British American Tobacco 2021 Second-Half Pre-Close Trading Update

7 December 2021

BRITISH AMERICAN TOBACCO p.l.c.

2021 Second Half Pre-Close Trading Update

Trading update – ahead of closed period commencing 1 January 2022

Jack Bowles, Chief Executive:

'2021 is the pivotal year in our transformation journey to build A Better Tomorrow.

Benefitting from a continued strong New Category performance, which is now a sizeable contributor to group revenue growth, we are making excellent progress towards our £5bn revenue target by 2025, supported by a clear focus on THP. 

By leveraging our increased scale, New Categories will contribute to profit growth for the first time as their losses start to reduce, a key step on our pathway to profitability by 2025.

We are building strong, fast growing, global brands of the future, adding another 3.6m consumers of non-combustible products¹ in the first nine months of the year, more than in all of 2020.

Our strong focus on cash flow and deleveraging continues. We recognise the clear value of a share buyback at the current valuation. We also continue to be clear on the need to deliver on our 2021 commitment to reduce leverage to c.3x adjusted net debt² / adjusted EBITDA³ and expect to reach this by the year end⁴. This will provide greater capital allocation flexibility as we enter 2022.

Sustainability is at the core of our transformation with ESG deeply embedded throughout the business. Alongside the acceleration in New Categories, we continue to advance our ESG agenda with stretching metrics, signing up to the UN-backed Race to Zero global campaign.

The next phase in our journey to create a sustainable Enterprise of the Future is being accelerated by our transformation programme Quest, leveraging our agile organisation and building on the success of our business simplification programme Quantum.

We are accelerating our transformation with continued strong momentum across New Categories and are confident in delivering our 2021 financial guidance.'

Performance highlights are expected to include:

Accelerating our Transformation:

• Strong acquisition of consumers of non-combustible products¹, up 3.6m Sept YTD to 17.1m
• Continued strong New Category volume and revenue growth
• Strengthened Vuse global value share leadership in Vapour⁵
• glo delivering strong consumer acquisition, driving continued THP category volume share gains across all key markets
• Further New Category investment, building strong global brands and capitalising on our momentum
• Leveraging our increased scale, New Categories will contribute to profit growth for the first time as their losses start to reduce

Delivering financial performance:

• Revenue growth at constant currency above 5%, benefitting from strong New Category revenue growth
• Robust combustibles revenue growth with continued strong pricing, partially offset by geographic mix driven by volume recovery in key lower margin Emerging Markets post COVID and lower US volume
• FY global tobacco industry volume now expected to be broadly flat (previously c.-1.5%) with the improvement driven by Indonesia. FY US industry volume expectations maintained at around -5.5%
• A strong US performance, driven by New Category revenue growth and combustible pricing
• Expected £1bn savings from Quantum delivered one year ahead of plan, well on track to deliver on our revised £1.5bn target by end of 2022, set at our H1 2021 results
• Maintaining mid single figure constant currency adjusted diluted EPS growth guidance for 2021, with our strong operational performance allowing us to absorb:
• A c.£260m profit impact⁶ from excise changes and competitive pricing in Australia and New Zealand, an increase from the £170m excise impact in Australia stated at H1 2021
• A continued transactional FX headwind of c.-2% on adjusted profit growth for FY 2021
• Strong FY operating cash conversion well in excess of 90% of adjusted profit from operations
• Leverage reducing to c.3x adjusted net debt²/ adjusted EBITDA³ by year end

Technical guidance:

• Underlying tax rate of c.25%
• Gross capex of c.£700m, in-line with adjusted depreciation and amortisation
• Applying current foreign exchange rates⁴ we would expect a translation headwind of over -7% on adjusted diluted EPS growth, (c.-9% on New Category revenue)

Trading update detail: Continued strong momentum in New Categories

Vuse now global leader in Vapour reaching 34.1% category value share in Top 5 Vapour markets Sept YTD, up 6.9 ppts vs. FY 2020

• Vuse now leads the category in 26 states in the US, and is approaching nationwide leadership with total Vapour value share of 31.4% up 650bps September YTD vs FY 2020
• Vuse Solo received the first of its kind US FDA⁷ Vapour marketing authorisation in October, giving us further confidence in our other Pre-Market Tobacco Product Applications (PMTAs) which share the same foundational science
• Vuse achieved strong value share gains in all other Top 5 markets, with Vuse global brand migration from Vype fully completed

Continued success of glo Hyper drove THP category volume share of consumables in the Top 9 THP markets up 4.5 ppts vs. FY 2020 to reach 17.7% Sept YTD.

• Strong performance of glo Hyper in Japan, driving glo total nicotine volume share up +120bps vs. FY 2020 to reach September YTD share of 6.6%. THP category volume share up 170bps YTD September vs. FY 2020 to reach 21.1%
• In ENA, glo Hyper continues to drive accelerated volume and revenue growth in 2021, with glo achieving strong THP category volume share gains across all key markets
• glo Hyper has been launched in 4 new markets in the year and is now in 22 of 24 glo markets globally, with further market roll outs planned for 2022

Extending volume share leadership in Modern Oral Top 5 ex US. Category share in Top 5 markets at 36.1% Sept YTD down 0.5 ppts vs. FY 2020 driven by the increased US weighting.

• Share in Top 5 markets ex US (which account for more than half of Top 5 Modern Oral value) reached 68.9%, up 140bps September YTD vs FY 2020
• In Sweden and Norway Modern Oral category volume shares of 59.5% and 63.8%, were up 5.6ppts and 1.7ppts September YTD vs FY 2020, respectively
• Velo Modern Oral volume share in the US grew 5.5ppts v FY 2020 to reach a September YTD share of 13.1% in a competitive market

Continued value growth in combustibles, with strong pricing partially offset by geographic mix and the absorption of a c.£260m profit impact⁶ in Australia and New Zealand

• Group cigarette value share up 10bps September YTD
• Volume recovery and share growth in key Emerging Markets, including Bangladesh and Pakistan
• Expected strong constant currency revenue and profit growth in the US, with good pricing and growth in value share and premium share (up +50bps and +60bps, respectively), driven by Natural American Spirit and Newport

Building on our strong ESG foundations we are creating shared value for all our stakeholders. Recent highlights include:

• For the 20^th consecutive year we have been named in the Dow Jones Sustainability Indices (DJSI), with an improved industry leading score of 86%, and are once again the only tobacco company to be included in the prestigious DJSI World Index
• In October our Sustainalytics score improved to 26.8⁸, and we have maintained MSCI's BBB score
• The 180-day results from our landmark 1-year glo clinical study were published in July.⁹ Completely switching to glo resulted in positive changes to all indicators of potential harm compared to smoking, the majority similar to quitting smoking
• We continue to develop a substantial body of scientific data for our reduced risk products¹⁰ across each category 
• In July, we set further stretching targets including net zero deforestation^11,12 of managed forests in our supply chain by 2025, and net positive impact on forests in our tobacco leaf supply chain by 2025¹²
• We recently signed up to the UN-backed Race to Zero global campaign