Velo and Vuse Beat the Assumptions Management Set Itself, APMEA Missed Again, and a 13% De-Rating Has Done the Rest

Results vs. Consensus

Three framing points govern every number below. First, BAT reports a full set of financials twice a year, so this is a genuine half-year income statement rather than a quarter, and there will be no second-half statement: half-on-half momentum has to be inferred from the difference between the interim and full-year growth rates. Second, the company presents three profit-and-loss columns rather than two, being reported, adjusted, and as adjusted for Canada, the last of which strips a percentage of the Canadian business's after-tax income because those profits are contractually committed to the claimants under the 2025 settlement. That percentage stepped down from 100% in 2025 to 85% in 2026. Management guides on, is incentivised on, and discusses the third column, so it is the basis used throughout unless stated otherwise.

Third, and this catches people every half, the release's summary tables pair a current-rate level with a constant-rate growth percentage. That is why the same adjusted operating margin appears in the announcement as both 43.5% and 43.7%, and the same New Categories contribution margin as both 13.3% and 13.8%. Neither is a misprint; they are the same metric at current and constant rates respectively. Every row in this note names its own basis.

H1 2026 scorecard

The shape is unusual and worth sitting with. The two lines that describe the operating business, revenue and profit growth, both landed marginally below expectations. The line that describes what a shareholder actually receives, EPS, beat by 3.5% and carried a guidance upgrade with it. Underneath the group aggregate, the regional dispersion is violent in both directions: the U.S. beat its revenue consensus by 250 basis points and its profit consensus by 260, while APMEA missed by 270 and 730 respectively. A group number that reads "in line" is concealing the widest regional divergence this company has printed in years.

Group income statement, half over half

Almost none of that reported movement is a statement about trading, and readers who followed the full-year print will recognise the pattern in mirror image. In February the reported column flattered the year, because the Canadian settlement provision swung from a £6.2bn charge to a net credit. This half it punishes the period, because the Canadian net credit shrank to £38m from £575m and three unrelated 2025 gains did not repeat: a £333m gain on the demerger of ITC's hotels division, a £904m provisional gain on the partial sale of the ITC stake, and a £72m Peru impairment that flattered the 2026 comparison in the other direction. Adjusting items totalled £1,160m against £325m. The associates line collapsing 87.2% is the ITC disposal gain rolling out of the base, not a change in the underlying stake's earnings, which fell 8.9% at constant rates.

The three-column bridge

Read the bottom row across and the whole disclosure problem is visible in one line. The same six months produce a 28.6% decline, a 5.9% increase and a 7.9% increase depending on which of three legitimate bases you select, a spread of 36 percentage points. On the fourth basis the company reports in its summary table, adjusted for Canada at the rates that actually applied, diluted EPS was 164.0p and grew 5.5%. That is the number an income holder should anchor on, and it is the number the consensus was set against.

Operating margin on all four bases

Adjusted diluted EPS bridge, as adjusted for Canada

Quality of Beat/Miss

Revenue. The 2.9% is honest but the composition inside the U.S. is not as strong as the headline. Group constant-currency revenue growth broke down as combustibles up 2.1% on price/mix of 6.8% against volume down 4.7%, New Categories up 18.0%, and Traditional Oral down 5.8%. The U.S. contributed 8.5%, and on the call management volunteered that roughly two points of the 5.0% U.S. combustibles growth was favourable trade inventory that unwinds in the second half, taking the underlying rate to about 3%. Against the company's own long-run frame of 0% to 1% U.S. combustibles revenue growth, 3% is still an outperformance, but the gap between the reported 5% and the underlying 3% is the single most important disclosure of the morning and it had to be extracted in Q&A rather than being in the release. Separately, U.S. volume fell 5.2% against an industry down 4.0%, so BAT lost 80 basis points of volume share and 40 of value share while taking the price.

Margins. Genuinely good, and better than the release's own summary table suggests. Adjusted operating margin as adjusted for Canada rose 30 basis points at constant rates to 43.7% while absorbing product-cost inflation estimated at 3.7%, or £101m at constant rates, plus a stated increase in commercial investment in the U.S., Germany, Italy and Romania. The mix engine is doing the work: New Categories contribution rose £95m to £269m at constant rates, lifting category contribution margin 3.3 points to 13.8%, which is 1.8 points above the full-year 2025 level of 12.0% rather than merely above the prior half. Six months ago management explicitly told the market not to extrapolate the 2025 contribution-margin gain because 2026 was a reinvestment year. It extrapolated anyway.

EPS. The 3.5% beat against consensus is real, and two-thirds of it is operating. The remaining third is the finance line, and there the disclosure is clean: net finance costs fell because debt was repaid with ITC proceeds, and the full-year adjusted net finance cost guide was cut to about £1.65bn from £1.75bn. The underlying tax rate was guided to 24% to 25%. The diluted share count fell 1.3% with 14.6m shares repurchased and cancelled for £649m in the half, roughly half of the £1.3bn programme. What the beat does not contain is any relief on translation: FX still cost 3.9 pence, and the full-year translational headwind on EPS is guided at 2% to 3%, only modestly better than the 3% assumed in February.

Segment Performance

Revenue and profit by region

United States: the reset is now an outperformance, with a two-point asterisk

The U.S. produced 8.5% constant-currency revenue growth and 10.1% adjusted profit growth, comfortably ahead of a 6.0% and 7.5% consensus, and adjusted operating margin at constant rates rose 80 basis points to 57.2%. Combustibles revenue grew 5.0% as price/mix of 10.2% and short-term inventory movements more than offset a 5.2% volume decline. New Categories in the region grew 58.1%, with Modern Oral revenue up 220% at constant rates and Vapour up 19.8%. Smokeless is now 22.7% of U.S. revenue. Reported profit rose 15.0% partly because the Group booked a £149m credit on settling historical litigation with ITG Brands over four brands sold in 2015, which also arrived as £149m of cash.

"In H1 2026, we have actively increased investment in key markets in response to heightened competitive activity, including in the U.S., where our combustibles volume share has started to stabilise."
— Tadeu Marroco, Chief Executive

The share data underneath is less comfortable than the revenue line. U.S. combustibles volume fell 5.2% against an industry decline of 4.0%, with the shortfall attributed to growth in the low-value segment where BAT is under-represented. Volume share fell 80 basis points and value share 40, driven by Newport and Lucky Strike. The response has been to invest behind Newport in premium, strengthen Camel, push Lucky Strike and Pall Mall Select in branded value, and extend Doral to five states at the low end. Management says share has held since January.

Assessment: the U.S. is the best-performing part of this company and it is also the part where the reported number most overstates the run rate. Strip the two points of inventory management disclosed in Q&A and combustibles grew about 3%, which is still well ahead of the 0% to 1% long-run frame but is a different picture from 5%. Management has now guided the second half to moderate toward the algorithm on a harder comparator and higher investment. The honest read is that the U.S. business is healthy, that the first half flattered it, and that the multi-category position, where BAT holds a number one or two share across every category, is the durable asset rather than any single half's price/mix.

Americas and Europe: flat revenue, and the Canada adjustment is now doing visible work

AME revenue grew 0.9% at constant rates, with combustibles up 2.5% on price/mix of 8.7% against volume down 6.2%, and New Categories up only 1.9%. Modern Oral was the bright spot at 21.8% growth on volume up 18.9%, with the UK and Poland now around half of regional Modern Oral revenue. Against that, Vapour fell 13.9% largely on regulatory change in Poland, and Heated Products fell 10.8% as growth in Romania was outweighed by competitive pressure in Italy and Poland. Combustibles volume share was flat and value share down 20 basis points. Adjusted profit fell 2.1% at constant rates but rose 1.1% as adjusted for Canada, and the reported figure collapsed 38.4% almost entirely because the Canadian settlement credit shrank from £575m to £38m, with a further £12m net loss on the exit from Cuba.

Assessment: AME was the standout region at the full year, growing profit 9.6% as adjusted for Canada, and it has stalled. The composition explains why the second half is supposed to be better: three of the four negatives, being Poland Vapour regulation, Italian and Polish Heated Products investment, and the Cuba exit, are either lapping or self-inflicted commercial spend behind launches. The one that is not is Germany, where trade-label growth has forced sustained down-trading pressure, and management's own description is that the growth in trade labels has "more stabilised" rather than reversed. Watch the £109m Canada adjustment line as well: it is the difference between a region that shrank profit 2.1% and one that grew it 1.1%, and the adjustment percentage steps down over time by design.

APMEA: "slower than expected" is the year's real miss

APMEA revenue fell 6.3% at constant rates against a consensus of down 3.6%, and adjusted profit fell 16.5% against a consensus of down 9.2%, with adjusted operating margin down 4.0 points to 32.4%. Combustibles fell 4.8% and New Categories 10.3%, the latter dragged by Heated Products down 12.5% on inventory movements and value-segment competition in Japan, and by Vapour down 28.2% following deliberate exits from Indonesia and South Korea. Modern Oral grew 43.2%, but from a base of only £29m of reported revenue. The Australian disclosure is the one that matters:

"Specifically in Australia, we estimate the illicit combustibles segment now accounts for around 80% of the combustibles industry volume, with the duty paid combustibles industry volume down more than 50% in the first half of 2026 (versus the same period in 2025)."
— British American Tobacco p.l.c., Half-Year Report for the six months to 30 June 2026

Assessment: at the full-year print management guided APMEA to "stabilise" in 2026, and this is the opposite of stabilisation. The Australian illicit share has gone from more than 65% to around 80% in six months and duty-paid industry volume has halved, which means the drag is compounding faster than the base is shrinking. The bull rebuttal, which management made again on this call, is that the drag self-extinguishes as the legal business approaches immateriality and that the second half laps the worst of the Australian regulatory shock. That is arithmetically true. It is also an admission that a regulator has written the asset down to nothing, and the region is still 17.5% of group revenue and 13% of adjusted profit at constant rates. The entire second-half weighting of the year rests on APMEA getting less bad.

Revenue by category

Smokeless products reached 19.8% of group revenue, up 1.6 points against the full-year 2025 position, which is more than double the 70-basis-point annual mix gain delivered in 2025 and the first evidence that the transition is accelerating rather than grinding. The smokeless consumer base reached 35.0m, up 0.9m in six months and 4.1m over twelve.

Modern Oral: the growth engine widened its lead

Global Modern Oral revenue grew 65.9% at constant rates on volume up 57.5%, with 7.9 billion pouches shipped in the half. Volume share across the top markets, which represent roughly 90% of addressable industry revenue, rose 8.4 points to 39.2%. In the U.S., volume grew 188% and revenue 220% on Velo Plus and Grizzly Modern Oral, with category volume share up 11.6 points to 29.8% and, per the call, 31% by the end of the period against a value share of nearly 26%. In AME, BAT holds 62% volume share across its top markets, described on the call as nearly seven times its nearest competitor, with 68.5% value share, and around half of regional revenue now comes from outside the Nordics. Velo Shift, the premium innovation, has taken 1% of value share in Sweden and 1.5% in Switzerland within months of launch. Velo Max, a higher-moisture line adding two strengths and four flavours, begins its national U.S. roll-out in the third quarter.

Assessment: Modern Oral is now the largest New Category by revenue and it is the only part of this portfolio where growth does not require taking share from someone. The 220% U.S. figure will not repeat, and management said so plainly, because Velo Plus was still building distribution through the first half of 2025 and the second-half comparator is far harder. But the structural picture improved on three axes simultaneously: share, geography, and premiumisation. This pillar is stronger than it was in February.

Vapour: the first half in which enforcement, not a competitor exit, did most of the work

Group Vapour revenue grew 5.3% at constant rates on volume up 4.2%, with the U.S. up 19.8% on volume up 14.9% and price/mix of 4.9%, and Vuse extending value share in tracked channels by 4.1 points to a record 55.9%. That was set against AME down 13.9%, largely Poland, and APMEA down 28.2% on deliberate exits from Indonesia and South Korea. The enforcement picture management laid out is the most concrete it has been: around half of U.S. Vapour industry volume is now covered by state directory and enforcement frameworks, more than 18 million unauthorised products have been seized through federal cross-agency work, the FDA is acting on foreign-manufacturer compliance, and attorneys general are pressuring illicit sales channels and payment providers. The legal U.S. Vapour industry returned to growth in the half.

"We extended value share to a record 55.9% in the first half and now hold more than double the share of our nearest competitor. Building on this leadership, we will begin a phased rollout of new adult focused Vuse flavors, broadening consumer choice and leveling the competitive playing field, starting in Q3 with distribution to approximately 25,000 outlets."
— Tadeu Marroco, Chief Executive

Assessment: in February the CFO told the market not to annualise the second-half 2025 Vuse recovery because part of it was a competitor delisting, and guided U.S. Vuse to flat for 2026. Volume then grew 14.9%. That is the single largest positive surprise in this release relative to management's own published assumption. The caveat is real and stated in the announcement itself: part of the volume gain is still attributable to the H2 2025 competitor exit, which sits in the base for the first half but becomes a headwind in the second. So the enforcement thesis is now partially, not fully, demonstrated. What has changed since February is that it is measurable at the industry level rather than inferable only from BAT's own share.

Heated Products: management has stopped forecasting a financial recovery

Heated Products revenue fell 11.7% at constant rates with volume share down 1.2 points, driven by inventory movements and value-segment competition in Japan, where excise-driven disruption also slowed industry growth. AME volume share fell 70 basis points as gains in Poland, Spain and Portugal were outweighed by Italy, Greece, Germany and the Czech Republic. glo Hilo has launched in nine target markets covering around 70% of industry volume, with roughly half of consumers new to the glo platform, and the Hyper Pro+ value-tier upgrade launches in Japan in the third quarter. Management sizes the category at around £9bn.

"In HP, I'm not expecting anything meaningful changing from the financial point of view. I do expect us to recover share from now until the end of the year with all the actions that we are putting in place."
— Tadeu Marroco, Chief Executive

Assessment: that sentence is the most consequential downgrade in the release and it was given in Q&A rather than in the announcement. Six months ago Heated Products was the "two-product answer" to two years of share loss, and glo Hilo plus the revamped Hyper were framed as the 2026 recovery. Management is now asking to be judged on share rather than on profit for the balance of the year. For modelling purposes this line should be carried flat to declining, and the £9bn white-space framing should be treated as an addressable market statement rather than a plan. This is the weakest part of the portfolio and it has weakened further.

Combustibles: the value engine held, on price

Combustibles revenue grew 0.5% on a reported basis to £9,561m and 2.1% at constant rates, with price/mix of 6.8% against volume down 4.7%, and category contribution up 2.7%. Group cigarette volume fell 4.6% to 218 billion sticks, with growth in Pakistan and Türkiye more than offset by the U.S., Bangladesh, Malaysia, Romania and Ukraine, plus inventory timing in Vietnam and exits from Cuba and Mozambique. Group cigarette volume share fell 30 basis points and value share 40, with AME flat, the U.S. down 80 and APMEA down 20.

Assessment: price/mix of 6.8% against volume decline of 4.7% is a healthier elasticity ratio than the 9.1% against 8.1% delivered in 2025, which is the right direction. The composition is different from last year in one important respect: the U.S. is now taking 10.2% of price against a 5.2% volume decline while losing 80 basis points of volume share, which is the classic late-stage trade of share for price. Management's answer is to ladder the portfolio down-market rather than defend premium share, extending Doral and pushing Pall Mall Select. That is the correct response and it is also the response that caps how much price the business can take from here.

Traditional Oral: the intended cannibalisation continues

Traditional Oral revenue fell 8.8% on a reported basis to £494m and 5.8% at constant rates, on volume down 9.6%, with the U.S., which is 97% of the category, down 5.2% at constant rates as price/mix of 7.2% failed to offset a 12.4% volume decline. U.S. value share fell 40 basis points and volume share 60, concentrated in the aspirational premium segment where Grizzly sits. Outside the U.S., revenue fell 22.5% at constant rates on the performance of Granit in Sweden.

Assessment: this is the bill for Modern Oral's success and it is being paid on schedule. Grizzly consumers migrating into pouches is the intended outcome, and a category losing £48m of half-year revenue while Modern Oral adds £313m is a trade worth making many times over. The only thing to monitor is margin: Traditional Oral is a very high contribution-margin business and the mix shift out of it is a structural headwind to group margin that Modern Oral has to grow through rather than around.

Volume KPIs

New Categories contribution: the quality-growth claim, checked

Assessment: the most important comparison in that table is the last column. A first-half contribution margin of 13.8% sits 1.8 points above the full-year 2025 level, in the half that management had pre-announced as a reinvestment period behind three concurrent premium roll-outs. Gross profit in New Categories rose more than £120m. The category is scaling rather than buying growth, and it is doing so while funding Velo Max, Vuse Ultra, glo Hilo and Hyper Pro+ simultaneously. This is the cleanest confirmation in the release.

Key Topics & Management Commentary

Overall Management Tone: Confident on the transformation and precise about what to discount, with a marked willingness to hand back headline numbers before being asked. The most quotable disclosures of the morning were all deflationary to the print, including the two points of U.S. inventory inside a five-point growth rate, the withdrawal of any financial recovery expectation for Heated Products, and the conversion of a raised constant-currency EPS guide into roughly 4% to 4.5% at the rates shareholders are paid in. Analyst pushback was concentrated on the U.S. combustibles run rate and on what the EPS upgrade is worth after currency, and on both the answers were specific rather than framework-level, which is a change from the full-year call.

1. The EPS Upgrade Is Real, and It Is Smaller Than It Looks

The headline change from this release is that full-year adjusted diluted EPS growth moved from the lower end to "towards the middle" of the 5% to 8% range, a first upward revision in this guidance cycle. Two mechanical drivers sit behind it: the adjusted net finance cost guide fell to about £1.65bn from £1.75bn, and the translational FX headwind narrowed to 2% to 3% from about 3%. Neither is an operating improvement. Pressed on what the upgrade delivers in sterling, the CFO gave the arithmetic without hedging.

"But you're right that once we take into account the FX impact, our adjusted EPS would be in the range of 4%, 4.5%, which is just for a reminder, is one of the best EPS performance of BAT in recent years, and we are very confident. And as I highlighted earlier, that it is mainly driven by the kickers below operating profit, mainly net finance cost and also the cash conversion, and we do get benefit from being a high cash generative business."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: "one of the best EPS performance of BAT in recent years" is defensible: the comparable 2025 figure on the same basis was negative 0.2%. But it doubles as an admission that the bar is low, and management named the source as the kickers below operating profit rather than the operating line. The February note underwrote roughly 2% reported EPS growth for 2026. The number is now roughly 4.3%. That change is worth about two points of annual total return, and it is worth exactly that much and no more.

2. Two Points of the U.S. Five Are Trade Inventory

U.S. combustibles revenue grew 5.0% at constant rates against a stated long-run algorithm of flat to plus 1%. Asked directly how to reconcile the two, the CEO decomposed the number unprompted and to his own disadvantage.

"Yes, you rightly point out that the 5% performance in H1 is well ahead of what the algorithm would suggest. We highlight the fact that we had some trade movements that has been beneficial in H1 that will be unwind in H2. I will tell you that this equates for something close to 2% of the 5% if you -- so underlying performance actually is more of a 3%. Clearly, we have a momentum in the H1. Duty drawback is part of the 3%, but it's not a major part of it."
— Tadeu Marroco, Chief Executive

Assessment: this is the disclosure the February note asked for and did not get, delivered in a different form. It does not size the duty drawback, but it does bound it: the drawback is inside a 3% underlying growth rate and is "not a major part" of it. That is materially more reassuring than the position six months ago, when an unsized benefit sat inside a 12.3% price/mix figure and was described as at a peak. The cost of the clarity is that the U.S. second half is now explicitly guided to moderate, and any model carrying 5% into the full year is carrying two points of working capital.

3. Velo Extended Its Lead on Three Axes at Once

Modern Oral is now the largest New Category by revenue and the disclosure around it has moved from share statistics to structural advantage. Global top-market volume share rose 8.4 points to 39.2%; U.S. volume share rose 11.6 points to 29.8%; AME volume share across top markets is 62% with 68.5% value share; and the premium tier is being built out through Velo Shift in Europe and Velo Max in the U.S. Management framed the group-level consequence in nicotine rather than category terms.

"Our total nicotine volume share increased by 110 basis points year-to-date, fueled by new categories, with Velo driving around 90% share of Modern Oral value growth and Vuse delivering over 100% share of Vapour value growth."
— Tadeu Marroco, Chief Executive

Assessment: capturing more than 100% of a category's value growth means the rest of the field is shrinking in aggregate, which is a stronger statement than share gain. The framing shift to total nicotine share is also the right one for this business, because it is the only major nicotine company with a top-two position in every category, and it makes the combustible volume decline a mix question rather than a terminal one. The risk is that the number is measured year-to-date in a single market and against a competitive set that is actively relaunching pouch products. Treat 110 basis points as a real but early data point.

4. U.S. Vapour Beat a Guide of Flat by Fifteen Points of Volume

The February guide was for U.S. Vuse volume to be flat in 2026, on the explicit reasoning that the second-half 2025 recovery had been flattered by a competitor delisting and that enforcement would arrest the decline without driving growth. Volume grew 14.9% and revenue 19.8%. Management attributes this to state-level enforcement now covering around half of industry volume, federal seizures exceeding 18 million units, and the FDA's new prioritisation guidance, which opens a pathway for both Vapour flavours and Modern Oral innovation. The flavour roll-out begins in the third quarter at approximately 25,000 outlets, with a second tranche of 25,000 in the fourth.

Assessment: the announcement itself still credits part of the volume gain to the competitor landscape change from the second half of 2025, which sits in the first-half base and reverses as a comparator in the second half. So this is not yet a clean enforcement-driven result. What it is, unambiguously, is a large beat against management's own published assumption, achieved in the market that is roughly two-thirds of group Vapour revenue and the largest Vapour value pool in the world. The February note said the enforcement thesis was "a real but unpriceable option on regulator behaviour". It has become considerably more priceable in six months.

5. APMEA Did Not Stabilise

The regional performance is set out above; the point here is the gap between the February commitment and the outcome. Management guided APMEA to "stabilise for the full year" on the mechanism of Bangladesh lapping its excise shock and the Australian drag becoming progressively less material. Instead revenue fell 6.3% and profit 16.5%, both meaningfully worse than a consensus that had already assumed a decline, and Australian illicit share rose from more than 65% to around 80%. The second-half case rests on comparators.

"So in terms of the building blocks for the second half of the year, and obviously, APMEA, we expect to be better performance in the second half than in the first half. It's clearly a recovery story. H1 2026 for APMEA was already better than the H2 2025. H2 2026 will be better than H1 2026 because we will be lapping a more softer comparator, if you want, in places like Australia, for example."
— Tadeu Marroco, Chief Executive

Assessment: the sequential framing is legitimate and it is also the weakest form of guidance available, because it asks investors to underwrite base effects in two markets where the policy trajectory has been consistently worse than assumed for two consecutive years. The material fact is that the entire second-half weighting of the group's profit guide depends on this region getting less bad, and the region has now missed its own guide once. The February bear point that APMEA fiscal and regulatory shocks recur rather than resolve has escalated, not moderated.

6. Heated Products Was Quietly Written Down for the Year

Revenue fell 11.7% at constant rates and volume share 1.2 points. glo Hilo is in nine markets covering around 70% of industry volume with about half of consumers new to the platform, and Hyper Pro+ arrives in Japan in the third quarter. Asked whether the second half brings improvement, management separated share recovery from financial recovery and committed only to the former. The relevant quote is set out in the segment discussion above.

Assessment: six months ago this was a "pincer" of two products, and the mid-teens New Categories guide was described as Velo plus two option positions. One of those options has now been marked down by management itself for the current year. The practical consequence for the model is that the full-year New Categories guide of mid-teens has to come almost entirely from Modern Oral, with Vapour lapping a harder comparator and Heated Products contributing nothing financially. That concentration is the single largest execution risk in the second half.

7. Quality Growth Survived the Reinvestment Year

New Categories contribution rose £95m to £269m at constant rates, a 54.7% increase, with contribution margin up 3.3 points to 13.8% and gross profit up more than £120m. That was delivered while simultaneously funding the Velo Max preparation, the Vuse flavour and Vuse Ultra roll-outs, glo Hilo scaling and the Hyper Pro+ launch. Management framed the discipline as selectivity rather than restraint, and the market exits in Vapour are the visible expression of it.

Assessment: in February the company told investors explicitly not to extrapolate the 2025 contribution-margin gain because 2026 was a reinvestment year. The margin expanded anyway, and by more than half the rate of the prior full year. Either the operating leverage in this business is stronger than management's own guidance framework assumes, or the reinvestment is back-half loaded and the second half will show the cost. The honest position is that both are partly true, and that a 13.8% contribution margin in a heavy launch half is a better result than the February guidance contemplated.

8. Fit2Win Got Bigger and Considerably More Expensive

The transformation programme was expanded again. Annualised savings by 2028 rose to about £700m from £600m, with £500m still targeted by 2027. The bill rose faster.

"Altogether, we now expect GBP 700 million of annualized savings by 2028 with GBP 500 million to be delivered by 2027. Total one-off costs are now GBP 950 million with GBP 840 million to be treated as adjusting. We continue to expect the majority of the cost to be incurred this year with balance in 2027."
— Javed Iqbal, Interim Chief Financial Officer

The half carried £370m of Fit2Win charges, of which about £230m was a non-cash write-down following a global bottom-up review of manufacturing assets and machinery. Costs incurred since inception reached £482m, of which £459m was treated as adjusting. Savings realised to date are about £105m, or 15% of the target.

Assessment: six months ago this was £600m of cost for £600m of annualised savings, a one-year payback. It is now £950m for £700m, a payback approaching a year and a half, and the incremental £350m of cost bought only £100m of incremental savings. Presentationally the issue is unchanged and now larger: £840m of the cost is classified as adjusting and therefore sits outside the profit line management is guided and paid on, while all of the savings flow into it. Roughly £620m of the total is cash. The programme is probably still worth doing. It has become a materially worse deal than the one presented in February, and the release did not frame it that way.

9. Cash Inflected Sharply; Leverage Did Not

Net cash generated from operating activities rose 47.3% to £3,402m and free cash flow before dividends rose 85.2% to £2,285m, with operating cash conversion at 80% against 75%. Three items drove it: lower Franked Investment Income Group Litigation Order payments of £111m against £368m, the non-repeat of a £491m U.S. tax deferral effect, and the £149m ITG Brands receipt. Below that, the FII GLO litigation also produced adjusting credits of £315m to net finance costs and £95m to taxation following further UK Supreme Court judgments. Against all of that, adjusted net debt rose to £31,969m from £30,416m at the year end, an increase of £1,553m over six months, while the target is to be inside 2.0 to 2.5 times by 31 December.

Assessment: the cash performance is the least-discussed strong number in the release and it matters more than the EPS beat, because BAT's equity story is a cash-return story. The leverage picture requires more care. First-half cash flow is seasonally weak at this company by its own description, the dividend is paid across the period and the buy-back has run at £649m, so a rise in net debt over the half is normal rather than alarming. It does, however, mean the year-end leverage commitment now depends on a large second-half cash inflow arriving on schedule, and it is one of very few 2026 commitments where the evidence to date points the wrong way.

10. The Industry Volume Assumption Has Been Cut Twice This Year

The global cigarette industry volume assumption has moved from down about 2% at the February print, to down about 2.5% at the June trading update, to down about 3% now. The June step was attributed to Bangladesh. The latest step has a different cause.

"The 2.5% to 3% is basically Brazil-driven. We had a massive excise shock in Brazil. The prices come into place on the 1st of August. This is really a meaningful price increase, excise driven. And obviously, this will have implications in the size of the market and it's a big market, like Bangladesh is also a big market, but it's basically Brazil driven."
— Tadeu Marroco, Chief Executive

Assessment: Brazil was one of the two markets carrying AME combustibles growth this half, on pricing. An excise shock effective 1 August therefore lands directly on the region that is supposed to accelerate in the second half. That is a specific, dated, quantifiable risk to the group's own second-half weighting, and it is the third emerging-market fiscal shock this company has absorbed in eighteen months after Bangladesh and Australia. The pattern is now the thesis point rather than the individual market.

11. Capital Returns Held, and the Real Catalyst Is Five Weeks Away

The dividend of 245.04p declared in February is being paid in four quarterly instalments of 61.26p, with 121.32p paid in the half. The £1.3bn buy-back is roughly half complete, with 14.6m shares repurchased and cancelled for £649m. Capital-allocation priorities were restated unchanged: investment in the transformation, balancing deleveraging with the progressive dividend and sustainable buy-backs, and selective bolt-on M&A. Management closed the call by pointing at a Capital Markets Day in September.

Assessment: the returns package is intact and unspectacular, which is what it should be while leverage is still above the corridor. The September event is the more interesting item on the calendar. The current medium-term algorithm was set at the 2024 Capital Markets Day, 2026 is the first year of it, and the year is tracking to the lower end on revenue and profit and the middle on EPS. A resetting or re-basing of that algorithm is the single largest known catalyst in the next twelve months, in either direction, and it falls within weeks of this note.

Guidance & Outlook

The composition of the second half was set out with unusual specificity. Management expects mid-teens New Categories revenue growth led by Velo and Vuse, an acceleration in AME driven by targeted commercial actions and innovation roll-outs, further sequential recovery in APMEA on softer Australian comparators, and a moderation in the U.S. as the inventory benefit unwinds against a harder comparator and higher investment. Fit2Win savings phase positively into the second half. The CEO's defence of the lower-end revenue and profit guide was that it is a choice rather than a constraint.

"Just on that point, Javed, I want to complement on the -- because I received some questions about the low end of the range. We are here thinking about the long-term sustainability of the algorithm. And we are doing the right investments for the business, for the sustainable growth of the business. We have to invest in combustible in the U.S., in some other key markets as well."
— Tadeu Marroco, Chief Executive

Implied second-half ramp. On the as-adjusted-for-Canada basis at current rates, the half delivered 164.0p against 155.5p, up 5.5%. Full-year 2025 was 340.5p, so the second half of 2025 was 185.0p. A full-year 2026 outcome of roughly 355p, which is the middle of the 5% to 8% constant-currency range less the guided 2% to 3% translational headwind, implies a second half of about 191p, or growth of roughly 3.2% against the 5.5% just delivered. In other words, operating profit is second-half weighted while EPS growth decelerates in the second half, because the finance-cost and buy-back kickers annualise out. That is not a contradiction, and it is not obvious from the guidance language.

Street at: consensus entering the print sat at 3.0% constant-currency revenue growth, 3.7% adjusted profit growth as adjusted for Canada, and 158.5p of adjusted diluted EPS. The first two were marginally missed and the third beaten by 3.5%. The composite twelve-month price target across the covering brokers sat around 4,858p in mid-August against a 4,214p share price, implying roughly 15% upside, with a range from 3,800p to 5,750p. That spread is wide for a consumer staple and is a fair proxy for how unresolved the smokeless-transition debate remains.

Guidance style: unchanged and consistent. This management team has now reset expectations downward once in February 2025, upgraded mid-year, delivered at the top end, opened 2026 at the floor of a new algorithm, and taken the EPS component up at the interims while leaving revenue and profit at the floor. The pattern is to guide to a number that can be cleared and to hand back any component of a beat that is not repeatable. Applied to the second half, it argues that the lower-end revenue and profit guide is more likely to be met than missed, and that the mid-point EPS guide is the number with genuine conviction behind it.

Analyst Q&A Highlights

What Is Actually Underneath the U.S. Combustibles Five Per Cent

The opening question of the session went straight to the gap between a 5% U.S. combustibles result and a stated framework of flat to plus 1%. Rather than defend the outperformance, management decomposed it and named the non-repeating portion, then set expectations for the second half accordingly.

Q: "And then on U.S. Combustibles, you registered plus 5% top line growth in H1, significantly ahead of the U.S. Combustibles framework of value flat to plus 1% growth. How should we think in the context of this H1 performance about the U.S. combustibles algo for the full year '26?"
— Andrei Andon-Ionita, Jefferies

A: "Yes, you rightly point out that the 5% performance in H1 is well ahead of what the algorithm would suggest. We highlight the fact that we had some trade movements that has been beneficial in H1 that will be unwind in H2. I will tell you that this equates for something close to 2% of the 5% if you -- so underlying performance actually is more of a 3%. Clearly, we have a momentum in the H1. Duty drawback is part of the 3%, but it's not a major part of it."
— Tadeu Marroco, Chief Executive

Assessment: the most valuable thirty seconds of the call, and it costs the company its best headline. Two of the five points are working capital and reverse. What remains is a 3% underlying rate against a 0% to 1% frame, of which the duty drawback is a minority component. That is the closest thing to a bound on the drawback anyone has extracted in two years of asking, and it makes the U.S. recovery look more like a business and less like a subsidy than it did in February.

Sizing the Duty Drawback, for the Third Consecutive Call

A recurring line of questioning at every disclosure event since the benefit first appeared returned again, this time asking for the volume base that qualifies and whether the benefit is still building. Management again declined the number, but the framing has changed: what was described at the full year as a benefit at its peak is now described as not very meaningful in the current half.

Q: "But firstly, starting on the U.S. Combustibles business, volumes are better and price mix is a touch lower versus what you were expecting. And I think in your comments, you said duty drawback is not a major part of it in terms of the mix. Can you quantify the volumes that are seeing the benefit from double duty drawback? And is it sequentially increasing? Or has that now stabilized?"
— Pallav Mittal, Barclays

A: "And the duty drawback, yes, in the first half, was not very meaningful. And in the second half, we will not be giving guidance about duty drawback, but this will be part of the elements that will be taking into consideration when we put in place our plans."
— Tadeu Marroco, Chief Executive

Assessment: still refused, for the third time, which remains a governance irritation. But the substance has improved materially. A benefit that is "not very meaningful" inside a 3% underlying growth rate is a very different input to a model than an unsized benefit inside a 12.3% price/mix figure. The February thesis point that U.S. pricing power was partly a policy artefact is weaker after this half, not stronger. What has replaced it as the U.S. concern is share: 80 basis points of volume share and 40 of value share went out the door.

What the Raised EPS Guide Is Worth in Sterling

The single most useful exchange of the morning, in which a questioner did the translation arithmetic out loud and asked management to confirm it. The answer confirmed both the number and its composition without qualification, and the CEO added the basis clarification unprompted.

Q: "I Just want to get back to the guidance -- very strong performance on EPS, up 5.5%. Now if I look at your guidance, you've talked about EPS in the middle of the range. So that brings basically 6.5%. You talked about translation impact negative 2% to 3%. So that brings us back to sort of adjusted EPS around about 4%. Am I more or less correct doing that assumption? So actually overall implies a bit of a slowdown in the EPS growth for the year."
— Rey Wium, Anchor Stockbrokers

A: "But you're right that once we take into account the FX impact, our adjusted EPS would be in the range of 4%, 4.5%, which is just for a reminder, is one of the best EPS performance of BAT in recent years, and we are very confident. And as I highlighted earlier, that it is mainly driven by the kickers below operating profit, mainly net finance cost and also the cash conversion."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: management confirmed on the record that the raised guide is worth about 4% to 4.5% in the currency shareholders are paid in, that this represents a deceleration from the first half's 5.5%, and that the driver is below the operating line. All three admissions are unflattering and all three were given directly. This is the number to build the model on, and it is roughly double the 2% carried into this year at the February print.

The Building Blocks of the Second Half

A recurring line of questioning asked what could push the year better or worse from here and what the specific watch items are. Management answered by region, and the honest content of the answer is that every region except the U.S. has to improve for the year to land where it is guided.

Q: "The second question is on full year '26 guidance. Maybe if you could just help elaborate on some of the moving parts that you expect to see in the second half in terms of how the 2.9% organic sales growth develops. What could maybe see it do better? What could maybe see it do worse? And what are the key items that you're going to be monitoring?"
— Mirza Faham Baig, UBS

A: "So in terms of the building blocks for the second half of the year, and obviously, APMEA, we expect to be better performance in the second half than in the first half. It's clearly a recovery story. H1 2026 for APMEA was already better than the H2 2025. H2 2026 will be better than H1 2026 because we will be lapping a more softer comparator, if you want, in places like Australia, for example."
— Tadeu Marroco, Chief Executive

Assessment: the sequencing is coherent and it is entirely comparator-driven in the region that missed. An investor underwriting the second half is underwriting that Australia does not get worse from an 80% illicit share, that Bangladesh has finished deteriorating, and that Brazil's 1 August excise increase is smaller than the Australian base effect is large. None of those is within management's control, and the group's profit guide is second-half weighted precisely because of them.

Why the Industry Volume Assumption Moved Again

A questioner tracked the industry volume assumption across three disclosure events this year and asked what had changed since June. The answer identified a new market rather than a deterioration in the previously named one, with a specific effective date.

Q: "At the trading updates in June, I think the business sort of downgraded its expectation for the global cigarette industry volumes from minus 2% to minus 2.5%. I think at the time, you noted this was predominantly driven by Bangladesh. It now seems the business has lowered its assumption again to now minus 3%. What is driving this latest sort of reduction in the outlook for cigarette volumes for the industry? Has Bangladesh deteriorated further? Or are you now seeing broader weakness across other markets?"
— David Roux, Morgan Stanley

A: "The 2.5% to 3% is basically Brazil-driven. We had a massive excise shock in Brazil. The prices come into place on the 1st of August. This is really a meaningful price increase, excise driven. And obviously, this will have implications in the size of the market and it's a big market, like Bangladesh is also a big market, but it's basically Brazil driven."
— Tadeu Marroco, Chief Executive

Assessment: a clean answer that is worse news than it sounds. Brazil carried AME combustibles pricing this half, and the excise increase lands on 1 August, meaning the full effect falls in the half that is supposed to accelerate. Three emerging-market excise shocks in eighteen months, each in a different geography, is no longer a series of one-offs. It should be modelled as a recurring annual charge against the combustibles line rather than as an exception.

Whether the New Categories Pruning Is Finished

With Vapour exits driving much of the APMEA New Categories decline and Heated Products being reprioritised, a questioner asked whether the portfolio rationalisation is complete or whether more markets are under review. The answer set out the criterion clearly and left the door open.

Q: "Firstly, just on the new categories portfolio. I think you've made the decision to exit some markets in vape and reprioritized in heated. Can you just sort of indicate whether that work is now complete or whether there are sort of still markets that you're looking at around the viability of those categories?"
— Damian McNeela, Deutsche Bank

A: "Yes, the HP. -- yes, the Vapour markets, we -- mainly we decide to leave markets in Asia where we don't see either a proper regulatory environment and/or enforcement. So -- and as a consequence, there is no financial return for a company, a legal company like BAT because we have to compete with illegal products, which there is no level playing field, if you want."
— Tadeu Marroco, Chief Executive

Assessment: the discipline is correct and the addressable market is getting smaller. Indonesia, South Korea, Poland and, on the CEO's own account of illegal penetration, the UK have all become markets where a compliant manufacturer cannot earn a return. The strategic consequence is that the Vapour business is converging on a U.S.-plus-selected-Europe footprint rather than the global one it was sized against, which raises its concentration risk even as it improves its returns. The unresolved element is that management said the review is largely but not entirely done, with some further impact expected in the second half.

Whether the Cash Conversion Beat Is Phasing or Durable

The final substantive question of the call picked up the strongest number in the release and asked whether it changes the full-year picture. Management attributed it to two things, one structural and one behavioural, and then declined to raise the full-year guide beyond the existing threshold.

Q: "Second one was on free cash conversion. Obviously, a little bit stronger than we would -- we normally see from BAT in H1. The question is, what are the drivers of that? Is it just phasing between periods? Or does that point to potentially better cash conversion on a full year basis, too?"
— Richard Felton, Goldman Sachs

A: "And I think on the cash conversion, 2 points from my side. One is because of the lower net financing cost, as I highlighted earlier, which was due to the debt repayment from the proceeds of ITC. But more importantly, also, I think I'm very proud of the work the finance team keeps on doing with our commercial colleagues to keep focus on cash as much as we do on profit."
— Javed Iqbal, Interim Chief Financial Officer

Assessment: management had an open invitation to raise the cash conversion guide and declined it, with the CEO adding that he would not assume much better than the previous year. That is consistent with the guidance style and it means the 80% first-half conversion should be read as phasing plus a genuine but modest improvement, not as a new run rate. Given that the year-end leverage commitment depends on second-half cash, the refusal to upgrade is the more informative half of the answer.

What They're NOT Saying

1. The size of the U.S. excise duty drawback, refused for a third time: the qualitative bound tightened usefully, from "at a peak" inside a 12.3% price/mix figure to "not very meaningful" inside a 3% underlying growth rate, but the number itself has now been withheld at three consecutive disclosure events. It remains the only material input to the group's largest profit pool that cannot be independently modelled.
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 departed after roughly fifteen months. Eleven months later, at the year's second-most-important disclosure event, neither the announcement nor the call carried a word on the process, and for the second consecutive results call no analyst asked. This is a second interim tenure in three years for the same officeholder.
3. The ITC exclusion order, absent entirely: at the full-year print, the pending International Trade Commission general exclusion order on imported illicit vapour devices was a named component of the enforcement thesis, awaiting final determination and a sixty-day presidential review. It was not mentioned once in this announcement or on this call, in a half where enforcement was the headline U.S. Vapour driver. Silence on a previously flagged catalyst is a disclosure event in itself.
4. The second-half cost of the New Categories investment step-up: management repeatedly flagged accelerating investment behind Velo Max, Vuse flavours, glo Hilo, Hyper Pro+ and U.S. combustibles, but gave no size for any of it, and no indication of whether the 13.8% New Categories contribution margin holds, compresses or expands as a result. The guidance framework absorbs it inside a range rather than disclosing it.
5. What the £230m non-cash manufacturing charge actually wrote down: the Fit2Win expansion included a global bottom-up review of manufacturing assets and machinery producing a charge of nearly £230m, described only as identifying opportunities to upgrade to next-generation technologies. Which assets, in which categories, and whether the write-down implies stranded combustibles capacity or New Categories retooling, was not addressed.
6. The path to the year-end leverage corridor: adjusted net debt rose £1,553m over the half against a commitment to be inside 2.0 to 2.5 times by 31 December. The commitment was restated, the arithmetic connecting it to the second-half cash flow was not.
7. "Selective bolt-on M&A", restated verbatim and still unspecified: named again as one of the capital-allocation priorities, with no scale, category or geography attached, for the second consecutive results event. Paired with a buy-back deliberately held at £1.3bn while leverage is inside touching distance of target, it remains the clearest signal in the release that capital is being reserved and the least explained.
8. Any second-half income statement, ever: as a semi-annual reporter BAT publishes no standalone half-two accounts, so the "acceleration in H2" that carries the full-year guide can only ever be inferred from the difference between these interims and the February full year. That is a structural disclosure gap rather than a choice, and it is why this note reconstructs the implied second-half EPS rather than waiting to be shown it.

Market Reaction

• Pre-print setup: the London line closed at 4,740p on 29 July, up 12.5% year to date, up 1.3% over the trailing thirty days and up 18.9% over twelve months, against a 52-week closing range of 3,733p to 4,962p. The New York ADS closed at $63.07, up 11.4% year to date and up 18.6% over twelve months, against a 52-week closing range of $50.39 to $66.70. The shares entered the print roughly 4% below their 52-week high.
• Reaction session, London: the ordinary shares gapped down 1.4% to open at 4,673p, traded as high as 4,788p, which is 1.0% above the prior close, then sold off to a low of 4,527p and closed at 4,566p, down 3.7%. Volume of 5.1m shares ran at 1.4 times the thirty-day average.
• Reaction session, New York: the ADS traded up 0.55% to $63.42 in the pre-market, opened down 1.9% at $61.88, ranged between $60.97 and $62.39 and closed at $61.69, down 2.2%. Volume of 5.1m ran at 1.1 times the thirty-day average. Sterling appreciated 0.75% against the dollar on the session, which accounts for about half of the 1.5-point difference between the two legs; the remainder sits in the four and a half hours the ADS trades after London closes.
• Relative: the S&P 500 rose 1.7% and the FTSE 100 fell 0.1% on the session, so the ADS underperformed its index by roughly 3.9 points and the London line its index by 3.6.
• Sector: the wider tobacco complex was weak the same day. Philip Morris fell 3.2% and Altria fell 9.3%, the latter reporting its own second quarter that morning. Imperial Brands' ADR fell 1.7% and Japan Tobacco's rose 5.7%.
• Since the print: the ADS has fallen a further 8.9% to $56.21 as at 21 August and the London line 9.5% to 4,131p, against the S&P 500 up 3.2%. From the pre-print close that is a decline of 10.9% for the ADS and 12.8% for the ordinary shares, and it has erased the entire year-to-date gain: the ADS is now 0.7% below its 31 December level.

The intraday shape on the day tells a clear story. The shares traded up 1% in London and up 0.55% in the New York pre-market on a release whose top line reads "in line with expectations, confident in FY26 guidance" and carries an EPS upgrade. Both legs then sold off steadily to close near the lows. What sits between the opening and the close is the call, and specifically the three deflationary disclosures made on it: two of the five points of U.S. combustibles growth are inventory, no financial improvement should be expected in Heated Products, and the raised constant-currency EPS guide is worth about 4% to 4.5% in sterling. A market that reads the release optimistically and the transcript pessimistically produces exactly this chart.

The three and a half weeks since are a different phenomenon and should not be conflated with the print. The move is concentrated in the two UK-listed international names: Imperial Brands' ADR has fallen 11.0% over the same window against Philip Morris down 2.0% and Altria down 2.7%, with the index up 3.2%. That is a de-rating of the UK-listed tobacco pair rather than a re-assessment of BAT's half, and no dated, sourced catalyst for it was identifiable at the time of writing. Two readings are available: either the market is discounting something not yet in the public record, or a defensive sector has simply been sold to fund an advancing index. This note takes the second view, with the acknowledgement that it is the less cautious of the two, and the price action is the principal risk to the rating change below.

Street Perspective

Debate: Is the EPS upgrade a genuine improvement or financial engineering?

Bull view: the guide moved up for the first time in this cycle, two-thirds of the first half's EPS growth came from operations, and the below-the-line benefit is a permanent reduction in interest expense funded by monetising a non-core associate stake at a good price. Turning a low-returning minority holding into debt paydown is capital allocation, not engineering.

Bear view: revenue and operating profit both came in below consensus and both full-year guides stayed at the floor. The only line that improved is the one furthest from the business. The finance-cost benefit annualises out, which is why management itself said the kickers moderate, and the implied second-half EPS growth of roughly 3.2% is well under the first half's rate.

Our take: the bears are right about the mechanism and the bulls are right about the durability. A permanently smaller interest bill is worth capitalising even though its growth contribution is transient, and the resulting reported EPS growth of roughly 4.5% against roughly 2% underwritten in February is the single largest change to the twelve-month return arithmetic. Both facts can be held at once; the mistake is treating a one-time step in the level as if it were a one-time item.

Debate: Has the enforcement thesis in U.S. Vapour finally become an earnings event?

Bull view: Vuse volume grew 14.9% against a guide of flat, value share hit a record 55.9%, the legal U.S. Vapour industry returned to growth, half of industry volume is now under state enforcement frameworks, more than 18 million unauthorised units have been seized, and the FDA's prioritisation guidance opens a flavour pathway that has been shut since January 2021. The flavour roll-out starts this quarter.

Bear view: the announcement itself still attributes part of the volume gain to a competitor exit from the second half of 2025, which flatters the first-half comparison and reverses in the second. The illicit devices that actually compete offer tens of thousands of puffs through channels BAT cannot serve, and by the CEO's own account the illicit product visible in tracked channels is only about 2% of the size of the true illegal market. Enforcement is closing a channel, not a category.

Our take: the bulls have the better of it for the first time in two years, with an important caveat. This is not yet a clean enforcement-driven result, but it is the second consecutive half of U.S. Vuse growth and the first in which industry-level enforcement metrics can be pointed at rather than inferred. The flavour re-entry is the genuinely new variable and it is deliberately slow, at 25,000 outlets a quarter, so the earnings effect lands in 2027 rather than 2026. That is a reason to own the shares before the effect, not after.

Debate: Does APMEA break the medium-term algorithm?

Bull view: the region is 17.5% of revenue and shrinking, the damage is concentrated in two markets where the drag mathematically self-extinguishes, the Australian comparator softens sharply in the second half, and Modern Oral in the region grew 43% and is building the replacement business. This is a runoff, not a structural break.

Bear view: management guided this region to stabilise and it missed consensus on both revenue and profit by wide margins. Australian illicit share went from more than 65% to around 80% in six months. The industry volume assumption has been cut twice this year, most recently on a Brazilian excise shock that lands on the other emerging-market region. Three fiscal shocks in eighteen months is a pattern, not a sequence of accidents.

Our take: the bears win the argument and the bulls win the valuation. A pattern of emerging-market excise shocks is now the correct base case and should be carried as a standing annual charge rather than an exception, which is what this note does below. But the region's profit contribution is already down to 13% at constant rates and falling, so the marginal damage from here is smaller each year, and the second-half guide depends on comparators rather than on a policy reversal. It is a permanent haircut to the growth rate, not a threat to the cash return.

Debate: Is the smokeless transition finally moving fast enough to matter?

Bull view: smokeless reached 19.8% of group revenue, up 1.6 points in six months against 70 basis points for the whole of 2025. New Categories contribution margin hit 13.8%, 1.8 points above the full-year 2025 level, in a heavy launch half. Modern Oral is now the largest New Category by revenue with 39.2% volume share across its top markets, and the consumer base reached 35 million.

Bear view: the acceleration is one category. Heated Products revenue fell 11.7% and management has withdrawn any expectation of financial improvement this year; Vapour grew 5.3% globally and only because of one market. Strip Modern Oral out and New Categories declined about 1% at constant rates. The 2035 ambition of a predominantly smokeless business still requires the mix to more than double from here.

Our take: both are describing the same fact from opposite ends. The transition is real, it is accelerating, and it is entirely dependent on one brand. The relevant question for a twelve-month horizon is not whether the 2035 ambition is credible, which it is not on this trajectory, but whether New Categories contribution keeps compounding faster than combustibles contribution decays. On this half's evidence it comfortably does, and the concentration risk in Velo is the price of admission rather than a reason to stay out.

Model Update & Valuation Framework

Valuation framework. At the 21 August close of 4,131p the ordinary shares carry a market capitalisation of roughly £90bn on 2,176m diluted shares, with the New York ADS at $56.21 on a one-for-one ratio. Full-year 2025 adjusted diluted EPS as adjusted for Canada at current rates was 340.5p. The middle of the guided 5% to 8% constant-currency range less the guided 2% to 3% translational headwind gives 352p to 355p for 2026, and management's own arithmetic on the call gives about 356p; call it 355p, or growth of 4.3%. That puts the shares on 11.6 times forward earnings, against 12.9 times at the reaction close, 13.4 times at the pre-print close and 12.7 times forward at the February initiation. The declared 245.04p dividend yields 5.9% and is covered 1.45 times on the forward number, a payout of 69%. The £1.3bn buy-back is 1.4% of market capitalisation.

What has to happen for the shares to work from here. Nothing heroic, which is the point. The 11.6% requires management to deliver a guide whose revenue and profit components sit at the floor of a range this team has cleared in each of the last two years, and whose EPS component it has just raised. Re-rating above that needs one of three things, all of which are now closer than they were in February: a September Capital Markets Day that re-bases the medium-term algorithm upward on the strength of Velo and the U.S. Vapour flavour re-entry; a second half in which APMEA actually stops declining rather than merely declining less; or the Vuse flavour roll-out scaling faster than the deliberate 25,000-outlets-a-quarter cadence implies. The principal risk to the arithmetic is not the business but the tape: the shares have fallen 12.8% since the print for reasons the disclosure does not explain, and a de-rating that continues will overwhelm an 11.6% expected return regardless of delivery.

Thesis Scorecard Post-Earnings

The pillars below are the ones established at the February initiation and carried in the standing thesis, graded against what this half's print and call revealed. Status tags follow the thesis-of-record convention: bull pillars run on track, at risk or broken; bear points run contained, emerging or materialising.

Overall: the thesis is net stronger, and it moved in both directions at once. Two of the four bear points improved, one of them materially, and both bull pillars that carry the growth were confirmed on numbers that beat management's own published assumptions. Against that, the two weakest parts of the portfolio got weaker, a fifth bear point had to be opened on Fit2Win, and the operating half of the guide is unchanged at the floor. The February rating rested on the judgment that a 30% twelve-month re-rating had already paid for a real operating improvement, leaving roughly a 9% total return. That judgment has been invalidated by the price, not by the business: the shares are 6% below the level at which we initiated, and the earnings they are being bought against are guided higher.

Action: upgrade to Outperform and own it for the return arithmetic, which is now roughly 11.6% with no multiple expansion, against a market-like 9% in February. Be clear about what this call is and is not. Of the three upgrade triggers set at the initiation, only the U.S. Vapour trigger fired and it fired partially; the duty drawback was refused for a third time and APMEA missed its own guide badly. This is therefore a valuation-and-guidance upgrade with one genuine operating confirmation underneath it, not a wholesale re-rating of the business. Two things would reverse it: a second-half revenue or profit miss against a guide already set at the floor, which would break the beat-the-guide pattern this rating leans on, or evidence that the ongoing de-rating in the UK-listed tobacco pair reflects information not yet in the public record. The September Capital Markets Day is the near-term event that resolves most of the uncertainty in either direction, and it falls within weeks.