British American Tobacco - Preliminary announcement - year ended 31 December 2018

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News Release

Preliminary announcement - year ended 31 December 2018

28 February 2019

A strong business performance across all categories

Key financials
Change vs
Change vs
Revenue £24,492m - +25.2% -
Profit from operations £9,313m - +45.2% -
Basic earnings per share (EPS) 264.0p - -85.6% -
Diluted EPS 263.2p - -85.6% -
Net cash generated from operating activities £10,295m - +92.5% -
Borrowings £47,509m - -3.9% -
Dividend per share 203.0p - +4.0% -
Adjusted revenue on a representative basis* £24,312m £25,760m -2.3% +3.5%
Adjusted profit from operations on a representative basis* £10,347m £10,924m -1.5% +4.0%
Adjusted diluted EPS 296.7p 315.5p +5.2% +11.8%
Adjusted cash generated from operations £8,071m £8,476m +146% +158%
Adjusted net debt £43,407m - -2.7% -
The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on pages 45 to 46 of the full announcement, with reconciliations from the most comparable IFRS measure provided.
* Representative basis – see page 3 of the full announcement for explanation of this metric. All variances above are against equivalent 2017 information for the year ended 31 December 2017, revised for the impact of IFRS 15.

Nicandro Durante, Chief Executive said:

“BAT performed well in 2018, exceeding our target of high single figure adjusted constant currency EPS growth, whilst continuing to invest in long-term sustainable returns. The full year effect of the RAI acquisition and a translational foreign exchange headwind of approximately 6% (on revenue and profit from operations) and 7% (on EPS) distorted the Group’s results. On an adjusted, constant currency, representative basis, this was a strong performance across the business, with:

  • 11.8% growth in adjusted, diluted, constant currency EPS;
  • Group adjusted revenue growing 3.5% driven by total price/mix of +7%, adjusted profit from operations up 4.0% and adjusted operating margins higher by 40bps, at current rates, with substantial investment in Potentially Reduced-Risk Products (PRRPs);
  • Outperformance in combustibles, with market share1 up 40 bps and strategic cigarette brand volume up 4.8%;
  • Excellent progress in Tobacco Heating Products (THP) and vapour, with adjusted revenue up 95% to £901 million, benefiting from the growth of vapour in the US, increasing 20%, and growth in glo, notably in Japan. With an excellent product pipeline, the Group continues to expect strong New Category growth, leading to New Category revenue of £5 billion by 2023/2024;
  • Improved financial performance across all regions, notably the US, where revenue was up 2.5% (excluding £94 million of revenue related to the sale of the international brand rights of Natural American Spirit in 2017), driven by pricing and value share, up 25bps, in combustibles; and
  • Strong operating cash flow conversion of 113% driving ex-foreign exchange deleveraging of 0.4x and supporting an increase in the dividend of 4%. At current rates, adjusted net debt to adjusted EBITDA was 4.0x.

We recognise that the proposed potential regulatory changes in the US have created some investor uncertainty.  We have a long experience of managing regulatory developments, a track record of delivering strong growth while investing for the future and an established multi-category approach. I am confident that my successor, Jack Bowles, will continue to deliver a similar level of sustainable long-term returns as we accelerate our Transforming Tobacco agenda. Looking into 2019 we are confident of another year of high single figure adjusted constant currency earnings growth and this confidence is reflected in our Board’s proposal to increase the dividend by 4%”.


  • The Group’s results benefitted from the full year effect of the RAI acquisition, which included certain accounting impacts related to the acquisition that affected the prior period. On a reported basis:
    • Revenue increased 25%, with revenue from the Strategic Portfolio higher by 49%;
    • Volume from cigarettes and THP grew 3.3%;
    • Profit from operations was up 45%;
    • Operating margin increased over 500 bps to 38.0%; and
    • Cash conversion of 111%.
  • On a representative basis (as if BAT had owned RAI and the other acquisitions, completed in 2017, from 1 January 2017, and defined on page 3 of the full announcement):
    • Total cigarette and THP volume declined 3.5% to 708 billion. In the key markets2 volume was down 2.7%, outperforming the industry which was estimated to be down 3.4%*, leading to a 40 bps increase in market share;
    • Strategic cigarette and THP volume grew 5.8%, led by a 217% increase in THP consumables to 7 billion sticks, as well as growth of Natural American Spirit, Rothmans and Pall Mall;
    • Adjusted revenue, at constant rates, increased by 3.5%, driven by robust cigarette price mix (6%) and growth in THP and vapour revenue of 95% to £901 million at constant rates of exchange;
    • Adjusted revenue from the Strategic Portfolio (defined on page 3 of the full announcement) was up 8.5% on a constant rate basis, driven by:
      • a 5.7% growth in revenue from the strategic combustible brands;
      • a near doubling of adjusted revenue from NGP to £901 million, at constant rates, with THP (up over 180% to £576 million) and vapour (26% higher at £325 million); and
      • an increase of over 11% in revenue from oral to £952 million.
    • Adjusted profit from operations grew 4.0% at constant rates of exchange as the adjusted revenue growth and continued drive for efficiency gains more than offset the significant investment in PRRP as the Group continues to develop this category until it matures to break-even and profitability. Since the acquisition, the Group has realised over US$300 million of savings from RAI on an annualised basis;
    • Adjusted operating margin, at current rates, was 40 bps higher at 42.6%, as the investment in the development and roll out of PRRP was more than offset by good pricing and cost control; and
    • Operating cash flow conversion of 113% (2017: 79%). Normalising for the timing of the MSA payment, brought forward to 2017, the operating cash conversion was 100% (2017: 97%), demonstrating the continuing strong cash generation while investing in the New Categories.
  • Adjusted net debt3 to adjusted EBITDA was 4.0x (from 5.3x in 2017) but would have been 3.6x on a constant currency basis. This reduction reflects the Group’s commitment to deleveraging;
  • Basic earnings per share declined 86%, with diluted earnings per share 86% lower, as the prior year was affected by a one-off gain related to the acquisition of RAI of £23.3 billion and by a £9.6 billion deferred tax credit due to the US tax reforms, both of which do not repeat in 2018;
  • Adjusted diluted earnings per share at constant rates of exchange rose 11.8% as the Group’s growth in operating performance and lower underlying effective tax rate (mainly due to the US Federal tax reform in 2017) more than offset an increase in net finance costs, due to the higher borrowings following the acquisition of RAI and an increase in investment in PRRPs; and
  • Dividend per share increases 4.0% to 203.0p, payable in four quarterly dividend payments of 50.75p per share.

The decision by the Quebec Court of Appeal, with regards to the 2015 award of CAD$15.6 billion (approximately £9 billion) against a Group subsidiary (Imperial Tobacco Canada – ITCAN) and others, of which ITCAN’s share was CAD$10.4 billion (approximately £6 billion) in relation to the Quebec Class Action is due to be released on 1 March 2019. See pages 19 and 42 of the full announcement for additional details.

1 - Key Market offtake share, as independently measured by retail audit agencies (including Nielsen), shipment share estimates, and share of retail for the US business, based upon latest available validated data.
2 - The Group’s Key Markets represent over 80% of the Group’s cigarette volume.
3 - For the purposes of assessing the Group’s ability to service its borrowings, the Group provides the ratio of adjusted net debt to adjusted EBITDA calculation. Adjusted net debt is net debt excluding the impact of the purchase price allocation adjustments (2018: £944 million, 2017: £947 million).
* Source: Internal estimates


Preliminary announcement - year ended 31 December 2018 (1.1 mb) 

Forward looking statements

This announcement contains certain forward-looking statements, including “forward-looking” statements made within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook”, “target” and similar expressions. These include statements regarding our intentions, beliefs or current expectations concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the economic and business circumstances occurring from time to time in the countries and markets in which the Group operates. In particular, among other statements: (i) certain statements in the Regional Review section (pages 9 to 12 of the full announcement); (ii) certain statements in the Borrowings and Adjusted Net Debt section (pages 15 to 17 of the full announcement); (iii) certain statements in the Notes to the Financial Statements section (pages 29 to 42 of the full announcement), including the Liquidity and Contingent Liabilities and Financial Commitments sections; (iv) certain statements in the Other Information section (pages 43 to 51 of the full announcement), including the Non-GAAP Measures section; and (v) certain statements in the Chief Executive introduction (page 1 of the full announcement).

All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data within this announcement. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: the impact of competition from illicit trade; the impact of adverse domestic or international legislation and regulation; changes in domestic or international tax laws and rates; adverse litigation and dispute outcomes and the effect of such outcomes on the Group’s financial condition; changes or differences in domestic or international economic or political conditions; adverse decisions by domestic or international regulatory bodies; the impact of market size reduction and consumer down-trading; translational and transactional foreign exchange rate exposure; the impact of serious injury, illness or death in the workplace; the ability to maintain credit ratings and to fund the business under the current capital structure; the inability to develop, commercialise and roll-out Potentially Reduced-Risk Products; and changes in the market position, businesses, financial condition, results of operations or prospects of the Group.

It is believed that the expectations reflected in this announcement are reasonable but they may be affected by a wide range of variables that could cause actual results to differ materially from those currently anticipated. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. The forward-looking statements reflect knowledge and information available at the date of preparation of this announcement and the Group undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on such forward-looking statements.

No statement in this communication is intended to be a profit forecast and no statement in this communication should be interpreted to mean that earnings per share of BAT for the current or future financial years would necessarily match or exceed the historical published earnings per share of BAT.

Additional information concerning these and other factors can be found in the Company’s filings with the U.S. Securities and Exchange Commission (“SEC”), including the Annual Report on Form 20-F filed on 15 March 2018 and Current Reports on Form 6-K, which may be obtained free of charge at the SEC’s website,, and the Company’s Annual Reports, which may be obtained free of charge from the British American Tobacco website


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