> My view remains unchanged that British American Tobacco has the widest spectrum of potential future outcomes relative to its peers.
I think that’s a fair conclusion.
Part of the difficulty (and the fun!) of being an investor is figuring out long term trends. Will one of the three NGP categories manage not only to take a large share from combustibles, but also be adopted by people who have never smoked?
In the US, the FDA has been pretty adamant, especially with vaping, that users should be current or former smokers. But when I look at modern oral, I see the possibility that it might be adopted more widely. I think it was Six Bravo who shared videos of Peter Attia explaining why he takes modern oral. Many financial analysts I read on Twitter sometimes offhandedly mention how they use Zyn. And modern oral is invisible in a way that vaping and HNB are not, reducing stigma and IMO reducing the political pressure on the FDA to reduce its use among adults.
I think those are fair observations and questions. As I mentioned in a different comment, I will be writing a detailed piece later in the summer rationalizing the basket approach and exploring some of the finer nuances between legacy and next-gen products. I don't think it's winner-takes-all for a specific next-gen category, considering the diversities of the world. I also believe that the cash flows produced by legacy products continue to be underestimated.
As Devin mentioned, the US version of VELO is a very different (and very inferior) product to what they sell outside the US. If/when they get an authorization from the FDA to sell their international version in the US, they might be able to compete against ZYN.
Tian is largely correct. Additionally there are Substantial Equivalence and SE exemption pathways. While they would appear simpler and more straightforward, there are examples showing attaining SE (as a small company) can still take years and countless additional costs.
Have you seen clear evidence the FDA are implementing on taking the illegal vapes off the retail selfs in the USA. The uk are having a similar problem if illegal vapes but there are constant news reports of actual shops being raiding by enforcement agency’s and closed or fines. The uk are taking this problem seriously. I’m concerned FDA are not enforcing it enough.
I do not disagree, and in previous pieces had stated I was all for share repurchases being paused in favor of focusing on deleveraging:
"I am not disappointed in this change in events. First, I have to commend management for being responsible stewards of capital and acting prudently to ensure future flexibility - so long as the broad market continues to remain sour on the sector, there will be plenty of opportunities to engage in buybacks in the future. Second, and more importantly, is that the servicing of debt isn’t the sole cause of pausing buybacks. Much like when PMI’s IQOS was doubted, it was only a few years ago when BAT pushed its “A Better Tomorrow” strategy, doubling down on New Categories. The ambitious goals set by the company, including reaching aggregate New Category profitability in 2025, seemed far-fetched to many. However, last year, it seemed that things were lining up to reach that goal even sooner, and I modeled as such in my published valuation."
The company will likely modestly deleverage throughout H2 of this year. Though, if maintaining a long-term x2.5 ratio is the goal, and if the denominator (adj. EBITDA) grows, debt may very well increase down the line.
Yes, both of PMI's key New Category products are impressive - with IQOS undoubtedly far ahead in heated tobacco. But Velo is still dominating outside of the United States. With very different geo and cat mixes and a pronounced difference in starting multiples, I continue to prefer a basket approach to holding these equities.
I’m not sure I’d want to own a basket per se, I feel like BAT and Philip Morris are the only ones I can take an confidence in that the future might be brighter than the past. I own both
Thanks for sharing, Oli. I will be writing a detailed piece later in the summer rationalizing the basket approach and exploring some of the finer nuances between legacy and next-gen products.
To your point, Altria and Imperial Brands certainly lag in NGPs. Also, unless one is a professional investor, it is not easy to understand and invest in Japan Tobacco or KT&G.
Aug 2, 2023·edited Aug 2, 2023Liked by Devin LaSarre
Hi. Does anyone know what is going on with $5bn of NEW bond offering. They removed $2.9bn of the debt, and replaced it with $5bn of NEW debt => total INCREASE of debt: $2.1bn. I hope I am wrong, am I? Thanks😃
Likely using proceeds from new raise to retire notes coming due soon, ie. rolling forward. If you look at the debt maturity profile, there are several years of notes they will likely be doing this with in the not too distant future.
> My view remains unchanged that British American Tobacco has the widest spectrum of potential future outcomes relative to its peers.
I think that’s a fair conclusion.
Part of the difficulty (and the fun!) of being an investor is figuring out long term trends. Will one of the three NGP categories manage not only to take a large share from combustibles, but also be adopted by people who have never smoked?
In the US, the FDA has been pretty adamant, especially with vaping, that users should be current or former smokers. But when I look at modern oral, I see the possibility that it might be adopted more widely. I think it was Six Bravo who shared videos of Peter Attia explaining why he takes modern oral. Many financial analysts I read on Twitter sometimes offhandedly mention how they use Zyn. And modern oral is invisible in a way that vaping and HNB are not, reducing stigma and IMO reducing the political pressure on the FDA to reduce its use among adults.
I think those are fair observations and questions. As I mentioned in a different comment, I will be writing a detailed piece later in the summer rationalizing the basket approach and exploring some of the finer nuances between legacy and next-gen products. I don't think it's winner-takes-all for a specific next-gen category, considering the diversities of the world. I also believe that the cash flows produced by legacy products continue to be underestimated.
I’m looking forward to reading that detailed piece!
It's one of those that is critically important yet keeps being delayed because there is so much to say and so many ways to approach each aspect.
But, BAT (VELO) is losing US market to PMI (ZYN).
As Devin mentioned, the US version of VELO is a very different (and very inferior) product to what they sell outside the US. If/when they get an authorization from the FDA to sell their international version in the US, they might be able to compete against ZYN.
Hmm, I didn't know that FDA is involved🤔
In a nutshell, any new tobacco product needs a “PMTA” from the FDA, otherwise it cannot be sold. That applies to modern oral nicotine, vapes, heat not burn, cigarettes, etc. To be approved, a product must show that it “promotes public health.” See https://www.fda.gov/tobacco-products/market-and-distribute-tobacco-product/premarket-tobacco-product-applications.
Tian is largely correct. Additionally there are Substantial Equivalence and SE exemption pathways. While they would appear simpler and more straightforward, there are examples showing attaining SE (as a small company) can still take years and countless additional costs.
I hope the new BAT's CEO will fix the promlem
At this point, they can not expedite. The PMTAs will go through the traditionally long and arduous process before a determination is made.
Have you seen clear evidence the FDA are implementing on taking the illegal vapes off the retail selfs in the USA. The uk are having a similar problem if illegal vapes but there are constant news reports of actual shops being raiding by enforcement agency’s and closed or fines. The uk are taking this problem seriously. I’m concerned FDA are not enforcing it enough.
Tian's comment highlights recent actions. I've also covered actions in pieces throughout the last year, which can be accessed in the archive.
I think the FDA is stepping up enforcement:
July 27: https://www.fda.gov/tobacco-products/ctp-newsroom/fda-puts-distributors-notice-illegal-e-cigarettes-popular-youth-including-elf-bareb-design-and-esco
June 22: https://www.fda.gov/news-events/press-announcements/fda-inspection-blitz-leads-more-180-warning-letters-retailers-illegal-sale-youth-appealing-elf-bar
given the increasing debt service cost, I would reckon that paying back more debt is more beneficial than resuming the share buybacks
I do not disagree, and in previous pieces had stated I was all for share repurchases being paused in favor of focusing on deleveraging:
"I am not disappointed in this change in events. First, I have to commend management for being responsible stewards of capital and acting prudently to ensure future flexibility - so long as the broad market continues to remain sour on the sector, there will be plenty of opportunities to engage in buybacks in the future. Second, and more importantly, is that the servicing of debt isn’t the sole cause of pausing buybacks. Much like when PMI’s IQOS was doubted, it was only a few years ago when BAT pushed its “A Better Tomorrow” strategy, doubling down on New Categories. The ambitious goals set by the company, including reaching aggregate New Category profitability in 2025, seemed far-fetched to many. However, last year, it seemed that things were lining up to reach that goal even sooner, and I modeled as such in my published valuation."
The company will likely modestly deleverage throughout H2 of this year. Though, if maintaining a long-term x2.5 ratio is the goal, and if the denominator (adj. EBITDA) grows, debt may very well increase down the line.
All I could think of whilst reading this is how impressive Zyn and IQOS are
Yes, both of PMI's key New Category products are impressive - with IQOS undoubtedly far ahead in heated tobacco. But Velo is still dominating outside of the United States. With very different geo and cat mixes and a pronounced difference in starting multiples, I continue to prefer a basket approach to holding these equities.
I’m not sure I’d want to own a basket per se, I feel like BAT and Philip Morris are the only ones I can take an confidence in that the future might be brighter than the past. I own both
Thanks for sharing, Oli. I will be writing a detailed piece later in the summer rationalizing the basket approach and exploring some of the finer nuances between legacy and next-gen products.
Sounds great! I look forward to it!
Thanks, Oli. Always appreciative of your support.
To your point, Altria and Imperial Brands certainly lag in NGPs. Also, unless one is a professional investor, it is not easy to understand and invest in Japan Tobacco or KT&G.
Hi. Does anyone know what is going on with $5bn of NEW bond offering. They removed $2.9bn of the debt, and replaced it with $5bn of NEW debt => total INCREASE of debt: $2.1bn. I hope I am wrong, am I? Thanks😃
Likely using proceeds from new raise to retire notes coming due soon, ie. rolling forward. If you look at the debt maturity profile, there are several years of notes they will likely be doing this with in the not too distant future.
Great Article.
Owned BAT took a profit, bought a muni below par.
Looking at BAT again.