Preliminary announcement - year ended 31 December 2019
27 February 2020
Strong operational performance drives deleveraging
|Profit from operations||£9,016m||-||-3.2%||-|
|Basic earnings per share (EPS)||249.7p||-||-5.4%||-|
|Net cash generated from operating activities||£8,996m||-||-12.6%||-|
|Adjusted profit from operations||£11,130m||£11,032m||+7.6%||+6.6%|
|Adjusted diluted EPS||323.8p||321.6p||+9.1%||+8.4%|
|Adjusted cash generated from operations (ACGFO)||£6,831m||£6,753m||-15.4%||-16.3%|
|Adjusted net debt||£41,726m||-||-3.9%||-|
Jack Bowles, Chief Executive said:
“When I became CEO, my commitment was to maximise value growth from combustibles, deliver a step change in New Categories and develop a simpler, stronger, faster, more agile organisation to create a better tomorrow. I am delighted with the progress we have made in all areas. We have delivered value growth from our combustible business and grown our New Categories business, now providing potentially reduced risk products to close to 11 million consumers. In September, we announced a significant restructuring and simplification programme, which is largely complete. This will create the capabilities and resources to continue investing in New Categories and allow us to deliver on our financial commitments. Looking into 2020, we are confident of another year of high single figure adjusted constant currency earnings growth."
Key highlights, at current rates unless otherwise stated:
- Reported diluted EPS of 249.0p down 5.4%, impacted by a number of adjusting items discussed below;
- Adjusted diluted EPS of 323.8p up 9.1%, or 321.6p up 8.4% at constant rates;
- Cigarette and THP volume share1 increased by 20bps, with value share2 up 30bps in key markets;
- New Categories revenue grew 36.9% or 32.4% to £1,214m at constant rates with strong growth in all categories, despite the slowdown in US vapour. Excluding US vapour, New Categories revenue grew 39% at constant rates;
- Reported revenue of £25,877m (up 5.7%);
- Adjusted revenue of £25,827m (up 6.2%), or £25,683m on a constant currency basis (up 5.6%);
- Reported profit from operations of £9,016m down 3.2% driven by adjusting items of £2,114m (2018: £1,034m) partly due to the charges incurred in respect of Canada (Quebec), Quantum (simplification programme), other smoking and health litigation including Engle in the US, Russia (excise dispute) and Indonesia (goodwill impairment), the majority of which are non-cash items;
- Adjusted profit from operations of £11,130m (up 7.6%), an increase of 6.6% on a constant currency basis;
- Reported operating margin declined 320 bps to 34.8%, largely due to the adjusting items;
- Adjusted operating margin up 50 bps with significantly increased investment in New Categories;
- At constant rates of exchange, the US delivered a strong year with adjusted revenue up 4.4%, value share up 30 bps and adjusted profit from operations up 6.4%;
- Operating cash flow conversion was 97%, with adjusted cash generated from operations down 16.3% (on a constant currency basis). Normalising for the timing of the 2018 MSA payment, ACGFO increased 1.2%;
- Free cash flow after dividends of £1,921m drove deleveraging of 0.5x to 3.5x (0.4x at constant rates); and
- Dividend up 3.6% to 210.4p, in line with our commitment to a 65% pay-out ratio of adjusted diluted EPS.
KEY PERFORMANCE INDICATORS – SUMMARY
- Reported revenue increased 5.7% to £25,877m;
- Reported profit from operations was down 3.2% to £9,016m, with reported operating margin down 320 bps at 34.8%, as the Group was impacted by a number of financial headwinds totalling £2,114m. These include charges related to Canada (Quebec £436m), amortisation and impairment of trademarks (£481m), the Group’s restructuring programme Quantum (£264m), other litigation including Engle in the US (£236m), Russia (in relation to an excise dispute, £202m) and Indonesia (goodwill impairment £172m);
- Reported basic and diluted EPS both declined 5.4% to 249.7p and 249.0p respectively;
- Borrowings decreased to £45,366m (2018: £47,509m), driven by the net repayment of borrowings, foreign exchange tailwinds and cash generation more than offsetting the non-cash recognition of lease liabilities under IFRS 16 of £607m; and
- Net cash generated from operating activities declined 12.6% to £8,996m, due to the timing of the Master Settlement Agreement (MSA) in the US in prior periods.
Volume and Share
- Total cigarette and THP volume declined 4.4% to 677bn sticks, with cigarette volume down 4.7% and THP volume up 31.6%. Group volume was particularly impacted by a one-off stock reduction in Russia, combined volume decline in Egypt (due to a change in local taxes impacting Pall Mall) and Venezuela (where macroeconomic conditions remain challenging). The remainder of the Group performed largely in line with the industry3 with combined cigarettes and THP volume down 3.2%. In the key markets, value share2 increased 30 bps while volume share1 was 20 bps up against 2018; and
- Strategic Cigarette and THP volume was down 2.5%, with volume share up by 70 bps (or 30 bps excluding migrations), with growth in all regions.
Non-GAAP adjusted basis
- Adjusted revenue4 increased 6.2% to £25,827m, or 5.6% to £25,683m on a constant currency basis, as cigarette price/mix of 9% and growth in revenue from New Categories and Traditional Oral, more than offset lower cigarette volume;
Revenue from the Strategic Portfolio (defined on page 49 of the full announcement) was up 8.9%, or 7.3% on a constant rate basis, with the growth driven (at constant rates) by:
- 5.6% growth in revenue from the strategic combustible brands;
32.4% increase in revenue from New Categories to £1,214m, with volume growth across all categories:
- THP revenue up 22.7% to £693m, with consumable volume up 31.6% to 9bn sticks, driven by Japan, Ukraine and Russia;
- Vapour revenue up 23.4% to £392m, with consumables volume increasing 19.5% to 226m units, with volume higher across ENA and Canada, which more than offset the slowdown in the US. In the US, volume returned to growth in the final quarter of the year; and
- Modern oral revenue up 273% to £129m, with volume 188% higher (to 1,194m pouches) driven by Scandinavia, US and Russia; and
- 11.0% increase in revenue from strategic traditional oral to £980m;
- Adjusted profit from operations grew 7.6% to £11,130m, or 6.6% to £11,032m at constant rates of exchange as adjusted revenue growth and the continued drive for efficiency gains (including product rationalisation to remove complexity) more than offset the increased investment in New Categories;
- Adjusted operating margin, at current rates, was 50 bps higher than 2018 at 43.1%;
- Adjusted diluted earnings per share at constant rates of exchange increased 8.4% to 321.6p;
- Adjusted cash generated from operating activities was down by 15.4% to £6,831m due to the timing of payments related to the MSA in prior periods described on page 7 of the full announcement, and working capital movements. Operating cash conversion was 97% (2018: 113%);
- Adjusted net debt5 decreased to £41,726m (2018: £43,407m). The decrease in free cash flow (after dividends paid to shareholders) to £1,921m (2018: £3,337m) was largely due to the timing of payments related to the MSA in prior periods. Adjusted net debt to adjusted EBITDA reduced by 0.5x in 2019, 0.4x on a constant currency basis; and
- Dividend per share increased 3.6% to 210.4p, payable in four quarterly dividend payments of 52.6p per share, being a pay-out ratio of 65% of adjusted diluted EPS, in line with the Group’s dividend pay-out policy.
We anticipate global industry cigarette and THP volume to be down c.4%, with US industry volume down c.5%, in 2020. We expect adjusted revenue growth in the 3-5% guidance range (at constant rates of exchange), together with continued operating margin improvement and further progress in New Categories towards our 2023/24 ambition of £5bn in revenue. Results, in particular New Category revenue growth, will be weighted to the second half of the year. The business is performing well and we are confident of delivering another year of high single figure constant currency adjusted EPS growth, with strong operating cashflow conversion in excess of 90%. Extrapolating today’s foreign exchange spot rates for the full year, we would expect a headwind of around 4% on full year adjusted EPS growth.
Preliminary announcement - year ended 31 December 2019 (1.9 mb)
Definition of key terms
Adjusting items and constant currency measures
To provide a more comprehensive understanding of the performance of the Group, this announcement also presents the adjusted performance of the Group, at current and constant translational rates of exchange. This excludes the adjusting items explained on pages 31 to 35 of the full announcement.
Adjusting items within this report represent certain items of income and expense which the Group considers distinctive based upon their size, nature or incidence. In addition, certain adjusting items within this report represent the potentially distorting impact of foreign exchange on certain of the Group’s results. As explained on page 47 of the full announcement, the Group does not adjust for normal transactional gains or losses in profit from operations which are generated by exchange rate movements.
The term cigarette principally refers to factory made cigarettes (FMC) and includes products that have similar characteristics and are manufactured in the same manner, but due to specific features may not be recognised as cigarettes for regulatory, duty or similar reasons.
Adjusted Revenue Growth of the Strategic Portfolio is a management measure, included within the Group’s short-term incentive scheme.
The Strategic Portfolio is comprised of:
- Strategic Combustibles and Strategic Traditional Oral products; and
- New Categories products.
Strategic combustibles comprise the Strategic Cigarette and OTP (defined below) brands Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Newport, Camel (US) and Natural American Spirit (US).
Traditional Oral* comprises:
Strategic Traditional Oral
- Strategic moist oral tobacco brands (including Grizzly and Kodiak);
- Strategic snus products (including Camel and Granit); and
- Other traditional moist oral brands and snus products (including Lundgrens).
New Categories* comprises:
- Tobacco Heating Products (THP) including glo, Neo sticks and our hybrid products;
- Vapour products including Vype, Vuse* (including Alto and Vibe), Ten Motives (including CIRRO) and ViP; and
- Modern Oral including all white modern oral brands: EPOK, Lyft and Velo.
Based on the available science, products within “New Categories” and “Traditional Oral” have been shown to be reduced-risk; are likely to be reduced-risk; or may have the potential to be reduced-risk, in each case if switched to exclusively as compared to continuing to smoke cigarettes.*
Other tobacco products (OTP) comprises largely the sales of roll-your-own (RYO), make-your-own (MYO), pipe and cigarillos.
*Our vapour product Vuse (including Alto and Vibe), and certain oral products including Grizzly, Granit, Camel Snus, Kodiak and Velo, which are sold in the US, are subject to the Food and Drug Administration (FDA) regulation and no reduced-risk claims will be made as to these products without agency clearance.
1. Key Market offtake volume 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. The Group’s Key Markets represent over 80% of the Group’s cigarette volume.
2. Value share represents the retail sales value of the product sold as a proportion of total retail sales value in that category.
3. Source – internal estimates.
4. Adjusted revenue excludes excise on bought-in goods, acquired and sold under short-term contract manufacturing agreements, discussed on page 31 of the full announcement which distort revenue and operating margin on a temporary basis. Such adjustment only applies to revenue related to certain non-strategic combustible volume in ENA.
5. Adjusted net debt is net debt excluding the impact of the purchase price allocation (PPA) adjustments of £848m (31 December 2018: £944m).
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, these forward-looking statements include, among other statements, statements regarding the BAT Group’s future financial performance, planned product launches and future regulatory developments, as well as: (i) certain statements in the Financial Performance Review section (pages 6 to 8); (ii) certain statements in the Category Performance Review section (pages 9 to 12); (iii) certain statements in the Regional Review section (pages 13 to 18); (iv) certain statements under the headings “Update on investigations into Misconduct Allegations”, “Update on Quebec Class Action and CCAA”, “Board Succession”, “Changes in the Group” and “Going Concern” (pages 20 to 23); (v) certain statements in the Notes to the Interim Financial Statements section (pages 30 to 44), including the Liquidity and Contingent Liabilities and Financial Commitments sections; (vi) certain statements in the Other Information section (pages 45 to 56), including the Non-GAAP Measures section and under the heading “Dividends”; and (vii) certain statements in the Chief Executive introduction (page 1).
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 and the impact of an unfavourable ruling by a tax authority in a disputed area; 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 deliver New Category 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 US Securities and Exchange Commission (“SEC”), including the Annual Report on Form 20-F filed on 15 March 2019 and Current Reports on Form 6-K, which may be obtained free of charge at the SEC’s website, http://www.sec.gov, and the Company’s Annual Reports, which may be obtained free of charge from the British American Tobacco website www.bat.com.
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