Executive Summary / Key Takeaways

• Accelerated Transformation to Smokeless: British American Tobacco (BTI) is aggressively pursuing its "Building a Smokeless World" vision, aiming for 50% of revenue from non-combustibles by 2035, a strategic pivot underscored by its new category profitability achieved two years ahead of target in 2023.
• Innovation-Driven New Categories: BTI's multi-category portfolio, featuring Vuse, Glo, and Velo, is driving growth, with Modern Oral (Velo) leading with 53% revenue growth in 2024. Strategic innovations like Glo Hilo and Velo Plus are designed to capture premium segments and expand market share.
• U.S. Turnaround and Regulatory Advocacy: Despite ongoing macroeconomic pressures and illicit vapor challenges, BTI anticipates its U.S. business to return to growth from 2025, supported by completed commercial investments, a refreshed Velo portfolio, and persistent advocacy for effective regulation and enforcement against illicit products.
• Robust Cash Generation and Shareholder Returns: BTI is a highly cash-generative company, projecting over £50 billion in free cash flow between 2024 and 2030. This underpins a progressive dividend policy and sustainable share buybacks, with a commitment to reach a target leverage range of 2.0-2.5 times by the end of 2026.
• Navigating Headwinds with Global Diversification: While facing significant combustible headwinds in Bangladesh and Australia in 2025, BTI's diversified global footprint and multi-category strategy provide resilience, enabling it to absorb regional pressures and maintain its medium-term growth algorithm of 3-5% revenue and 4-6% adjusted profit from operations (APFO) by 2026.

The Dawn of a Smokeless Era: BTI's Strategic Evolution

British American Tobacco p.l.c. (BTI), founded in 1902, has long been a titan in the global tobacco industry. However, the company is undergoing a profound transformation, pivoting from its traditional combustible cigarette business towards a "Smokeless World." This strategic evolution, encapsulated in its ambition to derive 50% of its revenue from non-combustible products by 2035, is a direct response to evolving consumer preferences, increasing regulatory scrutiny, and the immense public health opportunity presented by reduced-risk alternatives. BTI's journey into new categories, including vapor, heated tobacco, and modern oral products, began in earnest a decade ago, culminating in a multi-category portfolio that generated over £3 billion in revenue by 2023. This foundational shift is not merely aspirational; it is a meticulously planned and executed strategy, now reaching a critical inflection point where new categories are driving profitability and shaping the company's future.

The broader nicotine industry is experiencing an accelerated pace of change, with consumers increasingly switching to new categories. This trend is creating a growing adult nicotine value pool, particularly in the U.S., which represents one-third of the global total. BTI's multi-category approach is designed to capture this growth by offering diverse alternatives that cater to varying consumer preferences and regulatory landscapes worldwide. The company's historical investment in these new categories, which saw losses peak at £1.1 billion in 2020, has yielded significant results, with new category contribution becoming broadly breakeven in 2023—two years ahead of its original target. This achievement underscores the effectiveness of BTI's disciplined capital investment and focus on quality growth in high-value profit pools.

Competitive Positioning in a Transforming Landscape

BTI operates in a highly competitive global market, contending with industry giants such as Philip Morris International (PM), Altria Group (MO), and Imperial Brands (IMB). BTI's core competitive advantage lies in its extensive geographic diversification and a robust portfolio of established global brands, which provide resilience in volatile markets. This broad presence allows BTI to mitigate regional challenges by leveraging growth opportunities across its diverse operational footprint.

Compared to Philip Morris International, which often leads in heated tobacco technology with products like IQOS, BTI's strategy emphasizes a balanced portfolio across all new categories and regions. While BTI may appear to lag PM in the speed of innovation for some next-generation nicotine products, its widespread distribution networks and established brands like Vuse and Velo enable it to compete effectively by ensuring broad product availability and capturing market share in underserved regions. BTI's gross profit margin of 64.79% and operating profit margin of 18.07% (TTM) demonstrate solid financial health, though continuous investment in innovation is crucial to match PM's perceived technological edge and maintain profitability.

Against Altria Group, a U.S.-centric player, BTI's global reach is a significant differentiator. BTI's exposure to faster-growing emerging markets provides a buffer against the unique regulatory and macroeconomic pressures prevalent in the U.S. While Altria benefits from strong pricing power in its concentrated domestic market, BTI's diversified revenue streams enhance cash flow stability. In the modern oral segment, BTI's Velo brand, with its strong performance globally and in the U.S., is a direct competitor to Altria's on!, showcasing BTI's ability to innovate and gain traction in key growth areas.

When compared to Imperial Brands, BTI's larger scale and brand diversity, including iconic combustible brands like Dunhill and Lucky Strike, offer broader global appeal and greater resilience. BTI's strategic focus on leveraging its extensive distribution networks provides an edge in market positioning, while IMB often prioritizes cost leadership. BTI's ability to innovate across product lines, as seen in its new category launches, helps it differentiate, though addressing cost efficiencies remains vital to maintain financial competitiveness.

Technological Edge: Fueling the Smokeless Future

BTI's transformation is underpinned by significant advancements in its new category technologies, which are central to its competitive moat and long-term growth strategy. The company has revamped its entire innovation ecosystem, leading to an exciting pipeline of products across vapor, heated tobacco, and modern oral.

In the Heated Products (HP) segment, BTI is determined to significantly strengthen its portfolio. The launch of Glo Hyper Pro in 2024 marked a crucial step, offering a premium device with enhanced heat technology and improved consumables. This innovation aims to move Glo towards a premium positioning, a segment representing over 80% of the industry's value. The company's strategic vision extends further with Glo Hilo, a "breakthrough two-piece premium system" launched in Serbia in November 2024, with a broader rollout planned from mid-2025. Glo Hilo is designed to reshape Glo's competitive stance, allowing BTI to effectively compete in the high-value premium HP segment. Early results from Serbia are encouraging, with the new consumables, Vivto and Rebo, resonating well with consumers new to the Glo brand family. This focus on premiumization and technological advancement is critical for improving Glo's category contribution, which saw an improvement in 2024 driven by scale benefits and pricing.

For Vapor products, BTI's Vuse brand remains a global and U.S. value share leader, demonstrating strong financial resilience despite intense competition from illicit products. The company is innovating to offer premium vapor experiences with Views Ultra, an "untapped opportunity" representing just 3% of the vapor category value. Targeted rollouts for Views Ultra commenced in Canada in Q4 2024, positioning Vuse as a trusted brand delivering a responsible, high-quality, and satisfying experience. Furthermore, BTI is enhancing its disposable and rechargeable offerings with Vuse Go 2.0, featuring improved sensorials and a removable battery addressing sustainability and safety concerns, and Vuse Go Reload, which combines the flexibility of single-use products with a rechargeable device. The U.S. FDA's marketing granted order for Vuse Alto device and tobacco flavors in H1 2024 further validates BTI's commitment to responsible product development.

In Modern Oral, BTI's Velo is the fastest-growing new category, with revenue surging 53% in 2024. The company's portfolio expansion in the U.S. with Velo Plus, launched in Q4 2024, is a significant technological differentiator. Described as a "higher moisture product," Velo Plus is delivering "very encouraging early results," including strong uptake and driving total Modern Oral volume share above 10% in recent readings. This innovation, alongside a refreshed Velo expression and the launch of Grizzly Modern Oral, has propelled BTI's U.S. Modern Oral volume share to 6.6% nationally and 18% in New York by December 2024. Velo's gross margin per mil in AME is notably over two times that of combustibles, highlighting the high profitability of this segment. The strategic intent behind these innovations is clear: to capture market share in the fastest-growing new category globally and to drive significant improvements in category contribution and overall profitability.

These technological advancements and R&D initiatives are not merely product launches; they are foundational to BTI's strategy to build a sustainable competitive moat. By offering differentiated, consumer-relevant premium propositions, BTI aims to command higher average selling prices, reduce manufacturing costs through scale, and improve margins. This technological roadmap directly supports BTI's long-term growth strategy and its vision of a smokeless world, providing tangible benefits for investors through enhanced market positioning and improved financial performance.

Financial Performance and Operational Momentum

BTI's financial performance in 2024 reflects a company in active transformation, balancing investment with disciplined growth. Group revenue grew by 1.3%, with new category revenue surging by 8.9% and adjusted operating profit rising by 1.4%. Diluted EPS increased by 3.6%. This performance was underpinned by a robust combustibles price mix, up nearly 9%, which helped offset negative geographic mix. Adjusted gross profit expanded by £400 million, benefiting from revenue growth management and the increasing scale of new categories.

Crucially, new categories are now meaningfully contributing to group results. The new category contribution improved by £251 million in 2024, with the category contribution margin rising to 7% on an organic constant rates basis. This marks a significant milestone, demonstrating the success of BTI's strategy to drive quality growth in these segments.

Regionally, performance outside the U.S. showcased strong resilience. Excluding the U.S., revenue grew by 5.1% and operating profit by 7.5%, highlighting the strength of BTI's multi-category portfolio and global footprint. AME (Africa, Middle East, Europe) saw nearly 5% revenue growth, driven by both combustibles and a remarkable 47% increase in Modern Oral revenue. APMEA (Asia-Pacific, Middle East, Africa) also delivered strong results, with total revenue up 5.4% and new category revenue growing nearly 9%.

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The U.S. market, a cornerstone of BTI's future, presented a more complex picture. U.S. revenue declined by 3.4%, and adjusted operating profit fell by 3.5% in 2024, primarily due to commercial actions implemented over the last 18 months, ongoing macroeconomic pressures, and the impact of illicit vapor products. The U.S. combustibles industry declined by approximately 9% in 2024, with new category poly-usage and illicit vapor contributing significantly to this decline. However, BTI's U.S. financial performance improved throughout the year, with total volume share stabilizing in 2024 and growing 40 basis points when excluding the deep discount segment where the company is not present. This indicates that strategic investments in the U.S. are beginning to yield results.

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Strengthening Financial Resilience and Shareholder Returns

BTI is a highly cash-generative company, a critical factor in its ability to fund transformation and reward shareholders. The company has achieved operating cash conversion exceeding 100% for five consecutive years. Management projects generating over £50 billion of free cash flow between 2024 and 2030, providing substantial financial flexibility.

A key focus is deleveraging. BTI reduced its leverage to 2.4 times adjusted net debt to adjusted EBITDA in 2024, which would be 2.75 times when adjusted for the Canadian business. The company aims to be within its target leverage range of 2.0 to 2.5 times by the end of 2026, following court approval and implementation of the proposed Canada CCAA plan. This plan, which includes a £6.2 billion provision recognized in 2024, is expected to be tax deductible and will not impede BTI's capital allocation priorities.

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Shareholder returns remain a priority, with BTI committed to a progressive dividend policy, evidenced by a 2% growth announced in 2024. The company has also initiated a sustainable share buyback program, completing a £700 million buyback in 2024 and committing to £900 million in 2025. This is partly enabled by the partial monetization of its ITC (ITC) stake. BTI has no strategic interest in being a long-term shareholder of a hotel chain in India and intends to divest its stake in ITC at the opportune moment to maximize shareholder value and further support its deleveraging and buyback initiatives.
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Outlook and Strategic Trajectory

BTI views 2024 as an "investment year" and 2025 as a "deployment year," laying the groundwork for accelerated growth. For 2025, the company anticipates revenue growth of around 1% and adjusted profit from operations (APFO) growth of 1.5% to 2.5%, adjusted for Canada and including a 1.5% transactional FX headwind. This guidance incorporates significant combustible headwinds in Bangladesh and Australia, which are expected to impact 2025 group revenue growth by 1% and APFO growth by close to 2%. In Bangladesh, an ad hoc increase in VAT, supplementary duty, and excise, coupled with above-inflation floor price increases, is expected to accelerate illicit trade. Australia faces new tobacco regulations and excise increases, which are projected to further accelerate legal industry volume decline and fuel illicit trade, where 65% of nicotine usage is already illicit.

Despite these near-term challenges, BTI remains confident in its medium-term algorithm, targeting 3% to 5% revenue growth and 4% to 6% APFO growth (adjusted for Canada at constant rates) by 2026. This confidence is built on several key drivers:

• U.S. Financial Performance: An expected improvement in the U.S. financial performance, supported by a less negative industry volume backdrop, a more supportive macroeconomic environment for low-income consumers, and more meaningful enforcement against illicit vapor products.
• New Category Innovations: Quality growth driven by the full-year benefit of new category innovations deployed throughout 2025, including Glo Hilo, Velo Plus, and premium vapor products.
• Lapping Headwinds: The lapping of 2025 combustible headwinds in Bangladesh and Australia, alongside investments in innovation rollout.
• Efficiency Gains: A step-up in efficiencies from a new savings program targeting an additional £2 billion by 2030.

BTI's strategic initiatives extend to regulatory advocacy. The company has established "Omni" to leverage scientific evidence and shift broader stakeholder perception of tobacco harm reduction. It actively advocates for appropriate regulation and enforcement, particularly in the U.S. vapor market, where illicit products continue to distort competition. The success of Louisiana, where well-constructed regulation and enforcement led to a 33% growth in the legal vapor market and a 91% reduction in illicit single-use products, serves as a powerful example of what can be achieved.

Conclusion

British American Tobacco is in the midst of a profound and profitable transformation, strategically shifting towards a "Smokeless World." The company's commitment to its multi-category strategy, underpinned by significant technological advancements in its Vuse, Glo, and Velo platforms, is yielding tangible results, with new categories now driving profitability and contributing meaningfully to group performance. While 2025 presents specific headwinds in combustible markets like Bangladesh and Australia, BTI's diversified global footprint and robust cash generation provide a strong foundation to absorb these pressures.

The anticipated turnaround in the U.S. business, coupled with a relentless focus on innovation and efficiency, positions BTI to achieve its ambitious medium-term growth targets by 2026. For discerning investors, BTI offers a compelling investment thesis: a high-yield dividend payer with a clear strategic roadmap, a growing portfolio of reduced-risk products, and a commitment to sustainable shareholder returns, all while navigating a complex but evolving regulatory landscape. The company's ability to execute its innovation pipeline and drive effective regulatory enforcement against illicit products will be critical determinants of its long-term success and continued value creation in the journey towards a predominantly smokeless future.