The U.S. Turn Is Real, 2026 Is Guided to the Floor, and Management Told the Street Not to Extrapolate the Second Half

Results vs. Consensus

Three framing points are needed before any figure is read. First, BAT reports a full set of financials twice a year, so the February release is the audited full-year print and the only quarterly-grain disclosure is qualitative colour on second-half momentum. Second, the company now presents three P&L columns rather than two: reported, adjusted, and as adjusted for Canada. From 1 January 2025 the Group's own internal performance measure excludes the Canadian business other than New Categories, because under the court-sanctioned settlement implemented in August 2025 the profits of that business are contractually committed to paying down the litigation liability. Management guides on, is incentivised on, and discusses the third column, so that is the basis used throughout this note unless stated otherwise. Third, sterling strengthened materially through 2025, producing a 3.1% translational headwind on revenue and 3.6% on EPS, so the reported and constant-currency views of this company point in opposite directions.

FY 2025 scorecard

The beat is small and it is on growth rates, not on absolute sterling. That is how this name trades: UK sell-side scores BAT against its own guidance range and its constant-currency algorithm, so a 20-basis-point revenue surprise and a 0.8% EPS surprise are the whole of the numerical news. The more consequential comparison is against the guidance the company set for itself.

Delivered versus the guidance in force

Management returned to the phrase "top end of guidance" four times on the call. It is accurate. It is also worth remembering that the range being cleared was itself set low: this same company guided 2025 revenue growth to "about 1%" at the February 2025 print against a market sitting nearer 2.3%, and the shares fell as much as 9% that day. Beating a guide that was reset downward twelve months earlier is a real achievement of execution and a modest one of expectation.

Full-year income statement, year over year

None of the reported movement above is a statement about trading. The 265% jump in operating profit is the Canadian settlement provision swinging from a £6.2bn charge in 2024 to a £524m net credit in 2025, and the 157% EPS gain is the same event running through to the bottom line. The reported column is an accounting artefact this year and should be read as one.

The momentum table: interims versus full year, constant currency

This is the strongest table in the release and it is the one management wanted the market to look at. A full-year New Categories growth rate of 7.0% built off a first half at 2.4% requires a second half in double digits, which is exactly what the CFO claimed. The same logic holds for the group line and the profit line. The exit rate entering 2026 is materially better than the average of 2025, and that is the entire foundation of management's confidence in returning to the medium-term algorithm.

Quality of Beat/Miss

• Revenue: the beat is organic and its composition improved through the year, but its largest single contributor is the least durable. U.S. combustibles price/mix of +12.3% is what carried the group, and management confirmed that figure includes the benefit of an excise duty drawback it declines to size. The CEO's own long-run frame for U.S. combustibles is 0-1% revenue growth against a 6-7% volume decline; 2025 delivered 4.6% against a 7.7% volume decline. The gap between those two statements is the part of the beat that is borrowed from a policy benefit management called "a peak."
• Margins: genuinely high quality. Adjusted operating margin as adjusted for Canada was flat at 44.0% while absorbing roughly £300m of product-cost inflation, a c.1% transactional currency headwind and continued New Category launch spend. Gross profit grew 3.4%, ahead of revenue at 2.1%, which means mix and pricing did the work rather than cost cuts alone. Cumulative productivity savings reached £1.2bn since 2023.
• EPS: the company's own bridge takes adjusted diluted EPS as adjusted for Canada from 341.1p to 352.8p, a gain of 11.7 pence. Operations supplied 11.6 pence of that. Below the operating line the picture is negative: net finance costs and hybrid coupons cost 1.5 pence, the shrinking ITC associate stake cost 2.0 pence and tax cost 1.4 pence, for a combined drag of 4.9 pence. A further 5.0 pence came from "others", which the company attributes principally to the reduced share count from the cumulative 2024 and 2025 buy-back programmes (30.5 million shares repurchased and cancelled in 2025, diluted count down 1.2% to 2,199m). Underlying tax rate was 24.5%. The associate line is the quiet structural drag: adjusted income from associates fell 15.0% at current rates as BAT continued monetising ITC, and that source of earnings shrinks every time the stake is sold down.

Segment Performance

Revenue by region

Profit from operations by region

United States: the year the reset stopped costing money

The U.S. delivered 5.5% constant-currency revenue growth and 5.9% adjusted profit growth, its first year of both since 2022. Reported operating margin rose 6.6 points to 42.8% because 2024 carried a £646m Camel Snus impairment and £132m of Fox River income that did not repeat; the cleaner number is adjusted operating margin at constant rates of 56.8%, up 20 basis points. Combustibles revenue grew 4.6% as price/mix of 12.3% overwhelmed a 7.7% volume decline against an industry down 7.4%, with volume share off 10 basis points and value share up 30. Modern Oral revenue grew 310% to £327m on volume up 249%.

"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%."
— Tadeu Marroco, Chief Executive

Assessment: this is the most important thing that happened to BAT in 2025, because Reynolds is the cash engine that funds everything else and the market had been underwriting its terminal decline. The caveat is that outperforming a 7.4% industry decline by taking 12.3% of price is a strategy with a mathematical horizon, and part of that price/mix is a duty drawback benefit management calls a peak. The U.S. is fixed for now, not fixed permanently.

Americas and Europe: the quiet compounder

AME grew revenue 3.3% at constant rates and adjusted profit as adjusted for Canada 9.6%, with operating margin on that basis up 1.8 points to 32.1%. Combustibles revenue rose 2.3% on pricing in Türkiye, Brazil, Mexico and Romania, offsetting weaker Canada and Germany. Modern Oral volume grew 19.0% with revenue up 17.3%, Heated Products revenue rose 6.2%, and Vapour fell 11.4% on the Canadian enforcement vacuum plus regulatory and excise changes in the UK, Poland and France. Smokeless is now 19.9% of regional revenue. Notably, Vapour became profitable on a category-contribution basis in this region.

Assessment: AME is the proof-of-concept region for the whole strategy, delivering multi-category growth with all three New Categories improving contribution simultaneously. The 9.6% profit growth is the single best operating number in the release and it is getting almost no attention relative to the U.S. story.

APMEA: two markets, one problem

APMEA revenue fell 7.2% and adjusted profit fell 17.9%, with operating margin down 4.7 points to 36.1%. The damage is concentrated. In Australia, illicit product now exceeds 65% of combustibles industry volume and duty-paid industry volume fell more than 40% in the year. In Bangladesh, a January 2025 excise and minimum-price increase forced 20-30% consumer price rises and cut duty-paid industry volume by more than 20%. Together the two markets cost the Group roughly 1% of revenue and 2% of adjusted profit from operations. Growth in Pakistan, Nigeria and Indonesia only partly offset. New Categories in the region fell 7.6% as Modern Oral growth of 44.2% was swamped by Heated Products down 3.8% and Vapour down 39.4%, the latter partly deliberate as BAT exited Malaysia and Saudi Arabia.

"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."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: "stabilise" is the operative word and it is doing a lot of work. Management is not forecasting an APMEA recovery in 2026, only a smaller decline, and the mechanism for that is base effects rather than a change in either government's behaviour. A region that is 18.6% of revenue and shrinking its profit by 18% is the reason the 2026 guide sits at the floor rather than the middle.

Revenue by category

Smokeless revenue reached 18.2% of the group, up 70 basis points, and the smokeless consumer base grew by 4.7 million to 34.1 million, described by management as the strongest annual addition to date. Against the stated 2035 ambition of becoming a predominantly smokeless business, 18.2% with ten years to run implies the mix shift has to more than double from here, and the arithmetic only works if Modern Oral keeps compounding at something close to its current rate while Vapour stops shrinking.

Category contribution: where quality growth shows up

Category spend on marketing investment and research across New Categories was £1,703m against £1,683m the prior year, an increase of £20m. That £20m of incremental investment sits against £193m of incremental contribution. The Traditional Oral line is the mirror image: contribution fell £42m and margin gave up 2.6 points, the price of Grizzly consumers migrating into pouches. That cannibalisation is intentional and it is showing up exactly where you would expect.

Modern Oral: the category doing all the work

Global Modern Oral revenue grew 48.0% at constant rates on volume up 47.1% to 12.2 billion pouches, and BAT claimed global volume-share leadership across the top markets representing around 90% of industry revenue. The U.S. is the swing factor: revenue up 310%, category volume share up 11.6 points to 18.0%, value share up 9.1 points to 13.1%, with Grizzly Modern Oral adding a further 1.8% national share since its August launch to take total U.S. volume share to 25.8%. Management sized the U.S. Modern Oral category at over £2bn of revenue in 2025, now larger than the legitimate U.S. Vapour category.

"Importantly, we achieved positive category contribution within the first 12 months of launch, fully aligned with Velo's global payback profile."
— Tadeu Marroco, Chief Executive

Assessment: the consumption runway disclosed on the call is the more interesting number than the share gain. U.S. average daily consumption rose from roughly 2.8 pouches to 3.6, against roughly 6 in Europe and 12 in the Nordics, with brand awareness still only around 30%. If U.S. consumption converges even halfway toward European intensity, the category grows without BAT gaining another point of share. This is the only part of the portfolio where the growth is not a fight over a shrinking pool.

Vapour: a recovery management deliberately discounted

Group Vapour revenue fell 8.6% at constant rates on volume down 12.6%, with U.S. revenue down 3.4%, AME down 11.4% and APMEA down 39.4%. Value-share leadership held and improved 60 basis points, with U.S. value share up 2.0 points to 51.7%. The story management wanted told is the second half, when Vuse returned to U.S. revenue growth after eighteen months of decline, supported by state-level enforcement legislation covering around 50% of tracked industry volume by year-end and by early federal action. A favourable initial determination from an International Trade Commission administrative law judge recommending a general exclusion order on imported illicit devices is pending final determination and a 60-day presidential review.

Assessment: the enforcement thesis is credible and management has been consistent about it for two years. What changed on this call is that the CFO volunteered a reason not to extrapolate the second half, which is covered in detail below. With management's own estimate that roughly 7% of U.S. Vapour industry value is still illicit, the recovery is real but its slope is set by regulators rather than by BAT.

Heated Products: two years of share loss and a two-product answer

Heated Products revenue grew 1.0% at constant rates with volume down 3.7% and volume share down 1.5 points, hurt by competitive pressure in the value-for-money segment and the phase-out of legacy super-slims in Japan. The answer is a pincer: glo Hilo into the premium segment, launched in Japan, Poland and Italy with early trial-to-retention around 50%, and a revamped glo HYPER from the second quarter of 2026 into the value tier.

"In terms of tobacco heating product, it is a GBP 9 billion revenue category in which BAT has just below GBP 1 billion. So there is a lot of white space for us."
— Tadeu Marroco, Chief Executive

Assessment: the white-space framing is honest but it cuts both ways. Holding roughly a tenth of a category after a decade of investment, against a competitor that built it, is a weak position, and the fix is two product launches whose evidence base is currently three markets and a 50% retention statistic. This is the least de-risked line in the portfolio and it is the one management is asking for the most patience on.

Combustibles: shrinking volume, growing contribution

Combustibles revenue grew 1.0% at constant rates on price/mix of 9.1% against volume down 8.1%, with cigarette volume down 7.9% to 465 billion sticks. Category contribution rose 2.5% and contribution margin improved 0.9 points to 58.6%. Group cigarette volume share fell 10 basis points with value share flat.

Assessment: pricing power of 9.1% against volume decline of 8.1% is the entire investment case for the legacy business, and it worked again this year. The question the market has to underwrite is not whether it worked in 2025 but how many more years the elasticity holds, particularly as U.S. deep discount grew around 10% in 2025 against 7% in 2024. Management's response is to ladder brands rather than chase share, piloting Doral in Louisiana and West Virginia while noting that 95% of industry value still sits outside deep discount. That is the right instinct, but the deep-discount growth rate is accelerating and warrants monitoring.

Volume KPIs

Key Topics & Management Commentary

Overall Management Tone: Management was confident on delivery and conspicuously careful on extrapolation, repeating "top end of guidance" throughout while volunteering, unprompted, the reasons the second-half exit rate should not be annualised. Analyst pushback was narrow and clustered on two questions, what gets 2026 off the floor of the algorithm and how much of U.S. price/mix is the excise duty drawback, and on both the answers were framework-level rather than quantified. The posture is that of a team that believes it has earned credibility and is deliberately spending none of it on a stretch target.

1. The U.S. Turn, and the Part of It That Is Borrowed

U.S. combustibles price/mix of 12.3% is the largest single driver of the group's revenue growth, and management confirmed that it includes a benefit from the U.S. excise duty drawback, a long-standing provision that rebates duty against exports and which BAT now qualifies for at scale after Reynolds invested more than $200m in domestic manufacturing, added over 800 jobs and increased U.S. leaf purchasing by 65% to become the largest domestic leaf buyer by volume. The company declined twice to size the benefit.

"So we are not making disclosure 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."
— Tadeu Marroco, Chief Executive

Pressed a second time on whether the 2026 tailwind would be larger or smaller, management declined again but conceded the benefit is finite, describing it on the call as not forever and, in its own word, a peak.

Assessment: "positive without it" is a floor statement, not a magnitude. The distance between BAT's actual 4.6% U.S. combustibles revenue growth and its own stated long-run range of 0-1% is roughly four points of growth that has to come from somewhere, and management has now told the market that at least part of that source has peaked. Any model that straight-lines 2025 U.S. price/mix is modelling a policy benefit rather than a business.

2. Velo Plus and the Consumption Runway

The most quantified success in the release. Since its late-2024 launch, Velo Plus has taken the number two position in U.S. Modern Oral volume and value share, gaining nearly 18 points of volume share and nearly 14 of value share, more than doubling its consumer base and driving over 300% Modern Oral revenue growth. It captured 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."
— Tadeu Marroco, Chief Executive

The forward math disclosed in Q&A is more useful than the share statistics. Brand awareness sits around 30%; distribution covers roughly 93% of total oral revenue; and U.S. average daily consumption has risen from about 2.8 pouches to about 3.6, against roughly 6 in Europe and 12 in the Nordics. A higher-moisture variant, Velo Max, is in the FDA's new nicotine-pouch pilot programme, and capacity has been expanded ahead of authorisation.

Assessment: the growth here does not require share gains, only category maturation, and that is a materially better quality of growth than anything else BAT owns. The dependency to watch is regulatory: Velo Max needs a pathway through the pilot, and management was careful to note competitors will bring products through the same door. A level playing field is what the CEO asked for, and on the evidence outside the U.S., where Velo is roughly six times the size of its nearest European competitor, it is probably what BAT wants.

3. Vapour: the Second Half Management Told You Not to Extrapolate

The prepared remarks led with the recovery, which was the single most bullish data point available to anyone building a 2026 model.

"While the Vapour 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."
— Tadeu Marroco, Chief Executive

The CFO then took it apart. Pressed in Q&A on why 2026 Vapour is guided flat when the second-half exit rate was strong, he identified a one-off inside the recovery: a competitor product delisting from which Vuse captured more than its share, with 63% of those consumers staying within closed systems, and told the Street he would not annualise the second half into 2026. The exchange is set out in full below. He added that enforcement coverage varies state by state even where legislation exists, and that the International Trade Commission exclusion order, if it survives final determination and presidential review, would only bite late in the year given the length of the supply chain.

Assessment: this is the most important thirty seconds of the call and it is a credit to management's candour. It also removes the strongest argument for paying up for the shares today. The bull case on BAT rests substantially on legal Vapour re-inflating as illicit supply is squeezed, and management has just told the market that the observable evidence of that happening in 2025 was partly a competitor exit rather than enforcement. Enforcement remains a genuine multi-year option; it is simply not yet a 2026 earnings event.

4. Heated Products: Answering Two Years of Share Loss With Two Devices

Volume share fell 1.5 points, hurt by competition in the below-weighted-average-price segment where glo HYPER competes and by the phase-out of legacy super-slims in Japan. Management's response is to attack both ends: glo Hilo into the premium segment, which it says represents about 7% of category value and where BAT has never previously competed, and a redesigned glo HYPER from the second quarter with faster start, longer session, connectivity and a replaceable battery.

"So we are very encouraged by what we have seen of the performance of this product and in initial tests that we have been doing. And we believe that this will support our performance moving forward."
— Tadeu Marroco, Chief Executive

Assessment: the evidence base is thin. Three launch markets, an early trial-to-retention figure of around 50%, and a value-tier device that has not yet shipped. Heated Products is the category where BAT has spent the most and has the least to show, and 2026 asks investors to fund another year of launch spend against a competitor with an entrenched installed base. If the algorithm is going to miss anywhere, this is the most likely place.

5. APMEA: Australia Is Not a Cyclical Problem

Asked whether it was time to exit Australia, the CEO gave the most vivid answer of the call. Average legal cigarette prices there are the equivalent of £20 to £22 against roughly £6 for illicit product, illicit is 65% of combustibles volume, vapour is effectively 100% illegal at 9% adult incidence, and the smoking incidence has ticked up for the first time in years.

"If you add the Vapour 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."
— Tadeu Marroco, Chief Executive

Assessment: the argument for staying is that the drag self-extinguishes as the legal business approaches immateriality, which is true and also an admission that the asset is being written down to nothing by regulation rather than by competition. Bangladesh is a different problem with a similar shape: a single excise decision cut duty-paid industry volume by more than a fifth. Together these are 1% of group revenue and 2% of adjusted profit in a single year, and neither is within management's control. Investors underwriting the 2026 recovery are underwriting an absence of new fiscal shocks in a region that has delivered two in twelve months.

6. Quality Growth, Quantified

The phrase "quality growth" recurs throughout the announcement and the call and, unusually for a corporate slogan, it is checkable. New Categories contribution rose to £442m at constant rates from £249m, a £193m improvement, while category spend on marketing and research across New Categories rose from £1,683m to £1,703m. Contribution margin moved to 12.0% from 7.3%. Combustibles contribution rose 2.5% while combustibles volume fell 8.1%.

"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."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: £193m of contribution on £20m of spend is a genuine operating-leverage result and it is the strongest evidence that the New Categories business is finally scaling rather than buying growth. The counterweight is that management explicitly warned this will not be linear, and named 2026 as a reinvestment year. Investors should treat 2025's contribution step-up as a fact and 2026's as an open question.

7. Fit2Win Gets Bigger, and So Does Its Bill

The transformation programme was expanded to include organisational streamlining, lifting targeted annualised savings by £100m to £600m by 2028, with roughly £500m by 2027. The cost of getting there rose with it.

"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 non-cash items."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: a programme that costs £600m to deliver £600m of annualised savings is a roughly one-year payback, which is fine. The presentational point is less fine: £500m of that cost is classified as adjusting and therefore sits outside the adjusted profit line on which management is guided and paid, while the savings flow into it. That is a common convention and it is still worth naming, because roughly £400m of it is cash leaving the business in 2026 and 2027 without appearing in the number the market anchors on.

8. Canada: From Existential to Contractual

The plan of compromise and arrangement was implemented on 29 August 2025, releasing ITCAN, BAT p.l.c. and related companies from all past, present and future Canadian tobacco claims. The industry-wide settlement is CAD$32.5bn, roughly £17.6bn. ITCAN had paid CAD$5.5bn by year-end, of which CAD$4.8bn in the second half, and its first annual instalment of about CAD$156m for the five months to December is due on 30 July 2026. Annual payments run at an initial 85% of ITCAN net income after tax from all sources excluding New Categories, stepping down over time. The 2025 P&L carried a net credit of £524m, being a £708m provision release on revised Canadian industry forecasts less a £184m goodwill impairment, with Canada goodwill still carried at £1,994m.

Assessment: the change in character here is worth more than the accounting credit. For a decade the Canadian litigation was an unquantifiable tail risk on a tobacco balance sheet; it is now a defined, dated, capped payment schedule funded by a ring-fenced profit stream. That is precisely the kind of resolution that supports a multiple. The residual exposures are that the provision is an estimate sensitive to Canadian industry volume and pricing assumptions, that it moved by £708m in a single year on a forecast revision, and that £1,994m of goodwill still sits against a business whose profits belong to the claimants until 2039 or later.

9. Cash: The Headline Collapse and the Underlying Line

Net cash generated from operating activities fell 37.4% to £6,342m, free cash flow before dividends fell 48.8% to £4,048m, and free cash flow after dividends was an outflow of £1,190m against a £2,688m inflow the prior year. Three items explain it: the £2,560m Canada upfront payment, £678m from a U.S. tax deferral out of 2024 into 2025, and a £479m Franked Investment Income settlement, with £222m more due in 2026 and £41m in 2027. Adjusted operating cash conversion was 100%, against 101%. Excluding the Canada payment, free cash flow before dividends would have been £6,608m and free cash flow after dividends a £1,370m inflow.

Assessment: the dividend was not covered by reported free cash flow this year, and it is important to be precise about why. It was covered on an underlying basis, and the shortfall was a known, disclosed, one-time legal settlement. That said, the Canada instalments now recur annually, gross capex is rising to roughly £750m in 2026, and the FII GLO tail runs into 2027. The £50bn cumulative free cash flow target for 2024-2030 has £11.9bn delivered against it after two years, which implies roughly £7.6bn a year for the remaining five. That is achievable but leaves little slack for a further legal or fiscal surprise.

10. Capital Returns: 2% on the Dividend, £200m on the Buy-back

The dividend rose 2.0% to 245.04p, payable in four quarterly instalments of 61.26p, a payout of 69.6% of adjusted diluted EPS and 72.0% on the as-adjusted-for-Canada basis. The 2026 buy-back is £1.3bn, up £200m from the £1.1bn executed in 2025, though this was announced at the December pre-close update rather than at this print. Leverage improved 0.20x to 2.55x on the company's preferred as-adjusted-for-Canada measure, against a 2.0-2.5x target by end-2026.

"We remain our focus on cash and also delever. We have to enter into the 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."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: a 2% dividend increase preserves a 25-year growth record at the minimum viable increment and is below most measures of UK inflation, so income holders are taking a small real-terms cut for a second consecutive year. Together the dividend and buy-back return roughly 6.9% of market capitalisation, which is the substance of the investment case. The buy-back is deliberately paced behind deleveraging rather than ahead of it, and management showed no appetite to flex it upward mid-year.

11. The 2026 Guide and the Currency Wedge

Management framed 2026 as the return to the medium-term algorithm and then guided to the bottom of every range within it: revenue growth of 3-5% at the lower end, adjusted profit from operations growth of 4-6% at the lower end and second-half weighted, adjusted diluted EPS growth of 5-8% at the lower end. On top of that sits an expected c.3% translational currency headwind on the EPS line and a c.1% transactional headwind on profit, with the latter already inside the guided range.

"So I hope this all gives you an idea 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."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: take the guide at face value and the reported outcome is roughly 2% growth in adjusted EPS. That is the number a sterling investor is buying. Second-half weighting compounds the problem, because it means the evidence that the algorithm is working will not arrive until the interims in July at the earliest, and by then the base effects in Bangladesh and the ITC exclusion timeline will both still be unresolved. This is a guide constructed to be beaten, which is a defensible way to run a business and a poor reason to pay up for the equity today.

Guidance & Outlook

Implied composition of the 2026 revenue guide: management set out the building blocks explicitly. Combustibles are expected to contribute 1-2% growth, with the U.S. at 0-1% over the medium term and the other two regions above 2%, and New Categories are expected to grow at low double digits. For reference, 2025 delivered 1.0% from combustibles and 7.0% from New Categories, so the guide requires New Categories growth to roughly half again while combustibles hold their line. Within New Categories, Modern Oral is expected to lead, Heated Products to improve from the glo Hilo and revamped glo HYPER launches, and Vapour to be flat in the U.S.

Street at: the print was characterised across the immediate coverage as ahead of forecasts with guidance reiterated, and the sell-side response was to nudge estimates up by roughly a percentage point rather than to re-rate. The most constructive post-print target published on the day sat around 6% above the pre-announcement price, which is a useful summary of how much upside the market saw in the delivery.

Guidance style: deliberately conservative and consistently so. This management team reset expectations downward at the February 2025 print, upgraded mid-year in June, delivered at the top end, and has now anchored 2026 at the bottom of a range it spent two years earning the right to publish. The pattern argues for beats rather than misses. It also argues that the published guide is not the number to underwrite.

Analyst Q&A Highlights

What Could Lift 2026 Off the Floor of the Algorithm

The opening question of the session went straight to the guide, asking what would move the year toward the middle or upper half of the range rather than the bottom. Management answered structurally rather than with a bridge, walking the three regions and naming the specific drags it has assumed: a diminishing but still meaningful Australian headwind, a continued illicit-vapour drag in Europe compounded by a Polish regulatory change at the end of 2025, a tougher U.S. comparative after a strong year, an assumption of flat rather than recovering U.S. Vuse volume, and the revenue effect of geographic exits flagged at the pre-close update. No quantification of what an upside case would look like was offered.

Q: "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."
— Mirza Faham Baig, UBS

A: "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 Vuse 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."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: the answer was a list of downside assumptions, not upside levers, which tells you the guide is built from a conservative starting point rather than trimmed from an optimistic one. That supports the beat-the-guide pattern but it also means there is no articulated path to the middle of the range that an investor can underwrite today.

Why U.S. Vapour Is Guided Flat Despite the Second-Half Exit Rate

The most consequential exchange on the call. The questioner laid out the bull case precisely: enforcement built through 2025, the first half of 2026 will annualise that build, so a flat full-year guide implies the business shrinking again in the second half. Rather than defend the guide on conservatism, management disclosed a specific non-recurring driver inside the second-half number and declined to carry the exit rate forward.

Q: "I'm still just trying to square that circle given you've had pretty strong exit rate momentum through the second half of the year. I appreciate enforcement actions in vapour aren't 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 Vapour category, one would imagine or the legal Vapour category in the first half. So are you, therefore, expecting as we come into H2 of 2026 to see your Vuse business down year-on-year to get you back to that flat guidance for the year?"
— Simon Hales, Citi

A: "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 gained. So 63% of those consumers stayed within the closed systems. And in RCS system, Vuse gained more than their fair share of our category. So that is one thing, which is also boosting Vuse performance in the second half. So I wouldn't be reciprocating that second half into the full year of '26."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: a disclosure that costs management credibility with the bulls and earns it with everyone else. The practical consequence is that the second-half Vuse inflection cannot be used as a leading indicator, and the enforcement thesis reverts to what it has been for two years, a real but unpriceable option on regulator behaviour. Anyone whose model has legal Vapour re-inflating in 2026 is now working against management's own guidance.

How Much of U.S. Price/Mix Is the Excise Duty Drawback

The most persistent line of questioning on the call, raised by two analysts in succession. With U.S. combustibles price/mix at more than 12% against a long-run algorithm of 0-1% revenue growth, the size and durability of the duty-drawback benefit is the difference between a repaired U.S. business and a temporarily subsidised one. Management refused the number twice, offering only a floor statement and a directional signal on durability.

Q: "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."
— Multiple analysts incl. Richard Felton, Goldman Sachs; Pallav Mittal, Barclays

A: "In terms of duty drawback, look, I'm not giving guidance specifically for the drawback. There is -- we see that the benefits that we generate for the economy, for example, is the driver behind as much as we can start to grow employment and growing the activities in the farmers, domestic in the U.S. We carry on, obviously, this is not forever. This will be like you suggest, a peak."
— Tadeu Marroco, Chief Executive

Assessment: "a peak" is the most useful word management said about the U.S. all morning, and it was given away rather than volunteered. An undisclosed benefit that is now at its high point sits inside the single largest contributor to group revenue growth. Until it is sized, the quality of the U.S. recovery cannot be independently assessed, and the burden of proof sits with the 2026 delivery rather than the 2025 result.

Whether New Category Profitability Keeps Improving in 2026

Having delivered a 4.7-point improvement in New Categories contribution margin, management was asked how that trajectory evolves. The answer set expectations down without setting a number, framing 2026 as a reinvestment year behind three simultaneous premium launches and explicitly declining to commit to a pace of category-margin progression.

Q: "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?"
— Andrei Andon-Ionita, Jefferies

A: "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 Vuse 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."
— Tadeu Marroco, Chief Executive

Assessment: the 2025 contribution step-up was the most persuasive number in the release and management has just told the market not to annualise that either. Three premium rollouts running concurrently is a heavy investment year, and it lands alongside the bulk of roughly £400m of cash Fit2Win costs. The New Categories margin line should be treated as flat-to-modestly-up in 2026, not extrapolated.

The Moving Parts Inside the Low-Double-Digit New Categories Guide

A separate line of questioning challenged the guide from the opposite direction, arguing that low double digits looks like a sharp deceleration relative to what pouch and vapour scanner data suggest. The response decomposed the guide into a flat U.S. Vuse assumption, an ongoing European regulatory drag and continued competitive pressure in value-tier heated products, with Velo carrying the growth.

Q: "But your low double-digit growth, it still -- I mean, seems like you're factoring a pretty sharp normalization versus what we can see in data, especially on nicotine pouches and the e-Vapour side of things. So can you just help us understand the moving parts for your low double-digit guidance for '26?"
— Pallav Mittal, Barclays

A: "One, in the U.S., even as I explained in my presentation, that we had a negative number for the full year on Vuse. So what we are expecting in the Vuse 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."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: the guide is internally consistent, which is the point. Full-year New Categories growth of 7.0% with a double-digit second half, decelerating to low double digits for 2026, only makes sense if Vapour contributes nothing and Heated Products contributes little. That is exactly what management assumed. The guide is therefore Velo plus two option positions, and it is priced as such.

Whether Australia Is Still Worth Staying In

A questioner based in the market itself pressed on why a business where the legal category has collapsed remains in the portfolio at all. The answer did not defend the market's prospects; it argued that the drag self-extinguishes.

Q: "I mean, the legal market is now down to like 3 billion, 6 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?"
— Rey Wium, Anchor Stockbrokers

A: "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 been 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."
— Tadeu Marroco, Chief Executive

Assessment: an unusually candid answer. Management is not managing Australia back to health, it is waiting for the asset to shrink below the threshold at which anyone asks about it. That is a rational response to a regulatory environment it cannot influence, and it is also a reminder that the same policy design could be adopted elsewhere. The transferable risk here is not Australia; it is the demonstration that a sufficiently aggressive excise regime can move 65% of a market to illicit supply within a few years.

Enforcement Outside the United States

With the U.S. enforcement story doing the work in the bull case, a questioner asked whether governments elsewhere are showing any comparable appetite. The answer distinguished sharply between markets with retail licensing and enforceable penalties and those without, and conceded that the UK disposables ban had been circumvented.

Q: "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 Vapour markets ex U.S. on that topic would be very helpful."
— Richard Felton, Goldman Sachs

A: "But the attempt 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 market is illegal today in Vapour, and this is a demonstration of how difficult the governments find to either regulate, but more important to enforce regulation in some markets."
— Tadeu Marroco, Chief Executive

Assessment: the honest read is that ex-U.S. enforcement is not a 2026 catalyst anywhere. Management's response has been to reallocate rather than wait, concentrating on France, Germany and Italy while pulling back from Malaysia, South Korea and others. That is disciplined capital allocation and it is also a smaller addressable Vapour business than the one the strategy was originally sized against.

Headroom on the Buy-back

With leverage inside touching distance of the target corridor and underlying cash generation intact, the final substantive question asked whether the £1.3bn programme could be flexed higher during the year. Management showed no appetite, framing the £200m increase as the appropriate step and prioritising deleveraging and dividend continuity ahead of buy-back scale.

Q: "So my question is regarding the buyback, GBP 1.3 billion for 2026, 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. So -- but just to understand the moving parts on your buyback for full year '26."
— Bastien Agaud, Bank of America

A: "What we want to ensure is to create more optionality for capital allocation in 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 2026, 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."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: "optionality for capital allocation in medium to long term" is the phrase to note. Read alongside a stated appetite for selective bolt-on M&A to support the transformation, it suggests management is preserving balance-sheet capacity for something other than returning it. That is defensible after a decade of deleveraging, and it caps the near-term buy-back at a level that contributes 1.3% to total return rather than the 3% to 4% some holders had hoped for once the Canadian liability was resolved.

What They're NOT Saying

1. The size of the U.S. excise duty drawback: refused twice, with only a floor statement that combustibles revenue would have been positive without it and an admission that the benefit is at a peak. This is the single largest unquantified input into the group's headline growth rate, and its absence prevents any independent assessment of whether U.S. price/mix is repeatable.
2. Any update on the permanent CFO search: the finance seat has been held on an interim basis since 26 August 2025, when the previous incumbent stepped down abruptly after roughly fifteen months. A recruitment process was announced at the time. Nearly six months later, at the company's most important disclosure event of the year, neither the announcement nor the call carried a word on it, and no analyst asked. The interim officeholder is experienced, having served in the same capacity from May 2023 to April 2024, but a second interim tenure in three years is a governance fact worth naming.
3. A quantified path to the middle of the medium-term algorithm: asked directly what would deliver more than the lower end, management listed the drags it has assumed rather than the levers that would beat them. Investors are being asked to trust a range without being shown its upside case.
4. H2 disclosure of any kind: as a semi-annual reporter BAT publishes no second-half income statement, so the "accelerated momentum" claim that underpins the 2026 guide cannot be independently verified at the line-item level. It can be inferred from the difference between interim and full-year growth rates, which is what this note has done, but it is inference rather than disclosure.
5. 2026 pricing intentions in U.S. combustibles: declined outright. Given that price/mix of 12.3% is the load-bearing element of the U.S. result, and that deep discount grew around 10% in 2025 against 7% in 2024, the silence on forward pricing is the most consequential refusal after the drawback.
6. What "selective bolt-on M&A" means: named as one of four capital-allocation priorities, unaccompanied by any indication of scale, category or geography. Combined with the deliberate framing of buy-back restraint as creating "optionality", this is the clearest hint in the release that capital is being reserved, and the least specified.
7. The path from 18.2% smokeless revenue to "predominantly smokeless by 2035": the ambition was restated, the annual mix gain was 70 basis points. At that rate the target is unreachable, so either the rate has to accelerate sharply or the combustible base has to decline much faster than management's own 6-7% U.S. assumption. Neither scenario was addressed.

Market Reaction

• Pre-print setup: the London line closed at 4,426p on 11 February, up 5.0% year to date, up 5.3% over the trailing thirty days and up 30.4% over twelve months, against a 52-week closing range of 2,965p to 4,609p. The New York ADS closed at $60.33, up 6.6% year to date and up 41.2% over twelve months, against a 52-week closing range of $37.85 to $62.80. The gap between the two twelve-month returns is sterling's appreciation against the dollar, not a difference in the security. The shares entered the print roughly 4% below their 52-week high.
• Reaction session, London: the ordinary shares opened unchanged at 4,426p, traded down to 4,277.6p at the low, which is 3.4% below the prior close, recovered to a high of 4,484p and closed at 4,404p, down 0.5%. Volume of 7.00m shares ran at 1.8 times the thirty-day average.
• Reaction session, New York: the ADS gapped down 1.9% to open at $59.18, ranged between $59.06 and $60.84 and closed at $60.61, up 0.5%. Volume of 10.3m ran at 2.4 times the thirty-day average. The London market closes four and a half hours before New York, and the recovery happened in those hours.
• Relative: the S&P 500 fell 1.6% on the session, so the ADS outperformed the index by roughly 2.1 points on the day.

The intraday shape is more informative than the close. A stock that opens flat, sells off 3.4%, then recovers to finish marginally lower in its home market and marginally higher in its secondary listing has been re-underwritten rather than re-rated. The morning move is the guide: a print delivered at the top end of its range, immediately followed by a 2026 outlook set at the bottom of the next one, with a currency headwind stapled to the earnings line. The afternoon recovery is the balance sheet and the return: 5.6% of dividend, a £200m larger buy-back, leverage down 0.20x and a Canadian liability that has stopped being a question mark.

The absence of a violent move in either direction is itself the story, and it stands in deliberate contrast to the same event twelve months earlier, when a guidance reset took the shares down as much as 9% in a session. The market has already paid for the recovery: 30% in sterling over twelve months is a substantial re-rating of a business whose reported revenue still shrank 1.0% this year. What was priced in was delivery, and delivery is what arrived.

Street Perspective

Debate: Is the 2026 guide sandbagged or honest?

Bull view: this management team has a two-year record of guiding low and delivering at the top, most recently clearing a 1-2% revenue range at 2.1% and a 1.5-2.5% profit range at 2.3% after upgrading mid-year. The 2026 assumptions embed flat U.S. Vuse and a continued Australian drag, both of which have visible paths to improvement. The floor of the range is a starting point, not a forecast.

Bear view: the guide is at the bottom because the composition demands it. Vapour contributes nothing, Heated Products is a launch story with three markets of evidence, APMEA is guided only to stabilise, and the U.S. is lapping a 12.3% price/mix year that included a benefit management has called a peak. Second-half weighting means no confirming evidence until July.

Our take: both are right, and the bear framing matters more for the next six months. The guide is probably beatable, but the mechanism for beating it is a regulatory outcome rather than an operating one, and the confirming data point does not arrive until the interims. Buying ahead of that is paying for an option whose expiry is five months out.

Debate: Should the equity be underwritten on constant currency or on reported?

Bull view: constant currency is the correct measure of operating performance, translation reverses over a cycle, and management is guided and incentivised on the constant-currency algorithm because that is what it controls. On that basis earnings grew 3.4% in 2025 and are guided to grow 5% in 2026.

Bear view: dividends are paid in pence and the shares are quoted in pence. On the basis that reaches the holder, adjusted earnings fell 0.2% in 2025 and are guided to grow roughly 2% in 2026 after the stated c.3% translational headwind. A business that grows reported earnings 2% while paying out 72% of them is a bond with equity risk.

Our take: the bear framing is the right one for a sterling investor and the bull framing is the right one for judging management. Both can be true simultaneously, and the resolution is in the total return rather than the growth rate: 5.6% dividend plus 1.3% buy-back plus roughly 2% reported earnings growth is a high-single-digit proposition. Respectable, and roughly what the market delivers.

Debate: Does the Canadian resolution justify a re-rating?

Bull view: a decade-long, unquantifiable tail risk has become a defined payment schedule funded by a ring-fenced profit stream, with a full and comprehensive release from all past, present and future Canadian tobacco claims. Leverage fell 0.20x on the company's own preferred measure and is on track for the target corridor by year-end. That is precisely the kind of clarity that supports a higher multiple.

Bear view: most of that re-rating has already happened, which is what 30% in sterling over twelve months represents. The provision moved by £708m in one year on a revision to Canadian industry forecasts, which is a reminder that the liability remains an estimate. And £1,994m of goodwill still sits against a business whose profits belong to claimants for the foreseeable future.

Our take: the resolution is genuinely valuable and it is genuinely already reflected. The interesting question is no longer Canada but what the freed balance-sheet capacity gets spent on, and management's language about preserving optionality for bolt-on M&A suggests the answer is not buy-backs.

Debate: Is Velo enough to carry the smokeless transition?

Bull view: Modern Oral grew 48% with global volume-share leadership achieved, positive U.S. contribution inside twelve months, a 70% repurchase rate, and consumption intensity at roughly 3.6 pouches a day against 6 in Europe and 12 in the Nordics. The category is legal in 24 markets against 4 in 2022. This is a genuine growth business inside a declining one.

Bear view: Modern Oral is £1,165m of a £25,610m group. Even growing 48%, it is about 4.5% of group revenue, against a combustibles base losing volume at 8.1% a year. Meanwhile Vapour shrank 8.6% and Heated Products managed 1.0%. One category compounding does not make a smokeless transition; it makes a smokeless line item.

Our take: the bears have the arithmetic and the bulls have the direction. At 70 basis points a year of mix shift, the 2035 ambition is not credible on current trajectory, but that is a statement about a slogan rather than about the investment case. What matters over a three-year horizon is whether New Categories contribution keeps compounding, and on that the 2025 evidence is strong and the 2026 guidance is explicitly cautious.

Model Implications

Valuation framework. At the 4,404p close the shares trade on 12.9 times FY25 adjusted diluted EPS as adjusted for Canada and 12.5 times adjusted diluted EPS at current rates, with a market capitalisation of roughly £96.8bn on 2,199m diluted shares. Enterprise value of approximately £128bn against implied adjusted EBITDA of roughly £12.3bn, derived from the company's own 2.48x ratio on £30,416m of adjusted net debt, puts the business at about 10.4 times. The dividend of 245.04p yields 5.6% and is covered 1.39 times by adjusted earnings on the as-adjusted-for-Canada basis. Free cash flow before dividends of £4,048m as reported is a 4.2% yield; on the £6,608m underlying figure excluding the Canadian upfront payment it is 6.8%.

What has to happen for the shares to work from here. On the guided numbers, the forward multiple is roughly 12.7 times against a 2026 adjusted EPS of about 347p, so the total return is the 5.6% dividend plus the 1.3% buy-back plus around 2% of reported earnings growth, with no multiple expansion assumed. That is roughly 9%, and it requires management to hit a guide it has set at the floor. Re-rating above that needs one of three things: a sized and durable answer on the U.S. duty drawback, evidence that legal Vapour is inflecting independent of one-off competitor exits, or APMEA returning to growth rather than merely stabilising. None of the three is likely to be visible before the interims in July.

Thesis Scorecard Post-Earnings

This is initiation coverage, so the pillars below are established here rather than carried forward, and the status column reflects what the FY25 print and call showed against each one as first stated.

Overall: the operating thesis is stronger than the equity thesis. Three of four bull pillars were confirmed on hard numbers and the fourth is intact but unquantified; three of four bear points were also confirmed, and two of them (currency and the Vapour option) were confirmed by management's own guidance rather than by our inference. A business improving this clearly while guiding this cautiously, after a 30% twelve-month re-rating, is fairly valued rather than mispriced.

Action: hold. Own it for the 6.9% cash return and the improving operating trajectory, not for a re-rating. The signposts that would move this to Outperform are a sized and durable duty-drawback disclosure, a second consecutive half of Vuse growth attributable to enforcement rather than competitor exits, and APMEA returning to growth. The signposts that would move it to Underperform are a guidance cut at the interims, a further step down in deep-discount-driven U.S. pricing power, or capital being deployed into large M&A rather than returns.