British American Tobacco p.l.c. (NYSE:BTI) Q4 2025 Earnings Call Transcript

British American Tobacco p.l.c. (NYSE:BTI) Q4 2025 Earnings Call Transcript February 12, 2026

Tadeu Marroco: Good morning, everyone. I’m delighted to welcome you to our full year 2025 results presentation. With me this morning, Javed Iqbal, Interim CFO; and Victoria Buxton, Group Head of Investor Relations. 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 driving. We will then take your questions. With that, I would like to draw your attention to the disclaimers on Slide 2 and 3. So let’s begin by looking at the positive transformation momentum we are driving. Starting with some key highlights. We added 4.7 million smokeless consumers bringing our total to 34.1 million, mainly driven by our continued strong performance in modern Auto.

This marks our strongest growth acceleration to date and position us well for 2026. We delivered 2025 group results at the top end of guidance driven by resilient delivery in combustibles and an excellent performance from Velo in all 3 regions. Our disciplined focus on quality growth continues to improve returns on more targeted investments with new category contributing now up 77% at constant rates. Alongside this, we remain committed to investing behind our premium innovation launches, supporting long-term value creation. We continue to deliver strong cash returns for shareholders. In addition to our progressive dividend in December, we announced an increase to our share buyback to GBP 1.3 billion in 2026. Looking ahead, we are confident in returning to our midterm algorithm this year with the accelerated momentum through the second half of 2025, positioning us well for continued delivery.

I’m proud that we have delivered on all of our 2025 priorities and I want to thank our teams around the world for driving these encouraging results. Our performance reflects the clear momentum we are driving as we continue to build a track record of delivery. I’d like to take a moment to highlight 2 areas from last years that stand out to me. First, the return to both revenue and profit growth in the U.S. for the first time since 2022. A significant milestone driven by stronger combustibles performance, a return to revenue growth in vapor in the second half, and modern oral. As a result, we grew 30 basis points of combustibles value share. Second, we are delivering quality growth in new categories, launching premium innovations in each category while delivering a return to double-digit revenue growth in second half and category contribution growth, up 77% for the full year.

The progress we made in 2025 reinforces my confidence in our future delivery. And with that, I will hand over to Javed to take you through our 2025 performance in more detail.

Syed Iqbal: Thank you, Tadeu, and good morning, everyone. I am pleased to share that we delivered results at the top end of guidance on a constant currency basis. The performance was driven by return to growth in the U.S., a robust performance in AME and the strength of modern oral globally. Our reported numbers reflect some adjusting items, including nearly GBP 1.6 billion, mainly related to the annual amortization of our U.S. acquired trademarks, a net credit of GBP 524 million, following a change in the forecasted outlook for the Canadian combustible industry. We also recognized a gain of nearly GBP 900 million from the partial monetization of our ITC stake. To give you a clear view of our underlying performance, I will focus on constant currency, adjusted and where applicable adjusted for Canada metrics.

You can find further detail on adjusting items and share data in the appendix. We delivered group results at the top end of guidance, supported by accelerated momentum through the second half. Group revenue increased by 2.1%. Adjusted profit rose 3.4%, adjusted profit from operations grew 2.3% and adjusted diluted EPS was up 3.4%. Let’s now turn to new categories revenue grew by 7% driven by outstanding growth in modern oral, which was up strongly by 48% with heated products up 1%. This was partially offset by a nearly 9% decline in vapor mainly due to continued illicit pressures in the U.S. and Canada. Our second half use performance showed a clear improvement versus the mid-teens decline in H1, supported by early signs of strong enforcement activity in the U.S. We continue to deliver quality growth with gross profit up over GBP 200 million and category contribution reaching GBP 442 million.

This reflects our disciplined approach to return on investment, targeted investments in high-value markets and increasing scale benefit across our portfolio. I am proud of the progress we are making, and I’m particularly pleased with our accelerated H2 momentum, where we returned to double-digit new category revenue growth. Now turning to combustible. Revenue grew 1% with volume decline more than offset by continued robust price/mix across markets. We delivered quality growth here, too. Both gross profit and category contribution increased 2.5% driven by a strong performance in the U.S., positive price/mix and continued productivity and simplification gains, which I will speak to shortly. Our performance highlights the breadth of our global footprint with strong delivery in the U.S. and AME more than offsetting fiscal and regulatory headwinds in Bangladesh and Australia, which impacted total group revenue by around 1% and group adjusted profit from operations by around 2%.

This resilience and increasing momentum in H2 reinforces our confidence in future delivery. Turning to our regions starting with the U.S. In combustibles, we delivered a 4.6% increase in revenue with our strengthened portfolio, sharper execution and enhanced revenue growth management, driving price mix, including excise duty drawback. Value share here increased 30 basis points, with volume share down 10 basis points. In New category, revenue grew nearly 20%, driven by the success of Velo Plus, which delivered over 300% growth. While Vapor revenue was down 3.4% for the full year, we are encouraged that Vuse return to revenue growth in H2, supported by early signs of enforcement actions. Overall, U.S. revenue increased 5.5% and adjusted profit grew 5.9%, mostly driven by a strong combustible performance.

Importantly, Velo Plus reached positive category contribution within its first year, underscoring the scalability of our modern oral business model. Tadeu will share more detail on the U.S. shortly. In AME, we delivered another robust performance. Revenue grew over 3% with combustible up more than 2%, supported by strong delivery in Brazil, Turkey and Mexico with solid pricing. New category revenue increased 4.3%, mainly driven by modern oral, which grew over 17%. We are the clear modern oral leaders in the region with over 60% volume share in top markets, selling at a premium and strongly outperforming peers, which Tadeu will expand on later. Growth was further supported by heated products with revenue up over 6%, driven by Italy, Germany and Ukraine.

This was partially offset by competitive dynamics in Romania as we reallocated resources ahead of the glo Hilo launch. Vapor revenue declined more than 11%, mostly impacted by the lack of illicit enforcement in Canada and regulatory and excise changes in U.K., France and Poland. Adjusted operating profit grew by nearly 10%, driven by operating leverage and efficiency gains in combustibles and scale benefit and resource allocation driving improved contribution across all 3 new categories. AME is a true multi-category region, delivering high-quality growth and demonstrating the resilience and balance of our portfolio. In APMEA, growth in key markets, including Pakistan, Nigeria and Indonesia was more than offset by fiscal and regulatory headwinds in Bangladesh and Australia.

Total revenue declined 7.2% with combustibles down 8.3%. New category revenue was down 7.6%. Strong growth in modern oral was more than offset by heightened competitive activity in heated products in the value for money segment in South Korea and Japan, along the phaseout of our Super Slim platform. Our Vapor performance reflects strategic decisions taken to reduce our footprint and reallocate resources away from markets where regulation and enforcement do not support a responsible competitive landscape. Adjusted profit was down 17.9%, mainly due to challenges in Bangladesh and Australia. As we continue to navigate headwinds into 2026, we expect our performance to stabilize for the full year, supported by Bangladesh as we lap last year’s decline and with the drag from Australia becoming progressively less material year-on-year.

Turning now to our group operating margin, which was broadly flat at 44%. We successfully offset inflationary and FX pressures through a strong U.S. performance, higher profitability in new categories and continued cost savings. Transactional FX headwinds on adjusted profit of approximately 1% were primarily driven by Turkey, Japan and Nigeria. At current rate, operating margin expanded by close to 10 basis points. BAT has a strong track record of disciplined and cost savings, and we continue to build on that foundation. Since 2023, we have delivered GBP 1.2 billion in productivity savings. These efficiencies help us offset inflationary pressures and foreign exchange headwinds while continuing to fund innovations and growth in new categories.

In 2025 alone, we absorbed around GBP 300 million of inflationary cost increases in addition to transactional FX. Looking ahead, we remain focused on simplifying combustibles and scaling new categories, targeting a further GBP 2 billion in productivity savings by 2030. In addition, we now expect our Fit to Win program to deliver GBP 600 million of annualized incremental savings by 2028. We expect around GBP 500 million of these savings to be delivered by 2027, with the remaining benefits realized by the end of 2028. We are committed to reinvesting these savings to support further sustainable growth initiatives. Fit to Win is a transformational project that is reinventing BAT. As outlined at our 2025 half year results, it is centered on optimizing processes and ways of working to create a leaner, faster and more data-driven organizations.

Since half year, we have made strong progress. we have expanded the program to include organizational streamlining to sharpen our focus and improve speed of execution, allowing us to raise total annualized savings by a further GBP 100 million. To unlock these benefits, we now expect around GBP 600 million of associated costs over the next 2 years. As a structured time-bound program, GBP 500 million will be treated as adjusting, including around GBP 100 million of noncash items. As previously guided, this spend is already underway with the majority of costs expected to be incurred this year and concluding in 2027. Bringing it all together, earnings per share increased by 3.4% as operating profit growth and lower share count was partly offset by net finance costs, our reduced share of ITC profits and tax.

Our underlying tax rate was 24.5%. Our strong cash generation continues to enhance our financial flexibility. This has enabled us to announce a 2% increase in our dividend and increase our share buyback by GBP 200 million to GBP 1.3 billion for 2026. Alongside this, we continue to delever to 2.55x adjusted net debt to adjusted EBITDA at the end of 2025, and we remain on track to be within our 2 to 2.5x target range by year-end. While our 2025 cash delivery was impacted by the CCAA upfront payment and the prior year deferral of tax payments in the U.S., we remain on track to deliver more than GBP 50 billion in free cash flow by the end of 2030. And we continue to focus on our capital allocation priorities, which are investing in transformation, balancing deleveraging with progressive dividends and sustainable share buybacks and selective bolt-on M&A to support our transformation.

I’m excited about the future and confident in our ability to deliver our midterm algorithm of 3% to 5% revenue growth, 4% to 6% adjusted profit from operations growth and 5% to 8% adjusted diluted EPS growth. Our return to this midterm algorithm in 2026 marks a major milestone in our transformation journey and reinforces the strength and resilience of our strategy. Our confidence is underpinned by continued growth in the U.S., robust multi-category delivery in AME, low double-digit new category revenue growth led by Velo globally, a further improvement in new category contribution and continued savings from our productivity programs. Although we still have more work to do, and it will take time to stabilize performance in APMEA, we will continue to invest in our premium innovations rollout.

As a result, we expect 2026 to be at the lower end of these ranges and our profit performance to be second half weighted, driven by the phasing of new category investment and as Fit to Win savings build through the year. And with that, I’ll hand it back to Tadeu.

Tadeu Marroco: Thank you, Javed. So moving on now to the positive transformation momentum we are driving. In 2023, when I became Chief Executive, I committed to sharpening our focus and execution, guided by a refined strategy and ambition to become a predominantly smokeless business by 2035. And I’m proud to say that we have made significant progress across all 3 strategic pillars as we continue to build a track record of delivery. While there is still much to do, I’m confident that our focused investments and sharp execution are driving real momentum, as you can see from our 2025 results. Our progress underpins our confidence in sustainably delivering our midterm algorithm, while continuing to reward shareholders with strong cash returns.

I’d now like to highlight 5 points that demonstrate this. First, we have successfully reset our U.S. business returning to revenue and profit growth in 2025. While the U.S. macroeconomic environment remains dynamic the pace of combustibles industry volume decline started to moderate in 2025, down 7.4%. Against this backdrop, driven by the actions we have taken to strengthen our portfolio and shop and execution. Our U.S. combustibles business delivered strong revenue and profit growth in 2025. Driving value from our combustible business is essential to funding our transformation and the U.S. is a key driver of this. In line with the strategy we gained 30 basis points of total industry value share. I’m particularly encouraged that our financial performance accelerated in the second half.

This positive momentum reinforces my confidence in the resilience of our U.S. combustible business and our ability to deliver sustainable value going forward. Velo Plus is the fastest growing modern oral brand in the largest modern oral value pool globally. Since launch at the end of 2024, it has already reached the #2 position in both volume and value share, gaining nearly 18 percentage points of volume share and nearly 14 points of value share. And we are pleased to — that our share momentum has continued into the start of 2026. Velo Plus has more than doubled its consumer base and driven over 300% modern oral revenue growth, capturing around 70% of industry volume growth and 80% of industry value growth in December. All of this is underpinned by a consistent repurchase rate of around 70% throughout the year.

Importantly, we achieved positive category contribution within the first 12 months of launch, fully aligned with Velo’s global payback profile. The total U.S. Modern Oral category continues to grow strongly and has already overtaken the size of the legitimate vapor category at over GBP 2 billion of revenue in 2025. Velo Plus is a great product, and these results demonstrate this in what remains a highly dynamic category. Its impressive success also highlights the broader strength of our U.S. capabilities and executional excellence, from consumer insights and branding to enhanced digital analytics and distribution enabled by a rejuvenated [indiscernible] Our performance was further enhanced by the successful launch of Grizzly Modern Oral in the summer, which achieved close to 2% volume share by year-end, taking our total volume share of U.S. Modern Oral to 25.8%.

Through this momentum, I’m delighted to announce that at the end of the year, we reached global volume share leadership in Modern Oral, measured across the top Modern Oral markets, representing around 90% of total industry revenue. Second, we are premiumizing our new category portfolio. Velo is already the clear European leader around 6x larger than our nearest competitor. We continue to focus on consumer-led innovation to strengthen product satisfaction among adult consumers and extend Velo’s success. At the start of this year, we began the nationwide rollout of our latest innovation, Velo Shift in Sweden, following a successful pilot with key retailers and online partners. Velo Shift is reshaping the Modern oral experience, featuring a new comfort pouch design, 5 distinct sensory flavors and a differentiated [indiscernible] that stands out on shelf.

Trading at a premium to the core Velo range, Velo Shift is already driving incremental share in the channels where it has launched with further market rollouts planned through 2026. These results highlight not only the strength of Velo brands and innovation pipeline, but also the quality of our execution across European markets. We see premium vapor done right as a highly attractive untapped segment for further value creation. Vuse Ultra is our most advanced vapor device yet, driving meaningful performance improvement for Vuse in markets where we have launched, including value share gains of nearly 80 percentage points in Canada, close to 4 percentage points in Germany and above 2 percentage points in France. As Javed highlighted, we have made proactive strategic decision to focus our execution on the largest profit pools with more supportive regulation and enforcement.

Vuse Ultra is central to this approach, and I’m encouraged by the strength of its early performance with further launch planned in the key markets in 2026. Our breakthrough innovation platform, glo Hilo, introduced our first piece device and is designed to establish glo in the premium segment. While still early days, we are starting to drive encouraging results in priority launch markets, Japan, Poland and Italy, with the majority of consumers new to glo coming from both premium combustibles and the broader heated products category. We are also strengthening glo’s overall brand equity across key consumer metrics. This consumer response is translating to early volume share momentum. We are encouraged by early trial to retention rates of around 50%, providing further confidence in the platform’s potential.

In 2026, our focus will be on accelerating trial among premium consumers across both combustibles and heated products, supported by target online and in-person activations. We will continue to scale glo Hilo through additional market rollouts in the largest heated product profit pools where we can generate the strongest returns. Overall, we remain confident in the strength of this innovation platform and expect to progressively build share within the premium segment over time. As Javed highlighted, the heated products category remain highly competitive, and this has impacted our 2025 performance in the value for money segment where we are present with glo Hyper. Introducing glo Hilo into the premium space allow us to further differentiate our tier our portfolio.

We see a clear opportunity to strengthen glo’s overall performance across both premium and value for money segments. Central to this is the launch of our next-generation glo Hyper device from Q2. The new glo Hyper delivers a step change offering, quick starts, longer started session length, new connectivity and a replaceable battery. These innovations significantly improved the consumer experience, and we are also further enhancing the consumables range. Taken together, these upgrades create a much stronger proposition designed to reinforce our competitiveness in the value for money segment. Third, I’m proud of the strong progress we have made improving New category profitability. Since 2021, we have driven a GBP 1.4 billion improvement in category contribution with all 3 new categories contributing to this momentum.

Importantly, we have achieved this while continuing to invest in our transformation to drive future sustainable growth. Our new categories are meaningfully contributing to group results as we benefit from increased scale, reflecting traction in established markets while continuing to invest in new market launches. This supported by more consistent and constructive regulatory frameworks, such as those in place for Modern oral in 24 markets, up from just 4 markets in 2022. We have sequentially improved our performance each year. And through our quality growth approach, we remain committed to driving sustainable profitability improvement moving forward. Fourth, I’m encouraged by the signs of positive progress we are seeing in the regulation and enforcement of new categories, especially in the U.S. While the vapor category continues to be impacted by the proliferation of illicit products, Vuse returned to revenue growth in the second half after 18 months of decline.

This has been supported by increased state level enforcement with vapor directory and enforcement legislation representing around 50% of tracked industry volume by year-end. In addition, Vuse performance in the second half benefited from competitor exits, further strengthening our market position. Our recovery has also been supported by early signs of increased federal enforcement targeting borders and larger distributors, resulting in high levels of seizures and fines. Looking ahead, we are encouraged by the increased focus and funding directed towards strengthening the FDA’s enforcement capabilities. We were also pleased to receive a favorable initial determination on our International Trade Commission complaint from the administrative law judge who has recommended a general exclusion order on imported illicit vapor device.

We expect a final determination from the ITC in the coming weeks, which will then be subject to a 60-day presidential review. With an estimated 7% of the U.S. vapor industry value still illicit, we are hopeful the authorities will continue with enforcement initiatives in 2026. Reynolds continues to advocate for a level playing field so that adult nicotine consumers have access to high-quality compliant vapor products. Over time, we believe Vuse is well positioned to benefit from strong enforcement at both the federal and state levels. In addition, the FDA has recently recognized the positive role that nicotine pouches can play in helping adult smokers who would otherwise continue to smoke to transition to less risk alternatives, reinforcing their role in tobacco harm reduction.

We welcome the FDA’s new pilot program to streamline the PMTA review process for nicotine pouches. This is an important step towards keeping underage appealing illicit products out of the market while giving responsible manufacturers a more predictable path to PMTA authorization. We are confident in the strength of our science and portfolio, and we look forward to being able to complement our existing U.S. portfolio with Velo Max, a higher moisture modern oral product in 2026, and we have increased capacity to support our sustainable growth agenda. And the final point I would like to highlight is that our financial flexibility continues to strengthen, and we remain on track to generate more than GBP 50 billion of free cash flow by 2030. BAT is a highly cash-generative business, delivering at least 100% operating cash conversion annually since 2020, 100% of operating cash conversion, reflecting our strong cash discipline and clear focus on returns and enabling us to return GBP 34 billion of cash to shareholders over the same period.

We remain committed to delivering sustainable shareholder returns with a 25-year track record of dividend growth and our sustainable share buyback program. I’m confident that we will sustainably deliver our midterm algorithm as we are firmly committed to growing revenue sustainably and improving profitability. To conclude, we are carrying momentum into 2026, underpinned by a robust innovation pipeline, strong strategic partnerships and confidence in our future fit capabilities. We’re executing with discipline and delivering against our priorities. At the same time, we are enhancing financial flexibility, enabling continued investment in our transformation together with strong cash returns. I’m excited about the future for BAT and believe we are well positioned to deliver long-term sustainable growth and value for our stakeholders.

Thank you for listening. We will now be joined on stage by Victoria for the question-and-answer session.

Victoria Buxton: Thank you Tadeu and good morning, everyone. If you’ve joined us for the webcast, you can type your question directly into the online question box or if you joined the call, you can press star 1 on your telephone keypad. Tadeu and Javed will be very happy to take your questions. And I will now I’ll hand over to the conference call operator.

Q&A Session

Operator: Our first question is from Andre Andon Inter from Jefferies. Please go ahead, sir.

Andrei Andon-Ionita: First of all, 2 questions on Modern Oral, please. Number one, what are your expectations in terms of performance in the U.S. in fiscal ’26 for Modern Oral specifically? And secondly, are these expectations underpinned by the FDA approving the European Velo product for sale in the U.S.? Or are they mainly driven by the existing Velo Plus product? And perhaps finally, in terms of profitability, could you tell us a bit more about how you expect New categories profitability to evolve in fiscal ’26?

Tadeu Marroco: Okay. Andre, thank you for the question. We have — look, we have a very strong product with Velo Plus in the U.S. The levels of retention has been 70% throughout the year, which is really, really a very strong rate when you compare with other offers in the market. So basically, at the back of that, we believe that the product is competitive enough to continue growing in the U.S. market, has all the indications from that. Today, we still have a low level of awareness in the brand, around 30% — and we are present now in 150-plus outlets, 1,000 outlets, which accounts for something like 93% of the total auto revenue. We are also seeing that the average daily consumption as new products start to be more satisfying for consumers in the U.S. is increasing.

So it used to be around 2.8 pounds per day. Today is around 3.6 pouch per day. If you compare that with the European market, which is around 6 pouch per day, you see a lot of potential growth still in the U.S. and the Nordics is 12 pouch per day. So when you pull all this together, a strong product and the dynamics of the market evolving at the pace that it is in the U.S. So the expectation is that we will continue growing. That’s why we are investing in capacity, like I mentioned during my presentation. We mentioned Velo Max, which is an even higher moisture product that we have as part of the pilot that the FDA is running. We welcome the — first of all, that FDA is embracing nicotine pouch as a key category to address tobacco harm reduction in the U.S. because it’s the lowest risk profile, if you want.

There is no inhalation, there is no tobacco. There is no smelter that is much easier for consumers of cigarettes to convert into a much lower risk profile product. So they are put in place these pilots. We hope that for the next few months, we see our products, and we are cautious that other competitors will come with other products as well. And for us, there is no problem with that. But when I look outside the U.S. where everyone is free to compete, the leading brand outside the U.S. is Velo. Like we said, in Europe, we — our volumes in Velo are 6x higher than the second largest competitor. So what we want to see in the U.S. is a level playing field because in a level playing field, we know that we can win. So that’s the first question on Velo.

In terms of profitability, we have made a very strong profitability improvement in profitability when you compare that not long ago, back in 2023, we’re just reaching breakeven in this category. And today, we have a 12% category contribution. Obviously, I always said that this will not be linear year after year. because there will be years where we’re going to reinvest back in the business at the back of exciting innovations. And 2026 is one of these years because as I said during my presentation, we have now premium innovation in every single of those categories. So we want to roll out glo Hilo. We want to roll out Velo Shift. We want to carry on rolling out Velo Ultra. So we are not concerned about stipulating a specific pace of category growth year-on-year because this will vary over time, but the trend is very clearly.

The category will continue to grow.

Operator: We’ll now take our next question from Faham Baig from UBS.

Mirza Faham Baig: The first one is on guidance for full year ’26. You’ve guided for the lower end of the midterm targets. Could you maybe share factors that could result in the performance, whether in ’26 or beyond that, getting you to the middle or even upper half of the range would be helpful. And then second question is on heated tobacco. I guess it was a tough year in 2025 from a share perspective. How do you think about share progressing through 2026, particularly as competition in the category is intensifying?

Tadeu Marroco: Okay. Thank you, Faham. Look, I want to start with the second one first, and then we address the guidance. Yes, we clearly see areas of improvement in our performance in heated products. What we saw throughout ’26 is that the Bow WAP, which is basically where we were present until the launch of glo Hilo later in the year, has been very competitive in some of the key markets. And that’s the reason why I have just made the point today that we are coming with a revamped hyper product that we believe that together with revamped consumables, we will strengthen our position in that particular segment. So we are very encouraged by what we have seen of the performance of this product and initial tests that we have been doing.

And we believe that this will support our performance moving forward. And obviously, glo Hilo will complement that because it’s the first attempt that we have done in the — where 7% of the value of the category seats, which is the AWP, the premium part of it, which is — and we are extremely pleased with the performance. We are growing week after week with a level of retention of 50%. And this complemented by a revamped value for money proposition gives us the confidence that we can revert this trend and start growing from here. Now in terms of the guidance, I think that Javed can explain a bit more about 2026. I just want to call the attention that after 2 years of investing resetting our business, the U.S. business, our innovations pipeline, BAT is ready to go back to the midterm algorithm that we have always had in the company around a 3% revenue, 5% revenue, leading to a 4% to 6% operating profit with a kick around 1% to 2% for EPS.

That’s the range of 5% to 8%. Obviously, our targets have incorporated the transactional FX. I always try to make this disclaimer about BAT’s target. And — but the profile of growth of this range will differ now from where we were, I would say, several years ago because the new category will be even more preeminent on that. Out of the 3% to 5%, we have mentioned before that combustible, we expect to be delivering around 1% to 2% and with the U.S. being in the medium term between 0% to 1% and the rest of the group, the international part, I would say, the other 2 regions above 2%. And in 2025, we have — despite all the difficulties that we face, mainly in the APMEA region, we were able to deliver 1%. And we said that Bangladesh and Australia had an impact of 1% of top line, which otherwise will be high end of this range.

So I’m very confident that moving forward, we can comfortably be delivering within those range. And when you move to new categories for the algorithm to work, we had to deliver double-digit new category, hasn’t been the case in 2025, basically because of the headwind we face in vapor. There are a number of reasons for that, but mainly related to the illegal market in the U.S. that now we are seeing signs that the authorities, be federal or state level addressing. So we expect moving forward to have less of a drag and eventually even a tailwind coming from vapor that will be supportive of the category for BAT. And THP, we just spoke about, and we expect to accelerate our growth from now on with those offers. And obviously, Modern Oral, we have a leading brand now, and we expect to grow from strength to strength.

So I’m very confident about being able to deliver the double-digit new category revenue growth to deliver 1% to 2% on the combustible side. This will flow through to the 4% to 6% in terms of increasing margins that is supported by all the productivity savings that we have already mapped out until 2030. And specifically in ’26, I would like to Javed to comment about.

Syed Iqbal: Thank you Tadeu. I think on 2026, specifically, if I go region by region, and then we can look at overall. In case of APMEA, as I highlighted, that we expect Bangladesh to be not a big drag, but Australia still remain a meaningful drag, which is becoming smaller and smaller every year. So in 2026, Australia will still be a drag, but will be less meaningful in ’27. Having said that, also, we will continue to invest in the rollout of premium innovations in APMEA as well, as you saw in terms of glo Hyper, — so that’s where we’ll be there as well. The other thing in that area is that in case of AME, we still face headwinds from the illicit environment in vapor and also the regulation changes in Poland, which happened at the end of the year, which has made the legal vapor out of the market, which is again a drag for us.

Coming to U.S. you have to keep in mind that comparative from ’24 to ’25 versus ’25 to ’26 is very different. We are — we had a very good performance in ’25, so that comparatives changes. And also, we are assuming for now stable volumes in views in U.S. So we are expecting that the enforcement level as we’ve seen so today will stop that decline, but we’ll keep the volume overall stable. And lastly, also we highlighted in our pre-close trading update that we are exiting certain geographies, which are not adjusted, but they will have an impact on our numbers in 2026. So I hope this all gives you an idea of why the lower end of 2026. But having said that, we are all very proud and confident in the business that we are entering the first year of our midterm algorithm

Operator: Our next question is from Ray [indiscernible] from Anchor Stockbrokers.

Unknown Analyst: I just want to get back to — I mean, it’s quite interesting to listen to your optimism around the new categories. And I just had a quick look at the numbers. Obviously, Modern Oral is doing exceptionally well. You have the opportunity for vapor to at least stabilize and heated tobacco. I don’t know whether the jewelry is still out there. But I don’t know if you can just talk high-level stuff here. To give us an idea how do you — which of these categories give you or makes you the most excited in terms of the future growth in terms of that, I mean, especially now into 2026, you talk of a double-digit revenue growth. And then just a follow-up. Just on Australia, I mean, it’s quite interesting because I see in this market.

I mean the needle market is now down to like $3 billion or less. Now clearly, I mean, if I look at Japan, I mean, that’s basically what Japan will consume in the space of 7 days. So I mean, I struggle to understand why do you say it will still be a drag. Is it not a time that you could consider to exit this market? So I’m just curious to hear your thoughts around that.

Tadeu Marroco: Okay. On the new categories, obviously, Modern oral is the exciting category out of the 3. The pace of growth of Modern Oral around the world is very clear. And even in markets where there is no oral tradition, you take, for example, the U.K., when we launched Velo here 4 years ago, the incidence of nicotine and oral was 0. And today is around 3%. sporadically, it can go all the way to 4% in terms of use. And this is happening also in the likes of Poland. It’s happening in emerging markets because it’s very affordable. And like Pakistan that is doing extremely well. South Africa doing extremely well, Kenya. So there is a massive potential, and we are very pleased with the fact that now we have 24 markets already that have passed legislation.

The last one has actually been Argentina a few weeks ago. Portugal has just passed legislation as well. So we see clearly a lot of potential in this category, and we are obviously very pleased that we have a leading brand in this category. In terms of tobacco heating product, it is a EUR 9 billion revenue category in which BAT has just below $1 billion. So there is a lot of white space for us, and it has been more and more competitive. But we have now a product that is being present in the value side of the category, if you want, on the premium side that has never been the case before. So with glo Hilo, we are tapping a very, very — it has been an untapped subcategory within the category for BAT. And we are extremely excited about this possibility of to occupy some of that white space in a category that is still growing, not at the same rate of Modern Oral, obviously, but it still grows at a mid-single digit — high single digit.

So — and vapor is a difficult category because of lack of enforcement and/or regulation. And that’s the reason why we have — there is actually difficult to compete with some of these illegal products or products that doesn’t have a concerns in terms of responsible way of doing vapor. That’s why we came with this campaign because you see a proliferation of device with thousands of pubs that have a very different negative risk profile than the ones that we sell. So there is no level playing field. And the reason why we are addressing a premium subcategory within vapor with the likes of Vuse Ultra is exactly a recognition of that. We are not really competing for volume. We are competing for value and offering consumers a responsible way to do vapor.

And obviously, the U.S. is the largest vapor market. So all the attention is to the FDA that I think that has given some indications now that they understand that the root cause also of the problem is the lack of level playing field. And hopefully, we can see some of the pilots that they are doing now in nicotine pouch into vapor in the future as well. So that’s the new categories. Australia, look, Australia has, as you know, come with — since the introduction of Plant pack in 2012 with a very misguided and illogical regulations year after year and increasing excise at much higher than inflation to a point today that the average price of cigarette legal market in the Australia is more than 20 — equivalent of GBP 20, GBP 22 and whereas the illicit products is around GBP 6.

So as a consequence of that, 65% of the combustible market now is illegal. They have, in essence, reduced the average price for consumers. And for the first time in many years, we see an uptick of incidence of smokers in Australia. not just they decimated the tax collection, but also with this illogical regulation, they are seeing now incentivizing consumers to smoke a product that is much cheaper than the legal market and obviously carry on with all the criminality as we know and have seen in many different markets. Now the impact for us is that has always been a very important market for BAT. And — but like Javed said, we’ll come to a point that becomes insignificant. So the drag in ’26 will not be the same as ’25. It’s still a drag, but it’s not be the same.

And from there on, if the government carries on doing that, which seems to be heading towards 100% illegality anyway. We don’t even need to take this issue leave because the direction of travel has been very clear. If you add the vapor category that has an incidence of 9% of adult consumer and is 100% illegal today, 85% of nicotine consumption in Australia today is illegal. So it’s just a question of a couple of years and unless they decide to do something more reasonable.

Operator: Our next question is from Pallav Mittal from Barclays.

Pallav Mittal: Two of them. Firstly, on the U.S. business, clearly, your price mix is pretty strong at 12% plus. Can you help us understand what percentage of your U.S. volume portfolio is right now benefiting from the excise duty drawback? And how much scope does it have to increase in the future given your global business? That’s the first one. And then secondly, I appreciate all the commentary on your NGP guidance for 2026. But your low double-digit growth, it still — I mean, it seems like you’re factoring a pretty sharp normalization versus what we can see in data, especially on nicotine pouches and the e-vapor side of things. So can you just help us understand the moving parts for your low double-digit guidance for ’26?

Tadeu Marroco: Okay. will cover your second question. On the duty drawback, this is a long-standing legislation in the U.S. to incentivize local manufacturing and promote export from the U.S. So obviously, what we are doing is exactly that. Reynolds has invested more than $200 million in terms of manufacturing over the last couple of years. We have generated more than 800 jobs, and we increased our purchase of leaf in the U.S. by 65%. And today, Reynolds is the #1 company in terms of volume of leaf purchase in the U.S. market. So we are not making disclosures specifically about the duty clawback impact. But one data point for you to consider is the fact that our revenue in combustible would have been positive independent of the duty drawback.

So it’s important to mention that because at the end of the day, when you go back to what I was referring to in terms of the long-term algorithm, we expect the U.S. market in terms of combustible to be declining at rates around 6% to 7%. And this should be, given the elasticity and that still exist in the market, the possibility for Reynolds to get to a positive revenue around 0% to 1%. In the current years, it has been more than that because the company is doing extremely well in terms of the strength of the portfolio, but also the duty drawback is helping for those in that sense as well. But independent of the drawback, we are positive, and I feel very comfortable with the range that we have set ourselves for our long-term algorithm.

Syed Iqbal: I think on the overall new category revenue guidance of low double teens is one thing is one — a couple of points. One, in the U.S., even as I explained in my presentation, that we had a negative number for the full year on Views. So what we are expecting in the Views numbers to be flattish because it will require a more meaningful and more stronger enforcement. And given a very complex and long supply chain, even those measures will take time to have a meaningful impact. So even the ITC regulation, which today was talking about, if it gets passed through, it will be much later in the year when we’ll see some meaningful impact. And having said that, also, as I highlighted, the regulations, for example, in Poland and Europe, which has put a drag on the reuse volume because it has made the whole illegal business negative in that number, so that’s not possible to enter that market.

And also the highly competitive environment we see in the BWAP segment within the heated product portfolio, as we were talking about earlier, that competitiveness will continue to be there for the short term. So if you put all these together, that’s why our guidance on the low end of the teens. But having said that, we are very confident in midterm that Velo will lead the charge of new category revenue growth, being the fastest-growing brand in the fastest-growing nicotine category globally, including U.S. However said that, given all these points, that’s why we have guided on this front as the low teens for now.

Operator: Our next question is from Simon Hales from Citi.

Simon Hales: So a couple for me. I wonder if I could just first come back to some of those comments you just made on the U.S. business on a go-forward basis. Jo, just back to the point in terms of the base performance and the flat vapor expectation for 2026. I’m still just trying to square that circle, given you’ve got pretty strong exit rate momentum through the second half of the year. I appreciate enforcement actions in vapor and a straight upward line. But we’re still probably going to annualize at least through the first half, some of the building enforcement we saw in 2025, and that should help the bake category, 1 would imagine the legal vapor category in the first half. So you therefore expecting as we come into H2 of 2026 to see your Boost business down year-on-year to get you back to that flat guidance for the year.

That’s the first point. And then secondly, on the U.S., today, you talked about 6% to 7% being the normal full run rate of decline on combustibles volumes. Is that something you expect to see in 2026 and could you also perhaps talk a little bit about what you’re doing in discount at the moment, the performance of Doral last year and your plans on that brand going forward.

Syed Iqbal: Yes. So if I take the first one. So I think one thing which I have to highlight further on the second half performance of 2025 of Vuse in U.S. Other than the enforcement, there is also one item which will not see repetition was the delisting of competition product in which Vuse gains. So 63% of those consumers stayed within the glow systems. And in RCS system, views gained more than their fair share of our category. So that is one thing, which is also boosting Views performance in the second half. So I wouldn’t be recipocating that second half into the full year of full year of 26 is more focused and will be more dependent upon the level of enforcement we see. And as also highlighted by Tadeu that although we have seen regulation covering 40% of the legal volume but level of enforcement varies from state to state.

So one, not having that one-off of the exit of a competition, which we gained more than fair share. and enforcement still seems to be early days. So that’s why our guidance on the Vuse comment was made by me.

Tadeu Marroco: Yes. On the volume side, my comment is more, I would say, hypothetical situation. It’s not — what’s happening in the U.S. market is the fall. If you go back to 2020, 54% of the nicotine users were using traditional nicotine products, combustible traditional. You go now to 2025 is 34%. So the balance is happening. What’s happening is the transition of these consumers to either pay using or using solo users of becoming solo users of smokeless products, either modern oral or vapor products. So obviously, the secular decline that was related to ADC and level of incidents reducing over time around 4% will not be coming back. That’s my point. So even if you see a meaningful enforcement in vapor in disposables that we know that has currently plays a role in terms of the level of decline of cigarettes.

Even if we see that, even if we see improvement in the macroeconomics in the U.S., it’s very hard to imagine the market going back to 4% decline because of the dynamic of the poly use and solo users in new categories that I was referring to. So my point is that in the long run, with a meaningful enforcement in disposable with macroeconomics is strengthening between 6% to 7%. I think that where we see today in the next couple of years in the scenario that we are seeing I think that the performance in ’25, around 7% to 8% is a more reasonable one to assume. So that’s what I would assume. Now obviously, this is overall markets. When you separate from the overall market, the deeper discounts, the deeper discount has a very different dynamic. We are seeing more activity there from competitors.

And as a consequence, we saw the deeper discount growing by 10% in 2024 or 5 was even higher than the 7% that they grew in 2024. So we have been piloting [indiscernible] out to your question. We have been always very mindful because despite the fact that the deeper discount is growing as opposed to the general market, the 95% of the value continues to be outside the deeper discount. So we are very mindful in terms of testing the product, in this case, is [indiscernible] We did pilots in Louisiana in West Virginia. And what we are seeing in those pilots is suggesting that we’ll be able to expand Doral for other states as well. taking into consideration the source of business, the potential down trades of our own brands, we are doing that with the value in mind.

We are not doing that for the sake of market share. we want to cap to expand or in the states that makes sense from the value point of view.

Operator: Our next question is from Richard Felton from Goldman Sachs.

Richard Felton: Thank you for taking my question, three please. First one is on vapor. So look, great news that the U.S. is starting to take some proper enforce an action against elicit vapor. But your comments point to, I suppose, a challenging environment in markets ex U.S. So thinking about those ex U.S. markets, — are you seeing any shifts in appetite from governments or regulators to start to enforce against that illicit segment a little bit more stringently or does that remain very challenging. Any comments on some of your top vapor markets ex U.S. on that topic would be very helpful. And then the second one, sorry to come back on the duty drawback question. I appreciate you don’t want to give us the exact numbers for 2025, but just sort of, I suppose, from a high-level perspective, thinking about duty drawback into 2026, is the tailwind going to be more or less than it was in 2025 at a similar level?

Any high-level comments just to sort of help us triangulate on that would be very helpful.

Tadeu Marroco: Okay, Richard. Look, vapor is — I don’t think that there is one side fit saw here. There are — we know based on our own experience that when we have geographies where we have retail license, we have proper regulation and proper enforcement. I would say, for example, France is one of the case, you just can sell vapors in tobacco net source. And if you have got selling, for example, disposable now, you have a massive fine in euros and this helps with the discipline in the markets. And in the U.K., for example, despite the fact that we have been asking for a retail license, and we haven’t seen the movement in that direction. There is a tobacco vape being discussed as we speak. And hopefully, they will address that.

But the attempts to ban disposable has failed because the manufacturers that are not responsible, they try to circumvent in the case these regulations. So 50% of the markets is illegal today in vapor. And this is a demonstration of how difficult the governments find to either regulate but more important to enforce regulation in some markets. We have as much as we can, and we have promoted this vapor deserves better campaign. We have been very vocal about what are the measures that government should be taking into consideration to try to discipline that. And this, with no surprise, you will see us talking about retail license, [indiscernible] fines if they got caught a more stringent discussion in terms of age verification when you buy the product and a negative lease to avoid things like sucralose in the liquids to sweet the liquids.

So there is — in our webcast and all that, there is a plant of — but there is still a lot of work to be done on that. And as a consequence, we are trying to, as part of our resource allocation, return of investment mindset, the quality growth, which is not just about top line, but also bottom line. We have been focus on more important markets, the likes of France, like I said, the likes of Germany, the likes of Italy, which is standing out from others and then pulling back in markets like Malaysia, for example, in South Korea and so on and so forth. So that’s the situation on vapor and outside the U.S. In terms of duty drawback, look, we — I’m not giving guidance specifically for the [ Duropack. ] There is — we see that’s the benefits that we generate for the economy, for example, is the driver behind as much as we can start grow employment and growing the activities in the pharma domestic in the U.S. we carry on, obviously, this is not forever.

This will be like you suggest a peak. And in the meantime, we are strengthening our portfolio in combustible. We are seeing the overall market decline being more supportive, which is also important for the future. And more important is us being able to create a strong position outside combustible. Because I understand the concern on the combustible side, but overall nicotine in the U.S. is growing. It’s growing value and its growing volume. So despite the fact that you see consistent decline in cigarettes, you’ll see massive increase in the modern oral space. You see a strong increase still in vapor, unfortunately, on the illegal side, but it’s very encouraging, the signs that the new administration is given to address that. Because in tapping this potential there, there is no much concern about the direction of the cigarette because what we want in essence is exactly to migrate smokers out of cigarettes to add those products.

But it’s — what is needed is a level playing field.

Operator: Next question from Bastien Agaud from Bank of America.

Bastien Agaud: Bastien from Bank of America. I just have a quick 1 on the — your net debt is close to your target 2.5 and your free cash flow in 25million was quite strong. So my question is regarding the buyback, EUR 1.3 billion what kind of margin do you have to potentially increase it at some point or another during the year? I understand that your debt is approximately 70% in dollar. So could be quite volatile on that? But just to understand the moving parts on your buyback for full year ’26.

Syed Iqbal: I’ll take the question. Thank you very much. We started a sustainable share buyback program in 2024, and we started it with $700 million. And now we are at GBP 1.3 billion with an increase of GBP 200 million for 2026. We remain our focus on cash and also deliver. We have to enter into our range of 2% to 2.5%. And also, we want to make sure that we continue to deliver additional incremental dividend in sterling terms and continue our 25 years plus record on that front and continue a sustainable share buyback. What we want to ensure is to create more optionality for capital allocation and medium to long term for the business. So for now, I’m very comfortable with the increase we have done of GBP 200 million from GBP 1.1 billion to GBP 1.3 billion for and we keep on focusing on generating cash to bring us back into our range of 2% to 2.5% and continue a sustainable buyback.

Operator: Our next question is from Damien McNeela from Deutsche Numis.

Damian McNeela: First question is just on U.S. combustible and particularly on pricing. I was wondering if you could provide any more granularity on the pricing within the subsegments that you operate in? And what the sort of outlook for ’26 might be for pricing given the very strong year last year. And then the second question is on CapEx. You’ve indicated the step up this year. I was just wondering whether that level of CapEx is what we should be expecting for outer years past 2026.

Tadeu Marroco: Thank you, Damien. Look, on the CapEx side, we are increasing at the back of investments, mainly on the modern or space. Most of the CapEx today is being reverted back to new categories and our — and giving the space for us to continue growing. We don’t have huge expectations to be much beyond the level that is currently — and this is suiting us well because at that level, we still can be very close to the 100% of operating conversion. It’s not a limitation, but it’s just the fact that with this level [indiscernible] address the business needs. At the same time, it puts us in a strong position to continue having high levels of operating cash conversion, which is very helpful for the financial flexibility and capital allocation that Javed was referring to.

On the U.S. combustibles, look, I cannot be talking about pricing [Audio Gap] and we — what I can say to you is that the price elasticity is still very benign in the U.S. when you compare the price of cigarette vis-a-vis the average household income and Obviously, there is a dynamic debt because of the specific tax that when we increase the price of a pack of cigarettes, the manufacturer have a higher benefit than the consumer perceived as a price increase, which is also helpful. And — but what [indiscernible] has been doing is laddering some of our brands. We did that very successfully with Newport. We have launched Pall Mall Select as well, which is another laddering. And we have now Doral, like I said, in pilot phase that we probably will expect to roll out to more states.

But I cannot speculate with you about the future price.

Operator: That was the last question today over the phone. With this, I’d like to hand the call back over to Victoria. Over to you.

Victoria Buxton: Thank you very much, everybody, for your questions. I’m afraid that’s all we have time for today. So if you put a question into the web, then the IR team will be delighted to answer the question as soon as we can. I’d now like to hand back to Tadeu for closing remarks.

Tadeu Marroco: Okay. Thank you all for listening today and for your questions. To close, I’m confident we have the right building blocks in place to deliver our midterm algorithm supported by delivering 2025 results at the top end of guidance. We will continue to reward our shareholders through strong catch-up returns including our progressive dividend and a sustainable share buyback and enabling us to deliver long-term growth and value creation. Thank you again for joining us. I look forward to see many of you at the CAGNY conference next week where we are presenting on the 18th of February.