British American Tobacco H1 2026 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2026

Key Takeaways

  • Positive Sentiment: H1 results were in line with expectations on a constant-currency basis, with revenue up 2.9%, adjusted operating profit up 3.5%, and adjusted diluted EPS up 7.9%. Management upgraded full-year EPS growth expectations to the middle of its 5%–8% range.
  • Positive Sentiment: New categories continued to gain momentum, with revenue up 18% and contribution up 55% to £269 million. Modern oral revenue rose 66%, led by Velo, while U.S. vapor returned to double-digit growth; BAT plans to launch Velo Max and new Vuse flavors in the second half.
  • Positive Sentiment: Management expects stronger second-half performance in AME and APMEA, supported by commercial actions, new product launches, and the phasing of Fit2Win savings. The company remains on track to return to its medium-term growth algorithm and reach its 2.0–2.5x leverage target by year-end, alongside a £1.3 billion 2026 share buyback.
  • Negative Sentiment: Heated products remained weak, with glo revenue down nearly 12% amid inventory movements and intense value-segment competition, while APMEA revenue fell 6.3% and adjusted profit declined 16.5%. Combustible volumes also dropped 4.7%, with industry pressure and illicit trade weighing on several markets.
  • Neutral Sentiment: Full-year revenue and operating profit are expected at the lower end of the company’s guidance range as BAT increases investment in U.S. combustibles, Velo Max, Vuse flavors, and glo innovations, while absorbing about a 1% transactional FX headwind and moderating strong H1 U.S. growth.
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Earnings Conference Call
British American Tobacco H1 2026
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good morning, everyone. I'm delighted to welcome you to our 2026 interim results presentation. With me this morning is Javed Iqbal, Interim CFO, and Victoria Buxton, Group Head of Investor Relations. I will begin with our transformation 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 building. We will then take your questions. With that, I would like to draw your attention to the disclaimers on slide two and three. Let's begin by looking at our transformation momentum, starting with some highlights from H1. Smokeless now represents 19.8% of group revenue, up 160 basis points versus last year. We added 4.1 million smokeless consumers over the last 12 months, taking the total to 35 million.

Operator

This progress is mainly driven by modern oral industry growth, where the strength of the Velo brand continues to resonate strongly with consumers. Our first half results were in line with expectations, supported by a strong multi-category delivery in the U.S., excellent Velo momentum across all three regions, and the resilient combustibles performance in the U.S. and AME. Our disciplined focus on quality growth continues to improve returns through more targeted investments, with new category contribution up 55% at constant rates. As previously guided, we expect Adjusted Profit From Operations to accelerate in H2, driven by improvements in AME and APMEA. Our second half weighting will also benefit from the phasing of Fit2Win savings. Finally, we continue to generate strong cash returns.

Operator

We expect to be within our 2-2.5 times target leverage corridor by year-end, while continuing to reward our shareholders with our progressive dividend and GBP 1.3 billion share buyback in 2026. I'm encouraged by the momentum we are building as we transform BAT. New categories are becoming an increasingly meaningful contributor to group performance, reinforcing our confidence in sustainable delivery moving forward. After a period of investment and transition, returning to our algorithm for the full year is an important milestone. It reflects the progress we have made in reshaping the business and provides a stronger foundation for long-term value creation. With that, I will hand over to Javed, who will take you through our financial performance in more detail.

Speaker 1

Thank you, Tadeu, and good morning, everyone. I'm pleased to share that we delivered results in line with expectations on a constant currency basis. This performance was mainly driven by strong U.S. multi-category delivery and the acceleration in new category growth. Our reported results reflect some adjusting items, the majority of which are non-cash, including approximately GBP 800 million, primarily reflecting annual amortization of our U.S. trademarks, a GBP 370 million one-off adjustment related to Fit2Win, which around GBP 230 million is non-cash, and GBP 149 million credit following the settlement of historical litigation. To give you a clear view of our underlying performance, I will focus on constant currency adjusted and, where relevant, adjusted for Canada metrics. You can find further detail on adjusting items and share data in the appendix. We continue to build momentum in the first half, reinforcing our confidence in delivering our full-year guidance.

Speaker 1

Group revenue increased by 2.9%, adjusted gross profit rose 3.8%, adjusted profit from our operations grew 3.5%, and adjusted diluted EPS was up 7.9%. Let's now turn to new categories. Revenue growth accelerated to 18%, driven by an other outstanding performance from modern oral, which was up 66%. Vapor revenue increased 5.3%, driven by the U.S., where we returned to double-digit volume and revenue growth. This was partially offset by a decline in heated products, with glo revenue down nearly 12%, impacted by inventory movements and competitive intensity in the value segment. We continue to deliver quality growth, with gross profit up over GBP 120 million and category contribution up 55%, reaching GBP 269 million. This reflects our disciplined approach to investment and increasing scale benefits. We remain committed to investing behind profitable growth in vapor and heated products.

Speaker 1

Specifically, where we are becoming increasingly selective, where we deploy our resources, which Tadeu will talk more about later. Turning to combustibles. Combustible volumes was down 4.7%, with growth in Pakistan and Turkey more than offset by continued industry volume decline in other key markets, and the impact of market exits in Cuba and Mozambique. Revenue grew 2.1%, driven by a robust price mix of 6.8%. Growth in the U.S. and AME more than offset a slower-than-expected recovery in APMEA as fiscal and regulatory pressure persist. Adjusted gross profit and category contribution both grew ahead of revenue, driven by a strong performance in the U.S., positive price mix, and our continued focus on cost optimization. Combustible remains a powerful value engine for the group, delivering robust returns and continuing to fund our transformation.

Speaker 1

Our resilient performance reflects the breadth of our global footprint, the strength of our portfolio, and disciplined execution. Turning to our regions, starting with the U.S., we delivered a strong multi-category performance, driving total revenue up 8.5% and adjusted operating profit up 10.1%. New category revenue increased by nearly 60%, driven by continued success of Velo Plus, which grew more than 200%, and Vuse, which returned to double-digit volume and revenue growth. In combustibles, revenue grew 5%, driven by robust price mix, including the benefits of excise duty drawback and positive trade inventory movements. Value share declined by 40 basis points, and volume share was down 80 basis points, reflecting continued industry growth in deep discount segment and heightened competitive activity since Q4 last year. We have actively responded to this trend, investing behind our portfolio and further strengthening our commercial execution.

Speaker 1

As a result, we have held our volume share since January. Looking into the second half, we expect an acceleration of investment to support the launch of Velo Max and Vuse flavor pods, as well as behind our combustible portfolio in a highly dynamic market. Tadeu will talk about this in more detail later. In addition, we expect our strong H1 growth to moderate in H2 as positive inventory moments do not repeat, and we lap a stronger comparator. In AME, total revenue growth 0.9%, with combustible up 2.55% and new category up 1.9%. This was partially offset by lower direct leaf sales, reflecting our continued focus on higher return, more profitable areas. Combustible revenues was driven by strong delivery in Brazil, Turkey, and Mexico and robust price mix.

Speaker 1

This was partially offset by our exit from Cuba and increased competitive pressures in Germany and Romania, where we have taken targeted actions to strengthen our portfolio. In new categories, modern oral revenue was up 22%, driven by the strength of our portfolio across both established oral markets in Scandinavia and newer growth markets, including U.K. and Poland, which now account for around 50% of our modern oral revenue in the region. Heated product revenue declined by nearly 11%. Growth in Romania and Portugal was more than offset by lower revenue in Italy and Poland due to heightened competitive activity in the value segment. Looking ahead, we expect to strengthen our value proposition with the next generation Hyper Pro+ in the second half of the year. We are also encouraged by the continued momentum of Glo Hilo, which is performing well in the premium segment.

Speaker 1

Vapor revenue declined 14%, mostly impacted by regulatory changes in Poland as we continue to focus our investment on larger industry value pools. Adjusted operating profit increased 1.1%, supported by continued resilience in combustibles and quality growth in Velo and Vuse. This was partially offset by investments in heated product behind our innovations rollout. We expect performance to accelerate in H2, driven by our targeted commercial actions and the benefit of the rollout of new category innovations. Turning to APMEA, where our recovery has been slower than expected. Revenue was down 6.3%, primarily driven by combustibles. While we continue to drive growth in key markets, including Pakistan and Indonesia, this was more than offset by the challenging regulatory environment and the impact of illicit volume in Bangladesh and Australia, alongside the timing of inventory movements in Vietnam.

Speaker 1

Modern oral revenue increased by 43%, driven by our first-mover advantage and category leadership across emerging growth markets. These include Japan, Pakistan, South Africa, and global travel retail, highlighting the increasing opportunity for the category and for Velo. Heated product revenue declined 13%, impacted by material inventory movements and heightened competitive intensity in the value segment in Japan. Encouragingly, Glo Hilo continues to build momentum in the premium segment. With Hyper Pro+ launching in Japan in Q3, we expect an improving share performance in H2. Vapor revenue declined 28%, reflecting strategic market exits and more selective resource allocation. Adjusted profit declined 16.5%, mainly due to headwinds in key combustible markets. Looking ahead, we expect further sequential performance recovery in H2, supported by our commercial actions and investments in both combustibles and new category, and a softer comparator in Australia.

Speaker 1

Turning now to our group operating margin, which was up 30 basis points to 43.7%. We successfully offset inflationary pressures with a strong performance, higher profitability in new categories, and continued cost savings. At current rates, operating margin expanded by 10 basis points. We are making good progress with Fit2Win, our transformation program to build a leaner, faster, and more data-driven BAT. We have identified a further GBP 100 million of optimization savings, resulting in an incremental one-off GBP 100 million cash investment to support delivery. In addition, to further drive new category growth, we have also completed a comprehensive review of our manufacturing assets and machinery. Through this, we have identified opportunities to upgrade to more efficient next-generation technologies and state-of-the-art machinery to support future growth and productivity, and to accelerate our transformation.

Speaker 1

As a result, we have recognized a non-cash charge of nearly GBP 230 million in the first half. Altogether, we now expect GBP 700 million of annualized savings by 2028, with GBP 500 million to be delivered by 2027. Total one-off costs are now GBP 950 million, with GBP 840 million to be treated as adjusting. We continue to expect the majority of the cost to be incurred this year, with balance in 2027. Bringing it all together, earnings per share increased by 7.9% as growth in operating profit was supported by 4.4% growth from earnings kickers. This outperformance was primarily driven by lower net finance cost, reflecting repayment of debt with proceeds from the partial disposal of ITC stake in May last year, and higher operating cash conversion in H1.

Speaker 1

Looking to full-year, we now expect net finance cost to be around GBP 1.65 billion, with an underlying tax rate between 24%-25%. As a result, we have upgraded our full-year EPS guidance, with earnings kickers expected to be moderate as we annualize the benefit of lower debt levels. Strong cash generation continues to enhance our financial flexibility and support disciplined capital allocation. We remain on track to be within our two to 2.5 times leverage target range by year-end, and to deliver more than GBP 50 billion of free cash flow by 2030. We continue to focus on our capital allocation priorities, which are investing in transformation, balance deleveraging with progressive dividend and sustainable share buybacks, and selective bolt-on M&A to support our transformation.

Speaker 1

To summarize, H1 was in line with expectations. We are on track to return to our midterm algorithm for the full-year, with profit second-half weighted. Key drivers for H2 include mid-teens new category revenue growth, led by Velo and Vuse, driving a further improvement in new category contribution, an acceleration in performance in AME, further sequential recovery in APMEA, Strong H1 U.S. growth moderating due to increased investment, lapping a stronger comparator, As positive inventory moments do not repeat. We expect H2 performance to be further supported by the positive phasing of Fit2Win benefits.

Speaker 1

As previously guided, we expect revenue and operating profit to be at the lower end of this range for the full-year, absorbing around 1% transactional FX headwind and reflecting active investment choices, including the rollout of Velo Max and Vuse flavors in the U.S., scaling glo HYLO and glo Hyper pro+ launches, as well as increased combustible investment in the U.S. and other key markets. Finally, we now expect full-year EPS growth to be towards the middle of our 5%-8% range. Thank you. With that, I'll hand back to Tadeu.

Operator

Thank you, Javed. Looking ahead, I'm encouraged by the momentum we are building as we return to our algorithm and continue to transform BAT. We are entering the next phase of our journey from a position of strength, with accelerating financial delivery, increasing new category profitability, and a clear pathway to long-term growth and value creation. With that context, I want to share more detail on our progress, looking at the topics we get asked about most by you, our investors. Starting with the sustainability of our multi-category delivery in the U.S. Across the market, adult nicotine consumer behavior is changing in a significant way. BAT is fully aligned to where these consumers are heading. With our unique multi-category portfolio of number one or number two share positions across all categories. As a result, we are now the fastest-growing company in total nicotine.

Operator

Our total nicotine volume share increased by 110 basis points year to date, fueled by new categories, with Velo driving around 90% share of modern oral value growth, and Vuse delivering over 100% share of vapor value growth. My message here is clear. We believe we are the best position to win in total nicotine and continue to capture value in the world's largest nicotine value pool. I will now take you through the U.S. by category. Starting with combustibles, where we continue to balance disciplined investment with sustainable value creation. Industry volume continued to improve in the first half, declining 4.9% on a sales to retail basis. This was supported by moderating solos consumption decline trends, slowing outflow to illicit vapor, supported by regulatory enforcement actions, and the expansion of deeper discount into track channels, which we expect the industry to lap in the second half.

Operator

Our focus remains on driving value and share from our combustibles business, and we continue to deliver strong financial performance in H1, as Javed highlighted. Against this backdrop, we have seen heightened competitive activity from Q4 last year. We have already taken actions to further sharpen our portfolio management, strengthen our route to market, and leverage digital revenue growth management capabilities. In addition, we have been actively investing to strengthen our portfolio, and we are starting to see encouraging results. Target investments have been supporting Newport in premium, and we have also been strengthening Camel. Together, Lucky Strike and Pall Mall Select continue to drive both volume and value share gains in branded value, which, combined with expanding our Doral brand coverage to five states, is strengthening our presence and competitiveness at the low end of the market.

Operator

As a result, we have held our volume share since January, and we will continue to actively invest behind our portfolio in the second half. Second, I'm often asked about the regulatory enforcement landscape in the U.S. I'm pleased that we are starting to see recent actions having an impact on irresponsible illicit operators, while also providing responsible legal manufacturers a pathway to bringing scientifically backed products to market. We are now seeing multiple government measures beginning to address the long-standing balance between the legal market and illicit operators. First, around half of vapor industry volume is now covered by state directory and enforcement frameworks. Second, more than 18 million unauthorized vapor products have been seized through federal cross-agents collaboration. Third, the FDA is taking actions to improve regulatory compliance for manufacturers. Finally, attorney generals continue to increase pressure on illicit vapor sales channels and payment providers.

Operator

Importantly, these actions have supported the legal vapor industry return to growth in H1. We are also encouraged by the FDA's new prioritization guidance, which supports a pathway for both vapor flavors and modern oral innovation. Taken together, these developments support a more level playing field. In U.S. vapor, Vuse continues to strengthen its leadership position. We extended value share to a record 55.9% in the first half, and now hold more than double the share of our nearest competitor. Building on this leadership, we will begin a phased rollout of new adult-focused Vuse flavors, broadening consumer choice and leveling the competitive playing field, starting in Q3, with distribution to approximately 25,000 outlets. We will execute this expansion in a disciplined manner, upholding our high standards of product quality, retailer compliance, and underage access prevention.

Operator

Distribution will be carefully targeted as we work with retailers to secure their commitment to adult-only sales, supporting category sustainability. Altogether, this give us confidence in Vuse's ability to sustain growth and further strengthen its competitive advantage in the world's largest vapor market. Third, I'm often asked about the growth opportunity ahead in modern oral globally. In the U.S., I'm excited about expanding our Velo portfolio in the rapidly growing market. Velo Plus continues to deliver an outstanding performance with our overall modern oral volume share now 31%, and value share nearly 26%. In addition, we are capturing around 90% of category value growth, demonstrating both the strength of the product and brand together with the effectiveness of our commercial execution. Building on this success, we are expanding the Velo portfolio to capture a broader range of adult consumer preference, including launching some limited editions, Velo Plus variants.

Operator

Starting Q3, we will launch Velo Max, a higher moisture product and our latest innovation in the U.S. This will further expand our offer across two new strengths and four new flavors, complementing our existing portfolio and providing an incremental lever of growth. Velo is the clear global number one brand in modern oral, the fastest-growing category with the lowest risk profile. We continue to expand Velo's footprint as regulatory clarity improves, with 32 markets having now adopted category regulation, more than double the number versus 2024. Our clear leadership position continues to strengthen, underpinned by strong growth across all three regions and the successful execution of our premiumization and innovation strategy. Our scale advantage continues to widen. In the first half, BAT shipped 7.9 billion pouches, and across our top markets, our modern oral volume share increased by over eight percentage points to reach 39%.

Operator

As the category continues to grow at pace, we believe our superior portfolio, supported by continuous innovation, scale, brand strength, and regulatory capabilities, will become increasingly important competitive advantage. In APMEA, BAT is clear category leader with 62% volume share across top markets, making us nearly seven times larger than our nearest competitor. This leadership position is underpinned by our superior brand equity scores, 40% higher than our closest competitor in Europe, supporting our premium brand positioning, and reflected in our 68.5% value share. We continue to drive strong volume-led revenue growth, importantly, this growth is becoming increasingly broad-based. Around 50% of our revenue comes from outside the Nordics, where the category continues to develop with growing incidence and consumption, supported by expanded distribution, growing category adoption, and the strength of the Velo brand. Innovation remains a key differentiator. Through Velo Shift, we are extending our premium positioning.

Operator

Progress in Sweden and Switzerland is encouraging, with Shift capturing 1% of value share in Sweden and 1.5% in Switzerland within a few months of launch. Altogether, our strong momentum gives us confidence in our ability to continue driving sustainable, profitable growth and value creation in modern oral. Fourth, I am asked about our key drivers of performance improvement in heated products. We are resetting glo's performance with a sharper, more disciplined approach. Industry volume growth moderated further in the first half, reflecting excise-driven disruption in Japan and continued consumer polyusage across vapor and increasingly modern oral globally. At the same time, competitive intensity has stepped up. Against this backdrop, we are focusing our investments where we see the strongest consumer opportunity and the best return potential in what remains a significant GBP 9 billion value pool.

Operator

We are scaling glo HYLO to build premium growth and strengthening our value proposition with Hyper pro+. In addition, we are concentrating resource behind priority markets in a more selective way. Through this, our focus is clear. We set our performance and we build share momentum in H2 through innovation-led growth and disciplined execution. glo HYLO is beginning to demonstrate the benefits of our premiumization strategy. Launched across nine target markets, covering around 70% of industry volume, this provides a strong platform for future scale, with around half of consumers new to the glo platform. In addition, we are strengthening glo's brand equity as we establish our presence in the premium segment. This is translating into tangible commercial progress, with volume share increasing across key markets and particularly strong momentum in Poland.

Operator

We continue to focus on scaling glo HYLO through generating trial, targeting consumers of premium combustibles and heated products, while building awareness to unlock further growth. Finally, bringing it all together. As we build on our momentum, we see a clear pathway to improved growth in 2027. Our delivery will be supported by four key drivers. First, continued strong new category revenue growth led by continued momentum in modern oral, U.S.-led vapor delivery, and a more targeted approach in heated products. Second, consistent combustibles delivery supported by further recovery in APMEA. Target investment to sustainably drive combustible's value and share globally. Third, continuous strong profit conversion, reflecting improving new category returns and ongoing cost savings. Fourth, EPS accretion from share buybacks, lower finance costs, and continued strong cash generation.

Operator

To conclude, by focusing investment on our highest return opportunities, we are delivering quality growth through our multi-category portfolio, supported by sharper execution, enhanced capabilities, and disciplined resource allocation. Through this, we are driving higher returns and building a more resilient business. At the same time, we are enhancing financial flexibility, enabling continued investment in our transformation together with delivering strong cash returns. I am confident in our strategy, our execution, and that BAT is well-positioned to deliver long-term value for our shareholders. Before we move to Q&A, let me leave you with some of the key teams shaping BAT's next phase of growth and value creation. We look forward to sharing more at our Capital Markets Day in September. Thank you for listening. I will now hand over to Victoria to introduce the questions and answer session.

Speaker 2

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

Speaker 3

Thank you. The first question is from Andrei Andon-Ionita from Jefferies. Please go ahead.

Speaker 4

Hi, good morning Tadeu, Javed, and Victoria. Thank you very much for taking my questions. Two for me, please. Firstly, on U.S. e-vapor, do you see the illicit enforcement tailwind continuing into early H2? Also, for the launch of Vuse Ultra in H2, could you give us a bit more color as to what we should expect in terms of number of outlets targeted and the types of flavors that we should expect to see on the market? Then on U.S. combustibles, you registered +5% top-line growth in H1, significantly ahead of the U.S. combustibles framework of value flat to +1% growth. How should we think in the context of this H1 performance about the U.S. combustibles algo for the full year 2026? Thank you very much.

Operator

Okay. Thank you, Andrei, for the question. I'll start with the combustible numbers. You rightly point out that the +5% performance in H1 is well ahead of what the algorithm would suggest. We highlight the fact that we had some trade movements that has been beneficial in H1 that will be unwind in H2. I would tell you that this equates for something close to +2% of the 5. Underlying performance actually is more of a +3%. Clearly, we have a momentum in the H1. Duty drawback is part of the +3%, but it's not a major part of it. Most of the performance is organic performance. Let's put it that way. Obviously, as we highlighted in the presentation, we intend to continue to invest behind our portfolio as we progress in the second half of the year.

Operator

We are clearly seeing the dynamic of the low discount segment in the U.S. continue to grow. We have tried to become more competitive in that space as well. I would expect to see a more moderate performance in the second half of the year, particularly in combustible in the U.S. That should reflect in a number that will be much closer to the algorithm, maybe a bit still higher than the 0-1 that we have, but not as high as we see in the first half of the year. That's the combustible part. On the vapor part, it's very encouraging what we are seeing from the states enforcement. It's 50%. It's the first time that we saw the legal vapor market coming back on a very modest base.

Operator

Still, we have seen the last few years a decline of legal markets year after year. It's hard to predict exactly what happens next. I would suggest, with all the initiatives that I highlighted in the presentation, that we could expect to see at least a similar type of environment. I don't think that will be, I would say, significant. I'm more encouraged by the prioritization guidance from the FDA because these allow the legal American manufacturers to offer substantiated, high-quality products for adult nicotine smokers in the U.S. This translates into our ability to bring back flavors in the market and having a more level playing field. You cannot forget the fact that from one side, there is an element of enforcement that is important, and there is clearly, mainly from the state levels, an uptick on enforcement levels.

Operator

The root cause of illegality is not just about a lack of enforcement, it's about a lack of level playing field. Having a higher level playing field will be also very important. I would expect to continue to see some more traction from the legal vapor market. In terms of your question on-

Speaker 2

The flavors and how we roll out

Speaker 2

Yeah.

Speaker 2

Slater there.

Speaker 2

How we roll out. We mentioned that that would be basically in two phases. In Q3, we'll be reaching out 25,000 outlets. Why we are doing that way, because we have been very thoughtful in the way that we are rolling out flavors back in the market. We want to make sure that retailers do the ID scan before they sell the product to make sure that we have no youth accessing this product. There is a commitment and a compliance methodology that we are putting in place, and that's the reason we are very thoughtful in the way that we are rolling this out. The idea should go in the Q3 with 25,000. In Q4, there is another round of 25,000, but we'll be building from there. Okay?

Speaker 3

Thank you. The next question is from Faham Baig from UBS. Please go ahead.

Speaker 5

Good morning, team. Thank you for taking my questions as well. A couple from me as well. Starting with nicotine pouches in the U.S., could you maybe help us with the speed of launching Velo Max in terms of the distribution stores as well as the likely economics compared to Velo Plus. Of course, you've now seen competition launching their own improved versions of nicotine pouch products. How have you seen this impacting competitive and category dynamics thus far? The second question is on full year 2026 guidance. Maybe if you could just help elaborate on some of the moving parts that you expect to see in the second half, in terms of how the 2.9% organic sales growth develops. What could maybe see it do better, what could maybe see it do worse, and what are the key items that you're going to be monitoring?

Operator

On the nicotine pouch, we have a very well-established network from Velo+ in the U.S. We'll be launching Velo Max, and it's just a question of the normal time that takes to distribute in a continental country like the U.S. This will be probably faster than what took us to do in terms of Velo+ because we have now a well-established network. That was not necessarily the case when we first introduced Velo+, but it takes some time to get to where we are with Velo+. The idea is to use Velo Max as a complement to Velo+. Commercially speaking, we will be considering our competitor's position, obviously, and we want to make the product as competitive a product, to give the chance for consumers to try the product.

Operator

We believe that is an even enhanced product because, like I said, it has a higher moisture and different strengths. I think that we'll be addressing some consumer needs that not necessarily Velo+ is currently positioned for when we think about, for example, higher levels of strengths and obviously also different flavors. That is the reason why we say that distinct flavors will complement the portfolio. We feel very, very, I would say, optimally, very supportive of Velo, very good about the product that we have in the market. It's a competitive market. Obviously, there is no doubt that it will become more competitive. We see the strength of Velo+ supporting all these new launches from competition, and I do believe that it will still be a very strong brand. We are now leaders in 11 states in the U.S., we have a retention rate of 7%.

Operator

This hasn't changed. All the growth of the category to basically in the first half is coming from Velo+. Independent of the launch that we have seen so far, I do believe that we have all it takes with the capabilities we have built and the product that we have, and now complemented by Velo Max, all the conditions support the position that we have in the market. In terms of the building blocks for the second half of the year, and obviously at APMEA, we expect to be better performance in the second half than in the first half. It's clearly a recovery story. H1 2026 for APMEA was already better than the H2 2025. H2 2026 will be better than H1 2026 because we will be lapping more softer comparative, if you want, in places like Australia, for example.

Operator

If you remember well, they implement a very draconian regulation that accelerates exponentially the illicit trade in Australia in the second half of last year. We'll be lapping that. This will be more positive. Clearly, there will be the driver for the second half, and that is why we say that it's second half-weighted, mainly because of the performance in APMEA. AME, we have been investing heavily behind mainly combustible and HP, and we expect also to have some improvement in the second half. The U.S., we just spoke about the U.S., I don't expect the 5% to carry on in combustible for the rest of the year and because of the investments we need to do in the portfolio of combustible.

Operator

All in all, that's the reason why I expect a more positive second half overall for the group and leading to a full year in terms of top line in the lower end of our range. You want to add something?

Speaker 1

Similarly, the same will be the case for the building blocks for the APFO line as well. As we guided that we see a very strong performance in the U.S., but we will see a more stronger performance from AME and APMEA versus H1, and slightly less performance in the U.S. If you add this all both together, then we are again at the lower end of our algorithm for the full year, and but it's the first time we are entering the algorithm. Two, as I highlighted earlier, that EPS guidance, we will see the overall impacts slow down over the full year, but we will see a strong kicker. That is why we have guided on the upgrade of our EPS guidance to the mid of the range.

Operator

Just on that point, Javed, I want to complement on the because I received some questions about the low end of the range. We are here thinking about the long-term sustainability of the algorithm. We are doing the right investments for the business, for the sustainable growth of the business. We have to invest in combustible in the U.S., in some other key markets as well. We have to invest in this excellent performance that we have in modern oral across the world. We are resetting our HP business, which also requires investments with the launch of Glo Hilo. We obviously have an opportunity in vapor in the U.S. that we haven't seen in many years. We are doing the right things for the business for the long run.

Operator

As we always said, this is a year to go back to the algorithm, and reposition in the low end to create us the possibility to make the right investments to make this a sustainable story moving forward. I'm very confident that that will be the case.

Speaker 5

Thank you, Javed and Tadeu.

Speaker 3

Our next question is from David Roux from Morgan Stanley. Please go ahead.

Speaker 6

Thanks very much. Morning, Tadeu and Javed. My first question is just on combustibles. At the trading updates in June, I think the business sort of downgraded its expectation for the global cigarette industry volumes from -2% to -2.5%. I think at the time you noted this was predominantly driven by Bangladesh. It now seems the business has lowered its assumption again to now -3%. What is driving this latest sort of reduction in the outlook for cigarette volumes for the industry? Has Bangladesh deteriorated further, or are you now seeing broader weakness across other markets? My second question is just on Velo in the U.S. I guess it's a two-part question.

Speaker 6

If we take a step back, following the rollouts of Velo Max through the rest of this year, how many SKUs across strengths and flavors do you expect to have across the total Velo platform by the end of this year versus, say, where we are today? The second part of this is, your key competitor in the U.S. on nicotine pouches recently received a modified grant order to market using a reduced harm claim. Do you think this modified grant order really moves the needle in terms of marketing, and is this something that you'll be pursuing for Velo? Thank you.

Operator

Okay. Let's address first the combustible question. The two and a half to three is basically Brazil-driven. We had a massive excise shock in Brazil. The price is coming to place on the 1st of August. This is really a meaningful price increase, excise-driven. Obviously, this will have implications in the size of the market, and it's a big market. Bangladesh is also a big market, it's basically Brazil-driven. On Velo, we have already three strengths in Velo Plus. We have another two now strengths, we're going to have a total of five strengths in Velo. Obviously, this is the position we are today. What encourages in terms of this prioritization guidance from the FDA is that we'll be able, with more certainty, to bring more innovative products to the market in due time. Which hasn't been really the case for many, many years.

Operator

You note that we have been filing PMTAs and being there for a long, long time. This is about to change with the new guidance. For the time being, we're going to be with the launch of Velo Max with five different strengths with the Velo family moving from, as stands today.

Speaker 1

PM

Operator

at PM. First of all, I think that the MRTPA for more than oral is welcome as a category. I don't think that there is any major commercial benefit for any particular, I would say, SKU or product in the market. We do have in our applications for Velo, MRTPA applications as well. We might be in a position to receive one of those in due time. It's less about the commercial opportunity in the market, more about what it means from the advocacy of the category, mainly coming from a market like the U.S. with the FDA. I think that is very important.

Operator

As you know, we have been very ahead in terms of discussions with a number of stakeholders in order to proper regulate the category because we see the category as the lowest risk category within the new categories, if you want, because there is no inhalation, there is no tobacco. It is the closest you can get to any RT type of products. We have now 32 markets, like I mentioned my presentation, more than are regulated. A number of those markets sits in Europe, which is also very important. Events like that with the MRTPAs being delivered by FDA is very positive overall. It's less about the commercial impact in the local markets, more about the advocacy of the category even outside the U.S.

Speaker 6

Very clear. Thank you.

Speaker 3

Thank you. Our next question is from Damian McNeela from Deutsche Numis. Please go ahead.

Speaker 7

Morning. Thank you. Thanks for taking the questions. A few from me. Firstly, just on the new categories portfolio, I think you've made the decision to exit some markets in vape and reprioritized in heated. Can you just indicate whether that work is now complete or whether there are still markets that you're looking at around the viability of those categories? Is the first question. Second question is, can you provide a bit more information on what specifically is happening in the German combustibles market, with regards to increased competition, and if there is anything you can do or what you are doing, to combat that increased competition? Then the last one is just to follow up on Faham's question earlier. Are you able to provide any indication of relative pricing for Velo Max in the U.S. when it launches, please?

Operator

To start for the last, no, the price, we are not giving any indication of price of Velo Max. On Germany, what we have seen over the last few couple of years mostly is the increase in trade labels brands in the German market. More recently, this growth has more stabilized. This has created some, I would say, down trading pressures in the market that we obviously have to react to that. We are not seeing the growth at the pace that we were seeing before in trade labels. It seems that we are coming now to a more stable situation. That's what has been the dynamic over the last couple of years. Let's put it that way. More recently, 18 months, I would say. In terms of-

Speaker 1

Vapor exits and refocus on HP.

Operator

Yeah, the HP. Yeah. The vapor markets, mainly we decide to leave markets in Asia, where we don't see either a proper regulatory environment and/or enforcement. As a consequence, there is no financial return for a legal company like BAT, because we have to compete with illegal products, which there is no level playing field if you want. We decide to pull out of a number of markets that we have entered in the first place when they have regulated with an expectation that regulation would be made compliant. This was not the case. We have to accept that, Given that we will be constantly looking for best return for our investments in terms of resource allocation, we make the call to pull out. That's why you see the vapor numbers in APMEA in particular, negative as a consequence of these exits.

Operator

In APMEA is more a consequence of a change in legislation in Poland that basically make completely not viable to be present in the vapor market anymore. Also in the U.K. that with the change in the policies, again, another market that is very difficult to assess compliance. The latest numbers that I saw there is showing a very strong presence of illegal products in the U.K. market. This is something that we'll be continuing reassessing, I have to say. I'll tell you that most of it we have already act on. There will be probably some impact still coming across the H2 of this year. As we lap this for next year, always become less evident about these market exit decisions. Okay?

Speaker 7

Yeah. Thank you. Very clear.

Speaker 3

Thank you. Our next question is from Pallav Mittal from Barclays. Please go ahead.

Speaker 8

Good morning, team. Thank you for taking my questions. I had a technical issue earlier, so apologies if I missed it. Firstly, starting on the U.S. combustibles business, volumes are better and price mix is a touch lower versus what we were expecting. I think in your comments, you said duty drawback is not a major part of it in terms of the mix. Can you quantify the volume that are seeing a benefit from the duty drawback, and is it sequentially increasing or has that now stabilized? That's the first one. Secondly, on your vapor business, in Europe, it has been under pressure over the last couple of years, and recently you highlighted issues in Poland, et cetera, but how should we think about that European vapor business in the medium term?

Operator

Okay. On the vapor in Europe, yes, the major drag for the numbers are related to Poland. We have been in strong positions in places like Germany, which is a very important vapor pool. The Vuse Ultra, for example, is making big inroads there. In other markets like France, Spain, we have a lot of competition coming to the market, we also have a very strong pipeline that will reach the market in H2. We feel confidence in our ability to sustain our leadership position in vapor in Europe, in the markets that we have select to participate. That's the first one. On the combustible, as I mentioned, overall, the industry, I'll talk about the industry first. We have seen a reduction in the levels of decline.

Operator

As I make the point in my presentation, a lot of that has to do with the growth of the low end of the segment, of the category. Actually, if anything, it's growing. It's not declining, it's growing. Continuing to grow. We see less migration out of cigarettes towards the illegal vapors, and for basically two reasons. One is the accessibility, availability of these products get more constrained when you have more states passing legislation, which is the case now of 50% where the volume is sold. Also the fact that we have more solo users combustibles that they don't want to migrate to the vapor side. This overall is creating a dynamic that is more favorable than in the past.

Operator

It's hard to predict how it goes moving forward, because if anything, we still have to see the correlation with oil price and the conflicts that is happening in the Middle East and how this could impact oil price. We note that there is a correlation between oil price and consumption of cigarettes in the U.S. We haven't seen this yet in the H1, but it's difficult to predict in the second half of the year. Obviously, what we'll be doing and will be reflecting our top-line numbers, we will be increasing our competitiveness to be able to answer the fact that the lower end of the market is growing. This is one element that will have an implication the second half of the year.

Operator

The other element, like I mentioned before, is the inventory movements that has an impact around the 2% of revenue, that will be lapping the second half of the year. It's not a reflection of the underlying performance, if you want, of the first half of the year. That's the main reason why, in the case of U.S., we expect to be H1 skewed in terms of performance as opposed to the rest of the group that will be H2 skewed, because of the performance of APMEA improving and AME improving, more than offsetting the moderation that we'll be seeing in the U.S. in the second half.

Speaker 2

duty drawback.

Operator

The duty drawback, yeah. In the first half was not very meaningful. The second half, I will not be giving guidance about duty drawback, but this will be part of the elements that will be taken into consideration when we put in place our plans.

Speaker 8

Thank you.

Operator

Okay.

Speaker 3

Thank you. Our next question is from Rey Wium from Anchor Stockbrokers. Please go ahead.

Speaker 9

Yes. Good day, Tad, Travis and Victoria. If I may just start off by saying Victoria actually looks brilliantly in red. Shows there's an opening there. I just want to get back to the guidance. Very strong performance on EPS, up 5.5%. If I look at your guidance, you talk about EPS middle of the range, that brings it basically 6.5%. That brings us back to an adjusted EPS around about 4%. Am I more or less correct doing that assumption? Actually overall implies a bit of a slowdown in the EPS growth for the year. Within that you mentioned obviously the U.S. will be a bit slower and the other two regions will be a bit stronger. I just want to know whether that summary is spot on.

Speaker 1

I think if you look at the profit performance of H1 and our guidance for the full year, actually it will move in the right direction, which means it will have more positive impact on EPS. You are right that once we take into account the FX impact, our adjusted EPS would be in the range of 4%-4.5%, which is just for a reminder, is one of the best EPS performance of BAT in recent years. We are very confident, and as I highlighted earlier, that it is mainly driven by the kickers below operating profit, mainly net finance cost.

Operator

Also the cash conversion. We do get benefit from being a high cash generative business. Even in H1, we are delivering a high cash conversion, and we are on target to remain delivered above 95% conversion for the full year. Yes, you are right that our adjusted EPS would be more than 4%, around 4.5%.

Speaker 1

On a current basis.

Operator

On the current basis, yes.

Speaker 1

Yeah.

Speaker 9

Just also on that, the new category growth, your guide for mid-teens growth. You had 18% in the first half.

Speaker 9

I just want to get a feel of, do you expect an improvement in the heated products, which was down 12%? Obviously, I'm just curious about the growth in vapor, whether we can probably see a little bit of an acceleration there.

Operator

Yeah, look, on vapor, obviously we will have Vuse flavors coming in the market. Remember that I said that would be a phased approach, so most of the impact will be feeling in 2027. We also have to take into consideration that we'll be lapping the exit of one competitor in the U.S. that happened in the second half of last year. That's the dynamics around vapor. In HP, I'm not expecting anything meaningful changing from the financial point of view. I do expect us to recover share from now until the end of the year with all the actions that we are putting in place. Velo, which is mainly the reason why we are calling in the mid-teens, will be lapping a much stronger competitor in the second half.

Operator

Remember that in the first half of this year, we had basically launched Velo Plus at the end of 2024. They were still building up in the first half of 2025. We'll just lap this half year now in 2026. They have very strong numbers in terms of volume, in terms of revenue, triple digits in the U.S. Obviously, when it comes to the second half of the year, they are lapping a much stronger second half of 2025. That's the only reason why we are saying mid-teens in the full year.

Speaker 9

Excellent. Thank you.

Speaker 3

Thank you. Our final question today is from Richard Felton from Goldman Sachs. Please go ahead.

Speaker 10

Thanks. Good morning. Thank you for squeezing me in. Two questions from me, please. The first one, on U.S. vapor specifically. As we think about the competition between Vuse and the illicit segments, what are the gaps as it relates to flavors, devices, and price points? Which of those gaps can you now close as a result of the FDA prioritization guidance, I suppose?

Operator

Okay.

Speaker 2

George?

Operator

You want to ask another question? Let's finish here. You have another question?

Speaker 10

Sorry, that was the first one. Second one was on free cash conversion. Obviously, a little bit stronger than we normally see from BAT in H1. The question is, what are the drivers of that? Is it just phasing between periods, or does that point to potentially better cash conversion on a full-year basis, too? Thank you.

Operator

Okay. On the vapor, Javed covered the free cash flow. On the vapor side, obviously, we are more interested on the channel, because you probably saw there in my slide that we talk about illicit presence in channels, track channels being 12%. This is just 2% of the size of the illegal, because most of the sales of illegal is done via independent and vape stores. It's not just about the flavors, it's about they bring to markets, big device, big tanks device, with a massive number of puffs that we will never be allowed to do. It's not just a question of FDA approving, because we as a responsible company, we never commercialize any Vuse product in the world with more than 10 ML in terms of cartridge.

Operator

That equates to something like 4,000 puffs, because as you puff more and more, the metal degrades and contaminates the liquid that you inhale. It's a bad vapor. They don't care about that, those illegal players. You go out there and you buy 10,000 puffs and 20,000 puff device. In my last market visit in the U.S., I saw one of 100,000 puffs device. Obviously this has financial benefits when you consider the cost per puff of this device. I will never be able to compete there. This is a gap that needs to be closed by enforcement, because clearly they shouldn't be in the market in the first place because it doesn't bring any type of benefit health-wise, if not the contrary.

Operator

What we be closing the playfield is on the convenience stores channels, where we haven't been able to be present with flavors since January 2021. We'll be back. It's a very important channel as well. More important, it's a channel where we feel very confident about our ability through the retailers to check IDs before selling these products, where it not necessarily happens when you indiscriminately start selling in independent stores and other type of stores. I think that in that channel, we'll be closing the gap substantially. We'll be competitive. The impact of this in the overall illicit market, we have to wait and see. I don't want to do a proper estimation on that now.

Speaker 1

I think on the cash conversion, 2 points from my side. One is because of the lower net financing cost, as I highlighted earlier, which was due to the debt repayment from the proceeds of ITC. More importantly, also, I think I'm very proud of the work the finance team keeps on doing with our commercial colleagues to keep focus on cash as much as we do on profit. Hence that focus on cash has delivered higher cash, which makes me very confident that for the full year, we will be delivering another year of more than 95% cash conversion for the full year.

Operator

I wouldn't ask so much more that will be much better than previous year because we have a track record of a very strong cash conversion. The performance in H1 just give us more confidence that can be another year of a very strong delivery in that place.

Speaker 10

Thank you very much.

Speaker 3

Thank you. With this, I'd like to hand the call back over to Victoria for any additional or closing remarks. Over to you, ma'am.

Speaker 2

Thank you. Well, thank you very much for all the questions from the telephone lines. I'm afraid we are out of time, and therefore will not be able to get to the online questions, but the IR team will respond directly to those who sent questions in. Now I'd like to hand back to Tadeu for closing remarks.

Operator

Okay. Thank you all for listening today and for all your questions. Just to close, our H1 results were in line with our expectations, and we are on track to deliver our full-year guidance, with EPS now expect to be towards the middle of our 5%-8% range. We'll continue to reward our shareholders through strong cash returns, including our progressive dividend and sustainable share buyback, and deliver long-term growth and value creation. Thank you again for joining us. I look forward to seeing many of you in September at our Capital Markets Day.

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