British American Tobacco Plc – Interim Report

BRITISH AMERICAN TOBACCO p.l.c.  

HALF-YEAR REPORT TO 30 JUNE 2021

 

STRONG BRANDS DRIVE NEW CATEGORY ACCELERATION

PERFORMANCE HIGHLIGHTS	REPORTED				ADJUSTED
	Current	Vs 2020		Current		Vs 2020
	rates			Rates		(constant)
Cigarette and THP volume share		+20 bps
Cigarette and THP value share		+10 bps
Consumers of non-combustible products1	16.1m	+2.6m
Revenue (£m)	£12,175m	-0.8%		£12,175m		+8.1%
Revenue from New Categories (£m)	£883m	+40.4%		£883m		+50.0%
Profit from operations (£m)	£4,907m	-3.7%		£5,235m		+5.4%
Operating margin (%)	40.3%	-120 bps		43.0%		-70 bps2
Diluted EPS (pence)	141.6p	-6.0%		154.2p		+6.1%
Net cash generated from operating activities (£m)	£2,254m	-35.3%
Free cash flow after dividends (£m)				(£1,163)m		Not meaningful
Cash conversion (%)2	45.9%	-22.5 ppts		66.7%		-13.5 ppts
Borrowings3 (£m)	£45,010m	-10.8%
Adjusted Net Debt (£m)				£40,490m		-7.6%

The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on pages 54 to 58, with reconciliations from the most comparable IFRS measure provided.  Note – 1.  Internal estimate. 2. Movement in adjusted operating margin and operating cash conversion is provided at current rates. 3. Borrowings includes lease liabilities.

Accelerating our Transformation

Strong H1 Results

· New Categories revenue up 50% to £942m* · Our highest ever non-combustible product consumer acquisition +2.6m to 16.1m in H1, with 11.8% of Group revenue delivered by non-combustible products · Vapour revenue up 59%*, Vuse approaching global category value share leadership · glo revenue up 38%*, with glo Hyper volume share gains in ENA and Japan · Velo revenue up 63%*, with our T5 volume share of the Modern Oral category at 39.5% up 280 bps · Further incremental increase of £346m investment in H1, capitalising on strong momentum in all three New Categories · Full Year New Category losses expected to reduce

· Revenue up 8.1%* led by New Category growth and a partial recovery from prior-year COVID-19 impacts · Combustible revenue up 5.8%* with price/mix of 4.3%, reflecting Emerging Market (EM) recovery · Cigarette value share up 10 bps, and volume share up 10 bps reflecting strong EM performance · Further £256m cost savings, driven by Quantum, target increased to £1.5bn (previously £1bn) by 2022 · Adjusted profit from operations up 5.4%* includes a transactional FX impact of 2% · Adjusted operating margin down 70 bps, driven by increased New Category investment, geographic mix and transactional FX · Adjusted diluted EPS up 6.1%* · Operating cashflow conversion of 67%, reflecting phasing of excise payments in the US in 2020

Jack Bowles, Chief Executive:

“This has been an exciting period of growth in New Categories, with New Category constant currency revenue up by 50% in the first half. We added 2.6m consumers, our highest ever increase, to our non-combustible product consumer base, to reach 16.1m. This demonstrates our accelerating transformation driven by our multi-category portfolio, with continued key market share gains in all three New Categories.

We are building strong, global brands of the future with Vuse, Velo and glo. These are underpinned by industry leading multi-category consumer insights and science, with increasing digitalisation. We have invested a further incremental £346m in the first half, funded by continued value growth from combustibles and expect to reach our £1bn Quantum savings target 12 months early. We have now increased our savings target to £1.5bn by 2022.

Our rapid growth in New Categories is driving significant scale benefits and 2021 is shaping up to be a pivotal year in our journey towards A Better Tomorrow.

Our focus on New Categories growth and business sustainability puts ESG at the core of our strategy. There is great momentum across the business and we are well on track to meet our targets of £5bn of New Category revenue by 2025 and 50m non-combustible product consumers by 2030.

We are committed to reducing the health impact of our business . Our ambition remains a sustainable, high growth, multi-category, consumer products business. I am excited about the future for BAT.”

On track for FULL YEAR 2021 guidance:

· Global tobacco industry volume now expected to be down c.-1.5% (from c.-3%), driven by strong EM recovery.

· US industry volume expected to be down c.-5.5%, given continuing macro-economic uncertainties and a strong comparator.

· Constant currency revenue growth above 5% and continued strong progress towards £5bn New Categories revenue in 2025.

· Mid-single figure constant currency adjusted EPS growth, including continued expectation of c.2% transactional FX headwind.

· Expected translational FX headwind of c.7% on full year adjusted diluted EPS growth.

· Operating cashflow conversion in excess of 90%, Adjusted Net debt/Adjusted EBITDA around three times.

· Commitment to 65% dividend pay-out ratio and growth in sterling terms.  

* at constant rates of exchange
 

CHIEF EXECUTIVE'S STATEMENT

TRANSFORMING OUR BUSINESS – BUILDING A BETTER TOMORROW^TM

We are committed to our purpose of building A Better Tomorrow^TM. We will achieve this by reducing the health impact of our business through a progressive and continued portfolio transformation. As these results show, we are becoming a business that defines itself, not by the product it sells, but by the consumer needs that it meets. The addition of 2.6m consumers of non-combustible products in H1 2021, reaching 16.1m, highlights the progress we are making.

The accelerated growth of Vuse, glo and Velo positions us well to meet our New Categories revenue target of £5 billion by 2025. The progress of these brands – brands with purpose – highlights the strength of our three strategic priorities:

· Accelerating growth in New Categories, fuelled by:

· Value growth in combustibles; and

· Benefitting from a faster, simpler, more agile business.

Hyper has driven the growth of glo, we are growing volume share of the total modern oral market (partly due to Velo in US) and Vuse is the category value share leader in four of the top five vapour markets and market leader (by value share) in 20 US states.

Digitalisation is key to the future of our business and we continue to invest beyond our technology capabilities in manufacturing and supply chain. Our e-commerce footprint is developing quickly with consumer subscription programmes growing in priority New Category markets. Increasingly, data and analytics are playing a critical role in new capability areas such as more powerful Customer Relationship Management, pricing realisation via Revenue Growth Management and Marketing Spend Effectiveness tools.

Building A Better Tomorrow^TM is about creating shared value for all our stakeholders. We are making good progress towards achieving our ambitions, including:

· In May, we announced that Vuse had become the world's first verified¹ global carbon neutral vapour brand; and

· In March, we augmented our existing carbon emissions target by announcing our ambition to be carbon neutral across our entire value chain by 2050.

We are also proud of the notable recognition we have received for our ESG efforts (see page 22). So far, in 2021, this has included:

· The highest 'Gold Class' distinction in S&P Global's Sustainability Yearbook;

· Ranked as the third highest ESG-rated FTSE 100 company by Refinitiv, global provider of financial market data and a subsidiary of London Stock Exchange Group;

· Named as a Climate Leader by the Financial Times in its inaugural European ranking; and

· Named as a Global Top Employer for the fourth year running by the Top Employers Institute.

Our progress is testimony to the resilience of our staff, customers, partners and suppliers. We remain committed to supporting all our stakeholders throughout the COVID-19 pandemic.

As we enter the second half of the year, our focus on developing and delivering consumer-focused products and brands is driving accelerated momentum. We are creating multi-stakeholder value and transforming ourselves into a high-growth, consumer products business: global, consumer-centric, multi-category, with sustainability front and centre.

¹  As verified by Vertis based on product Life Cycle Assessment data provided by an independent third party, taking into account the Group's purchase of carbon credits through reforestation projects.

FINANCE & TRANSFORMATION DIRECTOR'S OUTLOOK STATEMENT

STRONG OPERATIONAL MOMENTUM AND CASH FLOW

Our strong momentum underpins our expectations for constant currency revenue growth of above 5% in 2021. The second half of the year will reflect the impact of geographic and portfolio mix, and a strong prior year comparator which offset the continued progress from New Categories.

Capitalising on our strong momentum, we further increased investment in New Categories by £346 million in H1 2021 and additional investment is planned for H2 2021. We continue to expect full year 2021 losses from New Categories to reduce, with a clear pathway to profitability by 2025. This investment has been funded by our continued strong growth in combustibles, and savings from Quantum, and expect to reach the £1 billion annualised savings target 12 months ahead of plan. With further savings identified, we have upgraded our Quantum target to £1.5 billion by 2022.

Full year constant currency adjusted profit from operations growth is expected to be driven by strong revenue performance and further savings from Quantum. This will be partially offset by the continued incremental New Category investment and challenges in Australia where we anticipate a one-off impact from changes in excise (£170 million) alongside a highly competitive pricing environment.

As previously communicated, we continue to expect no recovery in Global Travel Retail (GTR) until 2022, with COVID-19 continuing to negatively impact our associate income from ITC in the second half of 2021. We are also absorbing a c.2% transactional FX headwind in our constant currency guidance. Accordingly, we maintain our FY 2021 guidance of mid-single figure constant currency adjusted diluted EPS growth.

BAT is a highly cash generative business and we are on track to, once again, achieve operating cash flow conversion in excess of 90%, with year-on-year growth in H1 2021 impacted by the phasing of excise payments in 2020.

Our liquidity profile remains strong, with average debt maturity close to 10 years and maximum debt maturities in any one calendar year of around £4 billion. Our medium-term rating target remains BBB+/Baa1, with a current rating of BBB+/Baa2****.

We remain committed to our 65% dividend pay-out ratio and dividend growth in sterling terms, continuing to invest in the transformation of the business and building A Better Tomorrow^TM, while deleveraging the balance sheet to reach around 3x adjusted net debt to adjusted EBITDA by the year end. At that point we expect increased flexibility for capital allocation.

****A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.
 

GROUP OPERATING REVIEW

TOTAL GROUP VOLUME and REVENUE

 

For six months ended 30 June	Volume (unit)		Revenue (£m)
			Reported				At constant rates
	2021	Change	2021	2020	Change		FX	2021 cc	2020	Change
	Unit	%	£m	£m	%		£m	£m	£m	%
New Categories			883	628	+40.4%		59	942	628	+50.0%
Vapour ( 10ml units / pods mn)	247	+70%	398	265	+49.9%		25	423	265	+59.3%
THP (sticks bn)	8.4	+99%	359	286	+25.3%		35	394	286	+37.8%
Modern Oral (pouches mn)	1,607	+124%	126	77	+64.2%		(1)	125	77	+63.2%
Traditional Oral (stick eq bn)	4.1	-3.1%	558	576	-3.3%		54	612	576	+6.1%
Total Non-Combustibles			1,441	1,204	+19.5%		113	1,554	1,204	+29.0%
Cigarettes (sticks bn)	316	+1.8%
OTP incl RYO/MYO (stick eq bn)	9	-6.6%
Total Combustibles	325	+1.5%	10,527	10,854	-3.0%		958	11,485	10,854	+5.8%
Other			207	213	-2.0%		22	229	213	+7.9%
Total			12,175	12,271	-0.8%		1,093	13,268	12,271	+8.1%
Cigarettes and THP (sticks bn)	324	+3.1%

Use of the term “cc” refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

New Category consumables volume growth accelerated and was up substantially in all three categories. Combustibles volume was up 1.5%, driven by cigarette volume share gains (up 10 bps) and the recovery of emerging markets including Bangladesh, Pakistan, Vietnam, Brazil and South Africa, following the impact of COVID-19 last year. Duty paid industry cigarette volume was broadly stable in the first half of 2021.

On a reported basis, revenue was marginally lower than the prior year (down 0.8% to £12,175 million). Strong revenue growth in New Categories, up 40.4%, supported by combustible volume growth, price/mix of 4.3%, and value share gains of 10 bps, were more than offset by a translational foreign exchange headwind of 8.9%. Revenue was up 8.1% on a constant currency basis, reflecting New Category growth and a partial recovery in some EMs from the impact of COVID-19 in 2020.

Revenue from non-combustibles now represents 11.8% of Group revenue, up from 10.1% at FY 2020, reflecting strong New Category revenue growth of 40.4% (or 50.0% at constant rates of exchange).

PROFIT FROM OPERATIONS AND OPERATING MARGIN

 

For six months ended 30 June			Reported PfO (£m) Operating Margin (%)			Adjusted PfO (£m) Adjusted operating margin (%)
			2021	2020	Change	Adj	FX	2021 cc	2020	Change
Profit from Operations (PfO)			4,907	5,097	-3.7%	328	424	5,659	5,368	+5.4%
Operating Margin			40.3%	41.5%	-120 bps			42.6%	43.7%	-110 bps

Use of the term “cc” refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

Profit from operations on a reported basis was down 3.7% at £4,907 million, driven by an improvement in the Group's operating performance despite an incremental increase in investment in New Categories of £346 million (compared to the first six months of 2020) and a transactional foreign exchange headwind of 2%. This was more than offset by a translational foreign exchange headwind of 8% and £328 million in one-off charges (30 June 2020: £271 million) which included a cost of £71 million related to assets and liabilities held-for-sale, including in respect of the proposed sale of the Group's operations in Iran (as explained on page 20).

Reported operating margin was down 120 bps to 40.3%, largely due to the increased investment in New Categories, the held-for-sale impairment charges and higher costs due to transactional foreign exchange discussed earlier.

Adjusted profit from operations and adjusted operating margin

Adjusted profit from operations at constant rates was up 5.4%. Strong revenue growth and £256 million productivity savings driven by Quantum was partly offset by the further increase in New Category investment, up £346 million in H1 2021, geographic mix, no recovery in GTR and the absorption of a 2% transactional headwind in the period. Accordingly, adjusted operating margin was down 70 bps or down 110 bps at constant rates of exchange.

 

 

 

CATEGORY PERFORMANCE REVIEW

A STEP CHANGE IN NEW CATEGORIES

For six months ended 30 June	Volume (unit)		Revenue (£m)
			Reported				At constant rates
	2021	Change	2021	2020	Change		FX	2021 cc	2020	Change
	Unit	%	£m	£m	%		£m	£m	£m	%
New Categories			883	628	+40.4%		59	942	628	+50.0%
Vapour (10ml units / pods mn)	247	+70%	398	265	+49.9%		25	423	265	+59.3%
THP (sticks bn)	8.4	+99%	359	286	+25.3%		35	394	286	+37.8%
Modern Oral (pouches mn)	1,607	+124%	126	77	+64.2%		(1)	125	77	+63.2%
Traditional Oral (stick eq bn)	4.1	-3.1%	558	576	-3.3%		54	612	576	+6.1%
Total Non-Combustibles			1,441	1,204	+19.5%		113	1,554	1,204	+29.0%

Use of the term “cc” refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

VUSE – VAPOUR: Approaching Global Category leadership

· Vapour volume growth accelerating, up 70% with our highest ever consumer acquisition +0.9m to 7.5m

· Vuse value share growth of 610 bps vs FY 2020 to reach 31.6% May YTD of total vapour value share in key (T5) markets

· Vuse value share leader in four of the T5 markets, with leadership in 20 states in the US

· Vuse is the first global vapour brand to be independently verified¹ by Vertis as carbon neutral

Vapour continued its strong momentum (driven by Vuse) with volume accelerating, up 70%, and revenue up 50%, or 59% at constant currency. We delivered strong growth and value share gains across all our T5 markets achieving our highest total vapour value share of 31.6% May YTD (up 610 bps vs FY 2020) and are approaching global value share leadership. We maintained volume share leadership of devices in all T5 markets.

In the US, Vuse consumables volume grew 97%, materially outperforming the total vapour industry which has returned to growth (with industry volume up approximately 30%). This drove revenue growth of 42%, or 56% on a constant currency basis. Vuse family value share of total vapour was 30.0% (up 510 bps on FY 2020), driven by the continued success of Vuse Alto with value share reaching 27.5% May YTD, up 720 bps vs FY 2020. We have achieved market value share leadership in 20 states and continue to approach total value share market leadership.

In our other T5 markets, we continued to extend our value share leadership position, with all T5 Vype brand migrations completed by the end of H1 2021.

· In the UK, we reached 36.3% value share of the total vapour market May YTD, up 80 bps vs. FY 2020, led by Vuse reaching value share of 19.3% YTD up 440 bps vs FY 2020.

· In France, our value share leadership of total vapour extended further to reach 43.6% May YTD, up 1,210 bps vs FY 2020 driven by both ePen3 and ePod.

· In Germany, our value share of total vapour was 59.0% Apr YTD, up 930 bps vs FY 2020, driven by ePen3 and ePod.

· In Canada, our value share of total vapour was 75.2% May YTD, up 2,900 bps vs FY 2020, driven by ePod.

 

We have continued the rapid expansion of our e-commerce revenue, up 77% YTD compared to the first six months of 2020, with Vuse ranked No.1 in branded web traffic in all of our T5 markets². The number of consumers utilising our subscription programme has increased to c.20k, up 63% vs H1 2020.

This valuable subscriber base, improved trade margins and cost of sales scale efficiencies through automation and deployment of Marketing Spend Effectiveness and Revenue Growth Management tools are all contributing to our pathway to New Category profitability.

In May, the FDA posted its list of New Category 'deemed' tobacco products for which a Pre-market Tobacco Application (PMTA) had been filed, reflecting a positive step forward in the enforcement against products that are not included on the list. All our currently marketed deemed products are on the list and we remain optimistic about the impact that this will have on the addressable market for our brands going forward.

Vuse is one example of how we are driving our ESG purpose. We are very proud that Vuse has been independently certified by Vertis as the first global carbon neutral vapour brand in the period¹. Together with award-winning campaigns and digital engagement we are committed to building the most trusted vaping brand worldwide with a clear consumer-led purpose.

 

* T5 markets by revenue are the US, UK, France, Germany and Canada; they account for 75% of total industry vapour revenue (closed systems)

¹ As verified by Vertis based on product Life Cycle Assessment data provided by an independent third party, taking into account the Group's purchase of carbon credits through reforestation projects.

² Source: Similar Web.

CATEGORY PERFORMANCE REVIEW

glo – TOBACCO HEATING PRODUCTS (THP) – Hyper continues to accelerate share growth

· Volume up 99% driven by the continued success of glo Hyper, with consumer numbers up 1.2m to 5.3m.

· glo's THP category volume share reached 16.5% May YTD, up 320 bps vs. FY 2020 in our Top 9 markets.

· ENA volume up 368%, and revenue up 241% (or 248% at constant rates of exchange), gaining volume share across all key markets.

· Japan reached 6.2% May YTD volume share of total cigarettes and THP, up 80 bps vs FY 2020.

 

glo total consumable volume grew 99% in H1 2021, further accelerating from H2 2020, achieving over three times the global THP industry volume growth of 31.9%. This was driven by the continued success of glo Hyper in Japan and across ENA. glo total revenue grew 25.3% or 37.8% at constant currency. Since the launch of Hyper in the first half of 2020, glo's performance on key metrics such as brand power and consumer conversion have continued to improve supporting the sustainability of our ambition for glo to be the fastest growing global THP brand.

In APME, volume grew 23.1%, driven by Hyper as we continue to invest in consumer acquisition. The increased investment together with the partial absorption of excise in Japan, due to the disproportionate impact of excise harmonisation on our products, resulted in THP revenue in the region down 11.7% or 3.5% on a constant currency basis.

In Japan, volume growth for consumables and devices was driven by Hyper, with improved consumer conversion from trial to active usage of 41%. glo's volume share of the THP category reached 19.8% May YTD up 50 bps vs FY 2020. This represents 24% of the total growth in cigarettes and THP, well ahead of our category share.

In ENA, glo volume grew 368%, more than six times faster than THP industry growth rates of 54% in the region. The region now represents around 50% of our global THP volume. Revenue growth accelerated, up 241% or 278% at constant currency.

· In Russia, glo reached 17.6% THP category volume share in May YTD, up 900 bps FY 2020 and accounting for 44% of the growth of the category. 

· In the Ukraine, glo reached 19.0% THP category volume share May YTD (up 800 bps vs. FY 2020), with Kiev reaching 18.5% category volume share.

· In Italy, glo reached 10.7% THP category volume share May YTD, up 670 bps, with Hyper driving 100% of the growth.

· In Romania, we reached 22.7% category volume share May YTD, up 590 bps, and 20.1% volume share in Bucharest up 550 bps.

Hyper also continued to make good progress in Kazakhstan, Poland, Egypt, the Czech Republic and across other smaller ENA launch markets, and is now in 21 of glo's 23 markets, with further market roll-outs planned.

 

 

CATEGORY PERFORMANCE REVIEW

VELO – MODERN ORAL – International leadership and strong US momentum

· Accelerating global volume growth, up 124%, with consumer numbers up 0.7m to 2.2m

· Category volume share in key (T5*) markets reached 39.5% May YTD up 280 bps on FY 2020

· US volume up 450%, with volume share of Modern Oral at 16.0% May YTD, up 840 bps vs FY 2020

· ENA volume up 77.2% driving volume share of Modern Oral to 69.1% May YTD, up 160 bps

 

Our Modern Oral growth accelerated in the first six months of 2021, with volume up 124% and revenue up 64.2% or 63.2% at constant currency. Volume share of the Modern Oral category in our T5 markets reached 39.5% May YTD 2021 up 280 bps vs FY 2020.

In the US, volume was up 450% to 405 million pouches (compared to 74 million pouches in the same period in 2020) significantly outpacing industry growth of around 110%, with revenue up 17.3% or 29.3% on a constant currency basis. We continue to focus on consumer acquisition with our expanded portfolio following the acquisition of the nicotine pouch products of Dryft Sciences LLC (Dryft) in October 2020.

Velo recorded the largest growth in awareness across Modern Oral brands in the US, as we continued the national roll out of our enlarged portfolio reaching over 80,000 outlets in June 2021. In a competitive market we reached 16.0% volume share of Modern Oral May YTD 2021 up 840 bps vs FY 2020, with our volume share in 6 states already over 20%.

We estimate that approximately half of Velo consumers (in the US) come from the existing Modern Oral users, with the remainder sourced evenly from combustible, snus, traditional oral and vapour consumers. Our insights suggest that a high percentage of Modern Oral users are already poly-users of other categories.

In ENA, volume grew 77.2% with revenue up 67.5% or 64.9% at constant currency, as the Modern Oral segment continues to expand rapidly, and we continue to consolidate our industry leading position**. We consistently lead innovation in the category with three new formats launched and seven new flavours added in the last 12 months.

· In Sweden, where Modern Oral now represents 11.8% of the total oral category, our volume share of the Modern Oral category reached 57.8% May YTD, an increase of 410 bps vs. FY 2020**.

· In Norway, where Modern Oral now represents 27.3% of the total oral category, our volume share of the Modern Oral reached 63.4% May YTD up 130 bps vs. FY 2020.

· In Denmark, Modern Oral now represents 88.8% of the total oral category and continues to be the main driver of total oral category growth. Our volume share of the Modern Oral category declined by 380 bps vs FY 2020 to 90.1% May YTD, but still drove a 460 bps increase in our Modern Oral volume share of total oral category to 80.0%.

Our pilot launches in emerging markets including Pakistan and Indonesia are now delivering valuable insights, as we continue our roll-out in key urban markets. We believe that Modern Oral is an exciting longer-term opportunity to commercialise reduced risk products by offering affordable New Category alternatives to adult nicotine consumers, with further emerging market roll-outs planned for the second half of 2021.

In Kenya sales remain suspended due to local regulatory challenges, and we continue to engage with local authorities. In Germany, sales of Modern Oral have been suspended pending engagement with the authorities regarding the classification of tobacco-free nicotine pouches.

* Modern Oral focus markets revised to be T5 markets of US, Sweden, Norway, Denmark and Switzerland.

** Sweden volume share has been rebased to include Nicotine free pouches in all periods. Accordingly, BAT's FY2020 volume share of modern oral was rebased to 53.8%.

 

 

 

CATEGORY PERFORMANCE REVIEW

BEYOND NICOTINE

Our corporate venturing unit, Btomorrow Ventures (BTV) made five new investments in the first six months of 2021 – four in innovative consumer and technology businesses and one fund investment. Overall, 13 BTV investments have been completed since launch in 2020, providing us with evolving capabilities for the future across both New Categories and Beyond Nicotine.

As we explore beyond nicotine, we are building an eco-system of new capabilities and insights for the future. We are leveraging the expertise of our external partners and while it is early days in this space, we see this as an exciting way to recapture lost consumer moments and drive longer term growth.

On 11 March 2021, we entered a strategic collaboration agreement with Organigram Inc., a wholly-owned subsidiary of publicly-traded Organigram Holdings Inc., focused on research and product development activities of next generation adult cannabis products, with an initial focus on cannabidiol (CBD). As described on page 20, under the terms of the transaction, a Group subsidiary acquired a 19.9% equity stake in Organigram Holdings Inc. (listed on both the Nasdaq and Toronto Stock Exchange under the symbol “OGI”) to become its largest shareholder.

TRADITIONAL ORAL

Group volume declined 3.1% to 4.1 billion stick equivalents. Total revenue was £558 million, down 3.3% due to the impact of foreign exchange. At constant rates, revenue grew by 6.1%, driven by continued strong pricing in the US (price mix of 9.1%) which accounts for 97% of revenue from the category.

In the US, Traditional Oral volume declined 3.1% in the first half of 2021, with value share of moist up 20 bps and volume share down 20 bps. This was driven by Grizzly which continues to drive value growth through strong pricing, utilising revenue growth management techniques.

The Modified Risk Tobacco Product (MRTP) applications for Camel Snus were discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) in September 2018. We continue to work with the FDA as the MRTP applications and public comments remain under review by the Agency.

VALUE THROUGH COMBUSTIBLES

· Group value share up 10 bps, driven by the US up 40 bps

· Volume up 1.5% driven by EM recovery

· Strong pricing, partially offset by negative geographic mix

· Revenue growth up 5.8% at constant rates, with Combustibles price/mix +4.3%

Group cigarette value share increased 10 bps vs FY 2020, driven by the continued performance of the strategic cigarette brands in the US (up 50 bps). This combined with higher cigarette value share in Bangladesh, Germany, Japan, Vietnam, Turkey, Mexico, Pakistan and Taiwan to more than offset lower value share in Indonesia, Saudi Arabia, South Africa and Spain. Group cigarette volume share grew 10 bps with the strategic portfolio also up 10 bps. Pricing continued to be strong, with combustibles price/mix of 4.3%.

Group cigarette volume grew by 1.8% to 316.0 billion sticks (2020: 310.5 billion sticks) driven by the recovery in emerging markets. Volume grew in:

· Bangladesh (driven by the continued strength of the local portfolio);

· Brazil (where enhanced border security and restricted population mobility due to COVID-19 led to an increase in duty paid volume);

· South Africa (as the market recovered from the COVID-19 lockdown and ban of sales in April to August 2020);

· Pakistan (where illicit trade reduced following significant excise-led growth in recent years); and

· Vietnam (with strong volume recovery post COVID-19 lockdowns in the comparator).

This was partially offset by lower volume in:

· the US where the Group's cigarette volume was down 4.4% to 34.7 billion sticks (2020: 36.2 billion sticks), broadly in-line with industry volume which was down around 5%. This is more in-line with historical rates, driven by rising gas prices and the partial unwinding of last year's additional supply chain inventories and stronger consumption trends; and

· Indonesia where the Group has sought to drive increased value with pricing ahead of the industry.

Our GTR business continues to show no signs of recovery due to COVID-19 travel restrictions.

 

 

CATEGORY PERFORMANCE REVIEW

Volume of the strategic cigarette brands, collectively, grew 0.7% in the first six months of 2021:

· Dunhill's value share was down 10 bps as growth in Romania, Taiwan, Pakistan and Brazil was more than offset by declines in Indonesia, South Korea, Saudi Arabia, Australia, Malaysia and Netherlands. Volume was 8% lower, largely due to the impact of the tax increases and minimum retail price compliance in Indonesia, partially offset by recovering volume in Brazil and South Africa;

· Kent's value share was stable as growth in Turkey, Russia and Saudi Arabia were offset by lower value share in Japan, Romania, Brazil and Chile. Volume was down 0.5% as growth in Turkey was more than offset by lower volume in Japan and the Middle East;

· Lucky Strike's value share grew 20 bps, as growth in the US (following launch), in AMSSA (particularly Brazil, Chile and Colombia) in Japan and Russia more than offset lower value share in Indonesia, France and Spain. Volume grew 17% driven by Brazil, Russia, Argentina and the US, following the reintroduction of the brand in the final quarter of 2020. Growth was partially offset by the impact of the tax increases and minimum retail price compliance in Indonesia and lower volume in France;

· Rothmans' value share was stable as growth in Brazil, Italy, Malaysia and Czech Republic was offset by lower value share in Russia, New Zealand, Australia, South Africa, Poland, Ukraine, UK, and Pakistan. Volume was down 3.5% as growth in Brazil, Cuba and Poland was more than offset by lower volume in Russia, Ukraine, Kazakhstan and Nigeria;

· Pall Mall's value share was down by 10 bps as growth in Germany, Mexico, Australia and Chile was more than offset by lower value share in US, Saudi Arabia, Canada, Romania, New Zealand and UK. Volume was 6.1% higher, largely driven by Pakistan, Nigeria, Chile, Mexico and Saudi Arabia; and

· The Group's US domestic strategic combustibles portfolio largely performed well:

· Newport value share increased 60 bps in the US, despite a 2.4% volume decline, as both the menthol and non-menthol variants outperformed the market;

· Natural American Spirit value share was marginally higher than 2020. Volume was up 1.5% against the first six months of 2020; and

· Camel's value share declined 30 bps in the US, with volume down against the same period of 2020 by 9.7%.

Volume of other tobacco products (OTP) declined 6.6% to 9 billion sticks equivalent (being 3% of the Group's combustible portfolio).

Revenue from combustibles was down 3.0% at £10,527 million (June 2020: £10,854 million) with a translational foreign exchange headwind of 8.8% more than offsetting the impact of higher pricing across the Group. Revenue at constant rates of exchange was up 5.8% at £11,485 million (June 2020: £10,854 million) driven by good pricing notably in the US, Canada, Germany, Bangladesh and Brazil.

SIMPLIFYING THE BUSINESS – Transitioning to the enterprise of the future

· Quantum savings target increased (from £1bn) to £1.5bn by the end of 2022

· Quantum phase 2 drove £256m of savings in H1 2021

· The QUEST programme (Building the Enterprise of the Future) drives our transition, supported by accelerated digital transformation, technology and innovation

Building the Enterprise of the Future will give us the organisational flexibility to implement and operationalise our growth strategy – simplifying the business and speeding up decision-making. QUEST is an organisational transformation programme, built around five pillars, designed to deliver the Enterprise of the Future at enhanced speed. Underpinning QUEST is:

· Quantum, our programme designed to simplify our business;

· Unleashing innovation through data-driven insights and foresights, leveraging state-of-the-art technologies to ensure we are building the brands of the future;

· Empowering our organisation and attracting and retaining an increasingly diverse workforce;

· Shaping the sustainability agenda through our focus on reducing the health impact of our business and demonstrating excellence across our other ESG measures; and

· Technology and data analytics, which will drive our transformation and unlock commercial value across the entire value chain.

Phase 1 of the Quantum programme was completed last year delivering greater organisational speed and agility. We are building on this success by rolling-out Phase 2 which covers operational efficiency, route-to-market focus and supply chain productivity. We have realised further savings of £256 million in the first six months of 2021 driven by Quantum and are well on track to deliver our annualised £1 billion target by the end of 2021, being 12 months earlier than planned. As a result we have increased our expected cost savings target to annualised cost savings of £1.5 billion by the end of 2022. The savings from Quantum are enabling further increases in investment in New Categories and the building of new capabilities.