Non-combustible products help keep British American Tobacco on track

British American Tobacco updated the market on its trading ahead of its closed period on Wednesday, reporting that it continued to perform “well”, with its full-year guidance remaining unchanged.

The FTSE 100 cigarette giant said it was expecting a full-year industry volume decline of around 3.5%, but said it would exceed the 5.5% full year price mix achieved in 2017.

It reported that it was on track for “good” adjusted revenue and adjusted operating profit growth on a constant currency representative basis, with a second half weighting.

The company said it had grown its market share by 40 basis points in the year-to-date, which was driven by its ‘strategic brands’, which were ahead 180 basis points.

Full-year adjusted earnings per share growth was expected to be impacted by a currency translation headwind of around 6% for the full-year at current exchange rates.

BAT said it would exceed its “high single figure” constant currency adjusted diluted earnings per share growth target.

Among its non-cigarette products, BAT said it saw “strong growth” across its tobacco heated products (THP), vapour and oral “potentially reduced risk products” (PRRP) categories.

THP and vapour were on track to reach £900m of full-year reported revenue, with the company’s ‘Glo’ product now in 16 markets globally.

Glo’s share in Japan continued to grow, and was now 4.6%.

The company’s ‘Epen3’ product was also said to be performing well, with new market launches including France and New Zealand.

Oral tobacco was expected to deliver “strong” constant currency revenue growth on a representative basis.

In the US, BAT said it was performing well, with volume in line with expectations.

US industry volume decline remained in line with historic ranges, down 4.4% in the year-to-date, as the firm continued to expect an industry decline of between 4.0% and 4.5% for the full year.

It saw continued value share growth of 20 basis points in the year to date with the Natural American Spirit, Camel and Newport brands all growing their share.

The ‘Vuse’ vapour brand saw volume rise more than 30% in the year-to-date, despite the recall of the Vuse Vibe product.

Vuse Alto's national roll-out had now reached around 55,000 stores after 13 weeks, BAT said.

The board said it had delivered “good” revenue growth on a constant currency representative basis in the US market.

BAT also explained that its de-leveraging efforts remained on track, with net debt-to-adjusted EBITDA reducing at around 0.4x per annum, excluding the impact of currency movements.

At current exchange rates, net debt-to-adjusted EBITDA was expected to be around 3.9x by the end of 2018.

The group's medium-term rating target remained BBB+/Baa1, with a current rating of BBB+/Baa2.

Finally, the firm said it remained “well placed” to manage US regulatory proposals, explaining that it was “constructively engaging” regulators and supporting evidence-based regulation.

It pointed out that it had experience in managing regulatory change over a number of years.

BAT said regulation of menthol in cigarettes should be developed through a “comprehensive rule-making process”, be based on a “thorough review” of the science, and consider the “unintended consequences”, in order to withstand judicial review.

“We remain on track for a strong performance in 2018 - driven by both our combustible and PRRP businesses,” said chief executive officer Nicandro Durante.

“In the US, we are performing well, with positive pricing and continued value share growth.”

Durante said the de-leveraging remained on track, and the firm remained committed to a dividend payout ratio of at least 65%.

“We expect to exceed our high single figure adjusted diluted earnings per share growth at constant rates of exchange.”