed a clear improvement versus the mid-teens decline in H1, supported by early signs of strong enforcement activity in the U.S. We continue to deliver quality growth with gross profit up over GBP 200 million and category contribution reaching GBP 442 million. This reflects our disciplined approach to return on investment, targeted investments in high-value markets, and increasing scale benefit across our portfolio. I am proud of the progress we are making, and I'm particularly pleased with our accelerated H2 momentum, where we returned to double-digit new category revenue growth. Now turning to combustibles. Revenue grew 1% with volume decline more than offset by continued robust price/mix across markets. We delivered quality growth here, too. Both gross profit and category contribution increased 2.5% driven by a strong performance in the U.S., positive price/mix, and continued productivity and simplification gains, which I will speak to shortly. Our performance highlights the breadth of our global footprint, with strong delivery in the U.S. and AME more than offsetting fiscal and regulatory headwinds in Bangladesh and Australia, which impacted total group revenue by around 1% and group adjusted profit from operations by around 2%. This resilience and increasing momentum in H2 reinforces our confidence in future delivery.

Thank you, Javed. So moving on now to the positive transformation momentum we are driving. In 2023, when I became Chief Executive, I committed to sharpening our focus and execution, guided by a refined strategy and ambition to become a predominantly smokeless business by 2035. And I'm proud to say that we have made significant progress across all three strategic pillars as we continue to build a track record of delivery. While there is still much to do, I'm confident that our focused investments and sharp execution are driving real momentum, as you can see from our 2025 results. Our progress underpins our confidence in sustainably delivering our midterm algorithm, while continuing to reward shareholders with strong cash returns. I'd now like to highlight five points that demonstrate this. First, we have successfully reset our U.S. business returning to revenue and profit growth in 2025. While the U.S. macroeconomic environment remains dynamic, the pace of combustibles industry volume decline started to moderate in 2025, down 7.4%. Against this backdrop, driven by the actions we have taken to strengthen our portfolio and sharpen execution, our U.S. combustibles business delivered strong revenue and profit growth in 2025. Driving value from our combustible business is essential to funding our transformation, and the U.S. is a key driver of this. In line with the strategy, we gained 30 basis points of total industry value share. I'm particularly encouraged that our financial performance accelerated in the second half. This positive momentum reinforces my confidence in the resilience of our U.S. combustible business and our ability to deliver sustainable value going forward. Velo Plus is the fastest growing modern oral brand in the largest modern oral value pool globally. Since launching at the end of 2024, it has already reached the #2 position in both volume and value share, gaining nearly 18 percentage points of volume share and nearly 14 points of value share. And we are pleased that our share momentum has continued into the start of 2026. Velo Plus has more than doubled its consumer base and driven over 300% modern oral revenue growth, capturing around 70% of industry volume growth and 80% of industry value growth in December. All of this is underpinned by a consistent repurchase rate of around 70% throughout the year. Importantly, we achieved positive category contribution within the first 12 months of launch, fully aligned with Velo's global payback profile. The total U.S. modern oral category continues to grow strongly and has already overtaken the size of the legitimate vapor category at over GBP 2 billion of revenue in 2025. Second, we are premiumizing our new category portfolio. Velo is already the clear European leader, around six times larger than our nearest competitor. We continue to focus on consumer-led innovation to strengthen product satisfaction among adult consumers and extend Velo's success. At the start of this year, we began the nationwide rollout of our latest innovation, Velo Shift in Sweden, following a successful pilot with key retailers and online partners. Velo Shift is reshaping the modern oral experience, featuring a new comfort pouch design, five distinct sensory flavors, and a differentiated profile that stands out on the shelf. Trading at a premium to the core Velo range, Velo Shift is already driving incremental share in the channels where it has launched with further market rollouts planned through 2026. Third, I'm proud of the strong progress we have made improving new category profitability. Since 2021, we have driven a GBP 1.4 billion improvement in category contribution with all three new categories contributing to this momentum. Importantly, we have achieved this while continuing to invest in our transformation to drive future sustainable growth. Our new categories are meaningfully contributing to group results as we benefit from increased scale, reflecting traction in established markets while continuing to invest in new market launches. This is supported by more consistent and constructive regulatory frameworks, such as those in place for modern oral in 24 markets, up from just four markets in 2022. We have sequentially improved our performance each year. And through our quality growth approach, we remain committed to driving sustainable profitability improvement moving forward. Fourth, I'm encouraged by the signs of positive progress we are seeing in the regulation and enforcement of new categories, especially in the U.S. While the vapor category continues to be impacted by the proliferation of illicit products, Vuse returned to revenue growth in the second half after 18 months of decline. This has been supported by increased state level enforcement, with vapor directory and enforcement legislation representing around 50% of tracked industry volume by year-end. In addition, Vuse performance in the second half benefited from competitor exits, further strengthening our market position. Our recovery has also been supported by early signs of increased federal enforcement targeting borders and larger distributors, resulting in high levels of seizures and fines. Looking ahead, we are encouraged by the increased focus and funding directed towards strengthening the FDA's enforcement capabilities. We were also pleased to receive a favorable initial determination on our International Trade Commission complaint from the administrative law judge who has recommended a general exclusion order on imported illicit vapor devices. We expect a final determination from the ITC in the coming weeks, which will then be subject to a 60-day presidential review. With an estimated 7% of the U.S. vapor industry value still illicit, we are hopeful that the authorities will continue with enforcement initiatives in 2026. Reynolds continues to advocate for a level playing field so that adult nicotine consumers have access to high-quality compliant vapor products. And the final point I would like to highlight is that our financial flexibility continues to strengthen, and we remain on track to generate more than GBP 50 billion of free cash flow by 2030. BAT is a highly cash-generative business, delivering at least 100% operating cash conversion annually since 2020, reflecting our strong cash discipline and a clear focus on returns, enabling us to return GBP 34 billion of cash to shareholders over the same period. We remain committed to delivering sustainable shareholder returns with a 25-year track record of dividend growth and our sustainable share buyback program. I'm confident that we will sustainably deliver our midterm algorithm as we are firmly committed to growing revenue sustainably and improving profitability. To conclude, we are carrying momentum into 2026, underpinned by a robust innovation pipeline, strong strategic partnerships, and confidence in our future capabilities.

Thank you Tadeu and good morning, everyone. If you've joined us for the webcast, you can type your question directly into the online question box or if you joined the call, you can press star 1 on your telephone keypad. Tadeu and Javed will be very happy to take your questions. And I will now hand over to the conference call operator.

Our first question is from Andre Andon Inter from Jefferies. Please go ahead, sir.

First of all, two questions on Modern Oral, please. Number one, what are your expectations in terms of performance in the U.S. in fiscal '26 for Modern Oral specifically? And secondly, are these expectations underpinned by the FDA approving the European Velo product for sale in the U.S.? Or are they mainly driven by the existing Velo Plus product? And perhaps finally, in terms of profitability, could you tell us a bit more about how you expect new categories profitability to evolve in fiscal '26?

Okay. Andre, thank you for the question. We have a very strong product with Velo Plus in the U.S. The levels of retention have been 70% throughout the year, which is really a very strong rate when you compare with other offers in the market. So basically, at the back of that, we believe that the product is competitive enough to continue growing in the U.S. market, has all the indications from that. Today, we still have a low level of awareness in the brand, around 30%, and we are present now in 150-plus outlets, which accounts for something like 93% of the total auto revenue. We are also seeing that the average daily consumption as new products start to be more satisfying for consumers in the U.S. is increasing. So it used to be around 2.8 pouches per day, and today it's around 3.6 pouches per day. If you compare that with the European market, which is around 6 pouches per day, you see a lot of potential growth still in the U.S. and the Nordics is 12 pouches per day. So when you pull all this together, a strong product and the dynamics of the market evolving at the pace that it is in the U.S., the expectation is that we will continue growing. That's why we are investing in capacity, like I mentioned during my presentation. We mentioned Velo Max, which is an even higher moisture product that we have as part of the pilot that the FDA is running. We welcome the fact that FDA is embracing nicotine pouches as a key category to address tobacco harm reduction in the U.S. because it's the lowest risk profile if you want. There is no inhalation, there is no tobacco. There is no smelter that is much easier for consumers of cigarettes to convert into a much lower risk profile product. So they are putting in place these pilots. We hope that for the next few months, we see our products, and we are cautious that other competitors will come with other products as well. And for us, there is no problem with that. But when I look outside the U.S., where everyone is free to compete, the leading brand outside the U.S. is Velo. Like we said, in Europe, our volumes in Velo are six times higher than the second-largest competitor. So what we want to see in the U.S. is a level playing field because in a level playing field, we know that we can win. So that's the first question on Velo. In terms of profitability, we have made a very strong profitability improvement when you compare that not long ago, back in 2023, we were just reaching breakeven in this category. And today, we have a 12% category contribution. Obviously, I always said that this will not be linear year after year because there will be years where we're going to reinvest back in the business at the back of exciting innovations. And 2026 is one of these years because, as I said during my presentation, we have now premium innovation in every single one of those categories. So we are not concerned about stipulating a specific pace of category growth year-on-year because this will vary over time, but the trend is very clear. The category will continue to grow.

We'll now take our next question from Faham Baig from UBS.

The first one is on guidance for full year '26. You've guided for the lower end of the midterm targets. Could you maybe share factors that could result in the performance, whether in '26 or beyond that, getting you to the middle or even upper half of the range would be helpful. And then the second question is on heated tobacco. I guess it was a tough year in 2025 from a share perspective. How do you think about share progressing through 2026, particularly as competition in the category is intensifying?

Thank you, Faham. I'll start with the second point and then move on to the guidance. We see clear improvements in our heated products performance. Throughout 2026, the Bow WAP has been competitive in key markets. That’s why I mentioned today that we are introducing a revamped hyper product, alongside improved consumables, to strengthen our position in that segment. We're encouraged by the performance of this product and initial tests show promise. We believe this will enhance our performance going forward, and glo Hilo will complement this as it represents our first foray into the premium segment, which has performed exceptionally well. We're seeing weekly growth with a retention rate of 50%. This, combined with an improved value proposition, gives us confidence to reverse current trends and begin growing again. Regarding guidance, Javed can provide more details about 2026. I want to highlight that after two years of investment and resetting our U.S. business and innovations, BAT is prepared to return to our traditional midterm targets of around 3% revenue growth and 5% revenue growth, leading to 4% to 6% operating profit with an additional 1% to 2% for EPS, which gives a total range of 5% to 8%. Our targets account for transactional FX. The growth profile will differ now compared to several years ago, as new categories will play a more significant role. From the previous 3% to 5% guidance, we expect combustibles to contribute about 1% to 2%, with the U.S. medium-term expectations between 0% and 1%, while the international regions are projected to be above 2%. In 2025, despite various challenges, particularly in the APMEA region, we managed to achieve 1% growth. Bangladesh and Australia impacted our top line by 1%, otherwise, we would be at the higher end of our range. I’m confident that we can meet our growth targets going forward. For new categories, achieving the algorithm requires double-digit growth, which we didn’t see in 2025 due to challenges in the vapor segment. The illegal market in the U.S. has been a major factor, but we are starting to see federal and state authorities take action. We anticipate less drag from vapor moving forward, potentially becoming a tailwind for BAT. We discussed THP and expect to see accelerations in growth with these offerings. Additionally, we now have a leading brand in Modern Oral, and we expect to continue growing.

Thank you, Tadeu. I think on 2026, specifically, if I go region by region, then we can look at overall. In case of APMEA, as I highlighted, we expect Bangladesh to be not a big drag, but Australia will still remain a meaningful drag, which is becoming smaller and smaller every year. So in 2026, Australia will still be a drag, but will be less meaningful in '27. Having said that, we will continue to invest in the rollout of premium innovations in APMEA as well, as you saw in terms of glo Hyper, so that's where we'll be there as well. The other thing in that area is that in case of AME, we still face headwinds from the illicit environment in vapor and also the regulation changes in Poland, which happened at the end of the year, which has made the legal vapor out of the market, which is again a drag for us. Coming to U.S. you have to keep in mind that comparing '24 to '25 versus '25 to '26 is very different. We had a very good performance in '25, so that comparative changes. And also, we are assuming for now stable volumes in views in U.S. So we are expecting that the enforcement level, as we've seen so today, will stop that decline, but we'll keep the volume overall stable. And lastly, also we highlighted in our pre-close trading update that we are exiting certain geographies, which are not adjusted, but they will have an impact on our numbers in 2026. So I hope this all gives you an idea of why the lower end of 2026. But having said that, we are all very proud and confident in the business that we are entering the first year of our midterm algorithm.

I find it quite interesting to hear your optimism about the new categories. I took a quick look at the numbers and clearly, Modern Oral is performing exceptionally well. There seems to be potential for vapor to at least stabilize, and I'm uncertain about heated tobacco. Could you provide some high-level insights into which of these categories excites you the most regarding future growth, especially as we look toward 2026 with its anticipated double-digit revenue growth? Additionally, regarding Australia, I'm intrigued because the needle market has now decreased to around $3 billion or less. In comparison, Japan consumes that much in about a week. I'm having a hard time understanding why you anticipate it will still be a drag. Is this not a suitable time to consider exiting this market? I would appreciate your thoughts on that.

On the new categories, Modern oral stands out as the most promising of the three. Its growth globally is evident. For instance, in the U.K., where we introduced Velo four years ago, the oral nicotine usage was at 0% and now stands at about 3%, occasionally reaching 4%. This trend is also visible in countries like Poland and emerging markets where affordability plays a key role, such as Pakistan, South Africa, and Kenya. We see great potential, and we're pleased that 24 markets have now passed legislation for this category, with Argentina being the latest a few weeks ago and Portugal recently following suit. In the tobacco heating product sector, which generates EUR 9 billion in revenue, BAT is just under $1 billion, indicating substantial opportunity for us. It is becoming increasingly competitive, but we are now present on both the value and premium sides of the market. Our glo Hilo product opens up an untapped segment for BAT, and we are very enthusiastic about our ability to capture some of that market as it continues to grow, albeit at a slower pace than Modern Oral. Vapor presents challenges due to regulatory issues and competition from illegal products. We aim to address these issues with our campaign and by focusing on responsible vapor options like Vuse Ultra. Our goal is not to compete on volume but on value, particularly in the U.S., which is the largest vapor market. We are hopeful that the FDA recognizes the need for a fair competitive landscape and will explore regulatory pilots in the vapor space, similar to those for nicotine pouches. Regarding Australia, the market has suffered since the introduction of plain packaging in 2012, leading to illogical regulations and excise increases outpacing inflation. The cost of cigarettes in the legal market has surged to over GBP 20-22, while illicit products are around GBP 6. This has resulted in 65% of the combustible market being illegal, lowering prices for consumers and, for the first time in years, increasing the smoking rate in Australia. The government's approach has not only diminished tax revenues but also incentivized consumers to choose cheaper illegal products that come with associated criminal issues. While Australia has historically been an important market for BAT, as Javed noted, it may become increasingly insignificant. The impact will not be as pronounced in 2026 as it is in 2025, and if the government continues down this path, we’ll likely see a shift towards almost complete illegality in the market.

Thank you very much for your question. So first, just to reiterate, as Tadeu has mentioned, we believe vapor is a challenging category outside the U.S. because of the proliferation of illicit products. And we are focused on markets where we can compete effectively. And while we see potential in some markets, we also face ongoing regulatory challenges that can impact our performance. We're continuously evaluating our strategy with an emphasis on high-potential regions.

Two questions. First, regarding the U.S. business, your pricing mix appears strong at over 12%. Can you clarify what portion of your U.S. volume is currently benefiting from the excise duty drawback and the potential for that to increase in the future given your global operations? Secondly, I appreciate your comments on your NGP guidance for 2026. However, your low double-digit growth projection seems to indicate a significant normalization compared to the data we see, particularly for nicotine pouches and e-vapor products. Can you explain the factors influencing your low double-digit guidance for 2026?

Okay. I will cover your second question. On the duty drawback, this is a long-standing legislation in the U.S. to incentivize local manufacturing and promote export from the U.S. So obviously, what we are doing is exactly that. Reynolds has invested more than $200 million in terms of manufacturing over the last couple of years. We have generated more than 800 jobs, and we increased our purchase of leaf in the U.S. by 65%. And today, Reynolds is the number one company in terms of volume of leaf purchased in the U.S. market. So we are not making disclosures specifically about the duty clawback impact. But one data point for you to consider is the fact that our revenue in combustibles would have been positive independent of the duty drawback. So it's important to mention that because at the end of the day, when you go back to what I was referring to in terms of the long-term algorithm, we expect the U.S. market in terms of combustibles to be declining at rates around 6% to 7%. And this should be, given the elasticity that still exists in the market, the possibility for Reynolds to get to a positive revenue around 0% to 1%. In the current years, it has been more than that because the company is doing extremely well in terms of the strength of the portfolio, but also the duty drawback is helping for those in that sense as well. But independent of the drawback, we are positive, and I feel very comfortable with the range that we have set ourselves for our long-term algorithm.

I think the overall new category revenue guidance of low double digits is one aspect to consider. Several points are important. In the U.S., as I mentioned in my presentation, we had a negative figure for Vuse for the full year. We expect Vuse numbers to remain relatively flat, which will require stronger enforcement and will take time to have a meaningful impact due to a complex supply chain. Even the pending ITC regulation, if approved, will not yield significant effects until later in the year. Additionally, the regulations in Poland and Europe have negatively impacted reuse volumes, making it difficult to enter those markets. The competitive environment in the BWAP segment, particularly within the heated product portfolio, will persist in the short term. When considering all these factors, that's why we provided guidance on the low end of the teens. However, we are very confident that Velo will drive new category revenue growth in the midterm, as it is the fastest-growing brand in the rapidly expanding nicotine category globally, including in the U.S.

Our next question is from Simon Hales from Citi.

So a couple for me. I wonder if I could just first come back to some of those comments you just made on the U.S. business on a go-forward basis. Just back to the point in terms of the base performance and the flat vapor expectation for 2026. I'm still just trying to square that circle, given you've got pretty strong exit rate momentum through the second half of the year. I appreciate enforcement actions in vapor and a straight upward line. But we're still probably going to annualize at least through the first half, some of the building enforcement we saw in 2025, and that should help the vape category, I would imagine, the legal vapor category in the first half. So you therefore expect, as we come into H2 of 2026, to see your Vuse business down year-on-year to get you back to that flat guidance for the year. That's the first point. And then secondly, on the U.S., today, you talked about 6% to 7% being the normal full run rate of decline on combustibles volumes. Is that something you expect to see in 2026 and could you also perhaps talk a little bit about what you're doing in discount at the moment, the performance of Doral last year and your plans on that brand going forward?

Yes. So if I take the first one. So I think one thing which I have to highlight further on the second half performance of 2025 of Vuse in U.S. Other than the enforcement, there is also one item which will not see repetition was the delisting of competition products in which Vuse gains. So 63% of those consumers stayed within the glow systems. And in RCS systems, views gained more than their fair share of our category. So that is one thing, which is also boosting Vuse performance in the second half. So I wouldn't be replicating that second half into the full year of '26. It will be more focused and will be more dependent upon the level of enforcement we see. And as also highlighted by Tadeu, although we have seen regulation covering 40% of the legal volume, the level of enforcement varies from state to state. So not having that one-off of the exit of a competitor, which we gained more than a fair share of, and enforcement seems to be early days. So that's why our guidance on the Vuse comment was made by me.

Yes. Regarding volume, my remarks are more hypothetical. The situation in the U.S. market is declining. In 2020, 54% of nicotine users were using traditional combustibles, while by 2025, that number is expected to drop to 34%. This indicates a shift as consumers transition to either paying for or using smokeless products, such as modern oral or vapor products. The decline related to adult cigarette consumption and the reduction in usage over time around 4% is unlikely to reverse. Even with significant enforcement on vapor products and disposables, which contributes to the decline in cigarette sales, and even if macroeconomic conditions improve in the U.S., it's difficult to envision the market returning to a 4% decline due to the dynamics of poly-use and single-use users in the new categories. In the long run, considering substantial enforcement on disposables and strengthening macroeconomic conditions, we expect a decline of between 6% to 7%. For '25, a performance of around 7% to 8% seems more realistic. This applies to the overall market. When isolating the overall market, the deeper discount segment exhibits a different pattern, with competitors increasing activity, leading to a 10% growth in deeper discounts in 2024, surpassing the 7% growth observed in 2024.

That was the last question today over the phone. With this, I'd like to hand the call back over to Victoria. Over to you.

Thank you very much, everybody, for your questions. I'm afraid that's all we have time for today. So if you put a question into the web, then the IR team will be delighted to answer the question as soon as we can. I'd now like to hand back to Tadeu for closing remarks.

Okay. Thank you all for listening today and for your questions. To close, I'm confident we have the right building blocks in place to deliver our midterm algorithm supported by delivering 2025 results at the top end of guidance. We will continue to reward our shareholders through strong cash returns, including our progressive dividend and a sustainable share buyback, enabling us to deliver long-term growth and value creation. Thank you again for joining us. I look forward to seeing many of you at the CAGNY conference next week where we are presenting on the 18th of February.