Updates shares in paragraph 4, adds investor comments in 11-12, revenue share of alternative products in 13, interim CFO comment in 18, background in 19, graphic

By Emma Rumney and Shashwat Awasthi

Feb 12 (Reuters) - British American Tobacco BATS.L on Thursday announced a new AI-driven productivity programme expected to lead to job cuts, while reporting higher annual profit as its Velo nicotine pouch gained U.S. market share and sales of newer products picked up.

Interim finance chief, Javed Iqbal, said the programme would see BAT, which sells cigarettes, tobacco and other nicotine products, simplify and automate using data analytics and AI tools, adding it would affect staffing levels.

"It will have an impact on the size of the organisation," he said on a call, but noted it was too early to say how much of the workforce would be affected.

BAT shares, which surged 46% last year, were down 1.8% at 4,348 pence in mid-morning trading.

VELO NOW NO. 2 IN THE US IN MARKET SHARE

The productivity drive comes as Velo is winning market share from Philip Morris' PM.N Zyn and Altria's MO.N label On! in the key U.S. market, due to features such as higher nicotine strengths and lower pricing.

"We are extremely encouraged by the U.S. performance of Velo," CEO Tadeu Marroco said on the call. "There is still plenty of opportunity for Velo to carry on growing."

Velo is now No. 2 in market share in the U.S., behind Zyn, and is part of BAT's suite of newer products, including its Vuse vape and heated tobacco, in which it is investing heavily to spur growth.

BAT's revenue from new products grew by double digits in the second half and 7% for the year through December. Adjusted earnings per share rose 3.4% to 340.5 pence.

Anthony Sedgwick, co-founder of BAT investor Abax Investments, said newer products were growing rapidly and playing a key role in BAT's business.

This has raised the appeal of tobacco companies versus other consumer firms struggling with growth and against which tobacco stocks have traded at a discount, he said.

Newer smoking alternatives made up 18.2% of BAT's total sales in 2025, up from 17.5% in 2024.

REGULATORY CHALLENGES AND MARKET RISKS

CEO Marroco said Vuse's performance was improving, even as its vapour products continue to be hurt by unregulated vapes on the market.

He said regulatory efforts to address illicit vape sales have helped slightly but warned it would take time for market conditions to improve, and forecast a flat U.S. vape performance in 2026.

Additionally, BAT has struggled in Australia and Bangladesh, with demand in Australia hurt by rising duties and a growing illicit cigarette market. In Bangladesh, higher taxes and minimum-price regulations have pressured sales.

Iqbal said Australia would continue to be a drag in 2026.

Revenue from the Asia-Pacific, Middle East and Africa segment fell more than 7% in 2025, tempering overall group revenue growth to 2.1%, compared with 1.3% growth in 2024.

($1 = 0.7344 pounds)

(Reporting by Shashwat Awasthi and Nithyashree R B in Bengaluru, Emma Rumney in London; Editing by Janane Venkatraman, Joe Bavier and Bernadette Baum)

((Shashwat.Awasthi@tr.com))