Wrap Text
Preliminary Announcement - Year Ended 31 December 2018
British American Tobacco p.l.c.
Incorporated in England and Wales
(Registration number: 03407696)
Short name: BATS
Share code: BTI
ISIN number: GB0002875804
("British American Tobacco p.l.c." or "the Company")
28 February 2019
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2018
A STRONG BUSINESS PERFORMANCE ACROSS ALL CATEGORIES
KEY FINANCIALS 2018 Change vs 2017
Current Constant Current Constant
rates rates Rates rates
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%
Non-GAAP:
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, with reconciliations from the most comparable IFRS measure provided.
* Representative basis – see page 3 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,
1
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%”.
HIGHLIGHTS
• 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:
o Revenue increased 25%, with revenue from the Strategic Portfolio higher by 49%;
o Volume from cigarettes and THP grew 3.3%;
o Profit from operations was up 45%;
o Operating margin increased over 500 bps to 38.0%; and
o 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):
o 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;
o 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;
o 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;
o Adjusted revenue from the Strategic Portfolio (defined on page 3) 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.
o 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;
o 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
o 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 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
2
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
30 to 34.
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 45, the Group does not adjust for normal transactional gains or losses
in profit from operations which are generated by exchange rate movements.
Inclusion of results on a “representative basis”
Where appropriate, the Group is also presenting (as a supplement to the results) the 2018 performance against 2017, as though the
Group had owned the acquisitions made in 2017 for the whole of that year. Comparison of results on this basis are termed “on a
representative basis” and provide shareholders with a results comparison representative of the position as if the Group had owned the
acquisitions throughout 2017 and 2018.
Results on a representative basis are not deemed to be equivalent to pro forma financial information as they are derived from an
adjusted measure, which will exclude the adjusting items, that may arise in the context of a pro forma presentation due to the
requirements of such areas as purchase price allocation adjustments (to inventory, amortisation of the fair value adjustment to debt and
the amortisation of trademarks). As previously announced, in 2017, the Group withdrew from the Philippines. No adjustment to the 2017
representative basis information has been included as this is immaterial to the Group’s results. There were no material acquisitions in
2018 requiring adjustment.
For a reconciliation from the most directly comparable IFRS measures to the Group’s adjusted results on a representative basis, see the
appendices on pages 55 and 56. For additional information on the use of non-GAAP measures, see the discussion regarding “Non-GAAP
Measures” under the section “Other Information” on pages 45 to 49.
Strategic Portfolio
As previously announced, from 1 January 2018, the Group introduced a new measure called Adjusted Revenue Growth of the Strategic
Portfolio, as part of the short-term incentive scheme.
The Strategic Portfolio is comprised of:
• Strategic Combustibles; and
• Potentially Reduced-Risk Products (excluding certain immaterial Traditional Oral products).
Strategic Combustibles
Strategic combustibles comprise the Strategic Cigarette and OTP brands Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Newport, Camel
(US) and Natural American Spirit (US).
Potentially Reduced-Risk Products (PRRP)
PRRPs include:
• Tobacco Heating Products (THP) including glo, neo sticks and our hybrid products;
• Vapour products including Vype, Vuse (Alto and Vibe), Ten Motives (including CIRRO) and ViP;
• Modern Oral including the white snus brands of EPOK and Lyft; and
• Traditional Oral including moist snuff tobacco brands of Grizzly, Mocca, Granit and Kodiak, and the traditional snus products
(including Camel snus).
New Categories comprises THP, Vapour and Modern Oral effective 1 January 2019.
Based on the available science, PRRPs 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.
Revision of 2017 results for IFRS 15 (Revenue from Contracts with Customers), effective 1 Jan 2018
The Group’s results for the year ended 31 December 2018 are presented in accordance with IFRS 15 (Revenue from Contracts with
Customers). The 2017 results have been revised for IFRS 15 (as previously announced on 2 May 2018) which the Group adopted on a fully
retrospective basis.
*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.
3
PERFORMANCE IN NUMBERS
Year ended 31 December 2018
Reported Adjusted5 Adjusted5 at CC6
2018 Vs 20174 2018 Vs 20174 2018 Vs 20174
representative representative
basis7 basis7
Cigarettes and THP Volume (bn sticks)
Cigarettes 701 +2.6% -4.1%
Strategic cigarettes 444 +16.7% +4.8%
Other 257 -15.1% -16.4%
THP 7 +217% +217%
708 +3.3% -3.5%
By region:
US 77 +118% -5.3%
APME 228 +0.7% +0.7%
AMSSA 157 -5.4% -5.4%
ENA 246 -4.7% -5.3%
Total 708 +3.3% -3.5%
Other volume
Oral – Pouches – bn 3.9 +93% +10.5%
Oral – Other – mn kg 14.6 +119% -4.0%
Vapour – mn pods/10ml units 189 +100% +35.3%
OTP (incl RYO and MYO) – bn 22 -6.6% -7.5%
sticks equivalent
Revenue (£m):
US 9,495 +128% 9,495 -2.0% 9,838 +1.5%
APME 4,882 -1.8% 4,882 -1.7% 5,250 +5.7%
AMSSA 4,111 -4.9% 4,111 -4.8% 4,560 +5.6%
ENA 6,004 -1.7% 5,824 -1.3% 6,112 +3.5%
Total 24,492 +25.2% 24,312 -2.3% 25,760 +3.5%
Revenue from:
Strategic combustibles 15,457 +43% 15,457 +0.4% 16,273 +5.7%
NGP 883 +139% 883 +92% 901 +95%
Vapour 318 +89% 318 +23% 325 +26%
THP 565 +180% 565 +178% 576 +184%
Oral 917 +128% 917 +7.3% 952 +11.3%
Modern 34 +127% 34 +127% 36 +140%
Traditional 883 +128% 883 +5.1% 916 +9.0%
PRRP 1,800 +133% 1,800 +37% 1,853 +41%
Strategic Portfolio 17,257 +49% 17,257 +3.3% 18,126 +8.5%
Other 7,235 -9.0% 7,055 -13.7% 7,634 -6.6%
Total Revenue 24,492 +25% 24,312 -2.3% 25,760 +3.5%
Profit from operations (£m):
US 4,006 +244% 4,511 +1.8% 4,686 +5.8%
APME 1,858 -2.3% 1,948 -6.1% 2,099 +1.2%
AMSSA 1,544 -6.3% 1,738 -3.7% 1,922 +6.5%
ENA 1,905 +12.3% 2,150 -2.2% 2,217 +0.8%
Total 9,313 +45.2% 10,347 -1.5% 10,924 +4.0%
4
PERFORMANCE IN NUMBERS
Year ended 31 December 2018
Reported Adjusted5 Adjusted5 at CC6
4
2018 Vs 2017 2018 Vs 20174 2018 Vs 20174
representative representative
basis7 basis7
Operating Margin
US 42.2% +1,420 bps 47.5% +180 bps
APME 38.1% -20 bps 39.9% -180 bps
AMSSA 37.6% -60 bps 42.3% +50 bps
ENA 31.7% +390 bps 36.9% -30 bps
Total 38.0% +520 bps 42.6% +40 bps
Earnings per share (pence)
Basic 264.0p -86%
Diluted 263.2p -86% 296.7p +5.2% 315.5p +11.8%
Cash flow
Year ended 31 December
2018 2017 Variance
£m £m %
Net cash generated from operating activities (see page 35) 10,295 5,347 +93%
Dividends paid to non-controlling interests (142) (167) -15%
Net interest paid (1,533) (1,004) +53%
Net capital expenditure (845) (767) +10%
Trading loans to third parties (93) 101 -192%
Other 2 (10) +120%
Free cash flow 7,684 3,500 +120%
Net cash impact of adjusting items 601 685 -12%
Restructuring costs 293 513 -43%
Non-tobacco litigation (Fox River) 30 25 +20%
Tobacco litigation (Engle, Quebec deposit) 278 147 +89%
Dividends from associates (214) (903) -76%
Adjusted cash generated from operations 8,071 3,282 +146%
Cash conversion ratio 111% 83%
(Net cash generated from operating activities as a % of profit from operations)
Operating cash flow conversion 113% 79%
(Net cash generated from operating activities before the impact of adjusting items, trading loans, pension shortfall funding, taxes paid and after net
capital expenditure and dividends from associates as a % of adjusted profit from operations)
4. The results for 2017 have been amended (“Revised”) following the Group’s retrospective application of IFRS 15 (Revenue from Contracts with Customers). 2017 also reflects
the new regional structure, effective 1 January 2018. See page 29 and 30 and pages 55 to 56.
5. Adjusting items represent certain items which the Group considers distinctive based upon their size, nature or incidence. See pages 45 and 46. Reconciliations from the most
comparable IFRS measures have been provided, for revenue, on page 47, for profit from operations on page 47, for tax, on page 48, for cash conversion, on page 48, and for
diluted earnings per share, on page 47. For additional information on the use of non-GAAP measures, see the discussion regarding other “Non-GAAP Measures” under the
section “Other Information” on pages 45 to 49.
6. CC – constant currency – measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year’s results of the Group and, where
applicable, its segments. For additional information on the use of non-GAAP measures, see the discussion regarding “Non-GAAP Measures” under the section “Other
Information” on pages 45 to 49.
7. Representative basis – as if BAT had owned RAI and other acquisitions, undertaken in 2017, from 1 January 2017. The representative basis adjustment also includes an
aggregate amount of approximately £250 million of certain additional adjusting items related to the acquired companies (primarily related to Engle Progeny and transaction
costs incurred by RAI). A reconciliation to the 2017 adjusted “representative” results is provided in the attached appendices starting on page 55. For additional information on
the use of non-GAAP measures, see the discussion regarding “Non-GAAP Measures” under the section “Other Information” on pages 45 to 49.
Note: In respect of the United States region, all financial statements and financial information provided by or with respect to the US business or RAI (and/or the RAI Group) are
prepared on the basis of US GAAP and constitute the primary financial statements or financial information of the US business or RAI (and/or the RAI Group). Solely, for the
purpose of consolidation within the results of BAT p.l.c. and the BAT Group, this financial information is then converted to International Financial Reporting Standards as issued
by the IASB and adopted by the European Union (IFRS). To the extent any such financial information provided in these financial statements relate to the US business or RAI
(and/or the RAI Group), it is provided as an explanation of the US business’ or RAI’s (and/or the RAI Group’s) primary US GAAP based financial statements and information.
5
PERFORMANCE REVIEW
The following review presents the Group’s performance for the year ended 31 December 2018.
TOTAL GROUP REVENUE
On a reported basis, revenue increased by 25.2% to £24,492 million. This was driven by a 3.3% growth in volume
from cigarettes and THP, which was largely due to the inclusion of RAI as a wholly-owned subsidiary, as well as
pricing.
On a representative basis, adjusted revenue8 increased 3.5% at constant rates of exchange, as price mix in
cigarettes of 6%, and the growth of PRRP more than offset a decline in total cigarettes and THP volume of 3.5%.
Volume grew in a number of markets, including in Pakistan (as the market recovered following the revision to excise),
in Japan (driven by THP), and also in Turkey, Poland, Romania and Egypt. This growth was more than offset by lower
volume in Saudi Arabia (due to down-trading and market contraction following the 2017 excise-led price increase),
the US (partly due to the impact of fuel price rises on disposable income, the change in excise in California and the
growth of vapour), Brazil (primarily due to down-trading to illicit trade) and Russia (largely due to both market
contraction and inventory movements in the supply chain).
Revenue in 2017 on a representative basis included £94 million of revenue recognised by RAI related to the sale of
inventory associated with the international brand rights of Natural American Spirit. Excluding the revenue related to
the sale, adjusted revenue would have increased by 3.9% on a representative, constant currency basis.
Revenue from the Strategic Portfolio
Revenue from the Strategic Portfolio grew by 49% (to £17,257 million) mainly due to the inclusion of RAI. On a
representative constant currency basis, this was an increase of 8.5% driven by robust pricing, an increase in NGP
revenue (from THP and vapour) of 95% to £901 million and the performance of the Group’s strategic cigarette brands
which grew market share 40 bps.
Strategic Cigarette and THP brands
The strategic cigarette and THP brands collectively grew volume 5.8% on a representative basis:
• Dunhill’s overall market share was stable as strong performances in Indonesia, Brazil and South Africa were
offset by the effect of down-trading in Saudi Arabia and South Korea. Volume was 6.1% lower as the continued
growth in Indonesia was more than offset by the effect of the down-trading noted above and market size
contraction in Brazil, South Africa and Malaysia;
• Kent’s market share was up 50 bps, with volume increasing 1.7%, driven by Japan (including Kent Neo Sticks),
Turkey, Brazil and Ukraine. This more than offset lower volume in the Middle East and Russia (despite an
increase in market share as volume was affected by trade inventory movements);
• Lucky Strike grew market share 20 bps, which was driven by Indonesia, Japan, Colombia, Spain, France,
Argentina and Mexico. Volume was 1.0% down as growth in Germany, Colombia, Japan and Argentina was
more than offset by declines due to industry contraction in Indonesia and France;
• Rothmans’ market share continued to grow, increasing a further 110 bps with volume up 19.7% driven by
Ukraine, Russia, Nigeria, Bulgaria and migrations in Poland, Brazil and Colombia;
8 Adjusted revenue excludes the distorting effect on revenue discussed on page 31, which related to excise on products acquired under short-term contract manufacturing
arrangements.
6
Performance summary cont…
• Pall Mall market share grew 10 bps, with volume up 20.4% partly due to the inclusion of Pall Mall in the US
following the acquisition of RAI. This was an increase of 9.9% on a representative basis, partly due to the
strong volume and market share growth in Saudi Arabia that followed the market down-trading arising from
the excise-led price increases in 2017, more than offsetting lower market share in the US. Pakistan continued
to grow volume and market share after the revision to excise, with higher volume and market share also
achieved in Mexico and Australia; and
• The US market was estimated to be 4.5-5.0% down, due to the impact of higher fuel prices on disposable
income, the growth of the vapour category and the full year effect of the change in excise in 2017 in California:
• Newport grew market share 10 bps in the US. Volume declined 4.6% on a representative basis, partly due
to inventory movements within the supply chain;
• Natural American Spirit’s share momentum continued in the US, up 20 bps, with volume higher by 3.5%
on a representative basis, outperforming the market due to a strong performance in the premium
segment; and
• Camel’s market share was flat in the US. Volume was lower by 4.4%, on a representative basis, partly due
to a strong comparator period.
Tobacco Heating Products (THPs)
The Group delivered significant growth in THPs in 2018. In Japan (which accounts for approximately 70% of global
industry volume) market share accelerated its growth momentum in the second half of the year, boosted by the
launch of Neo, the Group’s premium consumables range. Although still in the roll out phase in many markets, we also
saw consistent growth across the other 14 THP markets. Key highlights include:
• An increase of over 180% in revenue to £565 million, or £576 million on a constant rate basis, due to 217%
growth in consumables volume to 7 billion, driven by Japan and an expansion to 10 markets in the year (Italy,
Serbia, Croatia, Greece, Poland, Czech Republic, Kazakhstan, Ukraine, Bulgaria and Malaysia);
• An increase in market share of glo in Japan to 4.7% (December 2018), and an increase to over 20% category
share; and
• Volume in Japan was weighted to the second half of the year following the launch of additional product
offers in 2018, with market share gaining 40 bps in that period.
Vapour
The Group’s vapour portfolio performed strongly with significant growth in both volume and revenue across our 15
vapour markets. Growth was weighted towards the second half of the year and driven by both new market and
product launches. Total volume was up by 35%, on a representative basis, with good performances in the world’s
three largest vapour markets – with volume growth in the US, UK and France. In France, we achieved market
leadership (in tracked channels). Key highlights include:
• Total vapour revenue increased 89% to £318 million, due to the inclusion of a full year’s revenue from RAI.
This was a 26% increase to £325 million (2017: £258 million) on an adjusted representative, constant rate
basis;
• In the US, notwithstanding a reduction in market share due to the rapid growth of the overall market,
consumables grew by 36%. This was driven by the expansion of Vuse Alto and re-launch of Vuse Vibe;
• Vype and the Group’s other vapour brands in the rest of the world (including 10 Motives and ViP in the UK),
grew consumables volume by 34%;
7
Performance summary cont…
• Our new product Vype e-Pen3 was launched in the second half of the year in the UK, Canada, Colombia, New
Zealand and France. It is performing extremely well, reaching 7.1% and 3.9% value share in France and the
UK respectively, and was voted Product of the Year (vapour category) in the UK’s largest consumer survey of
product innovation; and
• Vype is a leading vapour brand in Germany, where it is the clear market leader within the rechargeable
segment. The Group further enhanced its capabilities with the acquisition of Germany’s leading vapour retail
chain in November 2018.
Modern Oral
Our Modern Oral category comprises the brands EPOK and Lyft, which both experienced significant growth in 2018.
In the Nordics and in Switzerland, our brands have quickly established a meaningful foothold in the total oral market.
Key highlights include:
• Total revenue grew 127% to £34 million, a 140% increase on a representative, constant rate basis;
• EPOK is the fastest growing oral brand in the Nordics achieving 8% total oral market share (December 2018)
in Norway;
• In Switzerland EPOK is the fastest growing brand in the category and already has a 17% share of the total oral
category in December 2018, which is now 1.7% of the total nicotine segment; and
• Lyft, the Group’s tobacco-free product, was launched in Sweden, achieving 4.5% total oral market share in
handlers.
Traditional Oral
In the Traditional Oral category (comprising traditional snus and moist snuff) revenue from the strategic brands grew
128%, benefiting from the inclusion of RAI for the full 12 months. On an adjusted, representative basis at constant
rates of exchange this was an increase of 9% to £916 million.
In the US, traditional oral volume was down 2.3% on a representative basis. This was in part due to both a decline in
the total market, as well as a reduction in Grizzly market share of 40 bps, caused by the brand lapping a tough
comparator which had benefited from a competitor’s product recall, though returning to growth in the final quarter
of 2018. This was more than offset by total pricing and a 40 bps increase in total value share, with revenue from the
strategic portfolio growing 8% to £893 million, on a constant rate, representative basis.
Other tobacco products
Volume of other tobacco products (OTP) declined 6.6% (or 7.5% on a representative basis) to 22 billion sticks
equivalent (being approximately 3% of the Group portfolio), driven by lower volume in France, Spain, Hungary and
Germany.
PROFIT FROM OPERATIONS AND OPERATING MARGIN
Profit from operations, on a reported basis was up 45.2% at £9,313 million with operating margin up over 500 bps to
38.0%, largely due to the inclusion of a full year’s results from RAI. In particular, 2017 included a number of charges
related to the acquisition of RAI, including a £465 million increase to inventory as part of the purchase price
allocation adjustment, that reduced profit from operations and operating margin in that period. The Group’s results
were also negatively impacted by a translational foreign exchange headwind of 5.5%.
Adjusted profit from operations and adjusted operating margin
Adjusted profit from operations, on a representative basis and at constant rates of exchange was 4.0% higher at
£10,924 million, with growth across all regions, reflecting the increase in revenue, whilst increasing the investment
behind the expansion of THP and vapour by approximately £500 million (including device discounting). On a
representative basis, adjusted operating margin, at current rates, was 40 bps higher, due to the realisation of the cost
savings in the US (being over US$300 million on an annualised basis since the acquisition) and the enhancement in
operating margin in AMSSA which more than offset the increased investment undertaken in APME and ENA.
8
REGIONAL REVIEW
The performances of the regions are discussed below. The following discussion is based upon the Group’s internal
reporting structure announced in 2017 and effective from 1 January 2018. Prior period comparators have been
revised accordingly. Prior periods have also been revised for the impact of IFRS 15.
Regional Summary information
Cigarettes and THP Revenue Profit from operations
(bn sticks) (£m) (£m)
2018 Vs 2017 2018 Vs 2017 2018 Vs 2017
Actual Adj Repres Actual Adj Repres Actual Adj Repres
at cc at cc
US 77 +118% -5.3% 9,495 +128% +1.5% 4,006 +244% +5.8%
APME 228 +0.7% +0.7% 4,882 -1.8% +5.7% 1,858 -2.3% +1.2%
AMSSA 157 -5.4% -5.4% 4,111 -4.9% +5.6% 1,544 -6.3% +6.5%
ENA 246 -4.7% -5.3% 6,004 -1.7% +3.5% 1,905 +12.3% +0.8%
Total 708 +3.3% -3.5% 24,492 +25.2% +3.5% 9,313 +45.2% +4.0%
Variance termed “Adj Repres” refers to the variance between the 2018 adjusted performance against the adjusted 2017 performance on a representative
basis – as though the Group had owned the acquisitions undertaken in 2017 for the full financial year. Use of the term “at cc” refers to the variance
between the 2018 adjusted performance, at 2017 exchange rates, against the adjusted 2017 performance on a representative basis. A reconciliation of
the 2017 performance to adjusted representative is provided on pages 55 to 56.
UNITED STATES (US):
The cigarette industry was estimated to be around 4.5% lower in 2018 partly due to the impact of higher fuel prices
on disposable income, the growth of the vapour category and the full year effect of the change in excise in 2017 in
California. The decline moderated in the second half of the year, from an estimated 5.3% to 4.1%.
In 2018, cigarette volume from the US business was 77 billion sticks, which represents an increase of 118% due to the
recognition of a full year’s volume from RAI. On a representative basis, this was 5.3% lower than in 2017, with market
share down 20 bps, as continued market share growth in Natural American Spirit (up 20 bps) and Newport (10 bps
higher) and stable Camel share was more than offset by lower market share in Pall Mall (down 20 bps) and declines in
the remainder of the portfolio. US volumes were further affected by a strong comparator due to Camel and Newport
product launches in the first six months of 2017. Total value share grew 25 bps driven by the performance of the
premium brands.
The US vapour market experienced strong growth (up approximately 120% in volume terms) which the Group
estimates has contributed to a total volume decline in cigarettes of 0.7% during 2018. Whilst new competitor vapour
brands have taken market share, Vuse continued to grow volume of consumables (cartridges) by 36%, on a
representative basis, with distribution of Alto reaching over 70,000 outlets, which is estimated to be approximately
70% of the retail universe. Performance was negatively impacted by a product recall of Vibe, arising from a few
isolated issues which have been resolved.
Oral volume declined 2.3% on a representative basis, with market share down against the prior period which, on a
representative basis, benefited from a competitor’s product recall.
During 2018, the US Food and Drug Administration (FDA) regulatory proposals contributed to increased uncertainty
in the US operating environment. Given our long track record of success in the face of regulatory change in the
industry, and our strong portfolio of brands, we are confident in our ability to manage the proposals, noting that any
FDA regulation or proposed ban of menthol in cigarettes must be developed through a comprehensive rule making
process, be based on a thorough scientific review and consider all unintended consequences in order to withstand
judicial review.
9
Regional review continued…
In 2017, the FDA accepted and filed for substantive review the Modified Risk Tobacco Products (MRTP) applications
for Camel Snus, which were subsequently provided with a favourable recommendation from the Tobacco Products
Scientific Advisory Committee (TPSAC). There is no timetable for the FDA to issue a decision on the MRTP
applications, however the Group anticipates a decision during 2019.
Revenue
Reported revenue was £9,495 million, an increase on 2017 of 128%, largely due to the 12-month inclusion of results from
RAI, compared to approximately five months in 2017. On a constant currency, representative basis, adjusted revenue was
up 1.5% as pricing in both the combustibles and oral categories and higher Vuse consumables volume more than offset
the reduction in combustibles and oral volume (previously discussed). Revenue in 2017 on a representative basis included
£94 million of revenue recognised by RAI related to the sale of inventory associated with the international brand rights of
Natural American Spirit. Excluding the revenue related to the sale, adjusted revenue would have increased by 2.5% on a
representative, constant currency basis.
Revenue from vapour grew by 156% to £184 million, an increase of 20% on a representative, constant currency basis.
Excluding the impact of the recall related to the consignment of batteries noted above, management estimate the
increase would have been an increase of approximately 32%.
Profit from operations
Reported profit from operations was £4,006 million, an increase of 244% on 2017, largely due to the full year’s
inclusion in the Group’s results. Excluding adjusting items related to Engle and integration costs, profit from
operations was £4,511 million, an increase of 1.8% on an adjusted, representative basis, or 5.8% excluding the
translational foreign exchange headwind. This increase reflects the growth in revenue from the portfolio and cost
reductions since the acquisition of RAI.
Cost synergies are progressing well, with annualised savings of over US$300 million delivered to date. The Group
continues to expect to deliver over US$400 million of synergies by the end of 2020.
ASIA-PACIFIC AND MIDDLE EAST (APME):
Volume was up 0.7% at 228 billion sticks driven by the recovery in the combustibles volume in Pakistan (following the
revision to the excise structure that negatively impacted the equivalent period in 2017) and the performance of glo in
Japan and South Korea with sales of 6.5 billion sticks in the period. This growth in volume was partly offset by lower
volume in the Middle East, largely due to the impact of 2017 excise-led price increase in Saudi Arabia and the difficult
trading environment in a number of countries in the Middle East. Volume was lower in Bangladesh due to higher
illicit trade following an increase in excise, with Indonesia lower due to market contraction. Volume decreases have
slowed in Malaysia after a period of accelerated decline following the excise changes in prior years.
Market share in the region was up 110 bps. Kent (including THP sticks) was up in Japan (which was partly due to a
growing share of glo, up 340 bps), with Dunhill and Lucky Strike higher in Indonesia. Pall Mall grew in Pakistan,
Australia and particularly in Saudi Arabia, where the Group became market leader. The Group also grew Rothmans in
Malaysia and increased total market share in Bangladesh. This growth was partially offset by lower market share in
South Korea, due to a reduction in Dunhill partly driven by the growth of the THP segment and a reduction in Taiwan
driven by Dunhill and Pall Mall.
Revenue
Reported revenue declined 1.8% to £4,882 million, as pricing, higher volume (discussed above) and the positive mix
effect - largely in Japan through the growth in glo - was offset by a combination of inventory movements in the prior
year, down-trading in Saudi Arabia and by the foreign exchange headwinds related to the relative strength of sterling.
Excluding the translational foreign exchange headwind, constant currency adjusted revenue, on a representative
basis grew 5.7%.
10
Regional review continued…
Profit from operations
Reported profit from operations declined 2.3% to £1,858 million, as the performance was negatively affected by
foreign exchange headwinds and adjusting items related to the ongoing costs of the Group’s restructuring
programme. Adjusted profit from operations on a representative constant currency basis grew 1.2% to £2,099 million
driven by an improvement in Japan, where the performance of both combustibles and THP more than offset the
higher marketing investment, and increases in Australia, Pakistan and Bangladesh. These were partly offset by Saudi
Arabia which was negatively impacted by down-trading, as previously discussed, and South Korea.
AMERICAS AND SUB-SAHARAN AFRICA (AMSSA):
Volume was 5.4% lower at 157 billion sticks, largely driven by the growth of illicit trade in Brazil and South Africa, the
termination of a third-party licence agreement in Mexico and market contraction in Canada, Colombia and
Venezuela. South African volumes stabilised in the second half of 2018 after a period of decline.
Market share was 20 bps lower as growth driven by Kent (migration from Free) in Brazil, Dunhill in South Africa,
Rothmans in Colombia and Brazil (following the migration from Mustang and Minister respectively, to strengthen the
consumer proposition) and in Argentina, and Pall Mall in Mexico was more than offset by declines in the local portfolio
which was largely due to the growth in illicit trade especially in South Africa and Brazil.
Vype was launched in Canada through exclusive distribution in the top four key accounts, representing over 4,000
retail outlets. In the seven months since launch, it had sold to over 92,000 adult users.
Revenue
Reported revenue declined 4.9% to £4,111 million, due to the translational foreign exchange headwind of
approximately 10%. On a constant currency, representative basis, adjusted revenue grew by 5.6% to £4,560 million,
as pricing across the region (notably in Mexico, Brazil, Chile and Nigeria) more than offset the lower total volume and
the negative impact of mix due to the growth of lower-priced products following the significant excise-led price
increases in a number of markets.
Profit from operations
Reported profit from operations was down 6.3% to £1,544 million, as the effect of currency headwinds more than offset
growth across the region. Excluding adjusting items (mainly related to a £110 million asset impairment to recoverable
value in Venezuela arising from hyperinflationary accounting and costs related to the Group’s ongoing restructuring
programme) and the effect of currency, adjusted profit from operations on a representative, constant currency basis
grew by 6.5% to £1,922 million, driven by Nigeria, Mexico and Chile, partly offset by the effect of the lower duty paid
market and down-trading in South Africa.
11
Regional review continued…
EUROPE AND NORTH AFRICA (ENA):
Volume declined 4.7% to 246 billion sticks, which was a reduction of 5.3% on a representative basis, as volume from
assets acquired (from Bulgartabac and FDS) in 2017, combined with growth in Turkey, Egypt, Poland and Romania,
was more than offset by Russia (partly due to inventory movements and the growth of illicit trade), Ukraine (due to
market contraction following the excise-led price increase, leading to an increase in illicit trade), Italy (partly due to
impact of higher prices) and France (following the excise-led price increase).
Market share was flat as increases in Kent, led by Ukraine, Turkey, Kazakhstan and regaining premium segment
leadership in Russia and Rothmans (Ukraine, Russia, Poland, Spain, Bulgaria and Italy) was offset by the continued
declines in Pall Mall (Poland, Germany and Belgium) and a decline in the low-priced portfolio in Russia. Total market
share in Russia returned to growth in the second half of 2018, as the effects of the trade inventory movements
normalised.
Our THP and vapour portfolio continued to expand, with glo now present in 12 countries in ENA, including Russia,
Switzerland, Romania, Italy, Poland and Ukraine. Volume of vapour (devices and consumables) grew, notably in the
UK (driven by Vype, Ten Motives and ViP), with market share up (in traditional retail) in France and Vype remaining
the leading vapour brand in Germany. In November 2018, the Group further enhanced its capabilities with the
acquisition of Germany’s leading vapour retail chain, Quantus Beteiligungs-und Beratungsgesellschaft mbH. Further
launches and product developments are planned across the portfolio during 2019.
In oral, volume grew 44%, mainly driven by EPOK which is the fastest growing premium oral brand in both Norway
(reaching 8% total oral market share in December 2018) and in Switzerland (achieving 17% total oral market share in
December 2018). In Sweden, the Group launched Lyft, a tobacco-free product, achieving a 4.5% share of the total
oral market in handlers.
Revenue
Reported revenue was down 1.7% against 2017 at £6,004 million as pricing across the region (notably in Romania,
Russia, Germany and Ukraine) was more than offset by the impact of lower regional volume, continued excise
absorption in France and the translational foreign exchange headwinds of approximately 5%.
Adjusted revenue, at constant rates, was £6,112 million, an increase of 3.5% on a representative basis. This excludes
excise on bought-in goods, acquired and sold under short-term contract manufacturing arrangements which distorts
revenue and operating margin on a temporary basis, and the impact of foreign exchange movements on revenue.
Profit from operations
Reported profit from operations grew 12.3% to £1,905 million. This was due to an improvement in the operating
performance in Germany, Romania and Ukraine and a one-off charge of £69 million in 2017 in relation to a third
party in Croatia that does not repeat in 2018. This more than offset a reduction in profit from operations in Russia
(largely due to the impact of lower volume), the impact of excise absorption in France, restructuring costs incurred
(largely in Germany related to the factory closure), significantly increased investment in PRRPs and the impact of
foreign exchange on the reported results. Excluding adjusting items (related to the factory closure in Germany,
amortisation of acquired brands, other costs related to the Group’s ongoing restructuring programme and the 2017
impairment in Croatia) and the impact of the foreign currency headwind, adjusted profit from operations at constant
rates, on a representative basis was up 0.8%, at £2,217 million.
12
FINANCIAL INFORMATION AND OTHER
NET FINANCE COSTS
Net finance costs were £1,381 million, compared to £1,094 million in 2017, driven by the full year interest charge
incurred in the year on borrowings of £47,509 million (2017: £49,450 million). Net adjusted finance costs increased by
56% or 59% on a constant currency basis.
Net finance (costs)/income comprise:
2018 2017
£m £m
Finance costs (1,484) (1,197)
Finance income 103 103
Net finance costs (1,381) (1,094)
Less: adjusting items (see below) (4) 205
Hedge ineffectiveness - 9
Interest related to adjusting tax payables, see below 41 43
Acquisition of RAI - 153
Gain arising due to hyperinflationary accounting (45) -
Net adjusted finance costs (1,385) (889)
Comprising:
Interest payable (1,606) (1,094)
Interest and dividend income 68 84
Fair value changes – derivatives 154 149
Exchange differences (1) (28)
Net adjusted finance costs (1,385) (889)
Impact of foreign exchange (30)
Net adjusted finance costs (at constant rates of exchange) (1,415)
In 2018, the Group incurred interest on adjusting tax payables of £41 million (2017: £43 million). This included
interest of £25 million (2017: £25 million) in relation to the Franked Investment Income Group Litigation Order (FII
GLO), as described on page 42 and interest of £12 million in relation to retrospective guidance by a tax authority on
overseas withholding tax.
Also in 2018, the Group recognised a monetary gain of £45 million related to the application of hyperinflationary
accounting in Venezuela, as described on page 17. As this was not reflective of the underlying performance of the
Group, this has been treated as an adjusting item.
In 2017, the Group incurred pre-financing costs related to the acquisition of RAI of £153 million. As this related to the
pre-financing of the acquisition, and will not repeat, the costs were treated as an adjusting item.
Also in 2017, the Group realised a £9 million charge in relation to the reversal of a gain recognised in 2016, related to
hedge ineffectiveness on external swaps following the referendum regarding “Brexit”. This was deemed to be
adjusting as it is not representative of the underlying performance of the business.
All of the adjustments noted above have been included in the adjusted earnings per share calculation on page 37.
13
RESULTS OF ASSOCIATES AND JOINT VENTURES
The Group’s share of post-tax results of associates and joint ventures declined from £24,209 million to £419 million
due to the acquisition of RAI in 2017 which is now reported as a wholly-owned subsidiary and the recognition of a
gain of £23,288 million in 2017 arising from the acquisition, as the Group was deemed to have disposed of RAI as an
associate. For the Group’s other main associate, ITC Ltd (ITC) in India, the Group’s share of post-tax results was in line
with 2017 at £406 million (2017: £405 million) which was impacted by the foreign exchange headwind. Excluding the
impact of translational foreign exchange of £32 million and adjusting items of £32 million (2017: £29 million) largely
related to the deemed gain on dilution of the Group’s holding in ITC as described on page 34, on an adjusted constant
rate basis, the Group’s share of post-tax results from ITC was an increase of 8.0% to £406 million.
TAXATION
2018 2017
Revised
£m £m
UK
- current year tax 66 26
- adjustment in respect of prior periods (6) -
Overseas
- current year tax expense 2,460 1,615
- adjustment in respect of prior periods (5) 2
Current tax 2,515 1,643
Deferred tax (374) (9,772)
2,141 (8,129)
Adjusting items (see below) 223 10,220
Net adjusted tax charge 2,364 2,091
The tax rate in the income statement was a charge of 25.6%, compared to a credit of 27.5% for the full year 2017. The
credit in 2017 was due to the revaluation of net deferred tax liabilities following the change to the Federal tax rate in
the US (£9.6 billion). The tax rate in 2018 is also affected by the inclusion of RAI as a wholly-owned subsidiary
following the acquisition (in 2017 RAI was included within post tax results of associates until the acquisition date) and
was also affected by the impact of the adjusting items referred to below.
The Group’s tax rate is also affected by the inclusion of the share of associates’ and joint ventures’ post-tax profit in
the Group’s pre-tax results. Excluding this and the adjusting items referred to below, the Group’s underlying tax rate
for subsidiaries reflected in the adjusted earnings per share on page 37 was 26.4% in 2018 (2017: 29.7%). A
reconciliation from the tax rate in the income statement to the underlying to tax rate is provided on page 48.
Adjusting items relate to:
• a £79 million credit due to changes in the US state tax rates in the year, relating to the revaluation of
deferred tax liabilities arising on trademarks recognised on the RAI acquisition in 2017; and
• a £55 million charge related to retrospective guidance by a tax authority in the ENA region regarding the
application of overseas withholding tax between 2015 and 2017. A provision for the associated tax charge
and £12 million of interest has been recognised.
As the above items are not reflective of the ongoing business, these have been recognised as adjusting items within
taxation.
The adjusting tax item also includes £199 million (2017: £454 million) in respect of the taxation on other adjusting
items, which are described on pages 32 and 33.
Refer to page 42 for the Franked Investment Income Group Litigation Order update.
14
CASH FLOW
In the Group’s cash flow, prepared in accordance with IFRS and presented on page 28, net cash generated from
operating activities grew by 93% to £10,295 million (2017: £5,347 million) due to the cash generated by RAI and the
timing of the MSA payment in the US. The Group’s conversion rate (as defined as net cash generated from operating
activities as a proportion of profit from operations) increased from 83% to 111% in 2018.
Free cash flow and adjusted cash generated from operations (ACGFO)
Free cash flow, as defined on page 49, was £7,684 million, an increase of 120% on 2017 (2017: £3,500 million). This
movement was driven by the full year inclusion of results from RAI and enhanced cash generation across the
remainder of the Group. This was partly offset by a reduction in dividends from associates (due to the change in the
accounting treatment of RAI in 2017).
The Group generated £8,071 million adjusted cash from operations, an increase of 146% (2017: £3,282 million) or
158% at constant rates, with an operating cash conversion rate (based upon adjusted profit from operations and
defined on page 48) of 113% (2017: 79%). Normalising the timing of the MSA payment (£1.4 billion) that was brought
forward to December 2017, ACGFO would have increased by 43% compared to the same period in 2017, with an
operating cash conversion ratio of 100% (2017: 97%).
Free cash flow and ACGFO are reconciled from net cash generated from operating activities as follows:
2018 2017
£m £m
Net cash generated from operating activities (page 28) 10,295 5,347
Dividends paid to non-controlling interests (142) (167)
Net interest paid (1,533) (1,004)
Net capital expenditure (845) (767)
Trading loans to third parties (93) 101
Other 2 (10)
Free cash flow 7,684 3,500
Cash impact of adjusting items 601 685
Dividends from associates (214) (903)
ACGFO 8,071 3,282
Exchange 405
ACGFO at constant rates of exchange 8,476
BORROWINGS AND NET DEBT
Total borrowings were £47,509 million at 31 December 2018, a decrease of 3.9% (31 December 2017: £49,450 million)
largely due to the repayment, on maturity, of a €400 million bond in March 2018 and three bonds totalling US$2,500
million in June 2018.
Eight series of US$ denominated unregistered bonds totalling US$17.25 billion were issued in August 2017 pursuant
to Rule 144A with registration rights, whereby the Group committed to investors that the bonds would be
exchangeable for registered notes. In October 2018, investors were offered to exchange their unregistered bonds for
registered bonds in line with the registration rights. The exchange offer was completed in November 2018 with
99.7% of the bonds exchanged.
Total borrowings include £944 million (31 December 2017: £947 million) in respect of the purchase price
adjustments related to the acquisition of RAI.
The Group remains confident in its ability to access the debt capital markets successfully and reviews its options on a
continuing basis.
15
Borrowings and Net Debt continued…
The Group defines net debt as borrowings including related derivatives, less cash and cash equivalents and current
investments held at fair value. Closing net debt was £44,351 million (31 December 2017: £45,571 million). A
reconciliation of borrowings to net debt is provided below.
As at 31 December 2018 2017
£m £m
Total borrowings (47,509) (49,450)
Derivatives in respect of net debt:
Assets 647 640
Liabilities (269) (117)
Cash and cash equivalents 2,602 3,291
Current investments held at fair value 178 65
Net debt (44,351) (45,571)
Maturity profile of net debt:
Net debt due within one year (1,447) (2,048)
Net debt due beyond one year (42,904) (43,523)
Net debt (44,351) (45,571)
The movement in net debt includes the free cash flow earned in the year (2018: £7,684 million; 2017: £3,500
million) as described on page 15. This is offset by dividends paid to owners of the parent of £4,347 million (2017:
£3,465 million), other cash items including investments made, notably in 2017 related to the additional borrowings
in relation to the acquisition of RAI. Also impacting carrying value of net debt at the balance sheet date are non-
cash movements including, in 2017, the consolidation of RAI’s net debt (£9,915 million) as part of the acquisition,
and a negative translational foreign exchange headwind due to the movement in sterling against the reporting
currencies, largely US dollar, of £1,963 million (2017: £1,268 million tailwind).
These movements can be summarised as follows:
As at 31 December 2018 2017
£m £m
Opening net debt (45,571) (16,767)
Free cash inflow 7,684 3,500
Other cash payments, including dividends paid to owners of the (4,688) (23,263)
parent and investments made
Net debt acquired 1 (9,915)
Other non-cash movements 186 (394)
Foreign exchange (1,963) 1,268
Closing net debt (44,351) (45,571)
16
Borrowings and Net Debt continued…
Adjusted net debt to adjusted EBITDA
For the purposes of assessing the Group’s ability to service and repay borrowings, the Group uses the ratio of
adjusted net debt to adjusted EBITDA. Adjusted EBITDA is defined as profit for the year (earnings) before net finance
costs, taxation on ordinary activities, share of post-tax results of associates and joint ventures, depreciation,
amortisation, impairment costs and other adjusting items.
The Group also adjusts net debt for the purchase price allocation adjustment to the debt as part of the acquisition of
RAI as this is an accounting adjustment and does not reflect the enduring repayment of the instrument. The Group
management board believes that this additional measure, which is used internally to assess the Group’s financial
capacity, is useful to the users of the financial statements in helping them to see how the Group’s financial capacity
has changed over the year. The adjusted net debt position is provided below:
As at 31 December 2018 2017
£m £m
Net debt (44,351) (45,571)
Purchase price allocation (PPA) adjustment to acquired debt 944 947
Adjusted net debt (43,407) (44,624)
The Group’s ratio of adjusted net debt to adjusted EBITDA was 4.0x (2017: 5.3x). This was partly due to the
recognition of a full year’s adjusted EBITDA from RAI and is also reflective of the Group’s improved adjusted earnings
delivery, on a representative basis. The Group’s exposure to foreign exchange, particularly due to short term
volatility around the reporting date, notably in relation to the US denominated borrowings, led to a headwind on the
ratio. On a constant currency basis, adjusted net debt to adjusted EBITDA would have been approximately 3.6x.
The calculation of adjusted net debt to adjusted EBITDA is provided on page 49.
VENEZUELA
The macroeconomic environment continues to deteriorate in Venezuela. The results of our Venezuelan operations
have been consolidated within the Group’s results, in line with IFRS by virtue of control by the Group.
In 2018, the European Securities and Markets Authority (ESMA) recognised the specific issues related to Venezuela
and proposed that companies with exposure to Venezuela use an “estimated” exchange rate rather than the official
exchange rate, as otherwise required under IAS 21. Accordingly, the Group has used an exchange rate calculated with
reference to the estimated inflation since the latest dividend payment in 2010.
The net assets of the Group’s Venezuelan operations are subject to accounting adjustments under IAS 29 (Financial
Reporting in Hyperinflationary Economies), as they are revalued, for accounting purposes, from their acquisition date
to the balance sheet date. However, management believes that such a revaluation is not reflective of the recoverable
value of those assets and have incurred an impairment charge of £110 million (within profit from operations). This
charge has been treated as an adjusting item as it does not reflect the underlying performance of the Group. The
Group has also recognised a gain of £45 million within net finance costs, being the partial counter-party to the above
non-monetary asset movement, generating a monetary gain due to hyper-inflation accounting under IAS 29. This gain
has been treated as an adjusting item as it does not reflect the underlying performance of the Group.
The financial results of Venezuela, in sterling, are immaterial to the Group’s reported financial performance at less
than 0.5% of revenue, profit from operations and total assets.
17
FOREIGN CURRENCIES
The principal exchange rates used to convert the results of the Group’s foreign operations to pound sterling for the
purposes of inclusion and consolidation within the Group’s financial statements are indicated in the table below.
Where the Group has provided results “at constant rates of exchange” this refers to the translation of the results
from the foreign operations at rates of exchange prevailing in the prior period – thereby eliminating the potentially
distorting impact of the movement in foreign exchange on the reported results.
The principal exchange rates used were as follows:
Average Closing
2018 2017 2018 2017
Australian dollar 1.786 1.681 1.809 1.730
Brazilian real 4.868 4.116 4.936 4.487
Canadian dollar 1.730 1.672 1.739 1.695
Euro 1.130 1.142 1.114 1.127
Indian rupee 91.227 83.895 88.916 86.343
Japanese yen 147.376 144.521 139.733 152.387
Russian rouble 83.677 75.170 88.353 77.880
South African rand 17.643 17.150 18.321 16.747
US dollar 1.335 1.289 1.274 1.353
RISKS AND UNCERTAINTIES
During the year, the Directors carried out a robust assessment of the principal risks and uncertainties facing the
Group, including those that would threaten its business model, future performance, solvency, liquidity and viability.
As part of that assessment, the risk relating to the inability to obtain price increases and the impact of price increases
on consumer affordability thresholds is no longer considered a principal risk, as the likelihood has decreased
following improved pricing delivery over recent years and through recognition that the RAI acquisition has resulted in
better geographical diversity. Additionally, the risk related to tobacco and nicotine regulation was expanded to
include other relevant areas of regulation related to the Group’s operations.
The principal Group risks and applicable sub-categories are summarised under the headings of:
• Competition from illicit trade;
• Tobacco, nicotine and other regulation inhibits growth strategy;
• Market size reduction and consumer down-trading;
• Litigation;
• Geopolitical tensions;
• Disputed taxes, interest and penalties;
• Significant increases or structural changes in tobacco-related taxes;
• Foreign exchange rate exposures;
• Injury, illness or death in the workplace;
• Solvency and liquidity; and
• Inability to develop, commercialise and roll-out Potentially Reduced-Risk Products.
A summary of all the risk factors (including the principal risks) which are monitored by the Board through the Group’s
risk register will be included in the Annual Report and Form 20-F for the year ended 31 December 2018.
UPDATE ON ONGOING INVESTIGATION INTO MISCONDUCT ALLEGATIONS
As previously reported, we are investigating, through external legal advisers, allegations of misconduct and have
been liaising with the UK’s Serious Fraud Office (“SFO”) and other relevant authorities. It was announced in August
2017 that the SFO had opened an investigation in relation to the Company, its subsidiaries and associated persons.
We continue to co-operate with the SFO’s investigation. A sub-Committee of the Board has oversight of these
matters, providing support for the investigation between Board meetings.
18
UPDATE ON QUEBEC CLASS ACTION
On 27 October 2015, the Quebec Court of Appeal made an Order for Security in the amount of CAD$984 million
(approximately £566 million), of which Imperial Tobacco Canada’s (“ITCAN”) share was CAD$758 million
(approximately £436 million) paid in seven equal quarterly instalments. The final payment was made in 2017, with
the full value held on the Group’s balance sheet as a receivable subject to the outcome of the appeal. ITCAN
appealed the substantive decision awarding CAD$15.6 billion (approximately £9 billion) to the plaintiffs, of which
ITCAN’s share was CAD$10.4 billion (approximately £6 billion). This appeal was heard by a panel of five judges of the
Quebec Court of Appeal on 21-25 November 2016. The decision is due to be released by the Court of Appeal on 1
March 2019 at 21.00 (GMT). As at the date of this release, no judgment has been made available by the Court of
Appeal, there is no indication of the outcome and, consequently, there is no change to management’s assessment of
the outcome of the appeal. The Group continues to recognise the value of the Order for Security as a receivable and
with the outcome of the appeal against the substantive decision included as a contingent liability. Subject to the
outcome of judgment, the Group will assess its response and will provide further guidance.
Please refer to “Contingent Liabilities and Financial Commitments” below (page 41) and the 2017 Annual Report and
Form 20-F, note 28 Contingent Liabilities and Financial Commitments for a full discussion.
Additional information regarding the Court of Appeal’s decision and its anticipated impact on the Group will be
included in the 2018 Annual Report and Form 20-F.
BANGLADESH
On 25 July 2018, the Appellate Division of the Supreme Court of Bangladesh reversed the decision of the High Court
Division against BAT Bangladesh in respect of the retrospective demands for VAT and Supplementary Duty amounting
to approximately £170 million. The Attorney General’s Office has 30 days from receipt of the certified Court Order,
which remains to be issued, in which to seek a review of this decision.
CHANGES TO THE MAIN BOARD
In September 2018, the Group announced that Nicandro Durante will retire as Chief Executive Officer on 1 April
2019. Nicandro has served as the Group’s CEO for eight years.
It was also announced that Nicandro will be succeeded by Jack Bowles, who in anticipation of his appointment
became Chief Executive Designate on 1 November 2018 and joined the Board of British American Tobacco p.l.c. on
1 January 2019.
On 12 December 2018, the Company announced that Lionel Nowell, III retired from the Board of British American
Tobacco p.l.c. with effect from 12 December 2018. Lionel had served as a Non-Executive Director since July 2017
and was a member of the Audit and Nominations Committees from October 2017.
In a separate announcement today, the Company has announced that Ben Stevens will retire from the Board as
Finance Director on 5 August 2019. Ben joined BAT in 1990 and has served as Finance Director since 2008.
As also announced, Ben will be succeeded by Tadeu Marroco, currently Director, Group Transformation. Prior to his
appointment to the Board as Finance Director on 5 August 2019, Tadeu will be appointed as Deputy Finance Director
with effect from 1 March 2019, in addition to his current role.
19
CHANGES TO THE MANAGEMENT BOARD
As announced in October 2018, Andrew Gray, previously Chief Marketing Officer, stepped down from the
Management Board at the end of December 2018 and was replaced by Kingsley Wheaton, previously Regional
Director, Americas and Sub-Saharan Africa (AMSSA), with effect from 1 January 2019. As also previously announced
in November 2018, Luciano Comin succeeded Kingsley Wheaton and was appointed Regional Director, AMSSA with
effect from 1 January 2019.
On 14 December 2018, the Group announced a number of changes to the Management Board to accelerate the
implementation of our established and successful strategy. These included the creation of the following new
Management Board roles, with effect from 1 January 2019:
I. Director, New Categories. This role, reporting directly to the Chief Marketing Officer, has end-to-end
accountability for driving growth, innovation, world-class brand building and consumer insights for our vapour,
THP and modern oral categories.
II. Director, Digital and Information. This role, reporting directly to the CEO, is responsible for driving digital
transformation across the Group and further enhancing our digital consumer experience capabilities.
In addition, the roles of Chief Operating Officer and Group Business Development Director will cease to exist, with all
four regions (USA, Europe and North Africa, Asia-Pacific and Middle East and Americas and Sub-Saharan Africa)
reporting directly to the CEO.
In light of the above, the following appointments were made with effect from 1 January 2019:
• Paul Lageweg was appointed as Director, New Categories;
• Marina Bellini was appointed as Director, Digital and Information;
• Tadeu Marroco, previously Regional Director, Europe and North Africa, was appointed to a new
Management Board role, Director, Group Transformation. This role works closely with the Chief Executive
Designate in this key phase of our transformation, to simplify our structure and processes. In addition to this
role, Tadeu has been appointed as Deputy Finance Director with effect from 1 March 2019 and will succeed
Ben Stevens as Finance Director on 5 August 2019;
• Johan Vandermeulen, previously Regional Director, Asia-Pacific and Middle East, has succeeded Tadeu as
Regional Director, Europe and North Africa;
• Guy Meldrum was appointed to succeed Johan as Regional Director, Asia-Pacific and Middle East; and
• Hae In Kim was appointed as Director, Talent and Culture Designate.
The Group also announced that:
• Giovanni Giordano, currently Group Human Resources Director, will step down from the Management Board
at the end of March 2019 and will be succeeded by Hae In Kim as Director, Talent and Culture on 1 April
2019; and
• Naresh Sethi, currently Group Business Development Director, will step down from the Management Board
at the end of March 2019, when his role will cease to exist.
20
CHANGES IN THE GROUP
In November 2018, the Group acquired Quantus Beteiligungs-und Beratungsgesellschaft mbH. The company trades as
Highendsmoke and is Germany’s leading vapour retail chain, owns brands such as German Liquids and MIXD flavours,
and has a retail footprint of around 100 stores. The acquisition was not material and no adjustments to the Group’s
reported performance will be made. The Group did not complete any material acquisitions in the year.
On 25 July 2017, the Group announced the completion of the acquisition of the remaining 57.8% of RAI not already
owned by the Group for a consideration of £41.8 billion. RAI shareholders received, for each share of RAI common
stock, US$29.44 in cash, without interest, and 0.5260 BAT ordinary shares which are represented by BAT American
Depositary Shares (ADSs) listed on the New York Stock Exchange.
RAI ceased to be reported as an associate and has been consolidated as a wholly-owned subsidiary from the
acquisition date.
On 21 December 2017, the Group signed an agreement to acquire 100% of the share capital of Twisp Propriety
Limited, a South African e-cigarette/nicotine vapour company, conditional upon, amongst other things, anti-trust
approval. The proposed acquisition is subject to a South African Competition Tribunal process with a decision
expected in 2019.
GOING CONCERN
A description of the Group’s business activities, its financial position, cash flows, liquidity position, facilities and
borrowings position, together with the factors likely to affect its future development, performance and position, are
set out in this announcement. Further information will be provided in the Strategic Report and in the notes to the
financial statements, all of which will be included in the 2018 Annual Report and Form 20-F.
The Group has, at the date of this announcement, sufficient existing financing available for its estimated
requirements for at least the next 12 months. This, together with the ability to generate cash from trading activities,
the performance of the Group’s Strategic Portfolio, its leading market positions in a number of countries and its
broad geographical spread, as well as numerous contracts with established customers and suppliers across different
geographical areas and industries, provides the Directors with the confidence that the Group is well placed to
manage its business risks successfully in the context of current financial conditions and the general outlook in the
global economy.
After reviewing the Group’s annual budget, plans and financing arrangements for the next three years, the Directors
consider that the Group has adequate resources to continue operating and that it is therefore appropriate to continue
to adopt the going concern basis in preparing the Annual Report and Form 20-F.
DIRECTORS’ RESPONSIBILITY STATEMENT
The responsibility statement set out below is solely for the purpose of complying with Disclosure Guidance and
Transparency Rule 6.3.5R. This statement relates to and is extracted from the 2018 Annual Report. Responsibility is
for the full 2018 Annual Report and not the extracted information presented in this Preliminary Announcement. We
confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true
and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings
included in the consolidation taken as a whole; and
• the Strategic Report and the Directors’ Report include a fair review of the development and performance of the
business and the position of the Company and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they face.
This responsibility statement has been approved and is signed by order of the Board by:
Richard Burrows Ben Stevens
Chairman Finance Director
27 February 2019
21
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Mike Nightingale +44 (0)20 7845 1180 Press Office +44 (0)20 7845 2888
Rachael Brierley +44 (0)20 7845 1519
John Harney +44 (0)20 7845 1263
Webcast and Conference Call Participant Passcode: 7708518#
A live webcast of the results is available via www.bat.com/ir on 28 February 2019 at 09.30 GMT
If you wish to listen to the presentation via a conference call facility please use the dial in details below:
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UK (toll free): 0808 109 0701 US (toll free): 1 877 419 2272
Conference Call Playback Facility – Passcode: 7708518#
A replay of the conference call will also be available for 5 days.
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UK (toll free): 0800 633 8453 US (toll free): 1 866 595 5357
22
Financial Statements
GROUP INCOME STATEMENT
2018 2017
Revised
£m £m
Revenue 1 24,492 19,564
Raw materials and consumables used (4,664) (4,520)
Changes in inventories of finished goods and work in progress 114 (513)
Employee benefit costs (3,005) (2,679)
Depreciation, amortisation and impairment costs (1,038) (902)
Other operating income 85 144
Loss on reclassification from amortised cost to fair value (3) -
Other operating expenses (6,668) (4,682)
Profit from operations 9,313 6,412
Net finance costs (1,381) (1,094)
Finance income 103 103
Finance costs (1,484) (1,197)
Share of post-tax results of associates and joint ventures 419 24,209
Profit before taxation 8,351 29,527
Taxation on ordinary activities (2,141) 8,129
Profit for the year 6,210 37,656
Attributable to:
Owners of the parent 6,032 37,485
Non-controlling interests 178 171
6,210 37,656
Earnings per share
Basic 264.0p 1,833.9p
Diluted 263.2p 1,827.6p
All of the activities during both years are in respect of continuing operations.
The accompanying notes on pages 29 to 42 form an integral part of this condensed consolidated financial
information.
1Revenue is net of duty, excise and other taxes of £38,553 million and £37,780 million for the years ended 31 December 2018 and 31
December 2017, respectively.
The results for the year ended 31 December 2017 have been amended (“Revised”) following the Group’s retrospective application of
IFRS 15 (Revenue from Contracts with Customers). See pages 29, 55 and 56.
The loss on reclassification from amortised cost to fair value relates to IFRS 9 Financial Instruments, applied prospectively from 1
January 2018, as described on pages 29 and 30.
23
Financial Statements
GROUP STATEMENT OF COMPREHENSIVE INCOME
2018 2017
Revised
£m £m
Profit for the year (page 23) 6,210 37,656
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss: 3,099 (3,809)
Differences on exchange 3,868 (3,084)
Cash flow hedges
– net fair value losses (58) (264)
– reclassified and reported in profit for the year 17 109
– reclassified and reported in total assets - (16)
Investments held at fair value
– net fair value losses - (27)
Net investment hedges
– net fair value (losses)/gains (472) 425
– differences on exchange on borrowings (236) (68)
Associates – share of OCI, net of tax (38) (918)
Tax on items that may be reclassified 18 34
Items that will not be reclassified subsequently to profit or loss: 115 681
Retirement benefit schemes
– net actuarial gains 138 833
– surplus recognition and minimum funding obligations 4 (6)
Associates – share of OCI, net of tax 6 25
Tax on items that will not be reclassified (33) (171)
Total other comprehensive income/(expense) for the year, net of tax 3,214 (3,128)
Total comprehensive income for the year, net of tax 9,424 34,528
Attributable to:
Owners of the parent 9,239 34,361
Non-controlling interests 185 167
9,424 34,528
The accompanying notes on pages 29 to 42 form an integral part of this condensed consolidated financial information.
The results for the year ended 31 December 2017 have been amended (“Revised”) following the Group’s retrospective application of IFRS 15 (Revenue
from Contracts with Customers). See pages 29, 55 and 56.
24
Financial Statements
GROUP STATEMENT OF CHANGES IN EQUITY
2018 Attributable to owners of the parent
Share premium, Total attributable Non-
Share capital redemption Other Retained to owners controlling
capital and merger reserves reserves earnings of parent interests Total equity
£m £m £m £m £m £m £m
Balance at 31 December 2017 – revised 614 26,602 (3,392) 36,935 60,759 222 60,981
Accounting policy change (IFRS 9) – see
page 29 - - (9) (29) (38) - (38)
Revised balance at 1 January 2018 614 26,602 (3,401) 36,906 60,721 222 60,943
Total comprehensive income for the year
comprising: (page 24) - - 3,090 6,149 9,239 185 9,424
Profit for the year (page 23) - - - 6,032 6,032 178 6,210
Other comprehensive income for the year
(page 24) - - 3,090 117 3,207 7 3,214
Cash flow hedges reclassified and
reported in total assets - - (22) - (22) - (22)
Employee share options
– value of employee services - - - 121 121 - 121
– proceeds from shares issued - 4 - - 4 - 4
Dividends and other appropriations
– ordinary shares - - - (4,463) (4,463) - (4,463)
– to non-controlling interests - - - - - (163) (163)
Purchase of own shares
– held in employee share ownership
trusts - - - (139) (139) - (139)
Non-controlling interests – acquisitions - - - (11) (11) - (11)
Other movements - - - (6) (6) - (6)
Balance at 31 December 2018 614 26,606 (333) 38,557 65,444 244 65,688
2017 (Revised) Attributable to owners of the parent
Total
Share premium, attributable Non-
Share capital redemption Other Retained to owners controlling
capital and merger reserves reserves earnings of parent interests Total equity
£m £m £m £m £m £m £m
Balance at 1 January 2017 507 3,931 413 3,331 8,182 224 8,406
Total comprehensive (expense)/income for
the year comprising: (page 24) - - (3,805) 38,166 34,361 167 34,528
Profit for the year (page 23) - - - 37,485 37,485 171 37,656
Other comprehensive (expense)/income for
the year (page 24) - - (3,805) 681 (3,124) (4) (3,128)
Employee share options
– value of employee services - - - 105 105 - 105
– proceeds from shares issued - 5 - - 5 - 5
Dividends and other appropriations
– ordinary shares - - - (4,465) (4,465) - (4,465)
– to non-controlling interests - - - - - (169) (169)
Purchase of own shares
– held in employee share ownership
trusts - - - (205) (205) - (205)
Shares issued – RAI acquisition 107 22,666 - - 22,773 - 22,773
Other movements - - - 3 3 - 3
Balance at 31 December 2017 614 26,602 (3,392) 36,935 60,759 222 60,981
The accompanying notes on pages 29 to 42 form an integral part of this condensed consolidated financial information.
The results for the year ended 31 December 2017 have been amended (“Revised”) following the Group’s retrospective application of
IFRS 15 (Revenue from Contracts with Customers). See pages 29, 55 and 56.
25
Financial Statements
GROUP BALANCE SHEET
2018 2017
Revised
£m £m
Assets
Non-current assets
Intangible assets 124,013 117,785
Property, plant and equipment 5,166 4,882
Investments in associates and joint ventures 1,737 1,577
Retirement benefit assets 1,147 1,123
Deferred tax assets 344 333
Trade and other receivables 685 756
Investments held at fair value 39 42
Derivative financial instruments 556 590
Total non-current assets 133,687 127,088
Current assets
Inventories 6,029 5,864
Income tax receivable 74 460
Trade and other receivables 3,588 4,053
Investments held at fair value 178 65
Derivative financial instruments 179 228
Cash and cash equivalents 2,602 3,291
12,650 13,961
Assets classified as held-for-sale 5 5
Total current assets 12,655 13,966
Total assets 146,342 141,054
The accompanying notes on pages 29 to 42 form an integral part of this condensed consolidated
financial information.
The results for the year ended 31 December 2017 have been amended (“Revised”) following the Group’s retrospective application of
IFRS 15 (Revenue from Contracts with Customers). See pages 29, 55 and 56.
26
Financial Statements
GROUP BALANCE SHEET – cont…
2018 2017
Revised
£m £m
Equity – Capital and reserves
Share capital 614 614
Share premium, capital redemption and merger reserves 26,606 26,602
Other reserves (333) (3,392)
Retained earnings 38,557 36,935
Owners of the parent 65,444 60,759
Non-controlling interests 244 222
Total equity 65,688 60,981
Liabilities
Non-current liabilities
Borrowings 43,284 44,027
Retirement benefit liabilities 1,665 1,821
Deferred tax liabilities 17,776 17,129
Other provisions for liabilities 331 354
Trade and other payables 1,055 1,058
Derivative financial instruments 214 79
Total non-current liabilities 64,325 64,468
Current liabilities
Borrowings 4,225 5,423
Income tax payable 853 720
Other provisions for liabilities 318 399
Trade and other payables 10,631 8,908
Derivative financial instruments 302 155
Total current liabilities 16,329 15,605
Total equity and liabilities 146,342 141,054
The accompanying notes on pages 29 to 42 form an integral part of this condensed consolidated
financial information.
The results for the year ended 31 December 2017 have been amended (“Revised”) following the Group’s retrospective application of
IFRS 15 (Revenue from Contracts with Customers). See pages 29, 55 and 56.
27
Financial Statements
GROUP CASH FLOW STATEMENT
2018 2017
Revised
£m £m
Cash flows from operating activities
Cash generated from operating activities (page 35) 11,972 6,119
Dividends received from associates 214 903
Tax paid (1,891) (1,675)
Net cash generated from operating activities 10,295 5,347
Cash flows from investing activities
Interest received 52 83
Purchases of property, plant and equipment (758) (791)
Proceeds on disposal of property, plant and equipment 38 95
Purchases of intangibles (185) (187)
Purchases of investments (320) (170)
Proceeds on disposals of investments 167 160
Acquisition of Reynolds American Inc. net of cash acquired - (17,657)
Investment in associates and acquisitions of other subsidiaries net of cash
acquired (32) (77)
Proceeds on disposal of non-core business net of cash disposed 17 -
Net cash used in investing activities (1,021) (18,544)
Cash flows from financing activities
Interest paid (1,559) (1,114)
Proceeds from increases in and new borrowings 2,111 40,937
Inflows/(outflows) relating to derivative financial instruments 49 (406)
Purchases of own shares held in employee share ownership trusts (139) (205)
Reductions in and repayments of borrowings (5,596) (20,827)
Dividends paid to owners of the parent (4,347) (3,465)
Purchase of non-controlling interests (11) -
Dividends paid to non-controlling interests (142) (167)
Other 4 6
Net cash (used in)/from financing activities (9,630) 14,759
Net cash flows (used in)/from operating, investing and financing activities (356) 1,562
Differences on exchange (138) (391)
(Decrease)/increase in net cash and cash equivalents in the year (494) 1,171
Net cash and cash equivalents at 1 January 2,822 1,651
Net cash and cash equivalents at year end 2,328 2,822
Cash and cash equivalents per balance sheet 2,602 3,291
Overdrafts and accrued interest (274) (469)
Net cash and cash equivalents at year end 2,328 2,822
The accompanying notes on pages 29 to 42 form an integral part of this condensed consolidated financial
information. The net cash outflows relating to the adjusting items on pages 32 and 33, included in the above,
are £601 million (31 December 2017: £685 million).
The results for the year ended 31 December 2017 have been amended (“Revised”) following the Group’s retrospective application of
IFRS 15 (Revenue from Contracts with Customers). See pages 29, 55 and 56.
28
Notes to the Financial Statements
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The condensed consolidated financial information has been extracted from the Annual Report and Form 20-F,
including the audited financial statements for the year ended 31 December 2018. This condensed
consolidated financial information does not constitute statutory accounts within the meaning of Section 434
of the Companies Act 2006.
The Group has prepared its annual consolidated financial statements in accordance with IFRS as issued by the
International Accounting Standards Board (IASB), IFRS as adopted by the European Union (EU) and in
accordance with the provisions of the UK Companies Act 2006. IFRS as adopted by the EU differs in certain
respects from IFRS as issued by the IASB. The differences have no impact on the Group’s consolidated
financial statements for the periods presented.
These financial statements have been prepared under the historical cost convention, except in respect of
certain financial instruments. They are prepared on a basis consistent with the IFRS accounting policies as set
out in the Annual Report for the year ended 31 December 2017, except as required to be revised for the
implementation of accounting standards effective 1 January 2018, noted below.
The preparation of these condensed consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and
the disclosure of contingent liabilities at the date of these condensed consolidated financial statements. Such
estimates and assumptions are based on historical experience and various other factors that are believed to
be reasonable in the circumstances and constitute management’s best judgement at the date of the
condensed consolidated financial statements. In the future, actual experience may deviate from these
estimates and assumptions, which could affect these condensed consolidated financial statements as the
original estimates and assumptions are modified, as appropriate, in the year in which the circumstances
change.
With effect from 1 January 2018, the Group has adopted IFRS 15 Revenue from Contracts with Customers.
The Group has revised prior periods, as permitted by the Standard, to ensure comparability of the income
statement across prior periods. This Standard has changed the way the Group accounts for consideration
payable to customers, and requires certain payments to indirect customers, previously shown as marketing
expenses, to be shown as deductions from revenue. This has reduced revenue for the twelve months to 31
December 2017 by £664 million, with a corresponding reduction in operating costs. In addition, due to the
timing of the recognition of certain payments to indirect customers, revenue and operating profit for the
twelve months ended 31 December 2017 has been reduced by a further £64 million.
In addition, with effect from 1 January 2018, the Group has adopted IFRS 9 Financial Instruments with no
revision of prior periods, as permitted by the Standard. The cumulative impact of adopting the Standard,
including the effect of tax entries, has been recognised as a revision of opening reserves in 2018, and is £38
million arising from the impairment of financial assets under the expected loss model required under IFRS 9,
which accelerates recognition of potential impairment on loans and trade receivables when compared with
the incurred loss model under IAS 39. A simplified “lifetime expected loss model” has been used for balances
arising as a result of revenue recognition, as permitted by the Standard, by applying a standard rate of
provision on initial recognition of trade debtors based upon the Group’s historical experience of credit loss
modified by expectations of the future, and increasing this provision to take account of overdue receivables.
Applying the requirements of IFRS 9 has resulted in a decrease of trade and other debtors of £45 million as at
1 January 2018.
29
Notes to the Financial Statements
Accounting policies and basis of preparation cont…
IFRS 9 also changes the classification and measurement of financial assets. The category of available-for-sale
investments (where fair value changes were deferred in reserves until disposal of the investment) has been
replaced with the category of financial assets at Fair Value through Profit and Loss (for most investments) and
the category of financial assets at Fair Value through Other Comprehensive Income (for qualifying equity
investments). The available-for-sale reserve at 1 January 2018 has been reclassified as appropriate into
retained earnings. In addition, certain loans and receivables which do not meet the recognition and
measurement tests for amortised cost classification under IFRS 9 have been reclassified as financial assets at
Fair Value through Profit and Loss at the same date.
Given the immateriality of the various investment classes and to avoid clutter on the face of the balance
sheet, the Group will use the term “investments held at fair value” to refer to all of these financial assets
both pre- and post- the adoption of IFRS 9.
Further details on the impact on the Group’s balance sheet of these changes are provided on page 39. The
Group has adopted the hedge accounting requirements of IFRS 9 prospectively from 1 January 2018.
In addition, with effect from 1 January 2018, the Group has changed certain estimates of useful economic
lives for plant and machinery across the Group, harmonising depreciation rates used by the International
Businesses and by RAI from 14 years and 30 years, respectively, to a standard 20-year life. The effect of the
change is not material to the Group and is estimated to be £66 million for the year. RAI recognised an
impairment charge of £13 million in compliance with the new estimate.
ADJUSTING ITEMS
Adjusting items are significant items of income or expense in revenue, profit from operations, net finance
costs, taxation and the Group’s share of the post-tax results of associates and joint ventures which
individually or, if of a similar type, in aggregate, are relevant to an understanding of the Group’s underlying
financial performance because of their size, nature or incidence. In identifying and quantifying adjusting
items, the Group consistently applies a policy that defines criteria that are required to be met for an item to
be classified as adjusting. These items are separately disclosed in the segmental analyses or in the notes to
the accounts as appropriate.
The Group believes that these items are useful to users of the Group financial statements in helping them to
understand the underlying business performance and are used to derive the Group’s principal non-GAAP
measures of adjusted revenue, adjusted profit from operations, adjusted diluted earnings per share,
operating cash flow conversion ratio and adjusted cash from operations, all of which are before the impact of
adjusting items and which are reconciled from revenue, profit from operations, diluted earnings per share,
cash conversion ratio and net cash generated from operating activities.
30
Notes to the Financial Statements
ANALYSIS OF REVENUE BY SEGMENT
2018 2017
Reported Adj Items1 Adjusted Exchange Adjusted at Revised* Adj Items1 Adjusted
CC2
Revenue £m £m £m £m £m £m £m £m
US 9,495 - 9,495 343 9,838 4,160 - 4,160
APME 4,882 - 4,882 368 5,250 4,973 - 4,973
AMSSA 4,111 - 4,111 449 4,560 4,323 - 4,323
ENA 6,004 (180) 5,824 288 6,112 6,108 (258) 5,850
Total Region 24,492 (180) 24,312 1,448 25,760 19,564 (258) 19,306
ADJUSTING ITEMS INCLUDED IN REVENUE
Adjusting items in revenue relate to certain third-party contract manufacturing arrangements. The Group will
acquire and sell goods inclusive of excise, acquired from a third party under short-term arrangements, and
then passed on to customers. This increases both revenue and cost of sales, with no impact to profit from
operations but distorts operating margin. To better reflect the underlying performance of the Group, this
uplift from excise in both revenue and cost of sales has been adjusted for, given the temporary nature of the
arrangement.
ANALYSIS OF PROFIT FROM OPERATIONS AND DILUTED EARNINGS PER SHARE BY SEGMENT
2018 2017
Reported Adj Items1 Adjusted Exchange Adjusted Revised* Adj Items1 Adjusted
at CC2
£m £m £m £m £m £m £m £m
Profit from Operations
US 4,006 505 4,511 175 4,686 1,165 763 1,928
APME 1,858 90 1,948 151 2,099 1,902 147 2,049
AMSSA 1,544 194 1,738 184 1,922 1,648 134 1,782
ENA 1,905 245 2,150 67 2,217 1,697 473 2,170
Total Region 9,313 1,034 10,347 577 10,924 6,412 1,517 7,929
Net finance costs (1,381) (4) (1,385) (30) (1,415) (1,094) 205 (889)
Associates and
419 (32) 387 33 420 24,209 (23,197) 1,012
joint ventures
Profit before tax 8,351 998 9,349 580 9,929 29,527 (21,475) 8,052
Taxation (2,141) (223) (2,364) (144) (2,508) 8,129 (10,220) (2,091)
Non-controlling
(178) (6) (184) (6) (190) (171) (4) (175)
interests
Profit
attributable to 6,032 769 6,801 430 7,231 37,485 (31,699) 5,786
shareholders
Diluted number
2,292 2,292 2,292 2,051 2,051
of shares (m)
Diluted earnings
263.2 296.7 315.5 1,827.6 282.1
per share (pence)
Notes to the analysis of revenue and profit from operations above:
(1) Adjusting items represent certain items which the Group considers distinctive based upon their size, nature or incidence.
(2) CC: constant currency – measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year’s results
of the Group and, where applicable, its segments.
* 2017 results have been revised for the impact of IFRS 15 (Revenue from Contracts with Customers), effective 1 January 2018 with
retrospective application, and for the change to the regions, effective 1 January 2018, as previously announced.
31
Notes to the Financial Statements
ADJUSTING ITEMS INCLUDED IN PROFIT FROM OPERATIONS
Adjusting items are significant items in the profit from operations that individually or, if of a similar type, in
aggregate, are relevant to an understanding of the Group’s underlying financial performance. Full details of
the Group’s adjusting items will be included in the Annual Report and Form 20-F for the year ended 31
December 2018.
(a) Restructuring and integration costs
Restructuring costs reflect the costs incurred as a result of initiatives to improve the effectiveness and the
efficiency of the Group as a globally integrated enterprise, including the relevant operating costs of
implementing the new operating model. These costs represent additional expenses incurred that are not
related to the normal business and day-to-day activities. The new operating model includes revised
organisation structures, standardised processes and shared back office services underpinned by a global
single instance of SAP. These initiatives also include a review of the Group’s manufacturing operations, supply
chain, overheads and indirect costs, organisational structure and systems and software used. The costs of
these initiatives, together with the costs of integrating acquired businesses into existing operations, including
acquisition costs, are included in profit from operations under the following headings:
2018 2017
£m £m
Employee benefit costs 176 193
Depreciation and impairment costs 48 85
Other operating expenses 145 330
Other operating income (6) (8)
Total 363 600
The adjusting charge in 2018 relates to the integration costs associated with the acquisition of RAI and
ongoing costs of implementing the revisions to the Group’s operating model. This includes the cost of
packages in respect of permanent headcount reductions and permanent employee benefit reductions in the
Group. The costs also cover the downsizing activities in Germany, Russia and in APME, partially offset by the
income from sale of certain assets that have become available as part of the downsizing activities.
Restructuring and integration costs in 2017 include advisor fees and costs incurred related to the acquisition
of the shares in RAI not already owned by the Group, the restructuring initiatives directly related to
implementation of a new operating model and the cost of initiatives in respect of permanent headcount
reductions and permanent employee benefit reductions in the Group. The costs also cover certain integration
costs related to the acquisition of RAI, factory closure and downsizing activities in Germany and Malaysia,
certain exit costs and asset write-offs related to the withdrawal from the Philippines.
(b) Amortisation and impairment of trademarks and similar intangibles
Acquisitions including RAI, TDR and Skandinavisk Tobakskompagni in previous years, have resulted in the
capitalisation of trademarks and similar intangibles that are amortised over their expected useful lives, which
do not exceed 20 years. The amortisation and impairment charge of £377 million (2017: £383 million) is
included in depreciation, amortisation and impairment costs in the income statement.
(c) Fox River
In 2011, a Group subsidiary provided £274 million in respect of claims in relation to environmental clean-up
costs of the Fox River. On 30 September 2014, a Group subsidiary, NCR, Appvion and Windward Prospects
entered into a Funding Agreement with regard to the costs for the clean-up of Fox River. Based on this
Funding Agreement in 2018, £30 million has been paid (2017: £25 million).
32
Notes to the Financial Statements
Adjusting items included in profit from operations cont…
In January 2017, NCR and Appvion entered into a Consent Decree with the US Government to resolve how
the remaining clean-up will be funded and to resolve further outstanding claims between them. The Consent
Decree was approved by the District Court of Wisconsin in August 2017. The US Government enforcement
action against NCR was terminated as a result of that order and contribution claims from the Potentially
Responsible Parties (“PRPs”) against NCR were dismissed. On 4 January 2019, the US Government, P. H.
Glatfelter and Georgia-Pacific (the remaining Fox River PRPs) sought approval for a separate Consent Decree
that should bring an end to all litigation concerning the Fox River clean-up. The Consent Decree is expected to
be approved by the US District Court for the Eastern District of Wisconsin before the end of the second
quarter of 2019. Considering these developments, the provision has been reviewed. No adjustment has been
proposed, other than as related to the payments above, with the provision standing at £108 million at 31
December 2018 (31 December 2017: £138 million).
In July 2016, the High Court ruled in a Group subsidiary’s favour that a dividend of €135 million
(approximately £121 million) paid by Windward to Sequana in May 2009 was a transaction made with the
intention of putting assets beyond the reach of the Group subsidiary and of negatively impacting its interests.
On 10 February 2017, further to a hearing in January 2017 to determine the relief due, the Court found in the
Group subsidiary’s favour, ordering that Sequana must pay an amount up to the full value of the dividend
plus interest which equates to around US$180 million (approximately £145 million), related to past and
future clean-up costs. The Court granted all parties leave to appeal and Sequana a stay in respect of the
above payments. The appeal was heard in June 2018. Judgment was given on 6 February 2019 and the Court
of Appeal upheld the High Court’s findings against Sequana. The Court of Appeal refused applications made
by both parties for a further appeal to the U.K. Supreme Court. The Group is considering its further appeal
options. Due to the uncertain outcome of the case no asset has been recognised in relation to this ruling. In
February 2017, Sequana entered into a process in France seeking court protection (the “Sauvegarde”), exiting
the Sauvegarde in June 2017. No payments have been received.
(d) Other
In 2018, the Group incurred £294 million (2017: £534 million) of other adjusting items, including £178 million
related to Engle progeny litigation offset by credits related to the Non-Participating Manufacturers
settlement, which have been adjusted within “other operating expenses”.
The net assets of the Group’s Venezuelan operations are subject to accounting adjustments under IAS 29,
Financial Accounting in Hyperinflationary Economies, as they are revalued, for accounting purposes, from
their acquisition date to the balance sheet date. As discussed on page 17, this leads to an increase in the
sterling carrying value that does not reflect the recoverable value of those assets. Accordingly, an impairment
charge of £110 million has been recognised and treated as an adjusting item within “depreciation,
amortisation and impairment costs”.
In 2017, the release of the fair value acquisition accounting adjustments to finished goods inventories of
£465 million has been adjusted within “changes in inventories of finished goods and work in progress”.
Also included in 2017 is the impairment of certain assets (£69 million) related to a third-party distributor
(Agrokor) in Croatia, that has been adjusted within “other operating expenses”.
ADJUSTING ITEMS INCLUDED IN NET FINANCING COSTS
In 2018, the Group incurred interest on adjusting tax payables of £41 million (2017: £43 million). This includes
interest of £25 million (2017: £25 million) in relation to FII GLO, as described on page 42 and interest of £12
million related to retrospective guidance by a tax authority on overseas withholding tax. Also in 2018, the
Group recognised a monetary gain of £45 million related to the application of hyperinflationary accounting in
Venezuela, as described on page 17.
33
Notes to the Financial Statements
ADJUSTING ITEMS INCLUDED IN SHARE OF POST-TAX RESULTS OF ASSOCIATES AND JOINT
VENTURES
The following is a summary of the adjusting items incurred in respect of the Group’s associates and joint
ventures, shown reflecting the Group’s share of post-tax results:
2018 2017
£m £m
Gain on deemed disposal of RAI as an associate - 23,288
Costs incurred by RAI related to its acquisition by BAT - (33)
Other adjusting items incurred by RAI pre-acquisition - (60)
Tisak/Agrokor adjustment - (27)
Reversal of tax claim in ITC 10 -
Dilution of interest in ITC 22 29
Total 32 23,197
The Group’s interest in ITC decreased from 29.71% to 29.57% as a result of ITC issuing ordinary shares under
the company’s Employees Share Option Scheme. The issue of these shares and change in the Group’s share
of ITC resulted in a gain of £22 million (2017: £29 million), which is treated as a deemed partial disposal and
included in the income statement. ITC also recognised an adjusting gain related to the release of certain
provisions related to a tax claim, the Group’s share of which, net of tax, was £10 million.
In 2017, the Group is deemed to have disposed of its shares in RAI as an associate and acquired RAI as a
wholly owned subsidiary, with a gain on the disposal of £23,288 million.
In 2017, in the period prior to the acquisition, RAI incurred costs in relation to the acquisition of the
remaining shares not already owned by BAT, the Group’s share of which was £33 million, net of tax and
deferred tax charges in respect of temporary differences on trademarks, the Group’s share of which was £18
million. RAI also incurred restructuring charges the Group’s share of which was £14 million, net of tax (2016:
£7 million net of tax), and costs in respect of a number of Engle progeny lawsuits and other tobacco litigation
charges, the Group’s share of which was £32 million, net of tax (2016: £17 million, net of tax). Additionally, in
the period prior to acquisition, there was income related to the Non-Participating Manufacturer (NPM)
Adjustment claims of the states no longer challenging the findings of non-diligence entered against them by
an Arbitration Panel, the Group’s share of which is £4 million net of tax (2016: £2 million, net of tax). Also in
2017, the Group impaired the carrying value of its investment in Tisak d.d (Tisak) by £27 million, due to a
deterioration in the financial performance linked to the financial difficulties associated with a third-party
distributor (Agrokor) in Croatia.
The share of post-tax results of associates and joint ventures is after the adjusting items shown above which
are excluded from the calculation of adjusted earnings per share as set out on page 37.
ADJUSTING ITEMS INCLUDED IN TAXATION
Adjusting items relate to a £79 million credit due to changes in the US State tax rates in the year, relating to
the revaluation of deferred tax liabilities arising on trademarks recognised on the RAI acquisition in 2017 and
a £55 million charge related to retrospective guidance by a tax authority in the ENA region regarding the
application of overseas withholding tax between 2015 and 2017. A provision for the associated tax charge
and £12 million of interest has been recognised.
As the above items are not reflective of the ongoing business, these have been recognised as adjusting items
within taxation. The adjusting tax item also includes £199 million (2017: £454 million) in respect of the
taxation on other adjusting items, which are described on pages 32 and 33.
In 2017, the Group also recognised a deferred tax credit of £9,620 million relating to the changes in tax rates
in the US.
34
Notes to the Financial Statements
CASH FLOW
Net cash generated from operating activities
Net cash generated from operating activities in the IFRS cash flows on page 28 includes the following items:
2018 2017
Revised
£m £m
Profit from operations 9,313 6,412
Depreciation, amortisation and impairment 1,038 902
(Increase)/decrease in inventories (192) 1,409
Decrease/(increase) in trade and other receivables 502 (732)
Increase in amounts recoverable in respect of the Quebec Class Action - (130)
Increase/(decrease) in provision for MSA 1,364 (934)
Increase/(decrease) in trade and other payables 123 (685)
Decrease in net retirement benefit liabilities (100) (131)
Decrease in other provisions (107) (78)
Other non-cash items 31 86
Cash generated from operating activities 11,972 6,119
Dividends received from associates 214 903
Tax paid (1,891) (1,675)
Net cash generated from operating activities 10,295 5,347
Net cash generated from operating activities increased by £4,948 million due to the cash generated from
operating activities by RAI in 2018 and the timing impact of the MSA payment that was made in 2017 (£1.4
billion) which depressed the cash generated in the prior year. These more than offset the reduction in dividends
received from associates, predominantly being RAI’s dividend to the Group in 2017 prior to the acquisition. Other
movements include:
• The increase in inventory in 2018 was predominantly related to the timing of leaf purchases and
inventory movements in Romania, Turkey and Russia;
• Trade and other receivables were lower due to an increase in factoring of £301 million and improved
trade terms;
• The increase in trade and other payables was driven by higher excise payables which are impacted by
the timing of inventory movements in the supply chain; and
• The final quarterly payments in relation to the Quebec Class Action in 2017.
Expenditure on research and development was approximately £258 million in 2018 (2017: £191 million) with a
focus on products that could potentially reduce the risk associated with smoking conventional cigarettes.
Net cash used in investing activities
Net cash used in investing activities declined by £17,523 million to £1,021 million (2017: £18,544 million) as the
prior year included the acquisition of shares in RAI not already owned by the Group.
Included within investing activities is gross capital expenditure which includes purchases of property, plant
and equipment and purchases of intangibles. This includes the investment in the Group’s global operational
infrastructure (including, but not limited to, the manufacturing network, trade marketing and IT systems). In
2018, the Group invested £883 million, an increase of 2.4% on the prior year (2017: £862 million).
The Group expects gross capital expenditure in 2019 of £872 million mainly related to the ongoing
investment in the Group’s operational infrastructure including the expansion of our PRRP portfolio.
35
Notes to the Financial Statements
Cash flow cont…
Net cash used in financing activities
Net cash used in financing activities was an outflow of £9,630 million in 2018 (2017: £14,759 million inflow). The
2018 outflow was mainly due to the payment of a €0.4 billion bond (in March 2018) and three bonds totalling
US$2.5 billion (in June 2018) at maturity, the repayment of £0.6 billion (in January 2018), that was drawn under
the revolving credit facility in 2017. The 2018 outflow also included the higher dividend payment of £4,347
million (2017: £3,465 million) due to the higher dividend per share and the increase in share capital. The inflow in
2017 noted above, was principally due to the debt taken on related to the acquisition of RAI.
LIQUIDITY
The Treasury function is responsible for raising finance for the Group, managing the Group’s cash resources
and the financial risks arising from underlying operations. All these activities are carried out under defined
policies, procedures and limits, reviewed and approved by the Board, delegating oversight to the Finance
Director and Treasury function.
The Group has targeted an average centrally managed bond maturity of at least five years with no more than
20% of centrally managed debt maturing in a single rolling year. As at 31 December 2018, the average
centrally managed debt maturity of bonds was 8.8 years (31 December 2017: 9.2 years) and the highest
proportion of centrally managed debt maturing in a single rolling 12-month period was 18.4% (31 December
2017: 13.2%).
The Group continues to maintain investment-grade credit ratings, with ratings from Moody’s/S&P at Baa2
(stable outlook)/BBB+ (stable outlook) respectively, with a medium-term target of Baa1/BBB+. The strength
of the ratings has underpinned debt issuance and the Group is confident of its ability to successfully access
the debt capital markets. A credit rating is not a recommendation to buy, sell or hold securities. A credit
rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of
any other rating.
All contractual borrowing covenants have been met and these covenants are not expected to inhibit the
Group’s operations or funding plans. The only externally imposed capital requirement the Group has is in
respect of its centrally managed banking facilities, which require a gross interest cover of 4.5 times. The
Group targets a gross interest cover, as calculated under its key central banking facilities, of greater than 5
times. For 2018, it was 7.2 times (2017: 7.8 times).
In order to manage its interest rate risk, the Group maintains both floating rate and fixed rate debt. The Group
sets targets (within overall guidelines) for the desired ratio of floating to fixed rate debt on a net basis (at least
50% fixed on a net basis in the short to medium term). At 31 December 2018, the relevant ratios of floating* to
fixed rate borrowings were 21:79 (2017: 19:81) on a net basis.
It is Group policy that short-term sources of funds (including drawings under both the US$4 billion
commercial paper programme and £3 billion euro commercial paper programme) are backed by undrawn
committed lines of credit and cash. As at 31 December 2018, the outstanding commercial paper was £536
million (31 December 2017 £1.2 billion).
In July 2018, the Group exercised a one-year extension option for the £3 billion 364-day revolving credit facility,
extending the final maturity to 2019. The Group also has access to a £3 billion revolving credit facility with a
maturity date in 2021. These facilities were undrawn at 31 December 2018 (31 December 2017: £600 million
drawn).
* The Group has evaluated its floating rate debt maturing after 2021 in connection with the potential discontinuation of LIBOR after 2021 as a result of the UK Financial
Conduct Authority’s announcement on 27 July 2017. The Group believes that its contracts with interest rates based on LIBOR adequately provide for alternate calculations of
interest in the event that LIBOR is unavailable. Although these alternative calculations may cause an administrative burden, the Group does not believe that it would
materially adversely affect the Group or its ability to manage its interest rate risk.
36
Notes to the Financial Statements
RELATED PARTY DISCLOSURES
The Group’s related party transactions and relationships for 2017 were disclosed on page 170 of the Annual
Report and Form 20-F for the year ended 31 December 2017. In the year ended 31 December 2018, there
were no material changes in related parties or related party transactions. Full details of the Group’s related
party transactions as at 31 December 2018 will be included in the Annual Report and Form 20-F for the year
ended 31 December 2018.
EARNINGS PER SHARE
Basic earnings per share were 86% lower at 264.0p (2017: 1,833.9p) as the prior year benefited from both a
credit (£9.6 billion) in relation to the US tax reforms in that year and a gain related to the deemed disposal of
the Group’s associate holding in RAI as part of the acquisition of that company of £23.3 billion. Excluding
these and before other adjusting items, adjusted diluted earnings per share grew by 5.2% to 296.7p (2017:
282.1p) as the Group’s improved operating performance was partially offset by the higher interest charges,
reduced profit from associates and joint ventures and the foreign exchange headwind on both a transactional
and translational basis. On a constant translational foreign exchange basis, adjusted diluted earnings per
share were 11.8% higher at 315.5p.
2018 2017
Revised
pence pence
Earnings per share
- basic 264.0 1,833.9
- diluted 263.2 1,827.6
Adjusted earnings per share
- basic 297.6 283.1
- diluted 296.7 282.1
Headline earnings per share
- basic 269.9 699.8
- diluted 269.1 697.3
Basic earnings per share are based on the profit for the year attributable to ordinary shareholders and the
weighted average number of ordinary shares in issue during the period (excluding treasury shares). For the
calculation of the diluted earnings per share, the weighted average number of shares reflects the potential
dilutive effect of employee share schemes.
Adjusted diluted earnings per share are calculated by taking the following adjustments into account (see
pages 32 to 34):
2018 2017
Revised
pence pence
Diluted earnings per share 263.2 1,827.6
Effect of restructuring and integration costs 12.2 22.8
Effect of amortisation of trademarks and similar intangibles 13.0 14.3
Effect of hyperinflation on Venezuela’s retained earnings 2.8 -
Effect of retrospective guidance on overseas withholding tax 2.4 -
Effect of other adjusting items 6.1 17.1
Effect of associates’ adjusting items (1.4) (1,131.0)
Effect of other adjusting items in net finance costs 1.8 7.5
Effect of adjusting items in respect of deferred taxation (3.4) (476.2)
Adjusted diluted earnings per share 296.7 282.1
37
Notes to the Financial Statements
Earnings per share cont…
The presentation of headline earnings per share, as an alternative measure of earnings per share, is mandated
under the JSE Listing Requirements. It is calculated in accordance with Circular 4/2018 ‘Headline Earnings’ as
issued by the South African Institute of Chartered Accountants.
Diluted headline earnings per share are calculated by taking the following adjustments into account:
2018 2017
Revised
pence pence
Diluted earnings per share 263.2 1,827.6
Effect of impairment of intangibles and property, plant and equipment and 7.5 6.9
held-for-sale assets (net of tax)
Effect of gains on disposal of property, plant and equipment and held-for- (0.3) (1.7)
sale assets (net of tax)
Issue of shares and changes in shareholding of associates (1.0) (1.4)
Gain on deemed disposal of an associate (RAI) - (1,135.4)
Other (net of tax) (0.3) 1.3
Diluted headline earnings per share 269.1 697.3
The following is a reconciliation of earnings to headline earnings, in accordance with the JSE Listing
Requirements:
2018 2017
Revised
£m £m
Earnings 6,032 37,485
Effect of impairment of intangibles and property, plant and equipment and 173 144
held-for-sale assets (net of tax)
Effect of gains on disposal of property, plant and equipment and held-for- (7) (35)
sale assets (net of tax)
Issue of shares and changes in shareholding of associates (22) (29)
Gain on deemed disposal of an associate (RAI) - (23,288)
Other (net of tax) (8) 27
Headline earnings 6,168 14,304
The earnings per share are based on:
2018 2017
Earnings Shares Earnings Shares
Revised
Earnings per share £m m £m m
- basic 6,032 2,285 37,485 2,044
- diluted 6,032 2,292 37,485 2,051
Adjusted earnings per share
- basic 6,801 2,285 5,786 2,044
- diluted 6,801 2,292 5,786 2,051
Headline earnings per share
- basic 6,168 2,285 14,304 2,044
- diluted 6,168 2,292 14,304 2,051
38
Notes to the Financial Statements
IMPLEMENTATION OF IFRS 15 and IFRS 9
31 December 2017 Impact of IFRS 9 01 Jan 2018
Reported Adoption Revised Financial Expected Revised for
of IFRS 15 assets loss IFRS 9
reclass impairment
£m £m £m £m £m £m
Assets
Non-current assets
Deferred tax assets 317 16 333 - 7 340
Trade and other receivables 756 - 756 (2) - 754
Investments held at fair value 42 - 42 2 - 44
Other 125,957 - 125,957 - - 125,957
Total non-current assets 127,072 16 127,088 - 7 127,095
Current assets
Trade and other receivables 4,053 - 4,053 (144) (45) 3,864
Investments held at fair value 65 - 65 144 - 209
Other 9,848 - 9,848 - - 9,848
Total current assets 13,966 - 13,966 - (45) 13,921
Total assets 141,038 16 141,054 - (38) 141,016
Equity
Capital and reserves
Share capital 614 - 614 - - 614
Share premium, capital 26,602 - 26,602 - - 26,602
redemption and merger
reserves
Other reserves (3,395) 3 (3,392) (9) - (3,401)
Retained earnings 36,983 (48) 36,935 9 (38) 36,906
Owners of the parent 60,804 (45) 60,759 - (38) 60,721
Non-controlling interests 222 - 222 - - 222
Total equity 61,026 (45) 60,981 - (38) 60,943
Liabilities
Non-current liabilities
Other 64,468 - 64,468 - - 64,468
Total non-current liabilities 64,468 - 64,468 - - 64,468
Current liabilities
Trade and other payables 8,847 61 8,908 - - 8,908
Other 6,697 - 6,697 - - 6,697
Total current liabilities 15,544 61 15,605 - - 15,605
Total equity and liabilities 141,038 16 141,054 - (38) 141,016
39
Notes to the Financial Statements
CONTINGENT LIABILITIES AND FINANCIAL COMMITMENTS
The Group has contingent liabilities in respect of litigation, taxes and guarantees in various countries. These
are described below and are further described in Note 28 to the 2017 Annual Report and Accounts and Form
20-F. The Group is subject to contingencies pursuant to requirements that it complies with relevant laws,
regulations and standards. Failure to comply could result in restrictions in operations, damages, fines,
increased tax, increased cost of compliance, interest charges, reputational damage or other sanctions. These
matters are inherently difficult to quantify.
In cases where the Group has an obligation as a result of a past event existing at the balance sheet date, it is
probable that an outflow of economic resources will be required to settle the obligation and the amount of
the obligation can be reliably estimated, a provision will be recognised based on best estimates and
management judgment. There are, however, contingent liabilities in respect of litigation, taxes in some
countries and guarantees for which no provisions have been made. While the amounts that may be payable
or receivable could be material to the results or cash flows of the Group in the period in which they are
recognised, the Board does not expect these amounts to have a material effect on the Group’s financial
condition.
Taxes
The Group has exposures in respect of the payment or recovery of a number of taxes. The Group is and has
been subject to a number of tax audits covering, among others, excise tax, value-added taxes, sales taxes,
corporate taxes, overseas withholding taxes and payroll taxes. The estimated costs of known tax obligations
have been provided in these accounts in accordance with the Group’s accounting policies. In some countries,
tax law requires that full or part payment of disputed tax assessments be made pending resolution of the
dispute. To the extent that such payments exceed the estimated obligation, they would not be recognised as
an expense.
There are disputes that may proceed to litigation in a number of countries including Brazil, South Africa and
the Netherlands. In the Netherlands, the Dutch tax authority has issued a number of assessments on various
issues across the years 2003 to 2016 in relation to various intragroup transactions. The assessments amount
to an aggregate net liability across these periods of £902 million covering tax, interest and penalties. The
Group believes that it has good grounds of defence against all these issues and has appealed against the
assessments in full.
In Bangladesh, on 25 July 2018, the Appellate Division of the Supreme Court in Bangladesh reversed the
decision of the High Court against BAT Bangladesh in respect of the retrospective demands for VAT and
Supplementary Duty amounting to approximately £170 million. The Attorney General has 30 days from
receipt of the certified Court Order (which remains to be received) in which to seek a review of this decision.
The Group is also appealing the ruling in respect of sales taxes and penalties in South Korea.
Group litigation
Group companies, as well as other leading cigarette manufacturers, are defendants in a number of product
liability cases. In a number of the cases, the amounts of compensatory and punitive damages sought are
significant.
While it is impossible to be certain of the outcome of any particular case or of the amount of any possible
adverse verdict, the Group believes that the defences of the Group’s companies to all these various claims
are meritorious on both the law and the facts, and a vigorous defence is being made everywhere. If an
adverse judgment is entered against any of the Group’s companies in any case, avenues of appeal will be
pursued as necessary. Such appeals could require the appellants to post appeal bonds or substitute security
in amounts that could in some cases equal or exceed the amount of the judgment. At least in the aggregate,
and despite the quality of defences available to the Group, it is not impossible that the Group’s results of
operations or cash flows in a particular period could be materially affected by this and by the final outcome
of any particular litigation.
40
Notes to the Financial Statements
Contingent liabilities and financial commitments cont…
In Canada, following the implementation of legislation enabling provincial governments to recover healthcare
costs directly from tobacco manufacturers, ten actions for recovery of healthcare costs arising from the
treatment of smoking and health-related diseases have been brought and are proceeding in ten provinces.
Damages sought have not yet been quantified by all ten provinces; however, in respect of five provinces, the
damages quantified in each of the provinces range between CAD$10 billion (approximately £5.7 billion) and
CAD$118 billion (approximately £68 billion). Legislation in two of the three territories has received the Royal
Assent but is not yet in force. On 15 June 2018, the province of Ontario delivered an expert report
quantifying its damages in the range of CAD$280 billion (approximately £161 billion) and CAD$630 billion
(approximately £362 billion) in 2016/2017 dollars for the period 1954 – 2060. The province has amended its
Statement of Claim to claim damages of CAD$330 billion (approximately £190 billion) from CAD$50 billion
(approximately £28.8 billion). On 31 January 2019, the Province delivered a further expert report claiming an
additional CAD $9.4-10.9 billion in damages (approximately £5.4 billion - £6.3 billion) in respect of
environmental tobacco smoke. No trial date has been set.
In respect of the Quebec class action, the plaintiffs were awarded damages and interest in the amount of
CAD$15.6 billion (approximately £9 billion), of which the Group companies’ share is CAD$10.4 billion
(approximately £6 billion). The class actions are currently under appeal. In 2015, the Quebec Court of Appeal
upheld the Order for Security, of which ITCAN’s share is CAD $758 million (approximately £436 million),
which has been paid in full to the Court escrow account as required by the judgment. ITCAN continues to
retain strong legal grounds to appeal the original judgment. No charge against profit has been made with
regards to the deposit, as ITCAN continues to assess that the deposits are fully recoverable upon a successful
appeal of the original judgment. The decision is due to be released by the Court of Appeal on 1 March 2019 at
21.00 (GMT). As at the date of this release, no judgment has been made available by the Court of Appeal,
there is no indication of the outcome and, as such, there is no change to management’s assessment of the
outcome of the appeal. The Group continues to recognise the value of the Order for Security as a receivable
and with the outcome of the appeal against the substantive decision included as a contingent liability.
Subject to the outcome of judgment, the Group will assess its response and will provide further guidance.
As at 31 December 2018 the Group’s subsidiary, R. J. Reynolds Tobacco Company (“RJRT”), had been served
in 2,268 pending Engle progeny cases filed on behalf of approximately 2,841 individual plaintiffs. Many of
these are in active discovery or nearing trial. In 2018, RJRT or Lorillard Tobacco has paid judgments in 33
Engle progeny cases. Those payments totalled US$333 million (approximately £261 million) in compensatory
or punitive damages. Additional costs were paid in respect of attorneys' fees and statutory interest. In
addition, since 1 January 2016 through to 31 December 2018, outstanding jury verdicts in favour of the Engle
progeny plaintiffs had been entered against RJRT or Lorillard Tobacco Company for US$159.1 million
(approximately £125 million) in compensatory damages (as adjusted) and US$182.6 million (approximately
£143 million) in punitive damages. A significant majority of these verdicts are in various stages in the
appellate process and have been bonded as required by Florida law under the US$200 million (approximately
£157 million) bond cap passed by the Florida legislature in 2009. Although the Group cannot currently predict
when or how much it may be required to bond and pay, RJRT will likely be required to bond and pay
additional judgments as the litigation proceeds.
In respect of Fox River, on 6 February 2019 the English Court of Appeal affirmed the High Court’s 2016 and
2017 rulings against Sequana. Sequana is therefore liable to pay around US$180 million (approximately £141
million) plus costs to a Group subsidiary. Both sides were refused permission to make a further appeal to the
U.K. Supreme Court. The Group is considering its further appeal options.
Investigations
As previously reported by the Group, it has been investigating, through external legal advisors, allegations of
misconduct and has been liaising with the UK’s Serious Fraud Office (SFO) and other relevant authorities. It
was announced in August 2017 that the SFO had opened an investigation in relation to the Company, its
subsidiaries and associated persons. The Group continues to co-operate with the SFO’s investigation.
41
Notes to the Financial Statements
Contingent liabilities and financial commitments cont…
The outcomes of these matters will be decided by the relevant authorities or, if necessary, the courts. It is too
early to predict the outcomes, but these could include the prosecution of individuals and/or of a Group
company or companies. Accordingly, the potential for fines, penalties or other consequences cannot
currently be assessed. As the investigation is ongoing, it is not yet possible to identify the timescale in which
these matters might be resolved.
Summary
Having regard to all these matters, with the exception of Fox River and potentially certain Engle progeny
cases, the Group does not consider it appropriate to make any provision or charge in respect of any pending
litigation. The Group does not believe that the ultimate outcome of this litigation will significantly impair the
Group’s financial condition. If the facts and circumstances change, then there could be a material impact on
the financial statements of the Group.
Full details of the litigation against Group companies and tax disputes as at 31 December 2018 will be
included in the Annual Report and Form 20-F for the year ended 31 December 2018. Whilst there has been
some movement on new and existing cases against Group companies, there have been, except as otherwise
stated, no material developments to date in 2018 that would impact on the financial position of the Group.
FRANKED INVESTMENT INCOME GROUP LITIGATION ORDER
The Group is the principal test claimant in an action in the United Kingdom against HM Revenue and Customs
(“HMRC”) in the FII GLO. There are 25 corporate groups in the FII GLO. The case concerns the treatment for
UK corporate tax purposes of profits earned overseas and distributed to the UK. Full details will be provided
in the 2018 Annual Report and Accounts and Form 20-F. The Supreme Court judgment in the CFC & Dividend
Group Litigation Order, of which Prudential is the test case, was delivered on 25 July 2018. Applying the
Prudential judgment reduces the value of the FII claim to approximately £0.6 billion, mainly as the result of
the application of simple interest.
During 2015, HMRC paid to the Group a gross amount of £1.2 billion in two separate payments. Due to the
uncertainty of the amounts and eventual outcome the Group has not recognised any impact in the Income
Statement in the current or prior period in respect of the receipt which, net of the £261 million deduction by
HMRC, is held as deferred income. Any future recognition as income will be treated as an adjusting item, due
to the size of the order, with interest of £25 million in respect of 2018 (2017: £25 million) accruing on the
balance, which was also treated as an adjusting item.
RETIREMENT BENEFIT SCHEMES
The Group’s subsidiaries operate over 190 retirement benefit arrangements worldwide. The majority of the
scheme members belong to defined benefit schemes, most of which are funded externally and many of
which are closed to new entrants. The Group also operates a number of defined contribution schemes.
The present value of total funded scheme liabilities as at 31 December 2018 was £11,317 million (2017:
£11,868 million), while unfunded scheme liabilities amounted to £1,106 million (2017: £1,157 million). The
fair value of scheme assets declined from £12,350 million in 2017 to £11,925 million in 2018. The overall net
liability for all pension and healthcare schemes in Group subsidiaries amounted to £518 million at the end of
2018, compared to £698 million at the end of 2017.
The reduction in the net liability position was due to the change in the discount rates used in the valuation of
retirement benefit scheme liabilities and company contributions to the pension schemes, partly offset by
market movements on the asset values.
Contributions to the defined benefit schemes are determined after consultation with the respective trustees
and actuaries of the individual externally funded schemes, taking into account regulatory environments.
42
Other Information
DIVIDENDS
The Board has declared an interim dividend of 203.0p per ordinary share of 25p, for the year ended 31
December 2018, payable in four equal quarterly instalments of 50.75p per ordinary share in May 2019,
August 2019, November 2019 and February 2020. This represents an increase of 4.0% on 2017 (2017: 195.2p
per share), and a payout ratio, on 2018 adjusted diluted earnings per share, of 68.4%.
The quarterly dividends will be paid to shareholders registered on either the UK main register or the South
Africa branch register and to holders of American Depositary Shares (ADSs), each on the applicable record
dates set out under the heading ‘Key Dates’ below.
General dividend information
Under IFRS, the dividend is recognised in the year that it is declared or, if required, approved by shareholders.
Therefore, the 2018 accounts reflect the four quarterly dividends that were confirmed by the Directors in the
period, which, in total amount to 195.2p (£4,463 million (2017: 218.2p - £4,465 million)).
2018 2017
Pence per USD per Pence per USD per
Dividends declared: share ADS share ADS
Interim - - 56.5 0.758569
Final 2016 - - 118.1 1.523938
2017 second interim dividend - - 43.6 0.606868
2018 Quarterly payment 1 48.8 0.661142
2018 Quarterly payment 2 48.8 0.628153
2018 Quarterly payment 3 48.8 0.621712
2018 Quarterly payment 4 48.8 0.632496
195.2 2.543503 218.2 2.889375
Holders of ADSs
For holders of ADSs listed on the New York Stock Exchange (NYSE), the record dates and payment dates are set
out below. The equivalent quarterly dividends receivable by holders of ADSs in US dollars will be calculated
based on the exchange rate on the applicable payment date. A fee of US$0.005 per ADS will be charged by
Citibank, N.A. in its capacity as depositary bank for the BAT American Depositary Receipt (“ADR”) programme
in respect of each quarterly dividend payment.
South Africa Branch Register
In accordance with the JSE Limited (JSE) Listing Requirements, the finalisation information relating to
shareholders registered on the South Africa branch register (comprising the amount of the dividend in South
African rand, the exchange rate and the associated conversion date) will be published on the dates stated
below, together with South Africa dividends tax information.
The quarterly dividends are regarded as ‘foreign dividends’ for the purposes of the South Africa Dividends Tax.
For the purposes of South Africa Dividends Tax reporting, the source of income for the payment of the quarterly
dividends is the United Kingdom.
43
Dividends cont…
Key dates
In compliance with the requirements of the London Stock Exchange (LSE), the NYSE and Strate, the electronic
settlement and custody system used by the JSE, the following salient dates for the quarterly dividends
payments are applicable. All dates are 2019, unless otherwise stated.
Event Payment No. 1 Payment No. 2 Payment No. 3 Payment No. 4
Preliminary announcement 28 February 2019
(includes declaration data
required for JSE purposes)
Publication of finalisation 11 March 18 June 23 September 12 December
information (JSE)
No removal requests permitted 11 March to 18 June to 23 September to 12 December to
between the UK main register 22 March 28 June 4 October 27 December
and the South Africa branch (inclusive) (inclusive) (inclusive) (inclusive)
register
Last Day to Trade (LDT) cum 18 March 25 June 1 October 20 December
dividend (JSE)
Shares commence trading ex- 19 March 26 June 2 October 23 December
dividend (JSE)
No transfers permitted 19 March to 26 June to 2 October to 23 December to
between the UK main register 22 March 28 June 4 October 27 December
and the South Africa branch (inclusive) (inclusive) (inclusive) (inclusive)
register
No shares may be 19 March to 26 June to 2 October to 23 December to
dematerialised or 22 March 28 June 4 October 27 December
rematerialised on the South (inclusive) (inclusive) (inclusive) (inclusive)
Africa branch register
Shares commence trading ex- 21 March 27 June 3 October 24 December
dividend (LSE)
Shares commence trading ex- 21 March 27 June 3 October 26 December
dividend (NYSE)
Record date 22 March 28 June 4 October 27 December
(JSE, LSE and NYSE)
Last date for receipt of Dividend 12 April 18 July 24 October 16 January 2020
Reinvestment Plan (DRIP)
elections (LSE)
Payment date (LSE and JSE) 8 May 8 August 14 November 6 February 2020
ADS payment date (NYSE) 13 May 13 August 19 November 11 February 2020
44
Other Information
NON-GAAP MEASURES
To supplement the presentation of the Group’s results of operations and financial condition in accordance
with IFRS, the Group also presents several non-GAAP measures used by management to monitor the Group’s
performance. The Group’s management regularly reviews the measures used to assess and present the
financial performance of the Group and, as relevant, its geographic segments.
Although the Group does not believe that these measures are a substitute for IFRS measures, the Group
does believe such results excluding the impact of adjusting items provide additional useful information to
investors regarding the underlying performance of the business on a comparable basis.
The principal non-GAAP measures which the Group uses are adjusted revenue, adjusted profit from
operations, adjusted diluted earnings per share, operating cash flow conversion ratio, free cash flow and
adjusted cash generated from operations which are before the impact of adjusting items and are reconciled
from revenue, profit from operations, diluted earnings per share, cash conversion ratio and net cash
generated from operating activities. Adjusting items, as identified in accordance with the Group’s accounting
policies, represent certain items of income and expense which the Group considers distinctive based on
their size, nature or incidence. These include significant items in revenue, profit from operations, net finance
costs, taxation and the Group’s share of the post-tax results of associates and joint ventures which
individually or, if of a similar type, in aggregate, are relevant to an understanding of the Group’s underlying
financial performance. The adjusting items are used to calculate the non-GAAP measures of adjusted
revenue, adjusted profit from operations, adjusted operating margin, adjusted net finance costs, adjusted
taxation, adjusted share of post-tax results of associates and joint ventures, underlying tax rate and adjusted
diluted earnings per share. In addition to the operating cash flow conversion ratio, free cash flow and the
adjusted cash generated from operations, the Group also provides other non-GAAP measures of net debt,
adjusted net debt and the ratio of adjusted net debt to adjusted EBITDA, which the Group uses to monitor
its financial position.
Where appropriate, the Group is also presenting (as a supplement to the results) the 2018 performance
against 2017, as though the Group had owned the acquisitions made in 2017 for the whole of that year, and
including certain additional adjusting items related to the acquired companies including the RAI companies.
Comparison of results on this basis are termed “on a representative basis” and provide shareholders with a
results comparison representative of the position as if the Group had owned the acquisitions throughout
2017 and 2018.
Results on a representative basis are not deemed to be equivalent to pro forma financial information as they
are derived from an adjusted measure, which will exclude the adjusting items that may arise in the context
of a pro forma presentation due to requirements such as purchase price allocation adjustments (to
inventory, amortisation of the fair value adjustment to debt and the amortisation of trademarks).
The Management Board, as the chief operating decision maker, reviews a number of our IFRS and non-GAAP
measures for the Group and its geographic segments at constant rates of exchange. This allows comparison
of the Group’s results, had they been translated at the previous year’s average rates of exchange. The Group
does not adjust for the normal transactional gains and losses in profit from operations that are generated by
exchange movements. Although the Group does not believe that these measures are a substitute for IFRS
measures, the Group does believe that such results excluding the impact of currency fluctuations year-on-
year provide additional useful information to investors regarding the operating performance on a local
currency basis.
45
Other Information
Non-GAAP measures cont…
The Group also supplements its presentation of cash flows in accordance with IFRS by presenting the non-
GAAP measures of adjusted cash generated from operations, free cash flow and operating cash flow
conversion ratio. The Group’s management believes these measures, which are used internally, are useful to
the users of the financial statements in helping them understand the underlying business performance and
can provide insights into the cash flow available to, among other things, reduce debt and pay dividends.
Adjusted cash generated from operations, free cash flow and operating cash flow conversion ratio have
limitations as an analytical tool. They are not presentations made in accordance with IFRS and should not be
considered as an alternative to net cash generated from operating activities determined in accordance with
IFRS. Adjusted cash generated from operations, free cash flow and operating cash flow conversion ratio are
not necessarily comparable to similarly titled measures used by other companies. As a result, readers should
not consider these measures in isolation from, or as a substitute analysis for, the Group’s results of
operations or cash flows as determined in accordance with IFRS.
The Group also presents net debt and adjusted net debt, non-GAAP measures, on pages 16 and 17. The
Group uses adjusted net debt to assess its financial capacity. The Management Board believes that this
additional measure, which is used internally, is useful to the users of the financial statements in helping them
to see how business financing has changed over the year. Net debt and adjusted net debt have limitations as
an analytical tool. It is not a presentation made in accordance with IFRS and should not be considered as an
alternative to borrowings or total liabilities determined in accordance with IFRS. Net debt and adjusted net
debt are not necessarily comparable to similarly titled measures used by other companies. As a result, you
should not consider this measure in isolation from, or as a substitute analysis for, the Group’s measures of
financial position as determined in accordance with IFRS.
Due to the secondary listing of the ordinary shares of British American Tobacco p.l.c. on the main board of
the JSE Limited (JSE) in South Africa, the Group is required to present headline earnings per share and diluted
headline earnings per share, as alternative measures of earnings per share, calculated in accordance with
Circular 4/2018 ‘Headline Earnings’ issued by the South African Institute of Chartered Accountants. These are
shown on pages 37 and 38.
The Group also presents underlying tax rate, a non-GAAP measure, on page 14 and page 48. The Group uses
underlying tax rate to assess the tax rate applicable to the Group’s underlying operations, excluding the
Group’s share of post-tax results of associates and joint ventures in BAT’s pre-tax results and adjusting items.
The Management Board believes that this additional measure, which is used internally, is useful to the users
of the financial statements because it excludes the contribution from the Group’s associates, recognised after
tax but within the Group’s pre-tax profits, and adjusting items, thereby enhancing users’ understanding of
underlying business performance. Underlying tax rate has limitations as an analytical tool. It is not a
presentation made in accordance with IFRS and should not be considered as an alternative to the Group’s
effective tax rate as determined in accordance with IFRS. Underlying tax rate is not necessarily comparable to
similarly titled measures used by other companies. As a result, this measure should not be considered in
isolation from, or as a substitute analysis for, the Group’s underlying tax rate as determined in accordance
with IFRS.
46
Other Information
Non-GAAP measures cont…
Adjusted Revenue
Definition: Revenue before the impact of adjusting items.
2018 2017
Revised
£m £m
Revenue 24,492 19,564
Less: Excise on goods bought-in on short-term arrangements (180) (258)
Adjusted revenue 24,312 19,306
Impact of foreign exchange 1,448 -
Adjusted revenue re-translated at 2017 exchange rates 25,760 19,306
Impact of acquisitions - 5,577
Adjusted revenue on a representative basis, at constant exchange rates 25,760 24,883
Adjusted profit from operations
Definition: Profit from operations before the impact of adjusting items.
2018 2017
Revised
£m £m
Profit from operations 9,313 6,412
Restructuring and integration costs 363 600
Amortisation and impairment of trademarks and similar intangibles 377 383
Fair value movements in stock - 465
Fixed asset impairment in hyperinflationary economies 110 -
Other adjusting items 184 69
Adjusted profit from operations 10,347 7,929
Impact of foreign exchange 577 -
Adjusted profit from operations re-translated at constant exchange rates 10,924 7,929
Impact of acquisitions10 - 2,578
Adjusted profit from operations on a representative basis, at constant 10,924 10,507
exchange rates
Adjusted diluted earnings per share, at constant rates of exchange
Definition: diluted earnings per share before the impact of adjusting items, presented in the prior year’s rate
of exchange.
2018 2017
Revised
pence pence
Diluted earnings per share 263.2 1,827.6
Effect of restructuring and integration costs 12.2 22.8
Effect of amortisation of trademarks and similar intangibles 13.0 14.3
Effect of hyperinflation on Venezuela’s retained earnings 2.8 -
Effect of retrospective guidance on overseas withholding tax 2.4 -
Effect of other adjusting items 6.1 17.1
Effect of associates’ adjusting items (1.4) (1,131.0)
Effect of other adjusting items in net finance costs 1.8 7.5
Effect of adjusting items in respect of deferred taxation (3.4) (476.2)
Adjusted diluted earnings per share 296.7 282.1
Impact of foreign exchange 18.8
Adjusted diluted earnings per share, at constant exchange rates 315.5
47
Other Information
Non-GAAP measures cont…
Underlying tax rate
Definition: Tax rate incurred before the impact of adjusting items and to adjust for the inclusion of the
Group’s share of post-tax results of associates and joint ventures within the Group’s pre-tax results.
2018 2017
Revised
£m £m
Profit before taxation 8,351 29,527
Less: Share of post-tax results of associates and joint ventures (419) (24,209)
Adjusting items within profit from operations 1,034 1,517
Adjusting items within finance costs (4) 205
Adjusted profit before taxation, excluding associates and joint ventures 8,962 7,040
Taxation on ordinary activities (2,141) 8,129
Adjusting items within taxation (24) (9,766)
Taxation on adjusting items (199) (454)
Adjusted taxation (2,364) (2,091)
Underlying tax rate 26.4% 29.7%
Operating cash flow conversion ratio
Definition: net cash generated from operating activities before the impact of adjusting items and dividends
from associates and excluding trading loans to third parties, pension short fall funding, taxes paid and net
capital expenditure, as a proportion of adjusted profit from operations.
2018 2017
Revised
£m £m
Net cash generated from operating activities 10,295 5,347
Cash related to adjusting items 601 685
Dividends from associates (214) (903)
Tax paid 1,891 1,675
Net capital expenditure (845) (767)
Pension fund short fall funding 75 156
Trading loans to third parties (93) 101
Other 2 (9)
Operating cash flow 11,712 6,285
Adjusted profit from operations 10,347 7,929
Operating cash flow conversion ratio 113% 79%
2017 – revised measure for long term incentive plan (LTIP) purposes only
Operating cash flow (US) 628
Operating cash flow (ex US) 5,657
Adjusted profit from operations (US) 1,928
Adjusted profit from operations (ex US) 6,001
Operating cash flow conversion ratio (ex US – for 2017 LTIP) 94%
In 2017, the Group excluded the adjusted profit from operations and operating cash flow earned in 2017, following the acquisition of RAI. This
was an adjustment used for LTIP purposes only and provided above for clarity.
48
Other Information
Non-GAAP measures cont…
Ratio of adjusted net debt to adjusted EBITDA
Definition: net debt, excluding the impact of the revaluation of RAI acquired debt arising as part of the purchase
price allocation process, as a proportion of profit for the year (earnings) before net finance costs (interest), tax,
depreciation, amortisation, associates and adjusting items.
2018 2017
Revised
£m £m
Total borrowings 47,509 49,450
Derivatives in respect of net debt:
- Assets (647) (640)
- Liabilities 269 117
Cash and cash equivalents (2,602) (3,291)
Current assets held at fair value (178) (65)
Total net debt 44,351 45,571
Purchase price adjustment (PPA) to RAI debt (944) (947)
Adjusted net debt 43,407 44,624
Profit for the year 6,210 37,656
Taxation on ordinary activities 2,141 (8,129)
Net finance costs 1,381 1,094
Depreciation, amortisation or impairment costs 1,038 902
Share of post-tax results of associates and joint ventures (419) (24,209)
Other adjusting items (excluding depreciation and amortisation) 499 1,049
Adjusted EBITDA 10,850 8,363
Adjusted net debt to adjusted EBITDA 4.0x 5.3x
Translational foreign exchange impact to adjusted net debt (1,694)
Adjusted net debt at constant rates 41,713
Translational foreign exchange impact to adjusted EBITDA 590
Adjusted EBITDA at constant rates 11,440
Adjusted net debt to adjusted EBITDA (at constant exchange rates) 3.6x
Free cash flow
Definition: net cash generated from operating activities before the impact of trading loans provided to a third
party and after dividends paid to non-controlling interests, net interest paid and net capital expenditure.
2018 2017
Revised
£m £m
Net cash generated from operating activities 10,295 5,347
Dividends paid to non-controlling interests (142) (167)
Net Interest paid (1,533) (1,004)
Net capital expenditure (845) (767)
Trading loans to third parties (93) 101
Other 2 (10)
Free cash flow 7,684 3,500
10 Impact of acquisitions relates to the performance of the businesses acquired by the Group in the period prior to the acquisition and included to provide a
comparable 12-month representative base upon which to evaluate the Group’s performance. Included in profit from operations are certain adjusting items
recognised by the acquired businesses prior to the acquisition, including approximately £250 million (primarily related to Engle Progeny and transaction costs).
49
Other Information
ADDITIONAL INFORMATION
British American Tobacco is one of the world's leading consumer products businesses, with brands sold in
more than 200 markets. We have strategic combustible and THP brands – Dunhill, Kent, Lucky Strike, Pall
Mall, Rothmans, Newport (in the US), Camel (in the US) and Natural American Spirit (in the US) – and over
200 brands in our portfolio, including a growing portfolio of other potentially reduced-risk products. We hold
robust market positions in each of our regions and have leadership positions in more than 55 markets.
References in this document to information on websites, including the web address of BAT, have been
included as inactive textual references only. These websites and the information contained therein or
connected thereto are not intended to be incorporated into or to form part of this report.
ANNUAL REPORT and FORM 20-F
Statutory accounts
The financial information set out above does not constitute the Company’s statutory accounts for the years
ended 31 December 2018 or 2017. Statutory accounts for 2017 have been delivered to the Registrar of
Companies and those for 2018 will be delivered following the Company’s Annual General Meeting. The
auditors’ reports on both the 2018 and 2017 accounts were unqualified, did not draw attention to any
matters by way of emphasis and did not contain statements under s498(2) or (3) of Companies Act 2006 or
equivalent preceding legislation.
Publication
The Annual Report and Form 20-F will be published on bat.com on or around 12 March 2019. A printed copy
will later be mailed to shareholders on the UK main register who have elected to receive it. At the same time,
shareholders will be notified of the availability of the Annual Report and Form 20-F on the website and of the
Performance Summary together with other ancillary documents in accordance with their elections. Specific
local mailing and/or notification requirements will apply to shareholders on the South Africa branch register.
In addition, the Company files its Annual Report on Form 20-F and other documents with the United States
Securities and Exchange Commission (SEC). BAT’s filings are available to the public, together with the public
filings of other issuers, at the SEC’s website, www.sec.gov.
DISTRIBUTION OF PRELIMINARY STATEMENT
This announcement is released or otherwise made available or notified to the London Stock Exchange, the
JSE Limited and the New York Stock Exchange. It may be viewed and downloaded from our website
www.bat.com.
This announcement, together with the Group financial statements (including the notes to the financial
statements and the report of the independent registered public accounting firm (for US purposes) for the
year ended 31 December 2018), the consent of KPMG LLP and management’s report on internal control over
financial reporting, will be furnished on a Form 6-K with the SEC by 5:00pm UK time (12:00pm EST) on 28
February 2019 and will be available on the SEC's website at www.sec.gov. That Form 6-K will be submitted to
the U.K. National Storage Mechanism thereafter and will be available for inspection at
www.morningstar.co.uk/uk/NSM.
Copies of the announcement may also be obtained during normal business hours from: (1) the Company’s
registered office; (2) the Company’s representative office in South Africa; (3) British American Tobacco
Publications; and (4) Citibank Shareholder Services. Contact details are set out below.
Paul McCrory
Secretary
27 February 2019
50
Other Information
OTHER PRODUCTS
The Group reports volumes as additional information. This is done, where appropriate, with cigarette sticks as
the basis, with usage levels applied to other products to calculate the equivalent number of cigarette units.
The conversion rates that are applied:
Equivalent to one cigarette
Tobacco Heat sticks 1 heat stick
Cigars 1 cigar regardless of size
Oral
- Pouch 1 pouch
- Loose 2 grams
Pipe tobacco 0.8 gram
Roll Your Own 0.8 gram
Make-your-own (MYO)
- Expanded tobacco 0.5 grams
- Optimised tobacco 0.7 grams
Roll-your-own (RYO)
Loose tobacco designed for hand rolling, normally a finer cut with higher moisture, compared to cigarette
tobacco.
Make-your-own (MYO)
MYO expanded tobacco; also known as volume tobacco.
Loose cigarette tobacco with enhanced filling properties – to allow higher yields of cigarettes/kg - designed
for use with cigarette tubes and filled via a tobacco tubing machine.
MYO non-expanded tobacco; also known as optimised tobacco.
Loose cigarette tobacco designed for use with cigarette tubes and filled via a tobacco tubing machine.
SHAREHOLDER INFORMATION
FINANCIAL CALENDAR 2019
Thursday 25 April Annual General Meeting at 11.30am
Hilton London Bankside, 2-8 Great Suffolk Street,
London SE1 0UG
Thursday 1 August Half-Year Report
51
Other Information
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); (ii) certain statements in the Borrowings and Adjusted Net Debt section (pages 15 to 17); (iii) certain
statements in the Notes to the Financial Statements section (pages 29 to 42), including the Liquidity and
Contingent Liabilities and Financial Commitments sections; (iv) certain statements in the Other Information
section (pages 43 to 51), including the Non-GAAP Measures section; and (v) 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; 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,
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.
52
CORPORATE INFORMATION
Premium listing
London Stock Exchange (Share Code: BATS; ISIN: GB0002875804)
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ, UK
tel: 0800 408 0094; +44 370 889 3159
Share dealing tel: 0370 703 0084 (UK only)
Your account: www.computershare.com/uk/investor/bri
Share dealing: www.computershare.com/dealing/uk
Web-based enquiries: www.investorcentre.co.uk/contactus
Secondary listing
JSE (Share Code: BTI)
Shares are traded in electronic form only and transactions settled electronically through Strate.
Computershare Investor Services Proprietary Limited
PO Box 61051, Marshalltown 2107, South Africa
tel: 0861 100 634; +27 11 870 8216
email enquiries: web.queries@computershare.co.za
American Depositary Receipts (ADRs)
NYSE (Symbol: BTI; CUSIP Number: 110448107)
BAT’s shares are listed on the NYSE in the form of American Depositary Shares (ADSs) and these are evidenced by
American Depositary Receipts (ADRs), each one of which represents one ordinary share of British American Tobacco
p.l.c. Citibank, N.A. is the depositary bank for the sponsored ADR programme.
Citibank Shareholder Services
PO Box 43077, Providence, Rhode Island 02940-3077, USA
tel: +1 888 985 2055 (toll-free) or +1 781 575 4555
email enquiries: citibank@shareholders-online.com
website: www.citi.com/dr
Publications
British American Tobacco Publications
Unit 80, London Industrial Park, Roding Road, London E6 6LS, UK
tel: +44 20 7511 7797; facsimile: +44 20 7540 4326
e-mail enquiries: bat@team365.co.uk or the Company’s Representative office in South Africa using the contact
details shown below.
British American Tobacco p.l.c.
Registered office
Globe House, 4 Temple Place, London, WC2R 2PG, UK
tel: +44 20 7845 1000; facsimile: +44 20 7240 0555
British American Tobacco p.l.c. is a public limited company which is listed on the London Stock Exchange, New York
Stock Exchange and the JSE Limited in South Africa. British American Tobacco p.l.c. is incorporated in England and
Wales (No. 3407696) and domiciled in the UK.
British American Tobacco p.l.c.
Representative office in South Africa
Waterway House South
No 3 Dock Road, V&A Waterfront, Cape Town 8000
South Africa
PO Box 631, Cape Town 8000, South Africa
tel: +27 21 003 6576
53
DEFINITIONS and GLOSSARY
The following is a summary of the key definitions and terms used within this report:
Term Definition
AMSSA Americas (excluding US) and Sub-Saharan Africa. The key markets are:
Argentina, Brazil, Canada, Chile, Colombia, Mexico, Nigeria, South Africa
APME Asia Pacific and Middle East. The key markets are:
Australia, Bangladesh, Gulf Cooperation Council, Indonesia, Iran, Iraq, Japan,
Malaysia, New Zealand, Pakistan, South Korea, Taiwan, Vietnam
British American When the reference denotes an opinion, this refers to British American Tobacco
Tobacco, BAT, p.l.c. and when the reference denotes tobacco business activity this refers to British
Group, we, us and American Tobacco Group operating companies, either collectively or individually, as
our the case may be.
ENA Europe and North Africa. The Key Markets are:
Algeria, Belgium, Czech Republic, Egypt, Denmark, France, Germany, Italy,
Kazakhstan, Morocco, the Netherlands, Poland, Romania, Russia, Spain, Switzerland,
Turkey, United Kingdom, Ukraine
Modern oral EPOK and other modern white snus
NGP Next Generation Products, comprising vapour and THP categories
PRRP Potentially Reduced-Risk Products – THP, vapour, and oral categories
RAI Reynolds American Inc.
Representative Results communications in 2018 include presentation of results (volume, revenue
and profit from operations) against 2017, as though the Group had owned the
acquisitions made in 2017 for the whole of that year. Comparison of results on this
basis are termed “on a representative basis” and provide users of the
communications with a comparison representative of the position as if the Group
had owned the acquisitions throughout 2017 and 2018. For these comparison
purposes, the Group has previously issued the 2017 results on such a basis for the
full year ended 31 December 2017. See appendix II for a reconciliation from the most
directly comparable IFRS measure
Revised Prior period results are revised to take account of changes to IFRS, including the
impact of IFRS 15 (Revenue from Contracts with Customers), effective 1 January 2018
with retrospective application. The 2018 opening reserves positions have also been
revised for the implementation of IFRS 9 (Financial Instruments)
Strategic cigarette Includes Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Newport (US), Natural
and THP brands American Spirit (US), Camel (US), glo
Strategic Portfolio Includes Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Newport (US), Natural
American Spirit (US), Camel (US), Vype, Vuse, glo, Chic, Ten Motives, ViP, Epok,
Granit, Mocca, Grizzly, Camel Snus, Kodiak
THP Tobacco heating products, which include glo
Traditional oral Moist Snuff (Granit, Mocca, Grizzly, Kodiak) and other traditional snus products
(including Camel Snus)
US United States of America
Value share The retail sales value of the product sold as a proportion of total retail sales value in
that category
Vapour Rechargeable, battery-powered devices that heat liquid formulations – e-liquids – to
create a vapour which is inhaled. Vapour products include Vype, Vuse, Chic and Ten
Motives
54
APPENDICES
The following appendices reflect the 2017 results of the Group, after revision for IFRS 15 (effective 1 January
2018 with retrospective application), the new regional structure (effective 1 January 2018) and to provide
the users of these results with a comparable (representative) base, inclusive of the results of acquisitions for
the full comparable period, upon which to assess the Group’s results in 2018.
The use of the term representative basis is not deemed to be the same as pro forma as it excludes adjusting
items including, where relevant, certain impacts from the purchase price allocation process.
These appendices also provide the 2017 comparator data for the new performance measure “Revenue from
the Strategic Portfolio”.
APPENDIX I
REVENUE FROM OUR STRATEGIC PORTFOLIO
2017 FULL YEAR – including revision for IFRS 15
Adjusting
IFRS Adjusted Acquisitions Adj Repres
items
£m £m £m £m £m
Combustible Tobacco 10,842 - 10,842 4,553 15,395
Potentially Reduced-Risk:
Vapour 168 - 168 90 258
THP 202 - 202 1 203
Total NGP 370 - 370 91 461
Oral 402 - 402 453 855
Total Potentially Reduced-
772 - 772 544 1,316
Risk
Total Revenue from the
11,614 - 11,614 5,097 16,711
Strategic portfolio
Other brands / business 7,950 (258) 7,692 480 8,172
Total Revenue 19,564 (258) 19,306 5,577 24,883
Note – The term “Adj repres” refers to Adjusted results on a representative basis.
55
APPENDIX II
2017 FULL YEAR Volume (Cigarettes and THP) - unaudited
Reported Acquisitions Repres
Bn sticks Bn sticks Bn Sticks
Cigarettes 684 48 732
Key Strategic Brands 380 43 423
Other 304 5 309
THP 2 - 2
Cigarettes and THP 686 48 734
US 36 46 82
APME 226 - 226
AMSSA 166 - 166
ENA 258 2 260
686 48 734
2017 FULL YEAR revised for IFRS 15, on regional structure (effective 1 Jan 2018) and including
acquisitions for comparison purposes - unaudited
Revenue
IFRS Adj items Adjusted Acquisitions Adj repres
£m £m £m £m £m
US 4,160 - 4,160 5,531 9,691
APME 4,973 - 4,973 (4) 4,969
AMSSA 4,323 - 4,323 (3) 4,320
ENA 6,108 (258) 5,850 53 5,903
19,564 (258) 19,306 5,577 24,883
Profit from operations
IFRS Adj items Adjusted Acquisitions Adj repres
£m £m £m £m £m
US 1,165 763 1,928 2,502 4,430
APME 1,902 147 2,049 25 2,074
AMSSA 1,648 134 1,782 22 1,804
ENA 1,697 473 2,170 29 2,199
6,412 1,517 7,929 2,578 10,507
Operating Margin
IFRS Adjusted Adj repres
US 28.0% 46.3% 45.7%
APME 38.2% 41.2% 41.7%
AMSSA 38.1% 41.2% 41.8%
ENA 27.8% 37.1% 37.3%
32.8% 41.1% 42.2%
Note – The term “Adj repres” refers to Adjusted results on a representative basis.
Sponsor: UBS South Africa (Pty) Ltd
56
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