British American Tobacco - Interim Management Statement for the nine months ended 30 September 2016

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Interim Management Statement for the nine months ended 30 September 2016

21 October 2016

On track for another good year

  • Year-to-date revenue grew strongly, up 8.1% at constant rates of exchange, or 6.2% on an organic basis
  • Year-to-date revenue grew by 10.2% at current rates of exchange
  • Year-to-date cigarette volume from subsidiaries was 497 billion, up by 2.2% or 0.9% on an organic basis
  • Cigarette market share1 in Key Markets2 increased by 40 basis points (bps) year-to-date
  • Global Drive Brands performed exceptionally well, with cigarette volume up 9.8% year-to-date
  • Continued market expansion in our Next Generation Products portfolio
  • Offer for the 57.8% shares in Reynolds American Inc (“Reynolds”) not already owned by the Group, as announced this morning

Nicandro Durante, Chief Executive, commented: "Today we announced an offer for the 57.8% of Reynolds not already owned by the Group. This offer values Reynolds at $56.50 per share, a 20% premium to the closing share price on 20 October 2016. Settlement is proposed to be by a mix of both $24.13 in cash and 0.5502 shares of BAT for each Reynolds share. We are proud of the Group’s track record of consistent delivery for shareholders and bringing these two great companies together would further strengthen that delivery in the future.

In the first nine months of the year, the Group has, as anticipated, performed very well. Revenue at constant rates of exchange and cigarette volume both increased, driven by organic growth. The excellent momentum of our Global Drive Brands continued, driving an increase in Group market share. We have made significant progress in our Next Generation Products, both in terms of geographic rollout and product development. The on-going transactional foreign exchange headwinds on our cost base remain a challenge, despite the translational tailwind as a result of recent movements in Sterling. I remain confident that we are on track to deliver another year of good earnings growth at constant rates of exchange."


The following provides a summary of the Group’s revenue, volume and market share for the nine months ended 30 September 2016.


Group revenue for the nine months, at constant rates of exchange, grew 8.1% or 6.2% on an organic basis. Price/mix of over 5% reflects the continued strong pricing dynamics, including in high inflation markets, despite the growth in the low price segment in some Key Markets. Reported revenue increased 10.2%, further enhanced by the relative weakness in Sterling against the Group’s key trading currencies.

Cigarette volume and market share

The Group performed very well during the first nine months of the year, with cigarette volume up 2.2% or 0.9% on an organic basis, driven by the combination of focussed investment behind the Global Drive Brands (GDBs), high product quality and world beating innovation. Higher volume in a number of markets, notably in Ukraine, Bangladesh, Russia, Vietnam and Turkey, was partly offset by industry declines in Pakistan, Brazil and Venezuela. Volume in the three months to September was flat, but fell 1.3% on an organic basis.

Market share was up 40 bps year-to-date, as growth in Ukraine, Russia, Pakistan, Indonesia, Turkey, Poland, Japan, Romania, Chile and Colombia more than offset declines in Brazil, Malaysia and GCC. This strong performance was driven by the GDBs, which grew market share by 90 bps.

In the nine months ended 30 September 2016, the Global Drive Brands grew volume by 9.8%. Dunhill held market share, as good performances in Indonesia and South Korea were offset by industry declines following excise increases in Malaysia and Brazil, with an overall decline in volume of 0.8%. Kent’s market share was 10 bps higher, with volume up 2.9% driven by growth in Turkey, Russia and Japan.

Lucky Strike’s volume grew by 14.0%, following the launch in Indonesia and growth in Italy and France, with market share 10 bps higher. Pall Mall’s market share increased by 10 bps with volume up 0.5% driven by Venezuela, Poland and Mexico, offsetting lower volume in Pakistan, Russia and Spain. Rothmans’ market share increased by over 60 bps as volume grew by 45.6% driven by strong performances in Ukraine, Russia, Italy, Turkey, Nigeria and South Korea.

The segmental analysis of the volume of subsidiaries was as follows (cigarettes and cigarette equivalents):

  3 months to
3 months to
% change
9 months to
9 months to
% change
Asia-Pacific 44 45 -2.8% 149 148 +0.6% 198
Americas 28 30 -9.2% 84 91 -7.4% 124
Western Europe 32 30 +8.4% 89 81 +10.1% 112
EEMEA 61 60 +2.5% 175 167 +5.1% 229
Total cigarette volume 165 165 +0.0% 497 487 +2.2% 663
Total tobacco volume 171 171 -0.2% 515 505 +2.0% 689
Next Generation Products

During the first nine months of the year the performance of the Group’s NGP business has been very encouraging. In the UK, vapour market retail share, as per Nielsen, has reached 35% through the growth of VypeTM and the acquisition of Ten Motives. Geographic expansion continues, with the performance of VypeTM, in the markets where it is present, progressing well. Our vapour products are now present in the UK, France, Germany, Poland, Italy, Colombia, Monaco and Kuwait.

We are gearing up for the imminent launch of a new-to-world Vaping platform in Europe, called the Vype PebbleTM. After extensive R&D investment and a substantial programme of consumer insight generation, we believe PebbleTM will enable us to enhance the overall category and scale up consumer penetration.

In December of this year we will launch, in a city-test, our innovative electronic tobacco heating system. The system device will be branded GloTM and will be partnered with Kent NeostiksTM. Created by a dedicated R&D team we have extensively researched this offer on a multi-market basis and we believe GloTM offers significant advantages over existing products in the tobacco heating products category.

Trading Environment

The trading environment remains challenging in a number of Key Markets, with foreign exchange continuing to negatively impact our cost of sales at a transactional level. If exchange rates stayed the same for the remainder of the year there would be an adverse transactional impact on operating profit of 7% but, due to the recent movement in Sterling, a translational tailwind of 6%.

Industry volume decline was in line with prior year at around 2.5%, driven by the continued impact of excise driven price increases in high volume markets.


As announced in the Half-Year Report to 30 June 2016, in accordance with the relevant regulations, the Group will cease publication of an Interim Management Statement for Q1 and Q3, effective from 1 January 2017. The Group will instead release two short trading updates shortly before the closed periods for the Interim and the Full Year Preliminary Announcements.


The Group has sufficient financing and facilities available for the foreseeable future.

The changes in the financing arrangements of the Group since the date of the announcement of the Half-Year Report to 30 June 2016, include:

  • the issuance of a £500 million bond (maturing in 2021) in July 2016, and two bonds in September 2016 (a US$650 million bond maturing in 2019 and a £650 million bond maturing in 2052),
  • the repayments on maturity of a CHF 350 million bond in August 2016 and a £325 million bond in September 2016, and
  • the early repayment, in August 2016, of a US$700 million bond due to mature in November 2018. This was undertaken to manage the Group’s debt maturity profile, manage future refinancing risk and reduce the on-going interest expense. This lead to a loss of £101 million, which will be treated as an adjusting item in the year end accounts.


BAT, which owns 42.2% of Reynolds, has made a proposal to merge with Reynolds through the acquisition of the outstanding 57.8% in the company. U.S. securities law required BAT to announce its merger proposal promptly after it was made to the Board of Reynolds. The proposed merger values Reynolds at $56.50 per share, a 20% premium to the closing share price on 20 October 2016. Settlement is proposed to be by a mix of both $24.13 in cash and 0.5502 shares of BAT for each Reynolds share.

The proposal is earnings accretive in the first full year, including modest cost synergies and is expected to result in an accretive dividend per share for shareholders. The Group’s strong financial profile will be maintained, with a solid investment grade credit rating and enhanced cash generation.

The combined Group would be the world’s largest tobacco and Next Generation Products business by net turnover and operating profit with exposure to both cash generative developed and high growth developing markets, giving a unique capacity to exploit industry opportunities as they develop.

There have been no material events, transactions or changes in the financial position of the Group since the Half-Year Report to 30 June 2016, other than as outlined in this statement. Further, the Board is not aware of any material events, transactions or changes in the financial position of the Group which have occurred up to and including 20 October 2016, being the latest practicable date before the date of the publication of this Interim Management Statement.

On behalf of the Board
Nicola Snook
20 October 2016

Interim Management Statement for the nine months ended 30 September 2016 - full announcement (398 kb) 

[1] Key Market offtake share, as independently measured by AC Nielsen
[2] The Group’s Key Markets represent over 75% of the Group’s cigarette volume


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