Transforming
Tobacco

Performance Summary 2018
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Cautionary statement

Transforming
Tobacco

British American Tobacco (BAT) is one of the world’s leading consumer goods companies, with nicotine and tobacco brands sold around the globe. We employ over 55,000 people, partner with over 90,000 farmers and have factories in 48 countries, with offices in even more.

At BAT, we have been satisfying adult consumers, delivering shareholder value and creating valued employment for over a century.

Today we find ourselves in one of the most dynamic periods of change our industry has ever encountered.

Rapid product innovation, along with advances in societal attitudes and public health awareness, has given us the opportunity to make a substantial leap forward in our long-held ambition to positively impact the lives of millions of our consumers by providing them with lower-risk tobacco and nicotine products.

We call this ambition ‘transforming tobacco’ and we are fully committed to leading the transformation of our industry and our company.

Empowering
consumers 
through choice

In 2012, we articulated a clear vision that places adult consumers at the centre of our strategy. Our Transforming Tobacco ambition builds on this vision as we grow our business based on offering our consumers a broad range of outstanding products, informed consumer choice, and a drive towards a reduced-risk portfolio. More choice, more innovation, less risk.

It is widely accepted that most of the harm associated with cigarettes is caused by inhaling the smoke produced by the combustion of tobacco, and that cigarette smoking is the most dangerous way of consuming tobacco.

While smokers have historically had very few alternatives to combustible cigarettes, innovation is now providing adult consumers with a greater choice of tobacco and nicotine products that are potentially less risky than cigarettes.

BAT is at the forefront of the development and sale of a whole range of potentially reduced-risk products that provide much of the enjoyment of smoking without burning tobacco.

Our growing portfolio of potentially reduced-risk products (which we call PRRPs) includes vapour, tobacco heating products (THPs), modern oral products, as well as traditional oral products such as Swedish-style snus and American moist snuff.

Our acquisition of Reynolds American has transformed us into one of the world’s leading vapour companies and has also allowed us to significantly increase the size of our oral tobacco and nicotine products range.

Never before have so many of our consumers around the world had access to so many alternatives to combustible cigarettes. We continue to develop new and ever more innovative products to add to this range of potentially less risky choices.

…supported
by pro-active
external
engagement

In addition to our commitment to developing and offering a range of high-quality alternative products, we are also committed to working with governments and other stakeholders around the world to develop supportive regulatory regimes.

While we cannot be certain how many smokers will switch to our alternative products, we have already seen several countries dismantle barriers to these new products, which has given millions of additional adult consumers greater choice.

We recognise that our ambition to ‘transform tobacco’ relies not only on our development and commercialisation of new products, but on the support of regulators and society as well.

Greater consumer choice is at the heart of our strategy, but its effects require amplification from sensible regulations that allow adult consumers access to alternative choices, as well as from public health bodies and the media to drive informed consumer decision making.

By working with key stakeholders around the world, we strive to maximise the potential for reduced-risk products: safer choices for our consumers, benefits for public health, and a more sustainable and profitable business for our shareholders.

An unrivalled
range of
innovative
products

Consumer preferences are diverse and constantly evolving. Our increasingly broad range of potentially reduced-risk products allows us to meet these varied preferences and create a better tomorrow for our consumers.

Today, we have industry-leading products in vapour, in tobacco heating products, in modern oral products, as well as in the traditional oral category.

Notwithstanding the successes of our new categories, this is just the beginning, and innovation and technology will increasingly be at the heart of our business. Our research and development facility, comprising hundreds of scientists, is focused on the continued development of new and innovative potentially reduced-risk products and categories.

In 2018, we filed 130 patents and expect that number to significantly increase in the coming years.

Of course, expertise in this area is not solely within BAT and, consequently, we have a number of collaborations, partnerships and investments with third parties with a broad range of specialisms to help us drive and develop our pipeline of future products.

…underpinned
by a strong
global business

BAT’s ongoing transformation is supported by its strong global combustibles business, and every day more than 150 million adult consumers choose BAT brands.

The revenues from this business are vital to provide the investment for our PRRP business, while our global supply chain and worldwide distribution network of over 11 million retail outlets are powerful assets that drive our ambition to offer millions of adult consumers new and potentially less risky choices.

As we develop new and potentially reduced-risk product categories, our conventional cigarette business remains strong and continues to grow. This enables us to invest in the development of better and more innovative products, while continuing to deliver strong results and dividends to our shareholders. As a global business operating in over 200 markets, we are using our significant presence and distribution networks to offer our full range of potentially reduced-risk product choices to as many adult consumers as possible.

We are often asked why we don’t simply stop selling cigarettes. In short, immediately stopping our sales of cigarettes would be neither commercially sensible nor practical: the ongoing consumer demand for these products would either transfer straight to our competitors or, more worryingly, the black market.

We are proud of all our brands and believe that all our products have a role to play in our business success and our ambition to transform tobacco.

Another
step on an
exciting journey

Our potentially reduced-risk product business has seen outstanding growth. Our tobacco heating, vapour, and modern oral products are now available in 29 markets and used by six million adult consumers around the world. However, this is just the beginning, and with a growing consumer base of over one billion smokers and nicotine users in the world, the opportunities presented by these new categories are huge.

While we cannot be certain whether all smokers will switch to potentially reduced-risk products, we are committed to improving the lives of smokers by making a range of high-quality, innovative products as widely available as we practically can.

We believe that by doing this, and working with regulators to establish supportive regulatory regimes, many millions of smokers will increasingly make the choice to switch.

If we can all work successfully together, we can drive a scenario in which our consumers will have a range of potentially safer choices, our shareholders will own an even more sustainable and profitable business, and society could benefit from real progress in tobacco harm reduction.

Our year in numbers

KPI
Denotes KPI measure
Non-GAAP
Denotes non-GAAP financial measure, see Non-GAAP measures in the Annual Report and Accounts

Group cigarette (and tobacco heating products – THP) volume

708bn +3.3% (-3.5% representative4)
  • 2017: +3.2% (-2.6% organic3)
  • 2016: +0.2% (-0.8% organic3)

Revenue (£m)

£24492m +25.2%
Revenue chart

Definition: Revenue recognised, net of duty, excise and other taxes.

In 2018, revenue includes £17,257 million of revenue from the Strategic Portfolio, an increase of 49% on 2017 (on a reported and representative basis).

Profit from operations (£m)

£9,313m +45.2%
Profit from operations chart

Definition: Profit for the year before the impact of net finance costs/income, share of post-tax results of associates and joint ventures and taxation on ordinary activities.

Group market share of Key Markets

+40bps
KPI
  • 2017: +40 bps
  • 2016: +50 bps

Strategic Cigarette and THP volume

451bn +17.9% (+5.8% representative4)
Change in revenue chart
  • 2017: +17.9% (+7.6% organic3)
  • 2016: +7.5%

Change in adjusted2 revenue at constant rates1 (%)

+33.4%
KPI
Non-GAAP
Change in profit chart

Definition: Change in revenue before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

Change in adjusted2 profit from operations at constant rates1 (%)

+37.8%
KPI
Non-GAAP
Strategic Cigarette and THP volume chart

Definition: Change in profit from operations before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

Oral (Snus)
(no. pouches)

3.9bn +93% (+10.5% representative4)
Bar chart 6
  • 2017: +317% (+32% organic)
  • 2016: +9%

Change in adjusted2 revenue from the Strategic Portfolio at constant rates1 (%)

+56.1%
KPI
Non-GAAP
Bar chart 7

Definition: Change in revenue from the strategic portfolio before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

This measure was introduced in 2018, with no comparators provided.

Vapour (units)

189m +100% (+35% representative4)
Bar chart 10
  • 2017: +120%
  • 2016: +832%

Operating margin (%)

38.0%
Bar chart 9

Definition: Profit from operations as a percentage of revenue.

Diluted earnings per share (EPS) (p)

263.2p -86%
Bar chart 10

Definition: Profit attributable to owners of BAT p.l.c. over weighted average number of shares outstanding, including the effects of all dilutive potential ordinary shares.

Net cash generated from operating activities (£m)

£10295m +93%
Bar chart 11

Definition: Movement in net cash and cash equivalents before the impact of net cash used in financing activities, net cash used in investing activities and differences on exchange.

Adjusted2 operating margin (%)

42.6%
Non-GAAP
Bar chart 12

Definition: Adjusted profit from operations as a percentage of adjusted revenue.

Change in adjusted2 diluted EPS (%)

+5.2%
KPI
Non-GAAP
Bar chart 13

Definition: Change in diluted earnings per share before the impact of adjusting items.

Change in adjusted2 cash generated from operations at constant rates1 (%)

+158%
KPI
Non-GAAP
Bar chart 14

Definition: Change in adjusted cash generated from operations, before the impact of fluctuations in foreign exchange rates.

Total shareholder return (TSR) of the FMCG group – 1 January 2016 to 31 December 2018 (%)
The FMCG group comparison is based on three months’ average values

Bar chart 15

Target: A specific target is set each year

Definition: Free cash flow, excluding restructuring costs, dividends and other appropriations from associates

Change in adjusted2 diluted EPS at constant rates1(%)

+11.8%
KPI
Non-GAAP
Bar chart 16

Definition: Change in diluted earnings per share before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

Cash conversion (%)

111%
Bar chart 17

Definition: Net cash generated from operating activities as a percentage of profit from operations.

Total dividends per share (p)

203.0p +4%
Bar chart 18

Target: To increase dividend in sterling terms, based upon the Group’s policy to pay dividends of 65% of long‑term sustainable earnings.

Definition: Dividend per share in respect of the financial year.

Operating cash flow conversion ratio (%)

113%
KPI
Non-GAAP
Bar chart 19

Definition: Operating cash flow, as a percentage of adjusted profit from operations.

Changes in 2018

In 2018, the Group introduced a new measure called ‘adjusted revenue growth from the Strategic Portfolio’ as part of the continual assessment of the Group’s short- and long-term delivery of the strategic vision. This measure replaced the GDB and Key Strategic Brands volume growth metric as a key performance indicator in connection with the Group’s compensation plans. This Strategic Portfolio reflects the focus of the Group’s investment activity and includes the ‘Strategic Combustible Brands’ being Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Camel (US), Newport (US) and Natural American Spirit (US) and our potentially reduced-risk products portfolio, which comprises our THP, vapour, modern oral and traditional oral businesses. In line with the above, and to reflect the development of the categories, the Group is also providing specific volume metrics for vapour and oral.

Notes: To supplement our results of operations presented in accordance with IFRS, the information presented also includes several non GAAP measures used by management to monitor the Group’s performance. See the section Non-GAAP measures in the Annual Report and Accounts for information on these non-GAAP measures, including their definitions and reconciliations from the most directly comparable IFRS measure, where applicable. Certain of our measures are presented based on constant rates of exchange, on an adjusted basis, on a representative basis and on an organic basis.

  1. Where measures are presented ‘at constant rates’, the measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year results of the Group and, where applicable, its segments. See the Annual Report and Accounts for the major foreign exchange rates used for Group reporting.
  2. Where measures are presented as ‘adjusted’, they are presented before the impact of adjusting items. Adjusting items represent certain items of income and expense which the Group considers distinctive based on their size, nature or incidence.
  3. Where measures are presented as ‘organic’ or ‘org’, they are presented before the impact of the contribution of brands and businesses acquired during the comparator period, including Reynolds American, Bulgartabac, Winnington and Fabrika Duhana Sarajevo in 2017. There were no material acquisitions or disposals in 2018.
  4. Where measures are presented as ‘representative’, ‘rep’ or ‘on a representative basis’, they are presented inclusive of the acquired businesses in the 2017 comparator period as though those businesses had been included in the consolidated results for the whole of that comparator period and including certain additional adjusting items related to the acquired companies.

2018 overview

Chairman’s introduction
Richard Burrows

Richard Burrows

Chairman
“I am very pleased to report another strong set of results with market share, revenue, and profit from operations all growing”
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Chief Executive’s review
Nicandro Durante
Jack Bowles

Nicandro Durante

Chief Executive
“After 37 years at BAT, eight of them as CEO, I will retire in April 2019. I have seen BAT evolve and grow throughout my career, and am confident that this will continue during the dynamic period of change the industry is going through today.”

Jack Bowles

Chief Executive Designate
“It is an exciting time for me to take over as CEO. Our industry is evolving and with this comes great opportunity.”
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Executive’s review
Finance Director’s overview
Ben Stevens

Ben Stevens

Finance Director
“The Group again delivered growth across all key performance indicators”
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Director’s overview

Our strategic framework

for transforming tobacco

strategy bullseye

Our strategy remains as relevant today to drive our transforming tobacco ambition as it was when it was first rolled out in 2012. It enables us to continue delivering value growth while driving the investment required to deliver our transformational agenda.

Our vision remains clear: while combustible tobacco products will remain at the core of our business for some time to come, we understand that long-term sustainability will be delivered by our transforming tobacco ambition.

World’s best at satisfying consumer moments in tobacco and beyond.

Our consumers are at the core of everything we do and our success depends on addressing their preferences, concerns and behaviours.

We know that consumer preferences are fragmenting and evolving at an unprecedented pace, and consequently, we are focusing on providing a range of tobacco and nicotine products across the risk spectrum. In addition, we understand that to succeed in this space we need to continue enhancing our understanding of our consumers’ preferences in order to drive development of new and innovative products.

Delivering our commitments to society, while championing informed consumer choice.

We have long known that, as a major international business, we have a responsibility to address societal issues with our tobacco products, and that, as our business continues to grow, so does our influence and the responsibility that comes with it.

We are also clear that we have a duty to our shareholders to ensure we continue to deliver today and invest for a sustainable future and to our consumers to provide, in addition to our combustible products, a range of potentially reduced-risk products (PRRPs).

Our transforming tobacco ambition, with its core objective of providing adult consumers with more choice, more innovation and less risk will allow us to: satisfy these consumers; address societal concerns through the growth of multiple categories of potentially reduced-risk tobacco and nicotine products; and provide a sustainable, profitable future for our shareholders.

Our four key focus areas remain fundamental to our strategy as we focus on our transforming tobacco ambition.

Growth

Constantly developing our portfolio of potentially reduced-risk products and new technologies while continuing to drive revenue growth from our traditional combustible products.

Productivity

Effectively deploying resources between product categories and managing our cost base to release funds for investment.

Winning organisation

Ensuring we have great people with the right skill sets in the right teams to drive the transformation of our business.

Sustainability

Ensuring a sustainable business that meets the expectations of all our various stakeholders.

Our Guiding Principles provide clarity about what we stand for.

They form the core of our culture and guide how we deliver our strategy.

Enterprising spirit

We value enterprise from all of our employees across the world, giving us a great breadth of ideas and viewpoints to enhance the way we do business. We have the confidence to pursue growth and new opportunities while accepting the considered entrepreneurial risk that comes with it. We are bold and strive to overcome challenges. This is the cornerstone of our success.

Freedom through responsibility

We give our people the freedom to operate in their local environment, providing them with the benefits of our scale but also the ability to succeed locally. We always strive to do the right thing, and this freedom enables us to act in the best interests of our consumers while exercising our responsibility to society and other stakeholders.

Open minded

Our corporate culture is a great strength of the business and one of the reasons we have been, and will continue to be, successful. We are forward-looking and anticipate consumer preferences, winning with innovative, high-quality products. We listen to, and genuinely consider, other perspectives and changing social expectations. We are open to new ways of doing things.

Strength from diversity

Our management population comprises people from over 140 nations, giving us unique insights into local markets and enhancing our ability to compete across the world. We respect and celebrate each other’s differences and enjoy working together. We harness diversity – of our people, cultures, viewpoints, brands, markets and ideas – to strengthen our business. We value what makes each of us unique.

Our global business

Global map

Europe and North Africa

“PRRPs are gaining a strong foothold with THP now present in 12 markets, while oral volumes have grown 45%”

Johan Vandermeulen Regional Director
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introduction

Key markets

Austria, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Norway, Poland, Russia, Spain, Sweden, Switzerland, Turkey, Ukraine

Key figures

Volume

246bn

Revenue (£m)

£6,004m

Adjusted revenue at constant rates (£m)

£6,112m

Profit from operations (£m)

£1,905m

Adjusted profit from operations at constant rates (£m)

£2,217m

United States

“Pricing and value share growth in combustibles, as well as increased Vuse consumables volumes, has more than offset total volume declines”

Ricardo Oberlander President and CEO (RAI)
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introduction

Key figures

Volume

77bn

Revenue (£m)

£9,495m

Adjusted revenue at constant rates (£m)

£9,838m

Profit from operations (£m)

£4,006m

Adjusted profit from operations at constant rates (£m)

£4,686m

Americas and Sub-Saharan Africa

“Growth was driven by pricing, which more than offset volume declines in a difficult environment”
Luciano Comin Regional Director
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introduction

Key markets

Argentina, Brazil, Canada, Caribbean, Central America, Chile, Colombia, Kenya, Mexico, Nigeria, Paraguay, Peru, South Africa, Venezuela

Key figures

Volume

157bn

Revenue (£m)

£4,111m

Adjusted revenue at constant rates (£m)

£4,560m

Profit from operations (£m)

£1,544m

Adjusted profit from operations at constant rates (£m)

£1,922m

Asia-Pacific and Middle East

“Growth was driven by volume recovery in Pakistan as well as strong performance of glo in Japan”
Guy Meldrum Regional Director
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introduction

Key markets

Australia, Bangladesh, Cambodia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Sri Lanka, Taiwan, Vietnam

Key figures

Volume

228bn

Revenue (£m)

£4,882m

Adjusted revenue at constant rates (£m)

£5,250m

Profit from operations (£m)

£1,858m

Adjusted profit from operations at constant rates (£m)

£2,099m

British American Tobacco is a leading, multi-category consumer goods company that provides tobacco and nicotine products to millions of consumers around the world.

Our portfolio reflects our commitment to meeting the preferences of today’s adult smokers while transforming tobacco with a choice of potentially reduced-risk products.

These include vapour, tobacco heating products, modern oral products including tobacco-free nicotine pouches, as well as traditional oral products such as snus and moist snuff.

Our products are sold in over 200 markets with a balanced presence in high-growth emerging markets and highly profitable developed markets. Our business is divided into four regions across six continents.

Our Strategic Portfolio comprises our key brands in both the combustible and PRRP categories. This drives focus and investment on the brands and categories that will underpin the Group’s future growth.

We also have a portfolio of international and local brands which, while not the focus of our investment, contribute valuable returns across several key markets.

Strategic Portfolio

Combustible tobacco products
Combustible tobacco products
Combustible tobacco products
Potentially reduced-risk products

Vapour products

Vapour products

Tobacco heating products

Tobacco heating products

Modern oral products

Modern oral products

Traditional oral products

Traditional oral products

* Our vapour product Vuse, and oral products Grizzly, Camel Snus and Kodiak, which are only sold in the US, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

International and local
cigarette brands

International and local cigarette brands
International and local cigarette brands
International and local cigarette brands
International and local cigarette brands

Our business model

At the centre of our global business, operating in over 200 markets, is the manufacture and marketing of superior combustible tobacco products and potentially reduced-risk products (PRRPs).

These include vapour, tobacco heating products (THPs), modern oral as well as traditional oral products, such as moist snuff and traditional snus.

Our sustainable approach to sourcing, production, distribution and marketing helps us to create value for a wide group of stakeholders, from farmers to consumers.

We use our unique strengths and employ our resources and relationships to deliver sustainable growth in earnings for our shareholders.

Our people and relationships icon

Our people and relationships

We employ over 60,000 people worldwide, with a workforce that is diverse and multicultural.

We have a devolved structure, with each local company having responsibility for its operations.

Our people and relationships icon

Our people and relationships

The quality of our people is a major reason why the Group continues to perform well. In return, we commit to investing in our people as we do in our brands.

We encourage a culture of personal ownership and we value our employees’ talents and abilities. Their diverse perspectives help us to succeed.

We also have excellent relationships with a range of stakeholders, including farmers, suppliers, retailers and distributors.

We engage with regulators around the world to support regulation that is based on robust evidence and thorough research, that respects legal rights and livelihoods and delivers on the intended policy aims while recognising unintended consequences.

Resources for success icon

Resources for success

We make significant investments in research and development to deliver innovations that satisfy or anticipate consumer preferences and generate growth for the business across all categories.

Resources for success icon

Resources for success

Innovation

We make significant investments in research and development to deliver innovations that satisfy or anticipate consumer preferences and generate growth for the business across all categories.

The main focus of this investment is in our PRRPs. We continue to invest in the development and commercialisation of potentially lower-risk alternatives to smoking. We also conduct R&D into our conventional cigarette innovations such as capsule products, additive-free products, slimmer products, tube filters and Reloc, our resealable pack technology.

World-class science

We have an extensive scientific research programme in a broad spectrum of scientific fields including molecular biology, toxicology and chemistry. We are transparent about our science and publish details of our research programmes on our dedicated website, www.bat-science.com, and the results of our studies in peer-reviewed journals.

Source icon

Source

Source icon

Source

What we do

While the Group does not own tobacco farms or directly employ farmers, we buy more than 400,000 tonnes of tobacco leaf each year for our combustible tobacco products, our oral tobacco products and our THPs.

What makes us different

  • We provide on-the-ground support and advice to over 90,000 contracted farmers to help ensure consistency and quality of supply.
  • We invest over £60 million each year in our Leaf Research & Development and support farmers through our Extension Services.
  • Our leaf operations are managed globally to ensure that the Group works with reliable, efficient and responsible farmers in our source countries.
  • The e-liquids used in our vapour products are made from medical grade nicotine sourced internally or from high-quality third-party manufacturers.
Produce icon

Produce

Produce icon

Produce

What we do

We manufacture high-quality cigarettes, THP consumables and oral products in facilities all over the world. We also ensure that these products and the tobacco leaf we purchase are in the right place at the right time. Our vapour and tobacco heating product devices are manufactured in a mix of our own and third-party factories. We work to ensure that our costs are globally competitive and that we use our resources as effectively as possible.

What makes us different

  • In 2018, we had 55 factories, 47 of which produce cigarettes. These strategically placed factories enable us to maximise efficiency and ensure products are where they need to be at the right time.
  • Our production facilities producing cigarettes and the consumables for our THPs are designed to meet the needs of an agile and flexible supply chain, providing a world-class operational base that is fit for the future.
  • For our vapour and tobacco heating product devices, we expect our contract manufacturers to comply with the same high standards that exist on our own sites.
Market icon

Market

Market icon

Market

What we do

We offer adult consumers a range of products including cigarettes, vapour, tobacco heating products, and oral products in a number of markets around the world. Our range of high-quality products covers all segments, from value-for-money to premium.

What makes us different

  • Our successful portfolio of international, regional and local brands across four product categories continues to meet a broad array of adult consumer preferences, including those seeking potentially lower-risk alternatives to traditional cigarettes.
  • Our Strategic Portfolio accounts for over 60% of the cigarettes we sell and is a significant driver of growth.
  • We ensure that all our products are marketed responsibly; as such, our marketing initiatives and activities are governed by our International Marketing Principles, which often go beyond local legal requirements.
Distribute icon

Distribute

Distribute icon

Distribute

What we do

We distribute our products around the globe effectively and efficiently using a variety of different distribution models suited to local circumstances and conditions. Around half of our global cigarette volume is sold by retailers, supplied through our direct distribution capability or exclusive distributors. We continuously review our route to market for both combustible and PRRPs, including our relationships with wholesalers, distributors and logistics providers.

What makes us different

  • Our relationships with, and efficient distribution to, retailers worldwide ensure we can offer the products our adult consumers wish to buy, where and when they want them.
  • Our global footprint and direct distribution capabilities enable new product innovations to be distributed to markets quickly and efficiently.
Consumers icon

Consumers

Consumers icon

Consumers

We place consumers at the centre of our business. We invest in world-class research to understand changing consumer preferences and buying behaviour. This drives our leaf sourcing, product development, innovations, brands and trade activities.

We aim to satisfy consumers with a range of inspiring products across the risk spectrum and address expectations about how we should market them.

Downloads

Performance SummaryPDF 4.3mb
Annual report 2018

Annual Report and Form 20-F