British American Tobacco: Steadied

“With a stronger-than-expected H1, we now anticipate full-year revenue at the top end of our 1% to 2% guidance. We maintain our APFO guidance of 1.5% to 2.5%, reflecting increased investments in new categories, a stronger U.S. combustibles comparator in H2, and the 1% to 1.5% transactional FX headwind. All of this enables us to invest more in innovation while staying firmly on track for 2026.” - Soraya Benchikh, BAT CFO, H1’25 remarks

There has never been a shortage of points to criticize in British American Tobacco’s execution. It was not all that long ago, following FY’24 results, when I noted the wearing down occurring:

BAT’s full-year 2024 results included the trademarked “A Better Tomorrow” and a vibrant color palette to illustrate how that bright future will come about. Yet, every tomorrow that has come thus far has had no shortage of setbacks and challenges, many of which still require answers. The raw value of the underlying cash flows remains. But that is not all that appears raw. Like a whetstone, the dulling of the story has ground down many investors’ patience closer to the bone.

Yet, as concluded at the time, despite the prior indigestion brought on by an aggressive, and arguably stretched, approach to next-gen products, profitability and potential remained intact. H1’25 results once again affirmed that belief, showcasing a mix of incremental and radical improvements.

The reversal

Over the last several years, British American Tobacco’s central profit station, the United States, has faced immense concern. The group focused on winning over vapor with its Vuse line, while progress was muted due to the rapidly growing illicit market. Those very same illicits were adding to the already elevated decline rate of the group’s combustible volumes. At the same time, the group’s U.S. combustibles, which skew heavily into menthol, were set to take a massive hit from the menthol ban on the horizon. To add insult to injury, while the nicotine pouch category was growing rapidly, BAT was faced with the reality that its product, Velo 1.0, was, candidly, the least appealing product on the market.

Today, illicits remain a threat, poised to drain profits away from legal product categories. Yet, mounting enforcement actions, on both the Federal and state levels, are beginning to soften the effect. More importantly, the menthol ban is no longer threatening combustible profits in the foreseeable future. These factors have aided the group as it has correctly refocused efforts towards its combustible portfolio, with H1’25 U.S. combustibles net revenue and volumes fairing far better than what we have grown accustomed to.

Although vapor has languished, H1’s U.S. profits were further bolstered by modern oral, with associated revenues growing nearly 400% in the period. It would be easy to dismiss this development as material since in H1’25, the category made up less than 2% of segment revenues. It becomes even easier to disregard, as I’ve highlighted elsewhere, by considering that the promotional activities of competitors are likely to increase throughout the remainder of the year. However, what is occurring should not be dismissed.

Shortly after Velo Plus was launched in the U.S. in December of last year, I shared my views on the product:

Velo Plus is not as moist as the ‘2.0’ Scandinavian Velo. But on the plus side, it holds several standout qualities. First, the cans are a significant upgrade from Velo 1.0’s flimsy plastic and haphazard labeling. They are virtually identical to the cans of Scandinavian Velo and similar to all of the high-quality cans found in other markets, with durable plastic, clean labels, and a pop-top to discard used pouches. The only other U.S. brand with similar high-quality packaging is zone. When opened, the Velo Plus pouches provide a strong aroma. While they are not as moist as the Scandinavian variant, they are indeed more moist than all other products currently available in the U.S. market. They are also more filled than zone, making them more plush. The flavors aren’t intense, but each has an appropriate and long-lasting profile. More importantly, the delivery speed is top-notch. Overall, this is an unmistakably high-quality product that lives up to the excitement expressed by management.

Two months later, I went further, claiming that the product exceeded ZYN qualitatively. Initially, that claim was not well received. Yet, take your pick of metrics, and you are hard pressed to find one that doesn’t support the idea that Velo Plus is quickly winning over the adult consumer, and user reviews continue to shine. Several new developments, not reflected in the H1’25 results, provide additional positive longer-term implications for the group’s modern oral efforts.