Wrap Text
Annual Report for the Year Ended 31 December 2015 and Annual General Meeting 2016
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")
BRITISH AMERICAN TOBACCO p.l.c.
Annual Report for the Year Ended 31 December 2015 and Annual General Meeting 2016
British American Tobacco p.l.c. (the “Company”) reports that the following documents are
being mailed to its shareholders (as applicable) today, 22 March 2016. Those documents
with a web-link shown will also available to be viewed or downloaded on the British
American Tobacco website as indicated:
(1) Annual Report 2015 (including the Strategic Report 2015) www.bat.com/annualreport
(2) Performance Summary 2015 www.bat.com/annualreport
(3) Notice of Annual General Meeting 2016 www.bat.com/AGM
(4) Proxy Form
(5) Proxy Form - South Africa
(6) Voting Instruction Form - South Africa
In compliance with Listing Rule 9.6.1, copies of each of the above documents will be
submitted to the National Storage Mechanism as soon as practicable and will be available
for inspection via the following link: www.morningstar.co.uk/uk/nsm.
The Company made its Preliminary Announcement of its audited results (which included a
Directors’ responsibility statement) in respect of the year ended 31 December 2015 (the
“Preliminary Announcement”) on 25 February 2016. Further to the Preliminary
Announcement and with reference to the requirements of Rules 4.1 and 6.3.5 of the
Disclosure Rules and Transparency Rules (“DTR”), the following disclosures are made in the
Appendices below.
Appendix A to this announcement contains a description of the Principal Group risk factors
(page 37 of the Annual Report 2015) and Appendix B is a statement of related party
disclosures (page 190 Annual Report 2015). Together these constitute the material required
by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory
Information Service. This material is not a substitute for reading the full Annual Report 2015.
Any page numbers and cross-references in the extracted information below refer to page
numbers in the Annual Report 2015.
The Annual General Meeting of the Company is scheduled to be held at Milton Court
Concert Hall, Silk Street, London EC2Y 9BH on Wednesday 27 April 2016 at 11.30am.
G C W Cunnington
Deputy Secretary
22 March 2016
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Press Office:
Will Hill/Anne Vickerstaff 020 7845 2888
Investor Relations:
Mike Nightingale 020 7845 1180
Rachael Brierley 020 7845 1519
Sponsor: UBS South Africa (Pty) Ltd
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APPENDIX A
PRINCIPAL GROUP RISK FACTORS
Overview
The principal risk factors that may affect the Group are set out below.
Each risk is considered in the context of the Group’s strategy, as set out in the Strategic Report
on pages 8 and 9. Following a description of each risk, its causes and potential impact on the
Group are summarised. We also explain the activities we are undertaking to mitigate each risk.
The Group has identified, actively monitors and is taking action to mitigate many different risks.
This section does not include them all, but focuses on those risks that the Directors believe to
be the most important after assessment of the likelihood and potential impact on the business.
Not all of these risks are within the control of the Group and other factors besides those listed
may affect the Group’s performance. Some risks may be unknown at present. Others, currently
regarded as immaterial, could become material risks in the future.
The risk factors listed in this section and the activities being undertaken to mitigate them should
be considered in the context of the Group’s internal control framework. This is described in the
section on risk management and internal control in the corporate governance statement on
page 61 of the Annual Report. This section should also be read in the context of the cautionary
statement set out below.
Assessment of Group risk
During the year, the Directors have 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 or liquidity.
The principal risks facing the Group have remained broadly unchanged over the past year,
particularly with regard to the principal risks included in Marketplace, Excise and tax,
Operations, Regulation and Litigation risk factors.
The Board has considered the risks associated with the inability to recruit required talent and
the loss of existing talent. The impact of the risk has increased to reflect the challenge posed by
negative perceptions of the sustainability and corporate reputation of a tobacco business and is
now listed as a principal risk facing the business.
In addition, the Board has considered the foreign exchange rate exposure risk. An assessment
of the current exposure to transactional foreign exchange rate risk has resulted in an increase
to the risk rating.
A solvency and liquidity risk has also been disclosed as its assessment underpins our Viability
Statement set out below, although the mitigation plans reduce the likelihood of the risk
occurring.
With regard to the Group’s revised operating model and single IT operating system, another key
risk factor reported in 2014, in view of the good progress on deployment, the Board considers
that a combined risk, focusing on sustainability and benefits realisation, describes more
accurately the context of the current risk. As such, the risks have been merged into a new
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combined risk, which is the failure to achieve sustainability of the operating model and its
benefits. This is not considered to be a principal risk and as a result it is not reported again this
year.
The risk of failure to lead the development of the Next Generation Products category has also
been removed from the principal risk factors as progress has been made in several areas which
mitigates the risk.
Cautionary statement
The Strategic Report and certain other sections of the Annual Report contain forward-looking
statements that are subject to risk factors associated with, among other things, the economic
and business circumstances occurring from time to time in the countries and markets in which
the Group operates. It is believed that the expectations reflected in these statements 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.
Viability Statement
The Directors have assessed, in accordance with the requirements of the 2014 revision of the
UK Corporate Governance Code, the viability of the Group. The Directors have considered a
number of factors that affect the resilience of the Group, including the principal risks (as
described on pages 39–44) which are reviewed, with the mitigating actions, at least once a year.
The Directors also took account of the Group’s operational and financial processes, which cover
both short-term (1-2 year financial forecasts, 2-3 year capacity plans) and longer term strategic
planning. This includes a sensitivity analysis regarding core drivers to ensure the business is able
to continue in operation and can continue to meet the liabilities as they fall due.
The Group operates in a unique environment, being subject to inherent uncertainties with
regards to regulatory change and litigation, the outcome of which may have a bearing on the
Group’s viability. The Group maintains, as referred to in note 30 “Contingent Liabilities and
Financial Commitments” [on the Notes on the Accounts to the Annual Report] , that, whilst it is
impossible to be certain of the outcome of any particular case, the defences of the Group’s
companies to all the various claims are meritorious on both law and the facts. If an adverse
judgment is entered against any of the Group’s companies in any case, appeals will usually be
made, the duration of which can be reasonably expected to last for a number of years.
The Directors have no reason to believe the Group will not be viable over a longer period.
However, given the inherent uncertainty involved regarding litigation and regulation, the period
over which the Directors consider it possible to form a reasonable expectation as to the Group’s
longer term viability, based on the stress testing and scenario planning discussed above, is three
years.
Details of the principal risks are set out in the following tables.
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A. Marketplace risk factors
Competition from illicit tobacco trade
Definition
Illicit trade – in the form of counterfeit products, smuggled genuine products and locally
manufactured products on which applicable taxes are evaded – represents a significant and
growing threat to the legitimate tobacco industry. Most illicit products are sold at the bottom
end of the market and in contravention of applicable regulatory requirements.
Excise increases can encourage more consumers to switch to cheaper illegal tobacco products,
providing greater rewards for smugglers. The risk is exacerbated where current economic
conditions have resulted in high unemployment and/or reduced disposable incomes.
Global volume of illicit trade is estimated to be up to 12% of consumption. In the next decade,
we believe that the problem is likely to increase, driven by the increased regulatory and
compliance burden for legitimate manufacturers and further significant excise increases.
Time frame: Long term
Principal causes
- Unexpected and significant excise increases and widening excise differentials between
markets.
- Unintended consequences of regulation, e.g. plain packaging, graphic warnings, display
bans and ingredients restrictions.
- Extra compliance costs imposed on the legitimate industry giving a competitive
advantage to illicit manufacturers.
- Economic downturn.
- Lack of law enforcement and weak border controls.
Potential impact
- Erosion of brand value, with lower volumes and reduced profits.
- Reduced ability to take price increases.
- Investment in trade marketing and distribution is undermined.
Strategic impact: Growth (organic revenue growth)
Mitigation activities
- Dedicated Anti-Illicit Trade (AIT) teams operating at global and country levels and
internal cross-functional coordination.
- Active engagement with key external stakeholders.
- Cross-industry and multi-sector cooperation on a range of AIT issues.
- Global AIT strategy supported by a research programme to further the understanding
of the size and scope of the problem.
- AIT Engagement Team (including a dedicated analytical laboratory) works with
enforcement agencies in pursuit of priority targets.
Risk owner: Director, Legal and External Affairs
Market size reduction and consumer down-trading
Definition
As a consequence of steep excise-led price increases and the continuing difficult economic
and regulatory environment in many countries, market contraction and consumer down-
trading are expected to remain principal risks facing the Group.
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A number of instances of market contraction have arisen, particularly in Europe, Australia,
Brazil and Russia.
Time frame: Short/Medium term
Principal causes
- Downturn in the economic climate impacting consumers’ disposable incomes.
- Changes in the regulatory environment.
- Continued above-inflation price rises.
- Targeted growth of low-priced brands through aggressive pricing.
Potential impact
- Volume decline and portfolio mix erosion.
- Funds to invest in growth opportunities are reduced.
Strategic impact: Growth (organic revenue growth)
Mitigation activities
- Geographic spread mitigates impact at Group level.
- Quarterly brand reviews are presented to the Global Marketing Leadership Team as
well as to the Management Board.
- Economic outlook embedded into quarterly performance reviews in markets.
- Key market reviews at Management Board meetings.
- Close monitoring of sales volume by segment to detect changes in consumer
purchasing patterns in markets.
- Clear portfolio and pricing strategies, ensuring balanced portfolio of strong brands
across key segments.
• Increased focus behind product quality and innovation across all segments to provide
tangible differentiation and improve the price-value ratio.
• Overlap with many mitigation activities undertaken for other principal risks facing the
Group, such as competition from illicit tobacco trade, significant excise increases or
structure changes and inability to obtain price increases.
Risk owner: Regional Directors
Inability to obtain price increases and impact of increases on consumer affordability
Definition
Annual manufacturers’ price increases are among the key drivers in increasing market
profitability. The Group faces a risk that such price increases will not materialise.
Time frame: Short/Medium term
Principal causes
- Increased regulation reduces the ability to build brand equity and enhance the value
proposition to the consumer.
- Stretched consumer affordability arising from deteriorating economic conditions and
rising prices.
- Sharp increase or change in excise structure reduces opportunities for manufacturer-
led pricing.
- Competitor pricing activities.
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Potential impact
- Inability to achieve strategic growth metrics.
- Funds to invest in growth opportunities are reduced.
- Volumes may reduce faster than anticipated due to accelerated market decline.
- Down-trading and growth of illicit trade.
Strategic impact: Growth (organic revenue growth)
Mitigation activities
- Key market and pricing reviews at Management Board meetings.
- Pricing, excise and trade margin committees exist in all markets with regional and
global support.
- Robust business cases underpinning key innovative launches.
- Clear portfolio and pricing strategies, ensuring a balanced portfolio of strong brands
across key segments.
Risk owner: Regional Directors
B. Excise and tax risk factors
Significant excise increases or structure changes
Definition
Tobacco products are subject to substantial excise and sales taxes in most countries in which
the Group operates. In many of these countries, taxes are generally increasing, but the rate of
increase varies country by country and between different types of tobacco products.
A number of significant excise increases have taken place over the past three years, for example
in Australia, Russia, Brazil, South Korea, Turkey, Ukraine and the Philippines. To date, the Group
has been able to balance these increases with its geographic spread and continues to develop
effective measures to address the risk.
Time frame: Long term
Principal causes
- Fiscal pressures for higher government revenues.
- Increases advocated within the context of national health policies.
- Insufficient opportunity to engage with stakeholders in meaningful dialogue.
Potential impact
- Consumers reject the Group’s legitimate tax-paid products for products from illicit
sources or cheaper alternatives.
- Reduced legal industry volumes.
- Reduced sales volume and/or portfolio erosion.
- Some absorption of excise increases.
Strategic impact: Growth (organic revenue growth)
Mitigation activities
- Requirement for Group companies to have in place formal pricing and excise strategies
including contingency plans, with annual risk assessments.
- Pricing, excise and trade margin committees in markets, with regional and global
support.
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- Engagement with local tax and customs authorities, where appropriate, in particular in
relation to the increased risk to excise revenues from higher illicit trade.
- Portfolio reviews to ensure appropriate balance and coverage across price segments.
- Monitoring of economic indicators, government revenues and the political situation.
- Central team in place to define the excise management framework, develop training
materials, monitor and engage with international financial institutions on excise and
anti-illicit trade matters.
Risk owner: Regional Directors
Disputed taxes, interest and penalties
Definition
The Group may face significant financial penalties, including the payment of interest, in the
event of an unfavourable ruling by a tax authority in a disputed area.
Time frame: Short /Medium term
Principal causes
- Unfavourable ruling by tax authorities in disputed areas and aggressive auditing and/or
pursuit of tax claims.
Potential impact
- Significant fines and potential legal penalties.
- Disruption and loss of focus on the business due to diversion of management time.
- Impact on profit and dividend.
Strategic impact: Productivity (capital effectiveness)
Mitigation activities
- End-market tax committees.
- Internal tax function provides dedicated advice and guidance, and external advice
sought where needed.
- Engagement with tax authorities at Group, regional and individual market level.
Risk owner: Finance Director
C. Finance risk factors
Foreign exchange rate exposures
Definition
The Group faces transactional and translational foreign exchange (FX) rate exposures for
earnings/cash flows from its global business. During periods of sterling strength and FX rate
volatility, as seen in 2015, the adverse impact on the Group’s results can be significant.
Time frame: Short /Medium term
Principal causes
- FX rate exposures arise from exchange rate movement against the functional currency
and against sterling, the Group’s reporting currency.
Potential impact
- Fluctuations in FX rates of key currencies against sterling introduce volatility in reported
EPS, cash flow and the balance sheet driven by translation into sterling of our financial
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results.
- The dividend may be impacted if the payout ratio is not adjusted.
- Differences in translation between earnings and net debt may affect key ratios used by
credit rating agencies.
- Volatility and/or increased costs in our business, due to transactional FX, may adversely
impact financial performance.
Strategic impact: Productivity (capital effectiveness)
Mitigation activities
- While translational FX exposure is not hedged, its impact is identified in results
presentations and financial disclosures; earnings are re-stated at constant rates for
comparability.
- Debt and interest are matched to assets and cash flows to mitigate volatility where possible
and economic to do so.
- Hedging strategy for transactional FX and framework is defined in the treasury policy, a
Global policy approved by the Board.
- Illiquid currencies of many markets where hedging is either not possible or uneconomic are
reviewed on a regular basis.
- The Treasury system provides visibility of FX exposures and the hedge portfolio.
Risk owner: Finance Director
Solvency and liquidity
Definition
Liquidity (access to cash and sources of finance) is essential to maintaining the Group as a
going concern in the short term (liquidity) and medium term (solvency).
Time frame: Short/Medium term
Principal causes
- The external environment (foreign exchange and interest rates) and the availability of
financing and business conditions are subject to variability which may lead to stress in
the capital structure, liquidity and solvency of the Group.
Potential impact
- Inability to fund the business under our current capital structure resulting in missed
strategic opportunities or inability to respond to threats.
- Decline in our creditworthiness and increased funding costs for the Group.
- Requirement to issue equity or seek new sources of capital.
- Reputational risk of failure to manage the financial risk profile of the business,
resulting in an erosion of shareholder value reflected in an underperforming share
price.
Strategic impact: Productivity (capital effectiveness)
Mitigation activities
- Group policies include a set of financing principles and key performance indicators
including the monitoring of credit ratings, interest cover, solvency and liquidity with
regular reporting to the Board.
- The Group targets an average centrally managed debt maturity of at least five years
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with no more than 20% of centrally managed debt maturing in a single rolling year.
- The Group, through B.A.T. International Finance p.l.c., holds a central banking facility
of £3 billion with a final maturity of May 2020 (an additional one-year extension is
available at the option of the banks) spread across a wide banking group.
- Liquidity pooling structures are in place to ensure that there is maximum mobilisation
of cash liquidity within the Group.
- The Group has an externally imposed capital requirement for its centrally managed
banking facilities of maintaining gross interest cover above 4.5 times. The Group
targets a gross interest cover of greater than 5.
- Going concern and viability support papers are presented to the Board on a regular
basis.
Risk owner: Finance Director
D. Operations Risk Factors
Geopolitical tensions
Definition
Geopolitical tensions, social unrest, terrorism and organised crime have the potential to disrupt
the Group’s business in multiple markets.
Time frame: Long term
Principal causes
- Regional and/or global conflicts.
- Terrorism and political violence.
- Criminal activity leading to attacks on our people, supply chain or other assets.
- Economic policy changes, including nationalisation of assets and withdrawal from
international trade agreements.
Potential impact
- Potential loss of life, loss of assets and disruption to normal business processes.
- Increased costs due to more complex supply chain arrangements and/or the cost of
building new facilities or maintaining inefficient facilities.
- Reputational impact of inability to protect staff and assets from serious harm.
Strategic impact: Growth (organic revenue growth)
Mitigation activities
- Globally integrated sourcing strategy and contingency sourcing arrangements.
- Security risk modelling, including external risk assessments and the monitoring of
geopolitical and economic policy developments worldwide.
- Insurance cover and business continuity planning, including scenario planning and
testing and risk awareness training.
- Security controls for field force, direct store sales and supply chain with an emphasis on
the protection of Group employees.
Risk owner: Director, Legal and External Affairs
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Injury, illness or death in the workplace
Definition
The Group is committed to operating responsibly by maintaining the necessary controls that
safeguard the health, safety and welfare of the people who work for the Group, as well as
minimising the impact on the natural environment and the local communities in which the
Group conducts business activities. The risk of injury, death or ill health to employees and those
who work with the business is a fundamental concern of the Group and can have a significant
effect on its operations.
Time frame: Long term
Principal causes
- Failure to assess risk and implement appropriate control measures.
- Failure to monitor, assess and implement the requirements of regulations that apply to
Group sites and operations resulting in non-compliance with environment, health and safety
(EHS) standards.
- Insufficient information, instruction and training on health and safety at work.
Potential impact
- Serious injuries, ill health, disability or loss of life suffered by employees and the people
who work with the Group.
- Exposure to civil and criminal liability and the risk of prosecution from enforcement
bodies and the cost of associated fines and/or penalties.
- Interruption of Group operations if issues are not addressed quickly.
- High staff turnover or difficulty recruiting employees if perceived to have a poor EHS
record.
Strategic impact: Sustainability
Mitigation activities
- Risk control systems in place to ensure equipment and infrastructure are provided and
maintained.
- An EHS strategy ensures that employees at all levels receive appropriate EHS training
and information.
- Behavioural-based safety programme to drive Operations safety performance and
culture closer to zero accidents.
- Analysis of incidents undertaken regionally and globally to identify increasing incident
trends or high potential risks that require coordinated action to address.
- Focused programmes within Marketing to address specific risks associated with sales
and distribution activities.
- Dedicated global team to support management of EHS risks.
- Key issues and incidents monitored regionally and reported globally to oversee
compliance.
Risk owner: Director, Operations
E. Regulation Risk Factors
Tobacco regulation inhibits growth strategy
Definition
The enactment of unreasonable regulation that prohibits the Group’s ability to communicate
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with consumers, differentiate our products and launch future products. This increases business
costs and complexity.
Time frame: Long term
Principal causes
Pressure from some international health organisations, governments and the tobacco control
community to pursue regulation and policy that: is not evidence-based; is designed to eradicate
tobacco and nicotine use; excludes the industry from the manufacture and sale of Next
Generation Products or regulates them in a way that fails to incentivise their commercialisation;
and fails to deliver legitimate public health objectives.
Potential impact
- Erosion of brand value through commoditisation, the inability to launch innovations,
differentiate products, maintain or build brand equity and leverage price.
- Adverse impact on ability to compete within the legitimate tobacco industry and also
with increased illicit trade.
- Reduced consumer acceptability of new product specifications, leading to consumers
seeking alternatives in illicit trade.
- Shocks to share price on enactment of unduly onerous and restrictive regulation.
- Reduced ability to compete in future product categories and make new market entries.
- Constriction of the retail universe and limitations on product visibility.
- Increased scope and severity of compliance regimes in new regulation leading to higher
costs, greater complexity and potential reputational damage or fines for inadvertent
breach.
Strategic impact: Growth (organic revenue growth) and Sustainability (balanced regulation)
Mitigation activities
- Engagement and litigation strategy coordinated and aligned across the Group to drive a
balanced global policy framework for tobacco control.
- Prioritisation of key current and emerging regulatory issues.
- Stakeholder mapping and prioritisation, developing robust compelling advocacy
materials (with supporting evidence and data) and regulatory engagement
programmes.
- Regulatory risk assessment of marketing plans to ensure decisions are informed by an
understanding of the potential regulatory environments.
- Advocating the application of our integrated regulatory proposals to governments and
public health practitioners based on the harm reduction principles.
- Development of an integrated regulatory strategy that spans conventional
combustibles and includes Next Generation Products.
Risk owner: Director, Legal and External Affairs
F. Litigation Risk Factors
Litigation
Definition
Product liability, regulatory or other significant cases may be lost or compromised resulting in
a material loss or other consequence. Legal costs may increase significantly.
Time frame: Long term
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Principal causes
- Case lost by either a non-Group or Group company may set a precedent for the filing of
future claims against the Group.
- Cases are brought on the basis of the reversal of the burden of proof which places the
Group, as a defendant, at a disadvantage e.g. health care recoupment cases.
- Aggressive court timeline or approach that undermines defence preparation.
Potential impact
- Damages and fines, negative impact on reputation, disruption and loss of focus on the
business.
- Consolidated results of operations, cash flows and financial position could be materially
affected, in a particular fiscal quarter or fiscal year, by an unfavourable outcome or
settlement of pending or future litigation.
Strategic impact: Growth (revenue impact)
Mitigation activities
- Consistent litigation strategy across the Group.
- Expertise and legal talent maintained both within the Group and with our external
partners.
- Closer integration in Group litigation strategy and cost controls pursued.
Risk owner: Director, Legal and External Affairs
G. People Risk Factors
Inability to recruit or retain talent
Definition
The Group faces a risk of an inability to attract and retain the right people who have the ability
and personal leadership to drive and deliver competitive advantage and superior performance.
Time frame: Long term
Principal causes
- Negative perception of the sustainability and corporate reputation of a tobacco
company.
- Perceived uncompetitive remuneration packages compared to the marketplace.
Potential impact
- Undesirable voluntary turnover reducing organisational performance and productivity.
- Critical positions left vacant unbalances skills and capabilities and reduces sustainable
leadership to drive the Group strategy.
Strategic impact: Growth (revenue impact) and Winning Organisation
Mitigation activities
- Group employee communication campaign ‘The BAT Way’ and leadership team
interaction to strengthen employee engagement.
- Employee engagement ‘Your Voice’ analysis and global exit interviews to understand
employee satisfaction and drive targeted action.
- Elevating our employer brand and communication digitally through targeted social
media channels.
- Active talent agenda and talent management globally, providing succession planning
and stretch development opportunities to enhance the quality of our people and the
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strength of our talent pipelines.
- Investment in our leadership development portfolio to challenge and inspire, enabling
career development.
- Benchmarking of reward in line with a global FMCG comparator group.
Risk owner: Director, Group Human Resources
APPENDIX B
RELATED PARTY DISCLOSURES
The Group has a number of transactions and relationships with related parties, as defined in
IAS 24 Related Party Disclosures, all of which are undertaken in the normal course of
business. Transactions with CTBAT International Limited are not included in these
disclosures as it is a joint operation.
Transactions and balances with associates relate mainly to the sale and purchase of cigarettes
and tobacco leaf. Amounts receivable from associates in respect of dividends included in the
table below were £145 million (2014: £96 million). The Group’s share of dividends from
associates, included in other net income in the table below, was £640 million (2014: £518
million).
The below table includes amounts related to the new joint venture in 2015 in Hungary.
2015 2014
£m £m
Transactions
-revenue 38 38
-purchases (270) (279)
-other net income 639 512
Amounts receivable at 31 December 190 98
Amounts payable at 31 December (20) (25)
On 17 December 2012, a wholly-owned subsidiary of the Group, BATUS Japan Inc. (BATUSJ),
entered into an Amendment and Extension Agreement (referred to as the Amendment) with a
wholly-owned subsidiary of Reynolds American Inc. (RAI), R.J. Reynolds Tobacco Company
(referred to as RJRT). The Amendment modifies the American blend Cigarette Manufacturing
Agreement (referred to as the 2010 Agreement), effective as of 1 January 2010.
Prior to the Amendment, the term of the 2010 Agreement was scheduled to expire on 31
December 2014, subject to early termination and extension provisions. Pursuant to the
Amendment, the Manufacturing Agreement will remain in effect beyond 31 December 2014,
provided that either RJRT or BATUSJ may terminate the Manufacturing Agreement by furnishing
three years’ notice to the other party; such notice was given in January 2016.
During 2014, the Group received proceeds of £94 million in respect of its participation in the
share buy-back programme conducted by RAI. This programme ceased in the second quarter of
2014.
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On 12 June 2015, RAI completed its acquisition of Lorillard, Inc. and related divestiture
transactions to ITG Brands LLC, a subsidiary of Imperial Tobacco Group PLC, after receiving the
required regulatory approval. At the same time, the intention of which was announced on 15
July 2014, the Group invested US$4.7 billion (£3.0 billion) of cash in RAI to maintain its 42%
equity position in the enlarged business.
In addition, on 1 December 2015, the Group and RAI announced an agreement providing a
framework for collaboration and mutual cross-licensing of vapour product technologies through
2022.
During 2015, the Group acquired a further 24% interest in Souza Cruz S.A. at a cost of £1,660
million. This increased the Group’s shareholding to 99%. This transaction is shown as a £1,555
million reduction to reserves attributable to the owners of the parent and a £105 million
reduction in reserves attributable to non-controlling interests in note 20 [on the Notes on the
Accounts to the Annual Report]. The compulsory acquisition of the remaining shares was
approved on 5 February 2016, with Souza Cruz S.A. becoming a wholly-owned subsidiary at that
date. The cost of acquiring the remaining shares was £70 million.
During 2015, the Group acquired a further 0.2% interest in BAT Chile Operaciones S.A. at a cost
of £1 million. This increased the Group’s shareholding to 99%. This transaction is shown as a £1
million reduction to reserves attributable to the owners of the parent in note 20 [on the Notes
on the Accounts to the Annual Report].
During 2015, the Group acquired a further 9% interest in BAT Central America S.A. at a cost of
£16 million. This increased the Group’s shareholding to 88%. This transaction is shown as a £14
million reduction to reserves attributable to the owners of the parent and a £2 million reduction
in reserves attributable to non-controlling interests in note 20 [on the Notes on the Accounts to
the Annual Report].
For comparative purposes, prior year’s acquisitions are disclosed in note 26 [on the Notes on
the Accounts to the Annual Report].
As explained in note 12 [on the Notes on the Accounts to the Annual Report], contributions to
the British American Tobacco UK Pension Fund are secured by a charge over the Group’s Head
Office (Globe House) up to a maximum of £150 million.
The key management personnel of British American Tobacco consist of the members of the
Board of Directors of British American Tobacco p.l.c. and the members of the Management
Board. No such person had any material interest during the year in a contract of significance
(other than a service contract) with the Company or any subsidiary company. The term key
management personnel in this context includes the respective members of their households.
2015 2014
£m £m
The total compensation for key management personnel, including Directors,
was:
-salaries and other short-term employee benefits 20 20
-post-employment benefits 4 3
-share-based payments 11 11
35 34
15
There were no other long-term benefits applicable in respect of key personnel other than those
disclosed in the Remuneration Report.
Sponsor: UBS South Africa (Pty) Ltd
16
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