Company Quick10K Filing
British American Tobacco
20-F 2020-12-31 Filed 2021-03-09
20-F 2019-12-31 Filed 2020-03-26
20-F 2018-12-31 Filed 2019-03-15
20-F 2017-12-31 Filed 2018-03-15

BTI 20F Annual Report

Note 12: of The 24 Adverse Judgments Appealed By Rjrt As A Result of Judgments Arising in The Period 1 January 2018 To 31 December 2020:
Note 13: of The 26 Adverse Judgments Appealed By Rjrt (During The Period 1 January 2018 To 31 December 2020):
EX-2.18 d41562dex218.htm
EX-2.19 d41562dex219.htm
EX-4.3 d41562dex43.htm
EX-12 d41562dex12.htm
EX-13 d41562dex13.htm
EX-15 d41562dex15.htm

British American Tobacco Earnings 2020-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d41562d20f.htm 20-F 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

For the transition period from                      to                     

Commission file number 001-38159

 

 

British American Tobacco p.l.c.

(Exact name of Registrant as specified in its charter)

 

 

(Translation of Registrant’s name into English)

England and Wales

(Jurisdiction of incorporation or organization)

Globe House, 4 Temple Place, London WC2R 2PG, United Kingdom

(Address of principal executive offices)

Paul McCrory, Company Secretary Tel: +44 (0)20 7845 1000

Fax: +44 (0)20 7240 0555

Globe House, 4 Temple Place, London WC2R 2PG, United Kingdom

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading

symbol(s)

 

Name of each exchange

on which registered

American Depositary Shares (evidenced by American Depositary Receipts)   BTI   New York Stock Exchange
each representing one ordinary share    
Ordinary shares, nominal value 25 pence per share   BTI   New York Stock Exchange*
1.668% Notes due 2026   BTI26A   New York Stock Exchange
2.259% Notes due 2028   BTI28   New York Stock Exchange
2.726% Notes due 2031   BTI31   New York Stock Exchange
3.734% Notes due 2040   BTI40   New York Stock Exchange
3.984% Notes due 2050   BTI50A   New York Stock Exchange
4.700% Notes due 2027   BTI27A   New York Stock Exchange
4.906% Notes due 2030   BTI30   New York Stock Exchange
5.282% Notes due 2050   BTI50   New York Stock Exchange
2.789% Notes due 2024   BTI24   New York Stock Exchange
3.215% Notes due 2026   BTI26   New York Stock Exchange
3.462% Notes due 2029   BTI29   New York Stock Exchange
4.758% Notes due 2049   BTI49   New York Stock Exchange
2.764% Notes due 2022   BTI22   New York Stock Exchange
3.222% Notes due 2024   BTI24A   New York Stock Exchange
3.557% Notes due 2027   BTI27   New York Stock Exchange
4.390% Notes due 2037   BTI37   New York Stock Exchange
4.540% Notes due 2047   BTI47   New York Stock Exchange
Floating Rate Notes due 2022   BTI22A   New York Stock Exchange

 

*

Application made for registration purposes only, not for trading, and only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.

2,456,591,597 ordinary shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ☒   Yes    ☐  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes    ☒  No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with US GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13
(a) of the Exchange Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP  ☐    International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒    Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐  Item 17    ☐  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

 

 

 


Table of Contents

For the forward-looking non-GAAP information contained in this Annual Report on Form 20-F, no comparable GAAP or IFRS information is available on a forward-looking basis, as the effect of adjusting items and rates of exchange, which could be significant, may be highly variable and cannot be estimated with reasonable certainty. In addition, other components of the Group’s results, including the revenue generated from combustibles, cannot be estimated with reasonable certainty due to, among other things, the impact of foreign exchange, pricing and volume, which could be significant, being highly variable. As such, no reconciliations for this forward-looking non-GAAP information are available and we are unable to: present revenue before New Category revenue.


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LOGO

BAT Building the Enterprise of the Future Annual Report and Form 20-F 2020 BAT A BETTER TOMORROW


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LOGO

30% Of our direct energy from renewable sources >35% Reduce the total amount of water withdrawn from our 2017 baseline 100% Of plastic packaging to be reusable, recyclable or compostable > 30% Reduce our absolute Scope 1 and Scope 2 CO2e emissions from our 2017 baseline Ambitious Environmental Targets 2025 2030 Carbon Neutrality Target


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LOGO

Ambitious Business Goals New Category Revenue 2025 Target of £5bn 2030 Target of 50mn Consumers of Non-Combustible Products


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LOGO

Our Purpose To reduce the health impact of our business by offering a greater choice of enjoyable and less risky products for our consumers. We are clear that combustible cigarettes pose serious health risks. The only way to avoid these risks is not to start or to quit. However, we encourage those who would otherwise continue to smoke to switch completely to scientifically-substantiated, reduced-risk alternatives.* In order to deliver this, BAT is transforming into a truly consumer-centric multi-category consumer products business. Multi-Category Consumer Moments Portfolio Digital Consumer Insights Consumer Centricity Embedded Digitally Satisfaction Product RGM Product Index Boundaries * Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive. Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without Part agency clearance.


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Strategic Report        

               Governance Report                  Financial Statements                  Other Information      BAT Annual Report and Form 20-F 2020                  0 1  

 

Inside This Report

 

Strategic Report

 

 

LOGO

 

LOGO

Explore the story

of our year

Featuring downloadable

versions of this report,

along with our ESG report

and other content – all accessible on desktop, tablet and mobile.

 

www.bat.com/reporting

 

 

 

Delivering A Better TomorrowTM

  
For Consumers      29  

Tobacco Harm Reduction

  

Through World-class Science

     30  

Digital Transformation

  

Unlocking Commercial Value

     32  

Short-Term Deliverables to Fuel A Better Tomorrow

     34  
For Society and the Environment      44  

Awards and Recognition

     45  

Putting ESG Front and Centre

     46  

ESG Framework

     48  

Reducing the Health Impact of Our Business

     49  

Excellence in Environmental Management

     51  

Delivering a Positive Societal Impact

     54  

Robust Governance

     56  
For Employees      58  

Ethos

     59  

People and Culture

     60  
For Shareholders      64  

Financial Performance Summary

     65  

Treasury and Cash Flow

     70  

Other

     72  

Regional Review

     74  

Engaging With Our Stakeholders

     82  

 

Business Environment

  
Group Principal Risks      84  
 

British American Tobacco p.l.c. (No. 3407696)

Annual Report 2020

This document constitutes the Annual Report and Accounts of British American Tobacco p.l.c. (the Company) and the British American Tobacco Group prepared in accordance with UK requirements and the Annual Report on Form 20 -F prepared in accordance with the US Securities Exchange Act of 1934 (the Exchange Act) and the rules promulgated thereunder for the year ended 31 December 2020. Moreover, the information in this document may be updated or supplemented only for purposes of the Annual Report on Form 20-F at the time of filing with the SEC or later amended if necessary. Any such updates, supplements or amendments will also be denoted with a ‘»’ symbol. Insofar as this document constitutes the Annual Report and Accounts, it has been drawn up and is presented in accordance with, and reliance upon, applicable English company law and the liabilities of the Directors in connection with this report shall be subject to the limitations and restrictions provided by such law.

This document is made up of the Strategic Report, the Governance Report, the Financial Statements and Notes, and certain other information. Our Strategic Report, pages 2 to 88, includes our purpose and strategy, global market overview, business model, global performance, as well as our financial performance and principal Group risks. The Strategic Report has been approved by the Board of Directors and signed on its behalf by Paul McCrory, Company Secretary. Our Governance Report on pages 89 to 140 contains detailed corporate governance information and our Committee reports. The Directors’ Report on pages 89 to 116 (the Governance pages) and 271 to 343 (the Additional Disclosure and Shareholder Information pages) has been approved by the Board of Directors and signed on its behalf by Paul McCrory, Company Secretary. Our Financial Statements and Notes are on pages 141 to 253. The Other Information section commences on page 271.

This document provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards (IFRS). We believe these APMs provide readers with important additional information on our business. We have included a Non-GAAP measures section on pages 276 to 284 which provides a comprehensive list of the APMs that we use, an explanation of how they are calculated, why we use them and a reconciliation to the most directly comparable IFRS measure where relevant.

 

British American Tobacco p.l.c. has shares listed on the London Stock Exchange (BATS) and the Johannesburg Stock Exchange (BTI), and, as American Depositary Shares, on the New York Stock Exchange (BTI).

The Annual Report is published on bat.com. A printed copy is mailed to shareholders on the UK main register who have elected to receive it. Otherwise, shareholders are notified that the Annual Report is available on the website and will, at the time of that notification, receive a short Performance Summary (which sets out an overview of the Group’s performance, headline facts and figures and key dates in the Company’s financial calendar) and Proxy Form.

Specific local mailing and/or notification requirements will apply to shareholders on the South Africa branch register.

References in this publication to ‘British American Tobacco’, ‘BAT’, ‘Group’, ‘we’, ‘us’ and ‘our’ when denoting opinion refer to British American Tobacco p.l.c. and when denoting tobacco business activity refer to British American Tobacco Group operating companies, collectively or individually as the case may be.

The material in this Annual Report is provided for the purpose of giving information about the Company to investors only and is not intended for general consumers. The Company, its Directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this material is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. The material in this Annual Report is not provided for product advertising, promotional or marketing purposes. This material does not constitute and should not be construed as constituting an offer to sell, or a solicitation of an offer to buy, any of our products. Our products are sold only in compliance with the laws of the particular jurisdictions in which they are sold.

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 the Annual Report and Form 20-F.

Cautionary statement

This document contains forward-looking statements. For our full cautionary statement, please see page 318.

 


Table of Contents
  0 2          BAT Annual Report and Form 20-F 2020

 

Overview

Chairman’s Introduction

A Strong Operational Performance

During Challenging Times

 

 

LOGO

 

 

LOGO The strength of the business, combined with the professionalism and resilience of our global teams have enabled us, in 2020, to deliver a strong operational performance

during challenging times. LOGO

  

 

Welcome to our combined Annual Report and Form 20-F for 2020, my last as Chairman of BAT.

The unprecedented impact of the COVID-19 crisis has disrupted all aspects of life around the world and our sympathies are with anyone suffering from the virus or who has lost family or friends in the pandemic.

Our priority throughout has been to safeguard the welfare of our people while ensuring that the business has continued to operate effectively.

The Board and management have worked very closely together to address the disruptions experienced throughout the year.

The strength of the business, combined with the professionalism and resilience of our global teams have enabled us, in 2020, to deliver a strong operational performance during challenging times.

Foreign exchange headwinds impacted our reported results, with Group revenue down 0.4%. This was despite a good revenue performance (excluding the impact of currency) and I am pleased to report growth in both value and volume share, with revenue from New Categories growing 15%.

Clarity around the full impact of the pandemic, and for life to return to some semblance of normality, will take time.

The duration of the short-term impact on the performance of the business will depend on the nature and timing of the subsequent economic recovery, but we believe we are well positioned to emerge as a stronger company.

In the longer term, BAT’s strong foundations, resilient business model and consumer-focused strategy mean I remain excited about its future prospects.

Good Governance at the Heart of a Sustainable Business

Increasingly, business is moving beyond seeking only to deliver ‘shareholder value’ and is embracing a wider purpose that serves the interests of all stakeholders.

The expectations of broader society are that business should play a more active role in addressing and finding solutions to crucial social, economic and environmental issues. Evidence of these expectations can be found in the increasing amount of capital that is being channelled into environmental, social, and governance (ESG) funds.

We at BAT welcome this shift. It is aligned to our Company’s purpose, our sustainability agenda and the decision-making approach that the Board encourages.

Our commitment to delivering for the whole of society is evidenced by the ambitious ESG targets we set out in 2020. I am pleased to report we have made steady progress against our ambitions. We are increasingly shifting our business to consumers of non-combustible products, while reducing our impact on the environment.

Dividends

We have maintained our dividend commitment despite the challenging operating environment and the Board has declared a dividend of 215.6p per ordinary share, payable in four equal instalments of 53.9p per ordinary share, to shareholders registered on the UK main register or the South Africa branch register and to American Depository Shares (ADS) holders, each on the applicable record dates.

The dividends receivable by ADS holders in US dollars will be calculated based on the exchange rate on the applicable payment dates.

Further information on dividends can be found on page 69 of the Financial Review and page 320 in the Shareholder information section.

Board Composition

I am delighted that Luc Jobin has been appointed by the Board to be my successor as Chairman of BAT. Having worked closely with him in his role as a Non-Executive Director over the last three years, I am confident that BAT is well positioned for future success with Luc as Chairman.

I am also very pleased to welcome Karen Guerra and Darrell Thomas, who joined the Board as Non-Executive Directors on 14 September and 7 December 2020, respectively. Karen brings substantial knowledge and understanding of consumer goods and Darrell brings significant financial, regulatory and US experience.

I have no doubt that both Karen and Darrell will be assets to the Board, its work and BAT.

Future Outlook

As I reflect on my tenure as Chairman of BAT, I am thankful for all the efforts of, and collaboration between, our Board of Directors, management and employees around the world.

BAT made considerable progress strategically and financially during a difficult 2020. I have no doubt that the Company will navigate the future with both confidence and determination to continue building A Better TomorrowTM.

Richard Burrows

Chairman

 

 

LOGO

 

 


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LOGO

 

    

The Group’s response to the global COVID-19 pandemic continues to evolve and we expect the actions we take to develop over time as the needs of our people, our customers and society as a whole change.

 

We are steadfastly committed to supporting all our stakeholders throughout the COVID-19 pandemic, whether that be our workforce, customers, partners or suppliers.

 

Keeping the Group Operating in a Time of Crisis

 

The Group continues to navigate the challenges and impacts of COVID-19, with effective crisis management and risk management processes in place, and remains a financially resilient business.

 

Our Board has maintained close oversight of the Group’s response to the impact of COVID-19 throughout this period.

 

The Group remains financially robust. This demonstrates the confidence in the Group’s ability to continue to navigate COVID-19 with the associated macro and socio-economic challenges and uncertainty this international crisis brings.

 

We are committed to supporting all our stakeholders throughout the COVID-19 pandemic, whether that be our workforce, customers, partners or suppliers. We have not furloughed any staff or utilised any government schemes (or subsidies) due to the pandemic, other than in respect of the deferral of tax instalment payments within the calendar year.

 

  

Vaccine Development

 

BAT’s US bio-tech subsidiary, Kentucky BioProcessing (KBP), is developing a potential vaccine for COVID-19. Its Initial New Drug application was approved by the US Food and Drug Administration (FDA) in December 2020 and we are progressing through the first Phase I study of KBP’s COVID-19 vaccine candidate.

 

This move to human trials is the first phase of development that would, if successful, form part of the full-scale development programme that would aim to fully assess the safety and efficacy of the candidate vaccine.

 

KBP is a world leader in using plants to express, extract and purify proteins for use as vaccines and other pharmaceuticals.

 

The candidate vaccine’s unique use of innovative fast-growing plant-based technology means rapid production of the vaccine’s active ingredients in around six weeks compared to several months using conventional methods. The vaccine also has the potential to be stable at room temperature, which could be a significant advantage for healthcare systems.

 

Testing and Logistical Support

 

We have continued to evolve the forms of direct support we have deployed to address the global impact of COVID-19.

 

In addition to the COVID-19 vaccine candidate that is in development by our US bio-tech subsidiary, KBP, we have:

 

–  Loaned testing equipment to the UK government;

 

–  Provided access to 3D printers to help produce protective face shields;

 

–  Manufactured and distributed medical and hygiene equipment to vulnerable communities; and

 

–  Donated to many funds around the world focusing on supporting local COVID-19 responses.

  

Supporting our Suppliers and Communities

 

Our response to COVID-19 has been developed to incorporate the needs of wider stakeholder groups, including our smaller suppliers and those living in tobacco growing communities.

 

Some tobacco growing communities may be particularly vulnerable to both the virus and the economic implications of a global pandemic. We are taking great care that we don’t increase the immediate vulnerability of these communities and are committed to supporting them during the inevitable economic recovery that will follow.

 

We are working to support our smaller suppliers across the globe who may be struggling with cash flow issues by ensuring that, where needed, they are paid earlier than existing payment terms require or by extending payment terms to those customers who have expressed concerns.

 

Looking After our People

 

The Group’s management is doing all that it can to make sure that employees working from home feel connected.

 

Most importantly, we are working to ensure that the health, safety and wellbeing of employees who are unable to work from home, and those in countries where lockdown restrictions are not in place, are protected in their workplace.

 

For all employees, we are making sure they are aware of the extensive wellbeing support available to them, including:

 

–  Online medical consultations;

 

–  Counselling services; and

 

–  Mental health support.

 

 

 

         


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  0 4          BAT Annual Report and Form 20-F 2020

 

Overview

Chief Executive’s Review

Building A Better TomorrowTM and Delivering

Growth in a Challenging Environment

 

 

 

LOGO

  

 

LOGO From the start of our portfolio transformation journey, we have always been clear that no consumer is the same. In order to meet differing needs in multiple marketplaces, a portfolio of solutions is required –
that is the hallmark of a modern consumer products business. I am delighted, therefore, that adoption has accelerated across all three of our New Categories
in 2020 and that 13.5 million consumers are now

choosing our non-combustible products. LOGO

 

LOGO As the largest, and only truly global company in our industry, we take seriously our role to transform ourselves and demonstrate thought

leadership . LOGO

 

 

 

 

LOGO We have a very clear purpose to reduce the harm footprint of our business.

We are uniquely positioned

in that regard. LOGO

 

 

 

 

LOGO Recent months have seen upheaval on a global scale as a result of the COVID-19 pandemic.

It has had a profound impact on business and society

as a whole. LOGO

 

*

Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

Dear Stakeholders,

As the largest, and only truly global company in our industry, we take seriously our role to transform ourselves and demonstrate thought leadership.

We have a very clear purpose to reduce the harm footprint of our business. We are uniquely positioned to encourage the switch to reduced-risk products.*

 

  We operate worldwide, inclusive of the US, which represents 40% of the global industry’s value.

 

  Our well-embedded consumer-centric, multi-category consumer strategy is activated on a global scale, leveraging our insights on consumer satisfaction, innovation needs and taste preference.

 

  We are building the brands of the future – strong, global brands, specifically positioned in each target consumer segment.

From the start of our portfolio transformation journey, we have always been clear that no consumer is the same. In order to meet differing needs in multiple marketplaces, a portfolio of solutions is required – that is the hallmark of a modern consumer products business.

I am delighted, therefore, that adoption has accelerated across all three of our New Categories in 2020 and that 13.5 million consumers are now choosing our non-combustible products. We have a way to go – yet BAT is changing, and that change is accelerating.

Our Response to the Pandemic

Recent months have seen upheaval on a global scale as a result of the COVID-19 pandemic. It has had a profound impact on business and society as a whole. First and foremost, our thoughts are with the many individuals and families whose lives have been impacted by the virus.

At the beginning of the crisis, we took swift action across the entire business to ensure we could continue to operate safely and effectively.

Today, working remotely remains the norm for many at BAT. Where this has not been possible, for example in many of our factories around the world, the necessary measures have been put in place to ensure our people can work safely and securely. I would like to thank our teams around the world for their ongoing commitment, energy and passion.

Our Purpose: A Better TomorrowTM

Our business continues to transform during this period of unprecedented change. Our purpose – to build A Better TomorrowTM by reducing the health impact of our business – has remained our North Star. It continues to guide our strategic choices and the execution of our strategy.

Delivering A Better TomorrowTM through consumer-led insights, innovation and science are central to this purpose. Our consumer-centric, multi-category approach offers the widest range of enjoyable and less risky products, including Vapour products, Tobacco Heating Products (THP) and Modern Oral nicotine pouches.*

We believe our multi-category strategy is the most effective way of appealing to the diverse preferences of adult consumers around the world while reducing the health impact of our business. We believe consumers should either stop smoking, or not start.

For those who would otherwise continue to smoke, we are committed to encouraging them to switch completely to scientifically-substantiated, reduced-risk alternatives.*

 

 

LOGO


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Strategic Report        

   Governance Report            Financial Statements            Other Information            BAT Annual Report and Form 20-F 2020        0 5

 

              

 

 

 

LOGO Our business continues to transform during this period of unprecedented change.

Our purpose – to build A Better Tomorrow by reducing the health impact of our business – has remained our North Star.

It continues to guide our strategic choices and the execution of our

strategy. LOGO

 

 

 

LOGO We believe our multi-category strategy is the most effective way to appeal to the diverse preferences of adult consumers around the world while reducing the health impact of

our business. LOGO

 

 

 

LOGO I am pleased that we are making great progress towards our ESG ambitions and business transformation. BAT’s non-combustible products are now available in over 50 countries. We have increased the number of non-combustible product consumers by 3 million, reaching 13.5 million, and remain on track for

50 million by 2030. LOGO

 

 

 

LOGO We are providing an increasing number of adult consumers with products that provide satisfaction and can reduce the overall health risk compared with our combustible products. Our ambition is to build

the brands of the future. LOGO

Sustainability is at the heart of our business and is key to our transformation journey. In support of our A Better TomorrowTM purpose, we set out three ambitious ESG targets:

 

  Increasing the consumer base of our non-combustible products to 50 million by 2030;

 

  Achieving carbon neutrality by 2030 while accelerating our existing environmental targets to 2025; and

 

  Eliminating unnecessary single-use plastic and making all plastic packaging reusable, recyclable or compostable by 2025.

I am pleased that we are making great progress towards our ESG ambitions and business transformation. BAT’s non-combustible products are now available in more than 50 countries. We have increased the number of non-combustible product consumers by 3 million, reaching 13.5 million, and remain on track for 50 million by 2030.

In addition, we achieved a 37.4% decrease in our Scope 1 and Scope 2 CO2e carbon emissions against our 2017 baseline, supported by a 16 percentage point increase in our use of renewable energy compared with last year. Further details of our progress in all ESG areas are provided on pages 44-57 and in our ESG Report.

We are proud that our ESG efforts are being recognised externally through our inclusion in the Dow Jones Sustainability Indices for 19 consecutive years, our scores in leading investor indices such as MSCI and Sustainalytics, and through our CDP Climate A-List status.

In fact, BAT achieved more worldwide recognition and awards in 2020 than ever before, with well over 200 awards received.

Our Performance for Year Ended 31 December 2020

The year ended 31 December 2020 was a strong one for BAT’s global business.

The impact of the COVID-19 pandemic has been felt unequally across markets, with resilience seen across many developed markets, where around three-quarters of our revenue is generated, while some developing markets have experienced product, sales or supply chain restrictions.

Revenue was marginally lower than 2019 (down 0.4%), due to a foreign currency headwind of 3.5%. Excluding currency (and adjusting items in revenue impacting 2019), the Group delivered 3.3% revenue growth to £26,670 million, which was at the top end of our guidance range.

Profit from operations grew by 10.5% to £9,962 million with diluted earnings per share up 12%. Excluding adjusting items and the impact of foreign exchange, adjusted profit from operations, at constant rates of exchange, grew by 4.8% and adjusted diluted earnings per share grew by 5.5%.

Reported operating margin grew by 380 bps to 38.6%. On an adjusted basis, it grew by 100 bps at current rates.

We have continued to demonstrate our commitment to reducing leverage and investing in the business by maximising cash.

Delivering a Step Change in New Categories

Our New Categories portfolio is the broadest in the industry.

Through our multi-category approach, combined with powerful data and consumer analytics, we are providing an increasing number of adult consumers with products that provide satisfaction and can reduce the overall health risk compared with our combustible products.*† Our ambition is to build the brands of the future.

We aim to further accelerate the growth of revenue from our New Categories, reaching £5 billion in 2025. I am pleased to report that £1.4 billion of our revenues came from these products in 2020, representing 15% growth compared to 2019.

Overall, total Group Vapour revenue grew by 52% to £611 million. I am pleased to report we are the value share leader in closed systems in four of the top five markets, rapidly closing the gap on the US market leader.

We continue to grow volume share in THP, with consumable volume up 19% to 11 billion sticks – which would have been a growth of 29% had it not been for the withdrawal of glo Sens in the year. While overall revenue declined 13% to £634 million this was predominantly due to the impact of a £50 million charge to revenue (related to the withdrawal of glo Sens) and excise rate harmonisation in Japan. We now have around 20% share of category in multiple markets including Japan, Romania and Kazakhstan.

Our volume of Modern Oral increased 62% to 1.9 billion pouches with revenue increasing 57% to £198 million. Our acquisition of certain assets from Dryft, a US-based Modern Oral company, in October positions us well for future US growth and represents a further step towards building A Better TomorrowTM.

These results, combined with the investment of an additional £426 million in New Categories in 2020, demonstrate our commitment to delivering results sustainably in this exciting area of the business.

 

 

LOGO

 

 


Table of Contents
  06          BAT Annual Report and Form 20-F 2020

 

Overview

Chief Executive’s Review

Continued

 

 

LOGO We aim to further accelerate the growth of revenue from our New Categories, reaching £5 billion in 2025. I am pleased to report that £1.4 billion, of our revenues came from these products in 2020 representing 15% growth compared

to 2019. LOGO

 

 

 

 

LOGO These results, combined with the investment of an additional £426 million in New Categories in 2020, demonstrate our commitment to delivering results in this exciting area of the

business sustainably. LOGO

 

 

 

 

 

LOGO As these results demonstrate, we are accelerating our business transformation and building A

Better Tomorrow. LOGO

 

 

 

LOGO With our history of strong financial performance, coupled with a deep understanding of our consumers and an innovation-led, multi-category approach, we have the foundations in place to propel this great Company

even further forward. LOGO

Driving Value from Combustibles

While we aim to generate an increasing proportion of our overall revenues from New Categories, the performance of our combustibles business remains essential to funding the delivery of A Better TomorrowTM.

Revenue from combustibles declined 1.1% as the results were impacted by a translational exchange headwind of 3.7%. On a constant currency basis (and excluding adjusting items that impacted 2019), this was a growth of 2.8% to £23.6 billion as higher pricing across the Group, notably in the US, Russia, Germany, Canada, Australia, Mexico and Pakistan more than offset the impact of lower combustible volume.

Group cigarette value share increased 20 bps, with cigarette volume share up 40 bps. While Group cigarette volume declined 4.6% to 638 billion sticks, this should be seen in the context of an estimated decline in the industry of between 5.0% to 5.5%.

Our developed and developing market coverage supported our growth, with value share accelerating in developed markets and volume share in developing markets.

Simplifying the Business

Creating a more efficient, agile and focused business is vital to delivering A Better TomorrowTM. Our aim is to deliver annualised £1 billion in efficiency savings by 2022 and in 2020 we made good progress, with Quantum enabling gross savings of £660 million through organisational change and productivity initiatives.

A major component of simplifying the business is our digital transformation. We are investing in a digitally-enabled, empowered and connected organisation.

Our efforts to simplify the business go much further than digital transformation. We are removing complexities for our management structure, rigorously managing our cost base and embedding our internal culture.

Confidence in Our Future

As these results demonstrate, we are accelerating our business transformation and building A Better TomorrowTM.

Our ongoing success is only made possible by the dedication and energy of our talented people around the world and I want to thank them all for their commitment, determination and resilience in such a challenging environment.

This year, I want to extend a special thank you to our Chairman, Richard Burrows, who is stepping down from the role and retiring from the Board. Having served as Chairman since 2009, Richard’s strong leadership and contribution have been instrumental in the progress BAT has made in recent years. I would also like to congratulate Luc Jobin on his appointment as Chairman of the Board.

As Chief Executive, I am as proud of the rich heritage of BAT as I am excited by the journey ahead. With our history of strong financial performance, coupled with a deep understanding of our consumers and an innovation-led, multi-category approach, we have the foundations in place to propel this great Company even further forward.

Jack Bowles

Chief Executive

 

 

 

LOGO


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Strategic Report          

   Governance Report            Financial Statements            Other Information            BAT Annual Report and Form 20-F 2020        07

 

              

 

Financial Review

Finance and Transformation

Director’s Overview

 

 

 

LOGO

  

 

LOGO We continue to deliver against our financial objectives, despite the unprecedented challenges arising in 2020. This allows us to continue to reward shareholders with growth in dividends while deleveraging and investing in A Better Tomorrow. LOGO

  

 

LOGO Revenue growth driven by New Categories performance and combustibles pricing, more than offsets an estimated 2.5% COVID-19

headwind. LOGO

 

 

 

LOGO Project Quantum has realised savings that allowed us to invest a further £426 million in New

Categories. LOGO

 

 

 

LOGO Profit from operations Was up 10.5% (2019: down 3.2%), driven by the growth in revenue (excluding the impact from currency) and operational efficiencies while 2019 was impacted by certain charges that did not repeat, notably

in relation to Canada and Russia. LOGO

Financial Strength to Overcome Operational Challenges

2020 has provided unique challenges that the Group has met and overcome. Our geographic diversity, integrated infrastructure and determination to deliver has again delivered growth in our key financial indicators.

Our combustible portfolio, particularly in the US where we led industry pricing, has provided both the fuel to continue to increase our investment in our New Category portfolio and to deleverage the Group’s balance sheet despite headwind from COVID-19 of an estimated 2.5% on revenue.

Pricing and New Categories Drive Revenue Growth

Revenue was marginally lower than 2019, down 0.4%, at £25,776 million (while 2019 was up 5.7% to £25,877 million), as a translational currency headwind more than offset the operational performance, with revenue up 3.3% in 2020 (2019: 5.6%) on an adjusted constant currency basis, despite an estimated headwind on revenue from COVID-19 of approximately 2.5% in 2020.

Pricing across the cigarette portfolio (with price/mix of 7% in 2020 compared to 9% in 2019), higher revenue from New Categories (up 14.9% in 2020 and 37% in 2019) and Traditional Oral (up 7.2% in 2020 compared to 15% in 2019) more than offset a decline in cigarette volume of 4.6% in 2020 (2019: 4.7% decline). 2020 was also impacted by an estimated 2.5% headwind from COVID-19 due to the disruption and restrictions affecting certain markets (including South Africa and in Global Travel Retail).

Margin Growth While Investing in New Categories

Profit from operations increased by 10.5% to £9,962 million, compared to a decline of 3.2% to £9,016 million in 2019. This was largely driven by the operational efficiencies achieved under the Group’s restructuring programme (Project Quantum) and while 2020 was impacted by charges in respect of goodwill impairment (£209 million, largely in respect of Malaysia; 2019: £172 million mainly in respect of Indonesia), litigation charges (mainly in the US) of £487 million (2019: £236 million) and Quantum costs (£81 million; 2019: £264 million), 2019 was also negatively impacted by a charge in respect of the Quebec Class Action in Canada (£436 million) and the settlement of an excise dispute in Russia (£202 million).

Our operating margin increased by 380 bps to 38.6% in 2020 (2019 declined 320 bps to 34.8% driven by the lack of charges referred to above).

On an adjusted constant currency basis, profit from operations grew by 4.8% (2019: up 6.6%) with adjusted operating margin (at current rates) up 100 bps to 44.1% (2019: 43.1%). This was driven by growth in high margin markets (including the US) and efficiencies delivered in 2020 as part of Project Quantum which more than offset the continued investment in New Categories.

 

 

LOGO


Table of Contents
  08          BAT Annual Report and Form 20-F 2020

 

Financial Review

Finance and Transformation

Director’s Overview Continued

 

 

 

LOGO Dividends per share increasing by a further 2.5%, underpinned by the financial strength of our

business. LOGO

 

 

 

LOGO Cash flow generation remains extremely strong, with high conversion from profit to cash, facilitating the drive to deleverage

while investing for the future. LOGO

 

 

 

 

 

 

 

 

LOGO The Group continues to deliver against the financial objectives, despite the unprecedented challenges arising in 2020. This allows the Group to continue to reward shareholders with a growth in dividends while deleveraging and

investing in A Better Tomorrow. LOGO

Future Funding De-Risked Through Proactive Action

In 2020, we reduced future refinancing risk by raising £8.9 billion in the US dollar, euro and sterling markets, using the proceeds to repurchase and redeem £3.1 billion of bonds. This de-risked the future repayment profile by securing lower interest rates and future liquidity in uncertain times. This led to an increase in net finance costs of 8.9% to £1,745 million as we recognised net charges of £142 million in respect of the early redemption and tender offer. The increase in 2019 (up 16% to £1,602 million) was driven by foreign exchange headwinds and interest on leases recognised under IFRS 16 Leases.

As part of the Group’s de-risking of future funding, during 2020 gross interest cover ceased to be a covenant on the Group’s debt facilities.

EPS Growth Underpins Dividend Increase

On a reported basis, basic EPS was up 12.1% at 280.0p (2019: down 5.4% at 249.7p) with diluted EPS up 12.0% to 278.9p (2019: down 5.4% to 249.0p), largely due to the increase in profit from operations as discussed earlier.

Excluding the adjusting items and the effect of foreign exchange on the Group’s results, adjusted diluted earnings per share, at constant rates, increased by 5.5% to 341.4p, with 2019 ahead of 2018 by 8.4%.

Dividends per share for 2020 will be 215.6p, an increase of 2.5% (2019: 210.4p, up 3.6%), in line with our commitment of a 65% pay-out ratio on adjusted diluted earnings per share (2019: 65.0%).

Cash Generation Drives Debt Deleveraging

We continue to focus on a balanced approach of deleveraging, while investing for the future and providing a return via dividends to shareholders.

We remain extremely successful in converting operating performance to cash. The Group’s cash conversion ratio, based upon net cash generated from operations, was 98% (2019: 100%). The Group realised £9.8 billion (2019: £9.0 billion) of net cash generated from operating activities.

Consequently, in 2020, total borrowings (including lease liabilities) have reduced from £45,366 million in 2019 to £43,968 million in 2020, largely due to the net repayment of borrowings in the year, and a currency tailwind of £219 million.

 

Confidence in Future Delivery

In summary, the Group continues to deliver against the financial objectives, despite the unprecedented challenges arising in 2020. This allows the Group to continue to reward shareholders with a growth in dividends while deleveraging and investing in A Better TomorrowTM.

Tadeu Marroco

Finance and Transformation Director

 

 

LOGO


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Strategic Report          

   Governance Report            Financial Statements            Other Information            BAT Annual Report and Form 20-F 2020        09

 

              

 

Our Year in Numbers

 

 

Our performance metrics    Target / Ambition     2020      %      2019      %      2018     LOGO   LOGO   LOGO

 

Consumer                      

Number of Non-Combustible

Product Consumers

    50 million consumers by 2030       13.5m           10.5m           8m        

 

Market share                      
Cigarette and THP volume share growth (bps)     Grow by 0-10 bps (2020)       +30 bps           +20 bps           +40 bps             
Cigarette and THP value share growth (bps)       +20 bps           +30 bps           +40 bps        

 

Volume                      
Cigarettes (bn sticks)       638        -5%        668        -5%        701        

 

Other Tobacco Products (bn stick equivalents)       20        -2%        21        -7%        22        

 

Vapour (mn 10ml units / pods)       344        +52%        226        +19%        189        

 

THP (bn sticks)       11        +19%        9        +32%        7        

 

Modern Oral (mn pouches)       1,934        +62%        1,194        +188%        414        

 

Traditional Oral (bn stick equivalents)       8        -1%        8        -1%        8n        

 

Financial                      
Revenue (£m)       25,776        -0.4%        25,877        +5.7%        24,492        

 

Change in Adjusted Revenue at cc (%)          +3.3%           +5.6%           

 

Change in Revenue from Strategic Portfolio at cc (%)*     Increase 3-6% (2020)          +7.0%           +7.3%           

 

Revenue from New Categories (£m)     £5 billion by 2025       1,443        +14.9%        1,255        +36.9%        917        

 

Change in Revenue from New Categories at cc (%)*          +15.4%           +32.4%           

 

Profit from Operations (£m)       9,962        +10.5%        9,016        -3.2%        9,313        

 

Change in Adjusted Profit from Operations at cc (%)     Increase 4.0% to 6.5% (2020)          +4.8%           +6.6%           

 

Operating Margin (%)       38.6%           34.8%           38.0%        

 

Adjusted Operating Margin (%)       44.1%           43.1%           42.6%        

 

Diluted Earnings per Share (p)       278.9        +12.0%        249.0        -5.4%        263.2        

 

Adjusted Diluted Earnings per Share (p)       331.7        +2.4%        323.8        +9.1%        296.7        

 

Change in Adjusted Diluted Earnings per Share at cc (%)          +5.5%           +8.4%           

 

Dividends per Share (p)       215.6        +2.5%        210.4        +3.6%        203.0        

 

Dividend Pay-Out Ratio (%)       65%           65%           68%        

 

Net Cash Generated from Operating Activities (£m)       9,786        +8.8%        8,996        -12.6%        10,295        

 

                     

 

Cash Conversion (%)       98%           100%           111%        

 

                     

 

Borrowings, including Lease Liabilities (£m)       43,968        -3.1%        45,366        -4.5%        47,509        

 

                     

 

                     

 

Total Shareholder Return (rank)       20 of 23           21 of 23           19 of 23        

 

ESG                      
Total Scope 1 and 2 CO2e emissions (‘000 tonnes)    
Carbon neutral by 2030 for
our own business activities
 
 
    541        -30.9%        782        -7.0%        874        

 

Water Withdrawn (mn metres3)     Reduce water withdrawn by       4.03        -10.8%        4.51        -5.3%        4.77        
   

35% by 2025 to 3.38 against

2017 baseline

 

 

    22.5%           13.1%           8.2%        

 

Recycling (% of Waste Recycled Annually)     Recycle min 95% of waste       90.7%           90.5%           90.2%        

 

Please refer to pages 276 to 284 for definitions of the Non-GAAP measures. See the section ‘Non-Financial KPIs’ on page 274 for more information on these non-financial KPIs.

*

From 2021, Change in Revenue from Strategic Portfolio at cc will cease to be a KPI, being replaced as a KPI by Revenue from New Categories at cc.

1.

Where measures are presented ‘at constant rates’ or ‘at cc’, the measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year results of the Group and, where applicable, its segments. See page 73 for the major foreign exchange rates used for Group reporting.

2.

Where measures are presented as ‘adjusted’, they are presented before the impact of adjusting items. Adjusting items represent certain items of income and expense which the Group considers distinctive based on their size, nature or incidence.

 

LOGO


Table of Contents
  10          BAT Annual Report and Form 20-F 2020

 

Overview

Investment Case

 

Transformation Driving

Sustainable Growth

 

Delivering growth by reducing harm and

expanding our portfolio

 

Our corporate purpose is to build A Better TomorrowTM. Reducing the health impact of our business, by encouraging those smokers who would otherwise continue to smoke to switch completely to scientifically-substantiated, reduced-risk alternatives, is the greatest contribution we can make to society.* This means growing our New Category business and increasing the proportion of our revenue coming from New Category products as fast as possible.

 

Revenue growth in the global nicotine industry is accelerating through the development of New Categories, which offer reduced-risk alternatives to combustible products.* To capitalise on this growth, our well-embedded consumer-centric, multi-category strategy is activated on a global scale, leveraging our insights on consumer satisfaction, innovation needs and taste. We are building the brands of the future – strong, global brands, specifically positioned in each target consumer segment.

 

We have set ourselves ambitious targets to reach 50 million consumers of our non-combustible products by 2030, and more than triple our revenue from New Categories from £1.3 billion in 2019 to £5 billion by 2025. These ambitions will be met through the delivery of our three clear strategic priorities:

 

–  to drive a step change in New Categories, to accelerate growth supported by increased investment;

 

–  to generate value through Combustibles, to provide the capabilities and funding; and

 

–  to simplify the Group, to create a stronger, faster, more agile organisation.

 

 

     

Reducing the Health and Environmental Impact of our Business

 

Creating value for all our stakeholders

 

Our work to reduce the health and environmental impact of the business will drive growth and create shared value, delivering results that simultaneously benefit shareholders and wider society.

 

We will continue to create a stronger BAT by:

 

–  focusing on excellence in environmental management;

 

–  delivering a positive social impact; and

 

–  adhering to robust corporate governance.

 

This builds on our strong ESG foundations including our status as:

 

–  the first tobacco company to produce a Sustainability Report in 2001;

 

–  named in the Dow Jones Sustainability Indices for 19 consecutive years; and

 

–  a member of CDP Climate A List.

 

Our commitments are anchored in challenging targets, against which we will track and share the progress of our transformation.

 

Meanwhile, our ‘delivery with integrity’ programme is focused on ensuring that our ethical standards are never compromised for the sake of results.

 

LOGO

50mn

Non-Combustible

product consumers

targeted by 2030

 

LOGO

£5bn

New Categories revenue

targeted by 2025

 

 

 

1.1bn

consumers in global

combustibles market

to convert to reduced-

risk products*

 

LOGO

10%

Group revenue from

Non-Combustibles

         

 

LOGO

A-List

member of CDP Climate

A-List

 

LOGO

Carbon

Neutral

operations by 2030

 

  

 

19th

consecutive year

in the Dow-Jones

Sustainability Indices

 

LOGO

100%

of plastic packaging to be

reuseable, recyclable or

compostable by 2025

 

*

Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

 

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

 

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Unrivalled Global

Capabilities

 

Leveraging proven expertise and developing new capabilities to deliver our ambitions

 

Our New Category portfolio benefits from decades of insights and expertise that have driven our No.1 global revenue position in combustibles (excl. China). This combined with increased investment behind new capabilities gives us confidence that we can deliver our medium to long-term ambitions.

 

Our three global New Category brands leverage the benefits of our world-class R&D and our manufacturing, distribution, marketing and brand building capabilities, which are supported by our unrivalled global footprint across 180 markets, with 11 million points of sale, reaching 150 million consumers daily.

 

Together with our long-standing experience operating within complex regulatory, legal and fiscal frameworks, these provide BAT with a compelling competitive advantage to drive portfolio growth and transformation within the wider tobacco industry.

 

Through Project Quantum, our ongoing business simplification and efficiency programme, we aim to achieve a minimum of £1 billion of annualised savings by the end of 2022 to invest in new capabilities in areas such as:

 

–  data analytics;

 

–  enhanced consumer insight;

 

–  IP and innovation;

 

–  design and technology; and

 

–  e-commerce, enabling our ongoing digital transformation.

 

We are attracting new senior talent from a diverse range of industries globally to further enhance our current and future capabilities, which will enable us to deliver on our growth ambitions over the medium to long term.

 

  

 

  LOGO

1,500+

dedicated scientists and engineers

 

 

  LOGO

>£1bn

annualised savings by 2022

 

 

 

>11m

points of sale

 

 

LOGO

>180

markets in which

we operate

 

 

LOGO

>150mn

daily consumer

interactions

          

 

LOGO

 

 

  

 

 

 

 

 

 

LOGO

7%

dividend CAGR

over 10 years

 

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Table of Contents
  12          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Global Industry Overview

We are a global business, operating at scale, in a fast-paced world. To be sustainable we must anticipate, detect and adapt to major social, environmental, economic, political and technological shifts. Mega trends are important indicators, representing significant movements, patterns or trends shaping the macroenvironment. In the context of our industry, we see four megatrends as being likely to have substantial impact on the way we conduct our business.

 

Mega trend

 

Reduced Risk & Beyond

 

LOGO

 

Consumer Choice

 

It is widely accepted that most of the harm associated with tobacco is caused by inhaling the smoke produced by its combustion. Around the world, consumers now have increasingly high expectations beyond combustible products and nicotine. Many consumers are seeking out new products that deliver nicotine, with potentially reduced risk, as well as other ingredients from a wellbeing perspective – so-called ‘new active’ products.

 

World-Class Science

 

There is broad agreement among policy makers and the public health community: We need to develop a robust science base to inform policies and educate consumers about potentially reduced-risk products. The science associated with tobacco harm reduction plays a core role within the industry and society. World-class science can establish whether products are safer, or less risky, compared with cigarette smoking. It can also help build consumer trust in reduced-risk products.*

 

Regulation and Standards

 

The regulatory environment around tobacco harm reduction and ‘new active’ products is evolving. Science increasingly points to the likely benefit of reduced-risk products as an alternative to smoking.* This means we are seeing policy and regulatory shifts in several markets. Some countries have greater restrictions in place. Others, like the UK, view tobacco harm reduction within a regulated framework, encouraging smokers to use potentially reduced-risk nicotine products.

 

         

Mega trend

 

Digital Technology

 

LOGO

 

Smart Technology

 

Smart electronic devices and social media have increasingly become integral to people’s lives and daily routines. They have enabled greater access to new platforms and have enhanced the way people consume news, make connections and shop.

 

E-commerce platforms, available on the go, have led to social media platforms being used by brands to sell their products. Social e-commerce is increasingly viewed as a mainstream retail channel, on a par with other platforms, like websites and offline stores. This trend is only accelerating as greater numbers of social networks introduce pro-selling features like shoppable posts.

 

Online Sales During COVID-19

 

A major impact of the pandemic has been the implementation of city-wide, regional and national lockdowns. Many non-essential businesses have been ordered to close. As a result, many customers are generally avoiding public places. While the crisis is continually evolving, it has increasingly limited shopping for all but necessary essentials. Brands are having to adapt. Now, e-commerce is expanding to include new businesses, customers and product types.

 

Today, customers already have access to a wide variety of products from the convenience and safety of their homes. Firms have still been able to operate, despite contact restrictions and other confinement measures.

LOGO

 

*  Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

 

†   Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

         

 

LOGO

   LOGO

 

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Mega trend

 

Climate Change

 

LOGO

 

Population Migration

 

Climate change can re-shape patterns of migration and population displacement. This is driven by shoreline erosion, coastal flooding and agricultural disruption.

 

Various analysts have attempted to forecast future flows of climate migrants. These people are moving within their countries or across borders, on a permanent or temporary basis. The most widely repeated prediction is 200 million by 2050.

 

The impacts of climate migration on regional security, labour patterns and consumer habits will have wide-ranging effects on businesses across the globe.

 

Farming

 

Agricultural crops, such as tobacco, need suitable soil, water, sunlight and heat to grow. The length of the growing season in large parts of Europe, for example, has already been impacted by warmer air temperatures. Some crops are now experiencing harvest and flowering dates several days earlier in the season. Many regions are expected to see this trend continue.

 

Shifts in temperatures and growing seasons may also impact the production and spread of some species (i.e. insects), invasive weeds, or diseases, with crop yields potentially affected. Yield losses could be offset by different farming practices, such as: Crop rotation to match water availability, adjusting sowing dates to rainfall and temperature patterns and using crop varieties suited to new conditions.

 

LOGO

        

Mega trend

 

Waste and Recycling

LOGO

 

Manufacturing Resource Reduction

 

Reducing the resources needed for manufacturing – often referred to within the circular economy – is a key trend. This includes reducing waste and pollution by continuously re-using materials and products.

 

Many factors have brought this into focus. Resource prices have become more volatile and are expected to rise over the long term. Consumer demand is increasing. Meanwhile, easy-access, high-grade stocks of key commodities are reducing. Governments are also considering new restrictions on pollution and waste that apply for entire product lifecycles.

 

Recycling and Packaging

 

Today, businesses are expected to go further and recycle more. It is possible for most plastics used in packaging to be mechanically recycled with little loss of quality. However, current estimates place global uptake at less than 15%. Why?

 

One of the most important reasons is the lack of global standards. Proliferating materials, formats and labelling requirements mean many types of packaging are produced in quantities too small for recyclers to achieve economies of scale and profitability. There are also variations in collection methods and processing systems. This means the recyclability of a product in one city may not be compatible with another. As packaging changes, local waste-collection and recycling programmes are struggling to keep pace.

 

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Table of Contents
  14          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Global Industry Overview**

Continued

Today, the tobacco and nicotine market serves a growing base of more than one billion adult consumers. Generational differences and shifts in taste are continuing to emerge, as health and wellness become ever-more important. We anticipate growth in new categories of products, including – and beyond – tobacco and nicotine. Consumers expect these to provide stimulation and pleasure, in ways previously associated with cigarettes. We believe such growth will offset the predicted decline in cigarette consumption.

 

LOGO

Sales for the legal global tobacco market (2019) were worth approximately US$818 billion, according to the most recent estimates.

 

LOGO

The latest global figures (2019) suggest that global vapour sales are worth US$20.2 billion, while global THP revenues stand at US$15.2 billion. This is an increase of US$4.5 billion and US$3.3 billion, respectively, on 2018.

 

LOGO

Traditional oral products show steady, incremental growth. Meanwhile, new Modern Oral products are showing accelerated volume expansion in both Europe and the US.

 

LOGO

As one of the world’s most regulated and taxed industries, tobacco contributes over US$200 billion to government treasuries annually.

 

*

Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

**

All data sources on this page are from Euromonitor International unless otherwise stated.

Global Combustible Market

Sales for the legal global tobacco market (2019) were worth approximately US$818 billion, according to the most recent estimates.

The largest global tobacco category remains combustible cigarettes. With over 5,200 billion cigarettes consumed annually, it is valued at US$705 billion. Over 19% of the world’s adult population still chooses to smoke and will likely continue to do so unless consumers are offered suitable alternatives.

However, cigarette volumes have been falling. This is largely due to increased regulation and changing societal attitudes. One reason for the decline of legal tobacco volumes is the continued rise in illicit product consumption. This is now estimated to account for 12% of the global tobacco market.

A number of factors are driving the significant and growing illicit cigarette trade. These include the fact that cigarettes remain a reliable source of tax revenue for governments worldwide, price differentials between markets, regulatory changes and broader macroeconomic pressures.

It is generally accepted that there is a direct correlation between steep, ad hoc increases in taxes and illicit sales. The current sanctions in many countries often fail to deter criminals in search of profit.

 

LOGO   See pages 84 to 88 to read more about our Principal Group Risks
LOGO   For further discussion regarding the regulation of our business, please see pages 307 to 310

Global combustible regulation

As one of the world’s most regulated and taxed industries, tobacco contributes over US$200 billion to government treasuries annually.

Manufacturers are required to comply with a variety of regulations, varying considerably from market to market.

Legislation and regulation has focused mainly on: the introduction of plain packaging, product-specific regulations, graphic health warnings on packs, tougher restrictions on smoking in enclosed public places and bans on shops displaying tobacco products at the point of sale.

More recently, governments have begun considering and adopting regulations aimed at menthol flavourings. They have also targeted environmental concerns resulting from litter associated with cigarette consumption.

Impact of COVID-19

Beyond disruption to supply chains, analysts believe the short-term impact of COVID-19 on the tobacco industry will be relatively limited. It is likely that key cigarette volumes were only slightly lower than expected in 2020, in a number of markets globally.

This impact on volumes is expected to be felt unequally across geographies, with resilience seen across more developed markets while developing markets experience potentially greater numbers of consumers turning to the illicit market.

Production of the principal raw material – tobacco leaf – remains broadly diversified across a number of continents. The industry has proven adept at dealing with supply-side shocks.

Global New Categories Market

In recent years, the global tobacco and nicotine market has diversified beyond traditional, combustible tobacco. Evidence can be seen in growing categories like Vapour Products, Tobacco Heating Products (THP) and modern oral nicotine pouches.

The success of these New Categories is based on many factors. One is their ability to offer consumers satisfaction, in circumstances where combustible tobacco is no longer permitted or socially acceptable. Another is their ability to offer reduced risk compared to combustible products.*

New generations of adult consumers are focusing on health and lifestyle considerations, technological innovation, and personalised experiences. As a result, we expect the growth of New Categories to keep accelerating, as these products better meet those preferences and demands.

 

 

LOGO


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LOGO

 

The latest global figures (2019) suggest that global vapour sales are worth US$20.2 billion, while global THP revenues stand at US$15.2 billion. This is an increase of US$4.5 billion and US$3.3 billion, respectively, on 2018.

Traditional oral products show steady, incremental growth. Meanwhile, new modern oral products are showing accelerated volume expansion in both Europe and the US.

The relatively nascent market for wellbeing and ‘new active’ products has also grown. This is expected to continue as consumer tastes fragment and evolve. Within this space, cannabidiol (CBD) is expected to gain wider use, as evidenced by its recent growth in market size.

New Categories regulation

At a global level, the THP and vapour markets are still emerging. Regulation is in its early stages in many countries. While many governments are considering regulation specific to this category, it has often not been enacted.

Globally, there is a mix of attitudes towards THPs and vapour products. Some regulators aim to encourage them as potentially lower risk, while balancing concerns around possible increased youth usage. Others view them with greater scepticism, including some countries where they are banned.

Litigation

Legal and regulatory court proceedings continue in a number of forums against the tobacco industry, and more recently the vaping industry, with the most common being third-party reimbursement cases, class actions and individual lawsuits.

Special factors that led to product liability litigation in the US and Canada are not typically replicated in other countries, which is why large volume and high-value litigation has not generally spread to other parts of the globe. The industry has a proven track record of defending its rights and managing risks such as these.

 

 

LOGO


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  16          BAT Annual Report and Form 20-F 2020

 

Strategic Management

The Foundations of

our Evolved Strategy

We are committed to providing A Better TomorrowTM for all our

stakeholders. Our ambition is to deliver long-term sustainable

growth with a range of innovative and less harmful products that

stimulate the senses of new adult generations.

 

 

 

 

Strong

Foundations

 

  

LOGO

>180

markets in which

we operate

  

LOGO

>150m

daily consumer

interactions

LOGO

>11m

points of sale across

over 180 markets

  

Our wide range of capabilities make us exceptionally well-placed for future growth:

 

    our unique global marketing and distribution reach;  

 

    our track record of R&D and innovation;  

 

 

    our decades’ worth of consumer insights and brand-building expertise; and  

 

    our New Categories business aims to generate £5bn in revenue in 2025.  

 

 

Satisfying Consumer Tastes and Moments

20 years ago

combustible products fulfilled a multitude

of consumer moments

 

LOGO

 

For decades, combustible products satisfied a need for sensorial enjoyment for many individuals. While occasions for tobacco consumption are now reduced, new opportunities have arisen:

 

    new products provide us with an opportunity to capture, in a focused way, the lost consumer moments previously associated with tobacco; and

 

    evolving and fragmenting consumer needs provide us with opportunities for additional growth in a variety of new categories.

 

 

 

LOGO


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   Governance Report            Financial Statements            Other Information            BAT Annual Report and Form 20-F 2020                17

 

              

 

 

 

A Developing

Portfolio

 

LOGO

A wider portfolio of products that offer sensorial enjoyment for different moods and moments will allow us to capture the consumer moments previously associated with tobacco use, as well as satisfy new evolving consumer needs, through:

 

    scientifically-substantiated, reduced-risk tobacco and nicotine products;

 

    building the brands of the future; and

 

    ultimately, a portfolio of products beyond nicotine that leverages our proven expertise.

 

 

 

Parameters to Guide

Growth Opportunities

 

LOGO

Our new growth opportunities will capitalise on our core business strengths, creating clear boundaries for our portfolio development:

 

    reducing the health and environmental impacts of our business;

 

    leveraging our global marketing reach and scale;

 

    building on our knowledge of delivery platforms and technology;

 

    relying on our experience in managing complex regulatory and scientific matters; and

 

    meeting stringent strategic and financial metrics.

 

 

 

LOGO


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  18          BAT Annual Report and Form 20-F 2020

 

Strategic Management

A Strategy for

Accelerated Growth

As a leading consumer-centric, multi-category consumer goods business, we are dedicated to stimulating the senses of adult consumers worldwide. We aim to generate an increasingly greater proportion of our revenues from products other than combustibles, thereby reducing the health impact of our business.

This will deliver A Better TomorrowTM for our consumers who will have a range of enjoyable and less risky* choices for every mood and moment; for society through reducing the overall health and environmental impacts of our business; for our employees by creating a dynamic and purposeful place to work; and for our shareholders by delivering sustainable superior returns.

 

LOGO

 

Our Mission

 

Stimulating the Senses of New Adult Generations

 

Today, we see opportunities to capture consumer moments which have, over time, become limited by societal and regulatory shifts, and to satisfy evolving consumer needs and preferences.

 

Our mission is to anticipate and satisfy this ever-evolving consumer: provide pleasure, reduce risk, increase choice and stimulate the senses of adult consumers worldwide.

 

*  Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

 

†  Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance

 

Must Wins

 

High Growth Segments

 

Driven by our unique and data-driven consumer insight platform (PRISM), we will focus on product categories and consumer segments across our global business that have the best potential for long-term sustainable growth.

 

Priority Markets

 

By relying on a rigorous market prioritisation system (MAPS), we will focus the strengths of our unparalleled retail and marketing reach, as well as our regulatory and scientific expertise, on those markets and marketplaces with the greatest opportunities for growth.

 

How We Win

 

Inspirational Foresights

 

As one of the most long-standing and established consumer goods businesses in the world, we have a unique view of the consumer across all of our product categories, which is increasingly driven by powerful data and analytics.

 

These insights ensure that the development and responsible marketing of our products is fit to satisfy consumer needs.

 

Remarkable Innovation

 

As consumer preferences and technology evolve rapidly, we rely on our growing global network of digital hubs, innovation super centres, world-class R&D laboratories, external partnerships and our corporate venturing initiative to stay ahead of the curve.

 

Powerful Brands

 

For over a century, we have built trusted and powerful brands that satisfy our consumers and serve as a promise for quality and enjoyment. We will build the brands of the future by focusing on fewer, stronger and global brands across all our product categories, delivered through our deep understanding and segmenting of our consumers.

 

Connected

 

Few companies can claim over 150 million daily consumer interactions, over 11 million retail points of sale and a global network of expert employees around the world. Cultivating an ecosystem that directly connects us with consumers and stakeholders, especially through the power of digital technology, ensures we can build the brands of the future, deliver access to markets and foster innovations that offer sensorial enjoyment and satisfy consumer needs.

 

LOGO


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  LOGO     

LOGO We will become a business that defines itself by the consumer
needs it meets. We aim to provide our consumers with a portfolio
of solutions, recognising that tastes and preferences differ across
markets. This will enable sustainable, long-term growth as a
modern consumer products company with a clear focus on
insights, innovation, brands, activation, teams and technology.

Our ambition is to build the brands of the future. LOGO

  

Kingsley Wheaton

Chief Marketing Officer

 

LOGO

 

People and Partnerships

Our highly-motivated people are being empowered through a new ethos that is responsive to constant change, embodies a learning culture and is dedicated to continuous improvement. But we cannot succeed on our own, and our partnerships with farmers, suppliers and customers are also key for ensuring sustainable future growth.

US Focus

The United States comprises nearly half of our global business. It is also the single largest economy in the world, the largest single centre for technology and the key driver of global consumer trends, and is where we have the deep consumer understanding and financial strength to support the delivery of our mission to stimulate consumer senses around the rest of the world.

 

Our Purpose

 

By stimulating the senses of new adult generations, our purpose is to create A Better Tomorrow for all our stakeholders.

 

We will create A Better Tomorrow for:

 

LOGO

 

By responsibly offering enjoyable and stimulating choices for every mood and every moment, today and tomorrow;

 

LOGO

 

By reducing the health impact of our business by offering a range of alternative products, as well as by reducing our environmental and social impacts;

 

LOGO

 

By creating a dynamic, inspiring and purposeful place to work; and

 

LOGO

 

By delivering sustainable and superior returns.

 

LOGO   For more information about our purpose see inside front cover

 

Short-Term Deliverables to

Fuel A Better Tomorrow

LOGO   Ensure a Step Change in New Categories Performance

With our unique cross-category consumer understanding we are clear there is a huge opportunity for our New Categories.

 

LOGO

For more key detail see pages 34 to 39

 

LOGO   Drive Value From Combustibles

Our ambition is to drive value from Combustibles to fuel our investment in, and transition revenue to, New Categories.

 

LOGO

For more key detail see pages 41 to 42

 

LOGO   Simplify the Business

Our ongoing simplification programme, Project Quantum, will realise £1 billion of annualised savings through simplification and efficiencies by the end of 2022.

 

LOGO

For more key detail see page 43

 

 

LOGO


Table of Contents
  20          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Our Consumer-Centric

Multi-Category Portfolio

BAT is a leading consumer-centric, multi-category consumer goods business dedicated to stimulating the senses of adult consumers worldwide. Our portfolio reflects our commitment to meeting the evolving and varied needs of today’s consumer who seeks sensorial enjoyment for different moods and moments.

 

Strategic Portfolio

Our key brands in both the combustible and non-combustible categories. This drives focus and investment on the brands and categories that will underpin the Group’s future performance. The strategic portfolio is:

Non-Combustibles

All brands within New Categories and the strategic traditional oral brands in moist and snus.

Combustibles

Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans, Newport (US), Natural American Spirit (US), Camel (US).

 

 

Revenue by product category

 

LOGO

 

*

Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

 

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance

LOGO

 

 

LOGO


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LOGO

 

LOGO


Table of Contents
  22          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Our Global Business

To build A Better TomorrowTM, our marketplace analysis delivers insights regarding consumer trends and segmentation, which ultimately facilitates our geographic brand prioritisation across over 180 markets. Our business is divided into four, complementary regions with a balanced presence in both high-growth emerging markets and highly profitable developed markets.

 

 

 

United States                             

  

USA  

 

  

 

Americas and

  

AmSSA

 

 

of America

 

   Sub-Saharan Africa            

 

To achieve a step-change in New Categories, we are building new capabilities around the world focused on science, innovation and digital information.

Consumer preferences and technology are evolving rapidly, and we are staying ahead of the curve with our digital hubs, the creation of innovation super centres and further development of our world-class R&D laboratories. We are also leveraging the expertise of our external partners and are looking forward to exciting results from our venturing initiative.

                    

                 
Revenue by region

 

LOGO

 

LOGO

 

 

LOGO Our cutting edge technologies turn consumer insights into innovative and outstanding products that meet their needs. LOGO    LOGO The US business is transforming into a New Categories-oriented business, fuelled by reinvestments from the consistently industry- leading value growth in the tobacco categories. LOGO    LOGO Building A Better Tomorrow is crucial for the Group and the excellent performance of New Categories across AmSSA is proof of the leading role the region is playing. LOGO

Paul Lageweg

Director,

New Categories

  LOGO   

Guy Meldrum

President and

CEO (Reynolds

American Inc.)

  

LOGO

  

Luciano Comin

Regional Director,

AmSSA

  

LOGO

 

LOGO


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LOGO       

LOGO We were delighted to be included in The Gartner Supply Chain Top 25 in 2020, a global report identifying supply chain leaders. This is the latest external recognition of our efforts in delivering a world-class supply chain for our journey towards A Better Tomorrow. LOGO

 

Zafar Khan

Director, Operations

 

 Europe and                                     
  

 

ENA 

 

   Asia-Pacific and                    

 

APME

 

   LOGO   

180+

 

markets

 North Africa    Middle East
        
LOGO    LOGO   

150mn

 

consumers

   LOGO   

13.5mn

 

non-combustible

product consumers

   LOGO   

55,000+

 

employees

   LOGO   

139

 

nationalities

   LOGO   

40+

 

toxicologists

   LOGO   

1,500+

 

R&D specialists

 

LOGO We had a strong year across ENA, with revenue growth in all New Categories and remain resolute in our pursuit of A Better Tomorrow. LOGO    LOGO glo Hyper accelerated THP volume across APME and we have ambitious plans for 2021 and beyond. LOGO    LOGO I am very proud of our global team of world-class scientists and the research they are doing to assess and ensure the performance, efficacy and safety of our products. LOGO

Johan

Vandermeulen

Regional Director,

ENA

  LOGO   

Michael (Mihovil)

Dijanosic

Regional Director,

APME

   LOGO   

Dr. David O’Reilly

Director, Scientific

Research

   LOGO

 

LOGO

 

 


Table of Contents
  24          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Our Business Model

 

Our global business understands our diverse consumers, develops products to satisfy their preferences and ultimately distributes them across over 180 markets.

Six key enablers support us in turning powerful insights into products that provide enjoyment to our consumers, while engagement helps our key stakeholders benefit from our sustainable growth.

 

IP / Technology

 

 

  

  

Environmental

 

       

Manufacturing

 

 

    

 

    

 

£300mn+

R&D expenditure

 

7

R&D / Product centre sites

    

370,000tn

of leaf

 

2,568 GWh

energy consumed

 

4.03m

cubic metres of water withdrawn

    

79

BAT-owned manufacturing facilities

 

45

cigarette factories

 

LOGO

 

Social

 

   

  

 

  

Financial

 

   

  

 

  

Human

 

 

      

 

      

 

84,000+

contracted farmers

 

c30,000

Suppliers

 

180+

Markets

      

£600mn+

annual capital expenditure

 

£426mn

additional investment in New Categories

 

BBB+/Baa2

credit rating

      

55,000+

employees globally

 

1,500+

R&D specialists

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.

 

LOGO

 

 


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A Better                  As measured by...

TomorrowTM for...

 

 

Environmental

 

 

Social

 

 

 

 

 

 

 

 

 

 

Society

 

LOGO

 

 

 

–  37.4% reduction in Scope 1 and 2 CO2e emissions (since 2017)

 

–  Over 99% of wood fuel used for curing from sustainable sources

 

–  76% of tobacco hectares with best practice soil and water management plans

 

–  22.5% reduction in water withdrawn (since 2017)

 

–  21.4% reduction in waste to landfill (since 2017)

 

 

 

–  £41bn Tax paid to governments

 

–  38,000+ human rights farmer training sessions, with over 390,000 attendances in 2020

 
 

Financial

 

 

Social

 

 

 

 

 

 

 

 

Shareholders

 

LOGO

 

 

 

–  7% dividend growth (CAGR since 2010)

 

–  5.5% growth in adjusted diluted EPS at constant currency in 2020

 

–  3.3% increase in revenue (at constant currency)

 

 

 

–  Among world’s top 10% ESG performers in Dow Jones Sustainability Index (DJSI)

 

Financial

 

 

Social

 

 

 

 

 

 

 

 

Consumers

 

LOGO

 

 

–  +15% revenue from New Categories (vs 2019)

 

–  +20 bps in Cigs + THP value share with +30 bps in Cigs + THP volume share (vs 2019)

 

 

–  11m Number of outlets

 

–  13.5m Non-Combustible consumers

 

–  100% adherence to Youth Access Prevention Guidelines

 
 

Human

 

 

 

 

 

 

 

Employees

 

LOGO

 

 

–  30% reduction in lost workday cases (vs 2019)

 

–  Proportion of women in management roles grew to 38%

 

–  Accredited as Global Top Employer by the Top Employers Institute

 

–  Employee engagement index 7% higher than FMCG comparator group in latest ‘Your Voice’ survey

   

 

 

 

Non-financial

information statement

Non-financial information reporting required under the UK Companies Act is included in the Strategic Report as referenced below:

 

LOGO   Our business model is set out on page 24

 

LOGO   See pages 84 to 88 for Group Principal Risks

Our reporting in the following areas includes information about the policies and principles that govern our approach, due diligence processes, outcomes and non-financial performance indicators:

 

LOGO   Environmental matters pages 48 and 51 to 53
LOGO   Social matters pages 48 to 50, 54 to 55
LOGO   Anti-bribery and anti-corruption matters pages 48 and 56 to 57
LOGO   Employees pages 58 to 63
LOGO   Respect for human rights pages 48 and 54 to 55
LOGO   Further details of our Group policies and principles can be found at www.bat.com

 

 

 

LOGO

 

 


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  26          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Accelerating the Enterprise

of the Future

Building the Enterprise of the Future is about ensuring we have the organisational flexibility to implement and operationalise our growth strategy – simplifying the business and speeding up decision-making. Quest is an organisational transformation programme, built around five pillars, designed to deliver the Enterprise of the Future at enhanced speed.

 

                                      LOGO

 

 

 

*

Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

 

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance

Deliver

Quantum

Project Quantum is our ongoing simplification programme that is fuelling New Category investment and delivery against our financial guidance.

Across the business, we are looking at how BAT can become a simpler, faster and stronger organisation. This will support our ambition to build A Better TomorrowTM for employees, consumers, shareholders and society.

Through restructuring and right-sizing parts of the business to reflect our new priorities, improving ways-of-working to speed up decision-making and simplifying processes, we are focusing our efforts in a more targeted way to respond to emerging opportunities and deliver future growth.

 

LOGO  

See page

43

Unleash

Innovation

Our New Categories business requires us to build on our rich history of leveraging our insights on consumer satisfaction and taste preference, which enables us to continually innovate to meet their needs.

Across our portfolio and our supply chain, we are using data-driven insights and foresights, and leveraging state-of-the-art technologies to ensure we are building the brands of the future. This means delivering the experiences and the products consumers want, when they want them.

By combining our existing global talents with the best skills available externally, we will execute consumer-led innovation more quickly, with even better coordination between our supply chain and R&D.

 

LOGO  

See pages

30 to 39

 

 

LOGO


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LOGO      LOGO      LOGO

 

 

Empowered

Organisation

Our talented teams around the world are being empowered through a new ethos that is responsive to constant change, embodies a learning culture and is dedicated to continuous improvement.

Attracting and retaining an increasingly diverse workforce and providing a welcoming, inclusive working environment are key drivers of our transformation journey.

By creating a simpler, more connected business we will set the context for our teams and trust their expertise. We will foster an environment where teams can challenge ideas. Once in agreement, we will commit collectively, collaborate and hold each other accountable to deliver.

 

LOGO  

See pages

58 to 63

Shaping

Sustainability

We are moving ourselves from a business where sustainability has always been important, to one where it is front and centre in all that we do.

Our commitment to reduce the health impacts of our business – by providing a range of less risky products* – is central to our corporate purpose. We are committed to doing this openly and transparently, engaging with an ecosystem of scientists, regulators and policy makers to ensure our corporate strategy continues to take account of their views.

We will continue to deliver world-class science relating to reduced-risk products* while advocating for appropriate standards and regulations. This will continue to be underpinned by excellence in all other environmental, social and governance (ESG) measures.

 

LOGO  

See pages

44 to 57

Technology &

Digital

We will continue to drive digital transformation to unlock commercial value across the entire value chain.

Data analytics are being used to ensure the right decisions are being made at the right time. Throughout our supply chain and our corporate functions, we are applying modern technologies, making analytics available at the touch of a button and freeing up valuable time and resources that can be released and reinvested for future growth.

We are also providing our people access to a range of tools and platforms designed to upskill them in agile ways of working, innovation and design-thinking – enabling them to become more productive, connect more effectively with internal and external colleagues, solve problems quickly and spot opportunities.

 

LOGO  

See pages

32 to 33

 

 

LOGO


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  28          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Short-Term Deliverables to Fuel A Better TomorrowTM

Our purpose is to build A Better TomorrowTM by reducing the health impact of our business through offering a greater choice of enjoyable and less risky products* for our consumers. To accelerate this, we must become a stronger, simpler and faster organisation, which will be achieved through the delivery of three short-term priorities.

 

 

LOGO    Ensure a Step Change in New Categories Performance    LOGO    Drive Value From Combustibles   LOGO   Simplify the
Business

LOGO

 

Over the years, consumer moments that used to be satisfied by cigarettes have been replaced by other products.

 

With our unique cross-category consumer understanding, we are clear there is a huge opportunity to recapture these moments with a broader portfolio of products that are less risky than combustible products.*

 

We are clear that any portfolio expansion will leverage our strengths. We will maximise and seek to constantly improve our delivery platforms in Vapour, THP and Modern Oral, reducing the health impact and making a positive environmental contribution.

 

We aim to increase our non-combustible consumers from 11 million (2019) to 50 million by 2030, driving revenue from New Categories to at least £5 billion by 2025.

 

We are building new capabilities around the world focused on science, innovation, and digital information. Consumer preferences and technology are evolving rapidly, and we are staying ahead of the curve with our digital hubs, the creation of innovation super centres, and further development of our world-class R&D laboratories. We are also leveraging the expertise of our external partners, and are looking forward to exciting results from our venturing initiative.

   LOGO

 

Our ambition is to increasingly transition our revenues from cigarettes to New Categories over time.

 

In order to fund the development of our New Categories, we will continue to focus on generating value from our Combustibles business, driving sustainable increases in revenue, with volume share and value share growth.

 

Our performance is a direct function of the strength of our brand portfolio. We will continue to develop and invest in our brands for equity and future value, by offering winning brand and product propositions, enabled by purposeful innovation.

 

Revenue growth management is a critical enabler to unlock future value and our resource allocation will be focused and prioritised to deliver better results with fewer initiatives.

 

We will further consolidate our portfolio of strategic brands and deliver efficiencies through a much leaner portfolio, with far fewer stock-keeping units designed to a margin.

 

LOGO

 

Our ongoing simplification programme, Project Quantum, is expected to realise £1 billion of savings through simplification and efficiencies by 2022.

 

Through Quantum we will fundamentally re-evaluate how we are organised and reduce management layers to eliminate duplication and entrenched accountability.

 

We will create new capabilities and release valuable funds for further investment in our growth ambition, ensuring the Group is stronger, faster and more agile.

 

We will be steadfast in realising operational efficiencies, supply chain productivity and a focus on excellence in our route-to-market.

 

 

 

 

*  Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

 

†  Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance

 

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Table of Contents

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Table of Contents
  30          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Tobacco Harm Reduction

Through World-Class Science

Tobacco harm reduction is a public health strategy to minimise the negative health impact of conventional cigarettes. It recognises the important role that alternative sources of nicotine with lower health risks offer to smokers who may not otherwise want or choose to give up. We’re clear that our business is shifting towards a reduced-risk portfolio*, built on outstanding products, informed consumer choice, and underpinned by world-class science.

 

 

Understanding the Products and Risks

 

It’s widely accepted that most of the harm associated with tobacco is caused by inhaling the smoke produced by combustion.

 

Products that contain nicotine but don’t involve burning tobacco are likely to emit far fewer – and lower levels of – toxicants, compared to conventional cigarettes. This means they have the potential to be significantly less harmful to health.*

 

For decades, nicotine has been used in licensed medicinal products. However, for harm reduction to be more effective, we must create alternatives to cigarettes that smokers want to use. Additionally, and despite a growing body of scientific evidence regarding the benefits of reduced-risk products* , more research is required.

 

Assessing the Reduced- Risk Potential of our Products*

 

To achieve tobacco harm reduction, reduced-risk assessments need to be supported by robust science. That’s why we created our leading scientific research programme – and openly share its findings.

 

Most non-combustible products remain relatively new to the market. This means they lack the epidemiological data required to establish harm reduction potential over decades of use.

 

Instead, it’s necessary to take a weight-of-evidence approach, based on the emissions, exposure and risk levels of each product.

 

 

*  Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

 

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Note:

1.  Substantially reduced toxicants is not sufficient alone to determine reduced risk.

 

We use the term Potentially Reduced Risk Products (PRRPs) to cover tobacco and nicotine products that, based on available science, have been shown to be reduced-risk; are likely to be reduced-risk; or have the potential to be reduced-risk, in each case if switched to exclusively as compared to continuing to smoke cigarettes.

 

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Our multi-disciplinary risk

assessment framework

 

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World-Class Science

for A Better TomorrowTM

 

For more than 60 years, research and development has been a critical part of our business. The table to the right highlights how we aim to create A Better TomorrowTM through world-class science.

 

We invest in R&D to deliver innovations that satisfy or anticipate consumer preferences. This helps us generate business growth across all our categories. But the main focus of our investment is in reduced-risk products.*

        

 

Product development
and innovation

 

using scientific advances and new technologies to satisfy evolving consumer needs and preferences.

  

 

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Scientific evaluation
of risk reduction

 

to support evidence-based regulation and provide consumers with the information they need to make informed decisions.

   
     

 

Product
stewardship

 

to ensure quality and consumer safety based on robust science and toxicological risk assessments.

 

 

Collaborative
development of
product standards

 

to ensure a consistent approach to product quality and safety across the industry and build consumer confidence.

 

   

 

New Categories Delivering Consumer Choice

 

For tobacco harm reduction to succeed, smokers need access to products that deliver nicotine and an enjoyable experience, with reduced risks compared to smoking.*

 

That’s why we’re developing and commercialising alternative tobacco and nicotine products: Our New Categories. These don’t burn tobacco, while delivering nicotine to the user.

 

 

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Hand-held battery powered electronic devices which heat a liquid formulation (an e-liquid or sometimes called ‘juice’) – often containing nicotine – to create a vapour which can be inhaled. They don’t contain tobacco.

 

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Tobacco Heating Products (THP) are hand-held devices which heat tobacco. All THPs contain tobacco – this is a key difference from vapour products. However, like vapour products, no burning takes place, resulting in lower toxicant levels.

 

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Modern oral products, available both with and without tobacco, are similar in appearance and use to snus, an oral smokeless tobacco product that has been widely used in Sweden since the 1800s. There are decades of research (including epidemiology) on snus, with evidence demonstrating it is a reduced-risk product compared to using traditional cigarettes.

 

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60+

years of R&D

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100+

scientists

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95%

fewer toxicants

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1,500

R&D specialists

 

an important part

of BAT for more

than 60 years

     designers, engineers and tobacco specialists helped design our THP      emitted by our Vype product, compared to cigarettes**      who predominantly focus on New Category products

 

 

**

This product is not risk-free and contains nicotine, an addictive substance. Comparison of smoke from a scientific standard reference cigarette (approximately 9 mg tar) and vapour from Vype ePen3 in terms of the average of the nine harmful components the World Health Organization (WHO) recommends to reduce in cigarette smoke.

 

Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

 

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  32          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Digital Transformation

Unlocking Commercial Value

Digital Transformation across BAT is about leveraging technology to deliver value for consumers, customers, employees, shareholders and society. Technology and data are key enablers of A Better TomorrowTM, and their exponential value is achieved as we ensure the organisation has the skills, ways of working and culture to fully exploit them.

 

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LOGO Our business has delivered exceptional results with the acceleration of its digital transformation in 2020 and the opportunities ahead of us are huge. Our focus is to apply technology and new ways of working that deliver results faster, unlocking commercial value across the entire organisation.
The pandemic has offered opportunities to accelerate

our digital transformation even faster. LOGO

  

Marina Bellini

Director, Digital and Information

 

 

Consumers and Customers       Manufacturing and Supply Chain       Finance, HR and Legal
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4.3mn       5,000+       100%+
   
engagements on social media, improving our New Categories brands performance in digital channels – an increase of 100%+ vs 2019       SKUs enabled through end-to-end automation, compressing reaction times in a multi-category business       increase in hours saved through digital bots and automation of back-office activities

 

 

 

 100+

   30%+    70%+    2,900+

people newly recruited in data analytics, digital marketing technology, cyber, and new exponential technologies

   Agile delivery of technology solutions across our
organisation
   senior leaders who have experienced our new digital immersion programme    new joiners across the organisation remotely on-boarded

 

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Unlocking the Value of Technology and Data to Grow

Few companies can claim over 150 million daily consumer interactions and over 11 million retail points of sale. Staying connected to all of them, especially through digital, ensures better consumer engagement with brands, innovations and services that can stimulate the senses of new adult generations.   

 

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Decision-making supported by Big Data & Analytics

 

Significant investments in our Marketing Technology has delivered new capabilities within Social Listening, Social Activation, and Integrated Data Platforms.

 

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–  Across the organisation, we now have access to 90TB of consumer and other relevant value chain data sources, spanning more than 25 markets.

 

–  Over 1,000 users can now leverage over 30 machine learning models and dashboards to aid decision-making on consumer engagement.

  

–  Advanced analytics and CRM capabilities are providing unprecedented opportunities to develop consumer journey mapping through industry-leading marketing automation systems.

 

–  Personalised communications delivered to the right consumer at the right time have enabled the growth of consumers in New Categories. This has contributed to 480,000 new THP consumers in Japan.

  

9.8m

consumers in our database (2019: 7mn)

                       

 

Best-in-class commercial digital experience

 

Our integrated consumer marketing technology stack provides us with a Single Consumer View which captures all interactions in one place.

 

 

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–  A key focus has been creating a mobile-first, consistent e-commerce user experience, and launching a subscriptions capability to increase Consumer Lifetime Value.

 

–  Our Direct-to-Consumer business has been accelerated through the deployment of owned e-commerce sites – taking the number up to over 40 e-commerce store fronts worldwide.

 

–  Owned-Retail stores are being transformed to offer a seamless digital experience.

  

–  This has been achieved through global Content Management Systems, digital touch points, integrated e-commerce, and CRM.

 

–  Our new subscription services capability has grown by 5x.

 

–  Our powerful business-to-business technology platform now enables over 6 million engagements a month, with fast deployment of best practices for better results for our trade partners.

  
                       

 

Operational excellence powered by digital

 

New technologies have enabled the business to respond with greater agility and resilience to the complexity of our growing portfolio in New Categories and the COVID-19 pandemic.

  

–  We have invested in new cloud-based digital platforms to transform our supply chain which support improved visibility and prediction of demand and allows us to plan concurrently across multiple supply chain nodes.

 

–  By leveraging artificial intelligence and machine learning, we pro-actively manage to our stock-holding policies, sourcing, production, and logistics plans and quickly adapt to changes in the environment.

  

–  Cloud technology has been leveraged as an accelerator for over 55% of our processes.

 

–  Our Cyber Security team use industry-leading tools and technology. Rapid cyber risk reduction exercises are conducted regularly with advanced internal, and external testing followed by immediate remediations. A strong cyber culture is established within the organisation, supported by cyber simulations, awareness campaigns and customised training programmes.

  

200,000

test phishing emails sent across the whole organisation to increase cyber resilience

 

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  34          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Short-Term Deliverables to Fuel A Better TomorrowTM

 

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Ensure a Step Change in New Categories Performance

 

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Vuse/Vype fastest growing vapour brand reaching 26% total vapour value share in the top 5 markets.

 

Vuse/Vype value share leader in four of the top five markets.

 

Vuse gained market leadership in Canada in migration year with 46% value share (+2,220 bps vs 2019).

 

Vuse closed system device volume share leader in the US.

 

  

 

Toxicology tests

Cigarette vs ePen 2

 

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^ No observed mutagenicity under these test conditions.

† No observed genotoxicity under these test conditions.

The scientific evidence*

There is growing consensus among many public health bodies and academics that vapour products can have a significantly reduced-risk profile compared to smoking.

In the UK, for example, Public Health England has published a series of expert reviews of the latest evidence, drawing on peer-reviewed literature, surveys and other reports.

They concluded that “based on current knowledge, vaping is at least 95% less harmful than smoking”. This is supported by a wealth of other evidence reviews, studies and reports from public health bodies, regulators and academics in countries such as Australia, Canada, France and New Zealand.

LOGO It is well accepted within the public health community that, while the precise long-term effects of vaping are unknown, it is nevertheless substantially safer

than smoking cigarettes. LOGO

The Royal Society for

Public Health – 2018

 

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27

Number of markets where the Group’s vapour products are sold

 

 

*

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

 

 

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Regulation and PMTA

The future of tobacco harm reduction has always depended on robust science, and ensuring that this is accessible to audiences outside the scientific community is critical. This need is growing stronger than ever – with a number of cases of acute lung diseases (referred to as EVALI) reported among vapers in the US in 2019, consumers want to be clear on the risk profile of these products. In addition, consumer perceptions of nicotine are evolving with many consumers over-estimating the risks associated with nicotine generally.

This also demonstrates the importance of having, and enforcing, a robust and effective regulatory framework that ensures high product standards and prevents access and appeal to youth – things we have long advocated. Robust science has to be at the centre of any regulatory development and engagement.

That’s why we welcomed the US Food and Drug Administration’s (FDA) previously announced requirement to submit Pre-market Tobacco Product Applications (PMTAs).

PMTAs are based on a summary of all research findings to demonstrate that the products meet the FDA’s criteria as “appropriate for the protection of the public health”. We filed PMTAs for four Vuse products (and our Modern Oral Velo portfolio) ahead of the deadline of 9 September 2020 and have continued to work with the FDA throughout the implementation of this new regulatory framework. While COVID-19 has caused some delays, we expect to hear more on their progress over the course of 2021. Each of our applications consists of between 100,000 and 150,000 pages, with over 150 employees contributing to each one. They represent a major milestone for us, and include results from numerous clinical, non-clinical and behavioural research studies; chemical analyses; and toxicological reviews of individual ingredients. Detailed information on product design, operation and manufacturing is also included.

In the US, we believe all of our Vuse (and Velo) products will be shown to be appropriate for the protection of public health, and we expect to receive progress updates related to our PMTA submissions over the course of 2021.

Performance summary

In 2020, our vapour brands Vuse and Vype performed well across all the top five vapour markets (US, Canada, Germany, UK and France which, collectively, represent over 75% of global industry vapour revenue), rebounding well from the EVALI crisis in 2019 and the implementation of the US flavour ban in early 2020.

Total volume of vapour consumables was up 52% to 344 million units in 2020 (2019: 226 million units, an increase of 19% on 2018), driving revenue growth of 52% to £611 million (2019: £401 million, up 26.1%) or 53% at constant rates of exchange, accelerating in the second half of the year.

In the US, Vuse Alto drove total revenue from vapour up 85% to £383 million (2019: £207 million, up 12% on 2018), or 86% (2019: up 7%) on a constant currency basis, in a market that was estimated to be down 13% in volume due to the issues mentioned earlier. Vuse Alto drove vapour value share, in the US, to 24.9% for 2020 from 16.6% for the year ended 31 December 2019, with volume of consumables 70% higher (2020: 174 million units; 2019: 103 million units). Vuse Alto also achieved market leadership (by volume) for closed system devices, with over 60% device volume share in the final quarter of 2020. Vuse is now the market leader in 15 US states (by value share) and the Alto variant represents over 85% of the Vuse mix in the US in the final quarter of 2020, up from 50% in 2019.

We performed well in 2020 and 2019 in the other top vapour markets, and reinforced our leadership positions:

 

In the UK, total vapour value share of the category was 36%, compared to 38% in 2019. Vype performed well, with value share up 350 bps driven by both ePen3 and ePod in 2020 (compared to the full year 2019) although this was more than offset by a decline in Ten Motives and the remainder of the local portfolio;

 

In France, vapour value share reached 31.5% in 2020, an increase of over 1,400 bps (versus 2019), driven by ePen3 and ePod which were launched in 2019;

 

In Canada we achieved the value share leadership position in the year while simultaneously migrating from Vype to our global brand Vuse; and

 

In Germany, Vype continued to grow vapour value share, becoming market leader, increasing 1,430 bps to 50.1% in 2020 (compared to 35.7% in 2019).

Due to the continued success of ePod and ePen3, Vuse/Vype now holds the No.1 position (by value share) in four of the top five markets.

In January 2021, we have pilot-launched our first CBD vaping product, Vuse CBD Zone. This latest innovation will allow us, for the first time, to offer adult consumers a range of high-quality CBD vaping products from our trusted, global brand, Vuse. Initially available in Manchester, UK, it will offer adult smokers and vapers sensorial enjoyment, as Vuse CBD Zone caters to a variety of moods and moments in their busy lifestyles.

In 2019 we acquired Twisp (in South Africa), a leading vaping products company. Due to the restriction in sales of cigarettes and vapour products in 2020 in South Africa in response to COVID-19, the Group delayed activities linked to the development and sales of Twisp. While we remain confident of the future potential for the vapour category, an impairment charge of £11 million was recognised in 2020 ahead of the migration of Twisp to Vuse.

The Group’s performance in 2020 was also supported by the growth of e-commerce, with Vuse/Vype being the most visited branded e-commerce site across the majority of the main vapour markets, and ranking No.1 for branded search against competitors. In December, Vuse/Vype had over 17,500 subscribers (up 5x since January 2020) with the average subscriber lifetime value equal to 3x that of a traditional retail customer.

In 2019, we announced the intention to migrate certain vapour brands to Vuse, recognising an impairment charge of £66 million in that year. Despite the challenges of COVID-19 in 2020, we successfully migrated our vapour products to Vuse in a number of markets and will continue with our brand migration programme during 2021.

 

 

Proportion of vapour revenue

by region in 2020

(£m)

 

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  36          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Short-Term Deliverables to Fuel A Better TomorrowTM

 

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Ensure a Step Change in New Categories Performance

 

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Device volumes up 33%.

 

Consumable volumes up 19%.

 

Successful launch of glo Hyper in April 2020, driving glo to 14% volume share of category in key markets (up 30 bps on 2019) – despite withdrawal of glo Sens.

 

Record total nicotine volume share in Japan at 5.9% driven by Hyper.

 

Further market rollouts and strong innovation pipeline driving good momentum into 2021.

 

 

 

Toxicants of interest

Cigarette vs glo

 

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The scientific evidence*

By heating tobacco rather than burning it, THPs have the potential to have reduced risk compared to smoking. The absence of burning dramatically changes the nature of the aerosol. Comparing cigarette smoke with glo aerosol, the levels of toxicants were reduced on average by 90-95%.

Our latest clinical trials are the first-ever of their kind to demonstrate reduced risk of Tobacco Heating Products. The results showed switching completely to glo crossed the biologically significant threshold, and marker profiles were similar to cessation.

The three-month results from our long-term glo clinical study were published in Nicotine & Tobacco Research. This new research found that smokers who switched completely from smoking cigarettes to using glo substantially reduced their exposure to certain cigarette smoke toxicants over three months.

LOGO Tests on heated tobacco... found a reduction of up

to 95% in the number of toxic chemicals emitted by heated tobacco compared with

combustible cigarettes. LOGO

David Jones

MP and honorary life fellow of Cancer Research UK

 

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20

Number of markets where the Group’s Tobacco Heating Products are sold

 

*

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

 

 

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For many of the toxicants measured, the levels found in participants were similar to those in people who stopped using tobacco completely. The results were presented at scientific and media events in Japan and South Korea.

We also welcome an increasing number of independent reports that are broadly aligned with our own findings.

For example, a study commissioned by the UK Department of Health in 2017 found that people using the two available THPs on the UK market were exposed to around 50–90% less of the “harmful and potentially harmful” compounds compared with conventional cigarettes.

In 2018, a Public Health England report looked at current research on THPs and, while highlighting the need for more research, found that “compared with cigarettes, heated tobacco products are likely to expose users and bystanders to lower levels of particulate matter and harmful and potentially harmful compounds. The extent of the reduction found varies between studies”.

Leading innovation

In 2020, we continued to expand our portfolio with the launch of glo Hyper and Neo demi-slims. We went far beyond the traditional quantitative and qualitative studies as we radically re-engineered not just the glo ecosystem, but our entire way of working.

Our first step was to place consumers at the centre of the process, with insights gathered from thousands of consumers in person, across key markets. Every insight informed how we optimised the filter feel, puff satisfaction and flavour sensation.

After over 75,000 prototype sticks, we landed on an experience that we knew resonated with target consumers because it had been built in collaboration with them. The pivotal breakthrough was in harnessing our advanced induction heating technology to unlock record heating times, delivered by our signature boost feature.

The 150-strong global community of engineers, product developers, and operations teams came together across borders and time zones to build the Hyper device. It is designed to work with the new Neo demi-slims range which offer an elevated taste, with 30% more tobacco and the widest range of flavours in the market.

Performance summary

The Group’s THP portfolio grew, with consumable volume up 19% to 10.7 billion sticks (2019: up 32% to 9.0 billion sticks). Excluding Sens, THP consumable volume would have increased 29% in 2020.

This follows the launch in Japan of glo Hyper in April 2020 (which already accounts for 50% of the glo portfolio), and subsequent launches in ENA mainly in the second half of the year. glo Hyper the first-to-world THP launched with induction heating which provides a step change in consumer satisfaction with 30% more tobacco, faster heating and a boost button. This has resulted in conversion rates that are 50% higher than previous glo launches. The success of glo Hyper was achieved despite the impact of COVID-19 restrictions as the launch and ongoing marketing campaigns were successfully switched to digital platforms. This more than offset a tough comparator as the Group launched glo Pro, glo Nano and glo Sens in 2019.

Revenue declined 12.9% to £634 million (2019: up 28.9% to £728 million) with the decrease in 2020 largely due to the decision to withdraw glo Sens from the market during the second half of 2020 (being a reduction to revenue of £50 million) and the impact of excise harmonisation in Japan. The growth in 2019 was due to the increased volume in that year, partly due to the launches described earlier. Excluding the impact of the relative movements in sterling, at constant rates of exchange, this was a decrease of 12.7% in 2020 compared to an increase of 22.7% in 2019.

In Japan, following the launch of glo Hyper, glo’s total volume share grew 85 bps to achieve a volume share of 5.9% of total nicotine, (up from 5.0% in December 2019), being a category volume share of THP of 19.4% (2019: 19.6%). Temporary revenue weakness was driven by the withdrawal of glo Sens and excise harmonisation through part absorption of excise driven price increases in October. With glo capturing over 30% of category growth post excise increase, we are confident that glo will return to volume and revenue growth in Japan in 2021.

In 2020, momentum post glo Hyper launch in Russia and Ukraine continued through the second half of the year, with glo volume share in December 2020 (of cigarettes and THP) in Russia at 1.4% in December 2020, and glo’s volume share of THP more than doubling from 7.6% in June 2020 to 15.5% in December 2020. Since the launch of glo Hyper in pilot cities in Italy, glo has more than tripled its volume share of the THP category to 7.8%, with retention rates doubling.

With COVID-19 having a material impact on consumer engagement in 2020, we successfully leveraged our digital capabilities, adapting our commercial and marketing campaigns and resulting in a 1.5x increase in earned social media compared to 2019, with glo Hyper the highest interest THP new product launch recorded.

We expect to consolidate glo Hyper’s success with further market roll-outs planned in 2021. In addition, continuous product enhancements in both consumables and devices will build upon the performance in the final quarter of 2020 in Japan, Italy, Russia and Romania, providing momentum for further success in 2021.

 

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  38          BAT Annual Report and Form 20-F 2020

 

Strategic Management

Short-Term Deliverables to Fuel A Better TomorrowTM

 

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Ensure a Step Change in New Categories Performance

 

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Global volume and revenue growth, up 62% and 57%, respectively.

 

Consolidating modern oral category leadership in Scandinavia and growing share of total oral market.

 

US portfolio strengthened by the acquisition of certain assets from Dryft with national roll-out continuing in early 2021.

 

Future opportunity in Emerging Markets as affordable New Category proposition.

 

 

 

Toxicology tests

Cigarette vs Velo

The scientific evidence*

A wealth of epidemiological evidence from Sweden over many decades shows that use of snus, a type of traditional oral tobacco, is substantially less risky than smoking. This has been confirmed by the US FDA which, in 2019, in response to an application made by the company Swedish Match, formally recognised that switching completely from cigarettes to the snus products assessed can significantly lower the risks of mouth cancer, heart disease, lung cancer, stroke, emphysema and chronic bronchitis.

Already our chemical studies have shown that our modern oral products have even fewer and lower levels of toxicants than snus, and our toxicological studies have shown that the effect of this is to have even lower toxicological impact on human cells than snus. We’re confident that further research will confirm that consumers of modern oral products will be exposed to even fewer toxicants than snus users. Ultimately, we believe that modern oral products present less risk to users than cigarettes.

LOGO Smokeless tobacco products are much cleaner and less hazardous than cigarettes. Their use could reduce harm to smokers if they switched entirely to

these products. LOGO

Professor Neal Benowitz

Professor of Medicine at the University of California, San Francisco

 

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23

Number of markets where the Group’s modern oral products are sold

 

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1.  Toxtracker assay (rtkn and bscl2).

 

2.  At equivalent nicotine doses (7.85µg/ml velo vs. 4.34µg/ml cigarette).

 

3.  High content screening.

 

 

 

  *

Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

 

 

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Our products

Our modern oral products are white in colour and contain high-purity nicotine, water and other high-quality food-grade ingredients, including eucalyptus and pine tree fibres, flavouring and sweeteners.

Originating in Scandinavia, Velo is now a leading global brand of nicotine pouches. These typically appeal to a broader audience than traditional oral tobacco, and because of their affordability and lack of batteries, they can be particularly popular in low to middle income countries. For example, our subsidiary in Indonesia has delivered great results from their expansion activities in Jakarta. Following a promising performance in June 2020, the test has been expanded to 5,000 consumers, which is being closely monitored to gain consumer insights.

We are also delivering a step-change in modern oral manufacturing. Truly living our ethos, our modern oral factory in Pécs put together a bold plan to implement food industry standards for modern oral manufacturing. This has enabled us to ensure the availability of products that comply with regulations in different countries.

With a cross-functional team across quality, production, engineering and EHS teams delivering technical changes and process improvements, Pécs became the first site in BAT’s history to obtain the ISO 22000 certification for food safety standard.

Performance summary

In 2020, we consolidated our leadership position in Modern Oral outside the US, while strengthening our position in the US with an expanded portfolio.

In 2020, total Group volume of 1.9 billion pouches was an increase of 62% on 2019, when volume was 1.2 billion pouches, itself an increase of 188% on 2018.

Revenue increased 57% to £198 million (2019: up 267% to £126 million). Excluding the impact of foreign exchange, this was an increase of 57% in 2020 and 273% in 2019, on a constant rates basis.

In ENA, where we are the clear market leader with 71% volume share of Modern Oral in the key markets (being Norway, Sweden, Denmark, Switzerland and Germany), revenue increased by 59% (2019: up 234%) and is now over five times the 2018 levels as the category continued to take value and volume share from the traditional oral products as follows:

 

In Sweden, we grew our leadership position in the Modern Oral category reaching 62% volume share (2019: 56%) driven by Lyft;

 

In Norway, volume share of the total oral category increased in both years, reaching 15% in 2020 (2019: 11%);

 

In Switzerland, where volume share of the total oral category reached 53%, up from 44% in 2019;

 

In Denmark, where the Group continues to lead the development of the oral category, with 75% volume share of the total oral category, compared to 62% in 2019; and

 

In Germany, Velo gained the market leadership position (by both volume and value share) accelerating the growth of modern oral within the total oral category.

In the US, while growing volume (up 45% in 2020 following the launch in 2019) and revenue (up 14% to £10 million, from £9 million in 2019), the portfolio has been strengthened by the acquisition (in October 2020) of the nicotine pouch products of Dryft Sciences, LLC (Dryft). These products have been rebranded Velo and expands the US portfolio from 4 to 28 variants, with representation in the above 6mg nicotine strength segment. This acquisition marks a further step in BAT’s societal commitment to accelerate its transformation journey to build A Better TomorrowTM. With the national rollout of Velo branded Dryft products continuing in early 2021 and a return to growth in the final quarter of 2020, we have great momentum for future success.

PMTAs for all Velo products were submitted (in the US) ahead of the 9 September 2020 FDA deadline.

Pilot schemes in emerging markets are ongoing with initial encouraging results in Pakistan and Indonesia. In Kenya, we have temporarily suspended sales due to local regulatory challenges and continue to engage with the local authorities.

We continue to believe that Modern Oral represents an exciting opportunity to offer affordable New Category alternatives to adult nicotine consumers in emerging markets, given the absence of an electronic device and a pre-existing ritual of oral product consumption in a number of markets.

In line with the simplification agenda, the Group will continue to migrate the majority of its Modern Oral portfolio to Velo during 2021, with initial migration plans delayed due to COVID-19.

In 2020, the Group has revised the reporting of modern oral volume share to be yearly average which is reflective of the year’s performance after periods of initial launch. In periods of launch, a period end rate is used to provide users with the exit share which is more reflective of short-term movements.

 

 

Proportion of modern oral

revenue by region in 2020

(£m)

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Our products

We also sell a range of traditional oral products, including Swedish-style snus and American moist snuff, available in loose tobacco form or as pre-packed pouches. We have long sold snus in Sweden and Norway through our Fiedler & Lundgren business, whose brands include Granit and Mocca; and in the US we market snus under the Camel brand. Our American moist snuff products include our flagship Grizzly brand, as well as the premium moist snuff brand Kodiak.

The Modified Risk Tobacco Product (MRTP) applications for Camel Snus were discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) in September 2018. We continue to work closely with the FDA, which announced in December 2020 that it had reopened the comment period after our filing of additional information.

Performance summary

In 2020, volume was marginally lower (down 0.9%) on the prior year (at 8.4 billion stick equivalents), with 2019 0.6% lower than 2018.

Total revenue grew by 7.2% to £1,160 million (2019: up 15% to £1,081 million), driven by pricing in both 2020 and 2019, particularly in the US which accounts for 97% of the Group’s revenue from the category. On a constant rates basis, this was an increase in 2020 of 7.7% and 10% in 2019 (driven by pricing).

In the US, traditional oral volume declined 1.3% in 2020 (2019: down 1.5%). Value share of moist was down 25 bps and volume share down 35 bps, after a strong 2019 (value share growth of 80 bps). The 2020 decline was driven by Grizzly which was impacted by pricing pressures in the final quarter of 2019 and early 2020. Utilising revenue growth management techniques, value share has stabilised in the second half of 2020. Outside the US, which accounts for only 3% of Group revenue from the category, volume was higher by 2.8% in 2020, driven by Sweden where the Group’s Traditional Oral volume share (as a proportion of total oral) declined 80 bps after growing in 2019 by 50 bps. This was due to the growth in Lundgrens in both periods which, in 2020, was more than offset by a decline in the remainder of the portfolio, notably Granit and the de-listing of Knekt and the growth of Modern Oral.

 

Proportion of traditional oral

revenue by region in 2020

(£m)

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Strategic management

Short-Term Deliverables to Fuel A Better TomorrowTM

 

 

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Drive Value From Combustibles

 

 

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Highlights

 

Strategic cigarette brands deliver value share growth of 40 bps.

 

Group value share growth of 20 bps.

 

Strong pricing, with combustible price/mix of 7.3%.

Group cigarette value share increased 20 bps in 2020 (2019: up 20 bps), driven by the US, Mexico, Colombia, Turkey, Russia, Bangladesh and Japan which offset a reduction in Indonesia and Saudi Arabia.

In 2020, Group cigarette volume declined 4.6% to 638 billion sticks (2019: 668 billion), outperforming the total cigarette market which was estimated to be down between 5.0-5.5% (2019: 3.5-4.0%).

In 2020, cigarette volume grew in Brazil (where enhanced border security and restricted population mobility due to COVID-19 led to an increase in duty paid volume), in Turkey (driven by Kent and the local portfolio), and in Bangladesh (driven by the continued strength of the local portfolio).

Developed markets have been generally relatively resilient in 2020 with little evidence of accelerated downtrading despite the pressures of COVID-19.

In the US, Group cigarette volume was up 0.5% to 73 billion (2019: 73 billion), due to the performance of the strategic portfolio. In the final quarter of the year, we reintroduced

Lucky Strike to the US market, ensuring a truly global footprint for the brand. This was against an industry that was estimated to be up 1.5% driven by reduced consumer switching to vapour, higher supply chain inventories (due to the impact of COVID-19

and the timing of price increases) and an extra selling day, and stronger consumption trends resulting from the increase in fiscal stimulus and lower gas prices.

However, due to COVID-19, production or other supply chain restrictions affected sales in several markets, including Canada and Mexico. In South Africa, a total sales ban of tobacco products came into effect from March 2020, with sales recommencing in August 2020 following the easing of lockdown restrictions. While not a significant part of the Group, travel restrictions due to COVID-19 have impacted our Global Travel Retail (GTR) business, negatively impacting Group cigarette and THP volume by an estimated 1.0%. Furthermore, volume declined in Indonesia (due to the impact of tax increases and minimum retail price compliance) and in Pakistan where illicit trade grew significantly following excise-led price increases in prior years.

Group cigarette volume declined 4.7% in 2019 to 668 billion sticks as growth in Japan, the Middle East, South Africa, Romania and Poland was more than offset by Russia (partly due to the one-off stock reduction), Egypt (largely due to the change in local taxes impacting Pall Mall), Venezuela (due to the ongoing macro-economic challenges) and the impact of market decline in the US, Indonesia, Pakistan and Ukraine.

Cigarette volume share grew 40 bps in 2020, driven by Bangladesh, Mexico, Vietnam, Russia and Turkey which were partly offset by lower volume share in Indonesia and Saudi Arabia. In 2019, this was an increase of 20 bps due to growth in Japan, Pakistan, Bangladesh, Mexico, Ukraine and Russia.

 

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  Drive Value From Combustibles

The performance was underpinned by the strategic cigarette brands, with volume share 30 bps higher in 2020 (2019: up 70 bps driven by migration in Brazil and Colombia, or 30 bps excluding migrations):

 

  Dunhill’s overall volume share was down 20 bps (2019: stable) as growth in Romania and Netherlands was more than offset by declines in Saudi Arabia, Indonesia, Brazil, South Africa and Malaysia. Volume was 17% lower (2019: down 5.5%), largely due to the impact of the tax increases and minimum retail price compliance in Indonesia, the impact of COVID-19 on both South Africa (where there was a temporary sales ban in the year) and our GTR business, and the ongoing challenging operating environment in Malaysia;

 

  Kent’s volume share grew 10 bps (2019: up 10 bps) as growth in Brazil, Saudi Arabia, Turkey and Russia more than offset lower volume share in Romania and Japan. Volume was up 2.0% (2019: down 1.3%) as growth in Brazil, across the Middle East (including Saudi Arabia), Russia and Turkey more than offset lower volume in Japan;

 

  Lucky Strike’s volume share grew 10 bps (2019: stable), as growth in AmSSA (particularly Brazil, Colombia and Argentina) and in Japan more than offset lower volume share in Indonesia, Spain and France. Volume declined 2.0% as the impact of the tax increases and minimum retail price compliance in Indonesia, and lower volume in France and Spain, more than offset higher volume in Brazil, Japan and Argentina. Lucky Strike was re-introduced in the US in the final quarter of 2020;

 

  Rothmans’ volume share was 20 bps higher (2019: up 50 bps) as growth in Brazil, Colombia, New Zealand, Malaysia, Russia and Ukraine was partly offset by Pakistan and Turkey. Volume was 6.1% higher (2019: up 2.5%) as growth in Brazil, Pakistan and Bulgaria more than offset lower volume in Ukraine and Turkey; and

 

  Pall Mall’s volume share was stable (2019: up 10 bps) as growth in Pakistan, Australia, Mexico, South Africa, Chile and Canada was offset by lower volume share in New Zealand, Saudi Arabia, the US and Argentina. Volume was down 6.0% (2019: down 6.7%) largely driven by Pakistan, Saudi Arabia and South Africa.

The Group’s US domestic strategic combustible portfolio performed well:

 

  Newport volume share increased 40 bps (2019: up 40 bps), while volume grew 2.3% (2019: down 3.9%), with growth in both the menthol and non-menthol variants;

 

  Natural American Spirit performed well with volume share up 10 bps (2019: up 10 bps). Volume was up 6.0% against 2019 (2019: 0.5% increase); and

 

  Camel’s volume share declined 10 bps in the US (2019: down 10 bps) with volume up 1.2% (2019: down 6.0%).

Volume of other tobacco products (OTP) declined 1.7% to 20 billion sticks equivalent (2019: 7.1% decline), being 3% of the Group portfolio (2019: 3%).

In 2020, revenue from combustibles was down 1.1% at £22,752 million (2019: £23,001 million, growth of 4.2%).

Higher pricing across the Group in 2020, notably in the US, Russia, Germany, Canada, Australia, Mexico and Pakistan, was more than offset by the impact of lower Group volume, partly related to the impact of COVID-19 and a translational foreign exchange headwind of 3.7%. COVID-19 was estimated to be a headwind on Group revenue of approximately 2.5%, largely due to the restrictions in travel (impacting GTR) and due to the restrictions imposed in South Africa during the year.

The growth in revenue in 2019 was largely due to pricing, notably in the US (including a reduction in discounting), Canada, Kenya, Mexico, Nigeria and Saudi Arabia, and an improved geographic mix as the performance in high value markets such as Japan, South Africa, Romania and Australia combined with reduced volumes in lower value markets such as Pakistan and Egypt. This more than offset unfavourable portfolio mix due to the relative growth of lower value products, such as Rothmans and Pall Mall, and lower total volume.

After adjusting for the short-term impact of excise on bought-in goods (impacting 2019 and 2018) and the translational foreign exchange headwind (2019: tailwind of 0.6%), adjusted revenue from combustibles at constant rates of exchange was up 2.8% to £23,594 million. In 2019, this was an increase of 4.6%.

 

Change in cigarette volume share in key markets (bps)

+40 bps

 

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Definition: Annual change in cigarette volume share – being the number of cigarettes bought by consumers of the Group’s brands in key markets as a proportion of the total cigarettes bought by consumers in those markets (see page 274).

 

 

Change in cigarette value share in key markets (bps)

 

+20bps

 

 

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Definition: Annual change in cigarette value share – being the value of cigarettes bought by consumers of the Group’s brands in key markets as a proportion of the total value of cigarettes bought by consumers in those markets (see page 274).

 

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Number of cigarette factories in 43 countries

 

 

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Short-Term Deliverables to Fuel A Better TomorrowTM

 

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Simplify the Business

 

Highlights

 

  Quantum enabled £660 million gross savings through organisational change and productivity initiatives.

 

  On track to deliver at least £1 billion annualised savings by end 2022.

 

  Revenue Growth Management and Marketing Effectiveness initiatives ready to be deployed.

 

  In-house ‘Ventures’ business created and operational.

In 2019, we announced ambitious plans to fundamentally re-evaluate how we are organised and a redesign of management layers to eliminate duplication and entrenched accountability. We called this Project Quantum – designed to create new capabilities and release valuable funds for further investment in our growth ambition, ensuring the Group is stronger, faster and more agile.

In 2020, we realised the benefits of the first phase of Quantum. Alongside greater organisational speed and agility, Quantum drove significant cost savings, realising £660 million of gross savings through organisational change and productivity initiatives. However, further work on core processes and ways of working simplification is ongoing.

The second phase of Quantum will build on this success with the organisation ready for project roll-outs from the beginning of 2021, covering areas such as:

 

  further operational efficiency;

 

  route-to-market focus; and

 

  supply chain productivity.

The key objective in 2020 was to finalise the operational design of the second phase, running pilots in the second half of the year in a few strategically important geographies with the aim to use the learnings to fine-tune the design and methodology to support a successful wider roll-out programme in 2021 and beyond.

We are well on track to deliver the target of £1 billion total annualised cost savings from Quantum by 2022, in addition to the benefits from our:

 

  Revenue Growth Management; and

 

  Marketing Effectiveness initiatives.

The savings from Quantum are being used to fund investment in New Categories, leveraging new capabilities. We are attracting new talent from a diverse range of industries globally, in areas such as:

 

  IP;

 

  insights and analytics;

 

  product innovation;

 

  design and technology; and

 

  digital media.

These skills are supporting our work into foresights beyond nicotine, 21st century brand building, direct-to-consumer marketing and e-commerce, and advanced digital and data analytics.

In addition, in 2020 the increased agility brought about through Quantum and our diverse geographic footprint enabled us to quickly and effectively adapt and navigate the challenges caused by the global pandemic.

At the end of 2019 we established our corporate venturing unit, Btomorrow Ventures (BTV) and made excellent progress in 2020. During the course of the year, BTV made minority investments in eight small, innovative technology and consumer businesses, providing us with an exciting capability ecosystem for the future.

 

 

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44 BAT Annual Report and Form 20-F 2020 for society and the environment By moving from a business where sustainability has always been important to one where it is front and centre, in all that we do. We are committed to a step-change in our sustainability ambition. We have a number of stretching targets, which we are confident will deliver A Better TomorrowTM for all our stakeholders. These include: increasing our number of non-combustible product consumers from 11 million in 2019 to 50 million by 2030; achieving carbon neutrality by 2030 for our own business activities, and accelerating our existing environmental targets to 2025; and eliminating unnecessary single-use plastic and making all plastic packaging reusable, recyclable or compostable by 2025.A BETTER TOMORROW TM


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Awards and Recognition

Our sustainability efforts and commitment to high standards have

received notable independent recognition over the years, including

the following.

 

Investor Ratings

 

 

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Dow Jones Sustainability Indices (DJSI)

 

We are the only company in our industry listed in the prestigious World Index, representing the world’s top 10% ESG performers. We have achieved inclusion in the indices for 19 consecutive years.

 

 

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MSCI

 

We achieved a ‘BBB’ rating in the most recent MSCI ESG Ratings, which help investors identify and understand financially material ESG portfolio risks.

 

 

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Best-in-class ISS Score

 

We achieved the highest rating for the ISS Social Disclosures QualityScore, which identifies best-in-class sustainability disclosure practices.

 

 

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Sustainalytics

 

We achieved a score of 27.8 in the most recent Sustainalytics ESG Risk Ratings, which give investors insights into financially material ESG risks in their portfolios.

 

 

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Vigeo Eiris

 

We scored 47% (up by 5pp from 2019) in the most recent Vigeo Eiris rating. Vigeo Eiris, a rating and research agency, evaluates organisations’ integration of ESG factors into their strategies, operations and management.

 

 

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CDP Climate A-List

 

Our A-List inclusion for the second year recognises our actions to cut emissions, mitigate climate risks and contribute to a low-carbon economy. We are also proud to have achieved A- in CDP Water, and to be included in Supplier Engagement Leaderboard.

      

Awards and Recognition

 

 

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Gold Class Sustainability Award

 

In 2021, we were awarded Gold Class in RobecoSAM’s Sustainability Yearbook, which showcases the best performing companies in terms of financially material ESG metrics.

 

 

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Vype UK Product of the Year Award

 

In early 2020, our Vype ePod won in the e-cigarette category at the UK Product of the Year awards – the UK’s largest consumer survey of product innovation.

 

 

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Global Top Employer

 

We have been recognised as a Global Top Employer for four consecutive years, acknowledging our commitment to best-in-class working environments and career opportunities.

 

 

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Financial Times Diversity Leaders Report

 

We have ranked in the top 10% for two consecutive years. The report recognises organisations that have achieved a diverse and inclusive workforce.

 

 

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CRRA Reporting Awards – Openness and Honesty

 

We won the ‘Openness and Honesty’ award for our 2018 Sustainability Report at the 2020 Corporate Register Reporting (CRR) Awards – a testament to our approach to transparently reporting on key ESG challenges.