Company Quick10K Filing
British American Tobacco
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 27 Adverse Judgments Appealed By Rjrt As A Result of Judgments Arising in The Period 1 January 2017 To 31 December 2019:
Note 13: of The 40 Adverse Judgments Appealed By Rjrt:
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EX-4.14 d852737dex414.htm
EX-4.25 d852737dex425.htm
EX-12 d852737dex12.htm
EX-13 d852737dex13.htm
EX-15 d852737dex15.htm

British American Tobacco Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d852737d20f.htm 20-F 20-F
Table of Contents

 

 

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, 2019

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) each representing one ordinary share   BTI   New York Stock Exchange
Ordinary shares, nominal value 25 pence per share   BTI   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 2020   BTI20   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.

2,456,520,738 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 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

References in this document to information on websites or social media platforms, including the web address and social media channels of BAT, have been included as inactive textual references only. These websites and social media channels and the information contained therein or connected thereto are not intended to be incorporated into or to form part of the Annual Report on Form 20-F.


Table of Contents

LOGO


Table of Contents

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Table of Contents

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Table of Contents

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Table of Contents

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Table of Contents

LOGO


Table of Contents
    

 

Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

CONTENTS

 

STRATEGIC

REPORT

 

  Overview  

        

Chairman’s introduction

     2  

Chief Executive’s review

     3  

The foundations of our evolved strategy

     6  

Finance Director’s overview

     17  

Our year in numbers

     18  

  Strategic Management  

        

Global industry overview

     20  

Our business model

     22  

Our global business

     24  

Engaging with our stakeholders

     26  

Delivering our strategy

     28  

  Financial Review  

        

Financial performance summary

     43  

Income statement

     44  

Treasury and cash flow

     48  

Other

     51  

Regional review

     52  

  Business Environment  

        

Principal Group risks

     58  

GOVERNANCE

 

 

  Directors’ Report  

        

Chairman’s introduction on governance

     63  

Board of Directors

     66  

Management Board

     68  

Leadership and purpose

     69  

Our culture and values

     70  

Board engagement with stakeholders

     71  

Board activities in 2019

     74  

Division of responsibilities

     76  

Board evaluation

     78  

Nominations Committee

     79  

Audit Committee

     83  

  Remuneration Report  

        

Annual statement on remuneration

     90  

Annual report on remuneration

     93  
  

FINANCIAL

STATEMENTS

 

  Group Financial Statements  

        

Independent auditor’s report

     122  

Group companies and undertakings

     237  

OTHER

INFORMATION

  

Additional disclosures

     254  

Shareholder information

     299  
 

 

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

Annual Report 2019

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’) for the year ended 31 December 2019. 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 62, 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 63 to 114 contains detailed corporate governance information and our Committee reports. The Directors’ Report on pages 63 to 89 (the Governance pages) and 254 to 323 (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 115 to 253. The Other Information section commences on page 254.

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 258 to 268 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 298.

 

   

BAT Annual Report and Form 20-F 2019

  01


Table of Contents

 

  Overview

 

    

 

CHAIRMAN’S

INTRODUCTION

 

 

LOGO

  

   LOGO                                                                                                                                                              

A STRONG

OPERATIONAL

PERFORMANCE

 

         LOGO
 

 

Welcome to our combined Annual Report and Form 20-F for 2019. I’m pleased to report a strong operational performance with growth in revenue, as well as both value and volume share. Notwithstanding a number of one-off charges that led to a decline in reported profit from operations, performance was strong on an adjusted basis, growing on the back of our combustibles business and our continued progress in New Categories.

It has also been a busy year as we accelerate our ambition to transform our business. The Board and I are confident in the vision and focus of our new CEO, Jack Bowles, and his drive to satisfy evolving consumer preferences with new and innovative products.

Jack has already made great progress in his stated aim to simplify the Group and he and his management team have spent significant time looking at how we can accelerate the progress already made in our New Categories business. This has been instrumental in the Board’s endorsement of an evolution of our strategy and I am excited and energised about the possibilities for the future.

A sustainable and well-governed business

Our sustainability agenda is at the heart of our strategic plans to build a long-term sustainable business. We have made a clear commitment to providing consumers with a range of potentially less harmful products, which is central to our corporate purpose around which long-term growth is planned. I am proud to see that the continuing growth in our New Categories business reflects the significant success we have already made in this vital area.

However, we are also clear that long-term sustainability, as well as our ability to meet short-term financial and other targets, will be underpinned by successful delivery against other environmental, social and governance measures.

Last year, our newly-revised environmental targets gained the approval of the Science-Based Target initiative, and I’m very pleased to report that we are performing well against our goals. The Group’s direct carbon dioxide equivalent emissions are already 10% lower than its 2017 baseline, and we have also been honoured to have been named on the Carbon Disclosure Project’s prestigious ‘A List’ for climate change. This recognises our actions to cut emissions, mitigate climate risks and develop the low-carbon economy.

The Group’s commitment to improving social conditions, from respecting Human Rights in every country in which we operate to our own workforce diversity, remains central to the business. Human rights commitments, in particular involving issues such as child labour, sit at the heart of both our Standards of Business Conduct and Supplier Code of Conduct, and we have an array of due diligence procedures to monitor our entire supply chain. Our management comprises 141 different nationalities, while women made up 51% of senior recruits in 2019.

The Group’s governance practices promote transparent and responsible corporate behaviour. All our staff worldwide must comply with our Standards of Business Conduct, and we have continued to expand compliance training, which complements our internal ‘Speak Up’ channels.

Overall, the quality and success of our Sustainability Agenda continues to be recognised externally, and I am proud to report that we are once again the only company in the industry to have been included in the Dow Jones Sustainability Indices’ prestigious World Index in 2019. This is our 18th consecutive year of inclusion in the Index series, which reflects BAT’s long-standing commitment to delivering against ESG measures.

Dividends

The Board has declared a dividend of 210.4p per ordinary share, payable in four equal instalments of 52.6p 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 47 of the Financial Review and page 300 in the Shareholder information section.

Board composition and outlook

I am very pleased to welcome Jerry Fowden to the Board this year. He brings with him a wealth of executive experience relating to operations, transformation and marketing, which will complement the expertise of the other two North American members of our Board, and we look forward to the insights he will provide as we grow our business.

Kieran Poynter will retire from the Board with effect from the conclusion of the Annual General Meeting on 30 April 2020. Mr Poynter has served as a Non-Executive Director since July 2010, as Senior Independent Director since October 2016, and is currently a member of the Audit and Nominations Committees.

As we enter 2020, I feel strongly that the business is in excellent shape. As I write this opening statement, the Group is closely monitoring the development of Covid 19 (Coronavirus). We believe that our business continuity plans will ensure the business is prepared to manage the challenges as and when they may develop. Notwithstanding Covid 19, with our new management team and strategy, I am confident that we are well placed to deliver sustainable growth for many years to come.

Richard Burrows

Chairman

 

 

   

02

  BAT Annual Report and Form 20-F 2019


Table of Contents
    

 

Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

CHIEF EXECUTIVE’S

REVIEW

 

LOGO  

 

Dear shareholders and stakeholders,

 

I write this reflecting on my first year as Chief Executive of BAT. It is a privilege to lead the Group, with its record of achievements both past and present.

 

Since taking the helm in early 2019, I have focused the business on three clear priorities: driving value from combustibles, ensuring a step change in New Categories performance and simplifying the business. Stronger, simpler, faster.

 

My new management team has fully embraced these priorities and is already delivering against them.

 

In my first Annual Report as Chief Executive, I want to take this opportunity to set out my vision for BAT’s future.

 

   

BAT Annual Report and Form 20-F 2019

  03


Table of Contents

 

  Overview

 

    

CHIEF EXECUTIVE’S REVIEW

CONTINUED

 

LOGO        

I HAVE FOCUSED THE BUSINESS ON THREE CLEAR PRIORITIES:

 

  DRIVING VALUE FROM COMBUSTIBLES

 

  ENSURING A STEP CHANGE IN NEW CATEGORIES PERFORMANCE

 

  AND SIMPLIFYING THE BUSINESS

STRONGER, SIMPLER, FASTER.

 

    LOGO

 

LOGO        

OUR PURPOSE IS TO BUILD A BETTER TOMORROW BY REDUCING THE HEALTH IMPACT OF OUR BUSINESS THROUGH OFFERING A GREATER CHOICE OF ENJOYABLE AND LESS RISKY PRODUCTS FOR OUR CONSUMERS.

 

    LOGO

 

LOGO        

WE ARE ON A JOURNEY TO BECOME A BUSINESS THAT DEFINES ITSELF NOT BY THE PRODUCTS IT SELLS BUT BY THE CONSUMER NEEDS IT MEETS.

 

    LOGO

 

Delivering today

In 2019, building on our foundations, we delivered strong operational results and cash generation, creating a solid base for delivering today and building a better tomorrow.

I am especially pleased to report 6% revenue growth (at current rates of exchange) of £1.4 billion to £25.9 billion. This growth was achieved while also increasing investment in the business, growing our New Categories business by 37%, and increasing our value and volume share by 30bps and 20bps respectively.

Of course, we live in an age of relentless change. Consumers’ desires and tastes evolve, while societal attitudes are changing. These changes are providing us with growth opportunities we could not previously have imagined.

A clear corporate purpose

Our purpose is to build a better tomorrow by reducing the health impact of our business through offering a greater choice of enjoyable and less risky products for our consumers.

We will evolve our growth model through the development of our portfolio in tobacco, nicotine and beyond, meeting our consumers’ evolving need for enjoyment and satisfaction.

By building on our strong foundations, we will build a better tomorrow for consumers, employees, shareholders and society.

Our ambition is to increasingly transition our revenues from cigarettes to non-combustible products over time. We aim to achieve at least £5 billion in New Categories revenues in 2023/2024.

To achieve that, we need to continue to drive value from our combustible business and accelerate the growth of our New Categories.

Supporting this is our new ‘ethos’, which I am delighted to launch in 2020. Our ethos is about being bold, fast, empowered, responsible and diverse. This annual report is a showcase of our new ethos in action.

 

Acting responsibly

As a leading multinational business we understand our global impact, the importance of high standards of integrity, and our evolving societal responsibilities. As a result, we are moving from a business where sustainability has always been important, to one where it is front and centre in all that we do.

For our consumers, we want to offer a range of enjoyable and responsibly-marketed products in tobacco, nicotine and beyond.

For society, we aim to reduce the health and environmental impacts of our business.

For our suppliers and customers, we want to raise standards for everyone across our value chain.

For our employees, we want to create a dynamic, inspiring and purposeful place for them to work.

And for our shareholders, we want to deliver superior and sustainable returns.

Meeting consumer needs

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

Consequently, we have evolved our strategy to put a sharper focus on delivering a step change in New Categories performance, fuelled by investment from the continued delivery of our combustible business.

Our evolved strategy is about anticipating and satisfying the ever-evolving consumer: providing pleasure, reducing risk, offering and increasing choice, and stimulating the senses of adult consumers worldwide.

BAT will satisfy consumer needs through a focused portfolio of products that offer sensorial enjoyment for a variety of moods and moments. We will build fewer but stronger global brands.

This strategy is underpinned by a unique view of the consumer across four categories, which is increasingly driven by powerful consumer data and analytics and we are accelerating our investment further.

Our business will be further enabled by simplifying our management structure, truly embracing digital transformation, rigorously managing our cost base, and enhancing our internal culture.

 

 

   

 

   

04

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Governance

 

  

Financial Statements

 

  

Other Information

 

 

 

LOGO        

WE BELIEVE IN A MULTI-CATEGORY STRATEGY TO BETTER MEET CONSUMER NEEDS AND LEVERAGE OUR SCALE.

 

    LOGO

 

LOGO        

WE WILL FOCUS OUR PORTFOLIO DEVELOPMENT ON CONSUMER OFFERS THAT WILL CAPITALISE ON OUR CORE BUSINESS CAPABILITIES.

 

    LOGO

 

LOGO        

OUR FUTURE IS ABOUT BEING BOLD, FAST, EMPOWERED, RESPONSIBLE AND DIVERSE.

 

    LOGO

 

LOGO        

WE HAVE A STRATEGY FOR GROWTH AND SUSTAINABILITY.

 

    LOGO

 

Parameters of our developing portfolio

We will focus our developing portfolio on consumer offers that will capitalise on our core business capabilities.

Specifically, we consider there to be four key parameters that create the boundaries of our portfolio development.

First, we will leverage our unique global marketing reach and scale.

Second, we will build on our existing delivery platforms in vapour and modern oral where we have hard-earned technological expertise.

Third, given our well-developed regulatory and scientific expertise, we will operate in product categories that require those capabilities.

Finally, any portfolio investment will be judged by stringent strategic and financial metrics.

As we explore these portfolio development opportunities, our new corporate ventures team will accelerate the creation, development and commercialisation of new-to-world innovation on a test-and-learn basis.

Strong foundations

As the world’s largest international tobacco company by revenue, we are exceptionally well-placed for future growth. Our deep understanding of consumers, significant geographic spread, supply chain proficiency and experience engaging with diverse stakeholders are essential capabilities.

Few consumer goods companies can claim over 150 million consumer interactions every day; distribution in 11 million points of sale across a well-balanced, developed and emerging market footprint; and approaching 11 million consumers of non-combustible tobacco and nicotine products.

This year we have grown the New Categories revenue to £1.3 billion – a growth rate of 37% in 2019 (both at current rates of exchange) and more than double our revenues from two years ago. This provides us with a vital platform for the future.

Maximising efficiencies

I have been clear that we need to simplify the business and I have been dedicated to that end in my first year as Chief Executive.

During 2019, we launched both a fundamental re-evaluation of how we are organised and a redesign of management layers that eliminated duplication and entrenched accountability. We called this Project Quantum and it is the first, not the last, step, as we will constantly need to refine our business as the Group evolves.

Project Quantum created new capabilities in the organisation, and will help us release valuable funds for further reinvestment in our growth ambition.

Empowered and diverse

Our 53,000 plus people remain our most important asset. As we recast our structure, we are clarifying accountability and empowering real ownership to our teams.

As our business evolves, so too does our employee value proposition. Today, we are attracting a different and wider range of people and skillsets than we did before, injecting exciting new capability into the business. This is exemplified by our over 300 new specialist hires in 2019, who are bringing with them new capabilities in digital, product development and design.

For both our long-time BAT employees and those who have more recently joined, we are inspiring an ethos that is responsive to constant change and embodies a learning culture dedicated to continuous improvement.

Sustainable future

I am honoured to be at the helm of an exceptional business with such a successful history. My responsibility is to ensure that it is faster, bolder and stronger in the years to come.

We now have a business with a new corporate identity that reflects our company today and our journey ahead. We are becoming a business that defines itself not by the products it sells but by the consumer needs it meets.

Our total commitment to a multi-category business powered by investment from our combustibles category will drive sustainable growth and underpin continued delivery of high single-digit earnings growth on an adjusted constant currency basis.

I am confident that we have a strategy for growth and sustainability which will deliver a better tomorrow.

Yours

Jack Bowles

Chief Executive

 

LOGO        

OUR TOTAL COMMITMENT TO A MULTICATEGORY BUSINESS POWERED BY INVESTMENT FROM OUR COMBUSTIBLES CATEGORY WILL DRIVE SUSTAINABLE GROWTH AND UNDERPIN CONTINUED DELIVERY OF HIGH SINGLE-DIGIT EARNINGS GROWTH.

 

    LOGO
 

 

   

BAT Annual Report and Form 20-F 2019

  05


Table of Contents

 

  Overview

 

    

THE FOUNDATIONS OF

OUR EVOLVED STRATEGY

 

We are committed to providing a better tomorrow 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.

 

LOGO

 

   

06

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Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

 

 

 

LOGO

 

   

BAT Annual Report and Form 20-F 2019

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Table of Contents

 

  Overview

 

    

 

A STRATEGY FOR

ACCELERATED GROWTH

While combustible tobacco will be at the core of our business for some time

to come, we aim to generate an increasingly greater proportion of our revenues

from products other than cigarettes, thereby reducing the health impact

of our business.

This will deliver a better tomorrow for our consumers who will have a range of

enjoyable and potentially 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.

  

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 four 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 an upcoming corporate venturing initiative to stay ahead of the curve.

 

 

   

08

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Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

 

 

  LOGO   LOGO                   
 

 

 

 

OUR STRATEGY PUTS THE CONSUMER FIRST, FOCUSING ON UNDERSTANDING ADULT CONSUMER CHOICE AND ENJOYMENT. WE WILL CAPTURE LOST CONSUMER MOMENTS WITH A PORTFOLIO IN TOBACCO, NICOTINE AND BEYOND. THIS WILL ENABLE SUSTAINABLE, LONG-TERM GROWTH WITH A CLEAR FOCUS ON FORESIGHTS, INNOVATION, BRANDS, ACTIVATION, TEAMS AND TECHNOLOGY. WE WILL BECOME A BUSINESS THAT DEFINES ITSELF NOT BY THE PRODUCTS IT SELLS BUT BY THE CONSUMER NEEDS IT MEETS.

 

     

 

Kingsley Wheaton

Chief Marketing Officer

  LOGO
   

 

LOGO

 

 

 

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 focus 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 consumers, over 11 million retail points of sale, as well as a network of expert and skilled employees around the world. Staying connected to all of them, especially through digital means (including e-commerce), ensures better consumer connections, access to markets and innovations that offer sensorial enjoyment and satisfy consumer needs.

  

 

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:

 

Consumers   LOGO

 

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

Society   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;

Employees   LOGO

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

Shareholders   LOGO

By delivering sustainable and superior returns.

 

   

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  Overview

 

    

 

PUTTING SUSTAINABILITY

FRONT AND CENTRE

 

As we evolve our Group strategy, we are also evolving our Sustainability Agenda. 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.

 

 

 

New Sustainability Targets

 

We are committed to making a step-change in our sustainability ambition. As a result, we have announced a number of stretching targets that we are confident will deliver A Better Tomorrow for all our stakeholders.

 

These include:

 

– increasing our number of non-combustible product consumers from 11 million to 50 million by 2030;

 

– achieving carbon neutrality by 2030*; and

 

– bringing forward our existing 2030 environmental targets to 2025.

 

*  Based on Scope 1 and 2 carbon dioxide equivalent (CO2e) emissions.

 

Our commitment to reduce the health impacts of our cigarette business – by providing a range of potentially less risky products – is central to our corporate purpose. This is underpinned by excellence in all other environmental, social and governance (ESG) measures.

 

Each year we engage with a wide range of stakeholders to understand the issues that are most important to them. 2019 was a significant year, with many stakeholders re-emphasising the importance of addressing the health impacts of our cigarette business and with governments and cities around the world declaring a climate emergency.

 

 

Consequently, we refreshed our Sustainability Agenda (as an integral part of our evolved Group Strategy) to reflect the prominence of tobacco harm reduction and also to place a greater emphasis on the importance of addressing climate change and environmental management. At the same time, we remain committed to delivering a positive social impact and ensuring robust corporate governance across the Group.

 

 

OUR SUSTAINABILITY AGENDA

 

 

LOGO

 

   

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ETHOS

Our purpose is to build a better tomorrow by reducing

the health impact of our business through offering a greater

choice of enjoyable and less-risky products for our consumers.

 

LOGO

  

LOGO                                                                                                                                                                                          

  

A KEY DRIVER TO DELIVER THIS WILL BE OUR ETHOS – AN EVOLUTION OF OUR GUIDING PRINCIPLES – WHICH GUIDES OUR CULTURE AND BEHAVIOURS ACROSS THE ENTIRE GROUP. IT HAS BEEN DEVELOPED WITH SIGNIFICANT INPUT FROM OUR EMPLOYEES, AND ENSURES AN ORGANISATION THAT IS FUTURE FIT FOR SUSTAINABLE GROWTH.

 

    

 

Hae In Kim

Director, Talent and Culture                                                                                                              

   LOGO

 

LOGO

 

   

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OUR

PEOPLE

As our business evolves, so too does our employee value proposition. Today, as we have expanded our portfolio across a number of new categories, we are attracting a different

and wider range of people and skillsets than we did before, injecting exciting new capabilities into the business.

 

LOGO                                              

 

THERE ARE 141

NATIONALITIES

REPRESENTED AT

MANAGEMENT LEVEL

WITHIN OUR GROUP

                                                             

                                              LOGO

 

LOGO

  LOGO
 
LOGO  

LOGO                                                  

 

OUR GLOBAL EMPLOYEE SURVEY RESULTS DEMONSTRATE THAT

WE OUTPERFORM

OUR FMCG

COMPARATOR GROUP

                                             

                                                  LOGO

 

LOGO

 

   

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LOGO

 

 

LOGO                                                            

 

LAST YEAR WE
RECEIVED OVER 60,000
APPLICATIONS
TO OUR
GLOBAL GRADUATE
PROGRAMME

                                                     

                                                            LOGO

 

LOGO                                                        

 

WE WERE AWARDED
‘BEST PLACE TO WORK
FOR LGBTQ EQUALITY’

BY THE HUMAN RIGHTS
CAMPAIGN FOUNDATION
IN THE US, AND HAD
SEVEN FINALISTS IN
THE GLOBAL WOMEN
IN I.T. AWARDS

                                                     

                                                            LOGO

 

LOGO     LOGO

 

LOGO

 

LOGO                                                          

 

DIVERSITY MATTERS TO THE GROUP BECAUSE IT MAKES GOOD COMMERCIAL SENSE

                                                     

LOGO

       LOGO

 

   

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BUILDING WORLD-CLASS

CAPABILITIES FOR INNOVATION

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 upcoming venturing initiative.

 

LOGO

 

   

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LOGO

 

   

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LOGO


Table of Contents
    

 

Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

FINANCE DIRECTOR’S

OVERVIEW

 

 

LOGO

  

  LOGO                                                                                                                                 

CASH GENERATION
FUELS DIVIDENDS,
DELEVERAGING
AND INVESTMENT

             LOGO
   

 

Our financial ambitions as fundamentals improve

As we build A Better Tomorrow, we will be focused on three key priorities: releasing funds to support our growth agenda, maximising our marketing spend effectiveness and generating cash to continue to deleverage the balance sheet.

Our combustible portfolio and operational efficiencies will fuel our financial performance by providing the fire-power to invest in New Categories, both inorganically, mainly through our new corporate venturing initiative, and organically, in products that meet our consumers’ changing needs.

We remain committed to consistent and sustainable long-term 3-5% revenue growth which will deliver high single figure earnings growth, on a constant currency basis, whilst targeting a minimum of 95% cash conversion and a dividend pay-out ratio of 65% of adjusted diluted EPS over the medium to long-term.

Pricing and New Categories drive revenue growth

Revenue grew by 5.7% in 2019 to £25,877 million driven by pricing across the cigarettes portfolio (with price/mix of 9%) and an increase in revenue from Traditional Oral (up 15%, with 2018 up 127%) and New Categories (up 37%, 2018 up 138%), which more than offset a 4.7% reduction in cigarette volume. In 2018, revenue grew 25.2% at £24,492 million largely due to the full year effect of the RAI acquisition. Adjusting for the impact of acquisitions, excise on bought-in goods and the impact of currency, constant currency adjusted revenue grew 5.6% in 2019 (2018: up 3.5% on a representative constant rate basis).

Increased focus on operational efficiency

Profit from operations was down 3.2% (2018: up 45.2%), as the improvement in revenue and operational efficiencies were more than offset by the charges related to Canada, Russia, other smoking and health litigation (including Engle in

the US) and Indonesia (as discussed on page 154), the impact of the restructuring programmes (including Quantum), the ongoing investment in New Categories and the impact of amortisation of acquired brands. 2018 was positively skewed by the inclusion of 12 months of results from RAI. Our operating margin declined in 2019 by 320 bps to 34.8% on a reported basis.

Adjusted profit from operations grew by 6.6% on a constant currency basis (2018: up 4.0% on a representative, constant rate basis). On an adjusted basis, operating margin increased by 50 bps to 43.1% (2018: 42.6%).

Focus on dividends

Dividends per share for 2019 will be 210.4p, an increase of 3.6% (2018: 203.0p, up 4.0%), in line with our commitment of a 65% payout ratio on adjusted diluted earnings per share (2018: 68.4%).

Net finance costs increased 16% to £1,602 million partly due to a foreign exchange headwind and interest on leases recognised under IFRS16 (Leases). 2018 was up 26.2% to £1,381 million due to higher borrowings following the acquisition of RAI. Our banking facilities require a gross interest cover of at least 4.5 times. In 2019, our gross interest cover was 7.1 times (2018: 7.2 times).

On a reported basis, basic EPS was 5.4% lower than 2018 at 249.7p largely due to the the reduction in profit from operations. EPS in 2018 declined 86% as 2017 was materially affected by a deemed gain (£23.3 billion) arising on the acquisition of RAI. 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 8.4% to 321.6p, with 2018 ahead of 2017 by 11.8%.

Cash delivery leads to deleveraging and investment

In 2019, net cash generated from operating activities fell 12.6% to £8,996 million (2018: up 93% to £10,295 million), with 2018 positively impacted by the timing of payments related to the Master Settlement Agreement (MSA) in the US.

Based upon net cash generated from operating activities, the Group’s cash conversion ratio reduced from 111% in 2018 to 100% in 2019.

Adjusted net debt to adjusted EBITDA, as defined on page 267 provides a measure to assess the Group’s ability to meet its borrowing obligations. The Group continues to focus on a balanced approach of deleveraging, while investing for the future and providing a return via dividends to shareholders. This measure will be a key performance indicator in 2020, demonstrating our commitment to the deleveraging agenda. In 2019, the adjusted net debt to adjusted EBITDA ratio improved from 4.0 times to 3.5 times.

The Group continues to deliver against the financial objectives, which allows for growth in dividends while deleveraging and investing in A Better Tomorrow.

Tadeu Marroco

Finance Director

The term ‘representative’ is used to compare the 2018 results against an equivalent 2017 if that year included results from RAI for the whole of that period, including certain additional adjusting items related to the acquired companies.

 

 

   

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  Overview

 

    

 

OUR YEAR

IN NUMBERS

 

LOGO

 

Notes: To supplement our results of operations presented in accordance with IFRS, the information presented also includes several non-GAAP measures used by management to monitor the Group’s performance. See the section non-GAAP measures beginning on page 258 for information on these non-GAAP measures, including their definitions and reconciliations from the most directly comparable IFRS measure, where applicable. Certain of our measures are presented based on constant rates of exchange, on an adjusted basis, and on a representative basis and on an organic basis.

 

The information presented also includes several non-financial key performance indicators (“KPIs”) used by management to monitor the Group’s performance. The Group’s Management Board believes that these KPIs provide information that enables investors to better understand the Group’s performance across periods. See the section “Non-Financial KPIs” on page 257 for more information on these non-financial KPIs.

 

1. Where measures are presented ‘at constant rates’, 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 51 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.

 

    

 

   

 

   

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LOGO

 

3. Where measures are presented as ‘organic’ or ‘org’, they are presented before the impact of the contribution of brands and businesses acquired during the comparator period, including Reynolds American, Bulgartabac, Winnington and Fabrika Duhana Sarajevo in 2017. There were no material acquisitions or disposals in 2018 or 2019.

 

4. Where measures are presented as ‘representative’, ‘rep’ or ‘on a representative basis’, they are presented inclusive of the acquired businesses in the 2017 comparator period as though those businesses had been included in the consolidated results for the whole of that comparator period and including certain additional adjusting items related to the acquired companies.

                                                                                    

 

   

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  Strategic Management

 

    

 

GLOBAL INDUSTRY

OVERVIEW*

While the total tobacco and nicotine market comprises a growing

user pool of over one billion individual adult consumers, global trends

are shifting and our industry is experiencing a period of ongoing change.

Generational differences, as well as shifting attitudes towards health and

wellness, are expected to increase the growth of new categories of products

including and beyond tobacco and nicotine, which are able to provide

stimulation and pleasure for consumers in ways previously associated with

cigarettes. This is expected to play a role in off-setting the predicted steady

decline in cigarette consumption.

 

 

Global combustible market

While combustible cigarettes remain the largest global tobacco category, their volumes have seen a gradual fall over many years driven by increased regulation and changing societal attitudes. Total tobacco consumption, including illicit, declined 2% from 2018 to 2019; this decline rate is forecasted to remain between 2%-3% over the next three years, while the retail value of tobacco sales is expected to increase by between 2%-4% each year, driven principally by pricing.

The most recent estimates for the legal global tobacco market (2018) indicate that sales are worth approximately US$814 billion. More than US$700 billion of this comes from the sale of conventional cigarettes, with over 5,300 billion cigarettes consumed per year by over 19% of the world’s population.

A contributing factor to the decline of legal tobacco volumes is the continued rise in the consumption of illicit products. Cigarettes are a reliable source of tax revenue for governments worldwide, and price differentials between markets, regulatory changes and broader macroeconomic pressures have driven the establishment of a significant and growing illicit cigarette trade, now estimated to account for 11.2% of the global tobacco market.

It is generally accepted that there is a direct correlation between steep and ad hoc increases in taxes and an increase in illicit sales, with the current sanctions in many countries doing little to deter criminals for whom profits from the illegal sale of tobacco remain an appealing prospect. For example, following successive excise increases, the Australasia region has seen legal volumes decline substantially. However, in markets such as South Africa, where effective action has reduced the prevalence of illegal tobacco, legal volumes have been restored.

 

LOGO   See pages 58 to 62 to read more about our Principal Group risks

 

LOGO   For further discussion regarding the regulation of our business, please see pages 287 to 290

 

*

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

Global combustible regulation

Tobacco is one of the world’s most regulated and most taxed industries, contributing in excess of $200 billion to government treasuries each year. Manufacturers are required to comply with a swath of regulations that vary considerably across markets.

Legislation and subsequent regulation has been focused mainly on the introduction of plain packaging, product-specific regulation, 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.

In more recent years, governments have begun considering and adopting regulations aimed at menthol flavourings, as well as environmental concerns resulting from the litter associated with cigarette consumption.

 

LOGO        

THE RETAIL VALUE OF TOBACCO SALES IS EXPECTED TO INCREASE BY BETWEEN 2% AND 4% EACH YEAR

 

    LOGO

Global New Categories market

The last five years have seen the global tobacco and nicotine market diversify beyond traditional combustible tobacco with the growth of vapour and tobacco heating products (THPs), and modern oral tobacco.

The success of these new categories is the result of their ability to offer consumer satisfaction in circumstances where the consumption of combustible tobacco is no longer permitted or socially acceptable, as well as to offer potentially reduced risk compared to traditional cigarettes. With new adult generations increasingly focused on health and lifestyle considerations, technological innovation, and personalised consumer experiences, it is expected that the growth of new categories will continue to accelerate as they can better meet consumer preferences and demands.

New category nicotine products have grown quickly across the world, with an estimated 54 million vapour consumers and 15 million THP consumers.

The latest global figures (2018) suggest that global vapour sales are worth $15.7 billion, while global THP revenues stand at $11.9 billion.

While traditional oral products show steady incremental growth, new modern oral products (which comprise tobacco-free nicotine pouches) are showing accelerated volume expansion in both Europe and the US.

There has also been growth in the market for wellbeing and ‘new active’ products. This growth is expected to continue as consumer tastes fragment and evolve.

Within this space, cannabidiol (CBD) oil is expected to gain wider use, as already evidenced by its recent growth in market size.

 

 

   

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New Categories regulation

The THP and vapour markets are relatively nascent. Regulation is in its early stages in many countries and, while many governments are considering regulation specific to this category, it has often not been enacted. Globally, there is a mix of attitudes between regulators who aim to encourage THPs and vapour as products that are potentially lower risk for smokers and those who view them with greater scepticism – including some countries where they are banned.

Although many jurisdictions have yet to implement clear regulations concerning new category products, an increasing number of governments are passing laws that allow and encourage the growth of these categories, while also balancing concerns regarding increased youth usage.

The UK is an example of what can happen with the support of regulators and public health bodies. Driven by influential reports from Public Health England and the Royal College of Physicians on the reduced risk potential of vapour products, the UK Government has implemented a balanced regulatory regime that discourages youth uptake while also encouraging adult smokers to migrate to potentially less harmful products.

 

LOGO        

IT IS EXPECTED THAT THE GROWTH OF NEW CATEGORIES WILL CONTINUE TO ACCELERATE AS THEY CAN BETTER MEET CONSUMER PREFERENCES AND DEMANDS

 

    LOGO

Litigation

Legal and regulatory court proceedings continue in a number of forms 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        

THE LAST FIVE YEARS HAVE SEEN THE GLOBAL TOBACCO AND NICOTINE MARKET DIVERSIFY BEYOND TRADITIONAL COMBUSTIBLE TOBACCO WITH THE GROWTH OF VAPOUR AND TOBACCO HEATING PRODUCTS, AS WELL AS MODERN ORAL TOBACCO

 

    LOGO
LOGO        

THE TOBACCO INDUSTRY CONTRIBUTES IN EXCESS OF US$200 BILLION IN TAXES TO GOVERNMENT TREASURIES EACH YEAR

 

    LOGO
 

 

   

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OUR BUSINESS MODEL

Our global business understands our diverse consumers, develops products to satisfy their preferences, and ultimately distributes them across over 200 markets. Five 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.

 

LOGO

 

   

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LOGO

 

   

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OUR GLOBAL

BUSINESS

BAT is a leading, multi-category consumer goods business dedicated to stimulating the senses of adult consumers worldwide.

Our Strategic Portfolio comprises our key brands in both the combustible and new categories. This drives focus and investment on the brands and categories that will underpin the Group’s future growth.

We also have a portfolio of international and local brands which, while not the focus of our investment, contribute valuable returns across several key markets.*

 

LOGO

 

*

These combustible brands include Vogue, Viceroy, 555, Benson and Hedges, Peter Stuyvesant, Double Happiness, Kool, and Craven A, while oral brands include Granit, Mocca, and Kodiak.

 

 

   

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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.

BAT’s 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 regions, and

covers over 150 million consumers and 11 million retail

points of sale, with a balanced presence in both high-growth

emerging markets and highly profitable developed markets.

 

 

United States

of America

     

 

Americas and

Sub-Saharan

Africa

 

     

 

Europe and

North Africa

     

 

Asia-Pacific

and Middle East

  

 

LOGO

 

 

LOGO  

for more key detail on our Regional performance,

see pages 52 to 57

    

Map is representative of general geographic regions and

does not suggest that the Group operates in each country

of every region.

 

 

   

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ENGAGING WITH

OUR STAKEHOLDERS

 

    

LOGO

      

 

 

LOGO

     CIVIC PARTICIPATION IS A FUNDAMENTAL ASPECT OF
RESPONSIBLE BUSINESS AND POLICY MAKING, AND BRITISH
AMERICAN TOBACCO EMPLOYEES WILL PARTICIPATE IN THE
POLICY PROCESS IN A TRANSPARENT AND OPEN MANNER,
IN COMPLIANCE WITH ALL LAWS AND REGULATIONS
OF THE MARKETS IN WHICH IT OPERATES
      

 

Jerry Abelman Director, Legal & External Affairs and General Counsel

 

LOGO

 

LOGO

 

*

These engagement examples took place in 2019 and the strategic impact of engagement is measured against the strategic pillars in place for 2019.

 

Reporting for FY2020 will measure against our evolved strategy discussed on pages 8 to 9.

 

   

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LOGO

      

 

 

OUR 2019 ‘YOUR VOICE’ GLOBAL EMPLOYEE
OPINION SURVEY RESULTS SHOW WE CONTINUE
TO OUTPERFORM
 OUR GLOBAL FMCG COMPARATOR
GROUPS IN ALL CATEGORIES, INCLUDING
THE SUSTAINABLE ENGAGEMENT AND HIGH
PERFORMANCE INDICES

 

 
 

    

     

LOGO

 

 

LOGO

 

   

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DELIVERING

OUR STRATEGY*

 

LOGO  

SUSTAINABILITY

 

 
 

 

Our Sustainability Agenda is at the heart of our strategic plans to build a long-term sustainable business.

 

Within it, our clear commitment to providing our consumers with a range of potentially less risky products addresses the principal health impacts of our business.

 

We also know that our long-term sustainability will be driven by ensuring best-in-class delivery against all our other environmental, social and governance (ESG) measures.

 

In 2019, we refreshed our Sustainability Agenda to reflect the prominence of the health risks of smoking as our principal focus and to place greater emphasis on the importance of addressing climate change and environmental management.

 

Our priority areas are:

 

    
      

 

A commitment to reducing the health impact of our business

 

 

 
   
 

 

Excellence in environmental management

 

 
   
 

 

Delivering a positive societal impact

 

 

 
   
 

 

Robust corporate governance

 

 
 

 

Highlights during the year

 
 

–  growth of our New Categories revenues by 37% to £1.3 billion.

 

 
 

–  a 9.5% reduction of our direct Scope 1 and 2 carbon dioxide equivalent (CO2 e) emissions from our 2017 baseline.

 

 
 

–  revised Group Standards of Business Conduct to strengthen controls around human rights and incorporate a new Lobbying and Engagement Policy.

 

 
 

–  new independent research published into the impacts of tobacco growing and the role it plays in rural livelihoods.

 

 

 
  LOGO  

Read more about our sustainability performance

in each area at www.bat.com/sustainabilityreport

 

 

 

  Emissions**    2019      2018      2017  

Scope 1 CO2 e emissions (‘000 tonnes)

     396        415        427  

Scope 2 CO2 e emissions (‘000 tonnes)

     386        426        438  

Scope 3*** CO2 e emissions (‘000 tonnes)

     n/a            7,547            8,254  

Total statutory emissions (Scope 1 and 2 in ‘000 tonnes)

     782        841        864  

Intensity (tonnes per £ million of revenue)

     30.4        32.6        34.7  

All data is calculated on the basis of the Greenhouse Gas (GHG) Protocol Corporate Standard.

 

**

Scope 1 reporting includes: energy consumed at our factories and offices (coal, natural gas, wood, diesel and LPG), emissions from our dry ice expanded tobacco plants, and fuel consumed by our fleet vehicles.

 

Scope 2 reporting includes: electricity purchased and consumed at our factories and offices, purchased steam and hot water.

 

Scope 3 reporting includes: all 15 categories of the GHG Protocol.

 

***

Consolidation and verification of our 2019 Scope 3 data is ongoing to fully align with the GHG Protocol. 2019 data will be reported in the 2020 Annual Report and Form 20-F.

 

*

This year’s Annual Report and Accounts measures all backward-looking reporting against the strategy, which includes the four strategic pillars and KPIs, that was in place until March 2020. Next year’s Annual Report and Accounts will measure our delivery against our evolved strategy, which is detailed on pages 8 to 9.

 

New Sustainability Targets

 

We are committed to making a step-change in our sustainability ambition. As a result, we have announced a number of stretching targets that we are confident will deliver A Better Tomorrow for all our stakeholders.

 

These include:

 

–  increasing our number of non-combustible product consumers from 11 million to 50 million by 2030;

 

–  achieving carbon neutrality by 2030*; and

 

–  bringing forward our existing 2030 environmental targets to 2025.

 

*  Based on Scope 1 and 2 carbon dioxide equivalent (CO2e) emissions.

 

 

 

CO2e emissions

(in ’000 tonnes)

782

9.5% lower than 2017 baseline

 

LOGO

Definition: Group Scope 1 and Scope 2 carbon dioxide equivalent (CO2e) emissions.

Target: To reduce our Scope 1 and Scope 2 CO2e emissions by 30% by 2025 compared to our 2017 baseline.

 

 

Water use

(total water withdrawn in mn metres3)

4.51

13.1% lower than 2017 baseline

 

LOGO

Definition: Group water use in million cubic metres.

Target: To reduce water use to 3.38 mn metres3 by 2025, 35% lower than our 2017 baseline.

 

 

Recycling

(percentage of waste recycled)

90.5%

 

LOGO

Definition: Total percentage of Group waste re-used or recycled against total waste generated.

Target: To recycle 95% or more by 2025 in each year.

 

 

   

28

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Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

 

 

A commitment to reducing the

health impact of our business

As harm reduction is our most material ESG issue, we have long been committed to reducing the public health impact of smoking.

Satisfying consumer moments

Smokers are more likely to switch to new products if they can find satisfying alternatives that offer sensorial enjoyment and recapture consumer moments long-associated with tobacco that have been lost to shifting trends. We have a deep understanding of our consumers and we use these insights to develop an exciting product portfolio across a range of categories, including Vapour, Tobacco Heating Products (THPs) and Modern Oral products.

World-class science

The reduced-risk potential of new category products needs to be supported by sound science. We conduct cutting-edge research to evaluate our new category products and apply the highest standards for product safety and quality. Globally, we have over 1,500 scientists focused on researching and developing new category products and we openly share our science on bat-science.com. To date, we have published 59 peer-reviewed research papers on our new category products and the results indicate they have the potential to be significantly less risky than cigarettes. We are continuing to establish more evidence to support this.

Standards and regulation

New category products can only meet their potential if they are widely available with the right regulatory and market conditions in place, alongside high standards and responsible practices across the industry.

To support the success of our new product categories, we advocate for regulation that enables market availability, applies the highest product quality and safety standards, allows communication of the potential benefits and risks, and ensures affordability for consumers by taxing them appropriately, while preventing youth appeal and access.

Other ESG focus areas

In addition to our commitment to address the health impacts of smoking, we also continue to focus on a wide range of other important ESG issues.

 

LOGO   Read more about our ESG reporting on page 10

Excellence in environmental

management

We are committed to reducing our environmental impact across our operations and supply chain. Our Environment Policy is supported by a comprehensive Environmental, Health and Safety (EHS) management system which has been in place for many years and is based on international standards including ISO14001.

Addressing the impacts of climate change

Climate change is one of the most important global issues facing the world today.

We recognise that addressing the impacts of climate change is not only the right thing to do, but also makes sound business sense given how much we depend on natural resources for our products.

In 2019, our targets for reducing our C02e emissions by 2030 were given formal approval by the Science-Based Targets initiative (SBTi) and we have now brought forward our Scope 1 and 2 targets to 2025. Building on this, we are now setting ourselves an even more ambitious target: to be carbon neutral by 2030.

We are also committed to align our reporting with the Taskforce on Climate-related Financial Disclosures (TCFD) framework by 2022. We are also proud to have been named on the Carbon Disclosure Project’s prestigious 2019 ‘A List’ for our leading approach to climate change.

We have achieved a 7.0% year-on-year reduction in our Scope 1 and 2 carbon emissions in 2019. In total, these equalled 782,394 tonnes, 9.5% lower than 2017, our baseline year. Drivers include a 6.5% reduction in direct energy consumption and an increase in renewable energy use which now stands at 10.8%, an 1.6% increase over 2018.

Supporting our continued drive to reduce our emissions, we have developed a new Climate Change and Energy Standard which requires our subsidiaries to include renewables in their energy purchase agreements and we are also identifying opportunities to increase on-site energy generation and purchase more renewable energy certificates.

Meeting our ambitious climate targets will require collective effort across the Group and, given our Scope 3 emissions represent around 90% of our total carbon footprint, addressing impacts in our supply chain is also crucial. We are engaging with our largest suppliers to raise awareness of carbon reduction in our supply chain and we continue to make progress in the tobacco leaf supply chain, where more efficient curing technologies, smarter use of fertilisers and increases in yields are all contributing to reduced emissions.

In 2018, our Scope 3 emissions decreased by 3.3% compared to our 2017 baseline, driven by a reduction in purchase volume, changes to emissions factors and decreases in fertiliser and fossil fuel use for tobacco leaf curing.

Water and waste

As well as a priority focus on carbon and energy, our approach to environmental management also addresses a wide range of issues, including water use and waste management.

We have been steadily decreasing our water use and increasing water recycling for several years and 2019 saw a 5.3% year-on-year reduction in total water withdrawn.

Additionally, our increased focus on environmental management has resulted in us bringing forward our existing 2030 target for water and waste to 2025.

We are committed to recycling at least 95% of our total waste generated, which is more challenging in locations with limited recycling and waste management facilities. Nevertheless, 28% of our manufacturing sites have already achieved zero waste to landfill and another 24% are recycling at least 95% of their waste.

Sustainable agriculture

We have a long and proud history of working directly with farmers around the world to advance agriculture. We provide farmers with best practice environmental information and introduce them to new sustainable farming practices. For example, we have been successful in introducing drip irrigation technology to farmers in Brazil and Mexico, which has been shown to increase water usage efficiency by up to 90%, as well as reducing soil erosion and salination, and ultimately boosting yields.

We have an ongoing commitment to eliminate the use of unsustainable sources of wood by our contracted farmers for curing fuels. Monitoring of the last three years of our contracted farmers’ wood use for curing has shown 99% was from sustainable sources.

We also support community-based afforestation programmes in a number of countries. For example, our afforestation programmes in Bangladesh and Pakistan date back to the early 1980s and have planted over 185 million tree saplings combined. Both are recognised to be among the largest private sector-driven programmes in these countries.

 

 

   

BAT Annual Report and Form 20-F 2019

  29


Table of Contents

 

  Strategic Management

 

    

 

DELIVERING OUR STRATEGY

CONTINUED

 

Circular economy

Globally, there is growing concern around the use and disposal of plastics and other materials and increased pressure on businesses to address post-consumption waste. Adopting circular economy principles will deliver better products for our consumers, create efficiencies in our operations and reduce our overall impacts.

This is a new focus area for us and, in 2019, we established a cross functional project team, led by our Management Board, to develop a Group-wide circular economy strategy and oversee its implementation across all product categories. Initially, this is focusing on the recovery of post-consumption waste, reducing plastic waste in packaging and exploring opportunities to improve the recyclability of our products. Already, we have established new electronic device return and recycling schemes in France, Japan, Korea and Mexico.

 

Delivering a positive

societal impact

Reducing the harm associated with smoking and the opportunity to have a positive impact on public health is the most material issue for our business, but as one of the world’s most international businesses, we also have a larger role to play in delivering a positive societal impact.

 

Human Rights

Our integrated human rights strategy is aligned to the UN Guiding Principles and includes policies, due diligence, grievance channels and remediation procedures for our own business operations and supply chain, as well as working to understand and address the root causes. Our Human Rights policy forms part of our Group Standards of Business Conduct and is reflected in our Supplier Code of Conduct.

The most significant challenges for human rights are in our tobacco leaf supply chain and this has been a priority area for us for many years. The industry-wide Sustainable Tobacco Programme focuses on leaf supplier due diligence and compliance with international standards, and our own Thrive programme is focused at farm-level and seeks to identify and address the root causes and long-term challenges around human rights, including rural poverty.

To further enhance our understanding and ability to address human right issues in the tobacco supply chain, in 2019 we commissioned human rights impact assessments in tobacco growing areas in Indonesia and India, with two more planned for 2020 in Mozambique and Mexico. We will report on the results in a Human Rights Focus Report, to be published later in 2020.

 

All our other products materials and goods and services suppliers are subject to annual human rights risk assessments. Further independent audits are conducted on the highest risk by Intertek, our audit partner. In 2019, a total of 94 supplier audits in 31 countries were conducted, including 65 audits of tier 1 materials suppliers, 20 audits of tier 2 materials suppliers and nine audits of indirect goods and services suppliers.

The vast majority of issues identified in these audits were categorised by Intertek as ‘moderate’, relating to hours and wages, poor record keeping, and health and safety procedures. Eleven suppliers had issues identified that were categorised as ‘major’ by Intertek. These related to preventing worker interviews, excessive working hours, wages below the legal minimum, fire and emergency preparedness, lack of required permits or licences, poor record keeping and, in one case, retention of workers’ original documents.

By the end of the year, 71% of corrective actions had been fully completed and verified by Intertek, in desktop reviews for the moderate issues and 11 on-site follow-up audits for the major issues. All outstanding actions are in progress and being closely monitored.

 

LOGO   Further details of our approach to human rights and our Modern Slavery Act statement are available at bat.com/msa
 

 

 

 Sustainability: Our policies*    Summary of areas covered     Key stakeholder groups
Standards of Business Conduct (SoBC)    Speak Up, conflicts of interest, anti-bribery and anti-corruption, gifts and entertainment, respect in the work place, human rights, lobbying and engagement, political and charitable contributions, corporate assets and financial integrity, competition and anti-trust, anti-money laundering and tax evasion, anti-illicit trade, data privacy and information security.  

 

LOGO

 

 

Our People

 

 

LOGO

 

 

Governments and Wider Society

Environmental Policy    Our commitments to following high standards of environmental protection, adhering to the principles of sustainable development and protecting biodiversity covering our direct operations and supply chain, including agricultural, manufacturing and distribution operations.  

 

LOGO

 

 

 

Our People

 

 

LOGO   

 

 

Suppliers

 

 

LOGO

 

 

Consumers

  LOGO  

 

Governments

and Wider

Society

 

 

LOGO  

  Customers  
     
           
Health and Safety Policy    Our commitments to applying the highest standards of health and safety.  

LOGO

 

 

 

Our People

   
           
Supplier Code of Conduct   

Standards required of our suppliers worldwide, including business integrity, anti-bribery and anti-corruption, environmental sustainability, anti-illicit trade and respect for human rights (covering equal opportunities and fair treatment, health and safety, prevention of harassment and bullying, child labour and modern slavery, conflict minerals and freedom of association).

 

 

 

LOGO

 

 

Our People

 

 

LOGO   

 

 

Suppliers

 

 

LOGO  

  Customers   LOGO  

 

Governments

and Wider

Society

     
     
           

Strategic Framework

for Corporate

Social Investment(CSI)

   Sets out our Group CSI strategy and how we expect our local operating companies to develop, deliver and monitor community investment programmes within two themes: Sustainable Agriculture and Rural Communities; and Empowerment.   LOGO  

 

Governments

and Wider

Society

   
     
     
       
           
International Marketing   

The standards that govern marketing across all our product categories

and including the requirement for all our marketing to be targeted at adult

consumers only.

 

  LOGO  

 

Consumers

  LOGO     

 

Suppliers

Principles  

 

 

LOGO  

 

 

Customers

  LOGO  

 

Our People

       

 

These policies and procedures are endorsed by our Board, apply to all Group companies and support the effective identification, management and mitigation of risks and issues for our business in these and other areas.

 

 

*

Further details of our Group policies and principles can be found at www.bat.com/principles

 

Further details of our Strategic Framework for Corporate Social Investment can be found at bat.com/csi

 

   

30

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Governance

 

  

Financial Statements

 

  

Other Information

 

 

 

 

 

With the majority of our employees working in business areas where we have direct oversight and control, human rights challenges in our own operations are substantially avoided.

The challenges that do exist are mitigated by our robust policies and procedures in place across all Group companies. However, we recognise that we need to continually work to ensure these are effectively applied and that we carefully monitor the situation, particularly in countries assessed as higher risk, such as where regulation or enforcement regimes are limited, or there are higher levels of corruption, criminality or unrest. Our due diligence includes conducting an annual review of compliance with applicable Group policies and additional measures in place for operations in higher risk countries.

Farmer livelihoods

Rural poverty is recognised as a root cause for wider issues in agriculture, such as child labour, poor safety standards and urban migration. If we can support tobacco farmers to have prosperous livelihoods, we can help address these issues while also securing our tobacco leaf supply chain. We support our 90,000+ directly-contracted farmers through our Extension Services of expert field technicians. We develop new tobacco seed varieties that offer greater yields and higher quality and so help boost farmers’ profits, as well as introducing them to more efficient farming technologies that save farmers time and money. Our Extension Services also provide training and advice and help our farmers to grow other crops to enhance food security and generate additional sources of income. For instance, in 2019 our leaf operations and strategic third-party suppliers reported that 92% of their contracted farmers grew other crops, including fruit, vegetables, wheat, maize, cotton and soy.

To further increase our understanding of the role tobacco plays in rural livelihoods, we commissioned IMC Worldwide, one of the world’s leading international development consultancies, to conduct independent research in Bangladesh, Brazil and Kenya to identify if tobacco growing reduces resilience and prevents farmers and rural communities from prospering. Overall, IMC found no evidence of this: IMC concluded that tobacco growing plays an important and positive role in the livelihoods of tobacco farmers and labourers interviewed, while no evidence supporting a causal link between tobacco cultivation and poverty was found.

 

LOGO   Read more about the IMC Report at bat.com/farmers/research

 

LOGO   Read more about our Group risk factors related to tobacco leaf supply on page 275

Culture and workplace health and safety

The health and safety of our employees and creating a great place to work are also key components of our Sustainability Agenda. We focus on building an inclusive and supportive culture that attracts, engages and retains diverse and talented people, develops the next generation of leaders, and creates a fulfilling, rewarding and responsible work environment.

We also have a comprehensive workplace health and safety approach based on risk management and assessment, employee training and awareness, and tailored initiatives for specific issues and higher-risk areas. You can read more about our culture on pages 40 to 42 and page 70. More information on our approach to workplace health and safety is set out on page 42.

Community investment and social initiatives

As an international business, we play an important role in countries around the world and have built close ties with local communities. We encourage our employees to play an active role both in their local and business communities. Our charitable contributions policy in our SoBC is supported by the Group Strategic Framework for CSI, which sets out our Group CSI strategy and how we expect our local operating companies to develop, deliver and monitor community investment programmes within two themes: Sustainable Agriculture and Rural Communities, and Empowerment.

Our Group Head of Sustainability has oversight of the Group CSI strategy, and Board-level governance is managed through our Audit Committee, which reviews the strategy and an analysis of activities (including investment and alignment to the Group’s priorities) annually.

Our performance indicator in this area relates to the total amount of money contributed to charitable giving and CSI projects. In 2019, the Group contributed over £13 million in cash for charitable contributions and CSI projects, including £1.1 million given for charitable purposes in the UK. Much of this contribution is delivered through partnerships with external stakeholders including communities, NGOs, governments, development agencies, academic institutions, industry associations and peer companies.

 

Corporate governance

Robust corporate governance is key to our sustainable long-term growth. We are committed to achieving our business objectives in an honest, transparent and accountable way, and sustaining a culture of integrity in everything we do.

Our actions and behaviours impact all areas of our business, which is why corporate governance is such an important focus for us.

Our commitment to responsible corporate behaviour is underpinned by our SoBC which mandate high standards of integrity and require every Group company, joint venture which the Group controls and all staff worldwide, including senior management and the Board, to act with a high degree of business integrity, comply with applicable laws and regulations and ensure our standards are not compromised for the sake of results. We expect our contractors, secondees, trainees, agents and consultants to act in a way consistent with our SoBC and to apply similar standards within their own organisations.

Our SoBC comprise our global policies referenced on page 30 and are available in 12 languages. SoBC awareness and understanding is promoted through regular training and communications. Our SoBC are fully aligned with the provisions of applicable laws including the UK Bribery Act, the US Foreign Corrupt Practices Act and the UK Criminal Finances Act.

Corrupt practices are illegal, cause distortion in markets and harm economic, social and political development, particularly in developing countries. Our SoBC make it clear that it is wholly unacceptable for Group companies, our employees or our business partners to be involved or implicated in any way in corrupt practices. We keep our SoBC under regular review to maintain best practice and to take employee and stakeholder feedback into account. Our Board approved a revised version of the SoBC in 2019, which came into effect on 1 January 2020, supported by a global awareness campaign across the Group.

Delivery with integrity

Our Delivery with Integrity programme is focused on driving a globally consistent approach to compliance across the Group. This programme is led by our Business Conduct & Compliance Department reporting directly to the Director, Legal & External Affairs and General Counsel. This programme provides employees with ways to raise concerns without fear of retaliation and assurance that investigations will be fair and thorough. It drives a consistent approach to the mitigation of key compliance risk areas such as bribery and corruption, money laundering, tax evasion, competition law, sanctions, and data protection through tools and guidance for Group company employees and business units.

 

LOGO   Read more about our Group risk factors related to corporate behaviour and compliance with sanctions regimes and competition laws on pages 279 and 281
 

 

   

BAT Annual Report and Form 20-F 2019

  31


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  Strategic Management

 

    

 

DELIVERING OUR STRATEGY

CONTINUED

 

We monitor regulatory developments to ensure the continued evolution of our Delivery with Integrity programme.

Mitigating third-party risk is a key component of our compliance programme. We do this through a Third-Party Anti-Bribery and Corruption Procedure (the ABAC Procedure) which assists business units in identifying and mitigating bribery and corruption risks. The ABAC Procedure mandates a consistent methodology for due diligence of third parties, complemented by mandatory mitigation packages for third parties assessed as medium and high risk. In 2019, this due diligence procedure was applied retrospectively to over 4,500 existing third parties engaged by Group companies. In addition, given the challenges associated with intermediaries engaged to interface with public officials on the Group’s behalf, detailed due diligence and mitigation measures were completed for 903 service providers with external input and oversight. In 2019 we also launched an ABAC risk assessment tool to assist our markets to identify, assess and evaluate bribery and corruption risks.

In 2019, over 25,000 Group company employees completed our annual SoBC sign-off and e-learning through the online SoBC portal. Other Group company employees (over 30,000) who do not have easy online access completed the SoBC sign-off in face-to-face sessions which included training. In 2019, our SoBC e-learning through the online portal resulted in 10,800 training hours and it included scenarios covering product diversion, money laundering and bribery and corruption risks. To further increase awareness and accessibility, in 2019 we launched a new SoBC app, which provides easy access to our SoBC, Speak Up channels, procedures and guidance.

Information on compliance with our SoBC is gathered at a regional and global level and reported to the Regional Audit and CSR Committees, Corporate Audit Committee and to the Audit Committee.

Speak Up channels

We encourage anyone working for, or with, any Group company to raise concerns, including regarding accounting or auditing matters, through our Speak Up channels, which are independently managed and available 24 hours a day online, by text or telephone. The channels can be used in confidence, and anonymously where preferred, and are available in multiple local languages. Speak Up channels contact information is promoted through staff training and communications and through our SoBC app and Supplier Code of Conduct. Our Speak Up policy makes it clear no one will suffer any direct or indirect reprisal for speaking up about actual or suspected wrongdoing, even if they are mistaken.

Our Speak Up policy is supplemented by local procedures throughout the Group, providing staff with further guidance on reporting matters and raising concerns, and the channels through which they can do so. We do not tolerate the harassment or victimisation of anyone raising concerns or anyone who assists them. Such conduct is itself a breach of our SoBC and a serious disciplinary matter. In 2019, our global ‘Your Voice’ employee survey, completed by 90% of Group company employees, found that 79% strongly agreed they “can report concerns about actual or suspected wrongdoing at work without fear of reprisal”, 8% higher than the FMCG comparator norm.

Not all contacts made via our SoBC Portal involve SoBC allegations; some contacts relate to questions regarding the SoBC or other matters. There were 497 SoBC contacts in 2019, representing a 40% increase on the total number of SoBC contacts in 2018 (355 contacts).

In the year ended 31 December 2019, 359 of the 497 SoBC contacts were assessed as SoBC allegations and reported to the Audit Committee, representing a 35% increase on 2018 SoBC allegations (266). Of the 359 SoBC allegations reported, 130 were established as breaches and appropriate action taken (2018: 126). In 179 cases, an investigation found no wrongdoing (2018: 140). In 50 cases, the investigation continued at year-end (2018: 69), including investigation through external legal advisers of allegations of misconduct. Disciplinary action taken as a result of the 130 established SoBC breaches resulted in 80 dismissals (2018: 92). In 184 of the 359 SoBC allegations (51%), the person raising the allegation chose to remain anonymous.

Please refer to the Governance Report for more information about Board and Audit Committee oversight and monitoring of compliance with our SoBC. Our SoBC, and information on the total number of incidents reported under it, are available at bat.com/sobc.

Responsible marketing

Our International Marketing Principles (IMP) govern marketing across all our product categories and require all our marketing to be responsible, accurate and not misleading, targeted at adult consumers, transparent and compliant with all applicable laws.

Our IMP are applied consistently everywhere we operate, even when more stringent than applicable local laws. Through our long-standing IMP, responsible marketing is well embedded in the culture of our organisation and inherent to the way we operate. We continually evolve our IMP to reflect developments in marketing, our product portfolio, technology, changing regulations and stakeholder expectations, and the Board approved a revised version of the IMP in 2019.

To support our strict requirement to only direct marketing at adult consumers, all Group companies are required to adhere to our global Youth Access Prevention (YAP) Guidelines. These apply to all markets where our products are sold, including where distributed through third parties and include a mandatory requirement to provide retailers with point-of-sale materials with YAP messaging (unless prohibited by local laws). In 2019, 100% of Group companies to which our YAP Guidelines apply reported compliance.

Regulatory engagement

Truly effective regulation needs cooperation between governments and industry, and we have a legitimate role to play in policy-related debate that affects our business. We also respect the World Health Organization’s FCTC 5.3 provision, which calls for transparent and accountable interaction between governments and the tobacco industry.

By conducting all our engagement with politicians, policy makers and regulators transparently and with high regard for accuracy and integrity, we can make a valuable contribution to policy development and help enable the best information to be used as a foundation for decisions in policy making.

Our Principles for Engagement have long provided clear guidance for our external engagement with regulators, politicians and other third parties. In 2019, these were incorporated into a new Lobbying and Engagement Policy in our SoBC. The revised SoBC took effect from January 2020 and all lobbying and engagement activities across the Group are now subject to our SoBC compliance procedures.

 

 

   

32

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Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

 

Our sustainability efforts and commitment to high

standards have received notable independent

recognition over the years, including the following.

 

 

LOGO       LOGO       LOGO      

LOGO

 

       

CDP Climate A List

 

These recognise our actions to cut emissions, mitigate climate risks and develop the low-carbon economy, as well as engaging with our suppliers to manage climate risk and reduce Scope 3 carbon emissions in our supply chain.

     

Dow Jones

Sustainability Indices

BAT is 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 DJSI for 18 consecutive years.

     

Global Top Employer

 

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

     

SEAL Awards

 

BAT has been awarded with the SEAL Organizational Impact Award, which recognises overall corporate sustainability performance and represents the 50 most sustainable companies globally.

                 
LOGO       LOGO       LOGO      

LOGO

 

       

Top 5 FTSE ranking for our Modern Slavery Statement

     

Diversity leader in the Financial Times Diversity Leaders report

     

Leader status in the Global Child Forum’s benchmark study

     

International Women’s Day Best Practice Winner

       

The Business and Human Rights Resource Centre and Development International ranked BAT as being among the top five highest scoring companies in the FTSE for the detailed disclosure and action reflected in our Modern Slavery Statement.

     

BAT was ranked in the top 10% of the total of 8,000 organisations covered by this inaugural report. It was compiled from extensive research, with 80,000 people surveyed across 10 European countries.

     

In the Global Child Forum’s 2019 benchmarking study of children’s rights across the work place and supply chain, we were awarded ‘leader’ status with a score of 9.2 out of 10, compared to ‘industry’ and ‘all companies’ averages of just 5.6.

     

Our global campaigns for International Women’s Day have been recognised for two consecutive years as examples of best practice and featured as case studies by the International Women’s Day Association.

 

   

BAT Annual Report and Form 20-F 2019

  33


Table of Contents

 

  Strategic Management

 

    

 

DELIVERING OUR STRATEGY

CONTINUED

 

 

 

 

   LOGO

  GROWTH  
 

 

Our multi-category portfolio of brands continued to deliver strong growth in 2019, driven by our Strategic Portfolio.

 

Growth remains a key focus of our evolved strategy, and will be delivered by our inspirational foresights, remarkable innovation and powerful brands.

    
 

 

Highlights during the year:

 
 

–  group revenue grew by 6%, driven by price mix and growth in New Categories;

 

 
 

–  New Categories revenue grew 37%; and

 

 
 

–  Strategic Portfolio revenue grew 9%, driven by robust cigarette pricing and growth from New Categories and Traditional Oral.

 

 

 

 

 

 

LOGO

 

   

34

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Governance

 

  

Financial Statements

 

  

Other Information

 

 

 

 

 

Volume by product category

 

     Units    2019
units
       vs 2018
%
       2018
units
     vs 2017 (rep)
%
         2017 (rep)
units
 

Cigarette

   Sticks (bn)      668          -5%          701        -4%        732  

Other (incl RYO/MYO)

   Sticks (bn)      21          -7%          22        -8%        24  

Combustibles

   Sticks (bn)      689          -5%          723        -4%        756  

New categories:

                     

Vapour

   10ml units/pods (mn)      226          +19%          189        +35%        140  

THP

   Sticks (bn)      9          +32%          7        +217%        2  

Modern oral

   Pouches (mn)      1,194          +188%          414        +108%        199  

Traditional oral

   Stick equivalent (bn)      8          -1%          8        -0.4%        9  

Revenue by product category

 

     2019
£m
     vs 2018
%
    

Adjusting
items

£m

     Impact of
exchange
£m
    

2019
adjusted at
constant
rates

£m

     vs 2018
(adjusted)
%
     2018
£m
           vs 2017
%
    vs 2017
adjusted
repres at
constant rates
%
 

Combustibles

     23,001        +4%        (50      (59      22,892        +5%        22,072        +22%       +2%  

New Categories:

                         

Vapour

     401        +26%               (9      392        +23%        318        +89%       +26%  

THP

     728        +29%               (35      693        +23%        565        +180%       +184%  

Modern oral

     126        +267%               3        129        +273%        34        +127%       +140%  

Total New Categories

     1,255        +37%               (41      1,214        +32%        917        +140%       +98%  

Traditional oral

     1,081        +15%               (45      1,036        +10%        941        +127%       +8%  

Other

     540        -4%               1        541        -4%        562        -5%       -10%  

Revenue

     25,877        +6%        (50      (144      25,683        +6%        24,492        +25%       +4%  

 

Combustibles

Group cigarette volume declined 4.7% in 2019 to 668 billion sticks (2018: up 2.6% to 701 billion, or a 4.1% decrease on a representative basis). In 2019, 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.

2018 volume was positively impacted by the full year effect of the RAI acquisition. The decline in 2018, on a representative basis, was despite growth in a number of markets, including Pakistan (as the market recovered following the revision to excise), Turkey, Poland, Romania and Egypt. This growth was more than offset by lower volume in Saudi Arabia (due to down-trading and market contraction following the 2017 excise-led price increase), the US (partly due to the impact of fuel price rises on disposable income, the change in excise in California and the growth of vapour), Brazil (primarily due to down-trading to illicit trade) and Russia (largely due to both market contraction and inventory movements in the supply chain).

Group cigarette value share increased 20 bps, with volume share up 20 bps in 2019, maintaining the momentum of 8 successive years of growth, and building on the 40 bps increase in 2018.

Cigarette volume share in 2019 was higher in Japan (driven by Lucky Strike and Kool), Pakistan (as Pall Mall outperformed the declining market), Bangladesh (as the Group’s portfolio outperformed the declining market), Mexico (driven by Pall Mall), Ukraine (driven by Kent and Rothmans) and Russia (driven by Rothmans which outperformed the declining market).

Volume of the strategic cigarette brands collectively declined 3.0% (2018: up 16.7%, or an increase of 4.8% on a representative basis). Volume share of the strategic cigarette portfolio grew 70 bps in 2019, benefiting from migrations in Brazil and Colombia. Excluding migrations, the increase in strategic cigarette volume share was 30 bps (2018: up 40 bps) with growth in all regions:

 

  Dunhill’s overall volume share was stable (2018: stable) as growth in Bulgaria, Netherlands and Romania was offset by down-trading in Malaysia, South Africa, South Korea and Saudi Arabia. Volume was 5.5% lower (2018: down 6.1%) as growth in Bulgaria and Netherlands was more than offset by the effect of the down-trading noted above and industry contraction in Indonesia, Malaysia and South Korea;

 

  Kent’s volume share grew 10 bps, (2018: up 40 bps) with volume down 1.3% (2018: down 2.2%), as growth in the Middle East, Turkey, Uzbekistan, Romania and Peru was more than offset by lower volume in Russia, due to the one-off stock reduction;
  Lucky Strike’s volume share was in line with 2018 (2018: up 20 bps), as growth in Colombia, Japan, Spain, Bulgaria and Argentina was offset by Chile, Belgium and Indonesia. Volume was 3.5% down (2018: 1.0% down) as growth in Japan was more than offset by the impact of industry contraction in Indonesia;

 

  Rothmans’ volume share continued to grow, increasing 50 bps (2018: up 110 bps) with volume 2.5% higher (2018: up 19.7%), driven by Pakistan, Colombia, Bulgaria and the full year effect of migrations in Brazil and Poland, which more than offset lower volume in Russia and Ukraine which were impacted by competitive pricing and higher illicit trade;

 

  Pall Mall volume share was up 10 bps, as higher share in Pakistan, Australia, Chile, South Africa and Mexico was offset by reductions in the US and Turkey. Volume declined 6.7% as growth in Kenya, South Africa, Australia and Romania was more than offset by lower volume in Egypt (largely due to the change in local taxes), Pakistan (following the excise-led price increases), Venezuela (partly due to market contraction driven by the macroeconomic climate) and in the US (partly due to the competitive pricing in the low-price segment).
 

 

   

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CONTINUED

 

In 2018, Pall Mall volume increased 20.4% due to the full year impact of the US acquisition, with volume up 9.9% on a representative basis partly due to the strong volume and market share growth in the Middle East following a period of down-trading arising from the excise-led price increases in 2017.

The Group’s US strategic combustible portfolio performed well in a market that was estimated to be down 5.3% in volume:

 

  Newport volume share increased 40 bps (2018: up 10 bps), while volume declined 3.9% (2018: down 4.6% representative);

 

  Natural American Spirit performed well with volume share, including premium volume share, up 10 bps (2018: up 20 bps). Volume was up 0.5% against 2018, (2018: 3.5% increase on a representative basis); and

 

  Camel’s volume share declined 10 bps in the US (2018: flat) with volume lower by 6.0% (2018: down 4.4% representative), as the capsule and menthol variants performed well but were more than offset by a decline in the remainder of the Camel portfolio.

Volume of other tobacco products (OTP) declined 7.1% to 20.6 billion sticks equivalent (2018: 6.6% decline, or 7.5% on a representative basis), being 3% of the Group portfolio (2018: 3%).

Revenue from combustibles grew 4.2% to £23,001 million driven by higher pricing across the Group notably in the US (including a reduction in discounting), Canada, Kenya, Mexico, Nigeria, Saudi Arabia, Japan, Pakistan, Australia, New Zealand, Germany, France, Turkey and Ukraine. An improved performance in high value markets such as Japan, South Africa, Romania and Australia which, combined with reduced volumes in lower value markets such as Pakistan and Egypt, led to an enhanced geographic mix. These were offset by an unfavourable portfolio mix due to the relative growth of lower value products such as Rothmans and Pall Mall.

In 2018, revenue from combustibles increased by 21.5% to £22,072 million largely due to the full year inclusion of RAI and pricing in a number of markets, which more than offset a translational foreign exchange headwind of 6%.

 

After adjusting for the short-term impact of excise on bought-in goods and the translational foreign exchange tailwind of 0.6%, adjusted revenue from combustibles at constant rates of exchange was up 4.6% to £22,892 million. In 2018, this was an increase of 30% or 1.8% on an adjusted, representative constant currency basis.

2019 is the last year where the Group will adjust for the excise on bought-in goods as short-term contract manufacturing agreements in ENA, to which such adjustments relate, have either ended in 2019 or will be immaterial in 2020.

Tobacco heating products

The Group’s THP portfolio continued to grow, with consumable volume up 32% to 9.0 billion sticks (2018: up 217% to 6.8 billion sticks) while revenue increased 28.9% to £728 million (2018: up 180% to £565 million). Excluding the impact of the relative movements in sterling, at constant rates of exchange, this was an increase of 22.7% in 2019 and 184% in 2018.

 

  In Japan, the Group’s volume share grew to 5.0% in December 2019, an increase of 60 bps on 2018, while the Group’s THP category volume share reached 19.6%. Consumable volume grew 21% against 2018 driven by the launch of new device upgrades, ‘glo pro’, ‘glo nano’ and ‘glo sens’ together with a new range of consumables which achieved national distribution by the end of 2019. After an encouraging launch of ‘glo sens’, the Group will be reviewing the in-market execution, broadening device penetration and driving increased consumer uptake in 2020. The Group’s integrated, cross category approach to marketing has seen the Group’s volume share of total nicotine increase to 18.9% in December 2019 (up 210 bps from December 2018).

 

  In other markets, the Group continued to grow volume and glo is above 1% volume share in key cities in Eastern Europe, including Moscow. The Group’s THP products are now available in 17 markets with further expansion planned for 2020.

Vapour

By December 2019, the Group’s vapour products were present in a total of 27 markets as the Group continued to expand its geographic footprint during 2019, with the Group the leading vapour company in the key European markets.

The Group’s vapour portfolio continues to perform strongly despite a slowdown in the category growth rate in the US and in a number of other markets in the second half of 2019, partly impacted by the US regulatory environment. The Group welcomes the US FDA’s recent actions to clarify regulations in the US vapour market.

Total volume of vapour consumables was up 19% to 226 million units in 2019, driving vapour revenue up 26.1% to £401 million. In 2018, revenue was £318 million (up 89%) with volume 100% higher to 189 million units partly due to the full year impact of RAI. Excluding the movement of foreign exchange and adjusting for the impact of RAI (on 2018’s growth rate), this was an increase, at constant rates of exchange, of 23% in 2019 and 26% in 2018 (on a representative basis).

In the US, total revenue from vapour was £207 million, an increase of 12% on 2018, (2018: up 149% at £184 million). On a constant currency basis, this was an increase of 7% in 2019, with the US up 20% in 2018 after adjusting for currency and on a representative basis. Alto increased vapour value share to 15.4% in December 2019, driving total Vuse vapour value share higher to 21.2% in December 2019 (December 2018: 12.5%), despite a 6.2% decline in consumable volume.

On 2 January 2020, the US FDA announced that all flavoured cartridges/pods (excluding menthol and tobacco flavours) must be withdrawn until they have cleared through the Premarket Tobacco Application (PMTA) process. A Group subsidiary in the US has submitted a PMTA for Vuse Solo and the Group believes it is well positioned to submit applications for the remaining Vuse portfolio and a range of flavours by 12 May 2020. It is expected that, as required by the PMTA process to remain on the market, all these will be shown to be appropriate for the protection of public health. There is no intention to submit a PMTA for the Vapewild portfolio and consequently the Group has recognised an impairment charge in respect of the trademarks of £37 million.

 

 

   

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Vype continued to perform strongly, largely driven by the success of ePen3 and ePod.

In the UK, the Group maintained value leadership of the category with 38% vapour value share driven by Vype which performed well, with vapour value share increasing 290 bps to 12% (December 2019), due to the success of ePen3 (launched in 2018) with 10% vapour value share in December 2019.

In France, vapour value share reached 23% (December 2019), an increase of 1,210 bps (versus December 2018), driven by ePen3 and ePod, which was launched during the year.

In Germany, Vype continues to grow with an increase in Vype’s total share of vapour consumers to 17%.

In South Africa, Twisp, a leading vaping products company, was acquired in 2019. Twisp has close to 70 dedicated stores nationally, nationwide retailer distribution and a modern e-commerce platform.

In Canada, following a period of value share decline as competitors reacted to the legalisation of the market, Vype returned to growth and is the fastest growing vapour brand in Canada in the second half of the year, with value share in December 2019 of 28.2% (34.7% December 2018).

Following the announcement on 28 November 2019 regarding the intention to simplify the New Categories product portfolio, the Group expects to migrate certain vapour brands (including Vype, Chic, Highendsmoke and ViP) to Vuse during 2020, where possible, and has recognised an impairment charge of £29 million, as discussed on page 153.

Modern Oral

The Group is the leader in Modern Oral (on a pouch basis), with volume of 1.2 billion pouches in 2019. This was an increase of 188% on 2018, when volume was 0.4 billion pouches, itself an increase of 108% on 2017. Revenue increased 267% to £126 million (2018: up 127% to £34 million). Excluding the impact of foreign exchange, this was an increase of 273% in 2019 and 140% in 2018, on a representative, constant rates basis. This was driven by:

 

  The expansion, in 2019, in the US of Velo to over 100,000 retail outlets, achieving a category volume share of 10.1% in December 2019;

 

  Norway, where volume share (of the total oral category) grew, in 2019, to 14%, building on the growth in 2018 to 8%;

 

  Switzerland, where volume share of the total oral category reached 41% in 2019, having reached 17% in 2018;

 

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

 

  Russia where, following the launch in 2019, the Group achieved 27% volume share (December 2019) within the total oral category, in tracked channels. In December 2019, following concerns in Russia regarding irresponsible marketing by our competitors, all sales of modern oral have been temporarily suspended. There is no indication of a concern regarding the Group’s products or practices and we expect a regulatory framework will be implemented in 2020.

In line with the simplification agenda, the Group expects to migrate the majority of its modern oral portfolio to Velo during 2020.

Traditional Oral

In 2019, volume was marginally lower than the prior year (down 0.6% to 8.4 bn stick equivalents), with 2018 0.4% lower than 2017. Total revenue grew by 15% to £1,081 million (2018: up 127% to £941 million), driven by pricing in 2019, with the movement in 2018 due to the acquisition of RAI. On a constant rates basis, this was an increase in 2019 of 10% and 8% in 2018 (driven by pricing), after also adjusting for the RAI acquisition uplift effect in that year.

In the US, moist value share grew 80 bps in 2019, largely due to the performance of Grizzly with total volume share of moist up 10 bps. Total volume declined 1.5%. In 2018, volume in the US declined 2.3% on a representative basis.

The Modified Risk Tobacco Products (MRTP) application for Camel Snus was discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) in September 2018. A response is expected soon.

Outside the US, volume was higher in Sweden in 2019 with volume share increasing 50 bps to 10.9% of the total oral category, driven by growth in Lundgrens.

 

 

   

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LOGO

   PRODUCTIVITY   

 

We have continued our drive towards a more effective and efficient globally-integrated organisation, in large part through the consolidation of our Global Supply Chain Service Centre. This global integration allows for the lowest possible overheads cost, and has resulted in a more agile and responsive supply chain.

 

This increased flexibility and agility will play an important role in delivering our new strategy, which we look forward to reporting on next year.

 

Highlights during the year

 

–  another year of substantial productivity savings and RAI acquisition savings delivered ahead of schedule;

 

–  consolidation of our Global Supply Chain Service Centre; and

 

–  challenges of Track and Trace and plain packaging regulations successfully overcome.

 

 

 

Agile global operations model

The 2018 completion of our Global Supply Chain Service Centre resulted in the synchronisation of our end-to-end supply network, with Leaf supply chain, procurement, manufacturing, planning, logistics, and the introduction of new products all consolidated. In 2019, we built on these strong existing capabilities to leverage cross-functional synergies.

Our fast-paced geographic expansion of our New Categories business has necessitated a prioritisation of flexibility and agility. As a result, we have developed a more responsive supply chain, which involved developing different supply chain models to meet the different demand models that arise in our increasingly multicategory business.

This has improved response to markets, which has supported NTO growth in New Categories.

In 2019, supply chain flexibility and agility were also proven in response to both plain packaging regulation in Canada, as well as Tobacco Products Directive (TPD) regulations in the EU. In response to TPD regulations that mandated the traceability of all products and packs from manufacture to retail outlet, our supply chain was successfully adapted to ensure full compliance across 14 factories, 6,400 external warehouses, and 900,000 retailers. Similar successful flexibility was demonstrated by significant changes to ensure compliance while protecting revenue following strict new packaging regulations in Canada.

 

 

 

     LOGO

  LOGO       

                    

 
 

 

OUR FAST-PACED GEOGRAPHIC
EXPANSION OF OUR NEW
CATEGORIES BUSINESS HAS
NECESSITATED A PRIORITISATION
OF FLEXIBILITY AND AGILITY

 

 
   

 

Alan Davy

   LOGO  
  Director, Operations

 

 

LOGO

Definition: Profit for the year before the impact of net finance costs/income, share of post-tax results of associates and joint ventures and taxation on ordinary activities.

 

LOGO

Definition: Change in profit from operations before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

 

 

 

    

 

LOGO

Definition: Movement in net cash and cash equivalents before the impact of net cash used in financing activities, net cash used in investing activities and differences on exchange.

 

 

   

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LOGO

 

Definition: Profit from operations as a percentage of revenue.

 

LOGO

 

Definition: Adjusted profit from operations as a percentage of adjusted revenue.

Continued optimisation of manufacturing and leaf footprint

In 2019, we continued to optimise our manufacturing footprint and at the end of the year had 45 cigarette factories in 43 countries. The Group also has facilities that are manufacturing New Categories products and are co-located with the cigarette factories. In ENA, the Group also has two facilities manufacturing Modern Oral and one facility producing vapour liquids.

Cigarette factories were closed in Saratov, Russia and Phonm Penh, Cambodia.

While the Group does not own tobacco farms or directly employ farmers, it sources over 400,000 tonnes of tobacco leaf each year directly from over 90,000 contracted farmers and through third-party suppliers mainly in developing countries and emerging markets.

We continually strive to improve farmer sustainability and viability with a focus on improved quality, reduced costs of production and increased yield. As a result, we review our contracts on an annual basis to ensure that production is aligned to the needs of both the farmer and the Group.

The Group also purchases a small amount of tobacco leaf from India where the tobacco is bought over an auction floor. The price of tobacco in US dollars varies from year-to-year driven by domestic inflationary pressures, supply, demand and quality. The Group believes there is an adequate supply of tobacco leaf in the world markets to satisfy its current and anticipated production requirements.

Increasing productivity savings

By operating globally, exploiting our systems and striving for results, the Group delivered substantial productivity savings in 2019, supported in large part by the acquisition of Reynolds American Inc. with annualised savings of over US$400 million delivered by the end of 2019, a year ahead of schedule.

These savings are returned to the business for re-investment and to increase shareholder return. The Group considers all opportunities for productivity savings in the supply chain, including procurement, international logistics and leaf operations:

Procurement

Global visibility of forward demand and product specifications in one system has delivered significant benefits with the tender at a global level of print materials and tow being notable examples. In addition to the benefits of lower product cost, the development of long-term supplier relationships with key suppliers has improved security of supply and enabled higher flexibility in the supply chain.

International logistics

Whether by road, air or sea, our logistics are organised and controlled centrally. This facilitates opportunities to negotiate globally with third-party providers and allows us to benefit from our scale. Furthermore, this maximises the use of return shipments and economic order quantities to allow for maximum efficiency while maintaining the flexibility for fast response to market opportunities.

Leaf operations

These are similarly managed globally to ensure that the Group works with reliable, efficient and responsible farmers in our source countries. Our Global Leaf Pool operation aggregates demand to meet supply across all internationally traded tobacco. This approach balances the lowest possible working capital investment while reducing our exposure to crop failure (from changes in climate) and guaranteeing the best quality leaf to meet consumer demands.

In 2019, we continued to improve our productivity in all areas of our supply chain and elsewhere in the Group. As a result, we have increased our profitability and continue to deliver returns to our shareholders today and invest in the future.

 

 

 

   

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LOGO     WINNING ORGANISATION  

 

We enable growth by having a winning and agile organisation. We inspire diverse teams of committed and engaged people by:

– investing in our people;

– attracting the best;

– developing high-performing leaders; and

– offering a fulfilling, rewarding and responsible work environment.

 

Highlights during the year

 

–   accelerated talent development and attraction in growth markets and growth categories including tobacco heating products, vapour and modern oral;

 

–   celebrated our first year anniversary of B United, a network for our LGBT+ employees;

 

–   top Employer recognition in Europe, Africa, and Asia-Pacific; and

 

–   recognised as a Diversity Leader in 2019 by the UK Financial Times in its inaugural Diversity Leaders report, highlighting progress in promoting diversity across our organisation.

 

 

Investing in leaders

As our industry continues to transform, the way we attract and develop talent continues to evolve to meet these new challenges. Our increasingly data-led and digitally-enabled approach focuses on bringing new skills and capabilities to our teams.

We continue to reshape our employer brand to attract and retain capabilities needed to deliver our strategy, supported by our strong social media position that grew followership by over 20% in 2019. Our employee value proposition remains strong and the Group was awarded Global Top Employer recognition for the third consecutive year with special recognition in 35 countries, as well as the National Undergraduate Employability Award in the UK.

Developing critical capabilities is at the highest of the Group’s priorities and we are focused on personalised digital opportunities for upskilling employees.

 

LOGO  

You can read about our Group risk factor related to talent on page 274

To support our people, in 2019 we launched a new Digital Learning platform called The Grid, which consolidates our internal and external learning content together in one place for ease of access. Additionally, we launched the micro-learning mobile app Ed, which is available to all our Group company employees in marketing and provides mobile access to our New Category products learning portfolio. As a result, more than 6,700 marketeers and trade marketing representatives regularly use the app to support their daily sales visits to retail outlets and wholesalers.

Growth through diversity

Diversity matters to the Group because it makes good commercial sense. Having a diverse workforce means we are better able to understand and meet the varied preferences of our global consumers. We are proud of our Diversity and Inclusion Strategy, which is built on the three pillars of:

1. driving ownership and accountability;

2. building diverse talent pools; and

3. creating enablers;

all of which are underpinned by an inclusive culture.

1. Driving ownership and accountability

Ensuring ownership of and accountability for our Diversity and Inclusion Strategy across the Group is key to driving progress. Our regions, markets and business units have specific diversity action plans and initiatives in place to support diversity across the Group and to develop a pipeline of diverse talent at all levels of our organisation.

Our Director, Talent and Culture, has overall responsibility for all employee and human resources matters, while our Management Board oversees the development and management of talent within the Group’s regions and functions, and monitors progress against our key objectives and performance indicators. Our Board reviews progress on our Diversity and Inclusion Strategy and initiatives and diversity reporting forms a key part of all Functional and Regional Leadership Team meetings, with quarterly reviews.

 
 

 

Group diversity as at

31 December 2019

 

 

 
         Total      Male      Female      
 

Main Board

     11        8        3    
 

Senior management

     576        443        133    
 

Total Group employees

     53,185        38,402        14,783    
 

 

LOGO

 

Nationalities represented

 

 

 

 

 
         Total      
 

Main Board

     8    
 

Global headquarters

     83    
 

Management level globally

     141    

    

      

 

 

Senior managers:

Companies Act 2006

 

For the purposes of disclosure under Section 414C(8) of the Companies Act 2006, the Group had 190 male and 30 female senior managers as at 31 December 2019. Senior managers are defined here as the members of the Management Board (excluding the Executive Directors) and the Directors of the Group’s principal subsidiary undertakings. The principal subsidiary undertakings, as set out in the Financial Statements, represented approximately 70% of the Group’s employees and contributed over 76% of Group revenue and 78% of profit from operations in 2019.

 

 

 

   

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2. Building diverse talent pools

We are a diverse employer. There are 141 nationalities represented at management level within our Group, and we are pleased with the continuous progress we are making and the sustainable pipeline we are building in terms of nationality diversity.

We are also continuing to work hard to improve gender diversity within the Group. Women represent 27% of our Board and 15% of our Management Board, and comprised 24% of our senior recruits and 23% of our internal promotions in 2019. We support women’s development into senior roles through a variety of initiatives, including our Women in Leadership programme and participation in the 30% Club mentoring programme. We have female executives on all our senior functional and geographical leadership teams, and 49% of our 2019 graduate intake were women, supporting the development of a sustainable pipeline of women for senior management roles.

 

LOGO

  Read about our Global Graduate Programme at www.bat-careers.com/graduates

3. Creating enablers

To realise our diversity ambitions, we know we must develop enablers to provide a supportive environment for people to thrive. One of the ways we do this is by maintaining networks to share experiences. We currently support 13 women’s networks across all levels of our organisation, including Women in BAT UK network. We also partnered with the International Women’s Day Association for the second year on the #BalanceforBetter campaign.

‘B United’ celebrated its first anniversary in 2019. ‘B United’ is a Group network that provides our LGBT+ employees with a safe forum to share experiences, mentoring opportunities and help with overcoming hurdles, such as those relating to adoption or travelling abroad with same sex partners.

 

Employee engagement index

82%

FMCG comparator group 75%

 

 

Definition: Results from our ‘Your Voice’ employee opinion survey, carried out in 2019, enabled us to calculate our employee engagement index – a measure that reflects employees’ level of commitment, energy and connection towards the organisation.

Objective: To achieve a more positive score than the norm for FMCG companies in our comparator benchmark group.

 

 

 

 

Our other key metrics in this area include:

 

 

– Employee retention: In 2019, total voluntary turnover of management- grade employees was 1,085, representing 8.1% of the total management population.

 

 

– Diversity: Representation of women in senior management roles increased from 16% in 2016, and 21% in 2017, to 23% in 2019.

 

Inclusive culture

We can only truly harness the benefits of a diverse workforce if we have an inclusive culture that enables all our employees to flourish regardless of their gender, ethnicity, culture or other differences.

We were proud to be recognised as a Diversity Leader by the Financial Times in its inaugural Diversity Leaders report. The report, which lists the top 700 companies across 10 European countries, recognises organisations that have achieved a diverse and inclusive workforce across a number of criteria.

Workforce engagement

The Group has a range of well-established engagement channels worldwide covering the Group’s global workforce. We define the Group’s workforce as comprising all Group company employees and individuals contracted on a fixed term basis to undertake permanent roles.

Our workforce engagement channels include market and site visits by our Directors and Management Board members to meet local employees, town hall sessions, works councils, European Employee Council meetings, our ‘Your Voice’ global employee survey, global, functional and regional webcasts and webcasts with the Chief Executive. These engagement channels are implemented as appropriate for the composition of local workforce populations, at market, business unit, functional or regional levels. Our Speak Up channels are also available to our workforce worldwide and are discussed further on page 32.

The Board has taken account of the requirements of the UK Corporate Governance Code in its approach to engagement with the Group’s workforce. Given the spread, scale and diversity of the Group’s workforce, the Board considers it effective to use the established channels referred to above, and has augmented these from January 2019 by introducing Group-wide reporting structures to capture feedback from engagement channels at market, business unit, functional and regional levels.

To ensure the Board understands the views of our workforce, the Board now reviews consolidated feedback from these engagement channels annually. Feedback from the Board, with associated action planning, is cascaded back across our workforce and the Board is kept updated on progress against identified actions during the year. This approach supplements the Directors’ direct engagement, including through market and site visits, discussed further at page 72.

 

 

 

  Our policies and principles*

 

  

 

Summary of areas covered

 

  

 

Key stakeholder groups

 

 

Employment Principles

  

 

Employment practices, including commitments to diversity, reasonable working hours, family-friendly policies, employee wellbeing, talent, performance and equal opportunities, and fair, clear and competitive remuneration and benefits.

  

 

LOGO  Our People

 

 

Health and Safety Policy

  

 

Health, safety and welfare of all employees, other members of our workforce and third-party personnel.

  

 

LOGO  Our People

 

LOGO  Suppliers

 

 

LOGO  Customers        

 

Standards of Business

Conduct (SoBC)

  

 

 

Respect in the work place, including promoting equality and diversity, preventing harassment and bullying, and safeguarding employee wellbeing.

  

 

 

LOGO  Our People

 

   

 

Group Data Privacy Policy

  

 

 

The manner in which BAT processes personal data about all individuals, including consumers, employees, contractors and employees of suppliers.

 

  

 

 

LOGO  Our People

 

LOGO  Consumers

 

 

LOGO  Suppliers

 

LOGO  Customers

These policies and procedures are endorsed by our Board, apply to all Group companies and support the effective identification, management and mitigation of risks and issues for our business in these and other areas.

 

 

*

Further details of our Group policies and principles can be found at www.bat.com/principles

 

   

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Our global ‘Your Voice‘ employee survey is conducted across the Group every two years, most recently in 2019. The results from 2019 demonstrate that we continue to outperform our global FMCG comparator group in all areas surveyed, including our employee engagement index at 7% higher than our FMCG comparator group and our high performance index at 13% above our FMCG comparator group. Our Group results are also significantly ahead of our FMCG comparator group in the categories of corporate responsibility, diversity & inclusion and talent development.

Our Employment Principles

Our Employment Principles set out a common approach for our Group companies’ policies and procedures, recognising that each Group company must take account of local labour law and practice, and the local political, economic and cultural context.

In developing our Employment Principles, we have sought the views of a cross-section of internal and external stakeholders, and have consulted with employee representatives and (where relevant) with our works councils. All Group companies have adopted our Employment Principles and, through our internal audit processes, are required to demonstrate how these are embedded into the work place.

In addition to our Employment Principles, our Board Diversity Policy specifically applies to our Board and Management Board and is discussed further at pages 81 to 82.

Equal opportunities for all

We are committed to providing equal opportunities to all employees. We do not discriminate when making decisions on hiring, promotion or retirement on the grounds of race, colour, gender, age, social class, religion, smoking habits, sexual orientation, politics or disability. We are committed to providing training and development for employees with disabilities.

Rewarding people

Reward is a key pillar in ensuring that we have the right people to drive the business forward. Reward is necessarily local and we strongly support this through global frameworks to ensure leading edge policies, processes and technology are available to all markets.

Base pay rewards core competence relative to skills, experience and contribution to the Group, while annual bonuses, long-term incentives, recognition schemes and ad hoc incentives provide the right mix to ensure that sustained high performance is recognised and rewarded. We also offer our UK employees the chance to share in our success via our Sharesave Scheme, Partnership Share Scheme and Share Reward Scheme, and operate several similar schemes for senior management in our Group companies.

Our approach to rewarding Group company employees is set out further on pages 95 to 96. Further information on the Company’s Remuneration Policy for Directors can be found on pages 93 to 113.

Gender pay

Since 2018, we have published data relating to UK gender pay in accordance with statutory requirements.

 

LOGO   You can learn more about our published data relating to UK gender pay in line with statutory requirements at www.bat.com/genderpayreport

Safe place to work

Operating in challenging

environments

Providing a safe working environment for all our employees and contractors is paramount. As a global business, operating in diverse markets including some of the world’s most volatile regions, this can also be challenging.

Safety risks vary across our business. For example, our manufacturing sites carry lower risks, while the vast majority of all Group accidents are in Trade Marketing & Distribution (TM&D), which involves the distribution and sale of our products. We have close to 30,000 vehicles and motorcycles out on the road every day, often in environments with difficult social or economic conditions. Our goods have a high street value, and in a small number of markets this carries high risk of armed robbery and assault. Poor road infrastructure and wide variations in driving standards and behaviour provide further challenges.

Although these challenges will always exist, our goal is zero accidents across the Group. To help achieve this, we have a comprehensive approach based on risk management and assessments, employee training and awareness, and tailored initiatives for specific issues.

Since 2017, we have implemented a range of additional initiatives, such as ensuring drivers carry less stock, together with extra security measures for route planning and vehicle tracking. We use in-vehicle ‘telematics’ monitoring systems to analyse driver behaviour data, and use the insights to tailor our training programmes and improve driving skills and hazard perception.

In markets where we have introduced distribution by motorcycle, we provide training programmes to reduce risk. These provide practical techniques for different road conditions and types of traffic, safe speeds and distances, and how to spot a potential problem and take action to deal with it safely.

We are pleased to report that our actions are producing improvements. While vehicle-related incidents remained flat in 2019, we saw an 18% reduction in injuries reported across TM&D, driven by a 40% decrease in the number of assaults on our people.

Relatedly, the number of fatalities fell significantly from 12 in 2018 to one across the Group in 2019. This was primarily a result of our concerted effort to address the rise in attacks on our field-force. However, we recognise that changing local conditions, such as increased levels of violence and civil unrest, continue in certain markets and that this requires continuous assessments to ensure the learnings from other markets are rapidly deployed to mitigate any rising trends in potential threats to our people.

We are making every effort to further address these challenges in 2020, notably through sharing best-practice examples across our regions.

 

LOGO   You can read about our Principal Group risk relating to workplace health & safety on page 62

Health and Safety Policy

Our Health and Safety Policy recognises the importance of the health, safety and welfare of all our employees and third-party personnel in the conduct of our business operations. We are committed to the prevention of injury and ill-health, and strive for continual improvement in health and safety management and performance. This policy is supported by our Environmental, Health and Safety (EHS) management system, outlined on page 29.

Overall responsibility for Group health and safety is held by the Director, Operations. The Director, Group Talent and Culture, has overall responsibility for all employee and human resources matters.

 

 

 

Our key metrics* in this area include:

 

 
 

–  Lost Workday Case Incident Rate (LWCIR): There was a decrease in our LWCIR from 0.29 in 2018 to 0.27 in 2019.

 

 
 

–  Lost workday cases (LWC): The number of work-related accidents (including assaults) resulting in injury to employees and to contractors under our direct supervision, causing absence of one shift or more, decreased from 213 in 2018 to 186 in 2019.

 

 
 

–  Serious injuries and fatalities: The total number of serious injuries and fatalities to employees and contractors decreased from 54 in 2018 to 38 in 2019.

 

 

 

 

*

2018 LWC data has been restated to include Health and Safety data from our recent acquisitions.

 

 

   

42

  BAT Annual Report and Form 20-F 2019


Table of Contents
                 
                 
                 

 

 Financial Review

 

      

Strategic Report

 

  

Governance

 

  

Financial Statements

 

  

Other Information

 

 

FINANCIAL PERFORMANCE

SUMMARY

 

LOGO  

 

  

 

STRONG OPERATIONAL PERFORMANCE DRIVES DELEVERAGING

 

Tadeu Marroco

Finance Director

 

  LOGO        

 

Highlights

 

–  Group revenue was up 5.7% with profit from operations 3.2% lower than 2018;

 

–  At constant rates of exchange, adjusted revenue grew 5.6% with adjusted profit from operations up 6.6%;

 

–  Diluted earnings per share decreased 5.4%. Adjusted diluted earnings per share was up 9.1%, or 8.4% at constant rates;

 

–  Dividend per share was up 3.6% at 210.4p;

 

–  Net cash generated from operating activities declined 12.6%; and

 

–  Cash conversion at 100%.

 

     LOGO  

 

Non-GAAP measures

In the reporting of financial information, the Group uses certain measures that are not defined by IFRS, the Generally Accepted Accounting Principles (GAAP) under which the Group reports. The Group believes that these additional measures, which are used internally, are useful to users of the financial information in helping them understand the underlying business performance.

The principal non-GAAP measures which the Group uses are adjusted revenue, adjusted revenue from New Categories, adjusted revenue from the Strategic Portfolio, adjusted profit from operations and adjusted diluted earnings per share. Adjusting items are significant items in revenue, profit from operations, net finance costs, taxation and the Group’s share of the post-tax results of associates and joint ventures which individually or, if of a similar type, in aggregate, are relevant to an understanding of the Group’s underlying financial performance. As an additional measure to indicate the results of the Group before the impact of exchange rates on the Group’s results, the movement in adjusted revenue, adjusted revenue from the Strategic Portfolio, adjusted profit from operations and adjusted diluted earnings per share are shown at constant rates of exchange. The Group also includes, where appropriate, measures termed ‘representative’ or ‘organic’ to provide the user with the Group’s performance without the potentially distorting effects of acquisitions, particularly RAI. These non-GAAP measures are explained on pages 258 to 268.

Revenue

In 2019, revenue grew 5.7% to £25,877 million (2018: £24,492 million, up 25.2% on 2017). The higher revenue in 2019 was due to pricing across the cigarettes portfolio (with price mix of 9%) and an increase in revenue from Traditional Oral (up 15%, 2018 up 127%) and New Categories (up 37%, 2018 up 138%), which more than offset a 4.7% decline in cigarette volume (2018: increase of 2.6%). The growth in 2018 was mainly due to the inclusion of RAI as a wholly-owned subsidiary from the acquisition date as 2017 only included approximately five months of revenue from RAI. 2018 revenue was also driven by price mix of 6% (on the combustible brands) and the growth of the New Categories portfolio. Revenue was also affected by the movements of foreign exchange on our reported results which was a tailwind of 0.6% in 2019, compared to a headwind in 2018 of approximately 6%.

After adjusting for the short-term uplift to revenue due to the treatment of excise on bought-in goods and the effect of exchange on the reported result, on a constant currency basis, in 2019 adjusted revenue was up 5.6% as combustibles pricing and the growth of New Categories more than offset a decline in cigarette volume of 4.7%. Excluding the variance created to the Group’s results from the acquisition of RAI and other businesses in 2017, in 2018 adjusted revenue grew 3.5% on an adjusted, constant currency, representative basis as pricing and the growth in New Categories more than offset the decline in combustibles volume on a representative basis.

LOGO

 

Definition: Revenue recognised, net of duty, excise and other taxes.

In 2019, revenue includes £18,793 million of revenue from the Strategic Portfolio, an increase of 9% (2018: £17,257 million). Within the Strategic Portfolio, revenue from New Categories was £1,255 million (2018: £917 million).

 

 

LOGO

 

Definition: Change in revenue before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

 

Reconciliation of revenue to adjusted revenue at constant rates

 

               2019        2018     2018        2017  
       £m        Change %
(vs 2018)
       £m       Change %
(vs 2017)
       £m  

Revenue

       25,877        +5.7%          24,492       +25%          19,564  

Adjusting items

       (50)                 (180              (258

Add impact of acquisition (for representative calculation)

                                      5,577  

Adjusted revenue (2017 shown on a representative basis)

       25,827        +6.2%          24,312       -2.3%          24,883  

Impact of exchange

       (144)                 1,448                 

Adjusted revenue at constant rates

       25,683        +5.6%          25,760       +3.5%          24,883  

 

   

BAT Annual Report and Form 20-F 2019

  43


Table of Contents

 

  Financial Review

 

    

 

INCOME

STATEMENT

 

Profit from operations

Profit from operations fell by 3.2% to £9,016 million, compared to an increase of 45% to £9,313 million in 2018. This was driven by the recognition of charges related to Quebec Class Action in Canada (£436 million), the settlement of an excise dispute in Russia

(£202 million), amortisation and impairment of trademarks and similar intangibles

(£481 million), the impairment of Indonesian goodwill (£172 million), other smoking and health litigation costs of £236 million (which included Engle progeny in the US) and costs related to the restructuring programmes, which includes Quantum (£264 million). The growth in 2018 was driven by the inclusion of RAI mid-way through 2017.

Raw materials and other consumables costs declined 1.4% to £4,599 million in 2019 mainly due to the end of the contract manufacturing agreement which, due to excise recognition, led to an increase in revenue and in raw materials and other consumables costs. In 2018, this was an increase of 3.2% to £4,664 million due to the higher volume following the acquisition in 2017 of RAI as well as an increase in THP volume, and a year-on-year movement benefiting from a charge of £465 million recognised in 2017 related to the purchase price allocation adjustment to inventory which did not repeat in 2018.

Employee benefit costs increased by 7.2% to £3,221 million in 2019, which includes charges in relation to Quantum of £264 million. In 2018, this was an increase of 12.2% to £3,005 million, due to the acquisition of RAI in 2017.

Depreciation, amortisation and impairment costs increased by £474 million to £1,512 million in 2019 and by £136 million to £1,038 million in 2018. This includes the amortisation and impairment charges of £481 million (2018: £377 million) largely related to the trademarks and similar intangibles capitalised following acquisitions (including RAI, TDR, Skandinavisk Tobakskompagni A/S (ST) and VapeWild).

LOGO

Definition: Profit for the year before the impact of net finance costs/income, share of post-tax results of associates and joint ventures and taxation on ordinary activities.

Also included in 2019 are goodwill impairment charges in relation to Bentoel in Indonesia (£172 million) recognised in the year following a change in excise rates impacting forecast future performance. The increase in 2018 reflects the full year effect of RAI, with depreciation increasing in 2017 due to the higher depreciation charges following the consolidation of RAI in that year.

Other operating expenses increased by £1,183 million to £7,851 million in 2019 mainly due to the recognition of the charges in respect of Quebec Class Action in Canada (£436 million), Russia excise dispute (£202 million) and other litigation (including Engle progeny in the US) of £236 million. 2018 was up £1,986 million to £6,668 million, largely due to the consolidation of RAI, including charges in relation to the MSA.

Expenditure on research and development was £376 million in 2019 (2018: £258 million) with a focus on products that could potentially reduce the risk associated with smoking conventional cigarettes.

Adjusted profit from operations is the Group’s profit from operations before adjusting items. Adjusting items were £2,114 million in 2019 (2018: £1,034 million), including the charges related to trademark amortisation and impairment (discussed above), and restructuring and integration costs of

LOGO

Definition: Change in profit from operations before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

£565 million (2018: £363 million), of which Quantum incurred £264 million (2018: £nil). Quantum will simplify the business and create a more efficient and agile organisation to support the growth of New Categories. The charge in 2018 included costs related to the implementation of the operating model, integration costs associated with the acquisition of RAI and factory rationalisations (in Germany, Russia and APME).

In 2019, the Group also incurred a £436 million charge in respect of the Quebec Class Action in Canada, amortisation and impairment of trademarks and similar intangibles (£481 million), a charge of £202 million related to an excise dispute in Russia, impairment of goodwill in Indonesia (£172 million) and other smoking and health litigation costs of £236 million, including Engle progeny in the US.

In 2018, the Group incurred an impairment of assets in Venezuela due to the accounting revaluation (related to hyperinflationary accounting) of £110 million and £178 million charge due to Engle progeny cases in the US.

In 2019, adjusted profit from operations grew by 7.6% to £11,130 million or 6.6% to £11,032 million on a constant currency basis. This compared to an increase of 38% in 2018 which was largely driven by the full year effect of the acquisition of RAI in 2017. On a representative basis, adjusted profit from operations at constant rates increased by 4.0% in 2018.

 

 

Analysis of profit from operations, net finance costs and results from associates and joint ventures

 

                                     2019    

 

  

2018

 
     Reported
£m
    

Adjusting
item
s

£m

     Adjusted
£m
     Impact of
exchange
£m
     Adjusted
at CC
£m
         Reported
£m
    

Adjusting
items

£m

     Adjusted
£m
 

Profit from operations

                         

US

     4,410        626        5,036        (238      4,798          4,006        505        4,511  

APME

     1,753        306        2,059        43        2,102          1,858        90        1,948  

AmSSA

     1,204        638        1,842        70        1,912          1,544        194        1,738  

ENA

     1,649        544        2,193        27        2,220            1,905        245        2,150  

Total regions

     9,016        2,114        11,130        (98      11,032            9,313        1,034        10,347  

Net finance (costs)/income

     (1,602      80        (1,522      56        (1,466        (1,381      (4      (1,385

Associates and joint ventures

     498        (25      473   &nb