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 38 Adverse Judgments Appealed By Rjrt As A Result of Judgments Arising in The Period 1 January 2016 To 31 December 2018:
Note 14: of The 45 Adverse Judgments Appealed By Rjrt:
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British American Tobacco Earnings 2018-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d688893d20f.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 31 December 2018

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

 

Name of each exchange on which registered

American Depositary Shares (evidenced by American Depositary Receipts) each representing one Ordinary Share   New York Stock Exchange
Ordinary Shares, nominal value 25 pence per share   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.

2,456,415,884 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 U.S. 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:

 

U.S. 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

LOGO

Transforming
Tobacco
Annual Report and Form 20-F 2018


Table of Contents

 

 

 Contents 

 

    

 


 

 

    

   Strategic Report

 

Overview         
Transforming Tobacco      01  
Chairman’s introduction      07  
Our strategic framework for transforming tobacco      08  
Our year in numbers      10  
Strategic Management         
Chief Executive’s review      12  
Finance Director’s overview      14  
Global market overview      15  
Our global business      16  
Our business model      18  
Delivering our strategy      20  
Financial Review         
Financial performance summary      33  
Income statement      34  
Treasury and cash flow      39  
Other      42  
Regional review      43  
Business Environment         
Principal Group risks      48  
Governance   
Directors’ Report         
Chairman’s introduction      53  
Board of Directors      54  
Management Board      56  
Leadership and effectiveness      57  
Board activities in 2018      58  
Board effectiveness      60  
Audit Committee      64  
Nominations Committee      71  
Remuneration Report      73  
Financial Statements   
Group Financial Statements         
Independent auditor’s report      115  
Group companies and undertakings      236  
Other Information   
Additional disclosures      253  
Shareholder information      297  

British American Tobacco p.l.c. (No. 3407696) Annual Report 2018

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 2018. 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 additional information. Our Strategic Report, pages 1 to 52, includes our vision 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 53 to 114 contains detailed corporate governance information and our Committee reports. The Directors’ Report on pages 53 to 72 (the Governance pages) and 253 to 321 (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 252. The Other Information section commences on page 253.

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. This year, we have included a Non-GAAP measures section on pages 258 to 266 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.

BAT 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 www.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 296.

 

 

 

LOGO

 

 
www.bat.com/reporting      www.bat.com/investors      BAT IR app


Table of Contents

LOGO

Strategic Report Governance Financial Statements Other Information British American Tobacco (BAT) is one of the world’s leading consumer goods companies, with nicotine and tobacco brands sold around the globe. We employ over 55,000 people, partner with over 90,000 farmers and have factories in 48 countries, with offices in even more. Transforming Tobacco At BAT, we have been satisfying adult consumers, delivering shareholder value and creating valued employment for over a century. Today we find ourselves in one of the most dynamic periods of change our industry has ever encountered. Rapid product innovation, along with advances in societal attitudes and public health awareness, has given us the opportunity to make a substantial leap forward in our long-held ambition to positively impact the lives of millions of our consumers by providing them with lower-risk tobacco and nicotine products. We call this ambition ‘transforming tobacco’ and we are fully committed to leading the transformation of our industry and our company.


Table of Contents

LOGO

In 2012, we articulated a clear vision that places adult consumers at the centre of our strategy. Our Transforming Tobacco ambition builds on this vision as we grow our business based on offering our consumers a broad range of outstanding products, informed consumer choice, and a drive towards a reduced-risk portfolio. More choice, more innovation, less risk. Empowering consumers through choice It is widely accepted that most of the harm associated with cigarettes is caused by inhaling the smoke produced by the combustion of tobacco, and that cigarette smoking is the most dangerous way of consuming tobacco. While smokers have historically had very few alternatives to combustible cigarettes, innovation is now providing adult consumers with a greater choice of tobacco and nicotine products that are potentially less risky than cigarettes. BAT is at the forefront of the development and sale of a whole range of potentially reduced-risk products that provide much of the enjoyment of smoking without burning tobacco. Our growing portfolio of potentially reduced-risk products (which we call PRRPs) includes vapour, tobacco heating products (THPs), modern oral products, as well as traditional oral products such as Swedish-style snus and American moist snuff. Our acquisition of Reynolds American has transformed us into one of the world’s leading vapour companies and has also allowed us to significantly increase the size of our oral tobacco and nicotine products range. Never before have so many of our consumers around the world had access to so many alternatives to combustible cigarettes. We continue to develop new and ever more innovative products to add to this range of potentially less risky choices.


Table of Contents

LOGO

Strategic Report Governance Financial Statements Other Information In addition to our commitment to developing and offering a range of high-quality alternative products, we are also committed to working with governments and other stakeholders around the world to develop supportive regulatory regimes. While we cannot be certain how many smokers will switch to our alternative products, we have already seen several countries dismantle barriers to these new products, which has given millions of additional adult consumers greater choice. …supported by pro-active external engagement We recognise that our ambition to ‘transform tobacco’ relies not only on our development and commercialisation of new products, but on the support of regulators and society as well. Greater consumer choice is at the heart of our strategy, but its effects require amplification from sensible regulations that allow adult consumers access to alternative choices, as well as from public health bodies and the media to drive informed consumer decision making. By working with key stakeholders around the world, we strive to maximise the potential for reduced-risk products: safer choices for our consumers, benefits for public health, and a more sustainable and profitable business for our shareholders.


Table of Contents

LOGO

Consumer preferences are diverse and constantly evolving. Our increasingly broad range of potentially reduced-risk products allows us to meet these varied preferences and create a better tomorrow for our consumers. An unrivalled range of innovative products Today, we have industry-leading products in vapour, in tobacco heating products, in modern oral products, as well as in the traditional oral category. Notwithstanding the successes of our new categories, this is just the beginning, and innovation and technology will increasingly be at the heart of our business. Our research and development facility, comprising hundreds of scientists, is focused on the continued developme of new and innovative potentially reduced-ris products and categori In 2018, we filed 130 patents and expect that number to significantly increase in the coming years. Of course, expertise in this area is not solely within BAT and, consequently, we have a number of collaborations, partnerships and investments with third parties with a broad range of specialisms to help us drive and develop our pipeline of future products.


Table of Contents

LOGO

Strategic Report Governance Financial Statements Other Information BAT’s ongoing transformation is supported by its strong global combustibles business, and every day more than 150 million adult consumers choose BAT brands. The revenues from this business are vital to provide the investment for our PRRP business, while our global supply chain and worldwide distribution network of over 11 million retail outlets are powerful assets that drive our ambition to offer millions of adult consumers new and potentially less risky choices. …underpinned by a strong global business As we develop new and potentially reduced product categories, our conventional cigarette business remains strong and continues to grow. This enables us to invest in the development of better and more innovative products, while continuing to deliver strong results and dividends to our shareholders. As a global business operating in over 200 markets, we are using our significant presence and distribution networks to offer our full range of potentially reduced-risk product choices to as many adult consumers as possible. We are often asked why we don’t simply stop selling cigarettes. In short, immediately stopping our sales of cigarettes would be neither commercially sensible nor practical: the ongoing consumer demand for these products would either transfer straight to our competitors or, more worryingly, the black market. We are proud of all our brands and believe that all our products have a role to play in our business success and our ambition to transform tobacco.


Table of Contents

LOGO

Overview Our potentially reduced-risk product business has seen outstanding growth. Our tobacco heating, vapour, and modern oral products are now available in 29 markets and used by six million adult consumers around the world. However, this is just the beginning, and with a growing consumer base of over one billion smokers and nicotine users in the world, the opportunities presented by these new categories are huge. Another step on an exciting journey While we cannot be certain whether all smokers will switch to potentially reduced-risk products, we are committed to improving the lives of smokers by making a range of high-quality, innovative products as widely available as we practically can. We believe that by doing this, and working with regulators to establish supportive regulatory regimes, many millions of smokers will increasingly make the choice to switch. If we can all work successfully together, we can drive a scenario in which our consumers will have a range of potentially safer choices, our shareholders will own an even more sustainable and profitable business, and society could benefit from real progress in tobacco harm reduction.


Table of Contents
    

 

Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

Chairman’s introduction

 

 

LOGO   

“I am very pleased to report

another strong set of results with

market share, revenue, and profit

from operations all growing”

 

Richard Burrows

Chairman

 

Another strong set of results

Welcome to our combined Annual Report and Form 20-F for 2018. Yet again, I am very pleased to report another strong set of results with market share, revenue and profit from operations all growing.

Our 2018 results demonstrate not only that our combustible business is in good shape, but that our investment in a multi-category approach to our potentially reduced risk-product business is starting to pay off with encouraging results across all categories.

While the business is continuing to perform well, it is impossible for us to ignore investor sentiment, which has been negatively impacted by the regulatory threats in the US and competitor dynamics in the potentially reduced-risk product categories. However, we are confident that our strategy of continuing to deliver shareholder returns today while investing in the future remains the right one.

Dividends

The Board has declared a dividend of 203.0p per ordinary share, payable in four equal instalments of 50.75p 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 38 of the Financial Review and page 298 in the Shareholder information section.

A sustainable and well-governed business

As we work to transform our business, we remain equally focused on our Sustainability Agenda, which forms an integral part of our group strategy.

Given the important role that sustainability plays in securing the future of our business, we are constantly seeking new ways to further improve our practices. For example, in 2018 we updated our Supplier Code of Conduct with new human rights provisions for responsible sourcing of conflict minerals, as well as wages, benefits and working hours.

Additionally, good governance has long been a key priority for the Group, and we continue to strengthen our internal compliance programmes to ensure transparent and responsible corporate behaviour. For instance, in 2018 we enhanced our anti-bribery and corruption procedures with initiatives including a new third-party assessment procedure and a ‘Speak Up’ hotline, which empowers employees and business units to better identify and mitigate risks in key compliance areas.

Our efforts in these areas continue to be recognised externally, and I am proud to report that we were once again the only company in our industry to have been included in the Dow Jones Sustainability Indices’ prestigious World Index in 2018, while our Modern Slavery Act Statement has been ranked 3rd in the Global Governance FTSE 100 League Table.

Board composition and outlook

Our Chief Executive, Nicandro Durante, retires at the beginning of April 2019. During his eight years in the role he has grown the business substantially, delivering consistent and strong growth in both earnings and dividends. Importantly, he was the architect of the current strategy to transform the business and, with the successful establishment of BAT’s potentially reduced-risk products business and the acquisition of Reynolds American Inc., has created a stronger, truly global tobacco and nicotine company.

On behalf of the Board, I would like to thank him for his tremendous work, which has left BAT well positioned for future growth and success.

I would like to welcome Jack Bowles, our current CEO Designate, to the role of Chief Executive effective 1 April 2019. The Board was delighted to have been able to appoint such an experienced and dynamic successor from within BAT. In his most recent roles – as Director of the Asia Pacific Region and as Chief Operating Officer – Jack demonstrated excellent strategic leadership, delivering strong business growth including in vapour and tobacco heating products, as well as building very strong management teams. His track record of innovating and his experience across so many geographies and areas of the business position him extremely well to build on Nicandro’s achievements and write the next successful chapter in BAT’s history.

Ben Stevens, the Group’s Finance Director since 2008, will also retire from the Board in August of this year. Throughout his 30-year career at BAT, Ben contributed an enormous amount to the Company, and as an outstanding Finance Director he has been instrumental in ensuring the Company’s consistent earnings growth. On behalf of the Board, I would like to thank Ben for his leadership and invaluable contributions.

I am very pleased that Tadeu Marroco will be bringing his 26 years of experience within the Group to the Board when he succeeds Ben this summer. Given his broad experience as a Director of Western Europe, Director of Business Development, and Director of Group Transformation, the Board has full confidence that he will play a key role in continuing to deliver our ambition to transform our Company and our industry.

Additionally, Lionel Nowell, III, retired from the Board of British American Tobacco p.l.c. with effect from 12 December 2018. Lionel had served as a Non-Executive Director since July 2017 and had been a member of the Audit and Nominations Committees since October 2017.

Richard Burrows

Chairman

 

 

   
BAT Annual Report and Form 20-F 2018   07


Table of Contents

 

 Overview 

 

                                  

 

Our strategic framework

for transforming tobacco

 

Our strategy remains as relevant today to drive our transforming tobacco ambition as it was when it was first rolled out in 2012. It enables us to continue delivering value growth while driving the investment required to deliver our transformational agenda.

 

Our vision remains clear: while combustible tobacco products will remain at the core of our business for some time to come, we understand that long-term sustainability will be delivered by our transforming tobacco ambition.

 

  

 

 

 

LOGO

 

   
08   BAT Annual Report and Form 20-F 2018


Table of Contents
    

 

Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

 

Our vision

World’s best at satisfying

consumer moments in

tobacco and beyond.

Our consumers are at the core of everything we do and our success depends on addressing their preferences, concerns and behaviours.

We know that consumer preferences are fragmenting and evolving at an unprecedented pace, and consequently, we are focusing on providing a range of tobacco and nicotine products across the risk spectrum. In addition, we understand that to succeed in this space we need to continue enhancing our understanding of our consumers’ preferences in order to drive development of new and innovative products.

 

Our mission

Delivering our commitments

to society, while championing

informed consumer choice.

We have long known that, as a major international business, we have a responsibility to address societal issues with our tobacco products, and that, as our business continues to grow, so does our influence and the responsibility that comes with it.

We are also clear that we have a duty to our shareholders to ensure we continue to deliver today and invest for a sustainable future and to our consumers to provide, in addition to our combustible products, a range of potentially reduced-risk products (PRRPs).

Our transforming tobacco ambition, with its core objective of providing adult consumers with more choice, more innovation and less risk will allow us to: satisfy these consumers; address societal concerns through the growth of multiple categories of potentially reduced-risk tobacco and nicotine products; and provide a sustainable, profitable future for our shareholders.

 

Strategic focus areas

Our four key focus areas remain fundamental to our strategy as we focus on our transforming tobacco ambition.

 

LOGO      Growth   page 20

Constantly developing our portfolio of potentially reduced-risk products and new technologies while continuing to drive revenue growth from our traditional combustible products.

 

 
LOGO      Productivity   page 22

Effectively deploying resources between product categories and managing our cost base to release funds for investment.

 

 
LOGO      Winning organisation   page 24

Ensuring we have great people with the right skill sets in the right teams to drive the transformation of our business.

 

 
LOGO      Sustainability   page 28

Ensuring a sustainable business that meets the expectations of all our various stakeholders.

 

 
LOGO      Read about our industry   page 15
 

 

 

Guiding Principles

Our Guiding Principles provide clarity about what we stand for.

They form the core of our culture and guide how we deliver our strategy.

 

Enterprising spirit

We value enterprise from all of our employees across the world, giving us a great breadth of ideas and viewpoints to enhance the way we do business. We have the confidence to pursue growth and new opportunities while accepting the considered entrepreneurial risk that comes with it. We are bold and strive to overcome challenges. This is the cornerstone of our success.

Freedom through responsibility

We give our people the freedom to operate in their local environment, providing them with the benefits of our scale but also the ability to succeed locally. We always strive to do the right thing, and this freedom enables us to act in the best interests of our consumers while exercising our responsibility to society and other stakeholders.

Open minded

Our corporate culture is a great strength of the business and one of the reasons we have been, and will continue to be, successful. We are forward-looking and anticipate consumer preferences, winning with innovative, high-quality products. We listen to, and genuinely consider, other perspectives and changing social expectations. We are open to new ways of doing things.

Strength from diversity

Our management population comprises people from over 140 nations, giving us unique insights into local markets and enhancing our ability to compete across the world. We respect and celebrate each other’s differences and enjoy working together. We harness diversity – of our people, cultures, viewpoints, brands, markets and ideas – to strengthen our business. We value what makes each of us unique.

 

 

   
BAT Annual Report and Form 20-F 2018   09


Table of Contents

 

 Overview 

 

                                  

 

Our year in numbers

 

LOGO

 

 

Group cigarette (and tobacco heating
products – THP) volume

 

 

LOGO

 

 

 

Group market share of Key Markets

 

LOGO

 

 

 

 

Strategic Cigarette and THP volume

 

 

 

LOGO

 

 

 

Oral (snus)

(no. pouches)

 

LOGO

 

 

 

Vapour

(units)

 

LOGO

  

 

Revenue

(£m)

 

LOGO

 

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

 

In 2018, revenue includes £17,257 million of revenue from the Strategic Portfolio, an increase of 49% on 2017 (on a reported and representative basis).

 

 

Change in adjusted2 revenue
at constant rates1 (%)

 

LOGO

 

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

 

 

Change in adjusted2 revenue from the
Strategic Portfolio at constant rates1 (%)

 

LOGO

 

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

 

This measure was introduced in 2018, with no comparators provided.

 

  

 

Profit from operations

(£m)

 

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.

    

 

 

 

 

Change in adjusted2 profit from
operations at constant rates1 (%)

 

LOGO

 

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

  

 

Changes in 2018

In 2018, the Group introduced a new measure called ‘adjusted revenue growth from the Strategic Portfolio’ as part of the continual assessment of the Group’s short- and long-term delivery of the strategic vision. This measure replaced the GDB and Key Strategic Brands volume growth metric as a key performance indicator in connection with the Group’s compensation plans. This Strategic Portfolio reflects the focus of the Group’s investment activity and includes the ‘Strategic Combustible Brands’ being Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Camel (US), Newport (US) and Natural American Spirit (US) and our potentially reduced-risk products portfolio, which comprises our THP, vapour, modern oral and traditional oral businesses. In line with the above, and to reflect the development of the categories, the Group is also providing specific volume metrics for vapour and oral.

 

   
10   BAT Annual Report and Form 20-F 2018


Table of Contents
    

 

Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

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, on a representative basis and on an organic basis.

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 42 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.

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.

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.

 

 

Operating margin
(%)

 

LOGO

Definition: Profit from operations as a percentage of revenue.

  

 

Diluted earnings per share (EPS)
(p)

 

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Definition: Profit attributable to owners of BAT p.l.c. over weighted average number of shares outstanding, including the effects of all dilutive potential ordinary shares.

  

 

Net cash generated from operating activities (£m)

 

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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.

 

 

Adjusted2 operating margin
(%)

 

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

  

 

Change in adjusted2 diluted EPS
(%)

 

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Definition: Change in diluted earnings per share before the impact of adjusting items.

 

 

  

 

Total shareholder return (TSR) of the
FMCG group – 1 January 2016
to 31 December 2018 (%)

The FMCG group comparison is based on three months’ average values

 

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Change in adjusted2 diluted EPS
at constant rates1 (%)

 

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Definition: Change in diluted earnings per share before the impact of adjusting items and the impact of fluctuations in foreign exchange rates.

 

  

 

Cash conversion
(%)

 

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Definition: Net cash generated from operating activities as a percentage of profit from operations.

  

 

Total dividends per share
(p)

 

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Definition: Dividend per share in respect of the financial year.

Target: To increase dividend in sterling terms, based upon the Group’s policy to pay dividends of 65% of long-term sustainable earnings.

  

 

   
BAT Annual Report and Form 20-F 2018   11


Table of Contents

 

 Strategic Management 

 

                                  

 

Chief Executive’s review

 

 

 

 

 

 

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Nicandro Durante

Chief Executive

A winning strategy

After 37 years at BAT, eight of them as CEO, I will retire in April 2019. I have seen BAT evolve and grow throughout my career, and am confident that this will continue during the dynamic period of change the industry is going through today.

When I became CEO in 2011, we articulated a strategy to put the consumer at the heart of our business, and a vision to be the best at satisfying consumer moments in tobacco and beyond. This strategy has enabled us to deliver consistent outstanding year-on-year growth and shareholder returns, while at the same time establishing a successful and diverse potentially reduced-risk products (PRRP) business designed to meet the evolving and varied preferences of today’s consumers.

Thanks to this strategy, the Group continues to perform well. Our 2018 reported revenue and profit from operations are up 25% and 45% respectively, and while this is of course due primarily to our first full year’s inclusion of results from the US, we have nonetheless again exceeded our target of high single figure adjusted diluted constant currency EPS growth with an increase of 11.8%. This was driven not only by the strong performance of our combustible business, but also by the near-doubling of THP and vapour revenue.

Notwithstanding these results, it is clear that the market has concerns in relation to the impact of the changes the industry is going through and in respect of threatened regulatory developments. I am, however, confident that the business is in extremely good shape and that these changes, in reality, present significant opportunities for future growth. With our core combustibles business outperforming the industry, and with a strong and broad multi-category portfolio of PRRPs capable of meeting the evolving preferences of consumers around the world, I believe we are in a good position to deliver long-term sustainable growth.

A strong portfolio of both combustibles and PRRPs

Our results in 2018 reflect the successful performance of all elements of our portfolio, and highlight the importance of expanding consumer choice across all of our categories.

In combustibles, Group market share was up 40 basis points, driven by another strong performance from the Strategic Cigarette and THP brands, which grew volume by 5.8%.

In THP, our revenue increased to £565 million or £576 million, at constant rates. Our glo brand has achieved 4.7% market share (20% category share) in Japan, and continues to grow market share in South Korea, Romania and Italy.

 

 

The Group’s vapour portfolio performed strongly with significant growth in both volume and revenue across our 15 vapour markets. Momentum increased, with growth weighted towards the second half of the year driven by new market and product launches. Total vapour volume was up by 35% on a representative basis with good performances in the world’s three largest vapour markets – the US, the UK and France.

In oral tobacco we continue to grow value with strong performances from modern oral products such as Epok in Sweden, Norway and Switzerland, as well as traditional products such as Grizzly in the US, where revenues were £931 million, an increase of 3.1% on an adjusted representative basis.

Reynolds American Inc. (RAI)

RAI is delivering strong financial results for the Group. In 2018, revenue was up 128% (as a result of the full year effect). This was an increase of 1.5% on a representative constant currency basis, and was driven by robust price mix and a 25 basis points growth in value share, despite a decline in total volume. With adjusted operating margin up 180 bps, adjusted profit from operations was up 5.8% on a representative, constant rate basis. Annualised cost savings resulting from the acquisition are now running at over US$300 million per year, and we are on track to deliver at least US$400 million per year in cost synergies by the end of 2020.

While FDA regulatory proposals have driven some uncertainty in the US operating environment, our long track record of success in the face of regulatory change and our strong portfolio of brands give us confidence that we will be able to manage these issues. We are additionally reassured by the fact that, in order to withstand judicial review, any regulation of menthol in cigarettes must be developed through a comprehensive rule-making process, be based on a thorough scientific review and consider all unintended consequences.

Handing over

I am extremely pleased that the Board has chosen Jack Bowles as my successor. I have no doubt that his broad-ranging experience and expertise, combined with his energy, passion and drive for success, will help ensure the future growth of the Company.

I am tremendously proud of what we have achieved in the last eight years, and would like to thank all of my colleagues across the Group for their part in this.

 

 

   
12   BAT Annual Report and Form 20-F 2018


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Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

Jack Bowles

Chief Executive Designate

 

An exciting time for BAT

It is an exciting time for me to take over as CEO. Our industry is evolving and with this comes great opportunity.

With our depth of talent, our iconic brands and our range and pipeline of PRRPs, I am confident that we will take full advantage of these opportunities as we accelerate the transformation of BAT into a stronger multi-category tobacco and nicotine products company.

Strong foundations

It gives me great comfort to know that the fundamentals of our business are in such good shape. Our combustible business continues to deliver strong year-on-year growth. Our acquisition of RAI has made us a truly international tobacco and nicotine products business, and our PRRP business is firmly established and growing.

Our current strategy, with its aim of being the world’s best at satisfying consumer moments in tobacco and beyond, remains as relevant today as it was when it was first rolled out in 2012. The consumer is, and will continue to be, at the heart of everything we do. We know that our consumers’ tastes and preferences are evolving and fragmenting, and it is to satisfy these varied preferences that we have developed a broad range of different products with the potential to provide lower risks than combustible cigarettes.

Accelerating the delivery of our strategy

With confidence in our multi-category approach, we are now focused on our need to accelerate the delivery of our transforming tobacco ambition. Notwithstanding our great success to date in establishing our PRRP business, we acknowledge that we are at the start of a long journey. As the number of our consumers grows, our focus will be on accelerating our strategy to ensure that our products are able to satisfy the preferences of those many millions of adult smokers who are still looking for a satisfying but less risky alternative to their current products.

In order to further enhance the focus on our consumers we have created two new Management Board roles. Our new Director of New Categories will have end-to-end accountability for driving growth, innovation, world-class brand building and consumer insights for our PRRPs, while our new Director of Digital and Information is tasked with responsibility for enhancing our digital consumer capabilities.

Vision for success

I am excited about the challenges and opportunities that lie ahead for us. We have the right strategy, the right foundations, the right vision, and, most importantly, employees with the right skills and attitude to enable us to keep growing the Company for many years to come.

    

 

    

    

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BAT Annual Report and Form 20-F 2018   13


Table of Contents

 

 Strategic Management 

 

                                  

 

Finance Director’s overview

 

 

“The Group again delivered growth

 across all key performance indicators”

 

   Ben Stevens

   Finance Director

  

 

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Strong performance across all measures

Despite external challenges, translational foreign exchange headwinds of approximately 6% on revenue and profit from operations, and further investment in PRRPs, the Group again delivered growth across all key performance indicators in 2018.

Since the Group’s 2018 results are, on a reported basis, influenced by the full year inclusion of RAI (compared against five months in 2017), the results are also provided with a comparison on a representative basis, as though the Group had owned RAI and other acquisitions for the whole of the 2017 comparator period. This will provide readers with an understanding of the Group’s performance inclusive of RAI and other acquisitions in both 2017 and 2018.

Increase revenue and profit from operations

Revenue grew by 25.2% in 2018 to £24,492 million (2017 was up 38.5% at £19,564 million) largely due to the acquisition of RAI, concluded in July 2017. Adjusting for the impact of acquisitions, excise on bought-in goods and the impact of currency, adjusted revenue grew by 3.5% in 2018 on a representative constant rate basis, while 2017 had seen an increase of 2.9% (on an organic basis). This 2018 growth was driven by price mix (6% on combustibles) and the growth of vapour, THPs and modern oral, which more than offset a decline in combustible volume.

Profit from operations was up 45.2% (2017: up 38%), as the inclusion of 12 months of results from RAI and growth in revenue more than offset the ongoing investments in THP and vapour, the amortisation of acquired brands and the costs incurred as part of the Group’s restructuring programme.

Adjusted profit from operations grew by 4.0% on a constant currency representative basis (2017: up 3.7% organic, at constant rates).

A full reconciliation of our results under IFRS to adjusted revenue and adjusted profit from operations is provided on pages 258 to 261.

Against a backdrop of challenging conditions, notably the foreign exchange headwind, all regions performed well (as described on pages 43 to 47), growing adjusted profit from operations at constant rates of exchange on a representative basis, while investing in THP and vapour. This continues to demonstrate the ability of the Group, due to its geographic diversity, to offset the challenging environment in a number of markets.

Our operating margin increased by over 500 bps. This was driven by the positive mix effect from the consolidation of a full year’s results from RAI, while certain purchase price accounting adjustments that affected 2017 did not repeat. On an adjusted, representative basis, operating margin increased by 40 bps, as the Group continued to drive margin improvements while investing in the roll-out of PRRPs.

EPS movements reflect strong fundamentals

Net finance costs increased by £287 million to £1,381 million driven by the full year interest charge incurred in the year on borrowings of £47,509 million. Our banking facilities require a gross interest cover of at least 4.5 times. In 2018, our gross interest cover was 7.2 times (2017: 7.8 times, 2016: 12.2 times).

On a reported basis, basic EPS was 86% lower than 2017 at 264.0p, as the prior period (up 633% against 2016 at 1,833.9p) was materially affected by a deemed gain (£23.3 billion) on the disposal of the Group’s holding in RAI, required as part of the acquisition accounting. In 2017, the Group also recognised a deferred tax credit (£9.6 billion) related to the tax reforms in the US. Excluding these and other adjusting items, including those related to the acquisition of RAI, and the effect of foreign exchange on the Group’s results, adjusted diluted earnings per share, at constant rates, increased by 11.8% to 315.5p, with 2017 ahead of 2016 by 9.1%.

 

Cash flow generation drives deleveraging

In 2018, net cash generated from operating activities grew by 93% to £10,295 million. This was principally due to the inclusion of a full year’s cash flow from RAI, the timing of payments related to the Master Settlement Agreement (MSA) in the US, the cessation in 2017 of payments in relation to the Quebec Class Action and the ongoing cash generation in the rest of the Group.

Adjusted cash generated from operations (as defined on page 264) was £8,071 million, which represents an increase of 146% over 2017, or 158% on a constant rate basis. Excluding the timing of the early payment of the 2017 MSA liability, paid in 2017 and tax deductible at 2017 tax rates, adjusted cash generated from operations would have increased by over 43%.

Based upon net cash generated from operating activities, the Group’s cash conversion ratio increased from 83% in 2017 to 111% in 2018.

Adjusted net debt to adjusted EBITDA, as defined on page 266 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.

Delivering today and investing in the future

The Group continues to deliver against the financial imperatives, which supports the growth in dividends while deleveraging and investing in PRRPs for tomorrow’s success.

 

 

   
14   BAT Annual Report and Form 20-F 2018


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Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

Global market overview*

Today’s total tobacco and nicotine market comprises a growing user

pool of over one billion individual adult consumers.

While the decline in combustible cigarette consumption is expected to continue, it is predicted to be, at least partially, offset by the increasing

consumption of PRRPs, in particular vapour, tobacco heating and modern oral products.

 

Global potentially reduced-risk products (PRRP) market

The global tobacco and nicotine market is increasingly diversifying beyond traditional combustible tobacco with the growth of vapour and tobacco heating products (THPs), as well as the oral tobacco and nicotine market. The latest global figures (2017) suggest that the THP and vapour market is worth an estimated US$18 billion, while the oral tobacco and nicotine market is worth an estimated US$12.5 billion.

Vapour products have developed quickly across the world, with particularly strong growth in the US, France and the UK. While the overall prevalence of THPs is less than that of vapour, these products have emerged strongly in Japan and South Korea.

While traditional oral products show steady incremental growth, the modern oral category is quickly establishing itself and is expected to show accelerated volume expansion.

PRRP regulation

The THP and vapour market is relatively nascent, and regulation is in its early stages. 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 PRRPs, an increasing number of governments are passing laws that allow and encourage the growth of these categories. As the science continues to move in the direction of confirming the potential of these products to offer lower risk, more permissive regulations are expected to follow.

 

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see pages 48 to 52 to learn more about our Principal Group risks

 

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for further discussion regarding the regulation of our business, please see pages 274 to 279

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 of vapour products, the UK Government has implemented a supportive regulatory regime which is a contributing factor to category growth in the country.

Global combustible market

The most recent estimates for the global tobacco market (2017) indicate it is worth approximately US$785 billion (excluding China). More than US$700 billion of this comes from the sale of conventional cigarettes, with over 5,400 billion cigarettes consumed per year.

While combustible cigarettes remains the largest category, their volumes have seen a gradual fall over many years driven by increased regulation and changing societal attitudes. Although this is a trend which is predicted to continue, the growth of new categories of potentially reduced-risk tobacco and nicotine products is expected to, at least partially, offset this decline in combustible tobacco products.

Illicit tobacco

A contributing factor to the decline of legal tobacco volumes is the 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 illicit cigarette trade. The World Health Organization (WHO) estimates that one in every ten cigarettes and tobacco products consumed globally is illicit, with the market supported by various players, ranging from individuals to organised criminal networks involved in arms and human trafficking.

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 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 where effective action has reduced the prevalence of illegal tobacco, legal volumes have been restored.

Combustible regulation

Tobacco is one of the world’s most regulated and most taxed industries. Manufacturers are required to comply with a swath of regulations that vary considerably across markets.

Legislation and subsequent regulation is 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.

Litigation

Legal and regulatory court proceedings continue in a number of forms against the tobacco 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.

 

 

*

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

 

 

   
BAT Annual Report and Form 20-F 2018   15


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 Strategic Management 

 

                                  

 

Our global business

British American Tobacco is a leading, multi-category consumer goods company that provides tobacco and nicotine products to millions of consumers around the world.

Our portfolio reflects our commitment to meeting the preferences of today’s adult smokers while transforming tobacco with a choice of potentially reduced-risk products.

These include vapour, tobacco heating products, modern oral products including tobacco-free nicotine pouches, as well as traditional oral products such as snus and moist snuff.

Our products are sold in over 200 markets with a balanced presence in high-growth emerging markets and highly profitable developed markets. Our business is divided into four regions across six continents.

 

 

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16   BAT Annual Report and Form 20-F 2018


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Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

Our Strategic Portfolio comprises our key brands in both the combustible and PRRP 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.

 

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  *

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

 

   
BAT Annual Report and Form 20-F 2018   17


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  Strategic Management 

 

                                  

 

Our business model

 

 

LOGO

At the centre of our global business, operating in over 200 markets, is the manufacture and marketing of superior combustible tobacco products and potentially reduced-risk products (PRRPs).
These include vapour, tobacco heating products (THPs), modern oral as well as traditional oral products, such as moist snuff and traditional snus.
Our sustainable approach to sourcing, production, distribution and marketing helps us to create value for a wide group of stakeholders, from farmers to consumers.
We use our unique strengths and employ our resources and relationships to deliver sustainable growth in earnings for our shareholders. For more information on the structure of the Group, see page 254
Non-financial information
Our people and culture: pages 24 to 27
Respect for human rights: pages 28 to 32
Anti-corruption and anti-bribery:
pages 30 and 31
Environmental matters: page 32
Community and social matters: page 32

 

   
18   BAT Annual Report and Form 20-F 2018


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Consumers
We place consumers at the centre of our business. We invest in world-class research to understand changing consumer preferences and buying behaviour. This drives our leaf sourcing, product development, innovations, brands and trade activities. We aim to satisfy consumers with a range of inspiring products across the risk spectrum and address expectations about how we should market them.
Produce
What we do
We manufacture high-quality cigarettes, THP consumables and oral products in facilities all over the world. We also ensure that these products and the tobacco leaf we purchase are in the right place at the right time. Our vapour and tobacco heating product devices are manufactured in a mix of our own and third-party factories. We work to ensure that our costs are globally competitive and that we use our resources as effectively as possible.
What makes us different
• In 2018, we had 55 factories, 47 of which produce cigarettes. These strategically placed factories enable us to maximise efficiency and ensure products are where they need to be at the right time.
• Our production facilities producing cigarettes and the consumables for our THPs are designed to meet the needs of an agile and flexible supply chain, providing a world-class operational base that is fit for the future.
• For our vapour and tobacco heating product devices, we expect our contract manufacturers to comply with the same high standards that exist on our own sites.
see pages 22 and 23 for more details
Distribute
What we do
We distribute our products around the globe effectively and efficiently using a variety of different distribution models suited to local circumstances and conditions. Around half of our global cigarette volume is sold by retailers, supplied through our direct distribution capability or exclusive distributors. We continuously review our route to market for both combustible and PRRPs, including our relationships with wholesalers, distributors and logistics providers.
What makes us different
• Our relationships with, and efficient distribution to, retailers worldwide ensure we can offer the products our adult consumers wish to buy, where and when they want them.
• Our global footprint and direct distribution capabilities enable new product innovations to be distributed to markets quickly and efficiently.
Resources for success
Innovation
We make significant investments in research and development to deliver innovations that satisfy or anticipate consumer preferences and generate growth for the business across all categories. The main focus of this investment is in our PRRPs. We continue to invest in the development and commercialisation of potentially lower-risk alternatives to smoking. We also conduct R&D into our conventional cigarette innovations such as capsule products, additive-free products, slimmer products, tube filters and Reloc, our resealable pack technology.
World-class science
We have an extensive scientific research programme in a broad spectrum of scientific fields including molecular biology, toxicology and chemistry. We are transparent about our science and publish details of our research programmes on our dedicated website, www.bat-science.com, and the results of our studies in peer-reviewed journals.
You can take a video tour inside our state-of-the-art plant biotechnology labs and meet some of the scientists behind the science at www.bat.com/labtour or at www.youtube.com/ welcometobat
see pages 21, 22 and 28 for more information
BAT Annual Report and Form 20-F 2018

 

   
BAT Annual Report and Form 20-F 2018   19


Table of Contents

 

 Strategic Management 

 

                                  

 

Delivering our strategy

 

 

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  Growth

 

Our multi-category portfolio of brands continued to deliver in 2018, driven by our Strategic Portfolio.

 

Highlights during the year

 

–  Group revenue grew by 25% at current rates of exchange, 3.5% adjusted representative at constant rates;

 

–  Group market share in Key Markets up by 40 bps;

 

–  Strategic Portfolio cigarette and THP volume grew 17.9% (+5.8% representative).

 

 

 

Business performance

Group cigarette and THP volume from subsidiaries was 708 billion, an increase of 3.3%, with revenue up 25.2% at £24,492 million against the previous year due to the inclusion of a full year’s volume from RAI. On a representative basis, volume was 3.5% lower as growth in Pakistan, Japan (driven by THP), Turkey, Poland, Romania and Egypt was more than offset by declines in the GCC, US, Russia and Brazil.

Adjusted revenue, on a constant rate representative basis grew 3.5%, as pricing and the growth in PRRPs more than offset the decline in volume.

The Group’s cigarette and THP market share in its Key Markets continued to grow, up 40 basis points (bps). This was driven by another excellent performance by our Strategic Cigarette and THP portfolio with volume up 5.8% on a representative basis.

The Group’s THP and vapour portfolio contributed £883 million of revenue, or £901 million at constant rates of exchange, due to the expansion in the geographic footprint and the inclusion of a full year’s revenue from the acquired RAI portfolio. On a representative, constant rate basis the increase was over 95%, demonstrating the strong underlying growth in the year.

Strategic Portfolio

Our Strategic Portfolio comprises leading brands across the combustible and PRRP categories. This drives focus and investment on the brands and categories that will underpin the Group’s future growth.

Strategic Cigarette and THP brands

Our eight Strategic Combustible Brands account for over 60% of the cigarettes we sell and play a key role in our growth strategy.

Dunhill: Market share was stable as strong performances in Indonesia, Brazil and South Africa were offset by the effect of down-trading in Saudi Arabia and South Korea. Volume was 6.1% lower as the continued growth in Indonesia was more than offset by the effect of the down-trading noted above and market size contraction in Brazil, South Africa and Malaysia.

Kent: Market share was up 50 bps, with volume increasing 1.7%, driven by Japan (including Kent Neo Sticks for glo), Turkey, Brazil and Ukraine. This more than offset lower volume in the Middle East and Russia (despite an increase in market share as volume was affected by trade inventory movements).

Lucky Strike: Market share grew 20 bps, which was driven by Indonesia, Japan, Colombia, Spain, France, Argentina and Mexico. Volume was 1.0% down as growth in Germany, Colombia, Japan and Argentina was more than offset by declines due to industry contraction in Indonesia and France.

Pall Mall: Market share grew 10 bps, with volume up 20.4% partly due to the inclusion of Pall Mall in the US following the acquisition of RAI. This was an increase of 9.9% on a representative basis, partly due to the strong volume and market share growth in Saudi Arabia that followed the market down-trading arising from the excise-led price increases in 2017. Pakistan continued to grow volume and market share after the revision to excise, with higher volume and market share also achieved in Mexico, Egypt and Australia.

 

 

 

 

 

 

Revenue

(£m)

 

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

In 2018, revenue includes £17,257 million of revenue from the Strategic Portfolio, an increase of 49% on 2017 (on a reported and representative basis).

 

 

Change in adjusted revenue

at constant rates (%)

 

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

 

 

Change in adjusted revenue from the

Strategic Portfolio at constant rates (%)

 

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

This measure was introduced in 2018, with no comparators provided.

 

 

Strategic Cigarette and THP volume

 

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2017: +17.9% (+7.6% organic)

2016: +7.5%

 

 

 

   
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Group market share of key markets

 

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2017: +40 bps

2016: +50 bps

 

 

Total shareholder return (TSR) of the FMCG group – 1 January 2016 to 31 December 2018 (%)

The FMCG group comparison is based on three months’ average values

 

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Rothmans: Market share continued to grow, increasing a further 110 bps with volume up 19.7% driven by Ukraine, Russia, Nigeria, Bulgaria and migrations in Poland, Brazil and Colombia.

Newport: Market share grew 10 bps in the US. Volume declined 4.6%, on a representative basis, partly due to inventory movements within the supply chain, with the US market down 4.5-5.0% due to higher gasoline prices, 2017 excise-led price increase in California and the growth of vapour.

Camel: Market share was flat in the US. Volume was lower by 4.4%, on a representative basis, partly due to a strong comparator period.

Natural American Spirit: Share momentum continued in the US, up 20 bps, with volume higher by 3.5% on a representative basis, outperforming the market (estimated to be 4.5-5.0% down) due to a strong performance in the premium segment.

 

Potentially reduced-risk products (PRRPs)

A key component of our Strategic Portfolio are our PRRPs, which comprise vapour, THPs, and modern white oral products as well as traditional oral products such as moist snuff and snus. We are seeking to lead the entire category and have a suite of products to cater to consumers’ many and varying preferences.

Vapour products

The Group’s vapour portfolio performed strongly with significant growth in both volume and revenue across our 15 vapour markets. Momentum increased throughout 2018, with much of the growth weighted towards the second half of the year driven by new market and new product launches.

Total vapour volume was up by 100%, partly due to the acquisition of RAI. On a representative basis this was an increase of 35% with good performances in the world’s three largest vapour markets – the US, the UK and France.

More specifically, US vapour volume of consumables grew by 36%, on a representative basis, with the market rapidly expanding (up 120% in volume terms). This was driven by the expansion of Vuse following the expansion of Alto and re-launch of Vibe.

Vype and the Group’s other vapour brands in the rest of world (including Ten Motives and VIP in the UK) grew volume by 34%, driven by market-leading performances in the UK and France.

Our new Vype ePen3 is performing extremely well in launch markets such as Canada and the UK, where it was voted Vapour Product of the Year in the UK’s largest consumer survey of product innovation, and is indicative of the strong product pipeline we have in place to cater to changing preferences in this category.

Tobacco heating products (THPs)

The Group delivered significant growth in the THP category in 2018. In Japan, which accounts for 70% of global industry volume, our launch of neosticks returned us to growth, reaching a total market share of 4.7% in December 2018 and a 20% share of the category.

 

Across our 15 THP markets, we have grown total THP revenue, at constant rates, by over 180% to £576 million, and have increased consumables volumes by 217% to 7 billion sticks. While the majority of growth has been in Japan, glo is increasing market share in roll-out markets including South Korea, Romania and Italy, and is showing good initial results in recent launch markets including Croatia.

Modern oral products

Our modern oral category comprises the brands EPOK and Lyft, which both experienced significant growth in 2018. Total revenue grew 127% to £34 million, a 140% increase on a representative, constant rate basis.

EPOK performed well, achieving, in December 2018, 8% and 17% share of the total oral market in Norway and Switzerland respectively, being the fastest growing brand in the category.

Lyft, the Group’s tobacco-free product, was launched in Sweden, achieving 4.5% total oral market share in handlers.

Traditional oral products

Our traditional oral category, comprising snus and moist snuff, grew revenue from the Strategic Brands by 128% in 2018, a representative constant rate increase of 9%. While US volumes were down 2.3%, on a representative basis, in part due to a decline in the total market and a reduction in Grizzly market share over the year of 40 bps as the brand lapped a tough comparator which benefited from a competitor’s product recall, returning to growth in the final quarter of 2018. This was more than offset by total pricing and a 40 bps increase in total value share, with revenue from the strategic portfolio growing 8% to £893 million, on a constant rate, representative basis.

Local and international cigarette brands

In addition to the brands comprising our Strategic Portfolio, we have many other international and local cigarette brands including Vogue, Viceroy, Kool, Peter Stuyvesant, Craven A, Benson & Hedges, John Player Gold Leaf, State Express 555 and Shuang Xi.

 

 

In addition to revenue and the other measures discussed in this Annual Report and Form 20-F, BAT management focuses on volume as a key measure to evaluate performance. Volume is an unaudited operating measure and is calculated as the total global cigarette, THP, vapour or oral volume of the Group’s brands sold by its subsidiaries. The Group believes that volume is a measure commonly used by analysts and investors in the industry. Accordingly, this information has been disclosed to permit a more complete analysis of the Group’s operating performance.

The Group also uses market share to evaluate its performance. The Group evaluates changes in its key market offtake share (as measured by retail audit agencies (including Nielsen), shipment share estimates and share of retail for the US business) for tobacco products, based on the latest available data from a number of internal and external sources. Key markets consist of approximately 40 territories across all geographical segments, and represent approximately 80% of the Group’s global volume. Growth in these markets is largely driven by the Strategic Portfolio. The Group also highlights drivers for change in specific markets (e.g., volume, market share or value share (being the customer sales price earned as a proportion of the industry total customer sales price)). For PRRPs, the Group monitors its performance in select countries (e.g., UK, France, Germany, Italy) based upon category retail market share, based on the latest available data from a number of internal and external sources.

In addition, the Group’s performance is affected by global pricing, which is impacted by discounts, terms of credit with customers, excise taxes and other competitive, market-driven and regulatory factors. In certain markets, the Group has experienced increases or decreases in average prices resulting from changes in product mix, also referred to as price mix. The Group believes that pricing and market share are measures commonly used by analysts and investors in the industry.

 

   
BAT Annual Report and Form 20-F 2018   21


Table of Contents

 

 Strategic Management 

 

                                  

Delivering our strategy continued

 

 

LOGO    Productivity

 

 

We have continued our drive towards a more effective and efficient globally-integrated organisation by leveraging global systems and new ways of working. This global integration allows for the lowest possible overheads cost, the most cost-effective and responsive supply chain and that productivity opportunities are fully exploited.

 

Highlights during the year

 

–  Another year of substantial productivity savings and RAI acquisition savings on track;

 

–  Consolidation of our Global Supply Chain Service Centre;

 

–  Vapour and THP operations integration completed.

 

 

 

Globalising operations and improving efficiency

Global systems and ways of working across the Group are utilised to minimise our cost base and maximise expertise. Furthermore, by ensuring back-office activities are carried out efficiently and effectively, the end markets are free to focus their efforts on consumer-focused activities. This drive to a globally-integrated enterprise is most apparent in our Supply Chain, Talent and Culture, Finance, Procurement and Information Technology functions.

In line with this strategy, in 2017 the Group undertook a migration to a single Enterprise Resource Planning system, and in 2018 focused on delivering data and analytic capabilities globally to identify new sources of productivity savings, while also making progress on our complexity-reduction agenda.

Additionally, the implementation of Integrated Working Systems across our factories has generated important efficiency gains, reducing waste and loss in our manufacturing processes and enabling better service levels. This has been complemented by important manufacturing footprint reviews across our regions, which have optimised asset utilisation.

The completion of our Global Supply Chain Service Centre has resulted in the synchronisation of our end-to-end supply network, which now operates as a demand-driven enterprise. This, along with significant improvements in the efficiency of equipment and machinery, has improved the reliability of our supply network and has released cash by reducing our inventory of leaf, materials and finished goods.

This investment in machinery has also led to capital expenditure being targeted to the areas of the business with the greatest return on the investment. This global view also enhances our ability to react quickly, particularly within the PRRP space. Supply Chain integration also better allows the Group to leverage capabilities and scale to improve speed-to-market, which in turn generates savings and supports the rapid deployment of cutting-edge innovations.

These continued strategic investments in new machinery in 2018, supported by our global planning systems and integrated business model, enable us to deliver ‘on time and in full’ in all our Key Markets at optimal cost, with speed and scale.

With the RAI integration complete we have established a best-practice sharing model that is performing above expectations, with futher savings being delivered in procurement, manufacturing and supply chain.

On the PRRP front, the revision of supplier contracts has led to significant savings, as has integrating the growth of our vapour, tobacco heating and oral product portfolios, which has allowed the Group to both leverage economies of scale and reduce complexity.

As a result, annualised cost savings from the acquisition are now totalling over US$300 million per year, and we are on track to deliver at least US$400 million per year in cost synergies by the end of 2020.

 

 

Profit from operations
(£m)

 

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.

 

Change in adjusted profit from
operations at constant rates (%)

 

LOGO

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

 

 

   
22   BAT Annual Report and Form 20-F 2018


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Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

    

Net cash generated from operating activities (£m)

 

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.

 

 

Operating margin

(%)

 

LOGO

 

Definition: Profit from operations as a percentage of revenue.

 

Adjusted operating margin

(%)

 

LOGO

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

 

Continued optimisation of manufacturing locations and leaf growing

In 2018, we continued to optimise our manufacturing footprint and at the end of the year had 55 factories in 48 countries.

This includes two new factories, one in Zambia and one in Malaysia.

The German factory’s refocus on Other Tobacco Products (OTP), Dry Ice Expanded Tobacco (DIET) and Casing/Flavours Manufacture was completed in 2018, which marks the end of its manufacture of cigarettes. Additionally, it was announced in October 2018 that the Russian factory (Saratov) will close in Q4 2019.

We are continually looking to improve the efficiency of our entire supply chain with opportunities to improve our manufacturing operations being a particular focus. We are realising the benefits of our Integrated Work Systems, a programme that is designed to maximise equipment efficiency while ensuring we maintain high standards of product quality.

The improved equipment efficiency is delivering real benefits through improved productivity and lower maintenance costs together with reduced waste. An additional positive by-product is the release of capital expenditure which can be used to invest in further innovation.

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.

Ongoing productivity savings

By operating globally, exploiting our systems and striving for results, the Group delivered substantial productivity savings in 2018, supported in large part by the acquisition of Reynolds American which will continue to provide further opportunities for productivity savings.

These savings are returned to the business for re-investment and to increase shareholder return. The following examples show how the Group considers all opportunities 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 2018, while transactional foreign exchange rates again had a negative effect on our cost base, 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.

 

 

   
BAT Annual Report and Form 20-F 2018   23


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  Strategic Management 

 

                                  

Delivering our strategy continued

 

LOGO

 

  Winning organisation

 

We enable growth by having a winning organisation: by investing in our people, by attracting the best, and by developing high-performing leaders who inspire diverse teams of committed and engaged people in 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;

 

–  Launched Parents@BAT: a Group-wide pay and benefits programme for new parents;

 

–  Top Employer recognition in Europe, Africa, and Asia-Pacific.

 

 

Investing in leaders

The quality of our people is a key contributing factor to the Group’s performance. As a result, we commit to investing in our people as much as we do in our brands, and continuing to attract and retain the best people remains a key priority.

The long-term culture of the Group has been about developing talent from within, stretching and supporting high-performing managers who will lead the delivery of our strategy. This year, over 92% of our senior appointments, including our CEO Designate, were drawn from people already within the business – moves that have helped to deliver stronger and more diverse leadership teams and succession plans.

We continually update our capability frameworks and learning portfolio to enable development of new skills and knowledge to drive business performance. In June 2018, we offered our employees access to a new e-learning platform – Lynda.com – which provides a video library with over 6,500 courses on a variety of topics including leadership and core business skills, taught by well-known business leaders. Currently, Lynda is available to BAT employees worldwide in English, French, Spanish and German. More languages are in the pipeline for next year.

To improve understanding of our new and growing portfolio of potentially reduced-risk products, we launched a microlearning initiative that has been utilised by over 2,000 members of our sales force teams since its launch in 2018.

 

LOGO  

 

You can read about our Group risk factor related to talent on page 272

Attracting the best talent

When we do recruit externally, we actively seek those who will provide additional knowledge and skills that will strengthen our teams and ultimately make us a stronger business. In 2018, we continued to enhance our internal capabilities to engage and recruit those people who will help us succeed in growth markets and growth categories, including potentially reduced-risk products.

We also continued the digital growth of our employer brand – ‘Bring your Difference’ – across core social media channels, where we are now an industry leader with over 600,000 followers on LinkedIn (a 45% increase from 2017).

As competition for talented employees intensifies, people increasingly want to work for businesses with a good corporate reputation. We are proud to have been ranked among the top employers around the world and have been named as a Top Employer for Europe, Africa, Middle East, Latin America, and Asia-Pacific by the Top Employer Institute, an independent global certification company. We also received similar accolades in many of the countries in which we operate including ‘Great Place to Work’ in the US and Brazil.

In 2018, we hosted the largest-ever Global Graduate Academy, with over 200 participants gathering in London for an interactive learning experience supported by senior business leaders. Also during 2018, we held the Group’s first global graduate competition, which saw people compete to win a London internship, and received a global social media reach of 35 million people.

 

 

LOGO  

 

You can learn more about our Global Graduate Programme at www.bat-careers.com/graduates

 

 

Group diversity as at 31 December 2018

 

   

 

 

 

 

Total

 

 

 

 

   

 

Male

 

 

 

   

 

Female

 

 

 

Main Board     10       7       3  
Senior management     629       491       138  
Total Group employees     56,710       41,842       14,868  

 

LOGO

 

 

 

Nationalities represented

 

 

       Total  

Main Board

     7  

Global headquarters

     83  

Management level globally

     147  
  

Senior managers: Companies Act 2006

 

For the purposes of disclosure under section 414C(8) of the Companies Act 2006, the Group had 205 male and 26 female senior managers as at 31 December 2018. 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 72% of the Group’s employees and contributed over 76% of Group revenue and 95% of profit from operations in 2018.

 

 

 

   
24   BAT Annual Report and Form 20-F 2018


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Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

 

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 all business areas and levels of the Group is key to driving progress.

This is why all of our regions and all functions worldwide have a Diversity Champion, who is a member of the applicable Leadership Team. They are responsible for driving the agenda, including ensuring that agreed-upon diversity action plans are implemented and that development and retention plans for high-potential employees are executed with a strong focus on gender and nationality diversity.

For example, our IT Function is partnering with our major IT suppliers to provide cross-company mentoring for women in technology. Additionally, our Operations Function has identified a number of global ‘location agnostic roles’, that would previously have required relocating but can instead be carried out from the employee’s home country.

This approach helps ensure that diversity is embedded across the Group and that our pipeline of diverse talent is strong and healthy.

 

The Director, Group Human Resources, has overall responsibility for all employee and human resources (HR) 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 Main Board reviews progress on our diversity activity and performance twice a year, and diversity reporting forms a key part of all Functional and Regional Leadership Team meetings, with quarterly reviews.

2. Building diverse talent pools

We are a diverse employer. There are 147 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 30% of our Board, and in 2018 we increased female representation in senior management to 22%.

In 2019, two of our five new Management Board members are women. We also have female executives on all our senior functional and geographical leadership teams, and 46% of our 2018 graduate intake were women, ensuring a sustainable pipeline of women for senior management roles. These women have the opportunity to participate in our Global Graduate Academy: an intensive two-week programme focusing on accelerating the development of the Group’s next generation of leaders.

We require all recruitment agencies we work with to provide gender-balanced shortlists of candidates. We also focus on developing talent from within and one of the ways we are supporting women’s development into senior roles is through our Women in Leadership programme.

This provides training, mentoring and other types of career support for high-potential female employees and, over the last two years, has supported over 250 delegates. For the last four years, our most senior women have taken part in the Women Leaders Programme, run in conjunction with INSEAD business school.

We also provide mentoring, coaching and sponsorship programmes and have participated in the 30% Club for five years. This provides external support for our senior women, as well as mentoring women from other organisations.

In 2018, 51% of our senior recruits and 33% of internal promotions were women, moves that have helped deliver stronger and more diverse leadership teams. And we are having success in retaining our very best female talent, with turnover of senior women reducing dramatically from 15% in 2013 to just 1.7% in 2018.

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 providing women and other diverse groups with an opportunity to connect, engage and share experiences. At the moment we support 12 women’s networks across the Group that cut across all levels of the organisation, including our Women in BAT UK network, which currently has nearly 400 members.

Complementing these networks, the 12 most senior women in the business have established a panel with the aim of developing and mentoring women, as well as to encourage and support the Group’s leadership on its approach to gender diversity and the way in which talent pipelines are developed and managed.

 

 

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.   Group employees
Health and Safety Policy   Health, safety and welfare of all employees, other members of our workforce and third-party personnel.   Employees and contractors, suppliers, business partners, farmers
Standards of Business Conduct (SoBC)   Respect in the work place, including promoting equality and diversity, preventing harassment and bullying, and safeguarding employee wellbeing.   Employees and contractors
Group Data Privacy Policy   The manner in which BAT processes personal data about all individuals, including consumers, employees, contractors and employees of suppliers   Employees and contractors, suppliers, business partners, consumers
These policies and procedures are endorsed by our Board 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.

 

   
BAT Annual Report and Form 20-F 2018   25


Table of Contents

 

 Strategic Management 

 

                                  

 

Delivering our strategy continued

 

 

In 2018, we launched Parents@BAT – a range of benefits to support new parents employed by Group companies worldwide to balance their home and work lives. This offers significantly better terms than existing legal requirements for over 20,000 of our employees in 26 countries, including a minimum of 16 weeks’ fully paid maternity leave for new mothers and adoptive parents as well as a return-to-work guarantee, flexible working opportunities and an online advice service offering coaching support for all parents whenever they need it.

In many countries, BAT’s support for new parents already goes far beyond these minimum guidelines and local statutory requirements. For example, in the UK, we provide maternity leave with six months’ full pay with a pro rata bonus, statutory pay for three months and a return-to-work guarantee.

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, culture or other differences.

Our Inclusive Leadership and Understanding Bias training workshop is designed to make sure managers not only recognise they may have personal or organisational bias, but that they also understand how to develop inclusive teams and harness the viewpoints of others.

In 2018, we partnered with the International Women’s Day Association on the #PressforProgress campaign. Sponsored by our Management Board, the campaign focused on raising awareness and reinforcing the importance of gender parity. Activities were held across the Group, including inspirational talks from internal and external female leaders and opportunities for individuals to make their own commitments.

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.

 

Employee engagement index

 

LOGO

Definition: Results from our ‘Your Voice’ employee opinion survey, carried out in 2017, enabled us to calculate our employee engagement index – a measure that reflects employee satisfaction, advocacy and pride in the organisation. The Group’s next employee opinion survey will take place in 2019.

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

 

 

Our other key performance indicators in this area include:

 – Employee retention: In 2018, total turnover of management-grade employees was 1,963, representing 15% of the total management population.

 – Diversity: Representation of women in senior management roles increased from 16% in 2016, and 21% in 2017, to 22% in 2018.

 

Workforce engagement

The Group has a range of well-established workforce engagement channels worldwide to ensure the Board, including through updates provided by management, understands the views of the Group’s workforce across all jurisdictions in which the Group operates.

Group engagement channels include works councils, meetings with the European Employee Council, town hall sessions, global, functional and regional webcasts, and CEO webcasts, implemented at market, business unit, functional and/or regional level as appropriate for the composition of local workforce populations.

Additionally, the Board undertakes a Group market or site visit on an annual basis, including meeting with local employees, and the Executive Directors regularly visit markets and local sites across the Group. We also undertake a Group global employee opinion survey (‘Your Voice’) every two years.

From 1 January 2019, the Group has adopted an enhanced approach to workforce engagement worldwide in order to ensure meaningful and regular dialogue is maintained between the Board and our workforce given its geographical spread, scale and diversity.

In addition to this range of engagement channels, we have implemented new reporting channels to enable regular reporting to the Board on workforce views on key topics at all levels across the Group. Board feedback and associated action planning, as appropriate, is cascaded back to the workforce and the Board is kept updated on progress against identified actions during the year. We will report on these arrangements in our 2019 Annual Report and Form 20-F.

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 committed to 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 page 60.

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, recognition schemes and ad hoc incentives provide the right mix to ensure that high performance is recognised and rewarded. The Long-Term Incentive Plan (LTIP) has been established to make annual awards of free shares to senior managers provided certain challenging long-term performance conditions are met. The LTIP is one element of senior executives’ reward package aiming to align the interests of the Group’s senior managers with those of shareholders. Further information on the Group’s Remuneration Policy for the Executive Directors and the Non-Executive Directors can be found on pages 73 to 113.

 

 

   
26   BAT Annual Report and Form 20-F 2018


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Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

 

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.

Gender pay

In 2018, we began publishing data relating to UK gender pay in line 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. Our manufacturing sites, for example, carry fewer 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.

In 2017, we implemented a range of 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 recently introduced motorcycles, 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 say that our actions are producing improvements. Vehicle-related incidents fell in 2018 from 73 to 47, primarily due to a reduction in motorcycle incidents. In particular, we saw a notable reduction in injuries reported across TM&D, down 27%.

Nevertheless, the number of fatalities remained unchanged at 12 in 2018. This was partly a result of changing local conditions, such as increased levels of violence and civil unrest in certain markets where no workforce fatalities had occurred for many years.

We deeply regret this loss of life and the suffering caused to friends, family and colleagues. We liaise closely with the relevant authorities and conduct our own detailed investigations to determine the root cause of each accident, identify any lessons that can be learned and implement action plans, the outcomes of which are reviewed at Board level.

We are making every effort to further address these challenges in 2019, notably through sharing best-practice examples across our regions.

 

LOGO  

 

 

 

You can read about our Principal Group risk relating to Health and Safety on page 51

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 32.

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 performance indicators* in this area include:

 – Lost Workday Case Incident Rate (LWCIR): There was a decrease in our LWCIR from 0.36 in 2017 to 0.27 in 2018.

 – 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 248 in 2017 to 195 in 2018.

 – Serious injuries and fatalities: The total number of serious injuries and fatalities to employees and contractors decreased from 78 in 2017 to 53 in 2018.

 

 

*

2017 data has been restated to include Health and Safety data for RAI employees and contractors under our direct supervision.

 

 

   
BAT Annual Report and Form 20-F 2018   27


Table of Contents

 

 Strategic Management 

 

                                  

 

Delivering our strategy continued

 

 

LOGO

 

 

 

Sustainability

 

   

 

Sustainability is a key pillar of our Group strategy and plays a fundamental role in all aspects of our business.

 

Our sustainability agenda was developed through a detailed assessment process that identified the three key areas that have the greatest significance to our business and our stakeholders.

 

–  Harm reduction: we are committed to working to reduce the public health impact of smoking, through offering adult consumers a range of potentially reduced-risk products;

 

–  Sustainable agriculture and farmer livelihoods: we are committed to advancing sustainable agriculture and working to enable prosperous livelihoods for all farmers who supply our tobacco leaf; and

 

–  Corporate behaviour: we are committed to operating to the highest standards of corporate conduct and transparency.

 

Highlights during the year

 

–  Launch of the new global Anti-Bribery and Corruption Procedure that mandates both pre-contractual and retrospective due diligence for third-party business providers;

 

–  Implementation of a new set of consolidated International Marketing Principles that combine our standards for all our product categories; and

 

–  Deployment of a Farmer Sustainability Monitoring tool that identifies and addresses problems in real time.

 

 

   LOGO

 

 

Read more about our sustainability performance in each area at www.bat.com/sustainabilityreport

 

 

Harm reduction

Tobacco harm reduction is about encouraging adult smokers, who wish to continue using tobacco or nicotine products, to switch to potentially lower-risk sources of nicotine as compared to conventional cigarettes. We are committed to working to reduce the public health impact of smoking through offering adult consumers a range of potentially reduced-risk products (PRRPs).

 

LOGO  

 

Read about our progress in potentially reduced-risk products on page 21

Cutting-edge science

We are always on the lookout for the next cutting-edge technology that will enable us to provide adult smokers with more advanced, better-performing PRRPs.

We are also highly focused on testing and validating the reduced-risk potential of these products. To this aim, and to complement widely-available third-party science, we have developed a framework of scientific tests to assess the health risks of PRRPs relative to smoking cigarettes.

In 2018, we embarked on one of our most ambitious and large-scale clinical studies, examining risk indicators among adult smokers who continue smoking, switch to glo or stop completely. We expect to publish initial study results in 2019.

We openly share our scientific framework and publish peer-reviewed journal articles. To date, we have published 25 peer-reviewed articles on THPs, 23 on vapour products and six manuscripts that review them jointly. We will also continue presenting at conferences and to government technical advisory committees. In 2018, we presented at 24 scientific conferences and external meetings.

High standards and enabling responsible growth

Following high standards to ensure quality and consumer safety is at the heart of everything we do in the design, development and manufacturing of our products. We would like to see the same approach across the whole industry, so, in 2018, we continued to advocate for, and collaboratively contributed to the development of, consistent national and international standards and proportionate regulation for PRRPs.

This is essential for giving more smokers the assurances they need to support take-up of PRRPs, which can ultimately help to realise potential benefits for public health.

Marketing responsibly

As tobacco consumption presents serious health risks, and nicotine is an addictive substance, we need to ensure that our marketing is aimed only at adult consumers and is not designed to engage or appeal to youth.

 

 

 

To support this we have International Marketing Principles (IMP) in place that are applied consistently everywhere we operate, even when they are stricter than applicable local tobacco laws.

In light of our shift to being a multi-category business, in 2018 we compiled our responsible marketing standards for each of our product categories into one set of principles under our revised IMP, which govern all our product marketing. All Group companies are required to comply with the IMP and compliance is reported and monitored through our Control Navigator process, detailed on page 68.

In 2018, we also launched our revised Youth Access Prevention (YAP) guidelines that now cover all our product categories, and broadened their scope to also include markets where our products are distributed through third parties. It is now also mandatory for all our markets – unless there is a government ban in place – to provide retailers with point-of-sale materials with YAP messaging.

Sustainable agriculture and farmer livelihoods

Tobacco leaf remains at the core of our products, even with the growth of PRRPs, so the farmers who grow it are crucial to the continued success of our business.

We have traceability down to the farm level and centralised management of our tobacco leaf supply chain. This enables an agile, efficient and reliable supply of high-quality tobacco leaf to meet consumer demand, while also enhancing the sustainability of rural communities and agriculture.

In 2018, the Group purchased more than 400,000 tonnes of tobacco leaf:

 

68% from 18 Group leaf operations, which source from over 90,000 farmers; and

 

32% from more than 20 third-party suppliers, which source from over 260,000 farmers.

 

LOGO  

 

Read more about Sustainable Agriculture and Farmer Livelihoods at www.bat.com/ sustainabilityreport

Supporting our farmers

Through our global leaf research and development, we develop new and innovative farming technologies and techniques, which are made available to farmers as part of comprehensive agri-support packages.

We have a network of expert field technicians who provide on-the-ground support, technical assistance and capacity building for all our 90,000+ directly contracted farmers, helping them to run successful and profitable farms. Our third-party suppliers provide their own support for all the 260,000+ farmers they source from.

 

 

   
28   BAT Annual Report and Form 20-F 2018


Table of Contents
    

 

Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

 

By supporting farmers in this way, we can help them maximise the potential of their farms and enhance the livelihoods and resilience of rural communities.

They and future generations are then more likely to feel motivated to remain in agriculture, look after the environment and see the value of growing tobacco as part of a diverse range of crops.

Setting standards and driving change

We use the industry-wide Sustainable Tobacco Programme (STP) to conduct due diligence on 100% of our own tobacco leaf operations and third-party suppliers, which covers issues such as safe working conditions, preventing child and forced labour, and environmental protection.

We use the results of the self-assessments and on-site reviews to work with suppliers to drive corrective action and improvements. In the event of any serious or persistent issues, or where suppliers fail to demonstrate a willingness to improve performance, we reserve the right to terminate the business relationship.

We continue to collaborate with the industry to refine this programme, and in 2018 the STP Steering Committee carried out a comprehensive review of the STP’s requirements and outcomes to create more effective processes.

Since implementation in 2016, three rounds of self-assessment have been completed, with 62 independent on-site reviews, covering 100% of our total supply base.

Our ‘Thrive’ programme is based at the farm level and takes a more holistic and collaborative approach to identifying and addressing root causes and long-term challenges, such as rural poverty. It is based on the internationally-recognised ‘five capitals’ framework, with strength in all five demonstrating resilience and enabling farmers and rural communities to prosper.

Since introducing Thrive, we have assessed over 280,000 farmers who supply nearly 90% of our total tobacco leaf purchases. We are now using the results to inform our approach to selecting and developing new partnerships and community-based projects that will have a demonstrably positive impact for farmers and their communities.

Respect for human rights

The Group has a long-standing commitment to respect fundamental human rights, as affirmed by the Universal Declaration of Human Rights.

The most significant challenges for human rights abuses are in our tobacco leaf supply chain which, as with the wider agricultural sector, is recognised by the International Labour Organization to be particularly vulnerable to these issues due to the sheer scale and characteristics, such as large numbers of casual and temporary workers, family labour in small-scale farming and high levels of rural poverty.

Human rights challenges in our non-agricultural supply chain depend on the nature of the sector, the type of goods and services supplied, and the country of operation.

With the majority of our employees working in business areas where we have robust oversight and control, human rights challenges in our own operations are substantially avoided. The challenges that do exist are mitigated by a suite of robust policies, practices and compliance and governance procedures that we have 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 higher-risk countries, such as where regulation or enforcement are weak, or there are high levels of corruption, criminality or unrest.

Our due diligence processes for our business operations and supply chains enable us:

 

to monitor the effectiveness of, and compliance with, our Human Rights Policy commitments under our Standards of Business Conduct (SoBC) and our Supplier Code of Conduct; and

 

to identify, prevent and mitigate human rights challenges, impacts and abuses.

 

 

Our key performance indicators in this area focus on the number and results of reviews and audits conducted as part of our due diligence processes for our suppliers and business operations. In 2018:

 

–  Independent on-site reviews were conducted by an external firm on 26 of our tobacco leaf suppliers;

 

–  Independent audits were conducted by external firm Intertek on 88 non-agricultural suppliers in 29 countries; and

 

–  Group business operations in 26 higher-risk countries underwent enhanced due diligence to confirm compliance with applicable Group policies, standards and controls, and to provide details of any additional local measures in place to enhance human rights management.

 

Safeguarding human rights

With operations and supply chains in many diverse and challenging environments around the world, human rights are particularly important for our business and an area we have long focused on addressing.

In recent years, we have strengthened our approach to further align to the United Nations Guiding Principles on Business and Human Rights (UNGPs).

This began with a review of our existing policies and approach to human rights management, informed by an independently-facilitated stakeholder dialogue.

As a result, in 2014, we incorporated our Human Rights Policy into our SoBC. In early 2016, we complemented this with the introduction of our Supplier Code of Conduct, which defines the minimum standards expected of all our suppliers worldwide, including the respect of human rights.

Having established a strong policy base, we have continued to focus in 2018 on enhancing due diligence across our business and supply chains. Because of the nature of agricultural supply chains, the greatest risk of human rights abuses is within our tobacco leaf supply chain; as a result, we have extensive due diligence processes in place, as detailed on page 30.

For our non-agricultural supply chain, we have long had due diligence processes in place for strategic direct product materials suppliers.

However, to more closely align with the UNGPs and to better manage supply chain challenges and opportunities, we expanded the scope in 2016 to include all our direct materials suppliers, as well as strategic indirect suppliers.

All these suppliers are now assessed according to independent human rights indices and those with the highest risk exposure are prioritised for enhanced due diligence.

As a result, 77% of all our strategic global direct materials suppliers have been independently audited in the last three years.

In 2018, a total of 88 non-agricultural suppliers in 29 countries underwent independent on-site audits. As well as directly-contracted tier 1 direct suppliers, these also included 17 tier 2 strategic suppliers (those from whom our directly-contracted suppliers buy) for vapour and tobacco heating products, and eight strategic indirect suppliers of factory machinery and point-of-sale marketing materials in high-risk countries.

 

LOGO  

 

Further details of our approach to human rights and our Modern Slavery statement can be found at www.bat.com/msa

 

 

   
BAT Annual Report and Form 20-F 2018   29


Table of Contents

 

 Strategic Management 

 

                                  

Delivering our strategy continued

 

Human rights in tobacco growing

Agricultural supply chains are particularly susceptible to issues relating to child labour and, in 2000, as part of our long-running commitment to end the practice within tobacco farming, we became a founding board member of the Eliminating Child Labour in Tobacco Growing (ECLT) Foundation. We remain an active member today, alongside other major tobacco companies and leaf suppliers. ECLT helps to strengthen communities and bring together key stakeholders to develop and implement local and national approaches to tackle child labour.

We provide training and communications to farmers and rural community members to raise awareness of human rights issues, which reached over 134,000 beneficiaries in 2018. As discussed on page 28, we also run on-the-ground projects in farming communities to address root causes, such as rural poverty, in collaboration with local partners.

Our operational standard on child labour prevention was developed with inputs from the ECLT and the International Labour Organization. This complements our long-standing Child Labour Policy and provides detailed guidance regarding our requirements, including the provision of regular training, the conduct of farm monitoring and spot-checks, and the reporting of any incidents of child labour.

 

Sustainability reporting

 

 

 

 

 

LOGO

Corporate behaviour

Our actions and behaviour impact all areas of our business – which is why corporate behaviour is such an important focus for our long-term sustainability strategy. Our commitment to good corporate behaviour is underpinned by our Group Standards of Business Conduct (SoBC), or localised equivalent, which require every Group company 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 that our standards are not compromised for the sake of results.

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.

Our SoBC are continually kept under review, are fully aligned with the provisions of key corporate compliance laws including the UK Bribery Act, the US Foreign Corrupt Practices Act, the UK Criminal Finances Act, and are designed to meet the standards of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

In 2018, all employees across the Group completed their annual sign-off of the SoBC, received SoBC-related compliance training and declared any conflicts of interest. Of this, over 26,000 management-grade and office-based employees completed these steps through the online SoBC portal, including completing a tailored online training course focusing on ethical decision making and data security.

 

 

 

Sustainability: Our policies**

 

  

 

Summary of areas covered

 

  

 

Key stakeholder groups

 

Standards of Business

Conduct (SoBC)

  

Anti-bribery and corruption, conflicts of interest, and entertainment and gifts. Respect for human rights, including prevention of child labour and exploitation of labour, and respect for freedom of association.

Political contributions and charitable contributions.

Financial integrity, accurate accounting and record-keeping, and information security. Anti-illicit trade, competition and anti-trust, anti-money laundering and sanctions compliance. Whistleblowing.

  

Employees and contractors Governments and regulators

Local communities and society

Environment Policy    Our commitments to carrying out our business in an environmentally responsible and sustainable way, including agricultural, manufacturing and distribution operations.   

Employees and contractors Suppliers, business partners, and farmers

Local communities and society

Principles for Engagement    Our internal standards guiding all engagement activities, underpinning our commitment to corporate transparency.   

Employees and contractors Governments and regulators

Local communities and society

Supplier Code of Conduct    Standards required of our suppliers worldwide, including business integrity, anti-bribery and corruption, environmental sustainability and respect for human rights (covering equal opportunities and fair treatment, health and safety, prevention of harassment and bullying, child labour and exploitation of labour, and freedom of association).   

Suppliers and business partners Employees and contractors

Local communities and society

Strategic Framework for

Corporate Social Investment

   Sets out our Group corporate social investment strategy and a framework for our local operating companies to implement that strategy.    Local communities and society NGOs and development agencies

International Marketing

Principles

   Our internal standards guiding all marketing activities across all product categories.    Employees and contractors Distributors, retailers, customers

These policies and procedures are endorsed by our Board 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 www.bat.com/csi

 

   
30   BAT Annual Report and Form 20-F 2018


Table of Contents
    

 

Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

Delivery with integrity

In 2017, we introduced the Group’s updated compliance programme, ‘Delivery with Integrity’, which focused on strengthening and driving a globally-consistent approach to compliance across the Group.

The programme is led by our Business Conduct & Compliance department, reporting directly to the Director, Legal

& External Affairs and General Counsel.

In 2018, this department oversaw the successful deployment of several key initiatives to empower employees and business units across the Group to better identify and mitigate challenges related to key compliance areas such as anti-bribery and anti-corruption (ABAC) laws. To raise awareness of these issues with employees, an e-learning was delivered to a targeted cross-functional global audience selected on the basis of their potential interaction with government officials. Over 2,500 hours of mandatory ABAC training were logged as a result. To complement this, employee webcasts were also hosted for BAT managers across the world.

Additionally, to assist business units in identifying SoBC-related issues (in particular relating to bribery and corruption) in connection with third parties retained by the Group, a new Third-Party Procedure was launched in Q2 2018. This procedure mandates a consistent methodology across the Group for pre-contractual due diligence on prospective third-party business partners, and is complemented by mandatory mitigation packages (such as training and contractual clauses) for medium and high-risk third parties.

This due diligence also provides a retrospective review of third parties with which the Group did business before the Third-Party Procedure came into effect. In addition, given the challenges associated with intermediaries engaged to interface with public officials on the Group’s behalf, the review for these service providers has been conducted centrally, with external input and independent oversight. By August 2019, all relevant third parties with which the Group does business globally will have been reviewed.

 

LOGO

  Read more about our Group risk factor related to corporate behaviour on page 278

Group Standards of Business Conduct (SoBC)

The SoBC require all staff to act with a high degree of integrity, comply with applicable laws and regulations, and ensure that standards are never compromised for the sake of results.

All Group companies have adopted the SoBC or local equivalent. RAI Companies adopted their localised version of the SoBC with effect from 1 January 2018, and any instances of suspected improper conduct contrary to their localised SoBC, and established breaches, have been reported on an aggregated Group basis from 2018 onwards.

Information on compliance with the 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.

In the year ended 31 December 2018, 266 instances of suspected improper conduct contrary to the SoBC were reported to the Audit Committee (2017: 183).

Of the instances reported, 98 were established as breaches and appropriate action taken (2017: 78). In 99 cases, an investigation found no wrongdoing (2017: 75). In 69 cases, the investigation continued at the year-end (2017: 30), including investigation, through external legal advisers, of allegations of misconduct.

Please refer to page 70 for more information about the Audit Committee’s oversight and monitoring of compliance with the SoBC in 2018.

The SoBC, and information on the total number of incidents reported under it, are available at www.bat.com/sobc.

 

 

BAT Group SoBC reported incidents

Year to 31 December 2018

 

LOGO

‘Speak Up’ channels

To increase the accessibility of, and strengthen, our long-standing whistleblowing policy and procedures, in early 2018 we launched a new third-party managed ‘Speak Up’ system, which followed from a review of the Group’s existing whistleblowing procedures undertaken in 2017.

The system includes a website available in multiple languages, and local language hotlines for our markets, and enables improved global oversight of all reported issues in real time.

The SoBC also includes the Group’s whistleblowing policy, which enables staff and others to raise concerns, including regarding accounting or auditing matters, in confidence (and anonymously where they wish), without fear of reprisal. The Group’s whistleblowing policy is supplemented by local procedures throughout the Group and at the Group’s London headquarters, providing staff with further guidance on reporting matters and raising concerns, and the channels through which they can do so.

Of the total number of SoBC incidents reported in 2018 set out above, 138 were brought to management’s attention through whistleblowing reports from employees, ex-employees, third parties or unknown individuals reporting anonymously (2017: 131).

 

LOGO

  Our ‘Speak Up’ channels – www.bat.com/ speakup enable anyone working for, or with, our Group to raise concerns in their local language, in confidence and without fear of reprisal.
 

 

   
BAT Annual Report and Form 20-F 2018   31


Table of Contents

 

  Strategic Management 

 

                                  
                    
Delivering our strategy continued

 

 

 

CO2e emissions

(in ‘000 tonnes)

 

 

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 2030 compared to our 2017 baseline.

 

 

Water use

(total water withdrawn in mn metres3)

 

 

LOGO

Definition: Group water use in million cubic metres.

Objective: To reduce water use to 3.38 mn metres3 by 2030, 35% lower than our 2017 baseline.

 

 

Recycling

(percentage of waste recycled)

 

LOGO

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

Objective: To recycle 95% or more by 2030 in each year.

 

LOGO

 

 

 

Read about our Group risk factor relating to environmental laws on page 276

 

LOGO  

 

Further details of our approach to our reporting methodology can be found at www.bat.com/corporatebehaviour/scope

Environment

We are committed to reducing our environmental impact across our supply chain and operations and our Director, Operations, has overall responsibility for environmental management.

Our Environment Policy applies across all our activities including our supply chain.

The Policy is supported by our comprehensive Environmental, Health and Safety (EHS) management system, which has been in place for many years and is based on international standards, including ISO 14001.

Each of our Group companies has an EHS Steering Committee, with overall environmental responsibility held by the applicable General Manager or site manager. EHS is also a standing agenda item for management meetings and governance committees at area, regional and global levels. Our governance structures raise awareness of environmental challenges across our business and our aim is to create a consistent approach across our Group to manage them.

The primary environmental focus areas for our business include energy use, carbon dioxide (CO2) emissions, water use and availability, and waste and recycling. In our supply chain, the primary focus areas relate to the environmental impacts of tobacco farming.

Our approach to reducing the environmental impacts of our operations is long established and we have an internal reporting system in place for monitoring Group environmental performance.

During 2018 and following on from our acquisition of Reynolds American Inc. (RAI), we took the opportunity to review our long-term targets to reflect our new operations portfolio. Having undertaken a full analysis of our Scope 1, 2 and 3 carbon emissions we have now established a new 2017 baseline reflective of our enlarged operations and established new long-term targets including a commitment to setting science-based emissions targets.

Our new targets have gained Science-Based Targets initiative (SBTi) formal approval, and we join the ever-growing number of companies that have committed to making significant emissions reductions, in line with the most up-to-date climate science.

Community 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 corporate social investment (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 three themes:

 

Sustainable Agriculture and Environment;

 

Empowerment; and

 

Civic Life.

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) at least once a year.

Our key performance indicator in this area relates to the total amount of money invested in charitable giving and CSI projects. In 2018, the Group invested a total of £14.4 million in cash, and a further £1.2 million in-kind charitable contributions and CSI projects, including £1.04 million given for charitable purposes in the UK. Much of this investment is delivered through partnerships with external stakeholders including communities, NGOs, governments, development agencies, academic institutions, industry associations and peer companies.

 

 

 

*  As we have expanded our Scope 3 reporting to fully align with the Greenhouse Gas (GHG) Protocol, consolidation and verification for 2018 data is ongoing and is not practical to report at this time. The consolidated and verified data will be reported in the 2019 Annual Report and Form 20-F.

   

Emissions*

 

 

 

 

 

 
       2018      2017  
 

 

 
  Scope 1 CO2e emissions (’000 tonnes)      415        427  
  Scope 2 CO2e emissions (’000 tonnes)      426        438  
  Scope 3 CO2e emissions (’000 tonnes)*      n/a        8,254  
 

 

 
  Total statutory emissions (Scope 1 and 2 in ’000 tonnes)      841        864  
 

 

 
  Intensity (tonnes per £ million of revenue)                32.6                  34.7  
 

 

 

 

   
32   BAT Annual Report and Form 20-F 2018


Table of Contents
                       

 

 Financial Review 

 

       

Strategic Report

 

       

Governance

 

       

Financial Statements  

 

       

Other Information  

 

 

Financial performance summary

 

“A good year of progress in our key
financial metrics”

 

Ben Stevens

Finance Director

  

 

LOGO

  

Highlights

 

–  Group revenue was up 25% or 3.5% on an adjusted, representative basis at constant rates of exchange;

 

–  Profit from operations increased by 45% or 4.0% on an adjusted, representative basis at constant rates of exchange;

 

–  Diluted earnings per share fell 86%. Adjusted diluted earnings per share up 5.2% or 11.8% at constant rates;

 

–  Dividend per share up 4.0% at 203.0p;

 

–  Net cash generated from operating activities up 93%;

 

–  Cash conversion at 111%.

 

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 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 266.

Revenue

 

Revenue

(£m)

 

LOGO

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

In 2018, revenue includes £17,257 million of revenue from the Strategic Portfolio, an increase of 49% on 2017 (on a reported and representative basis).

In 2018, revenue was £24,492 million, an increase of 25.2% on 2017 (2017: £19,564 million, up 38.5% on 2016). The revenue growth in both years was mainly due to the inclusion of RAI as a wholly-owned subsidiary from the acquisition date, with 2018, 2017 and 2016 including 12 months, approximately five months and nil months of revenue from RAI respectively. Revenue was also up, driven by price mix of 6% (on the combustible brands) and the growth of the PRRP portfolio. Revenue was affected by the sale of products bought in on short-term contract manufacturing arrangements inclusive of excise. Revenue was also affected by the movements of foreign exchange on our reported results which was a headwind in 2018 of approximately 6%, compared to a tailwind of 4% in 2017.

    

 

 

Change in adjusted revenue

at constant rates (%)

 

 

LOGO

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

After adjusting for the revenue from acquisitions, including RAI, 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 representative, constant currency basis, adjusted revenue was up by 3.5% (2017: 3.0% on an adjusted organic basis) as pricing and the growth in THP, vapour and modern oral more than offset the decline in combustible volume on a representative basis (2017: down 2.6% on an organic basis).

 

Reconciliation of revenue to adjusted revenue at constant rates

 

             
            2018                    2017      2016  
      £m     Change %      £m     £m     Change %      £m  
            

(vs 2017 Rep)

 

    

Repres

 

   

Organic

 

   

(vs 2016 Org)

 

    

£m

 

 
Revenue      24,492       +25%        19,564       19,564       +39%        14,130  

 

Adjusting items

     (180            (258     (258             

 

Add/(subtract) impact of acquisition (for representative/organic calculation)

                  5,577       (4,050             
Adjusted revenue      24,312       -2.3%        24,883       15,256       +8%        14,130  

 

Impact of exchange

     1,448                (700         
Adjusted revenue at constant rates      25,760       +3.5%                14,556       +3%           

 

   
BAT Annual Report and Form 20-F 2018   33


Table of Contents

 

 Financial Review 

 

                                  

 

Income statement

 

Adjusted revenue growth from

the Strategic Portfolio

 

    LOGO
Change in adjusted revenue from the
Strategic Portfolio at constant rates (%)

 

LOGO

 

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

 

This measure was introduced in 2018, with no comparators provided.

Reconciliation of revenue to adjusted revenue at constant rates of exchange, by product category

 

                   
    

2018

£m

 

   

Adjusting

items

£m

 

   

Impact of

exchange

£m

 

   

Adjusted at

constant

2018

£m

 

   

Adjusted at

constant

vs 2017

%

 

   

Adjusted at

constant

vs 2017

repres %

 

   

2017

£m

 

   

Acquisitions

£m

 

   

2017

repres

£m

 

 
Strategic Portfolio comprises:                  
Combustible portfolio     15,457             816       16,273       +50.1%       +5.7%       10,842       4,553       15,395  
Potentially reduced-risk products (PRRPs)                  

Vapour

    318             7       325       +93.5%       +26.0%       168       90       258  

THP

    565             11       576       +185.1%       +183.7%       202       1       203  

NGP

    883             18       901       +143.5%       +95.4%       370       91       461  

Modern Oral

    34             2       36       +140.0%       +140.0%       15             15  

Traditional Oral

    883             33       916       +136.7%       +9.0%       387       453       840  

Oral

    917             35       952       +136.8%       +11.3%       402       453       855  
Total PRRPs     1,800             53       1,853       +140.0%       +40.8%       772       544       1,316  
Strategic Portfolio     17,257             869       18,126       +56.1%       +8.5%       11,614       5,097       16,711  
Other     7,235       (180     579       7,634       -0.8%       -6.6%       7,692       480       8,172  
Revenue     24,492       (180     1,448       25,760       +33.4%       +3.5%       19,306       5,577       24,883  

 

Revenue from the Strategic Portfolio and adjusted revenue from the Strategic Portfolio grew by 49% at current rates and by over 56% at constant rates, benefiting from the acquired brands from RAI in 2017. On a representative basis this was a growth of 8.5% at constant rates.

This performance was driven by the strategic combustible brands, up 43% or 50% at constant rates of exchange, or 5.7% on a constant rate, representative basis, due to the volume performance described on pages 20 and 21 and pricing across the major markets.

PRRP revenue grew 133% in total, to £1,800 million (2017: £772 million). Adjusting for the enhancement from the acquisitions and the impact of foreign exchange, this was an increase of 41%, largely due to THP and vapour (together delivering £901 million on an adjusted, representative, constant currency basis).

Vapour grew to £318 million from £168 million in 2017, an increase of over 26% to £325 million on an adjusted constant currency, representative basis), with THP (up over 180% to £565 million or £576 million at constant rates of exchange).

Also included in PRRP are traditional oral, delivering revenue of £883 million, an increase of 9% to £916 million on an adjusted constant currency, representative basis, and modern oral, (increasing adjusted revenue by 140% to £36 million at constant rates of exchange).

THP growth was due to an increase in consumables volume of 217% to 7 billion, largely in Japan as described on page 21.

The 26% representative, constant currency growth in vapour revenue was supported by a 35% increase (on a representative basis) in consumable volume with growth in the world’s three largest vapour markets (US, UK and France), as discussed on page 21.

The increase in revenue was despite the impact of the product recall in the US.

Modern oral adjusted revenue increased, up 140% at £36 million on a constant currency, representative basis, due to the growth of EPOK and Lyft, notably in the Nordics and Switzerland.

Traditional oral grew adjusted revenue by 9% on a representative, constant rate basis, as a 2.3% volume decline in the US, partly due to the impact in the prior period of a competitor product recall which positively affected volume in 2017, was more than offset by pricing.

 

 

   
34   BAT Annual Report and Form 20-F 2018


Table of Contents
    

 

Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

 

Profit from operations

 

 

Profit from operations

(£m)

 

 

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.

Profit from operations grew by 45.2% to £9,313 million and by 37.8% to £6,412 million in 2017. This was driven by the inclusion of RAI mid-way through 2017, and the improved revenue in 2018 and 2017 as described earlier, partly offset by:

Raw materials and other consumables costs increased by 3.2% to £4,664 million in 2018, and by 19.7% to £4,520 million in 2017, mainly due to the higher volume following the acquisition in 2017 of RAI as well as an increase in THP volume. 2017 included a charge of £465 million related to the purchase price allocation adjustment to inventory which did not repeat in 2018.

Employee benefit costs increased by £326 million or 12.2% to £3,005 million in 2018 and by £405 million to £2,679 million in 2017. The movement was largely due to the acquisition of RAI in 2017.

Depreciation, amortisation and impairment costs increased by £136 million to £1,038 million in 2018 and by £295 million to £902 million in 2017.

This includes the amortisation and impairment charges of £377 million (2017: £383 million, 2016: £149 million) largely related to the trademarks and similar intangibles capitalised following the acquisitions (including RAI, TDR and Skandinavisk Tobakskompagni A/S (ST)). The charge in 2018 includes 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. 2018 was a lower charge than 2017, as 2017 included the impairment of trademarks acquired in Europe and North Africa (ENA) and migrated to the Group’s Strategic Portfolio, more than offsetting the full year effect of the amortisation of trademarks acquired as part of RAI.

Other operating expenses increased by £1,986 million to £6,668 million in 2018 (2017 up by £1,645 million) mainly due to the consolidation of RAI, including charges in relation to the Master Settlement Agreement.

Expenditure on research and development was £258 million in 2018 (2017: £191 million, 2016: £144 million) with a focus on products that could potentially reduce the risk associated with smoking conventional cigarettes.

Included in profit from operations are a number of adjusting items related to restructuring and integration costs and one-off charges, provisions and income. Adjusted items are defined in note 1 in the Notes on the Accounts.

Total adjusting items were £1,034 million in 2018 (2017: £1,517 million, 2016: £825 million), including the charges related to trademark amortisation and impairment (discussed above), and £363 million (2017: £600 million, 2016: £603 million) of restructuring and integration costs.

 

Change in adjusted profit from operations at constant rates (%)

 

 

LOGO

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

These restructuring and integration costs relate to the implementation of the new operating model, integration costs associated with the acquisition of RAI and factory rationalisations (in Germany, Russia and in Asia-Pacific and Middle East (APME)), the £110 million impairment of assets following the accounting revaluation in Venezuela (related to hyperinflationary accounting) and £178 million charge due to Engle in the US. Adjusting items in 2017 also included the release of the purchase price allocation adjustment to inventory (£465 million) and the impairment of certain assets related to Agrokor in Croatia.

We call the underlying profit before these items ‘adjusted profit from operations’.

In 2018, adjusted profit from operations at constant rates grew by 38% to £10,924 million, largely driven by the full year effect of RAI on the Group’s performance. On a representative basis, adjusted profit from operations at constant rates increased by 4.0%. This compares to an organic, constant rate, growth in 2017 of 3.7%, with the growth driven by the improved revenue as pricing combined with the continued management of the cost base more than offset the impact of lower volume.

 

 

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

 

                       
                                2018                                     2017  
    

Reported

£m

   

Adjusting

items

£m

   

Adjusted

£m

   

Impact of

exchange

£m

   

Adjusted

at CC

£m

        

Reported

£m

   

Adjusting

items

£m

   

Adjusted

£m

   

Uplift to

include acq

£m

   

Adjusted

repres

£m 

 
Profit from operations                      
US     4,006       505       4,511       175       4,686         1,165       763       1,928       2,502       4,430   
APME     1,858       90       1,948       151       2,099         1,902       147       2,049       25       2,074   
AmSSA     1,544       194       1,738       184       1,922         1,648       134       1,782       22       1,804   
ENA     1,905       245       2,150       67       2,217           1,697       473       2,170       29       2,199   
Total regions     9,313       1,034       10,347       577       10,924           6,412       1,517       7,929       2,578       10,507   
Net finance costs     (1,381     (4     (1,385     (30     (1,415       (1,094     205       (889    
Associates and joint ventures     419       (32     387       33       420           24,209       (23,197     1,012      
Profit before tax     8,351       998       9,349       580       9,929           29,527       (21,475     8,052      

 

   
BAT Annual Report and Form 20-F 2018   35


Table of Contents

 

 Financial Review 

 

                                  

 

Income statement continued

 

Operating margin

 

Operating margin

(%)

 

 

LOGO

Definition: Profit from operations as a percentage of revenue.

Operating margin in 2018 was ahead of 2017 by over 500 bps to 38.0%, as the Group’s performance and the full year impact of RAI more than offset the increased spend related to the PRRP portfolio, restructuring and integration costs incurred. 2017 (down 10 bps to 32.8% against 2016) was affected by the purchase price allocation adjustments arising as part of the RAI acquisition, including the £465 million uplift to inventory, dilutive effects of excise on bought-in goods and higher investment in PRRP.

In 2018, adjusted operating margin grew by 150 bps largely due to the full year effect of RAI. On a representative basis, this was an increase of 40 bps as the impact of pricing more than offset the investment into PRRP and inflation on the cost base.

In 2017, adjusted operating margin increased by 230 bps as the inclusion of RAI, the growth in adjusted organic revenue (driven in part by pricing) and ongoing cost savings (including the US$70 million of synergies achieved), more than offset the impact of inflation and transactional foreign exchange. Adjusted organic operating margin increased by 40 bps in 2017.

 

 

 

Adjusted operating margin

(%)

 

 

LOGO

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

Net finance costs

In 2018, net finance costs increased by £287 million to £1,381 million, largely due to the full year effect of servicing a higher level of debt following the acquisition of RAI. In 2017, net finance costs increased by £457 million to £1,094 million, largely due to the additional financing, including pre-financing charges of £153 million, required to acquire RAI and the finance costs associated with the RAI debt now consolidated within the Group.

In both 2018 and 2017, the Group recognised interest of £25 million in relation to FII GLO.

In 2018, the Group also recognised a monetary gain arising from the revaluation of the Group’s operations in Venezuela in line with hyperinflation (£45 million), which has been treated as an adjusting item.

Before the impact of adjusting charges related to FII GLO, the monetary gain in Venezuela, the 2017 pre-financing noted above and the translation impact of foreign exchange, adjusted net finance costs were 59.2% higher in 2018, with 2017 up 57.5% on 2016.

The Group’s average cost of debt in 2018 was 3.0%, ahead of 3.3% achieved in 2017 (2016: 3.1%).

Associates and joint ventures

Associates in 2018 largely comprised the Group’s shareholding in its Indian associate, ITC. The Group’s share of post-tax results of associates and joint ventures, included at the pre-tax level under IFRS, declined 98% to £419 million (2017 up £21,982 million on 2016, to £24,209 million) as the prior period included the results of RAI prior to the acquisition, after which it was consolidated as a wholly-owned subsidiary. Also in 2017, the Group recognised a gain of £23,288 million, which arose as the Group was deemed, under IFRS, to have disposed of RAI as an associate in that period.

Excluding the effect of the gain noted above and other adjusting items, the Group’s share of associates and joint ventures on an adjusted, constant currency basis was 58.5% lower in 2018 at £420 million as the Group ceased to recognise the results of RAI as an associate, while the Group’s share of ITC’s post-tax results grew by 8.0%. In 2017, the Group’s share of results of associates and joint ventures on an adjusted constant currency basis fell to £951 million, a decline of 28.3% due to RAI’s contribution as an associate for only part of the year, while the Group’s share of ITC’s post-tax results grew by 16.7%.

 

 

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

 

                                                2017                        2016  
      Reported
£m
   

Adjusting
items

£m

    Adjusted
£m
   

Impact of

exchange

£m

   

Adjusted

at CC

£m

   

Impact of

acquisitions

£m

   

Adjusted

organic

at CC

£m

        

Reported

£m

   

Adjusting

items

£m

   

Adjusted

£m

 

Profit from operations

                      

US

     1,165       763       1,928       (101     1,827       (1,827                          

APME

     1,902       147       2,049       (87     1,962       (31     1,931         1,774       198       1,972  

AmSSA

     1,648       134       1,782       17       1,799       (27     1,772         1,422       262       1,684  

ENA

     1,697       473       2,170       (153     2,017       (36     1,981           1,479       345       1,824  

Total regions

     6,412       1,517       7,929       (324     7,605       (1,921     5,684           4,675       805       5,480  

Non-tobacco litigation:

                      

Fox River/Flintkote

                                                       (20     20        

Profit from operations

     6,412       1,517       7,929       (324     7,605                           4,655       825       5,480  

Net finance (costs)/income

     (1,094     205       (889     56       (833           (637     108       (529

Associates and joint ventures

     24,209       (23,197     1,012       (61     951                           2,227       (900     1,327  

Profit before tax

     29,527       (21,475     8,052       (329     7,723                           6,245       33       6,278  

 

   
36   BAT Annual Report and Form 20-F 2018


Table of Contents
    

 

Strategic Report

 

       

 

Governance

 

       

 

Financial Statements

 

       

 

Other Information

 

 

 

 

Tax

In 2018, the tax charge in the Income Statement was £2,141 million, against a credit of £8,129 million in 2017 and a charge of £1,406 million in 2016. The 2017 credit was largely due to the impact of the change in tax rates in the US which led to a credit of £9.6 billion related to the revaluation of deferred tax liabilities arising on the acquired net assets of RAI, and described below. The tax rates in the Income Statement are therefore a charge of 25.6% in 2018, against a credit of 27.5% in 2017 and a charge of 22.5% in 2016. These are also affected by the inclusion of adjusting items described earlier and the associates and joint ventures’ post-tax profit in the Group’s pre-tax results. Excluding these items and the deferred tax credit in 2017, the underlying tax rate for subsidiaries was 26.4% in 2018, 29.7% in 2017 and 29.8% in 2016. See the section Non-GAAP measures on page 262 for the computation of underlying tax rate for the periods presented.

Tax strategy

The Group’s global tax strategy is reviewed regularly by the Board. The operation of the strategy is managed by the Finance Director and Group Head of Tax with the Group’s tax position reported to the Audit Committee on a regular basis. The Board considers tax risks that may arise as a result of our business operations. In summary, the strategy includes:

 

complying with all applicable laws and regulations in countries in which we operate;

 

being open and transparent with tax authorities and operating to build mature professional relationships;

 

supporting the business strategy of the