Q2 2022 British American Tobacco PLC Pre-Close Trading Statement Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Pallav Mittal - Barclays Bank PLC, Research Division - Analyst : It's been 8 months now since the PMTA approval on some Vuse products in the U.S. So have you witnessed any change in the consumer acceptance of the product post-approval? Tadeu Luiz Marroco - British American Tobacco p.l.c. - Finance & Transformation Director, Member of Management Board and Executive Director No. In reality, the consumers are not even aware that the products get approved. That's an important point. The approval just give you the right to keep your products in the market. So once you get the approval in the marketing authorization, you cannot publicize that. You cannot advertise that for consumers. So it's completely indifferent. So this is -- that's why we are not very precious about the timing of approval, for example, of the Vuse Alto. We were one of the last to submit our PMTA. We'll probably be seeing other approvals before us, but this wouldn't be a problem because the consumers are unaware of what the FDA did in terms of approval or not. We feel very confident in our -- and that's the important bit. We feel very confident about the approval of Vuse Alto because the science foundation of the product is exactly the same that we use in the other SKUs of the family and they all got approved it. And we make sure that we took the learnings before from the orders to give a robust dossier for Vuse Alto. So we are confident that we get approved. But independent of the timing that, we can keep the product in the mind and consumers will not perceive the difference once they finally get approved.

Question: Jared T. Dinges - JPMorgan Chase & Co, Research Division - Analyst : Thanks for the questions. So in recent years, we've seen industry pricing ahead of inflation in the U.S. in cigarettes. And given this year, you actually have a very inflationary backdrop across other categories. But essentially, you're seeing cigarettes becoming more affordable. Do you see any opportunity to kind of offset any U.S. down trading through accelerated pricing even further? Would you -- or do you kind of prefer to take this year to make cigarettes relatively more affordable in the U.S.? That's the first one. Tadeu Luiz Marroco - British American Tobacco p.l.c. - Finance & Transformation Director, Member of Management Board and Executive Director Look, Jared, this is a continuous checking for us. We have these very sophisticated models to analyze, the level of elasticity in a very granular base. It's not that we take one initiative because we have to consider that pricing is one thing, but the discount is what it really matters in the U.S. And the discount varies a lot. So you see the headline prices, but what the consumer end up paying at the end is what is offering him after discount. So the levels of discount varies a lot, and this is a consequence of us analyzing exactly the point that you are raising, the level of affordability. And this will vary between different states, for example, or even between different channels. And so overall, my point about the comment on the price is that we are seeing a better price environment than the previous year. And we are not seeing, particularly in the U.S. at this point in time, a big difference in terms of elasticity from what we have seen in the previous years. We got -- consumers are still spending similar amounts of money. But overall, I'm not just talking about cigarettes, but they are a bit more selective in terms of where they spend the money. And we are using all these intelligence and follow-up from consumers to understand where we need to apply the right levels of discount. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Jared T. Dinges - JPMorgan Chase & Co, Research Division - Analyst : Got it. That's very helpful. And then maybe just switch gears but also in the U.S. So you guys have talked about in the past a potential shakeout kind of post-PMTA, I think you quantified the size of that potential opportunity in the past. We've continued to see the disposable category grow and grow. Like I know which brand a winner within that is changing and it's become pretty fragmented, but it is combined fairly sizable now, and it's almost all flavored and primarily non-menthol flavored. We've seen some PMTA denials come through. I know some of those are going through the court system that are under review. But maybe you can give us an update on how big you think that opportunity is and will be. And when you think we'll finally see that shake out? And then maybe just to add to that, how many of those consumers that are consuming kind of like the fruity-flavored vapor products? How many do you think would actually stay within vapor if it was only menthol and tobacco flavors being offered? Tadeu Luiz Marroco - British American Tobacco p.l.c. - Finance & Transformation Director, Member of Management Board and Executive Director Yes. Look, we -- you have to consider -- the bigger picture is that the FDA has [100] employees to deal with this massive amount of dossiers of submissions, millions of that. So they have provided some market authorization, some market denials. I think that they have something like 500,000 to 1 million of case still to be analyzed. So they are really late on that. And it's pretty not a surprise -- pretty much not a surprise because there are amount of SKUs that exist in the market was very substantial vis-a-vis the capacity they have to assimilate all that. So that's the first thing. The second is we are seeing a more and more concentration of -- in the U.S. for closed systems because all these open systems and the liquids having tremendous difficulty to get approved through the FDA, which, again, is not a surprise. And as we move along, we expect this to materialize. One big loophole that existed that the FDA just recently acted on that is related to the disposable synthetic nicotine. And why I'm saying the loophole because remember that they ban all flavors other than menthol and tobacco back in January 2020, but there was no mention to synthetic nicotine because synthetic nicotine in principle doesn't have -- was not subject to the remit of the FDA. So this type of products grew to something close to 20% of the total market over the last couple of years. And the FDA has just enact -- the President, actually, enact the mandate that the FDA has now having authorization to regulate these products as well. So we expect the FDA to do -- to request PMTA in these products, as they did for the other products in the markets with tobacco. So the question here is how long this will take and the level of enforcement that we will see for this to materialize? So -- but the size of the price can be as big as 20% of the market, but it's very difficult to precise the timing of that. And my point is not just a question of time, but it's also a question of enforcement. In terms of our consumers, we are seeing still a very good attraction in terms of menthol and tobacco. And you saw that the category continued growing since January 2020 when the fruit flavors has been taken out. Okay? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.